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BANKRUPTCY LEGISLATION AMENDMENT BILL 2004

2002-2003-2004



THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA





HOUSE OF REPRESENTATIVES





BANKRUPTCY LEGISLATION AMENDMENT BILL 2004





EXPLANATORY MEMORANDUM






(Circulated by authority of the Attorney-General,
the Honourable Philip Ruddock MP)

BANKRUPTCY LEGISLATION AMENDMENT BILL 2004

Readers’ Guide

This Explanatory Memorandum is divided into three main sections: a general outline of the main provisions of the Bankruptcy Legislation Amendment Bill 2004 (the Bill) (Section 1); a discussion of the main policy objectives underlying each of the provisions (Section 2, commencing at page 3); and a detailed discussion of each provision, item by item (Section 3, commencing at page 6).

Section 1 - General Outline

2 The Bankruptcy Legislation Amendment Bill 2004 (the Bill) will make a number of significant changes to Part X of the Bankruptcy Act 1966 (the Act). These changes arise following a review of the operation of Part X conducted by the Insolvency and Trustee Service Australia and the Attorney-General’s Department.

3 The objects of this Bill are to:

(a) enhance the integrity of Part X arrangements by increasing the disclosure requirements imposed on those involved in such arrangements; and
(b) streamline the operation of Part X by providing a single type of agreement which will replace the existing three types as well as simplify the processes for setting aside and terminating such agreements.

4 The amendments relating to Part X including, necessary changes to the form of a statement of affairs for purposes other than Part XI, are found in Schedule 1 of the Bill.

5 The Bill also proposes to make related changes to Division 6 of Part IV of the Act which provide for post-bankruptcy compositions and schemes of arrangement. These changes are found in Schedule 2 of the Bill.

6 Some of the amendments necessary to implement the findings of the Part X review affect the operation of the Act generally and it is proposed that they apply to all types of administration under the Act. These amendments relate to the performance standards expected of registered trustees (Schedule 3) and false and misleading statements by creditors in voting documents (Schedule 4).

7 Other amendments proposed by the Bill are consequential on the above measures or are minor and technical changes designed to streamline the operation of the Act. These amendments are found in Schedules 5 and 6 of the Bill.

8 The Bill also proposes amendments to the Bankruptcy Legislation Amendment Act 2002 to correct a drafting error in the transitional provisions contained in that Act. These amendments are found in Schedule 7 of the Bill.

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Financial Impact Statement

9 The amendments proposed by this Bill will have no significant financial impact.

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Section 2 - Policy objectives

10 The amendments proposed by this Bill arise from the report on the review of the operation of Part X of the Bankruptcy Act 1966 conducted by the Insolvency and Trustee Service Australia and the Attorney-General’s Department. On 14 October 2003, the Attorney-General, the Hon Philip Ruddock MP announced the release of the report on the review. The report and proposals for legislative change (contained in the Attorney-General’s media release) are available from the website of the Insolvency and Trustee Service Australia (ITSA) at www.itsa.gov.au.

11 The Government decided to conduct the review following concerns related to potential conflicts arising from the relationship between the debtor and the controlling trustee as well as the impact on the outcome of the meeting where the debtor has so-called ‘friendly’ creditors who are associated entities or family members. However, the review was not limited to dealing with these issues and also considered whether arrangements between debtors and their creditors without sequestration are still a useful feature of the personal insolvency system.

12 The Issues Paper which was released at the start of the review identified a number of potential problems for discussion:
1. ‘Friendly’ creditors—concerns that a debtor may be able to manipulate the outcome of the vote.
2. Quality of reports by controlling trustees—concerns about the quality, and lack of, information provided by controlling trustees which may be related to their performance or the short time frame allowed for investigations and report.
3. Voting requirements—concerns that the special resolution requirement can be onerous and may be the reason behind attempts by debtors to manipulate outcomes of meeting.
4. Purchase of proxies—concerns that in a number of cases a creditor who effectively has the deciding vote had been persuaded to vote in favour of the proposal by accepting a fee to assign their proxy.
5. Decline in use of Part X arrangements—the number has steadily declined: 1285 in 87/88, 552 in 95/96 to 424 in 00/01 and no research had been conducted into possible reasons.
6. Rate of return to creditors—concerns about the very low returns achieved in Part X administrations.
7. Role of the trustee—concerned a perception that some controlling trustees and trustees treat the debtor as their client and are not acting independently.
8. Creditors’ meetings—concerns about the way meetings have been conducted by the trustee, for example, trustee practices in allowing creditors to ask questions of the debtor before deciding how to vote or not providing such an opportunity by advising the debtor not to attend because the trustee believes creditors will not attend.
9. Extent of Inspector-General’s powers—concerns that the Inspector-General’s powers to overturn a Part X following an investigation are limited and that limitation may pose a threat to the integrity of Part X.

13 There was extensive consultation in the course of the review. The Issues Paper was the subject of discussion at focus groups in each State and Territory and written submissions were received from major stakeholders including financial counsellors, registered trustees and major creditors.

14 The review found that there was general endorsement of the utility and performance of Part X and that fundamental change was not necessary. However, the review identified a number of possible reforms to increase the effectiveness and efficiency of the system and to enhance its overall integrity.

15 The amendments proposed in this Bill will enhance the integrity of the Part X process but will not affect the fundamental policy underpinning Part X of providing a simple and flexible process for debtors and creditors to come to an agreement without sequestration.

16 To introduce greater simplicity and flexibility to the Part X process, it is proposed to provide for a single type of generic Part X agreement which would, by agreement between the debtor and creditors, incorporate elements of the three types currently found in Part X. These arrangements will be known as ‘personal insolvency agreements’ instead of ‘Part X arrangements’ as that term fails to describe what these arrangements are actually about.

17 There would be standard provisions which would need to be elected by creditors and flexible arrangements would be provided for varying the proposal. Those standard provisions will include the following matters:
• the property or income of the debtor to be dealt with in the agreement (including whether this includes ‘after-acquired’ property)
• whether the antecedent transaction provisions would be available to recover any assets disposed of to third parties prior to the agreement
• whether the standard rules of distribution of dividends would apply, and if not, to set out the applicable rules
• whether the debtor is to be released from provable debts (fully or partially) and if a release can occur, to specify when this would happen

18 If accepted by a special resolution, the agreement would require execution of a deed. However, on a trustee’s determination that the debtor is in material breach of the agreement, termination of the agreement is proposed to be by passage of an ordinary resolution.

19 The current process for judicial review of the deeds or composition is proposed to be simplified. For example, it is proposed to replace the current review with a simple and consistent method of terminating or avoiding the Part X agreement which will extend to a power to make restitution. In particular, to recognise that the parties’ agreement is paramount, the current requirement that the avoidance of an agreement must to be ‘in the interests of creditors’ will be removed when the basis for seeking the order is that the requirements of Part X were not met.

20 Changes proposed to enhance the integrity of the Part X process will include increased disclosure requirements in relation to the information provided to debtors and creditors. For example, prescribed information will be provided to debtors contemplating a Part X proposal and to creditors about their rights. It is proposed that debtors and creditors will be required to disclose their relationship and creditors will be required to disclose any collateral agreements regarding voting.

21 Other proposed increased disclosure requirements will affect controlling trustees and trustees. For example, there will be a declaration of interests by controlling trustees and trustees.

22 The Statement of Affairs will be made available to the controlling trustee before the execution of the authority and the controlling trustee will need to file the executed Statement with ITSA for creditors’ access.

23 Other changes proposed to enhance the integrity of the Part X process will affect the following broad areas:
• Practitioner standards of technical proficiency and fundamental obligations—For example, it is proposed that a regulation making power will be introduced to provide standards of performance to satisfy the legislative obligations of practitioners. In addition, other proposed changes will extend to protecting a practitioner’s right to recovery and indemnity of remuneration.
• Enhancing the effectiveness of the Part X administrators—For example, investigatory and recovery powers will be provided to controlling trustees and trustees; and the Courts will be empowered to vary agreements to remedy defects which act to prevent achievement of the parties’ intentions.

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Section 3 - Notes on sections and Schedule items

Section 1 - Short Title

24 The Bankruptcy Legislation Amendment Bill 2004 (the Bill) proposes amendments to the Bankruptcy Act 1966 (the Act) and the Bankruptcy Legislation Amendment Act 2002. By proposed section 1, when the Bill has been enacted, it will be known as the Bankruptcy Legislation Amendment Act 2004.

Section 2 - Commencement

25 In accordance with the table in proposed section 2, proposed sections 1 to 3 and anything in the Bill not elsewhere covered in that table will commence on the day of Royal Assent. Proposed Schedules 1, 2, 3, 4 and 5 will commence on a day to be fixed by Proclamation. If the proclaimed day has a date more than 6 months after the day of Royal Assent, the Schedule 1 provisions will commence on the first day after the end of that 6 months period. Schedule 6 will commence immediately after the commencement of Schedule 1 to the Bankruptcy Legislation Amendment Act 2002 (that date being 5 May 2003).

Section 3 - Schedules

26 Proposed section 3 is a drafting device to allow all the amendments proposed to be made to the Bankruptcy Act 1966 and the Bankruptcy Legislation Amendment Act 2002 to be set out in Schedules (each dealing with a different subject area). The items in the Schedules will amend the Act and will have effect according to their terms. Notes on the Schedule items follow.

Schedule 1—Amendments relating to statements of affairs and Part X agreements

Part 1—Amendment of the Bankruptcy Act 1966

Division 1—Amendments relating to statement of affairs

27 Section 5 of the Act provides definitions of certain terms used in the Act.

28 Items 1 and 2 insert new definitions of the terms ‘related entity’ and ‘relative’ which are relevant to the disclosure requirement proposed to be included in the new statement of affairs (defined in the proposed new section 6A). The definitions address the need for a debtor to disclose a wide range of related entities in the statement of affairs so that creditors are fully informed for the purposes of the voting process.

29 Section 6A provides for matters related to the statements of affairs for purposes other than Part XI of the Act. Subsection 6A(1) provides that the section has effect for the purposes of the specified provisions including section 188A. Item 3 omits the reference to ‘188A’ and substitutes ‘Part X’ because section 188A has been replaced and it is now more appropriate to include a generic reference to Part X in this section.

30 Subsection 6A(2) provides for the form and content of a statement of affairs. Item 4 inserts new paragraph 6A(2)(b) that the statement referred to in subsection 6A(1) includes a statement identifying any creditor who is a related entity of the debtor or bankrupt. This will address a key policy objective of these reforms – that is, to strengthen the requirements for debtors to disclose all matters which may be relevant to creditors who are being asked to decide whether or not to vote in favour of the debtor’s proposal.

31 Subsection 6A(3) provides that if the trustee reasonably suspects that the information in the statement is misleading or is incomplete, a trustee may require the debtor to provide such information or provide books to enable the trustee to decide if the particulars in the statement are correct. Item 5 proposes to insert new subsection 6A(4) that provides that, for the purposes of subsection 6A(3), a reference to a statement of affairs that is required to be given under Part X, a reference in that subsection to the trustee is a reference to, whichever is applicable, a controlling trustee within the meaning of that Part or the trustee of the personal insolvency agreement. This amendment will improve the position of the controlling trustee who is required to provide a report to creditors on the effect and merits of the debtor’s proposal.

Division 2—Amendments relating to Part X agreements

Definitions and interpretation

32 Section 5 provides definitions of terms used throughout the Act. Items 6, 7, 9, 10, 11 and 12 propose changes to definitions which are necessary only to reflect the new terminology used in Part X (that is, personal insolvency agreements). Item 8 proposes to define a ‘personal insolvency agreement’ as a personal insolvency agreement executed under Part X.

33 Subsection 5AA(1) provides a table for working out the place of origin of bankruptcy and insolvency matters. Items 13 and 14 propose amendments necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements. Item 6 of the Table deals with a Part X administration and the place of origin is ‘The District in which the Official Receiver was given a copy of the authority under section 188 that relates to the administration.’ Item 13 proposes to repeal subsection 5AA(2) and to substitute a new subsection 5AA(2) which contains the reference that the ‘authority’ under section 188 relates to a personal insolvency agreement.

34 Section 5H provides that, for the purposes of the Act, the financial affairs of a natural person include certain matters such as any act or thing done by a person at a time when property of the person was subject to control under Part X and to a Part X administration. In addition, under subsection 5H(c), the financial affairs include the conduct of the trustee of the Part X administration and of the person acting under such an authority. Items 15 and 16 propose amendments necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

35 At subparagraph 5H(b)(iv), item 10 proposes to omit ‘a deed of assignment, deed of arrangement, or composition’ and to substitute ‘a personal insolvency agreement’. By that amendment, under subparagraph 5H(b)(iv), the financial affairs of a natural person would include any act or thing done by or to a person or to his or her business or property at a time when property of the person was subject to a personal insolvency agreement.

36 At paragraph 5H(c), item 11 proposes to omit ‘deed of assignment or arrangement, a person acting under such an authority or a person administering such a composition’ and to substitute ‘personal insolvency agreement or a person acting under such an authority’. By that amendment, under paragraph 5H(c), without limiting the generality of paragraph 5H(b), the financial affairs of a natural person include any conduct of the trustee of such a bankrupt estate, or of such a personal insolvency agreement or a person acting under such an authority.

Functions of Inspector-General

37 Section 12 deals with the functions of the Inspector-General in Bankruptcy. Under subsection 12(1), the Inspector-General’s duties include making inquiries and investigations as he thinks fit on certain matters related to bankruptcy or administrations under the Act. Items 17 to 21 propose amendments necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

38 Under paragraph 12 (1)(b), the Inspector-General may make inquiries and investigations as he thinks fit with respect to the administration of, or the conduct of a trustee (including a controlling trustee), in relation to the insolvency matters specified at subparagraphs (i) to (vi). Subparagraph 12 (1)(b)(iii) refers to the administrations under Part X. Item 17 proposes to repeal that subparagraph and to substitute the reference to the new ‘personal insolvency agreement’.

39 Under paragraph 12 (1)(ba), the Inspector-General may make inquiries and investigations as he thinks fit with respect to so much of the conduct and examinable affairs of a bankrupt or debtor, including a debtor subject to the 3 types of Part X administrations at subparagraph (ba)(iii). Item 18 proposes to omit that subparagraph and to substitute new subparagraph (iii) which refers to ‘a debtor under a personal insolvency agreement.’

40 Paragraph 12(1BA) provides for the timing of the Inspector-General’s inquiry or investigation under paragraph (1)(b) or (ba). The inquiry or investigation may be made at any time, whether before or at the end of the administration. Item 20 proposes to omit the references to the three types of Part X administrations and updates the references by substituting ‘composition, scheme or agreement’.

41 Subsection 12(2) provides for the powers of the Inspector-General for the purposes of discharging her or his functions under the Act. Item 21 proposes to omit the references to the 3 types of Part X administrations at subparagraph 12(2)(b)(iv) and to update the reference by substituting ‘personal insolvency agreement’.

Consequential changes in terminology

42 Section 18 deals with the body corporate known as the Official Trustee in Bankruptcy. Subsection 18(10) provides for the situation when the Official Trustee acts as one of the trustees of a Part X administration and the exercise of a power or the performance of a function is dependent on the opinion, belief or state of mind of such a person. Item 22 proposes to omit the reference to the three types of Part X administrations and to update the reference by substituting ‘personal insolvency agreement’.

43 Section 18A deals with the liability of the Official Trustee. Subsection 18A(1) provides that the Official Trustee is subject to the same personal liability as trustees of all administrations provided by the Act, including as controlling trustee in relation to property subject to control under Part X and as trustee of the three types of Part X administrations. Item 23 proposes to omit the reference to the three types of Part X administrations and to update the reference by substituting ‘personal insolvency agreement’.

44 Section 20J(1) provides that, where the Official Trustee is trustee of certain estates, including the three types of Part X administration, interest on moneys earned by those estates is not to be paid into the estates. Item 24 proposes to repeal subparagraph 20J(1)(b)(ii) and to insert a new subparagraph which updates the reference by substituting ‘as trustee of a personal insolvency agreement’.

45 Section 31 provides for the matters to be determined in open court. Included in those matters at paragraph (j) are applications under Part X for orders to set aside or avoid the deed or composition or a provision of such a deed or composition or for a sequestration order against the estate of a debtor. Item 25 proposes to repeal paragraph 31(1)(j) and to substitute new paragraph (j), which would provide for applications made under Part X ‘for an order terminating or setting aside a personal insolvency agreement’. There is no change to the policy of section 31. The amendment is consequential to the Bill’s repeal of the three existing types of Part X administrations, providing for a personal insolvency agreement and streamlining the provisions relating to termination and setting aside.

Acts of bankruptcy

46 Section 40 of the Act provides for acts of bankruptcy which form the basis of creditors’ petitions. Items 26 to 30 propose amendments necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

47 Under paragraph 40(1)(l)(i), a debtor commits an act of bankruptcy if, having been required by a special resolution of creditors meeting to execute one of the three types of Part administrations or to present a debtor’s petition, the debtor fails to execute the deed or composition in compliance with the requirements of the Act. Items 26 and 27 propose to omit the references to the three types of Part administrations and to substitute ‘personal insolvency agreement’ or ‘agreement’, as appropriate, in new paragraph 40(1)(l) and new subparagraph 40(1)(l)(i).

48 Under paragraph 40(1)(m), a debtor commits an act of bankruptcy if having been subject to any of the three types of Part administrations, the administration is declared void, is set aside or terminated by the court or creditors under that Part. Item 28 proposes to repeal paragraph 40(1)(m) and to substitute a new paragraph referring to a ‘personal insolvency agreement’.

49 Items 29 and 30 propose to replace the references in subsections 40(5) and (6) to the three types of Part administrations and to substitute ‘personal insolvency agreement’ or ‘agreement’, as appropriate.

Debtors’ petitions

50 Section 55 allows a debtor to present to the Official Receiver a petition for his or her own bankruptcy. Subsection 55(6) provides limitations on who may present debtor’s petitions. A debtor who is subject to any of the three types of Part X administrations is not, except with the leave of court, entitled to present a petition unless the deed or composition has been declared void, or set aside or terminated or has been finalised. Item 31 repeals subsection 55(6) and substitutes a new subsection 55(6) which proposes to omit the references the three types of Part administrations and to substitute ‘personal insolvency agreement’. There is no change to the existing policy of subsection 55(6).

51 Section 56A provides for the persons who may present a debtor’s petition against a partnership. Subsection 56A(1) provides that a debtor’s petition may be presented against a partnership by all the partners or a majority of the partners who are resident in Australia. Subsections 56A(3) to (5) provide limitations on those partners who may present a debtor’s petition against a partnership. Those limitations relate to the partner being subject to a Part X administration unless it has been finalised or has been declared void or has been set aside or terminated or the court has given leave. Item 32 proposes to repeal subsections 56A(3), (4) and (5) and to substitute new subsection 56A(3) which would replace the references to the three types of Part administrations and substitute ‘personal insolvency agreement’. There is no change to the policy underlying section 56A.

52 Section 57 deals with the situation where joint debtors who are not in partnership may present to the Official Receiver a petition jointly against themselves. Subsection 57(7) provides limitations on who may be entitled to join in present a petition under this section. A debtor who is subject to any of the three types of Part X administrations is not, except with the leave of court, entitled to join in presenting a petition unless the deed or composition has been declared void, or set aside or terminated or has been finalised. Item 33 proposes to repeal subsections 57(7) and to substitute a new subsection which would replace the references to the three types of Part administrations and substitute ‘personal insolvency agreement’. There is no change to the policy underlying section 57.

Committee of inspection

53 Division 5A of Part IV deals with a committee of inspection who may be appointed by creditors for the purpose of advising and superintending the trustee. Section 71 deals with the matters related to the vacation of office by reason of certain maters including at paragraph 71(2)(b) if the member of such a committee becomes subject to any of the three types of Part X administrations. Items 34 and will add the word ‘or’ at the end of paragraphs 71(2)(a) and (b) to clarify that each of the matters in paragraphs 71(2)(a) to (d) are in the alternative. Item 35 proposes to repeal paragraph 71(2)(b) which refers to the three types of Part X administrations and to substitute new paragraph 71(2)(b) which refers to a personal insolvency agreement. There is no change to the policy in subsection 71(2). Under proposed new paragraph 71(2)(b), the office of a member of the committee of inspection would become vacant if he or she executes a personal insolvency agreement.

Consequential changes in terminology

54 Section 109 deals with priority payments to be made before applying the proceeds of the property of the bankrupt. Items 36 and 37 propose amendments to paragraph 109(1)(c) necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

55 Section 114 provides for unpaid liabilities, expenses incurred and any unpaid remuneration of the trustee when a Part X administration is declared void, annulled set aside or terminated to be provable debts in the bankruptcy. Items 38 to 41 make amendments necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

56 Item 42 proposes an amendment to the note at the end of section 163 necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

Personal insolvency agreements

57 Item 44 proposes to repeal the existing heading to Part X of the Act and to insert a new heading ‘Part X – Personal insolvency agreements’.

58 Section 187 is an interpretation section for some terms used in Part X. Items 45 to51 propose to repeal terms which become redundant with the introduction of personal insolvency agreements. These amendments are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

Authorising a controlling trustee

59 Section 188 deals with an authority provided by a debtor to a trustee, a solicitor or the Official Trustee to take control of the debtor’s property. This is the first step necessary in establishing a personal insolvency agreement. Subsection 188(2) provides for matters that will make an authority effective for the purposes of Part X.

60 Item 52 proposes to insert new subsections 188(2AA) and 188(2AB). Proposed subsection 188(2AA) will require that, before the person before the person consents to exercise the powers given by the authority, the person must give the debtor the information prescribed by the regulations. This requirement will mirror that which applies to debtors wishing to petition for bankruptcy and is designed to ensure that debtors are informed about the Part X process and consequences from the start of that process. Proposed new 188(2AB) will require that before the Official Receiver gives approval to name the Official Trustee in the authority, the Official Receiver must give that debtor the information prescribed by the regulations.

61 Item 53 proposes to insert new subsections 188(2C) and (2D) which provide additional matters that will make an authority effective for the purposes of Part X.

62 Proposed new subsection 188(2C) will provide that, if the person authorised is a registered trustee or solicitor, the authority signed by the debtor under this section is not effective for the purposes of this Part, unless before the person authorised consents to exercise the powers given by the authority, the debtor gives to the person authorised a statement of the debtor’s affairs and a proposal for dealing with them under this Part. This will replace the current requirement that the debtor provide the statement of affairs within 14 days of giving the authority. This is designed to ensure that a controlling trustee has sufficient information about the debtor’s affairs and proposal prior to being required to commence an investigation. This will put the controlling trustee in a better position to make use of the limited time available to prepare a report to creditors prior to the initial meeting. Proposed new subsection 188(2D) imposes an equivalent requirement on a debtor who nominates the Official Trustee as controlling trustee. The notes at the end of these two proposed subsections draw attention to the requirements of a statement of affairs as set out in section 6A.

63 Proposed new subsection 188(2E) provides that a proposal for dealing with the debtor’s affairs under this Part must include a draft personal insolvency agreement. A note refers readers to section 188A which sets out requirements for personal insolvency agreements.

64 Item 54 proposes to repeal subsection 188(5) and to substitute a new 188(5) which would require a registered trustee or solicitor who consents to exercise the authority, within 2 working days of consenting, to give copies of the authority and the statement of affairs to the Official Receiver of the district in which the debtor resides. This is designed to improve transparency and enable the Inspector-General to receive early notice of all Part X proposals which may require investigation or attendance at a creditors’ meeting. Proposed new subsection 188(5A) provides that a ‘working day’ does not include a Saturday, Sunday or public holiday in the place where the registered trustee or solicitor consented to exercise the powers given by the authority.

65 Item 55 proposes to repeal section 188A and to substitute new section 188A which sets out the requirements of a personal insolvency agreement. Proposed subsection 188A(1) provides that the personal agreement is a deed that is expressed to be entered into under Part X of the Act and that complies with subsection 188A(2).

66 Proposed new subsection 188A(2) provides that the personal insolvency agreement must deal with all the following matters set out in paragraphs (a) to (m). Proposed new subsection 188A(3) provides that subsection 188(2) does not limit the provisions that may be included in a personal insolvency agreement. The purpose of the proposed new provision is to provide for a single type of agreement under Part X which allows for all elements of the three existing types of arrangements to be included but which provides greater flexibility and choice to debtors and creditors. It will provide debtors with a greater range of options for negotiation if creditors are not prepared to accept the initial proposal. By requiring the agreement to address each of the matters set out in the proposed new subsection, creditors will also be given a clearer proposal which explains what property and/or income is included and which other provisions of the Act (such as those relating to antecedent transactions and release from provable debts) would apply if they accepted the debtor’s proposal.

67 Item 55 also proposes to introduce new section 188B which provides creditors with the right to inspect and obtain a copy of the debtor’s statement of affairs prior to the initial meeting of creditors. This will assist creditors in making an informed decision about whether or not to support the debtor’s proposed personal insolvency agreement.

68 Item 56 proposes to repeal paragraphs 189(1A)(b) and (c) and to substitute a new paragraph 189(1A)(b). Subsection 189(1A) provides for circumstances in which the control of property of a debtor who has given an authority under s 188 will end. The proposed amendment is necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

69 Item 57 proposes to insert a new section 189AAA which provides for a stay of proceedings relating to a creditor’s petition where an authority signed by a debtor under s 188 has become effective. This is to ensure that the debtor has an opportunity to attempt to come to an agreement with his or her creditors without sequestration. Where the authority has become effective and either the creditor’s petition was presented against the debtor before the authority became effective or the petition was presented against the debtor after the authority became effective, but before the first or only meeting of the debtor’s creditors called under the authority, the creditor’s petition is stayed until whichever of the following events first occurs:

- the conclusion of the meeting; or
- the adjournment of the meeting.

70 Proposed new subsection 189AAA(2) provides that the section does not limit subsection 206(1) which provides that a court may adjourn the hearing of a creditor’s petition when a creditors meeting has passed a special resolution requiring a debtor to execute a personal insolvency agreement and before the execution of the personal insolvency agreement.

71 Unlike trustees whose right to indemnity for remuneration is provided at common law, a controlling trustee’s right to remuneration is unclear. Item 58 proposes a new section 189AC which would clarify the position of a controlling trustee’s right to remuneration. Proposed new subsection 189AC(1) provides that the controlling trustee is entitled to be indemnified out of the debtor’s property for his or her remuneration and any costs, charges or expenses properly and reasonably incurred while the debtor’s property was subject to control. Proposed new subsection 189AC(2) provides that, to the secure a right of indemnity provided in subsection (1), the controlling trustee has a lien on the debtor’s property. The ‘debtor’s property’ is defined in subsection 190(5). Under proposed subsection 189AC(3), the lien provided at subsection (2), ceases to have effect if the debtor becomes bankrupt. Upon bankruptcy, section 109 of the Act provides for a priority payment in payment of the remuneration of the controlling trustee.

Controlling trustee’s report to creditors

72 Section 189A requires the controlling trustee to provide a report to creditors which summarises and comments on the debtor’s affairs. The controlling trustee is also required to give an opinion as to whether the creditors’ interests would be better served by accepting the debtor’s proposal or by the bankruptcy of the debtor. The controlling trustee has limited time to prepare this report and many complaints relating to Part X matters concern the quality and adequacy of this report. It is intended to introduce regulations which describe the minimum performance standards expected of controlling trustees and that these regulations would include the minimum requirements of a section 189A report.

73 In addition to these standards, items 59 and 60 introduce some additional requirements in relation to section 189A reports. Item 59 proposes to insert new paragraph 189A(1)(c) which will require the controlling trustee to include in the report the names of any creditor identified in the debtor’s statement of affairs as a related entity of the debtor. Concerns about non-disclosure of related creditors have been central to many criticisms of the operation of Part X. It is not intended to restrict the rights of related creditors to vote or receive dividends under a personal insolvency agreement. However, it is important that all creditors are aware of any relationships which may influence the voting outcome. (Note that Item 126 will impose a similar obligation on the proposed trustee of the agreement)

74 Item 60 proposes to introduce subsections 189A(3) and (4) which require the controlling trustee to make a written declaration stating whether the debtor is a related entity the controlling trustee and whether the debtor is a related entity of a related entity of the controlling trustee. The term ‘related entity’ will be defined in section 187 as amended by this Bill. This declaration must accompany the section 189A report and must also be given to the Official Receiver. These changes are intended to address concerns that some controlling trustees do not act impartially (that is, they see themselves as acting to protect the debtor’s interests) and creditors may believe they are not fully informed about the debtor’s affairs and proposal. However, it is important that all creditors are aware of any relationships which may influence the voting outcome.

75 Section 190 describes the duties and powers of controlling trustees. Item 61 proposes an amendment to subsection 190(5) which is necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

76 Item 62 proposes to insert new section 190A which will deal with additional duties of controlling trustees. Section 19 already lists the duties of a registered trustee in relation to the administration of bankrupt estates and it is appropriate that the Act contain a parallel provision covering the duties of controlling trustees. There has been some uncertainty about the role and obligations of controlling trustees. This amendment, along with the proposed regulations detailing the minimum performance standards of a controlling trustee, will assist those practitioners who perform the role infrequently to understand what is expected of them. The duties of a controlling trustee as described in the proposed new section 190A are based, to a significant extent, on the duties of a trustee set out in section 19. They have been adapted, as appropriate, to reflect the functions of a controlling trustee – see proposed paragraphs 190A(a) to (f), and (h). Two other duties that are specifically relevant to controlling trustees have been included at paragraphs (g) and (j). Paragraph (g) provides a clear obligation for a controlling trustee to disclose to creditors any material personal interests held by the trustee that could conflict with the proper exercise of her or his powers or the proper performance of his or her functions. Paragraph (j) requires a controlling trustee to exercise powers and perform functions in an impartial and independent manner.

77 Section 192 deals with changing the controlling trustee. Items 63 and 64 proposes amendments to that section which are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

Meeting of creditors

78 Section 194 sets a time limit within which the controlling trustee must call the first meeting of creditors. This is currently 35 days after the debtor signed the authority (or 42 days if signed in December). The time period is measured in calendar days. This can cause problems for the controlling trustee and creditors where public holidays fall during that period as the time period for dealing with and considering the debtor’s proposal is effectively shortened. Item 65 proposes to amend section 194 so that the time period is measured in working days. There is no overall lengthening of the time period but public holidays and weekends will be excluded by this amendment.

79 There have been other concerns arising from the fact that the time period currently starts running from the date on which the debtor signs the authority. There may be a delay before the controlling trustee consents (and starts) to act which effectively reduces the time available to investigate the debtor’s affairs and prepare the section 189A report. Item 65 also proposes to amend section 194 to provide that the time period starts running from the time at which the controlling trustee gives his or her consent or approval.

80 Item 65 also proposes the introduction of a new section 194A which will require the debtor’s statement of affairs and the controlling trustee’s declaration of interests under subsection 189A(3) to be tabled at the creditors’ meeting. The proposed new section also requires the debtor to table a written statement at the meeting identifying any material changes to the information contained in his or her statement of affairs since it was provided. There will be a similar requirement for the controlling trustee to table a written statement about any material changes in relation to his or her declaration of relationships with the debtor.

81 Items 66 to 119 propose amendments to section 204, 205, 205A, 206, 207 and 209 which are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

Application of other provisions of the Act to Part X

82 Item 120 proposes to insert a new section 211 which deals with the application of other provisions of the Act in relation to a debtor whose property is subject to control under Part X. The proposed new section will apply (with such modifications as are prescribed by the regulations) the investigation powers which are available to bankruptcy trustees to allow controlling trustees to undertake further investigations in relation to debtors for the purposes of Part X. This will allow controlling trustees to make use of these powers to obtain further information in preparing the section 189A report. Although controlling trustees may find it impractical to use such powers routinely, it will allow them a greater opportunity to encourage debtors to comply with requests for information.

General provisions

83 Section 213 provides that arrangements by the debtor with his or creditors which are made otherwise in accordance with Part X are void. This is no longer necessary as a failure to comply with the requirements of Part X will provide a ground for setting aside the agreement. Section 214 provides that a deed of assignment or a deed of arrangement must be expressed to be entered into under Part X and must contain provisions nominating a person as trustee. This is no longer necessary as the requirement is imposed by the proposed new section 188A which sets out the requirements of a personal insolvency agreement. Item 121 proposes to repeal sections 213 and 214.

84 Section 215 provides that only a registered trustee or the Official Trustee can be the trustee of a Part X agreement. Item 122 proposes an amendment to section 215 which is necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

85 Section 215A deals with the nomination or appointment of the trustee of a Part X agreement. Items 123 to 125 propose amendments to section 215A which are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

86 Item 126 proposes to insert a new subsection 215A(3) requiring the proposed trustee of the agreement, prior to the creditors passing a resolution, to make a declaration concerning relationships with the debtor. This will mirror the requirement to be imposed on controlling trustees and is being introduced for the same reasons (see discussion of Item 60 above). The nominated trustee will be required to provide a copy of this declaration to the controlling trustee prior to any resolution being passed by creditors and the controlling trustee will be required to table this declaration at the creditors’ meeting.

87 Items 127 to 140 propose amendments to sections 216, 217, 218, 219, 220 and 221 which are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

Variation of personal insolvency agreement

88 Item 141 proposes a new section 221A which will deal with the method for varying a personal insolvency agreement. The proposed provision recognises that variation of an agreement is a matter on which the debtor and creditors must agree and that the process for varying an agreement should mirror that for establishing the agreement. Therefore, the creditors would be required to pass a special resolution to approve any variation.

89 The proposed provision would also allow the trustee, with the written consent of the debtor, to propose a variation. The trustee may be asked by the debtor to propose a variation on the basis that the debtor’s circumstances have changed. Under the proposed provision, the trustee would be required to give notice of the proposed variation to all creditors. The process is then similar to the existing provisions in Part X which allow for variation of deeds and compositions without the need to call a meeting of creditors.
Setting aside or terminating a personal insolvency agreement

90 Item 142 proposes new provisions dealing with the Court’s power to set aside or terminate a personal insolvency agreement. These provisions would bring together a range of existing provisions relating to setting aside and terminating deeds and compositions. Although this is required because the existing provisions apply individually to deeds of arrangement, deeds of assignment and compositions, it is also aimed at providing a single and simpler regime detailing the circumstances in which an agreement should be capable of being set aside or terminated. It is also to reduce some of the existing confusion about the process for setting aside different types of agreements by having a single provision dealing with setting aside an agreement and a single provision dealing with the Court’s power to terminate an agreement. The new provisions would also allow the Inspector-General in Bankruptcy to apply for a personal insolvency agreement to be set aside.

• setting aside a personal insolvency agreement

91 Proposed replacement section 222 would deal with the Court’s power to set aside a personal insolvency agreement. Proposed subsection 222(1) would allow the Inspector-General, the trustee or a creditor to apply to have an agreement set aside where the terms of the agreement are unreasonable or are not calculated to benefit creditors generally. It would also allow the Court to make an order setting aside the agreement where it is satisfied that, for any other reason, the agreement ought to be set aside.

92 Proposed subsection 222(2) deals with setting aside an agreement which does not comply with the requirements of Part X. Proposed subsection 222(3) would prevent the Court from setting aside an agreement on this ground if the agreement complies substantially with the requirements of Part X. Proposed subsection 222(4) would provide that an application to set aside an agreement on this ground must be made before all the obligations created by the agreement have been discharged.

93 Proposed subsection 222(5) deals with setting aside an agreement on the grounds of false or misleading information. In relation to the debtor, this could relate to false or misleading information given in answer to questions at a meeting of creditors, in the debtor’s statement of affairs or the further information required to be given by the debtor at the creditors’ meeting where his or her circumstances have changed since completing the statement of affairs. The ground could also be established where the debtor has omitted a material particular in any of these situations. In relation to the controlling trustee, the ground could be made out in relation to information required to be given concerning his or her relationship with the debtor under the proposed subsection 189A(5) or subsection 194A(5). Proposed subsection 222(6) would provide that the Court must only set aside an agreement on the ground that the debtor or controlling trustee has given false or misleading information if it is satisfied that it would be in the interests of creditors to do so. Proposed subsection 222(7) would provide that an application to set aside an agreement on this ground must be made before all the obligations created by the agreement have been discharged.

94 Where the Court makes an order setting aside a personal insolvency agreement, proposed subsection 222(8) would also allow the Court to make such other orders as it thinks fit. This is intended to allow the Court to make any orders necessary to place the parties in the position in which they would have been had they not entered into the agreement. By virtue of proposed subsection 222(9), this could include orders for compensation.

95 Proposed subsections 222(10), (11) and (12) would replicate existing provisions which allow the trustee or a creditor who applies for an agreement to be set aside to include, in their application, an application for a sequestration order.

• terminating a personal insolvency agreement

96 Proposed new section 222A would deal with the process for termination of a personal insolvency agreement by the trustee. This process would be the same as the existing process for terminating a deed or composition without the need to call a meeting of creditors. The proposed new section would be the single provision relating to the trustee’s ability to propose termination of a personal insolvency agreement.

97 Proposed new section 222B would deal with the process for termination of a personal insolvency agreement by creditors. It is envisaged that this process would be used where the trustee has proposed a termination under the new section 222A but this has not occurred following an objection from a creditor or creditors. Under proposed subsection 222B(1), the creditors could terminate an agreement by passing an ordinary resolution. A special resolution would be required only where property of the debtor is covered by a restraining order or forfeiture order under the proceeds of crime legislation or where a pecuniary penalty order under that Act is in force in relation to the debtor (unless that order had already been made or was in force when the personal insolvency agreement was made) – subsections 222B(2) and (3) which represent no change from the existing provisions relating to termination of deeds and compositions. Proposed subsection 222B(4) defines ‘default’ to be a failure by the debtor (or, where the debtor has dies, the person administering the debtor’s estate) to carry out or comply with a term of the personal insolvency agreement.

98 Proposed new section 222C would deal with termination of a personal insolvency agreement by the Court. The Court will be able to terminate an agreement where the debtor (or, where the debtor has died, the person administering the debtor’s estate) has failed to carry out or comply with a term of the agreement, or the agreement cannot be proceeded with without injustice or undue delay to the creditors, the debtor (or, where the debtor has died, the debtor’s estate), or where the Court is satisfied that, for any other reason, the agreement ought to be terminated. The Court will also be given the power to make other orders ancillary to the order terminating the agreement including orders for compensation where appropriate.

99 Proposed new section 222D will provide that a personal insolvency agreement is terminated by the occurrence of any circumstance or event on the occurrence of which the agreement provides that it is to terminate. Proposed new section 188A, which sets out the requirements of a personal insolvency agreement, allows the debtor and creditors to include provisions which set out the circumstances or events which will lead to the automatic termination of the agreement.

100 Items 143 to 146 propose amendments to sections 223 and 223A which are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements. Those two sections contain further provisions relating to the calling and conduct of creditors’ meetings.

101 Item 147 proposes to replace section 224 and 224A (which deal with some of the consequences of terminating a deed or composition or declaring a deed or composition void). The amendments are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements. Section 224 will continue to provide for actions taken in administering a personal insolvency agreement which is set aside or terminated. Section 224A will continue to provide for notice that an agreement has been set aside, varied or terminated to be provided to the Official Receiver and will also require notice to be given to creditors.

102 Items 148 to 150 propose amendments to sections 225 and 226 which are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

103 Item 151 proposes an amendment to subsection 226(1) to replace the reference to section 188A with a reference to subsection 188(2C) or (2D). This amendment is consequential upon the changes to the location of the provisions requiring the debtor to provide a statement of affairs and do not represent any change in the policy or purpose of section 226.

104 Subsection 226(2) allows a creditor, in relation to a composition, to inspect and make a copy of the debtor’s statement of affairs. Item 152 proposes to repeal this provision as it will no longer be necessary. The provisions relating to access to the debtor’s statement of affairs will now be located in proposed new section 188B which will provide the same level of access as the existing subsection 226(2).

105 Items 153 and 154 propose amendments to sections 226 and 227 which are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

Personal insolvency agreement to bind all creditors

106 Item 155 proposes to insert new section 229 which replicates existing provisions applying to each type of Part X arrangement. The effect of this provision is to provide that a properly executed personal insolvency agreement binds all creditors. It will also provide, as do the existing provisions, that, once the agreement has become binding on creditors, it is not competent for a creditor to present a creditor’s petition against the debtor, enforce any remedy against the debtor or the debtor’s property in respect of a provable debt or commence any legal proceedings or take a fresh step in a proceeding in respect of a provable debt. The rights of secured creditors to realize or otherwise deal with that creditor’s security and the rights or creditors under maintenance agreements and maintenance orders will be protected.

Release of provable debts

107 Item 155 also proposes to insert new section 230 which deals with the debtor’s release from provable debts once he or she has executed a personal insolvency agreement. The proposed new provision is slightly different to existing provisions as it needs to reflect the flexibility to be provided by personal insolvency agreements. Proposed section 188A will require the personal insolvency agreement to include a provision stating whether or not, and to what extent, the debtor is released from provable debts. It will be possible for the agreement to provide that the debtor is released from some provable debts but remain liable for others. Proposed subsection 230(1) will provide that, if a personal agreement provides for the debtor to be released from a provable debt, the agreement operates to release the debtor from that debt unless the agreement is set aside or terminated.

108 Proposed section 230 will contain some exceptions to the general rule providing for release from provable debts if the agreement provides for such release. Proposed subsection 230(3) will provide that a debtor is not released from a debt which would not be released if the debtor had become a bankrupt and was discharged from bankruptcy. Proposed subsection 230(4) will provide protection for secured creditors to take action to collect that part of the debt for which the secured creditor has not proved under the agreement. Proposed subsection 230(5) will provide that, in the case of partnership or other joint debts, the debtor not covered by the agreement is not discharged from the debt. The same subsection will also provide that debts in the nature of a surety for the debtor are not discharged.

Application of general provisions of the Act

109 Item 155 also proposes to insert new section 231 which will deal with the application of general provisions of the Act to personal insolvency agreements. This is consistent with existing provisions in the Act applying individually to each type of Part X agreement and does not represent a change in policy. As with the existing provisions of this type, proposed section 231 will apply a range of provisions to personal insolvency agreements and allow for the regulations to prescribe modifications to those provisions to ensure they are compatible with personal insolvency agreements.

Right of debtor to remaining property

110 Item 155 also proposes to insert new section 231A which deals with the right of the debtor to remaining property. This is consistent with existing provisions in the Act applying individually to each type of Part X arrangement and does not represent a change in policy. The general principle reflected in the proposed section is that, if any property remains after payment in full of the costs, charges and expenses of the administration, all provable debts and interest on interest-bearing provable debts, the debtor is entitled to have that property returned. As with the existing provisions, the Court will be able to direct the trustee not to return that property if it is needed, or likely to be needed, to satisfy orders under the proceeds of crime legislation.

111 Finally, item 155 proposes to insert new section 232 which will allow the trustee, at the debtor’s request, to give the debtor a certificate to the effect that all the obligations created by the agreement have been discharged. This language is different to that used in some of the existing provisions and reflects the change to a single type of agreement which can create a range of different obligations depending upon what the debtor and the creditors agree to include in the agreement.

Other consequential changes

112 Item 156 proposes to repeal Divisions 4, 5 and 6 of Part X. These Divisions contain provisions specific to each of the existing types of Part X arrangement and are no longer necessary following the change to a single type of agreement.

113 Item 157 proposes to amend paragraph 254(1)(b) which deals with payment of unclaimed moneys into the Consolidated Revenue Fund. This amendment is necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.

Offences

114 Part XIV of the Act contains provisions creating offences against the Act. Many of these offences refer to deeds and compositions under the existing Part X.

115 Items 158 to 176 proposes amendments to these offence provisions where necessary to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements. These do not represent a change in policy in relation to these offences. In most cases, the proposed amendments are a simple change of terminology.

116 Items 164 to 173 propose amendments to section 268 which deals with offences in relation to Part X arrangements. Item 171 proposes to insert a new subsection 268(4) which will provide that the offence created by subsections (2) and (3) does not apply to an act or omission that is done or made after all the obligations that the personal insolvency agreement created have been discharged or the personal insolvency agreement has been set aside or terminated. This language is different to that used in the existing provision and reflects the change to a single type of agreement which can create a range of different obligations depending upon what the debtor and the creditors agree to include in the agreement. It also reflects the language used in the provisions which streamline the process for setting aside or terminating an agreement.

117 Item 172 proposes to insert a new subsection 268(5) which reflects the fact that a personal insolvency agreement must include a provision stating whether the antecedent transaction provisions apply. The proposed new subsection 268(5) merely reflects this change in imposing an obligation on the debtor to make full and true disclosure to the trustee of dispositions made in the two year period prior to bankruptcy.

Other provisions

118 Items 177 to 187 make consequential changes to sections 280, 301, 302, 302A, 302AB, 302B, 305, 306, 311 and 312 which are necessary only to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements.


Part 2—Amendment of other Acts

119 A number of other Commonwealth Acts refer to deeds and compositions under the existing Part X for a range of purposes (for example, for the purpose of restricting eligibility for appointment or employment where a person has entered into a Part X arrangement). In many cases, these references are specifically to deeds of assignment, deeds of arrangement and compositions. As such, it is necessary to amend these references to reflect the repeal of the three types of Part X administrations and the introduction of personal insolvency agreements. Items 188 to 211 propose to make the necessary amendments. These proposed amendments do not make any changes to the policy underlying the Acts being amended.



Part 3—Application and transitional provisions

120 Under subsection 2(1) of this Bill, the proposed amendments contained in Schedule 1 will commence on a single day to be fixed by Proclamation. The effect of this will be that the new Part X provisions will apply in relation to section 188 authorities given after commencement of the new provisions. It is intended that, in relation to section 188 authorities given prior to commencement, the existing provisions of Part X will continue to apply. This would be the case even where the section 188 authority is given prior to commencement but the subsequent creditors’ meeting approving the debtor’s proposal and execution of the agreement occur after commencement. None of the new provisions will apply to existing Part X arrangements – therefore, it is necessary to ensure that the existing provisions can continue to apply in relation to Part X arrangements executed prior to commencement.

121 Item 212 is intended to ensure that, notwithstanding the changes to Act made by this Bill, the Act and regulations as they stood prior to commencement of the amendments continue to apply to deeds and compositions executed prior to commencement.

122 Item 213 is intended to ensure that, notwithstanding the changes to Act made by this Bill, the Act and regulations as they stood prior to commencement of the amendments continue to apply section 188 authorities given prior to commencement. This will mean that, where a section 188 authority was given prior to commencement, the rules concerning creditors’ meetings, resolutions which can passed by creditors and the types of arrangements available to debtors will be those which apply under the existing provisions and not the amended provisions.

123 Item 214 relates to the amendments concerning statements of affairs. The Bill proposes amendments to the form of the debtor’s statement of affairs (see Item 4 of this Schedule). Item 214 will provide that this amendment applies to a statement of affairs filed after the commencement of this amendment.

124 Item 215 will provide a regulation-making power to resolve any further transitional issues arising from the amendments made by this Bill.
Schedule 2—Amendments relating to compositions and schemes of arrangement

125 Division 6 of Part IV of the Act provides a mechanism for bankrupts to propose a composition or scheme of arrangement for dealing with their debts. If the creditors accept the bankrupt’s proposal, the bankruptcy is annulled.

126 Many of the concerns which will be addressed by the proposed amendments to Part X (contained in Schedule 1 of this Bill) also arise in relation to post-bankruptcy compositions and arrangements. Therefore, it is proposed to make some amendments to the provisions of Division 6 of Part IV to address these concerns.

127 Items 1, 2 and 3 are consequential amendments necessary because of the amendment proposed by Item 8 which will provide for compositions or schemes to be ‘set aside’ or ‘terminated’ rather than ‘annulled’.

128 Item 4 proposes to insert new subsection 73(1A) which will require the trustee, within two working days after receiving the bankrupt’s proposal, to give a copy of that proposal to the Official Receiver. This requirement does not currently exist. As a result, ITSA does not receive notice of these proposals and the Inspector-General is not always able to exercise his regulatory functions. The notification requirement will put the Inspector-General on notice that a proposal has been made which will allow the Inspector-General to decide whether there are matters to investigate or whether to attend the creditors’ meeting to ensure creditors are fully informed before making their decision. Item 11 is an application provision relating to this amendment and provides that the new subsection 73(1A) will apply to proposals lodged with trustees after this Item commences (which will be a date fixed by Proclamation). The notification requirement will not apply to proposals given to trustees before commencement of these amendments.

129 Item 5 proposes to insert new subsection 73(2AA) which will require the trustee’s report to creditors on the bankrupt’s proposal to name each creditor who was identified on the bankrupt’s statement of affairs as a related entity. It is not intended to restrict the rights of related creditors to vote or receive dividends under the composition or scheme of arrangement. However, it is important that all creditors are aware of any relationships which may influence the voting outcome.

130 Item 6 proposes to insert new section 73B which will require the proposed trustee of the composition or scheme of arrangement to make a written declaration stating whether the bankrupt is a related entity of the proposed trustee and whether the bankrupt is a related entity of a related entity of the proposed trustee. The proposed trustee will be required to give a copy of this declaration to the Official Receiver and the trustee of the bankrupt’s estate. The trustee of the bankrupt’s estate will be required to give a copy of the declaration to all creditors at the same time as the report on the bankrupt’s proposal required under subsection 73(2). These changes are intended to address the risk that the proposed trustee may not act impartially and creditors may believe they are not fully informed about the bankrupt’s affairs and proposal. It is important that all creditors are aware of any relationships which may influence the voting outcome. This requirement will apply only where the proposed trustee of the composition or scheme is someone other than the trustee of the bankrupt’s estate.

131 Item 6 also proposes the introduction of a new section 73C which will require the bankrupt’s statement of affairs and the proposed trustee’s declaration of interests under subsection 73B(2) to be tabled at the creditors’ meeting. The proposed new section also requires the bankrupt to table a written statement at the meeting identifying any material changes to the information contained in his or her statement of affairs since it was provided. There will be a similar requirement for the proposed trustee to table a written statement about any material changes in relation to his or her declaration of relationships with the bankrupt.

132 Item 7 proposes to repeal subsections 75(4), (5), (6), (7) and (8). These provisions deal with annulment of a scheme or composition. These provisions are no longer necessary because Item 8 proposes to insert a new section 76B dealing with setting aside and termination of a composition of scheme of arrangement. The proposed new section will incorporate into Division 6 of Part IV the new sections 222 to 222D, 224 and 224A proposed in the amendments to Part X contained in this Bill. This will mean that the process for setting aside or terminating a post-bankruptcy composition or scheme of arrangement will mirror those applying to personal insolvency agreements.

133 Items 9 and 10 propose amendments to paragraph 109(1)(c) and subsection 114(1) to omit the word ‘annulled’. These amendments are consequential to the amendments proposed by Item 8 which will mean that a composition or scheme will no longer be annulled – instead, they will be ‘set aside’ or ‘terminated’.

134 Item 12 is a transitional provision applying to the amendments contained in this Schedule. The amendments made by this Schedule do not apply to a composition or scheme of arrangement which was annulled before the commencement of this Item, or to an application made under subsection 75(4) for an annulment of a composition or scheme of arrangement, or to proceedings in relation to that application which had not been finally determined. The existing Act and regulations will continue to apply to those matters.

135 Item 13 provides for the application of the amendments made by items 5 and 6 that concern the new disclosure requirements of the bankrupt’s related entities and the trustee’s declaration of relationships. If a copy of the trustee’s report on the proposal was sent to a creditor before the commencement of this Item, the new disclosure requirements will not apply. Schedule 2 will commence on a day to be fixed by Proclamation.
Schedule 3—Amendments relating to performance standards

136 Section 155H of the Act deals with involuntary termination of a trustee’s registration and sets out the grounds on which the Inspector-General may consider terminating such registration. Item 1 proposes to add, as an additional ground, failure by the trustee to comply with a prescribed standard. This refers to the minimum standards of performance expected of trustees and makes it clear that the Inspector-General is able to consider performance standards, as well as the duties and obligations of a trustee, in making decisions about a trustee’s suitability for continued registration. Item 2 proposes to amend subsection 155H(4) to include a reference to the new ground in the list of matters to be considered by a committee formed for the purposes of section 155H.

137 Item 3 proposes to insert new subsection 155(5) which will provide that the regulations may prescribe standards applicable to the exercise of powers, or the carrying out of duties, of registered trustees. The standards to be included in such regulations will be developed in consultation with the Insolvency Practitioners’ Association of Australia. The standards should also be reviewed regularly to ensure they adapt to emerging issues for practitioners. It is desirable to include these standards in the regulations so that they can be more easily updated.

138 These amendments will apply to registered trustees generally. The standards will also include expectations of controlling trustees. Therefore, a failure to comply with the standards when acting as a controlling trustee would be a matter for a committee to consider in relation to that practitioner’s status as a registered trustee.

139 The regulations currently provide the grounds upon which a solicitor becomes ineligible to act as a controlling trustee. The proposed amendments to section 155H will not affect solicitors. However, equivalent amendments will be made to the regulations to ensure the same standards apply to all controlling trustees.
Schedule 4—Amendments relating to voting documents

140 Section 263C of the Act creates an offence where a creditor knowingly or recklessly gives the trustee a statement under section 64D that is false or misleading in a material particular. A statement under section 64D concerns the creditor’s entitlement to vote.

141 Section 64E allows a creditor to appoint a proxy to vote on behalf of the creditor at the meeting.

142 The amendments proposed in this Schedule are intended to expand the scope of the offence to include false or misleading statement given in both the section 64D statement and the proxy under section 64E.

143 Item 1 proposes to omit, from subsection 263C(1), the words ‘section 64D statement knowing or reckless that the statement’ and replacing them with the words ‘voting document knowing or reckless that the document’.

144 Item 2 proposes to repeal the definition of ‘section 64D statement’ in subsection 263C(2). Item 3 proposes to insert a new definition of ‘voting document’ in subsection 263C(2) which encompasses both the section 64D statement and a proxy form as described in section 64E. The amendments will apply to voting documents given to the trustee for the purposes of all meetings called under the Act (that is, under Part IV, IX, X or XI).
Schedule 5—Amendments relating to notice of meetings

145 Section 64A of the Act outlines the requirements applying to notices of creditors’ meetings. Subsection 64A(2) requires these notices to be in writing and delivered by post, document exchange or facsimile. These very specific requirements arguably prevent other forms of delivery such as email. Many creditors, particularly large financial institutions, would prefer to receive notices electronically. The requirements in subsection 64A(2) are also inconsistent with other provisions of the Act which allow for service of documents in a manner specified by the regulations – this provides more flexibility by allowing the regulations to change as new technology emerges and different ways of delivering documents become available.

146 The amendments proposed by Items 1 and 2 will facilitate delivery of notices of meetings by email. Item 1 proposes an amendment to paragraph 64A(1)(b) so that, where the trustee is aware of an email address for a creditor, the trustee will be obliged to give that creditor notice of the meeting. Item 2 proposes to insert new subsection 64A(2) which will provide that notice of a meeting must be given in a manner specified in the regulations. Regulation 16.01 of the Bankruptcy Regulations provides that, unless the contrary intention appears, service of documents can be provided by any of the specified methods including those set out in subsection 64A(2) and by email. Paragraph 64A(2)(c) as currently drafted evinces a contrary intention to regulation 16.01 which means it is not currently possible to serve these notices by email. This is inconsistent with other provisions of the Act which do not prevent service by email. There is no reason why any of the methods specified in regulation 16.01 would not serve as sufficient notice of meetings.

147 Item 3 is an application provision which will provide that the amendments to section 64A apply where, after commencement of these amendments, a person tells the trustee, or the trustee otherwise becomes aware, that the person is a creditor of the bankrupt.
Schedule 6—Minor and technical amendments

148 The amendments proposed in the Schedule are minor amendments which have been identified in the ongoing review of the operation of the Act. Those amendments are technical in nature, do not affect the underlying policy of the Act and will enhance its operation.

Bankruptcy notices

149 Currently subparagraph 41(3)(c)(i) operates to prohibit the issue of bankruptcy notices which are based on judgments more than 6 years old but only where they are made by a Court exercising bankruptcy jurisdiction. State and Territory Court judgments which are more than 6 years old are not caught by that provision and bankruptcy notices have been issued on the basis of those judgments. Item 1 proposes to correct this anomaly and provide that any judgment order more than 6 years old may not be relied on in presenting a bankruptcy notice. Item 4(1) is an application provision which will mean that this amendment applies to a bankruptcy notice issued after commencement of the amendment.

Income contributions

150 At the start of a contribution period, a bankrupt is assessed for income contributions. Subsection 139W(2) provides for adjustment of the assessment at each contribution period based on a number of factors including changes in the number of dependants. The words ‘wholly or partly dependent on the bankrupt for economic support’ describe the word ‘dependants’ in paragraph 139W(2)(c). That description is redundant because the definition of ‘dependant’ at section 139K, inserted by amendments in 2002, already includes those words. Item 2 proposes that those words, and related redundant words, should be omitted from paragraph 139W(2)(c).

Arrest warrants

151 Item 3 proposes to repeal subsection 267E(2) and insert a new subsection 267E(2) which will provide that the Registrar may issue a warrant for the arrest of a bankrupt who fails to attend before the Official Receiver or authorised person. Subsection 267E(1) provides for the Registrar to issue a warrant for arrest of a person who fails to attend before the Official Receiver or authorised person who is provided with a power to obtain information and evidence under section 77C. However, under subsection 267E(2) the Registrar must not issue such a warrant unless he or she is satisfied that the person was offered an advance of allowances and expenses in respect of attendance, in accordance with subsection 77E(1). By virtue of subsection 77D(2), a bankrupt is not entitled to such an advance in respect of an attendance relating to her or his bankruptcy. It is proposed to extend the Registrar’s power of arrest to the bankrupt as it is often the bankrupt who does not appear, notwithstanding that the bankrupt is not entitled to an advance. Item 4(2) is an application provision which will mean that this amendment applies to a warrant issued after commencement of the amendment.
Schedule 7—Amendment of the Bankruptcy Legislation Amendment Act 2002

152 The amendments proposed in this Schedule will make an amendment to the Bankruptcy Legislation Amendment Act 2002 (the BLAA) necessary to correct a drafting error in the transitional provisions in that Act.

153 Section 2 of the BLAA explains when the Act commences. It provides that sections 1 to 3 of the Act commence on the day on which the Act receives Royal Assent. It further provides that the provisions of Schedule 1 (which contains the substantial amendments to the Bankruptcy Act 1966) commence on a single day to be fixed by Proclamation. That day was fixed as 5 May 2003.

154 The transitional provisions were intended to explain how the amendments made by the BLAA apply, particularly in relation to bankruptcies for which the date of bankruptcy was prior to commencement of the amendments. These provisions rely on the two concepts found in Item 198 of Schedule 1:

commencing date means the date on which section 1 commenced

commencing time means the time when section 1 commenced

155 Section 1 commenced on the day on which the Act received Royal Assent which was 18 December 2002.

156 Insolvency practitioners have been operating on the basis that the amendments commenced on 5 May 2003 and that they generally apply to conduct or events which occurred after that date.

157 The transitional provisions frequently explain how the amendments commence by reference to whether the date of bankruptcy was after the commencing date or the commencing time. It is now clear that both the commencing date and the commencing time are 18 December 2002 (that is, the date of Royal Assent).

158 For example, item 206, which deals in part with the application of the amendments which repealed early discharge from bankruptcy, state that the amendment applies “...to bankruptcies for which the date of the bankruptcy is after the commencing date.”

159 Trustees have been operating on the basis that this amendment applies to bankruptcies for which the date of bankruptcy is after 5 May 2003. However, it is now apparent that it applies to bankruptcies for which the date of bankruptcy is after 18 December 2003. This is certainly not what was intended in drafting these amendments. It was intended that the amendments should generally apply only to bankruptcies for which the date of bankruptcy was after the commencement of the actual amendment. This is significant because trustees could already be receiving early discharge applications from people who became bankrupt after 18 December 2002 when they may not, in fact, be entitled to be discharged.

160 The same problem arises in relation to all of the transitional provisions which refer to the commencing date and the commencing time.

161 The amendments proposed by Items 1 and 2 would replace the reference to section 1 with a reference to Schedule 1 in the definitions of commencing day and commencing time in Item 198 of Schedule 1 of the BLAA. Item 3 is a validation provision intended to protect any action taken which was based on the assumption that the amendments actually commenced on and applied from 5 May 2003.

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