Bankruptcy: Employment and financial restrictions

With reform pending in the personal bankruptcy jurisdiction, the Reconstruction, Recovery and Insolvency team has decided to commence a regular bankruptcy circular in addition to our long-standing corporate insolvency bulletin. We intend to monitor reform in the personal insolvency area and to keep you updated on interesting cases and developments. We welcome your feedback in terms of topics and thank you for agreeing to receive what will be a bi-monthly publication.

Did you know?

• In Australia in 2015/2016 there were 29,527 personal insolvencies of which:
  • 17,202 were formal bankruptcies;
  • 12,150 were debt agreements; and
  • 175 were personal insolvency agreements.¹
• In Western Australia there has been a 22% increase in bankruptcies.²

Of those formal bankruptcies, approximately 78% were consumer-related (i.e. non business).³

Bankruptcy in Australia

Currently a bankrupt is automatically discharged from bankruptcy after a period of 3 years. Previously bankrupts were allowed to apply for early discharge, but these provisions were removed in 2002.⁴

The ability to discharge from bankruptcy matters because, while undischarged, a bankrupt faces a number of restrictions which include:

• Restrictions on travel:
  • a bankrupt individual is forbidden from travelling overseas without first obtaining written permission from the trustee.
• Restrictions on obtaining finance:
  • Bankrupt individuals are required to disclose their bankruptcy if applying for any form of credit above an indexed amount, which is currently set at $5,507 (this amount is updated quarterly).⁵
  • A debtor’s bankruptcy is identified on the National Personal Insolvency Index (NPII), for the remainder of the life of the debtor and a debtor’s bankruptcy status appears on their credit report for five years.
• Restrictions on employment:
  • While the Bankruptcy Act 1966 does not directly prevent bankrupt individuals from seeking employment, many professional associations and licencing authorities impose specific conditions and limitations on bankrupt members.
  • Prospective employers are entitled to ask if a job applicant is or has been a bankrupt, and may search the NPII directly.
• Bankrupts are prevented from administering trust accounts without the permission of the Court.
• The Corporations Act 2001 (Cth) prohibits bankrupts from acting as the director or manager of a corporation during the bankruptcy period

Government proposes reform

Since 2014, the Federal Government has been examining whether bankruptcy law should be reformed. Earlier this year, the Turnbull government, as part of the National Innovation and Science Agenda, proposed a reform to bankruptcy law, with a specific focus on reducing the period of time a bankrupt faces restrictions by reducing the discharge period.⁶ It is hoped that such reform will encourage innovation.

These proposed reforms appear to have been modelled on the reform undertaken in the United Kingdom (UK) in 2004.⁷ In the UK it was reported that the reform led to:

• a reduction in discrimination faced by bankrupts;
• some speeding up of the rehabilitation of bankrupts; and
• encouraging business set up (to some extent).⁸

What to expect from the reform?

In Australia most personal insolvencies are not business related⁹ and it has been noted that comparisons with the UK are limited, as its consumer debt is ~ 35% whereas in Australia it is closer to ~80%.¹⁰

Question: Does this mean that in Australia, any positive impact this reform (in and of itself) may have on innovation and entrepreneurship may be less noticeable than it was in the UK? How many more people would take up the option of bankruptcy if the period was only one year?

We expect that this proposed reform may lead to an increased uptake in bankruptcies, although we note that in the Australian context any increase in innovation will likely require further reform e.g. to the period of time that a bankrupt’s status appears on his or her credit rating and the NPII. After all, while the ability to quickly recover from financial malaise (i.e. being discharged after a period of 1 year, rather than having to wait 3 years) likely plays an important role in innovation, access to capital and perceptions of bad debt risk are likely to play a more integral role in the ability for an individual to start a small business and for that business to prosper.

The bankruptcy circular

We are interested to hear from you on your views about interesting topics that might be covered in future editions of this circular.

Feel free to circulate this to your clients and free to get in touch if you would like to discuss any of the above.

Otherwise, we look forward to working with you in 2017!