Select Committee recommends tougher personal insolvency regime

The Commerce Select Committee (the Committee) has been unable to reach a decision on whether the period of time for which a debtor's name can remain on a public insolvency register should be extended to five years.  It wants this held out of the Insolvency Amendment Bill to allow further consideration.

Most of its other recommendations are relatively minor but their effect in combination will be to make the Bill tougher. 

The Committee reported the Bill back to the House last week.

Extension of time for information on public registries

The Committee has recommended that the proposal to extend out to five years the time for which an individual debtor's name can remain on a public insolvency register be separated out from the rest of the Bill and dealt with later.

The Committee was unable to reach an agreed view and noted there had been a number of objections to the proposed extension, including from the Privacy Commissioner who would prefer a three-year term rather than five. 

The rationale for a shorter time span is that the No Asset Procedure (NAP) is intended as a "one off opportunity for financially distressed individuals to avoid the stigma of bankruptcy and to rebuild their lives".

Institutions that rely on data about potential debtors or borrowers may wish to consider making a submission should Parliament agree to hold the issue over for further consultation.

Recommended amendments

  • The NAP should not be available to a person who has made one or more insolvent gifts.  (The Committee believes that this will ensure that the debtor cannot conceal assets from creditors by gifting them).
  • Fraudulent debts will become enforceable again once a debtor is discharged from the NAP, with the debtor liable to pay any interest and penalties accrued following termination of the NAP.  (This provision will have an element of retrospectivity as it will apply to all fraudulent debts that remain undischarged at the time the Bill is passed.  The Committee considers this is justifiable as it does not affect any legitimate interest of the debtor).
  • When a bankrupt is discharged, his or her debts are written off but the liability of any co-debtor (such as a business partner, co-trustee or guarantor) remains unless the person applies separately to be discharged.  The Committee recommends amending the Bill to include equivalent provisions in relation to discharge from the NAP.
  • The Committee has dealt with some practicalities of how public registers will operate.  In particular, it has stipulated that bankruptcies prior to 1967 (the date of the previous Act) are not to be counted when identifying multiple insolvency events, as records back that far are considered to be unreliable.  It has also provided that the register must contain a separate entry and details for each insolvency event (NAP or bankruptcy) to enable multiple insolvencies to be listed accurately.
  • The Committee recommends that an oversight in the Privacy Act 1993 be corrected so that the Act provides for the summary instalment order register as well as the NAP and bankruptcy registers.

The Bill

The Bill aims to address four key issues that have arisen since the Insolvency Act 2006 was enacted:

  • Fraudulent debts – bankruptcy law prevents debts that have been incurred fraudulently from being written off.  The NAP contains no such prohibition and the Bill seeks to change that, to make the processes consistent.

  • The discharge period under the no asset procedure – currently the Official Assignee (OA) is required to discharge a person from the NAP after 12 months, even where the OA is in receipt of information which warrants further investigation, such as creditor objections.  The Bill would give the OA power to impose an extension of up to 25 working days.

  • Insolvent gifts in bankruptcy – the OA is able to claw back any gifts that a bankrupt made prior to being adjudicated bankrupt and can then distribute that property to creditors.  The 2006 Act introduced provisions intended to modernise the law in this area, but those changes have increased the administrative burden on the OA.  The Bill would mean that the law reverts to the insolvent gift provisions in the Insolvency Act 1967.

  • Public registers for personal insolvency – under the 2006 Act, public registers are maintained for persons entered into the NAP and adjudicated bankrupt for one and seven years respectively.  Future lenders or credit rating agencies may want access to that information for a longer period, to enable them to properly assess the creditworthiness of individuals.  Along with the proposed five-year extension to the period for NAP details to remain public, the Bill also allows indefinite access to details about individuals who had been subject to multiple insolvency processes (e.g. NAP and bankruptcy or two or more bankruptcies).

Our thanks to Sunita Patel, Solicitor, for writing this edition of Brief Counsel.

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Related topics: Restructuring & insolvency; Bankruptcy

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