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1 1996 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES BANKRUPTCY LEGISLATION AMENDMENT BILL 1996 EXPLANATORY MEMORANDUM - (Circulated by authority of the Attorney-General and Minister for Justice - the Honourable DaryIWilliams AM QC MP) Cat. No ISBN

2 Printed by Authority by the Commonwealth Government Printer --

3 BANKRUPTCY LEGISLATION AMENDMENT BILL EXPLANATORY MEMORANDUM READER'S GUIDE 1 This explanatory memorandum is divided into 5 main sections, an introduction and summary of the main provisions of the Bankruptcy Legislation Amendment Bill 1996 (the Bill) (Section I), a discussion of the main policy objectives underlying each of the provisions (Section 2), and a detailed discussion of each provision, item by item (Section 3). At the end, there is a table which sets out the existing provisions of the Bankruptcy Act 1966 and indicates how each provision will be affected by the Bill (if at all), what new provisions are proposed to be included, and what existing provisions are proposed to be repealed (Section 4). Section 5 sets out the legislative history of the Bankruptcy Act Section 1 INTRODUCTION AND SUMMARY OF MAIN PROVISIONS 2 The Bankruptcy Legislation Amendment Bill 1996 (the Bill) will make a number of significant and important changes to bankruptcy law, to further the Government's commitment to modernising personal insolvency law. The Bill comprises 3 Parts, the first dealing with preliminary matters, the second making a small amendment to the Administrative Decisions (Judicial Review) Act 1977 which also comprises the vast majority of the Bill's provisions, proposes amendments to the Bankruptcy Act 1966 (the Act), and the third part making the language of the Act gender neutral. 3 The amendments to the Act fall into 15 main categories, as follows: (a) (b) the establishment of a 'One Stop Service' for bankrupts and insolvent debtors within the Insolvency and Trustee Service, Australia (ITSA), the Division of the Attorney-General's Department which deals with bankruptcy and personal insolvency matters, and to rationalise bankruptcy administration by abolishing the offices of Registrar and Deputy Registrar in Bankruptcy; revision of the antecedent transaction avoidance provisions under which trustees can recover property from third parties who are given property by debtors facing bankruptcy or insolvency;

4 2 (c) revision of Part X of the Act which creates alternative regimes to bankruptcy,. by streamlining the process of establishing such administrations, and by making meeting procedures align with those in bankruptcy; (d) creation of a new form of insolvency administration to be known as debt agreements, for low income debtors for whom administrations under Part X of the Act are not a feasible option; (e) modernising the statement of the duties of bankruptcy trustees; (f) establishing new administrative arrangements for the registration of trustees under the Act; (g) correcting anomalies and making improvements to the compulsory income contribution regime provided for in the Act in light of experience with the operation of the scheme since it first came into effect on 1 July 1992; (h) providing for forms used for administrative purposes under the Act to be approved administratively, rather than incorporated in statutory forms prescribed by subordinate legislation; (i) conferring jurisdiction in bankruptcy on the Federal Court of Australia to the exclusion of courts other than the High Court under the Constitution, and the defunct Federal Court of Bankruptcy, subject to the cross vesting of jurisdiction scheme provided for in the Jurisdiction of Courts (Cross Vesting) Act 1987 and complementary State and Territory legislation; (j) changing the power to make subordinate legislation so that the Governor General will be empowered to make regulations relating to matters other than court practice and procedure, leaving those matters to be dealt with by the courts in their own rules; (k) providing for the creation, by regulations, of a new register of bankruptcies and personal insolvencies to be known as the National Personal Insolvency Index, in order to place the present bankruptcy record keeping system on a sound statutory basis; (1) making powers of trustees discretionary, but subject to review by the Court; (m) improving investigative powers of trustees; (n) repeal of spent transitional provisions relating to the changeover from the Bankruptcy Act 1924 to the Act, and conversion to decimal currency in 1966; (0) amendments consequential to those made under the heads outlined in paragraphs (a) to (n) above, and transitional provisions to facilitate implementation of the One Stop Service initiative.

5 3 Financial Impact Statement 4 The key feature of the Bill involving additional outlay is the One Stop Service initiative. It will be resourced from two sources. The first is the transfer to ITSA from the Federal Court of some salaries and administrative expenses associated with the transfer of those responsibilities currently undertaken by the Court. t 5 Secondly, the Attorney-General's Department received funds as part of the Access to Justice New Policy Proposal in the 1994/95 Budget, to enable the delivery of new and improved services, together with transitional and setup costs for the One Stop Service. Those amounts are: 1996/97 $900, /98 $325, /99 $150, /2000 $122,000 Those funds cover the salaries of temporary staff (six in 1996/97 and three in 1997/98), costs of information and publicity, the establishment of the new bankruptcy register (NPII), a research facility, and minor fitout and accommodation costs. The NPU will operate in conjunction with ITSA's new OTISS computer system which is nearing introduction and which has been separately funded. 6 Revenue currently recovered by the Federal Court in respect of bankruptcy notices, bankruptcy fees, and searches of the register in future will be recovered by the Attorney General's Department, through ITSA. 7 It is estimated that by 1998/99 the full benefits of rationalisation from One Stop Service will be available to ITSA. These factors will offset the ongoing operational costs of One Stop Service to a Significant extent. It is not expected that the level of other revenue items related to bankruptcy activities will be affected by these amendments. 8 A second area of new activity potentially involving minor additional costs is the administration of debt agreements by ITSA on behalf of the Official Trustee. It is estimated that the bulk of debt agreements will occur in lieu of minor bankruptcies and, hence, they will not involve any, or a significant, increase over the current workload levels of ITSA, which handles approximately 92% of all bankruptcies. Debt agreements will not produce any increased income or revenue to the Commonwealth.

6 4 Section 2 - Policy objectives (a) One Stop Service initiative and administrative rationalisation 9 Bankruptcy administration has traditionally comprised 3 main branches, namely registry functions, estate administration functions, and trustee supervision and law enforcement type functions. The Act provides for statutory office holders and private citizens registered under the Act to perform these functions, and to some extent, the vanous functions overlap. It is necessary to outline the existing functions of the various participants in bankruptcy administration and briefly relate the recent history of bankruptcy administration, in order to understand how the system works, and why the One Stop Service initiative is proposed by the Bill. 10 The Inspector-General in Bankruptcy, in practice, is the administrative head of ITSA. The principal functions of the office are to oversight bankruptcy administration, to prepare a report to the Minister about the operation of the Act, to manage the Common Investment Fund in which all moneys held by the statutory corporation called the Official Trustee are invested, and to review various decisions of trustees relating to matters such as income contributions, and discharge from bankruptcy. The Inspector Generat as delegate of the Minister, also authorises Commonwealth funding of proceedings and inquiries in relation to bankrupt estates and bankrupt deceased estates. The majority of the statutory functions performed by the Inspector-General fall into the category of supervisory ancllaw enforcement type functions. As administrative head of IT'::iA, the Inspector-General is the supervisor, under the Public Service Act 1922, of all the Official Receivers and their staff. The functions of the Official Receivers are described below. 11 The Registrars and Deputy Registrars in Bankruptcy have functions which span all three categories of law enforcement, supervision of trustees and estate administration. The Registrars maintain records about all the persons who become bankrupt, or enter into some other form of insolvency administration under the Act. Those records include paper records, where files are maintained, containing creditor's and debtor's petitions, statements of affairs by debtors and bankrupts, trustee's statements and accounts relating to administrations, and also electronic records, in particular a data base known

7 5 by the acronym BIOS, which refers to the Bankruptcy Index Online System, which records particulars of bankruptcies and other administrations. 12 Registrars issue bankruptcy notices, which in many instances are the first step in bankruptcy proceedings brought by creditors. They are responsible, under the Act, for accepting and processing debtor's petitions, and for notifying bankruptcies that come about as a result of sequestration orders made by courts against debtors. Registrars preside at examinations into the conduct of debtors, bankrupts and associated persons and at examinations of trustees. Registrars have some residual responsibility for auditing the accounts of trustees, although by administrative arrangements developed in recent years, the task of conducting audits of trustees accounts and records has been transferred to ITSA. 13 The Registrars are appointed from among the District Registrars and Deput~ District Registrars of the Federal Court of Australia. In fact, in each State and Territory, the Registrar in Bankruptcy is the District Registrar of the Federal Court. The Registrar and Deputy Registrars of the Federal Court are able to perform all the functions of a Registrar in Bankruptcy. The administrative supervisor of the Registrars is the Registrar of the Federal Court, a statutory office holder under the Federal Court of Australia Act 1976, who has similar powers and functions to a Departmental Secretary, in relation to the staff of the Federal Court. It is worth noting that prior to the creation of the Federal Court, the Inspector-General was also the administrative supervisor of the Registrars. When the Federal Court was created, an agreement was negotiated between the then Attorney-General and the then Minister for Business and Consumer Affairs for the Registrars and Deputy Registrars in Bankruptcy to be transferred from the Department of Business and Consumer Affairs to the Attorney-General's Department to form the core registry staff for the then new court. The Registrars and Deputy Registrars in Bankruptcy retained their appointments as such, and took on the additional functions of District and Deputy District Registrars of the Federal Court. 14 The Official Receivers in Bankruptcy are the regional heads of ITSA, and are statutory office holders under the Act, reporting administratively to the Inspector General in Bankruptcy, but independent in terms of the performance of their statutory functions. The principal role of the Official Receivers and their staff is to administer bankruptcies on behalf of the Official Trustee, a statutory corporation created by the Act to carry out the functions of a trustee. The Official Trustee administers of the order of

8 6 92% of bankruptcies, with the remaining 8% being administered by private sector registered trustees. The Official Trustee also administers most, although not all, deceased estates which are being administered in bankruptcy. The Official Trustee also administers a small proportion of Part X insolvencies, although this is usually as interim trustee, pending the appointment of a new registered trustee. The Official Trustee acts as trustee of a Part X administration usually where the registered trustee dies, or ceases for some other reason to be a registered trustee. 15 Official Receivers have other functions, which are performed in relation to bankruptcies being administered by the Official Trustee, and also bankruptcies and Part Xs being administered by registered trustees. Among those functions are conducting interviews of bankrupts and others on oath, carrying out investigations into bankruptcies, accessing premises for the purposes of obtaining information about bankrupts, issuing garnishment notices to enforce income contributions, issuing notices to recover property from persons who received property under void transactions, interviewing applicants for registration as trustees, varying income contribution assessments where a bankrupt claims to suffer hardship, referring alleged bankruptcy offences to the Australian Federal Police for investigation, or the Director of Public Prosecutions for prosecution, and performing functions delegated to them by the Inspector-General. t 16 The Bill proposes the abolition of the offices of Registrar and Deputy Registrar in Bankruptcy, and the distribution of the functions performed by them among the Inspector-General, the Official Receivers, trustees and the Federal Court. The main reason for doing this is to ensure that as much as possible, the public only has to deal with one administrative agency in relation to bankruptcy and personal insolvency matters, that is, ITSA, rather than 2 agencies, ITSA and the Federal Court (by virtue of the fact that the Court's registry staff are the Bankruptcy Registrars). 17 When a debtor presents a debtor's petition for bankruptcy, he or she must go to the Registrar's office in the Federal Court to complete a petition and a statement of affairs. When the petition is accepted, the debtor becomes a bankrupt. A file relating to the bankruptcy is opened, and the petition and statement of affairs are kept on it. The Registrar must notify the trustee of the bankruptcy and send a copy of the statement of affairs to the trustee. The particulars of the bankruptcy are recorded on the BIOS data base referred to earlier. In a large number of cases, the bankrupt has no assets, and a

9 7 low income so that he or she would not be liable to make contributions to the estate. In those cases, no further material is added to the file, because nothing further can prod ucti vel y be done. If however, there are assets, and further work is done, or litigation is undertaken, documents relating to the bankruptcy will be incorporated in lhl' till, Those will be either court documents, or documents required to be filed with the Registrar, or generated by the Registrar. _ 18 Creditor's petitions are somewhat different, in that they are presented by a creditor and served on the debtor, and commonly, there will be a contest between the creditor and the debtor as to whether a sequestration order should be made. Creditor's petitions are dealt with by court hearing before a Judge, or a District or Deputy District Registrar of the Federal Court exercising delegated judicial powers. If a sequestration order is made, the bankrupt must file a statement of affairs with the Registrar within 14 days of being notified of the order. Unlike with debtor's petitions, the bankrupt, rather than the Registrar has to give a copy of the statement of affairs to the trustee. 19 In the 1994/5 financial year, 11,748 bankruptcies (approximately 83% of all bankruptcies) resulted from the acceptance of debtor's petitions, and 2,384 bankruptcies (17% of total) resulted from sequestration orders on creditor's petitions. The Official Trustee became trustee of 13,043 of these bankruptcies (92%), and registered trustees lullk on 1089 bankruptcies (8%). Clearly, if the bankruptcy registry function was incorporated in ITSA, many debtors would not need to visit the Federal Court at all- the petition could be presented at ITSA, along with the statement of affairs, and, if a registered trustee had not consented to be the trustee, the administration of the bankrupt's estate by the Official Receiver, on behalf of the Official Trustee could begin immediately, without the exchange of papers and documents between ITSA and the Federal Court. 20 For some years, the officer in charge of the ITS A office in Townsville has held a statutory appointment as a Deputy Registrar in Bankruptcy for the limited purpose of accepting debtor's petitions, because of the absence of a bankruptcy registry in North Queensland. This system has worked quite well, and showed that there are advantages in merging at least some of the functions of the office of Registrar with that of Official Receiver.

10 8 21 A number of the functions presently performed by the Registrar will, after the commencement of the amendments be carried out by Official Receivers. These functions include: issuing bankruptcy notices; the acceptance of debtor's petitions; the maintenance of bankruptcy records, within the framework of the proposed new National Personal Insolvency Index (NPII) discussed below; the administration of the pre bankruptcy moratorium provisions, under which a debtor who proposes to present a debtor's petition against himself or herself can invoke a 7 day stay period to enable him or her to give consideration to whether he or she should enter an insolvency administration outside bankruptcy; accepting authorities signed by debtors under section 188 to enable the debtor to propose to creditors an administration under Part X of the Act, namely a deed of assignment, a deed of arrangement or a composition; being the repository for documents required to be filed by registered trustees, such as accounts relating to the administration of estates. 22 The opportunity has been taken in the Bill, as far as possible, to reduce the requirements on trustees to file documents and certificates, in order to cut down administrative costs and to ensure that only the information which is essential to be included in the public record is in fact included. For example, section 64A requires a trustee to file certificates of resolutions and special resolutions passed at meetings of creditors with the Registrar. Such certificates will no longer be required to be filed, but the trustee will be under an obligation to retain appropriate records of resolutions and special resolutions and permit the records to be inspected at all reasonable times by the creditors, the bankrupt and by officers of the Department conducting audits of administrations. D21_ Revision of antecedent transaction avoidance provisions 23 A fundamental feature of the law of bankruptcy is that in certain circumstances, it operates to enable property and money given or transferred by a person who subsequently becomes a bankrupt to be recovered by the bankruptcy trustee, to enable its sale, and the distribution of the proceeds of the sale to the bankrupt's creditors. The current law provides for a period of 'relation back', and makes specific provision in

11 9 relation to 'settlements' of property (section 120), fraudulent transactions (section 121) and preferential payments or transfers to creditors (section 122). The provisions focus largely on the nature of the transaction being impugned, and the intention of the parties to the transaction. The Bill proposes changes to this area of the law to simplify it, and to change the focus of the provisions away from the intention of the parties to particular transactions, to the nature of the transactions and the likely effect on the creditors. To the extent that a person's intention in dealing with property is relevant, as it will be in relation to proposed section 121, objective criteria are laid down which can be used to draw inferences as to the likely intention of the transferor of property. The Bill also proposes the insertion of a new section under which the provisions of trust deeds which provide for some forfeiture or qualification of the interest of a beneficiary in a trust fund in the event that the beneficiary becomes bankrupt or insolvent will be void against the trustee of the beneficiary's bankrupt or insolvent estate (item 189, proposed section 302B). 24 When a person becomes a bankrupt, the divisible property of the person vests in the trustee. The bankrupt has no power to deal with the property that has vested in the trustee. The property belongs to the trustee, and it is the trustee's task to sell the property and to distribute the proceeds of the sale among the creditors. This vesting of property is forever. At no time does the bankrupt get the property back, although if the creditors are paid in full, the bankrupt is entitled to receive whatever is left over. 25 The trustee's title to the property is said to 'relate back' to the commencement of the bankruptcy. A bankruptcy is taken to commence at the occasion of the commission by the debtor of the first act of bankruptcy within the period of 6 months before the presentation of the petition on or by virtue of which the debtor becomes a bankrupt. This notion is of particular importance in bankruptcies which result from the presentation of creditor's petitions, because a creditor's petition cannot be presented unless the debtor has committed an act of bankruptcy upon which the petition can be founded. The trustee may be able to claim property from a person to whom the bankrupt has disposed of it, whether voluntarily or involuntarily, during the relation back period unless the person gave valuable consideration for the property, did not know a bankruptcy petition had been presented against the debtor, and acted in good faith in the ordinary course of business.

12 10 26 Section 120 of the Act makes 'settlements of property', other than settlements in consideration of marriage, or settlements in favour of a purchaser in good faith and for valuable consideration void against the trustee if they occurred within a period of 2 years before the commencement of the bankruptcy of the settlor. Such settlements will also be void if they occurred more than 2 years before, but not more than 5 years before the commencement of the bankruptcy unless at the time of the settlement, the settlor was able to pay all of his or her debts without the aid of the property comprised in the settlement. 27 There are two obvious difficulties with section 120, the first being the obscure language of the provision and the second, the focus of the section on the type of transaction entered into by the debtor, rather than on the effect or possible effect on creditors of the entry of the person into the transaction concerned. The term 'settlement' has an accepted meaning at common law and refers to a disposition of property made with the intention that the person receiving the property should retain it more or less permanently. Some transactions which substantially deplete the assets of the debtor could be held not to be settlements, because of the absence of an intention that the property should be retained by the recipient. Some of these matters were commented upon by the Law Reform Commission in its report ALRC45, General Insolvency Inquiry, Australian Government Publishing Service, Canberra 1988, paragraphs 662 to t> The Bill proposes the replacement of section 120 with a much simplified provision, under which a transfer of property by a person who later becomes a bankrupt is void against the trustee if it took place not earlier than 5 years before the commencement of the bankruptcy, and the transferee gave no consideration or consideration less than the market value of the property concerned, as at the time of the transfer. If the transfer took place more than 2 years but not more than 5 years before the commencement of the bankruptcy, the transfer will be valid against the trustee if the recipient of the property proves that the transferor was not 'insolvent' at the time. The term 'insolvent' is proposed to be defined in new subsections 5(2) and 5(3). The new subsections correspond with subsections 95A(1) and (2) of the Corporations Law, which define when a person is insolvent. A person is taken to be insolvent when he or she is not able to pay all of his or her debts when they become due and payable. 29 Section 121 of the Act deals with fraudulent dispositions of property, and provides that a disposition of property made with intent to defraud creditors, not being for

13 11 i,'aluableconsideration in favour of a person acting in good faith is void against the trustee. The most problematic aspect of this section is the use of the notion of 'fraudulent intent', which carries with it overtones of criminality. The Bill proposes to replace section 121 with new provisions which will make a transfer of property void where the property would probably have become part of the bankrupt's estate were it not for the transfer, and the transferor's main purpose in making the transfer was to prevent the transferred property from becoming divisible among the transferor's creditors, or to hinder or delay the process of making property available for division among the creditors. The transferor's main purpose is to be taken to be to defeat or delay creditors if it can reasonably be inferred from all the circumstances that at the time of the transfer, the transferor was, or was about to become "insolvent', as proposed to be defined in new subsections 5(2) and 5(3). 30 Section 122, dealing with preferences, is proposed to be rewritten by the Bill, to make it simpler, and to introduce the test of whether consideration given for a transfer Wd~ ~qual to the market value of the property transferred, at the time of the transfer. These revised notions will be utilised in proposed new sections 120 and 121. Further, for the purposes of these sections certain matters are defined to have no value as consideration, and those are promises to marry or become the de facto spouse of a person, the transferee's love and affection for the transfer, the making of a gift under deed where the transferee is the spouse or de facto spouse of the transferor, and the fact that the transferor is related to the transferee. 31 The items of the Bill which relate to the avoidance of transfers of property which a person has entered into before bankruptcy are items 213 and 327. (c) Revision of Part X of the Act by streamlining establishment processes and making meeting procedures align with those in bankruptcy 32 Part X of the Act provides for debtors to enter into insolvency administrations uutslde bankruptcy. In particular, a debtor can enter into a deed of assignment, a deed of arrangement or a composition. Under a.deed of assignment, all the debtor's property, which would be divisible property if the debtor became a bankrupt, vests in a trustee for distribution to the debtor's creditors. Execution of the deed releases the debtor from all debts which would be provable if the debtor had become a bankrupt when executing the deed. A deed of arrangement may provide for the administration of the affairs of a

14 12 debtor with a view to the payment, in whole or in part of the debtor's debts. A deed of arrangement might provide for the carrying on of a debtor's business with a view to trading out of difficulties, and could include other elements, such as assignment of property or future income. A deed of arrangement does not release the debtor from his or her debts unless the deed contains a specific provision releasing the debtor. A composition is an arrangement by which creditors of a debtor agree to accept payment of debts due to them by instalments, or agree to accept, in full satisfaction of debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by instalments or in a lump sum or otherwise. 33 The manner in which a Part X administration is initiated is provided for in Division 2 and it is that a debtor signs an authority under section 188 of the Act in favour of a registered trustee or a solicitor. Within 10 days before giving the authority, the debtor must complete a statement of his or her affairs, which is given to the registered trustee or the solicitor. A solicitor's obligation is to call a meeting of the creditors within the time prescribed in the Act (thirty five days in a month other than December or forty two days if the authority is given in December), for the creditors to consider a proposal that the debtor's affairs be dealt with under the Part. In the case of a registered trustee, the trustee, as well as having to call a meeting of the debtor's creditors, must take control of the debtor's property. The debtor is not able to deal with the property without the express authority of the trustee. The control period continues until the creditors resolve to release the debtor's property from control, a deed of assignment or deed of arrangement is executed by the debtor, a composition is accepted by the creditors, the Court releases the debtor's property from control, the debtor becomes a bankrupt or the debtor dies, whichever happens first. 34 The registered trustee must, within 14 days of consenting to exercise the power under the authority prepare a report that summarises the debtor's affairs, and file the report with the Registrar. Both registered trustees and solicitors must prepare a statement setting out the possible special resolutions that may be passed by creditors at a meeting. 35 A number of provisions of Division 2 of Part X deal with the procedure to be followed at meetings called pursuant to section 188 authorities. Section 196 deals with the election of the chairman, section 197 with adjournments, section 198 with entitlement to vote at a meeting, section 199 with restrictions on proxy voting, section

15 with the manner of voting, section 201 with admission and rejection of claims to vote, section 202 with quorum at meetings and section 203 deals with the preparation of minutes of meetings and the preparation and filing with the Registrar of certificates setting out the terms of resolutions passed. 36 Section 204 sets out the special resolutions that may be passed at a meeting of creditors. Those special resolutions are that the debtor's property be released from control, that the debtor execute a deed of assignment, that the debtor execute a deed of arrangement, that the creditors accept a composition proposed by the debtor, or that the debtor present a debtor's petition for bankruptcy within 7 days of the passing of the resolution. 37 The Bill proposes a number of changes to Division 2 of Part X. First, the functions of a solicitor and those of a registered trustee will be made the same, that is, both will assume control of the property of the debtor after consenting to exercise the powers conferred by an authority under section It will no longer be necessary for the debtor to prepare a statement of affairs in the period before executing the authority, however the debtor will be required to do so within 14 days after executing an authority under section 188. Although in most cases the controlling trustee may require the debtor to furnish the statement before consenting, in order to give the trustee a better understanding of the debtor's financial position, there may be cases, for example, where the debtor is running a business where it is not easy to prepare a comprehensive statement of affairs, but it may be of critical importance to the ongoing conduct of the business that its assets be taken under control. The changed arrangements will enable this to be done. 39 The Bill also includes provision for the control period to come to an end by operation of law. At present, the control period can continue indefinitely, if creditors do not agree on any Part X proposal or release the debtor's property from control, the debtor does not become bankrupt or die, and no person applies to the Court for an order releasing the debtor's property from control. In these circumstances, the debtor and the controlling trustee may be exposed to liabilities for offences or costs, and it is appropriate that the period should come to an end without the need for applications to the Court or the convening of a meeting of creditors for these purposes.

16 14 40 When a person becomes a bankrupt, legal proceedings against the person in respect of provable debts are stayed. That is not the case where a debtor has executed an authority under Part X. However, it is appropriate that legal proceedings in respect of provable debts should be stayed during the control period, so that in the event the debtor does enter into a Part X administration, the creditors are largely on an equal footing. The Bill includes provision to this effect. 41 When an authority under section 188 in favour of a registered trustee comes into t effect, the trustee is able to deal with the debtor's property as if he or she were the attorney of the debtor, and the debtor is not able to deal with his or her property, except to the extent the trustee authorises. The Bill will modify this position so that the coming into effect of an authority will give rise to a statutory charge over the debtor's property, so that the trustee's control over the property is enhanced, and property potentially available to creditors under a possible future Part X administration is not dissipated. 42 The provisions dealing with the calling of meetings and procedure at meetings referred to above, sections 196 to 203, are proposed to be repealed, and the comprehensive provisions of Division 5 of Part IV of the Act, laying down a code of meeting procedure in relation to bankruptcy is to be made applicable to meetings under Part X as if the debtor were a bankrupt and the controlling trustee was the trustee in the bankruptcy. Provision is included to enable modifications to be made to the provisions of Division 5 of Part IV by the regulations to suit the particular requirements of Part X. This proposed change will make the same set of basic rules about meetings applicable in all the forms of administration available under the Act. 43 Another important change is that proposed to section 204 of the Act. One of the special resolutions that a meeting of creditors called pursuant to a section 188 authority can pass is that the debtor present a debtor's petition for bankruptcy within 7 days of the passing of the resolution. There are instances where the debtor does not do this, and creditors are then put to the inconvenience and expense of having to bring proceedings against the debtor. Accordingly, the bill proposes that meetings of creditors be able to pass a special resolution that the debtor become bankrupt, and the debtor will become bankrupt by operation of law on the 15th day after the passing of the special resolution, unless the debtor applies to the court for an order setting aside the resolution. If the debtor does apply to the Court for an order, the control period will continue until the application is disposed of by the Court. If the Court dismisses the debtor's application,

17 15 or the debtor's application lapses or is withdrawn, the debtor will become a bankrupt at the time of the dismissal, withdrawal or lapsing of the application. If the Court grants the dehtor's application, the special resolution of the creditors will be set aside, and the debtur':, property will be released from control. 44 The items of the Bill relating to these matters are items 331 and 339. Cd) Debt agreements - a new form of insolvency administration 45 Over a number of years, there have been calls for a form of insolvency administration outside bankruptcy and Part X that can be availed of by persons with low levels of debt, few assets and low incomes who are not able to afford to enter Part Xs and who do not wish to become bankrupt. The Bill proposes the insertion of a new Part IX into the Act which sets up a simple form of insolvency administration to be known as debt agreements. In 1977, the Law Reform Commission published its report ALRC6, Insolvency: The Regular Payment of Debts proposing a regular payment of debts scheme. In its report the Commission commented: 'The complexity and attendant cost of the procedures available outside bankruptcy may be appropriate, at least in some respects, for larger bankruptcies; they are assuredly inappropriate for small or consumer debtors and their creditors, for whom the expense alone constitutes adequate deterrent. But Part X is an inadequate response for the further reason that it is voluntary only in its initial stages; thereafter the creditors alone may call the tune. As long as a debtor has to risk forced sequestration in bankruptcy, Part X will continue to be little used by debtors, business debtors or small consumer debtors alike... Experience both in Australia and elsewhere indicates that rehabilitation of debtors and the successful completion of schemes [of regular debt repayment] depend to a very large degree upon the will and enthusiasm of debtors freely and voluntarily entering into them as dignified and responsible means of solving their debt difficulties.' (ALRC6 at paragraphs 31 and 38)'. In ALRC45, the Law Reform Commission repeated its call for a new alternative form of administration for low income debtors and proposed that a new Part IX be introduced intu the Act entitled Debts Payment Plans. The new Part IX proposed to be introduced by the Bill draws to an extent on the Commission's recommendations made in ALRC6 dnd ALRC45, however there are some significant differences in approach.

18 Debtors with levels of liability not exceeding a threshold amount will be able to put forward a proposal to creditors for dealing with debts. Thus, a debtor will be eligible to propose a debt agreement where his or her debts do not exceed $50,996.40, that is, 7 times the maximum basic rate of partnered pension under the Social Security Act As the amount of pension is indexed the threshold will also increase over time in line with pension movements. The threshold amount may be varied by regulation. 47 The debtor would put the proposal to the Official Trustee, which would be responsible for ascertaining whether the proposal was acceptable to the debtor's creditors. Proposals might relate to matters such as the payment of less than the full amount of all or any of the debtor's debts, a moratorium on payment, periodic payments out of income, or an undertaking to seek financial advice. This could be done in 2 ways, either by calling a meeting of the creditors, or sending notice of the proposal to the creditors, and requesting them to indicate by voting letter whether they accept the proposal. Before a proposal can become a debt agreement, it must get the approval of a special resolution of the creditors if a meeting is called to consider it. A special resolution is a resolution passed by 75% in value and a majority in number of creditors present personally, by attorney, proxy or by telephone at a meeting and voting on the resolution. Where the voting letter procedure is used, creditors will have to give written notice of their acceptance or otherwise of the proposal before a specified time, referred to as 'the deadline', passes, and a majority in number and at least 75% in value of creditors replying must approve the proposal before it can become a debt agreement. 48 The same mechanisms will be able to be used to vary and terminate debt agreements. In addition, the Bill provides for the termination of a debt agreement by the Court, and will empower the Court to declare a debt agreement to be void. A debt agreement will otherwise come to an end when the debtor has fulfilled all of his or her obligations under it. 49 The Official Trustee will not necessarily perform a trustee function under a debt agreement, as it would as trustee in a bankruptcy, requesting proofs of debt from creditors, realising assets or collecting moneys, holding funds and distributing them among creditors. A debt agreement could provide for the debtor to make payments to cr~ditors directly, or for this to be done by some other third party, or perhaps, one of the creditors on behalf of the others. It is not proposed that there be any fees or administrative charges associated with debt agreements. Oversighting of agreements

19 17 will be provided on the basis that it is fully funded by Government. It is thought that if fees were charged, debt agreements would in many cases not be viable either for the debtor, or for his or her creditors, which would of course defeat the purpose of creating a further alternative to existing regimes. 50 A debt agreement will release the debtor from debts which would be provable in bankruptcy as if the debtor had become a bankrupt when the particulars of the agreement are recorded on the National Personal Insolvency Index. The making of a debt agreement will operate to stay legal proceedings for enforcement of debts, other than debts or liabilities arising under a maintenance agreement or maintenance order. 51 Item 325 of the Bill proposes the insertion of the new Part into the Act. ~ Duties of trustees 52 Trustees in bankruptcy are subject to the general law of trusts, as modified by the provisions of the Act. Among the duties of trustees at general law are the following: the trustee must be fully acquainted with the terms of the trust; the trust property must be brought under the trustee's effective control; the trustee must adhere to and carry out the terms of the trust; the trustee must act impartially between the beneficiaries; the trustee must properly invest the trust funds, and keep and render proper accounts and give full information about the affairs of the trust; and the trustee must not use trust property for his or her own benefit. Section 19 of the Act specifies particular duties of bankruptcy trustees. These duties include: to notify the fact of bankruptcy in accordance with the subordinate legislation; to ascertain the assets and liabilities of the bankrupt; to convene meetings of the bankrupt's creditors; to attend meetings of creditors or to arrange for an authorised person to attend such meetings on the trustee's behalf; in a case where the bankrupt became a bankrupt as a result of the making of a sequestration order, ensure that the bankrupt files a statement of affairs as required by the Act;

20 18 advise creditors of the trustee's opinion about whether the bankrupt is eligible for, and not disqualified from, early discharge. Other provisions of the Act also impose specific duties on trustees. Section 64 requires the trustee to convene a meeting of creditors whenever the creditors so direct by resolution, or where at least 25% in value of the creditors so request in writing. Section 140 requires the trustee to declare and distribute dividends among the creditors who have proved their debts with all convenient speed. Division 3 of Part VIII of the Act sets out a number of requirements trustees must observe in dealing with moneys received by 4 them in their capacity as trustee. 53 The Bill proposes the revision of the general statement of trustee's duties in section 19 to give it more contemporary relevance. Some of the additional duties proposed to be incorporated are as follows. The trustee will have to determine whether the estate includes property that can be realised to pay a dividend to creditors, and report to the creditors within 3 months of the bankruptcy on the likelihood of the creditors receiving a dividend before the bankruptcy ends. Previously, trustees were required to prepare a report about the causes of bankruptcy and file it with the Registrar. Subsequently, this was changed so that an investigation would be carried out about the affairs of a bankrupt if it seemed desirable to do so, and a report would then be filed about those investigations pursuant to section 19AA. However, it is preferable that those who are directly interested in the administration of the estate, namely the creditors, should be informed, reasonably early in the administration of the likely prospects of their receiving a dividend, and it should be the duty of the trustee to so inform the creditors. 54 The Bill proposes the insertion of specific duties that trustees consider whether the bankrupt has made a transfer of property that is void against the trustee, and take appropriate steps to recover property for the benefit of the estate. The trustee's duties will extend to taking whatever steps are practicable to ensure that the bankrupt discharges all of his or her duties under the Act, considers whether the bankrupt has committed any offences against the Act, and refers to relevant law enforcement authorities any evidence that the bankrupt has committed an offence. 55 The Bill also proposes that it be stated that the trustee has a duty to administer estates as efficiently as possible by avoiding unnecessary expense, and trustees must exercise their powers and perform their functions in a commercially sound way. It is of fundamental importance that estates be administered in a commercially sound way. In

21 19 particular, trustees must exercise judgment on matters such as whether the costs of recovering property are likely to outweigh the benefits to creditors in terms of returning a dividend. 56 It will also be the duty of the trustee of a bankrupt's estate to enter an objection to the discharge of the bankrupt if the trustee believes that this will induce the bankrupt to carry out his or her responsibilities. 57 The items of the Bill relating to these matters are items 74 and 275. (f) New administrative arrangements for the registration of trustees 58 Under the existing arrangements for the registration of trustees, an individual must make an application to the Court for an order directing the Registrar to register him or her as a trustee. Before making an application however, the applicant must apply to the Official Receiver for a report in relation to the application. A committee comprising the Official Receiver, another officer of the Department and a representative of the Insolvency Practitioners' Association of Australia (the IPAA) is convened to interview the applicant about his or her suitability to be registered, having regard to criteria such as the applicant's abilities in oral and written communication, whether or not the applicant has any experience in bankruptcy and company liquidation work, the applicant's knowledge of the relevant law, and the applicant's capacity in relation to the :JLKce::,sful conduct of business activities. The applicant has to furnish to the committee at least 2 written references about these matters. This is provided for under the Bankruptcy Rules. 59 The report is one of the documents that has to be presented to the Court hearing an application for a person to be registered. The Court must be satisfied, on the basis of the report, and other factors, such as that the applicant possesses the relevant educational qualifications, and is not himself or herself a bankrupt or insolvent, that the person is suitable to be registered. If it is so satisfied, it may make the order referred to earlier that the Registrar register the applicant. The Registrar cannot register the applicant before the applicant enters into a bond for the prescribed amount, and with approved sureties.

22 20 60 It has been widely believed that these bonds involve the making of an up front cash payment by the person who becomes registered. That is in fact not the case - the bond is merely a written undertaking that he or she will pay a specified sum of money to the Commonwealth in the event that the terms of the bond are breached. The trustee's insurer would be the person who had to make any payment in the event that a bond was breached. Registration comes to an end automatically at the end of 3 years from the date of registration, but there is provision for it to be extended automatically where the person asks for an extension, and no person raises an objection to the continued registration. The person can also relinquish registration voluntarily by telling the Registrar that he or she wants to stop being a registered trustee. The Court is empowered to cancel the registration of a person in various circumstances, for example where the trustee becomes a bankrupt or commits a breach of duty in the course of administration of an estate. 62 This system is proposed to be substantially modified by the Bill. Under the proposals in the Bill, the Inspector-General in Bankruptcy will become the registering authority. In carrying out this function, the Inspector-General will be required to implement the reports of the committee which conducts interviews of applicants for registration. The composition of the committee will be the Inspector General, an officer of the Department and a person nominated by the Insolvency Practitioners Association of Australia. Decisions of the committee about applicants for registration will be reviewable by the Administrative Appeals Tribunal (AAT). The Court will have no further role in the registration of persons as trustee, except as it would in the ordinary course of litigation where some aspect of the registration process was being disputed on legal grounds. There is nothing of particular importance about bankruptcy trustees which makes it appropriate in point of principle or practice that the Court should be the registration authority. Tax agents and company liquidators and auditors, for example are subject to administrative registration and disciplinary procedures, and trustees under the Act are a similar type of profession. Occupational licensing practices and procedures are more appropriately dealt with by administrative agencies, subject to administrative review by the AAT and the courts. 63 The requirement that a person enter into a bond as a condition of registration is to be removed, and instead, it is proposed that it be a condition of registration that the