Federal Register of Legislation - Australian Government

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A Bill for an Act to amend the law relating to bankruptcy, and for related purposes
For authoritative information on the progress of bills and on amendments proposed to them, please see the House of Representatives Votes and Proceedings, and the Journals of the Senate as available on the Parliament House website.
Introduced HR 07 Jun 2001

Bankruptcy Legislation Amendment Bill 2001

1998-1999-2000-2001

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

BANKRUPTCY LEGISLATION AMENDMENT BILL 2001

EXPLANATORY MEMORANDUM

(Circulated by authority of the Attorney-General,

the Honourable Daryl Williams AM QC MP)

ISBN: 0642 45860X

Readers' Guide

This Explanatory Memorandum is divided into three main sections: a general outline of the main provisions of the Bankruptcy Legislation Amendment Bill 2001 (the Bill) (Section 1); 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).

Section 1 - General Outline

2 The Bankruptcy Legislation Amendment Bill 2001 (the Bill) will make a number of significant changes to bankruptcy law. The changes address concerns that the bankruptcy system is biased toward the debtor and that debtors are not encouraged to think seriously about the decision to declare themselves bankrupt. The changes also address unfairness and anomalies, particularly in relation to the operation of the early discharge arrangements and the lack of effective sanctions on unco-operative bankrupts. Finally, the changes will streamline the administration of bankruptcies by trustees.

3 The objects of this Bill are to:

(a) introduce, in relation to most debtors, a mandatory 30 day cooling-off period under which the debtor may withdraw the petition within 30 days of the Official Receiver accepting it; and repeal the existing optional 7 day cooling-off period;

(b) give Official Receivers a discretion to reject a debtor's petition where it appears that, within a reasonable time, the debtor could pay all the debts listed in the debtor's statement of affairs and that the debtor's petition is an abuse of the bankruptcy system;

(c) abolish early discharge from bankruptcy;

(d) strengthen the objection-to-discharge provisions of the Bankruptcy Act 1966 (the Act) by making it easier for trustees to lodge objections to a person's discharge from bankruptcy and harder for bankrupts to sustain challenges to objections;

(e) make clear that a bankruptcy can be annulled by the Court whether or not the bankrupt was insolvent when a debtor's petition for bankruptcy was accepted; and

(f) double the current income threshold for debt agreements, to allow and encourage many more debtors to choose this particular alternative to bankruptcy.

4 Other changes proposed by the Bill are consequential on the above measures, streamline the operation of the Act or are a consequence of the Insolvency and Trustee Service of Australia (ITSA) having become an executive agency.

Financial Impact Statement

5 It is expected that the main changes proposed by the Bill will have an unquantifiable but minimal financial impact. The repeal of the early discharge provisions should slightly reduce ITSA's costs after a 6 month phasing-out period. However, any reduction will be at least offset by the cost of handling substantially more debt agreement proposals due to the doubling of the income threshold for such proposals. Other measures in the Bill are expected to have no significant financial impact.

Regulation Impact Statement

PROPOSED AMENDMENTS TO THE BANKRUPTCY ACT AND REGULATIONS APPLYING TO THE REGISTRATION OF BANKRUPTCY TRUSTEES.

Background: The present trustee registration scheme

6 The Bankruptcy Act 1966 (the Act) makes provision for the registration of private sector trustees to administer bankrupt estates. Trustees are registered for an initial period of 3 years and can apply for re-registration after that time. Re-registration is automatic on application and payment of a fee (currently $1,000). The fee partially recovers the costs of administering the registration system. The provisions of the Act require applicants to hold certain qualifications and to have relevant experience and prescribes the duties of a trustee.

7 On receiving an application a Committee is convened to consider it. The Committee comprises the Inspector-General, an officer of the Attorney-General's Department and a member chosen by the Insolvency Practitioners Association of Australia (IPAA). The Inspector-General must act in accordance with the Committee's recommendation.

8 A person who applies to become a trustee is registered if they meet criteria set out in section 155A of the Act. The Committee assesses the suitability of the applicant using criteria relating to minimum academic qualifications, experience, knowledge and abilities, insurance coverage, and moral and business conduct.


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9 Section 155A(3) of the Regulations provides the Committee with some discretion to register a trustee who does not meet all the requirements (defined in Regulation 8.02) prescribed by the regulations.

10 There are about 200 trustees registered, of which 165 are active. An inactive trustee is one who has not taken on any new estates in the past year. He or she may still be working on older estates, as an estate can take several years to finalise.

11 There are no limits to the number of trustees registered at any time. In the past, where there were insufficient trustees in a particular area, staff of ITSA encouraged qualified people to apply for registration.

12 Qualifications and experience are tested not only at initial registration. Continued eligibility is tested through ITSA investigations of complaints about specific conduct of trustees, its periodic inspections of the trustees' practices and regular reporting to the Inspector-General in Bankruptcy.

13 If ITSA considers a trustee is not performing satisfactorily, the Inspector-General may call upon a Committee to determine whether the trustee should be de-registered or have conditions imposed on his or her further practice as a registered trustee.

14 There is a right of review to the Administrative Appeals Tribunal (the AAT) of all the Inspector-General's decisions regarding registration.Problems

15 Two issues needed to be addressed:

(a) In November 1998, the AAT made a decision that two applicants who did not meet the specific criteria could nonetheless be registered because, in its opinion, they had the capacity to become trustees. The Tribunal members relied, as they were entitled to, upon a strict view of subsection 155A(3). That provision was intended to allow registration of otherwise qualified applicants who may have had international qualifications that did not exactly fit those prescribed. However, it was cast in wider terms and the applicants fell within them.

Following the AAT decision, senior counsel advised that, in his view, it was a real threat to the continued efficacy of the registration scheme, particularly if applied in future registration review matters before the AAT. Counsel also recommended that the Committee be able to require applicants to sit an exam.

(b) Unrelated issues have been the lateness of applications by some trustees to extend their registrations and the delay by some in paying estate charge due by trustees under the Bankruptcy (Estate Charges) Act 1997.

Objectives

16 The objectives of the current trustee registration system are:

(a) that only competent and adequately qualified practitioners work as bankruptcy trustees; and

(b) that registration extension applications be lodged before the expiry of current registration and that charge debts be paid by the due date.

Options

- initial registration

17 As to objective (a), there were only two options available. Option one, doing nothing, was undesirable because, first, it would not achieve the outcome required of the registration system and, secondly, applicants would be left unsure about the standard of knowledge required of them.

18 Option 2 was to recast section 155A to ensure that applicants cannot be registered if the Committee is not satisfied that they have the ability (including knowledge) to perform satisfactorily the duties of a registered trustee. In that regard, the proposed insertion of a provision empowering a Committee to require applicants to sit for an exam will assist the Committee's decision making.

19 In parallel, the involuntary termination provisions in section 155H are proposed to be amended to extend the grounds on which a trustee can be asked to give the Inspector-General a written explanation why he or she should continue to be registered. Under the proposal, an explanation can be sought if the Inspector-General believes that the trustee no longer has the ability (including knowledge) to perform satisfactorily the duties of a registered trustee. Regulations would also be amended to support this course of action.

- re-registration

20 As to objective (b), again, one option would have been to do nothing. However, this was unacceptable, as trustee re-registration applications should be lodged before the relevant expiry date, and charge payments should be made by the due date for payment. Option 2 was to make the necessary changes to address these issues.

21 To encourage trustees to apply and pay for re-registration on time, it is proposed to add a provision prohibiting re-registration if the person owes more than $50 of notified charge, or of penalty in relation to it. It is also proposed to bring forward the due date for applications and payment of fees to a month before current registration expires.

22 Payment of the fee late, but before the current registration expiry date, will attract a 20% penalty. If the fee and the penalty are not paid before the current registration expiry date, the trustee will be unregistered and will need to apply to the Court to become registered again.

Costs imposed by the new regulatory measures


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23 Under both proposed measures, there ordinarily will be no additional registration costs to the Government or trustees. The assessment of a trustee for initial registration will continue to be made by a Committee using standards applied before the AAT decision, but with the Committee also having the proposed new option of requiring the applicant to sit an exam.

24 Trustees will re-register, as, as at present, by application. By encouraging on-time payment this proposal is expected to reduce trustee applications to the Court for registration and the associated expense.

25 Additional costs will be incurred if a trustee has failed to perform in a satisfactory manner in the preceding 3 year period. This will be assessed by ITSA periodically and the trustee given advice after each inspection. If a trustee falls short of the standards, he or she will be asked prior to the date for re-registration to explain why he or she should continue to be registered. If the response is unsatisfactory, a Committee will be convened to assess the application for re-registration.

26 The proposed amendments will impose a small additional cost on ITSA, which must evaluate trustee performance. This is consistent with the regulatory role already performed and in line with planned enhancements to regulatory procedures in other areas.

27 It is anticipated that the need to convene the Committee would be rare, as most trustees respond to reports made following annual inspections. The costs of convening Committees are about $3,000.

Consultation

28 The consultants who reviewed the trustee registration provisions consulted key stakeholders in the personal insolvency system, including registered trustees, creditors, and financial counsellors, the Bankruptcy Reform Consultative Forum and a bankruptcy discussion group in Melbourne. Public submissions were called for but no submissions were received.

29 The parties affected are the trustees. The IPAA has agreed that regulation of trustees is desirable and should continue in its present form. It has indicated that it is desirable to have an effective mechanism for weeding out non-performers.

30 Without competent trustees, creditors and bankrupts could be affected adversely and costs to government in dealing with complaints would escalate. Eventually, creditor confidence in the bankruptcy system as a whole would be affected adversely.

31 The Bankruptcy Reform Consultative Forum and a reasonable sample of active trustees in each State were consulted by ITSA about the proposed registration extension procedures. No objections were raised.

Conclusion

32 The amendments proposed clarify and strengthen the registration provisions to enable the registration Committee to recommend for registration only those applicants who have the necessary qualifications, experience and practical expertise to undertake satisfactorily the duties of a trustee. They encourage trustees to lodge and pay for re-registration on time.

33 The proposed amendments will have little financial impact while enhancing the Inspector-General's capacity to ensure the desired outcome that only those individuals who are competent are registered and remain registered

Implementation

34 The proposals are to be implemented by amendments to Division 1 of Part VIII of the Act and by amendments to the Bankruptcy Regulations.

Review

35 The registration scheme and the inspections of trustees are reviewed regularly to ensure they are meeting their objectives. The Inspector-General reports annually to Parliament on both the outcomes achieved by regulation of trustees and the registration process.

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Section 2 - Policy objectives

Cooling-off period

36 The Bill proposes that the majority of debtors petitioning for their own bankruptcy will be subject to a 30 day cooling-off period after their petition is accepted. Most debtors will not become bankrupt until 30 days after presenting their petition. Only individual and jointly-petitioning debtors will be able to access the cooling-off period. Partnership debtors and deceased estates which petition for bankruptcy will be excluded from access.

37 The delay afforded by the cooling-off period will allow debtors who have acted too hastily in petitioning for bankruptcy to reconsider their decision. If satisfied that bankruptcy is not the best option for them, they will be able to withdraw their petition by giving written notice to the Official Receiver.

38 The cooling-off period also will allow the creditors the opportunity to consider whether a debtor's bankruptcy is in the creditors' best interests. Within a few days of a petition being presented, creditors will be informed of that fact and given other material information by the Official Receiver. Creditors then will have the opportunity to negotiate with the debtor during the remainder of the 30 day period. For example, they may reach agreement with the debtor on a fresh repayment schedule or, perhaps, arrange a consolidation loan. A debtor can then choose to withdraw his or her petition and avoid bankruptcy.


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39 Some debtors will not be able to access the cooling-off period. One group is those who, in the 12 months before petitioning, attempted unsuccessfully to make alternative arrangements under the Bankruptcy Act. For example, a debtor will be ineligible for the cooling-off period if, in that 12 months, his or her creditors rejected a Part IX debt agreement proposal, an arrangement under Part X was terminated, or a post-bankruptcy composition or scheme was annulled under subsection 75(4).

40 Also, because of the possible prejudice to creditors in some cases if a trustee is not appointed immediately a petition is presented, the Bill proposes that the petitioning debtor be ineligible for the cooling-off period if he or she:

(a) has been carrying on a business at any time in the 30 days beforehand; or

(b) is the subject of a creditor's petition or of a specified legal proceeding against him or her which is scheduled for substantive hearing on a day that is less than 60 days after the day on which the debtor's petition is presented.

41 A legal proceeding for these purposes will mean one for recovery of an amount that would be a provable debt if the debtor becomes bankrupt as a result of presenting the petition, being either a claim against the debtor for a debt of at least $2,000, or for unliquidated damages.

42 These 2 measures to deny particular debtor groups access to a cooling-off period offer protection to creditors against possible debtor abuse of the cooling-off period. First, it can be important that a trustee take immediate control of business assets to facilitate the sale of a business as a going concern or to prevent the possible loss of valuable stock, plant and equipment through deterioration or dissipation. Also, without the second measure, a debtor

could file a petition to gain the cooling-off period's protection from a creditor's existing or scheduled proceedings against the debtor, but then withdraw the petition and avoid bankruptcy. In that circumstance, the creditor might then be unable to restart proceedings for some time, or to have a de-listed proceeding re-listed for hearing for some 12 to 18 months.

43 Importantly, even if the Official Receiver is unaware of the debtor's ineligibility for the cooling-off period, so that such a period apparently is in place, the debtor will in fact be bankrupt from the time of presenting his/her petition if the facts exist.

44 A further protection for creditors lies in the proposal that an Official Receiver have a discretion to deny a cooling-off period to a debtor if he or she believes, on reasonable grounds, that having the cooling-off period would be likely to result in a reduction in the dividend to creditors, eg, due to the likely dispersion, concealment, dissipation or diminution in value of assets during the cooling-off period.

Official Receiver's discretion to reject a debtor's petition

45 There has never been an insolvency test for petitioning debtors and this basic principle will remain largely undisturbed by the Bill. However, some debtors petition for bankruptcy for the wrong reasons: their petitions are an abuse of laws intended to protect debtors who cannot pay their debts, and to give them a fresh start.

46 Accordingly, in quite limited circumstances, Official Receivers will be able to reject a debtor's petition. The Bill proposes that, where it appears to the Official Receiver, from information in the statement of affairs (or from other information supplied by the debtor) that, if the debtor did not become a bankrupt, the debtor would be likely to be able to pay the debts, within a reasonable time, the Official Receiver may reject the petition.

47 However, the discretion can only be exercised if, in addition to the above:

(a) it is evident to the Official Receiver that the debtor is petitioning because of an unwillingness (and not an incapacity) to pay; or

(b) the debtor has been bankrupt previously, on his or her own petition, either at least three times in all or at least once in the last 5 years.

48 This measure is directed only at the most blatant abuses of the system. It is not envisaged that any petition will be rejected under this proposed measure without personal or telephone contact first being made with the debtor by senior, experienced ITSA staff.

49 Importantly, the Bill proposes that the Official Receiver will not be bound in every instance to consider whether to exercise the discretion. This means that, as now, the vast majority of petitions will be accepted without any enquiry into the debtor's solvency.

50 A debtor whose petition is rejected through the exercise of the Official Receiver's discretion will be able to have that decision reviewed by the Administrative Appeals Tribunal (the AAT.)

Abolition of early discharge

51 The Bill proposes the abolition of the early discharge provisions of the Act. They are most often cited as the cause of concern that bankruptcy is too easy. The reduced period of bankruptcy is seen to discourage debtors from trying to enter formal or informal arrangements with their creditors to settle debts, and provides little opportunity for debtors to become better financial managers.

52 Also, when introduced, early discharge was described as applying to those whose bankruptcy was brought about by misfortune rather than misdeed. The

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provisions were targeted at a new category of bankrupt - consumer debtors with low asset-backing who over-extend and then cannot repay their debts. However, many believe that bankruptcy in this group is due more to lack of financial responsibility than to misfortune.

53 There is no intrinsic reason why bankrupts who have assets available for distribution or income sufficient to make a contribution to the estate (which disqualifies them for early discharge) are less worthy of early discharge than those who do not. In addition, allowing only those whose debts exceed 150% of income to apply, discriminates against women who have joint debts with, and generally a lower income than, their spouse. In other words, the provisions operate in quite discriminatory ways.

Objection-to-discharge provisions strengthened

54 The objection-to-discharge provisions allow bankruptcy trustees to lodge an objection to the bankrupt's automatic discharge at the end of the 3 year standard period of bankruptcy. Depending on the grounds of objection, the standard bankruptcy period can be extended by 2 years or, in more serious cases, by 5 years.

55 Under the present regime a notice of objection must set out the ground(s) of objection, refer to the evidence that, in the trustee's opinion, establishes the ground(s) and state the trustee's reasons for objecting to discharge on the ground(s) specified in the notice.

56 In practice, trustees often have found it difficult to maintain objections. Frequently, objections have been cancelled on review by the Inspector-General, the Administrative Appeals Tribunal (AAT) or the Federal Court. The reasons for cancellation vary. Some trustees have found it difficult to differentiate clearly the ground(s) of an objection and the reason for filing the objection. Moreover, on occasions, the AAT has upheld a bankrupt's challenge to an objection simply because, either during an AAT hearing or just before it occurs, the bankrupt eventually has provided information long sought by the trustee and the non-supply of which information was the ground of the trustee's objection. Such decisions undermine a prime purpose of the objection regime which is to induce a bankrupt to co-operate, promptly, with the trustee of the bankrupt estate.

57 The Full Federal Court decision in Inspector-General in Bankruptcy v Nelson (1998) 168 ALR 340 establishes that a sufficient reason for filing an objection under the current provisions is that doing so will advance the trustee's administration of the bankrupt estate. However, conversely, punishment of the bankrupt for failure to co-operate was found to be an impermissible reason for filing an objection. 58 To address these deficiencies in the present law which have hampered a trustee's capacity to elicit co-operation from some bankrupts, and to strengthen the trustee's hand, the Bill proposes a tougher objection-to-discharge regime under which it is expected that more objections will withstand the review process.

59 It is proposed that trustee objections will fall into one of two groups, namely, those which specify at least one `special ground' and those which specify none. In the first group, the trustee's notice of objection still will have to set out the ground(s) of objection and the evidence relied on to establish it or them, but need not state the reasons for filing an objection to the bankrupt's discharge from bankruptcy. For objections which contain no `special ground', the trustee will be obliged, as now, to provide in the notice his or her reasons for filing an objection.

60 The bankrupt's pre-objection conduct, rather than the trustee's capacity to show that an objection will advance the conduct of the administration, will determine whether an objection is lodged and whether reasons will have to be given in the notice. For example, the special grounds listed in the notice and regarding which no reasons are required will include:

(a) the bankrupt, when requested in writing by the trustee to provide written information about the bankrupt's property, income or expected income, failed to comply with the request; and

(b) the bankrupt failed to pay to the trustee an amount that the bankrupt was liable to pay under section 139ZG (ie, an amount payable under the contribution scheme).

61 In addition, proposed new paragraphs 149D(1)(ab), (da), (ha) and (ma) will constitute special grounds under proposed new subsection 149N(1A). Three of those paragraphs specify types of intentional behaviour by bankrupts which can disrupt a trustee's administration; the fourth specifies transfers of property with the intention of defeating creditors, ie, transfers covered by section 121 of the Bankruptcy Act 1966, as conduct which can attract an objection on a special ground. While it can be difficult to infer intention, in each instance the burden of proof which the trustee will bear if an objection is challenged is the civil onus, ie, proof on the balance of probabilities.

62 Further, by proposed subsection 149N(1B), a reviewer will not be able to cancel an objection by taking into account any conduct of the bankrupt after the time when the ground first commenced to exist. Objections on special grounds will be reviewable only as to whether the ground(s) and evidence are made out, unless the reviewer is satisfied by the bankrupt that the facts supporting the objection arose without any fault on the bankrupt's part.

63 While a trustee's hand is strengthened greatly by the proposed new provisions, it remains the case that a trustee does not have to file an

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objection unless subsection 149B(2) applies, and a trustee can cease to object on a particular ground (section 149H) or withdraw an objection at any time (section 149J).

Annulment of bankruptcy by Court whether or not petitioning debtor insolvent

64 Section 153B of the Act gives the Court power to annul a bankruptcy if it is satisfied that a petition ought not to have been presented. The Bill proposes an amendment to make clear that the Court can so decide, even if the debtor is insolvent.

65 High-income debtors who are maintaining an expensive lifestyle and petition for bankruptcy with the aim of avoiding paying a particular creditor (eg, the ATO) will be among those targeted by this proposed amendment. If the Court believes that the debtor could make arrangements to pay the creditor it could annul the bankruptcy as an abuse of process.

Doubling of the current income threshold for debt agreements

66 Debt agreements were introduced in 1996 as a low-cost alternative to bankruptcy, available to low-income debtors with assets and debts below specified thresholds. Debtors cannot access the provisions if they have an after-tax income of more than $30,530 (if there are no dependants) and either their assets or debts exceed $61,061 (March 2001 figures, subject to 6 monthly indexation). The comparatively low income threshold has been criticised as denying a large group of debtors any realistic alternative to bankruptcy.

67 It has been noted that debtors who were `too poor' to be required, under one Part of the Act, to make contributions from income for the benefit of their creditors were nonetheless invited, under another part of the Act, to make a debt agreement proposal to creditors. Despite this criticism, nearly 1200 debt agreement proposals were lodged with ITSA for processing in 1999-2000. Doubling the threshold will increase substantially the number of debtors who will be able to make a debt agreement proposal to their creditors as an alternative to bankruptcy. It is consistent with an important theme of the reform measures - to encourage debtors to consider the alternatives seriously before choosing bankruptcy.

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Section 3 - Notes on sections and Schedule items

Section 1 - Short Title

68 The Bankruptcy Legislation Bill Amendment 2001 (the Bill) proposes amendments to the Bankruptcy Act 1966 (the Act). By proposed section 1, when the Bill has been enacted, it will be known as the Bankruptcy Legislation Amendment Act 2001.

Section 2 - Commencement

69 Proposed section 2 contains the commencement provisions of the Bill. If enacted, the Bill, which by Schedule 1 makes amendments to the Act, will commence on a day to be proclaimed by the Governor-General. If the proclaimed day has a date more than 6 months after the date of Royal Assent, the Act will commence 6 months after Assent.

70 However, by subsection 2(3) of the commencement provision, special commencement rules will apply to Schedule 1 items 41, 61, 125 and 153 (the deferred items), all of which will commence at the earlier of:

(a) if Parts 4 and 10 of the Administrative Review Tribunal Act 2001 have not commenced before the day that applies under subsections 2(1) and (2) of the commencement provision, immediately after the commencement of those Parts; and

(b) immediately after the commencement time of all other Schedule 1 items, as determined under subsections 2(1) and (2) of the commencement provision.

Section 3 - Schedule

71 Proposed section 3 is a drafting device to allow all the amendments proposed to be made to the Bankruptcy Act 1966 to be set out in a Schedule. The items in the Schedule will amend the Act and will have effect according to their terms. Notes on the Schedule items follow and include notes on transitional and application items.

Schedule 1--Amendments to the Bankruptcy Act 1966

(This schedule sets out all of the amendments proposed to be made to the Bankruptcy Act 1966.)

Part 1--Amendments

Definitions

72 Items 1 to 11 inclusive propose amendments to subsection 5(1) of the Act which contains a number of definitions of terms used in the Act.

73 Item 1 proposes to insert a definition of administrator by which a person authorised under paragraph 185C(2)(c) of the Act to deal with property under a debt agreement is an administrator. The definition is relevant for proposed provisions relating to the Inspector-General's proposed powers in relation to debt agreement administrators.

74 Item 2 inserts a definition of cooling-off period, in relation to a debtor's petition, as meaning the period of 30 days referred to in proposed subsections 55(4B) or 57(5A) as the case requires. The cooling-off period is the period in which a debtor can reconsider his/her decision to petition for bankruptcy and may withdraw that petition. Equally, during the cooling-off period, creditors may attempt to negotiate a solution other than bankruptcy for the debtor's financial difficulties.

75 Item 3 replaces an incorrect reference to `section 56' in the subsection

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5(1) definition of debtor's petition with a correct reference to `section 56A'.

76 Items 4 to 7 inclusive, respectively repeal the definitions of declaration of intention, declared debtor, enforcement process, and frozen debt, contained in subsection 5(1). Each of these definitions was relevant to the 7 day `freeze' of a creditor's actions against a debtor under Division 2A of Part IV of the Act. The definitions become redundant with the proposed repeal of that Division: see the notes on item 38.

77 By transitional provision item 226, the amendments proposed by items 4 to 7, item 11 and associated items 27 and 38 will not apply to notices of intention that were lodged before the time when section 1 commences. In other words, notices lodged before commencement will still have effect.

78 Item 8 proposes to insert in the Act a definition of ITSA as meaning the Insolvency and Trustee Service Australia which is established as an executive agency under section 65 of the Public Service Act 1999. This definition facilitates references to that Service throughout the Act.

79 Item 9 inserts a definition of offence against this Act as including an offence against section 137.1 or 137.2 of the Criminal Code and being an offence that relates to this Act. The purpose of inserting this definition is to ensure that the expression `offence against this Act' picks up offences which were contained in the Bankruptcy Act but have been consolidated into the Criminal Code. By transitional provision item 227, this provision will apply to conduct which constitutes an offence at any time.

80 Item 10 inserts a definition of officer of ITSA as meaning an APS employee in ITSA and as including the Inspector-General. This expression is used throughout the Act in cases where, previously, the expression `officer of the Department' was used. That latter term was appropriate while ITSA was a Division of the Attorney-General's Department but is inappropriate now that ITSA has become an executive agency and is no longer a part of that Department.

81 Item 11 proposes the repeal of the subsection 5(1) definition of stay period, consequent upon the proposed repeal of Division 2A of Part IV which provides for a 7 day `freeze' of a creditor's actions against a debtor. Its repeal makes the definition redundant.

82 Item 12 proposes to insert references to sections 55B and 57AB into item 3 in the table in subsection 5AA(1) of the Act. The effect of this is that, where control of a debtor's property occurs under those sections, the place of origin of the matter is the Bankruptcy District in which the Court made an order directing a trustee to take control of a debtor's property. By transitional provision item 237, the change proposed by item 12 will apply in relation to petitions presented after commencement.

83 Item 13 proposes to replace the words `officer of the Department' in subsection 11(4) of the Act with the words `officer of ITSA'. Since ITSA became an executive agency on 1 July 2000, it no longer is a part of the Attorney-General's Department and nor are its staff. This change will enable the Inspector-General to continue to delegate powers to the same persons as previously, ie, individual ITSA staff members, but in their capacity as an `officer of ITSA' rather than as an `officer of the Department'.

Enquiry powers regarding controlling trustees

84 Item 14 proposes the insertion of the words `(including a controlling trustee)' after the words `conduct of a trustee' in paragraph 12(1)(b) of the Act. This proposed amendment will empower the Inspector-General to inquire into and investigate the conduct of a controlling trustee just as he or she may now do regarding a trustee.

85 The amendment proposed by item 15 is consequential upon the proposed extension of the Court's power to appoint a controlling trustee under proposed new sections 55B or 57AB, ie, during a cooling-off period. By transitional provision item 237, the change proposed by item 15 will apply to petitions presented after commencement.

Enquiry powers regarding debt agreement administrators

86 Item 16 proposes an amendment to subsection 12(1) to extend the Inspector-General's regulation powers over trustees to debt agreement administrators.

87 Item 17 is an amendment consequential on that proposed by item 10 and will allow an Official Receiver to delegate powers to an officer of ITSA.

Appointment of Inspector-General and Official Receivers

88 Item 18 proposes the omission, from section 16 of the Act, of the words `Secretary to the Department' and the substitution of the word `Minister'. The effect of this is that the Inspector-General and each Official Receiver will be appointed by the Minister rather than, as previously, by the Secretary to the Attorney-General's Department. The previous arrangement was appropriate when the Inspector-General headed a Division of that Department and is inappropriate now that ITSA is an executive agency. By transitional provision item 229, existing appointments will continue in force after commencement.

89 Item 19 proposes to repeal existing subsections 17(1) to 17(6) inclusive and to substitute new subsections. Proposed subsection 17(1) will provide for the Minister to appoint a person to act as Inspector-General. Similarly, by proposed subsection 17(2), the Inspector-General may appoint persons to act as Official Receivers. Section 33 of the Acts Interpretation Act 1901

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provides more details of how these types of provisions apply and are to be interpreted.

90 Item 20 is a drafting amendment made as a consequence of the changes effected by item 19. By transitional provision item 230, existing appointments will continue in force after commencement.

91 Item 21 makes a drafting change consequential upon that made by item 12. It extends, to a Court order under proposed new sections 55B and 57AB, the indemnity provided by the Commonwealth to the Official Trustee for any personal liability for actions or omissions in carrying out a Court order under section 50. By transitional provision item 237, the change proposed by item 21 will apply to petitions presented after commencement.

Duties of trustee

92 Item 22 makes a change to paragraph 19(1)(i) which nominates the Inspector-General, in addition to relevant law enforcement authorities, as a person to whom trustees are to refer any evidence of an offence by a bankrupt against the Act. By transitional provision item 227, this provision will apply to conduct at any time.

Official Trustee's powers to investigate a bankrupt's affairs

93 Subsection 19AA(2) currently gives an Official Receiver the power to investigate any bankrupt's conduct and examinable affairs, and the books, accounts and records kept by the bankrupt, in relation to any bankruptcy. These investigative powers are necessary and appropriate for the trustee of a bankrupt estate, but not for an Official Receiver.

94 Accordingly it is proposed by items 23 and 24 that subsection 19AA(2) be repealed and subsection 19AA(1) amended to include the Official Trustee (by changing the term "registered trustee" to "trustee").

95 By transitional provision item 231, changes to section 19AA will apply to bankruptcies for which the date of the bankruptcy is after commencement.

The Common Investment Fund

96 Item 25 makes a change consequential on that made by item 12. It extends the section 20B accountability obligations of the Official Trustee, for moneys received when acting as a controlling trustee under Division 2 of Part X, to apply to moneys received if the Official Trustee is appointed under proposed new sections 55B and 57AB. By transitional provision item 237, the change proposed by item 25 will apply to petitions presented after commencement.

Alteration of filing date for statement of affairs

97 Item 26 proposes to insert new section 33A into the Act. The effect of this new section is to allow the Court to order that a statement of affairs be treated as having been filed at a time before it was actually filed, provided that the Court is satisfied that the bankrupt believed, on reasonable grounds, that this statement had been filed at a time before it actually was filed.

98 Proposed subsection 33A(3) allows a period of grace of 30 days before the order can take effect to allow the trustee to disengage from the role of trustee.

99 By transitional provision item 232, the change will apply to statements of affairs filed at any time, whether before or after commencement.

Acts of bankruptcy

100 Items 27 and 28 propose the repeal of paragraph 40(1)(da) and the insertion of paragraph 40(1)(daa) dealing with acts of bankruptcy. These are consequential on the proposed repeal of the current 7 day cooling-off period and the introduction of a new mandatory 30 day cooling-off period. By transitional provision item 237, the change proposed by item 28 will apply to petitions presented after commencement.

Bankruptcy notices

101 Item 29 proposes that subsection 41(1) be repealed and replaced by a new subsection to allow 2 or more final judgments or final orders valued at $2,000 (rather than one as is currently required) to support the issue of a bankruptcy notice. Item 30 proposes a consequential drafting change.

102 Item 31 and item 32 propose consequential amendments to paragraphs 41(6A)(a) and 41(6C)(a) to take account of the fact that multiple final judgments or final orders may support the issue of a bankruptcy notice.

103 By transitional provision item 233, these changes will apply to the issue of bankruptcy notices on applications that are made after commencement.

104 The amendment proposed by item 33 omits a reference in paragraph 43(2)(a) of the Act to Division 3 of Part VII because it is proposed by this Bill to repeal that Part which, in specified circumstances, provides for early discharge from bankruptcy after 6 months.

Taking control of debtor's property after a creditors' petition is presented

105 Item 34 proposes to amend subsection 50(1) of the Act to allow a creditor who wishes to have a controlling trustee appointed over a debtor's property to apply to the Court for such an appointment after a creditor's petition has been presented, as well as after a bankruptcy notice has been issued against the debtor. The amendment will restore to this group of creditors a right inadvertently taken from them as an unintended consequence of an amendment in 1996. By transitional provision item 235, this change will apply to any creditor's petition that is presented after commencement.

106 Item 35 proposes a technical amendment to paragraph 54(1)(a) of the Act to make clear that a debtor against whom a sequestration order has been made is to

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make out and file, `with the' Official Receiver a statement of his/her affairs. The present wording requiring that the statement be filed `in the office of' the Official Receiver has proved confusing.

Copies of statements of affairs

107 Item 36 proposes an amendment to subsection 54(4) of the Act to give a person who presently can `make copies of' a statement of affairs the right to `obtain' a copy of a statement of affairs. Administratively, this arrangement will be far more convenient for debtors and ITSA staff.

108 Item 37 amends existing section 54 of the Act to allow a bankrupt the same free access to his or her own statement of affairs as a creditor. Also, the Official Receiver is given a discretion to refuse to allow a person access under section 54 to particular information in a statement of affairs on the grounds that access to that information would jeopardise, or be likely to jeopardise, the safety of any person.

Repeal of Division 2A of Part IV: notice of declaration of intent

109 Item 38 proposes the repeal of Division 2A of Part 1V of the Act reflecting the proposed repeal of the optional 7 day cooling-off period and introduction of a mandatory 30 day cooling-off period. It is not appropriate that there be 2 parallel or successive cooling-off periods in the Act.

Petitioning debtor must have specified connection with Australia

110 By proposed item 39, new subsection 55(2A) will oblige the Official Receiver to reject a debtor's petition unless the debtor has an appropriate connection with Australia. Those requirements are specified already in the Act before a sequestration order can be made.

Official Receiver may reject a debtor's petition in particular circumstances

111 Item 40 proposes the insertion of new subsections 55(3AA), (3AB) and (3AC) under which the Official Receiver may reject a debtor's petition if it appears from the information in the statement of affairs and any additional information supplied by the debtor that, if the debtor did not become a bankrupt, the debtor would be likely either immediately or within a reasonable time to be able to pay all the debts specified in the statement of affairs; and at least one of the following conditions is satisfied:

- first, it appears from the information in the statement of affairs and any additional information supplied by the debtor that the debtor is unwilling to pay one or more debts to a particular creditor or creditors or is unwilling to pay creditors in general; or

- secondly, before the current petition was presented, the debtor previously became bankrupt on a debtor's petition at least three times or at least once in the period of 5 years before presentation of the current petition.

112 The purpose of new subsection (3AA) is to give the Official Receiver a discretion to reject a debtor's petition where it is plain to the Official Receiver that the petition is an abuse of the bankruptcy system.

113 One key purpose of the bankruptcy system is to allow people in a hopeless financial position to rule a line under their debts and be given a fresh start. However, subsection (3AB) makes clear that the Official Receiver is not required to consider, in relation to any or every debtor's petition, whether there is a discretion to reject it under subsection (3AA). The Official Receiver is not required to apply an insolvency test to every debtor who petitions for bankruptcy. Only the more blatant and obvious cases that might come to the Official Receiver's attention are likely to be considered as to the possible exercise of the discretion.

114 By proposed new subsection (3AC), a debtor whose petition is rejected under subsection (3AA) will be able to apply to the Administrative Appeals Tribunal for a review of the Official Receiver's decision. By transitional provision item 236, the change proposed by item 39 and item 40 will apply to petitions presented after commencement.

Tribunal undertaking review

115 Item 41 proposes an amendment of proposed new subsection (3AC). It is one of 4 deferred items in the Bill proposed to allow for the possibility that proposed legislation to replace the Administrative Appeals Tribunal with an Administrative Review Tribunal might not become law at all, or might become law either before or after this Bill is enacted (if it is enacted). Special commencement rules will apply to item 41 (and the 3 other deferred items in this Bill, ie, items 61, 125 and 153) as follows:

If Parts 4 and 10 of the proposed Administrative Appeals Tribunal Act 2001 have commenced before Schedule 1 of the Bill, the amendment proposed by item 41 will come into force immediately after the commencement of the non-deferred items and immediately will amend new subsection (3AC) to omit the reference to the `Administrative Appeals Tribunal' and substitute a reference to the `Administrative Review Tribunal'.

If Parts 4 and 10 of the proposed Administrative Appeals Tribunal Act 2001 have not commenced before Schedule 1 of the Bill, but do come into effect subsequently, the amendment proposed by item 41 will come into force immediately after the commencement of Parts 4 and 10 of that proposed Act. The amendment would have the same effect of omitting the reference to the `Administrative Appeals Tribunal' and substituting a reference to the `Administrative Review Tribunal'.

116 The other deferred items, ie, items 61, 125 and 153 all provide to the same effect and the same commencement rules will apply in relation to them.

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117 Item 42 proposes a drafting amendment to subsection 55(4) to cover the possibility that a Court may, under provisions of section 55 other than subsection (3), direct an Official Receiver to reject a debtor's petition.

New 30 day cooling-off period regarding a debtor's petition

118 Item 43 contains one of the main policy changes proposed by the Bill. It proposes to repeal subsection 55(4A) and substitute new subsections (4A) to (4G) inclusive. Those new subsections provide that, where the Official Receiver accepts a debtor's petition presented under section 55, he/she must endorse the petition accordingly. The petition is subject to a cooling-off period of 30 days starting on the day after the day on which the petition is endorsed unless any of the exclusion provisions in subsection (4B) applies. By transitional provision item 237, the change proposed by item 43 will apply to petitions presented after commencement.

Some debtor petitions cannot be eligible for the cooling-off period

119 Proposed paragraphs 55(4B)(a) to (e) inclusive (item 43) and section 55B (item 49) list a series of criteria that deny a debtor access to the cooling-off period.

* If any of the following things happen to the debtor or persons including the debtor in the 12 months before the petition is presented:

- a debtor's petition under section 55 or section 57 was withdrawn by the debtor;

- a composition or scheme was annulled under subsection 75(4);

- a debt agreement proposal was rejected by creditors;

- a debt agreement was terminated; or various Part X arrangements were terminated or declared void or set aside.

* A creditor's petition is pending against the debtor or a substantive hearing of a legal proceeding against the debtor is scheduled for a day less than 60 days after the day on which the petition is presented. The disqualifying legal proceeding must be for recovery of an amount that would be a provable debt if the debtor becomes bankrupt as a result of presenting the petition and must involve a claim against the debtor for a debt of at least $2,000 or a claim against the debtor for unliquidated damages.

* The debtor carried on a business (with or without another person) at any time in the 30 days before presenting his or her petition. This addresses concerns about the possible dissipation of assets by a debtor, or deterioration of assets, during the cooling-off period, or that the opportunity to continue the business as a going concern could be lost.

* The Official Receiver determines, on reasonable grounds, that having the cooling-off period would be likely to result in a reduction in the dividend to creditors.

* The Court directs, on application from a creditor, that a debtor's property be taken under the control of a trustee. The creditor may approach the Court during a cooling-off period but only before the debtor becomes a bankrupt or withdraws the petition. To protect a creditor who has applied for a direction under this section, a debtor will not, without leave of the Court, be able to withdraw his/her debtor's petition after an application under this section has been made. The Court may summon the debtor or an examinable person in relation to the debtor for examination under section 55B.

120 The thrust of the provisions which deny a cooling-off period in relation to a debtor's petition is that an arrangement other than bankruptcy has been tried by the debtor and failed in the preceding 12 months, that the debtor currently is being pursued by way of a creditor's petition or there are business or other assets which could be dissipated. Creditors who are in such a position as against the debtor are entitled to know that the debtor will become bankrupt and that a trustee will be appointed immediately the debtor's petition is accepted.

When debtor becomes a bankrupt if cooling-off period does not apply

121 Proposed new subsection 55(4D) provides that, if the cooling-off period does not apply, the debtor becomes a bankrupt at the beginning of the day on which the debtor's petition is endorsed.

Debtor may withdraw petition during cooling-off period

122 Proposed new subsection 55(4E) provides that, if the cooling-off period applies, the debtor may, by notice in the approved form given to the Official Receiver, withdraw the petition at any time during the cooling-off period. However, this general rule is modified if a creditor has made an application under section 55B for the appointment of a controlling trustee, in which case leave of the Court will be required for withdrawal of the petition. The effect of a withdrawal is that the debtor does not become a bankrupt by virtue of presenting the petition.

When the debtor becomes a bankrupt

123 Finally, proposed subsection 55(4G) provides that, if the cooling-off period applies and the debtor does not withdraw the petition, the debtor becomes a bankrupt `at the beginning of the day' after the cooling-off period. This terminology is derived from section 57A which is proposed to be repealed.

Debtors avoiding the cooling-off period

124 Item 44 proposes the insertion of new subsection 55(6B) under which a debtor, without the leave of the Court, will not be entitled to present a petition during a cooling-off period that applies in relation to a previous

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petition presented by the debtor under section 55 or under section 57. This will prevent a debtor avoiding the cooling-off period by withdrawing a petition and immediately lodging a fresh debtor's petition.

125 Item 45 proposes an amendment consequential on the insertion of new subsection 55(6B).

126 By transitional provision item 236, the change proposed by items 44 and 45 will apply to petitions presented after commencement.

127 Item 46 proposes the omission, in paragraph 55(8)(a), of references to Division 3 of Part VII because that Division, which deals with early discharge from bankruptcy, is proposed to be repealed by this Bill.

128 Item 47 proposes to amend subsection 55(9) to the same effect as the amendment proposed by item 36: see the notes on that item. Similarly, item 48 would amend section 55 along the same lines as the amendments to section 54 proposed by item 37.

Protection of debtor during cooling-off period

129 Item 49 proposes the insertion of a new section, section 55(A), to protect the debtor from action by creditors in relation to a frozen debt during the cooling-off period. A frozen debt is to be defined to mean a debt that will be a provable debt if the debtor becomes a bankrupt as a result of presenting the petition. The term therefore does not include debts incurred by the debtor after the petition has been presented: those debts will not be provable in a bankruptcy which results from the presentation of the petition.

130 In relation to a frozen debt, the creditor cannot apply for enforcement of, or enforce, a remedy against the debtor's personal property; a sheriff cannot take action to execute or sell property under any process issued by a Court to enforce payment of such a debt owed by the debtor; and a person who is entitled under a law of the Commonwealth, or of a State or Territory, to retain or deduct money from money that is or will be owing or payable to the debtor must not retain or deduct that money. Therefore, for example, writs of execution cannot be used by a creditor during the cooling-off period in relation to a frozen debt.

Creditors may take some proceedings during cooling-off period

131 However, by proposed subsection 55A(2) the restrictions do not prevent a creditor from starting a legal proceeding in respect of a frozen debt or from taking a fresh step in such a proceeding (except to enforce a judgment). Neither, by subsection 55A(3), is the right of a secured creditor to realise or otherwise deal with his, her or its security affected.

Time at which person becomes bankrupt

132 Section 57A of the Act specifies the time at which a person becomes bankrupt on a debtor's petition. However, the introduction of a cooling-off period means that there can no longer be a universal rule for when that is to happen: separate rules need to be specified in the various sections of the Act which deal with particular circumstances in which a debtor's petition is lodged. Therefore, item 50 proposes to amend subsection 56E(1) to provide that, where a debtor's petition against a partnership has been referred to the Court but has not been amended under a direction of the Court, each member of the partnership becomes bankrupt at the beginning of the day on which the Official Receiver accepted the petition. Item 51 makes a similar amendment in relation to the case where the Court has directed that the petition be amended.

133 By transitional provision item 237, the changes proposed by items 49 to 51 will apply to petitions presented after commencement.

134 Item 52 proposes to amend paragraph 56E(3)(a) to omit a reference to Division 3 of Part VII because that Division, which deals with early discharge from bankruptcy, is proposed by this Bill to be repealed.

135 Item 53 proposes to amend subsection 56F(3) of the Act by removing references to a trustee being a registered trustee. This distinguishes the role of the Official Receiver from that of the Official Trustee and puts the Official Trustee in the same position as a registered trustee.

136 Items 54 and 55 make amendments parallel to those made by item 36 and 47: see the notes on those items. However, the amendment proposed to be made by item 56 to insert paragraph (aa) in section 56G(2) of the Act has the effect that a person who is a member of a partnership and who became bankrupt as a result of a petition may obtain a copy of or take extracts from any statement of affairs that was given to the Official Receiver in connection with a debtor's petition against the partnership. In other words, the petitioning debtor is able to obtain for no fee a copy of his/her own debtor's petition. Item 57 makes a consequential drafting amendment as a result of item 56. Item 58 proposes a similar amendment of section 56G in relation to partnerships as is proposed by item 37 to section 54 in relation to individual debtors: see the notes on item 37.

Amendments regarding joint debtors

137 Items 59 to 68 inclusive replicate, in relation to joint debtors, the provisions inserted in relation to individual debtors regarding, respectively: the necessity for a debtor to have a specified connection with Australia when petitioning: the Official Receiver's power to reject a debtor's petition; the cooling-off period and the exclusions from access to it; the inspection of a statement of affairs; the protection of a petitioning debtor during the cooling-off period; and the taking of control of a debtor's property during the

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cooling-off period. By transitional provision items 236 and 237, the changes proposed by items 59 to 68 (other than item 61) will apply to petitions presented after commencement. Item 61 is a deferred item: see the notes on item 41.

138 Item 69 proposes the repeal of section 57A because it is no longer appropriate to specify, in only one provision, just when it is that a debtor's petition results in bankruptcy. If a cooling-off period applies and the petition is not withdrawn, bankruptcy results at the end of the cooling-off period. If no cooling-off period applies, bankruptcy occurs immediately the petition is accepted.

Convenience for the creditors of proposed time and place for meeting

139 Item 70 proposes to add a new subsection 54(3) to the Act which would require that, when a trustee is convening a meeting of creditors, the trustee must consider whether the proposed time and place is convenient for the creditors. This provision does not replace the existing section 64M requirement for a motion on these very issues at a meeting of creditors.

A note about proxies

140 Item 71 proposes the addition of a note at the end of subsection 64M(1) which deals with proxy voting at meetings of creditors. The note points out that, under proposed new subsection 64ZB(3) which deals with proxy voting at creditors' meetings, a proxy or attorney may vote at a meeting even though the appointing instrument is lodged after the announcement of proxies: see the separate notes on the amendment proposed by item 77.

Quorum at a creditors' meeting

141 Item 72 proposes an amendment of section 64N by the insertion of a new replacement subsection (2) which provides that a quorum is constituted by the presence of the trustee or the trustee's representative, and a creditor (or proxy or an attorney of a creditor) participating in the meeting in person or by telephone. However, the note makes clear that, as a meeting requires at least two persons, the person who is the trustee or the trustee's representative cannot also be the proxy or attorney of the creditor referred to in proposed paragraph 2(b). This means that a trustee cannot hold a meeting with himself or herself but, for example, could hold the meeting, as trustee, with a member of his/her staff who holds a proxy for a creditor.

142 By transitional provision item 238, the changes proposed by items 70 to 72 will apply to meetings of which notice is given after commencement.

Trustee to advise creditors about estimated remuneration and its impact on dividends

143 Item 73 proposes to amend subsection 64U(5) of the Act by inserting new subsection (5A) under which the trustee must include, in a statement under subsection (3), an estimate of the total amount of his/her remuneration and an explanation of the likely impact of that remuneration on the dividends (if any) to creditors. The purpose of this provision is to ensure that, as far as possible when creditors are being asked to consider and vote on the trustee's proposed remuneration, they are fully informed as to how much the trustee is likely to take from an estate as remuneration and the extent to which this will have an effect on dividends, if any, payable to creditors. For example, if it is clear to the trustee that his/her likely remuneration will mean that there is no prospect of a dividend being paid to creditors, the trustee must inform the creditors to that effect. By transitional provision item 239, the change proposed by item 73 will apply to meetings held after commencement.

144 The amendment proposed by item 74 is a consequential one flowing from ITSA's change of status from being a Division of the Attorney-Generals Department to being an executive agency under the Public Service Act 1999: see the notes on item 10.

Voting by secured creditors

145 Items 75 and 76 each propose a technical amendment. Each will substitute words, in subsections 64Z(9) and 64ZA(5) respectively of the Act, with the effect that a creditor holding security can vote for the full amount of it if the security is held over property other than that of the debtor. Where, however, the security is held over the property of the debtor, a secured creditor can only vote to the extent of the shortfall in that security. This technical amendment is to be made to adopt the terminology `secured creditor' rather than have the subsections refer to a creditor who `holds a security in respect of a debt'. A change made to the respective subsections in 1996 inadvertently has caused confusion amongst creditors who hold a security.

Holders of proxies lodged `late' may vote on subsequent motions

146 Item 77 proposes the repeal of subsection 64ZB(3) and the insertion of new subsections (3) and (3A). Proposed new subsection (3) allows the President to accept new proxies after the formal announcement of initial proxies under section 64M, thus allowing those new proxy holders to vote on subsequent motions. Holders of proxies lodged with the President at a meeting can vote on motions put after lodgment of the instrument of appointment.

147 Proposed new subsection (3A) is to allow the person appointed as a proxy for the adjourned part of a meeting to be a person different from the person appointed as proxy for the pre-adjournment part of that meeting.

148 By transitional provision item 238, the changes proposed by items 75 to 77 will apply to meetings of which notice is given after commencement.

Creditors' resolution without meeting

149 Item 78 proposes the insertion of a new section, section 64ZBA, to allow a

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trustee to hold the meeting by post. The proposal addresses the difficulty trustees often encounter in persuading creditors to attend, or send a proxy in relation to, a creditors' meeting.

150 The provision is restricted to single proposals and the notice must invite the creditor to vote either yes or no on the proposal or to object to the proposal being resolved without a meeting of creditors.

151 Provided at least one creditor votes in writing and no other creditor objects in writing to the proposal being resolved without a meeting of creditors, the proposal is decided in accordance with the majorities required for a special resolution or an ordinary resolution.

152 A trustee's signed certificate as to any matter relating to a section 64ZBA proposal is to be prima facie evidence of the matter.

Trustee may require surety for cost of meeting

153 Items 79 and 81 propose a mechanism to discourage bankrupts from making frivolous or vexatious requests to the trustee to call meetings to consider a section 73 proposal for the annulment of a bankruptcy. This outcome is to be achieved by the bankrupt being required to lodge with the trustee an amount that is sufficient to cover the estimated costs incurred in arranging and holding the meeting and the estimated fee that, if approved by the creditors, will be payable to the trustee in respect of that meeting.

154 In addition, proposed new subsection 73(2B) will allow a trustee to refuse to call a section 73 meeting if the proposal to be put to the meeting does not make adequate provision for the payment to the trustee of fees accrued in respect of the trustee's administration of the bankrupt's estate, and that are not able to be taken out of the bankrupt's estate.

155 As an added safeguard for trustees, subsection 73(3) is proposed by item 80 to be amended to deny the opportunity of a creditors' meeting to amend the debtor's proposal in a way that reduces any provision for payment of fees referred to in proposed new subsection (2B).

156 By transitional provision item 240, the changes proposed by items 79 to 81 will apply to proposals lodged, after commencement, under subsection 73(1) of the Act.

Variation of composition or scheme of arrangement

157 Item 82 proposes the insertion of new section 74A into the Act to provide for the variation of a composition or scheme of arrangement that has been accepted in accordance with Division 6 of the Act provided the debtor has consented in writing to the proposed variation. Currently, that Division makes no provision for the variation of such a composition or scheme. By transitional provision item 241, the change proposed by item 82 will apply to section 73 compositions and schemes of arrangement made after commencement. Further, by that transitional item, a Part X composition or scheme of arrangement is made when it is accepted by creditors.

158 Proposed subsections 74A(3) to (6) inclusive provide a means by which a variation proposal can be made in writing by the trustee, with the debtor's consent and without calling a meeting. The proposed measure does not require that the proposal be voted on by the creditors. It is a sufficient safeguard that any one creditor who either opposes the proposal or objects to it being resolved without a meeting has the power to challenge it by objecting in the specified manner to it being so resolved. If at least one creditor lodges such a written notice of objection, the proposal can only be considered in the ordinary way, ie, by calling a formal meeting of creditors.

159 The amendments effected by items 83 to 85 are drafting amendments of a technical nature only and do not affect the substantive law. By transitional provision item 242, they will apply to changes that occur after commencement.

Duties of bankrupt

160 Item 86 proposes the insertion in the Act of new paragraphs 77(bb) and (bc), to impose on a bankrupt an additional duty, ie, to advise the trustee of any material change in the particulars contained in the bankrupt's statement of affairs. By item 87, a material change is to be defined by proposed subsection 77(2) to mean one which could reasonably be expected to be relevant to the administration of the bankrupt's estate.

161 Items 88 to 90 are all drafting changes of a minor technical nature and do not affect the substantive law. By transitional provision item 242, they will apply to changes that occur after commencement.

Trustee powers to investigate

162 The amendments proposed by items 91 to 94 to section 77A, and the repeal of section 77B proposed by item 95, are each a consequence of the fact that the Official Receiver's existing power under subsection 19AA(2) to conduct an investigation into the affairs of a bankrupt is proposed by this Bill to be repealed because the investigation function is one properly carried out by a trustee: see the notes on item 24. Accordingly, items 91 to 94 propose to delete references to a person called `the investigator' and insert in their place a reference to `a trustee'. This reflects the fact that it will be a trustee, and not an Official Receiver, who conducts a section 19AA investigation. By transitional provision item 231, all these changes will apply to bankruptcies for which the date of the bankruptcy is after commencement.

163 By item 96, subsection 80(1) of the Act is proposed to be amended by replacing an obsolete reference to subparagraph 6A(2)(b)(i) (which was repealed in 1996) with the requirement that a bankrupt notify his/her trustee of a

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change of name or of address. An associated amendment is effected by proposed new paragraph 77(bb): see the notes on item 86. By transitional provision item 242, the amendment made by this item will apply to a change that occurs after commencement.

Debts incurred in cooling-off period are not provable in the bankruptcy

164 Section 82 of the Act specifies what debts are, and are not, provable in a bankruptcy. Item 97 proposes to insert new subsection 82(2A). In recognition of the fact that debts might be incurred during a cooling-off period by a debtor who has lodged a debtor's petition, and to ensure that such debts remain the responsibility of the debtor notwithstanding any resulting bankruptcy, the proposed subsection makes clear that debts so incurred in that period are not provable in the bankruptcy. In other words, they survive the bankruptcy. This puts such debts in the same category as current post-bankruptcy debts. By transitional provision item 237, the change proposed by item 97 will apply to petitions presented after commencement.

Time limit for appeal against trustee's estimate of value of contingent debt or liability

165 Item 98 provides to the effect that where, under subsection 82(4), a trustee estimates the value of a contingent debt or liability provable in the bankruptcy, a person aggrieved by that estimate may appeal to the Court within 28 days after the day on which the estimate is notified to that person. The imposition of a time limit is to ensure that a trustee's administration of a bankruptcy is not unduly hindered by an aggrieved person challenging the trustee's valuation of a contingent liability at a time unreasonably distant from when the person becomes aware of the trustee's estimate. By transitional provision item 243, the amendment made by this item will apply to the review of trustee decisions made after commencement.

166 Item 99 proposes the repeal of section 99. This measure is connected with that proposed by item 101: see the notes on that item. By transitional provision item 244, the amendment made by this item will apply to trustee decisions made after commencement.

Debts to be rounded down to nearest dollar

167 Item 100 would repeal existing section 103 and replace it with a new section which provides for the rounding down, to the nearest dollar, of all amounts in proofs of debts which include cents. By transitional provision item 244, the amendment made by this item will apply to proofs admitted after commencement.

Admission or rejection of proofs of debt

168 The amendments proposed by items 99 and 101 are a consolidation of two current provisions into one provision, the proposed new subsection 104(1). By transitional provision item 244, the amendments made by this item will apply to trustee decisions made after commencement.

Priority of unpaid superannuation contributions

169 Section 109 of the Act provides an order of priority for payments made by a trustee in relation to amounts realised in the administration of a bankrupt's estate. Under paragraph 109(1)(e), the fifth priority in subsection 109(1) is payment of amounts due to any employee of the bankrupt, whether remunerated by salary, wages, commission or otherwise, in respect of services rendered to or for the bankrupt before the date of bankruptcy. There is a limit per employee, being a prescribed amount (as at March 2001, $3,100 (indexed)).

170 Current doubts about whether unpaid employer superannuation contributions are accorded any priority at all by section 109 will be resolved by the amendment proposed by item 102. It makes it plain that they are. This proposed amendment will align the bankruptcy law with the Corporations Law. By transitional provision item 246, the amendment made by this item will apply to bankruptcies for which the date of bankruptcy is after commencement.

171 Item 103 proposes an amendment to subsection 109(7B) consequential upon the change of status of ITSA from a Division of the Attorney-General's Department to an executive agency. It effects no change of substance to the Act.

Commencement of bankruptcy: vexatious counter-claims, set-offs or cross-demands.

172 By lodging an unmeritorious counter-claim, set-off or cross demand in relation to a bankruptcy notice, an unscrupulous debtor who has no valid defence to the notice can nonetheless extend the time for compliance with the notice and effectively defer the date of his/her bankruptcy. A consequence of this deferral is to bring forward the commencement of what otherwise would be the `relation back' period under section 115.

173 Item 104 therefore proposes to amend section 115 by permitting the Court to find that the application under subsection 41(7) to set aside the notice was frivolous, vexatious or otherwise without substantial merit. If the Court so finds, the bankruptcy is to be taken to have relation back to, and to have commenced, at the time that would have applied under subsection 115(1) if the time for compliance had not been extended under subsection 41(7).

Property divisible among creditors: `sentimental' property

174 Subsection 116(2) of the Act specifies property which is not divisible among the creditors of the bankrupt. Non-divisible property includes `household property'. There has been doubt, however, whether the term `household property' is apt to cover commercially valuable sporting medals and

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the like.

175 Under proposed new paragraph 116(2)(ba) to be inserted by item 105, a bankrupt will be able to retain personal property which has sentimental value to the bankrupt and which is of a kind prescribed by the regulations, if creditors, by special resolution, before the trustee realises the property, agree to permit the bankrupt to keep it.

176 Relevant regulations have not yet been made: it is intended that the type of property to be prescribed will include such items as sporting medals, trophies, and civil and military awards, but not jewellery. By transitional provision item 246, the amendment made by this item will apply to bankruptcies for which the date of bankruptcy is after commencement.

Time limit for realising property

177 Under proposed new subsection 129AA, to be inserted by item 106, there will be an initial period specified within which a trustee is to realise property.

178 The proposal specifies that, in relation to property disclosed by the bankrupt on the statement of affairs, and to after-acquired property disclosed within 14 days of the debtor becoming aware of it, the revesting time will be 6 years from the date of discharge of the bankrupt (paragraph (3)(b)). For after-acquired property disclosed after discharge, the revesting time will be 6 years from the date on which the bankrupt discloses the property to the trustee (paragraph (3)(c)).

179 The trustee readily will be able to extend the revesting time by up to 3 years in cases where realising the property is not practicable before the original revesting time. A simple example is the case where a trustee is unable to sell an interest in a house property because that interest is subject to a life tenancy; it will often be the case that the trustee has no practical option but to wait for the life tenant to die.

180 The new provisions will encourage trustees to realise assets within a reasonable time frame and discourage undue delays in the administration of an estate.

181 Proposed new subsection 129AA(7) provides that section 127 (which allows a trustee to claim property for up to 20 years) will not apply in respect of any property that revests in the bankrupt pursuant to section 129AA. This will ensure that the trustee cannot rely on section 127 to claim particular property that has revested in the bankrupt. Section 127 would still apply in respect of property which either was not disclosed by the bankrupt on the statement of affairs or was `after-acquired' property which was not disclosed, in writing, by the bankrupt to the trustee.

182 By transitional provision item 248, the amendment made by item 106 will apply to all bankruptcies, including those that ended before commencement. However, for that latter group, the initial revesting time is to start on the sixth anniversary of commencement, instead of the sixth anniversary of the date of discharge.

Powers exercisable by trustee

183 The amendments proposed by items 107 to 110 inclusive would merge the provisions of sections 134 and 135 of the Act. They would repeal section 135 (item 110) and transfer the remaining provisions of section 135 to section 134, where they will be incorporated as new paragraphs 134(1)(aa), (ab), (ac), (ia) and (ma) respectively. There is no change proposed to the powers of a trustee: the opportunity is being taken to improve the layout of the law.

Trustee's power to assess liability of bankrupt to make contributions from income

Definition of dependant

184 Item 111 proposes to change the definition of dependant in section 139K of the Act to allow the dependant to earn up to an amount specified in the Regulations (proposed to be $2,500). Under the current definition a person is disqualified as a dependant if they earn `any income'. That is too restrictive.

Income tax includes Medicare levy

185 Item 112 proposes an amendment to 139K of the Act to include a definition of income tax and to make clear that income tax includes Medicare levy. This amendment is for the avoidance of doubt and does not change the substantive law.

Definition of income

186 Item 113 proposes the repeal of subparagraph (b)(ii) of the definition of income in section 139L of the Act.

187 Section 139L of the Act provides a complex definition of income in relation to a bankrupt for the purposes of the contribution scheme in Division 4B of Part VI of the Act including for example that some payments under the Social Security Act are income for contribution purposes and others are not income. The essence of the subparagraph is to be transferred and reproduced, but in clearer form, in the Bankruptcy Regulations.

188 As the Social Security Act is amended frequently, it is appropriate that these types of provisions be dealt with by the Bankruptcy Regulations which can be more readily amended.

Tax refunds

189 Items 114 and 115 propose to amend section 139N of the Act to ensure that the amount of a bankrupt's unpaid income tax (and which, because of the

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bankruptcy, will not be payable) is not deducted from the bankrupt's income, and that a tax refund attributable to the period up to the date of the debtor's bankruptcy (and which is an asset in the bankruptcy and thus vests in the trustee) is not added to the bankrupt's income, for the purposes of the contribution scheme.

190 Proposed new subsection 139N(2) provides to that effect for income tax refunds in respect of tax years of income that ended before the date of the bankruptcy. Proposed new subsection 139N(3) relates to income tax refunds that relate to a tax year of income that straddles the date of bankruptcy. In such a case, to the extent that the refund relates to the period up to the date of bankruptcy, it is excluded from the debtor's income for contribution scheme purposes, and that part which relates to the post-date of bankruptcy segment of the year of income is treated as income for the purposes of that scheme. To simplify calculations, refunds which relate to a straddle year are to be apportioned on a time basis.

Determination of higher income threshold in cases of hardship

191 Item 116 proposes a new section 139T, modelled on existing section 139T, but providing for the trustee of a bankrupt estate rather than the Official Receiver to assess hardship when deciding liability for income contributions. The trustee is best placed to consider the initial application for hardship. The trustee's decision is reviewable by the Inspector-General.

192 Items 117 to 119 propose amendments to section 139U of the Act requiring a bankrupt to give the trustee particulars of all income that was derived or is expected to be derived by each dependant of the bankrupt during the relevant assessment periods.

193 These amendments are consequential on that proposed by item 111 to be made to section 139K of the Act to allow a bankrupt's dependant to earn an income of up to a prescribed amount and retain the status of dependant.

Trustee to notify bankrupt of review rights regarding hardship decisions

194 Item 120 proposes to amend subsection 139W(4) to require the trustee to give written notice to the bankrupt about the possibility of a variation, under section 139T on the grounds of hardship, of the bankrupt's assessed contribution liability.

No time limit on making assessment

195 It is proposed by item 121 to amend the contribution provisions by inserting a new provision, section 139WA, under which it will be clear that there is no time limit for the trustee to make an assessment under section 139W or a fresh assessment under subsection 139W(2). In particular, such an assessment may be made after the end of a contribution assessment period or after the bankrupt has been discharged from bankruptcy.

196 To avoid any doubt about the intended scope of the word `bankrupt' in applying new subsection 139WA(1), proposed new subsection 139WA(2) provides that a reference in Division 4B of Part VI to `a bankrupt' includes a reference to a former bankrupt.

197 The amending provision is intended to ensure that bankrupts gain no benefit from hindering the trustee's ability to make an accurate assessment of the bankrupt's liability to make a contribution under Division 4B of Part VI of the Act.

198 By transitional provision item 249, the amendments made by items 111 to 121 inclusive will apply to contribution assessment periods that begin after commencement.

Time limit for applying for review of assessment

199 Item 122 provides for a 60 day time limit on requests under paragraph 139ZA(3)(a) for a review of a trustee's assessment of a contribution liability. This limit is to facilitate the trustee's prompt administration and finalisation of an estate. By transitional provision item 243, the amendment made by this item will apply to the review of decisions made after commencement.

200 Item 123 proposes the amendment of subsection 139ZE(1) which requires the Inspector-General to notify both the bankrupt and the (registered) trustee of the Inspector-General's decision on the review of an assessment made by a trustee. The amendment proposes to omit references to a `registered' trustee. The result will be that the provision will apply both to a registered trustee and the Official Trustee. The amendment recognises the Official Trustee as an entity quite separate from the Inspector-General.

Review of assessment decisions

201 Item 124 proposes the repeal and replacement of section 139ZF with the effect of requiring bankrupts to utilise the internal review mechanism, ie, review by the Inspector-General, before seeking AAT review of a trustee's contribution assessment. Item 126 proposes an amendment consequential on the removal of that right of direct access to the AAT. By transitional provision item 250, the amendments made by these 2 items will apply to the review of decisions made after commencement.

202 Item 125 is a deferred item: see the notes on item 41.

Repeal of Division 4C of Part VI

203 Item 127 provides for the repeal of Division 4C of Part VI of the Act. That Division provides for a bankrupt who is liable to pay income contributions not to leave Australia without permission of the Court. It is proposed to transfer the primary decision making in relation to such matters from the Court

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to the trustee of the bankrupt estate: see the notes on items 209 and 212. By transitional provision item 251, the amendments made by this item will not affect the rights of bankrupts in relation to permission for overseas travel granted before commencement or sought before, but granted after, commencement.

204 Items 126 and 128 propose a minor drafting amendment of a technical nature to subsection 145(3). No substantive change to the law is proposed by the amendment.

205 Item 129 proposes an amendment of subsection 149(1) to remove what will become an obsolete reference upon the repeal of the early discharge provisions. By transitional provision item 234, this change will apply to bankruptcies for which the date of the bankruptcy is after commencement.

Bankruptcy extended when objection filed

206 Item 130 proposes to amend subparagraph 149A(2)(a)(i) to replace the subsection 149D(1)-based list of objection grounds which extend a bankruptcy by 5 years. Each ground in the new list will constitute a special ground of objection: see the notes on items 135 to 140.207 Item 131 proposes a minor drafting amendment to correct a drafting error. It will make no change to the substantive law.

208 Item 132 proposes an amendment to subsection 149A(3) of the Act which sets out the effect of an objection being withdrawn or cancelled. The amendment proposes to repeal subparagraph (3)(b)(iii) to remove reference to the early discharge provisions as their repeal will make them irrelevant in determining the effect of the cancellation or withdrawal of an objection. By transitional provision item 234, this change will apply to bankruptcies for which the date of the bankruptcy is after commencement.

209 Item 133 proposes to amend subsection 149B(1) to remove the Official Receiver's power to file a notice of objection to discharge. The filing of such an objection is not an Official Receiver function but, rather, a function of the trustee. Item 134 proposes a consequential technical amendment.

Objections to discharge

- Background

210 The objection-to-discharge provisions of the Act allow a trustee to file an objection to the bankrupt's discharge from bankruptcy. A successful objection extends the standard period of bankruptcy by either 2 years or 5 years, depending on the grounds of the objection. The grounds are specified in the Act. They relate to various means by which a bankrupt's non-cooperation with the trustee can frustrate the trustee's efforts to administer the bankruptcy.

211 When filing an objection, the trustee must set out the ground of objection, the facts relied on to support the ground and the reasons for filing an objection. Case law establishes that punishing the bankrupt, of itself, is not a lawful reason. The only valid reason for filing an objection has been held to be to advance the trustee's administration of the bankruptcy. This approach does not encourage bankrupts to cooperate with trustees.

- Special grounds of objection

212 The amendments propose to address this weakness in the present law by identifying some existing grounds, and adding some new grounds, as "special grounds". In these special ground cases the trustee will not need to show that filing the objection will advance the administration, only that the special ground existed. Therefore, if the grounds of objection include a special ground, only the facts supporting that special ground need to be established. The special grounds are specified in paragraphs 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (k) and (ma). Item 135 proposes that paragraph 149C(1)(c), which requires a trustee to state the reasons for objection to discharge, not apply regarding objections filed on those special grounds.

- New grounds of objection, including special grounds

213 Item 136 proposes the insertion of proposed new grounds of objection in subsection 149D(1). They are: that any transfer is void against the trustee in the bankruptcy because of section 120 or 122 (new paragraph 149D(1)(aa)); and a new special ground - that any transfer is void against the trustee because of section 121 (new paragraph 149D(1)(ab). 214 Items 137, 138 and 140 propose to add further, special grounds of objection. Respectively, the items deal with the intentional provision by the bankrupt, after the date of bankruptcy, of false or misleading information to the trustee; and a bankrupt's intentional failure to disclose to the trustee either a liability or the bankrupt's beneficial interest in any property.

215 By item 139, failure to comply with the requirements of paragraphs 77(1)(bb) or (bc) will be a ground (but not a special ground) of objection. By transitional provision item 242, the amendment made by this item will apply to failure to notify a change, referred to in those paragraphs, which occurs after commencement.

216 The amendment proposed by item 141 would amend subsection 149F(1) so that, when a notice of objection is filed by a trustee, the trustee must give a copy of it to the bankrupt, together with a notice to the effect that the bankrupt may request the Inspector-General to review the decision of the trustee to file a notice. This removal of any reference to the AAT reflects the proposed requirement that a bankrupt must first access internal review before seeking external review.

217 The amendments proposed by items 142 to 146 inclusive are consequential

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upon the proposed withdrawal of the Official Receiver's power to file an objection to the discharge of a bankrupt: see the notes on item 133. By transitional provision item 252, the amendments made by items 133 to 146 will apply to objections filed after commencement.

218 Item 147 proposes the insertion of a 60 day time limit in which a bankrupt may apply, under paragraph 149K(3)(a), for a review of the trustee's decision to object to the bankrupt's discharge. By transitional provision item 243, the amendment made by this item will apply to the review of decisions made after commencement.

219 Item 148 proposes an amendment consequential on the loss of the Official Receiver's power to file an objection to the discharge of a bankrupt: see the notes on item 133.

220 Item 149 proposes a new subsection 149N(1A), under which an objection must not be cancelled if it specifies at least one special ground and there is sufficient evidence to support the existence of at least one such ground.

Bankrupt's conduct after ground commenced to exist must be ignored on review of objection

221 Trustees understandably are disconcerted when an objection filed by them has been cancelled by the AAT or the Court because, for example, immediately prior to a review hearing, the bankrupt has provided information long sought by the trustee. By proposed new subsection 149N(1B), no notice is to be taken by a review tribunal or the Court when applying proposed new subsection 149N(1A), of any conduct of the bankrupt after the time when the ground concerned first commenced to exist.

222 However, as a bankrupt may fail, for reasons beyond the bankrupt's control, to comply with a duty imposed under the Act, the proposed amendment permits the Inspector-General to cancel an objection made on a special ground if the bankrupt establishes that there was a `reasonable excuse' for the conduct or failure that constituted a special ground.

223 Paragraph 149D(1)(h) is excluded from the `reasonable excuse' provision. This is because non-payment of assessed contributions must remain an effective ground of objection when a bankrupt receives substantial benefits from friends or family and so is able to maintain a lifestyle `of undiminished splendour' (see Bond v The Trustee of the Property of Alan Bond, a Bankrupt (1994) 125 ALR 399). The value of such benefits can be assessed by the trustee as `income' for contribution scheme purposes. It is not appropriate that an objection filed on the ground of non-payment of such an assessed contribution be cancelled because of a `reasonable excuse' that the bankrupt had no capacity to pay the contributions.

224 By transitional provision item 252, the amendments made by items 148 and 149 will apply to objections filed after commencement.

Notifying Official Trustee of objection review decision

225 Section 149P obliges the Inspector-General to notify the bankrupt and the trustee about the outcome of the Inspector-General's review of an objection decision or the Inspector-General's refusal of a request for a review of the trustee's decision to object to discharge. Item 150 proposes an amendment to ensure that the provisions of subsection 149P(1) apply to the Official Trustee as well as to a registered trustee, by extending the notification obligation to cases where the Official Trustee is the trustee.

226 Item 151 proposes another amendment consequential on the loss of the Official Receiver's power to file an objection to the discharge of a bankrupt: see the notes on item 133. By transitional provision item 252, the amendment made by this item will apply to objections filed after commencement.

Internal review of objection decision required before external review accessible

227 Item 152 proposes the repeal and substitution of section 149Q to make clear that applications to the Administrative Appeals Tribunal can only be made for a review of a decision of the Inspector-General on the decision of a trustee to file an objection or a decision of the Inspector-General refusing a request to review a decision of the trustee to file a notice of objection. This measure ensures that a bankrupt dissatisfied with such a decision must first seek review of it by the Inspector-General rather than seeking initial review of it by the Administrative Appeals Tribunal. By transitional provision item 250, the amendment made by this item will apply to the review of decisions made after commencement.

228 Item 153 is a deferred item: see the notes on item 41.

Repeal of early discharge provisions

229 Item 154 proposes the repeal Division 3 of Part VII which is the division dealing with the early discharge of bankrupts from bankruptcy. The effect of the amendment will be to repeal the early discharge provisions under which some bankrupts can obtain discharge from bankruptcy after 6 months. By transitional provision item 234, this change will apply to bankruptcies for which the date of the bankruptcy is after commencement.

Annulment on payment of debts to include payment of interest

230 Item 155 proposes an amendment to subsection 153A(1) of the Act to make clear that annulment on the ground of full payment of the bankrupt's debts requires, in relation to any debts that bear interest, interest reckoned up to and including the date on which the debt, including the interest, is paid.

Annulment of bankruptcy by Court whether or not petitioning debtor

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insolvent

231 Item 156 proposes the insertion of a new subsection in section 153B of the Act. That section gives the Court power to annul a bankruptcy. There is at present no test for insolvency in relation to a debtor's petition filed under the Act and it is not proposed that, in the ordinary case, there be one. However, the amendment will enable the Court to annul a bankruptcy even if the debtor is insolvent.

232 Some debtors who petition for bankruptcy may be technically insolvent but could make arrangements to repay their debts: they choose not to while maintaining an expensive lifestyle. Section 153B, as proposed to be amended, would enable the Court to find that their petition is an abuse of process.

233 A person, for example, might have an income of $400,000, no assets and owe one creditor (eg, ATO) $500,000. The creditor in such a situation would be able to argue that the bankruptcy should be annulled because the debtor has the capacity to pay the debt within a reasonable time but appears to have chosen not to pay it while continuing to enjoy a lifestyle which absorbs all of his or her (often) very substantial income. The Court would not be able to rely on the person's technical insolvency (inability to pay debts as they become due and payable) to dismiss the application.

234 Items 157, 162 and 164 propose an amendment which is consequential on the change of ITSA's status from that of a Division of the Attorney-General's Department to that of an executive agency under the Public Service Act 1999. Under the proposed change, an `APS employee' will be substituted for an `officer of the Department' as a person who may form part of the membership of a committee convened to consider a person's application for registration as a trustee under the Act, or the conditions applying to a trustee's registration or whether or not a trustee should continue to be registered.

Registration of trustees

235 Item 158 proposes an amendment to subsection 155A(1) of the Act to allow a committee convened to decide whether an applicant should be registered as a trustee to require the applicant to sit for an exam in addition to the present compulsory interview.

236 Item 159 proposes to insert new subsection 155A(4A) which provides that an applicant should not be registered if the applicant does not have the ability (including knowledge) to perform satisfactorily the duties of a registered trustee. An Administrative Appeals Tribunal has held that the current law permits a person to be registered as a trustee even if that person did not, at the time of registration, have that ability. That decision was open to the Tribunal but the provision had not been intended to have that outcome. Under the proposed amendment, it will be insufficient for an applicant to satisfy a committee that the applicant has a capacity to acquire the requisite ability and knowledge after they have been registered.

237 By transitional provision item 255, the amendments made by items 158 and 159 will apply to registration applications made after commencement.

238 The effect of existing section 155D is that Inspector-General must extend a trustee's registration for three years from the expiry of his or her current registration if the trustee applies in writing before the expiry of the registration and the person has paid the charge imposed by section 6 of the Bankruptcy (Registration Charges) Act 1997. Items 160 and 161 propose to insert new subsections 155D(2) and (3) into the Act and to amend paragraph 155(D)(b). Item 160 adds a further requirement to existing paragraph 155D(b) which is that any late payment penalty under proposed subsection 155D(3) has been paid. The amendments proposed by item 161 would provide that the Inspector-General must not extend a trustee's registration if the trustee owes more than $50 of charge under the Bankruptcy (Estate Charges) Act 1997 or of penalty under section 281 of the Act in respect of that charge. This sanction can only be applied, however, if the Inspector-General has notified the person of the unpaid charge at least 14 days before the due date for payment of the charge under proposed new subsection 155D(3).

239 Proposed new subsection 155D(3) changes the current arrangements in relation to the payment by trustees of their registration charge, ie, the payment which ordinarily will renew their registration as trustees for a further 3 years.

240 At present, if a trustee's payment is received after the expiry of the trustee's current registration, the trustee is unregistered and must apply to the Court for an order that he or she be re-registered. Such applications are costly and inconvenient for trustees.

241 To minimise the number and impact of such cases, the Bill proposes a revised arrangement whereby the charge payable for the extension of a trustee's registration is to be due for payment one month before the date of expiry of that registration. Further, if the charge is not paid by the due date, an additional amount equal to 20% of the charge is payable by the trustee by way of penalty.

242 It is proposed that ITSA will alert trustees to the forthcoming expiry of their registration and, if the charge is not then paid by the due date, send a reminder to affected trustees that a 20% penalty has become applicable. If, ultimately, the trustee does not pay the charge and the penalty before the expiry of his or her current registration, the by then unregistered trustee will have no option but to apply to the Court for re-registration. 243 By transitional provision item 256, the amendments made by items 160 and 161 will

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apply to extensions of registration with an expiry date at least 3 months after commencement.

244 Item 163 proposes to insert in section 155H an additional ground for de-registration of a trustee. That ground will be that the trustee no longer has the ability (including knowledge) to perform satisfactorily the duties of a registered trustee. It is appropriate that this ground be added to those already appearing in subsection 155H(1) because trustees need to maintain their professional expertise so as to be able to continue to perform satisfactorily their duties as registered trustees. By transitional provision item 255, the amendment made by this item will apply to registration applications made after commencement.

Minimum remuneration of registered trustee

245 Items 165 and 166 propose amendments to subsection 161B(1) to increase, by 8.4%, the minimum statutory trustee remuneration payable under the Act to take account of the impact of the GST and associated tax changes under the new tax system.

246 Item 167 proposes the insertion of new subsection 162(6A) under which the trustee must, in relation to his/her remuneration, give such notices to the bankrupt and creditors as are required by the regulations. It is intended that the regulations will require that the bankrupt and creditors be given adequate information about a trustees' remuneration and also notified of the rights of the bankrupt and creditors to seek to have that remuneration taxed if they are dissatisfied with its amount.

Remuneration of successive trustees

247 Item 168 amends section 164 by substituting `Officer of ITSA' for `Officer of the Department' to reflect ITSA becoming an executive agency.

Time limit for review applications under section 178

248 Item 169 proposes an amendment to section 178 of the Act to insert a 60 day time limit in which an application may be made to the Court for a review of a trustee's act, omission or decision. At present, no time limit is specified: some bankrupt's have applied to the Court for a review many years after the act, omission or decision concerned. This is both inconvenient and costly for trustees: setting a time limit will allow a reasonable period for persons to seek review under section 178. By transitional provision item 243, the amendment made by this item will apply to the review of trustee decisions made after commencement.

Streamlined method for replacing trustee

249 Item 170 proposes a streamlined method for replacing a trustee under the Act. Proposed new section 181A will allow the trustee of a bankrupt's estate to notify creditors of a proposal to replace the trustee, providing the new trustee has consented. If no creditor lodges a written objection within the specified time, the change of trustee takes place on the date specified in the notice. The new trustee is treated as having been appointed by the creditors and therefore has the same powers as if he/she had been appointed by them under section 157 of the Act.

250 The effect of proposed evidentiary provision subsection 181A(6) is that a trustee's signed certificate as to any matter relating to a section 181A proposal is to be prima facie evidence of the matter.

251 By transitional provision item 258, the amendments made by item 170 will apply to all bankruptcies, including those for which the date of bankruptcy is before commencement.

Official Receiver to process debt agreement proposals

252 Items 171 to 176 inclusive, items 178 and 180, and items 182 to 193 inclusive, all propose minor drafting changes to sections in Part IX of the Act, ie, the Part which deals with debt agreements. The proposed changes are a recognition that the processing of debt agreement proposals is more appropriately an Official Receiver function than an Official Trustee function. By transitional provision item 255, the amendments made by all these items will apply to debt agreements in force at commencement and those made thereafter. Item 194, which proposes to repeal a note to section 185Y, will apply in the same way.

Doubling the income threshold for debt agreements

253 Item 177 proposes a doubling of the present income threshold for debt agreement proposals. This measure will enable more people to enter into an arrangement with creditors and thereby avoid bankruptcy. By transitional provision item 260, the amendment made by this item will apply to debt agreement proposals given after commencement.

254 Item 179 proposes to insert subsection 185D(2) to extend to debtors who make debt agreement proposals the right that the Bill proposes that bankrupts will enjoy: to access, for no fee, their own statement of affairs: see the notes on item 37.

Oversight of debt agreement administrators

255 Item 181 provides that the Official Receiver must refuse to accept a debt agreement proposal for processing if the person nominated in it as administrator is ineligible in accordance with the regulations to act as an administrator.

256 The debt agreement mechanism inserted in the Act in 1996, was introduced as a low-cost, simple process under which a debt agreement administrator could be any person, such as a debtor's friend or family member, and need hold no formal qualifications.


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257 Whilst it is desirable, as far as possible, to continue to maintain this informal approach, the vast majority of debt agreements are administered by persons who do so as a business. Some evidence of sharp practices has emerged. It therefore is appropriate for a regulatory regime - but less detailed than that provided in the Act in relation to registered trustees - to be established. It is proposed that the regulations will provide criteria under which certain persons will be ineligible to be nominated as debt agreement administrators in debt agreement proposals.

258 By transitional provision item 260, the amendment made by this item will apply to debt agreement proposals given after commencement.

Oversight of controlling trustees who are solicitors

259 In a similar vein, item 195 proposes the insertion of subsections 188(2A) and (2B) under which the regulations may prescribe the circumstances in which a person other than the Official Trustee or a registered trustee is ineligible to act as a controlling trustee under Part X of the Act.

260 There is evidence that some controlling trustees who are solicitors have been performing that role in an unsatisfactory and unprofessional manner. Taking court action against them is costly and time-consuming. It therefore is intended by this measure that solicitor controlling trustees will be subject to regulation by the Inspector-General, just as registered trustees and the Official Trustee already are. A controlling trustee solicitor's failure to meet eligibility conditions prescribed in the regulations will make him or her ineligible to act as a controlling trustee. By transitional provision item 262, the amendment made by this item will apply where the control ends after commencement.

Notification of cessation of control as controlling trustee

261 Item 196 proposes an amendment to section 189 of the Act so that a trustee will be required to notify the Official Receiver in writing within 7 days after becoming aware that his or her control has ended because of an event specified in subsection 189(1A). The purpose of this amendment is to ensure that the National Personal Insolvency Index can be kept up-to-date. By transitional provision item 263, the amendment made by this item will apply where the control ends after commencement.

262 The amendments proposed by items 197 and 198 delete redundant references to section 198, a section repealed in 1996. Similarly, item 199 proposes to correct an incorrect reference to subsection 188(2) in paragraph 222(4)(b) of the Act by substituting a correct reference to section 188A.

Validation of acts of Part X trustee acting in good faith

263 Section 224 of the Act validates the acts of trustees or any other persons who have entered into transactions in good faith under a Part X arrangement without being aware that the arrangement has been voided or terminated under the provisions of the Act. The amendments proposed by items 200 and 201 will extend references in paragraphs 224(c) and 224(d) to include references to proposed new sections under which Part X arrangements can be terminated: see the notes on items 203 and 204 for an explanation of the new proposed provisions referred to in items 200 and 201. By transitional provision item 241, the changes proposed by all these 4 items will apply to Part X arrangements made after commencement. Also by that transitional item, a Part X composition or scheme of arrangement will be made when it is accepted by creditors, and a deed of arrangement will be made when it is executed.

264 Item 202 would amend an incorrect reference in subsections 226(1) and (2) of the Act to subsection 188(2) and substitute a correct reference to section 188A.

Variation of deed of arrangement

265 Item 203 proposes the insertion of new sections 234A and 234B into the Act. Under those sections, it will be possible for a Part X deed of arrangement to be varied by a special resolution of creditors or by the trustee (new section 234A) or for a deed of arrangement to be terminated by the trustee (new section 234B).

266 The variation of deeds of arrangement may be effected by the creditors, with the written consent of the debtor, by special resolution at a meeting called for the purpose (new subsection 234A(1)).

267 Similarly, with the debtor's written consent, a trustee may in writing propose a variation of a deed of arrangement (new subsection 234A). The trustee would give notice of the proposed variation to the creditors, state why the variation is being proposed and what its likely impact on creditors will be if it is approved. If no creditor lodges a written notice of objection, the proposed variation takes effect on the date specified in the notice. No vote of creditors is required. A creditor who objects to the proposal, or to it being dealt with other than by a creditors' meeting, can lodge with the trustee a written notice of objection.

268 The effect of proposed evidentiary provision subsection 234A(6) will be that a trustee's signed certificate as to any matter relating to a section 234A proposal is to be prima facie evidence of the matter.

Termination of deed of arrangement by trustee

269 Proposed new section 234B provides a comparable mechanism for terminations of deeds of arrangement. The notification procedure is the same as in subsections 234A(2) to (4), except that it requires that the debtor be in default under the deed of arrangement before a termination can take place. By subsection 234B(5), the debtor is in default if the debtor has

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failed to carry out or failed to comply with a provision of the deed or, if the debtor has died, the debtor or the person administering the deceased estate of the debtor has failed to carry out or comply with a provision of the deed. Subsection 234B(5) is modelled on existing paragraph 236(1)(a) of the Act.

270 The effect of proposed evidentiary provision subsection 234B(6) will be that a trustee's signed certificate as to any matter relating to a section 234B proposal is to be prima facie evidence of the matter.

Variation of composition

271 Item 204 proposes the insertion of new sections 240A and 240B which would deal with the variation of a Part X composition or the termination, at the instigation of the trustee, of a Part X composition.

272 The provisions of proposed new section 240A parallel, in relation to the variation of a composition, the provisions proposed to be inserted by new section 234A in relation to the variation of a deed of arrangement: see the notes on item 203.

Termination of composition by trustee

273 Similarly, the provisions of proposed new section 240B parallel, in relation to the termination of a composition by a trustee, the procedure set out in proposed new section 234B regarding the termination of a deed of arrangement by a trustee: see the notes on item 203 as they relate to proposed new section 234B. In relation to the termination of a composition by a trustee, proposed subsection 240B(5) sets out when a debtor is to be regarded as in default. However, in this case new subsection 240B(5) is modelled on paragraph 242(1)(a) of the Act.

Offence of incurring further debts: threshold amount repealed

274 Item 205 proposes to amend subsection 265(8) of the Act to omit the words `of an amount of $500 or upwards'. This amendment has the effect of removing any threshold for the commission of the offence of incurring debts within 2 years before bankruptcy without having, at the time of contracting the debts, any reasonable or probable ground of expectation, after taking into consideration the debtor's other liabilities (if any), of being able to pay the debt.

275 The removal of the $500 threshold for this offence aligns the bankruptcy law with the Corporations Law which has no such threshold regarding a comparable offence. By transitional provision item 264, the amendment made by this item will apply to debts contracted after commencement.

276 Each of the amendments proposed by items 206 to 208 omits a reference to section 77B in the offence provisions in section 265A of the Act. These omissions are consequential on the repeal of section 77B of the Act proposed by item 95 of the Bill. By transitional provision item 231, these changes will apply to bankruptcies for which the date of the bankruptcy is after commencement.

Permission for debtor or bankrupt to leave Australia

277 Item 209 proposes the insertion of a new paragraph in section 272 of the Act. Proposed new paragraph 272(baa) will provide to the effect that a debtor who has the benefit of the protection from creditors afforded by the proposed new cooling-off period cannot leave Australia or do an act preparatory to leaving Australia without permission of the Court. The debtor cannot apply to his or her trustee during the period because no trustee is appointed until the date of bankruptcy at the end of that period (assuming the debtor does not withdraw the petition).

278 Item 210 proposes the repeal of paragraph 272(ba) because of the repeal of Division 4C Part VI (see item 127), and item 211 proposes an amendment consequential upon the proposed repeal of paragraph 272(ba) of the Act.

279 Consistently with the effective transfer from the Court to the trustee of the power to permit a debtor or bankrupt to travel overseas, item 212 proposes to insert new subsections 272(2) and (3). By those subsections, the trustee may impose written conditions on a consent to travel overseas if the bankrupt is liable to make a contribution to the trustee under the contribution scheme. A contravention by the bankrupt of any conditions imposed by the trustee is an offence and, under subsection (3), is punishable on conviction by imprisonment for a period not exceeding 1 year. By transitional provision item 251, the amendments made by items 210 to 212 will not affect the rights of bankrupts in relation to permission for overseas travel granted before commencement or sought before, but granted after, commencement.

Applications for more time to pay charge amounts

280 Item 213 proposes an amendment to paragraph 282(2)(b) of the Act to require that a person who seeks an extension of time to pay interest charge or realisations charge is to apply for that extension before the original time for payment. By transitional provision item 265, the amendment made by this item will apply to applications made after commencement.

Hardship test to become `undue hardship'

281 Item 214 proposes an amendment of paragraph 283(1)(a) of the Act to insert the word "undue" before "hardship" so that the Inspector-General, when considering whether to remit an amount of interest charge, realisations charge or late payment penalty that is payable but has not been paid, may consider both whether failure to remit the amount would cause a person undue hardship and whether it is appropriate to remit the amount. The existing test of "hardship" in paragraph 283(1)(a) has been distinguished by the Administrative Appeals Tribunal (AAT) from the test of "undue hardship" set out in regulation 16.10(2)(a) of the Bankruptcy Regulations. The AAT took the view that the section 283 test was more liberal than that called for by the regulations. It is considered appropriate that the Act and the regulations use an identical test of hardship in this context and that it be the test of "undue hardship" rather than simply "hardship". By transitional provision item 266, the amendment made by this item will apply where the application for remission is made to the Inspector-General after commencement.

282 Items 215 and 216 propose amendments which are consequential on the repeal of the early discharge provisions of the Act. References in section 304A to provisions within those early discharge provisions will become redundant and are proposed to be omitted. By transitional provision item 234, these changes will apply to bankruptcies for which the date of the bankruptcy is after commencement.

Scope of section 305 extended to Part X arrangements

283 Section 305 of the Act sets out a scheme where trustees of a bankrupt estate may seek Commonwealth assistance, if monies in the estate are insufficient for the purpose, to institute, continue or defend proceedings in relation to the estate of the bankrupt, the examinable affairs of the bankrupt or other matters specified in the section. Trustees from time to time have made representations that the scope of the section should be extended to trustees under Part X of the Act.

284 The amendment proposed by item 217 would remove the capacity of an Official Receiver to seek assistance under section 305 and allow a new category of trustee, ie, a trustee under Part X in relation to a debtor, to seek assistance under the section.

285 The amendments proposed by items 218 to 223 inclusive make consequential drafting amendments following that proposed by item 217 and to reflect the fact that, in a Part X matter, the trustee is handling the affairs of a debtor and not the affairs of a bankrupt.

286 Item 224 proposes an amendment to section 305 to define what is to constitute an estate in section 305. By proposed paragraph 305(4)(a), estate, in relation to a Part X deed of assignment, will mean the property that is vested in the trustee under the deed; in relation to a Part X deed of arrangement, the term will have the same meaning but will extend also to property that is available or may become available to the trustee under the deed; and, in relation to a Part X composition, it will mean the property that is available or may become available to the trustee under the composition.

Part 2--Transitional provisions.

287 As noted in relation to section 3 of the Bill, the notes on the Schedule items in Part 1 include notes on the transitional and application items. These items extend from item 225 to item 266 inclusive.

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