There are currently two Bills before Parliament which will involve amendments to the Bankruptcy Act ("the Act).
The aim of this article is to provide a brief overview of the proposed changes and to review the impact on Credit Managers.
DEBT AGREEMENT REFORM BILL
This Bill is likely to pass into law, as it has support both major parties.
The Debt Agreement regime (pursuant to Part IX of the Bankruptcy Act) was initially a mess when it was first introduced.
The problem was that it was largely hijacked by several cowboy operators who promoted the business of "get out of your debts".
The result was that Debt Agreements ("Agreements") in many cases involved payment of large upfront fees to the operators, who then put up proposals which had a low chance of success. In addition, they were not motivated to administer the Agreements properly, because they received their fees up front.
Subsequent improvements in the system have largely eliminated the rogue operators.
The main changes proposed are
• improve regulation of agreement administrators,
• make them much more professional,
• impose a three year cap on the period of payments (as opposed to five years)
• increase the maximum net asset position of debtors to $223,350.00
• cap payments to a ratio of the debtor's after tax income
I believe that the proposed changes will improve the overall recovery percentage (currently about 60%), improve confidence creditors will have in the system, reduce defaults and will completely remove any remaining dodgy administrators from the market place.
In summary, Credit Managers need not take any action and will benefit by the changes.
For the smaller debts which are covered by Agreements, it pays to let administrators collect the instalments and disburse them to creditors.
BANKRUPTCY AMENDMENT (ENTERPRISE INCENTIVES BILL 2017)
This Bill is part of the smart nation initiative by the government. It has support from both major parties and thus is likely to become law.
The rationale behind the changes is to reduce the stigma associated with bankruptcy, reduce the term of bankruptcy from three years to one year and thus allow insolvent debtors to get back on their feet and to start another business.
There appears to be reasonably positive support from the insolvency and credit industries for the changes.
The question then is what impact will these changes have on Credit Managers?
Bankruptcy is a tool more likely to be used by SMEs than larger corporate creditors. Many corporates, such as banks, utilities and telcos are reluctant to use the bankruptcy process, for fear of negative media publicity.
There is also a perception that bankruptcy action is expensive (which it is) and that it is generally uncommercial to use it.
A review of our bankruptcy files during the last 12 months indicates that 66% of our creditors were actually SMEs, 55% of debtors were consumers (as opposed to business operators), and that 46% of reasons for non-payment were avoidance.
It is note-worthy that 43% of our bankruptcy files were settled, only 17% resulted in a Bankruptcy Order and 39% did not proceed beyond a Bankruptcy Notice due to commercial consideration.
The likely impact of the changes is that there will be a spike in bankruptcies, particularly voluntary bankruptcies. The reason is that debtors in financial strife will see bankruptcy as a more viable way for them to solve their problems.
Indeed, there may well be a switch by some debtors from going along the Debt Agreement path and more towards bankruptcy, due to the twelve month bankruptcy period.
I believe that the changes will increase the need for Credit Managers to improve their credit checking processes.
In particular, an important step will be to always include the following question in even the most basic Credit Application Form:
"Have you have entered into an arrangement pursuant to the Bankruptcy Act?"
If the answer is "yes", great care needs to be made in providing credit.
The answer is easily checked against the public record and if a false answer has been provided, the policy should be to decline credit and insist on payment upfront.
I believe that bankruptcy is a useful tool and will continue to be useful. However, it should normally only be used in the circumstances where the debtor has sufficient equity in real estate or other assets and simply refuses to enter into sensible settlement negotiations.
In that case, the threat of bankruptcy proceedings is a real one, because the trustee appointed will be able to take control of the real estate asset and set it.
In summary, bankruptcy action should only be used in certain circumstances but in those circumstances it is a powerful tool. The proposed changes will not lessen bankruptcy as an option for credit managers.
Whilst bankruptcy is federal, don't overlook several useful state judgment enforcement processes.
Garnishee is particularly effective in NSW and ACT and is available in all states except S.A.
If you hold a judgment and your debtor has an interest in real estate in S.A. or Tasmania, you can lodge a caveat over the title.
Several states have processes to sell a judgment debtor's equity in real estate and this process can often be a better option than bankruptcy.
The writer is CEO of Prushka Fast Debt Recovery Pty Ltd and is principal of Mendelsons National Debt Collection Lawyers Pty Ltd. Prushka acts for in excess of 56,000 small to medium size businesses across Australia and operates on the basis of NO RECOVERY – NO CHARGE. www.prushka.com.au Free call 1800 641 617. The writer is also the author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.
Roger Mendelson provided evidence to the Senate Legal and Constitutional Affairs Legislative Committee which recently conducted a hearing into both Bills.