|
|
Home
| Databases
| WorldLII
| Search
| Feedback
Australian Senate Standing Committee for the Scrutiny of Bills - Scrutiny Digests |
2.1 This chapter considers the responses of ministers to matters previously raised by the committee.
|
Purpose
|
This bill seeks to amend the Bankruptcy Act 1966 to reform
Australia's debt agreement system
|
|
Portfolio
|
Attorney-General
|
|
Introduced
|
House of Representatives on 14 February 2018
|
|
Bill status
|
Before the Senate
|
2.2 The committee dealt with this bill in Scrutiny Digest No. 3 of 2018. The Acting Attorney-General responded to the committee's comments in a letter dated 19 April 2018. Set out below are extracts from the committee's initial scrutiny of the bill and the minister's response followed by the committee's comments on the response. A copy of the letter is available on the committee's website.[1]
2.3 Division 2 of Part IX of the Bankruptcy Act 1966 (Bankruptcy Act) sets out the process for giving a debt agreement proposal[3] to the Official Receiver[4] for processing. Within that Division, subsection 185C(4) sets out the circumstances in which a debtor cannot give a debt agreement proposal to the Official Receiver. Item 20 of the bill proposes to insert a new paragraph 185C(4)(e), which provides that a debtor cannot give a debt agreement to the Official Receiver if the total of the payments under the agreement would exceed the debtor's yearly after tax income by a certain percentage. Item 21 proposes to insert a new paragraph 185C(4B), which provides that the minister can determine this percentage by legislative instrument.
2.4 Proposed paragraph 185C(4)(e) and proposed subsection 185C(4B) would therefore appear to allow the minister to determine significant elements of the debt agreements framework in the Bankruptcy Act (that is, who may not submit a debt agreement to the Official Receiver) by delegated legislation.
2.5 The committee's longstanding view is that significant matters, such as eligibility requirements for entering into a debt agreement, should be included in primary legislation unless a sound justification for the use of delegated legislation is provided. In this instance, the explanatory memorandum states:
Currently paragraph 185C(2D) of the Bankruptcy Act contains the only restriction on the size or frequency of a debtor's proposed payments under a debt agreement. It specifies that a debt agreement administrator should certify that the debtor is likely to be able to discharge the obligations created by the agreement as and when they fall due. While this certification provides a safeguard against the submission and adoption of unsustainable payment schedules, it does not always prevent debt agreements that could cause the debtor undue financial hardship. For example, a debtor could propose to devote a significant proportion of their after tax income to debt agreement payments. The payment schedule could be sustainable but the debtor could suffer undue financial stress in discharging the obligations.
Item 20 inserts a new paragraph 185C(4)(e), which provides that a debtor cannot give the Official Receiver a debt agreement proposal if the total payments under the agreement exceed the debtor's income by a certain percentage. Item 21 provides that the Minister can determine this percentage by legislative instrument under new subsection 185C(4B).[5]
2.6 The committee appreciates that the intention of proposed paragraph 185C(4)(e) and proposed subsection 185C(4B) is to provide additional safeguards within the debt administration framework, to prevent debtors' exposure to additional financial hardship. However, the committee notes that the explanatory memorandum does not explain why it is necessary to allow the minister to determine eligibility requirements for entering into a debt agreement by delegated legislation, nor does it provide any examples of the circumstances in which it is envisaged that this power would be exercised.
2.7 The committee also notes that the bill does not set a minimum threshold on the percentage that the minister may determine under proposed subsection 185C(4B), or any other guidance as to how the power in that subsection should be exercised. The committee is concerned that, without a minimum threshold, proposed subsection 185C(4B) could permit the minister to set a percentage that would enable debtors to enter into a debt agreements without the capacity to meet agreed repayments. This could substantially undermine the safeguards that proposed paragraph 185C(4)(e) seeks to establish.
2.8 The committee seeks the Attorney-General's detailed advice as to:
• why it is considered necessary and appropriate to allow the minister to determine certain eligibility requirements for entering into debt agreements by delegated legislation; and
• the appropriateness of amending the bill to set a minimum threshold on the percentage that the minister may determine under proposed subsection 185C(4B).
Acting Attorney-General's response
2.9 The Acting Attorney-General advised:
Proposed paragraph 185C(4)(e) of the Bill introduces a requirement for debt agreement proposals to satisfy a payment to income ratio, to be determined by the Minister by legislative instrument under proposed subsection 185C(4B). Proposed subsection 185M(1E) introduces this same requirement for proposals to vary a debt agreement.
The proposed payment to income ratio is intended to prevent the establishment and continued operation of debt agreements with the most excessive debt repayment schedules. The ratio would supplement existing measures in the Bankruptcy Act 1966 (the Act) which currently function to prevent most debt agreements with unaffordable debt repayment schedules. Paragraph 185C(2D)(c) of the Act, for example, requires a debt agreement administrator to certify that the debtor can discharge their obligations under the agreement. Unlike the proposed payment to income ratio, paragraph 185C(2D)(c) requires the administrator to assess the debtor's individual financial circumstances on a case-by-case basis.
However, should these existing safeguards fail, for example due to administrator malfeasance, the ratio will operate to prevent the most excessive debt repayment schedules which have the potential to cause significant harm to debtors. The power to determine the ratio will not significantly alter the eligibility requirements for entering into a debt agreement, as it will only be exercised in a manner that captures these outliers. The explanatory memorandum will be amended to clarify this objective.
Noting the above, it is therefore appropriate to maintain the flexibility of setting the ratio's percentage by legislative instrument. The percentage may need to be amended quickly in light of the fluctuating nature of the financial market, and in consideration of the significant harm that may be experienced by debtors if the percentage is or becomes unsuited to market conditions. This percentage will be developed in consultation with key industry stakeholders.
I further advise that it would be inappropriate to amend the Bill to set a minimum threshold on the percentage that the Minister may determine. As the payment to income ratio will only safeguard against the most excessive debt repayment schedules, and will not significantly alter the eligibility requirements for entering into a debt agreement, it is not necessary for the Bill to set a minimum threshold.
Committee comment
2.10 The committee thanks the Acting Attorney-General for this response. The committee notes the advice that the payment to income ratio in proposed paragraph 185C(4)(e) and proposed subsection 185M(1E) is intended to prevent the establishment and continued operation of debt agreements with the most excessive debt repayment schedules. The committee also notes the Acting Attorney General's advice that this ratio would supplement existing measures in the Bankruptcy Act 1966 (Bankruptcy Act) which currently functions to prevent most debt agreements with unaffordable debt repayment schedules. The committee notes the example provided by the Acting Attorney General in this regard.
2.11 The committee further notes the Acting Attorney-General's advice that, should the existing safeguards in the Bankruptcy Act fail, the proposed payment to income ratio will operate to prevent the most excessive debt repayment schedules which have the potential to cause significant harm to debtors. The committee also notes the advice that the power to determine the ratio (or a percentage for this ratio) will not significantly alter the eligibility requirements for entering into a debt agreement, as it will only be exercised in a manner that captures those outliers (that is, debt agreements with the most excessive repayment schedules). The committee welcomes the Acting Attorney General's advice that the explanatory memorandum will be updated to clarify this objective.
2.12 The committee further notes the Acting Attorney-General's advice that, owing to the matters outlined above and in the interests of maintaining flexibility, it is appropriate for the minister to set the percentage of the proposed payment to income ratio by legislative instrument. The committee also notes the Acting Attorney General's advice that the percentage may need to be amended quickly in light of the fluctuating nature of the financial market, and in consideration of the significant harm that may be experienced by debtors if the percentage is or becomes unsuited to market conditions. The committee notes the Acting Attorney General's advice that the percentage will be developed in consultation with key industry stakeholders.
2.13 Finally, the committee notes the Acting Attorney General's advice that it would be inappropriate to amend the bill to set a minimum threshold on the percentage that the minister may determine by legislative instrument. The committee notes the advice that, as the payment to income ratio will only safeguard against the most excessive debt repayment schedules, and will not significantly alter the eligibility requirements for entering into a debt agreement, it is not necessary for the bill to set a minimum threshold.
2.14 The committee welcomes the undertaking to amend the explanatory memorandum to clarify the operation and intent of the proposed payment to income ratio, and the minister's power to set a percentage for that ratio.
2.15 The committee requests that the additional information provided by the Acting Attorney-General be included in the explanatory memorandum, noting the importance of this document as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901). In particular, the committee would appreciate the inclusion of the information regarding:
• why it is appropriate to set the percentage of the payment to income ratio by legislative instrument; and
• why it is inappropriate to set a minimum threshold on the percentage that the minister may impose.
2.16 In light of the detailed information provided by the Acting Attorney General, the committee otherwise makes no further comment on this matter.
2.17 Proposed subsection 185EC(6) seeks to make it an offence for the proposed administrator in relation to a debt agreement proposal to give, or to agree or offer to give, valuable consideration to an affected creditor,[7] with a view to securing the creditor's acceptance or non-acceptance of the proposal. Proposed subsections 185MC(6) and 186PC(6) similarly seek to make it an offence for the administrator of a debt agreement to give, or agree to give, valuable consideration to an affected creditor, with a view to securing the creditor's acceptance or non-acceptance of a proposal to vary or terminate the agreement. It is proposed that each of the offences would be punishable by a term of imprisonment of three months.
2.18 The committee notes that the Guide to Framing Commonwealth Offences provides that if imprisonment is chosen as a penalty for a Commonwealth offence, a term of at least six months should be applied. This is because imprisonment should be reserved for serious offences.[8] The Guide further provides that if a longer term of imprisonment (that is, a term of imprisonment of six months or more) would never be justified, a fine should be used.[9]
2.19 Where a bill proposes to impose a custodial penalty of less than six months for a Commonwealth offence, the committee would therefore expect a detailed justification to be provided in the explanatory memorandum. In this instance, the explanatory memorandum states that '[t]his punishment is appropriate to deter fraudulent conduct in the financial sector which can have severe consequences for both affected creditors and debtors.'[10] This would suggest the offence is relatively serious, yet imposing a custodial penalty of three months suggests a fine might be more appropriate. The committee notes that under section 4B of the Crimes Act 1914, one month imprisonment equates to a pecuniary penalty of five penalty units.
2.20 Additionally, the committee would expect that penalties involving terms of imprisonment should be justified by reference to similar penalties for similar offences in Commonwealth legislation. This not only promotes consistency, but guards against the risk that the liberty of a person is not unduly limited through the application of disproportionate penalties. In this regard, the committee notes that the Guide to Framing Commonwealth Offences states that a penalty 'should be consistent with penalties for...offences of a similar kind or of a similar seriousness. This should include a consideration of...comparable offences in Commonwealth legislation'.[11] In this instance, the explanatory memorandum does not make reference to penalties for comparable offences in Commonwealth legislation.
2.21 The committee seeks the Attorney-General's more detailed justification for setting a custodial penalty of three months' imprisonment in relation to the offences in proposed subsections 185EC(6), 185MC(6) and 186PC(6) instead of a pecuniary penalty. The committee's consideration of the appropriateness of the proposed penalty would be assisted if the justification explicitly addresses relevant principles as set out in the Guide to Framing Commonwealth Offences.[12]
Acting Attorney-General's response
2.22 The Acting Attorney-General advised:
The proposed new subsections make it an offence for a debt agreement administrator to give or offer to give a creditor valuable consideration with a view to securing the creditor's acceptance of a proposal to establish, vary or terminate a debt agreement.
These provisions are intended to deter serious financial misconduct. By establishing or prolonging debt agreements, debt agreement administrators stand to earn substantial financial gain. However, entering into unaffordable debt agreements can have serious financial consequences for both debtors and creditors. Debtors, in particular, can potentially endure severe financial hardship by entering into agreements with unreasonable rates of return.
Debt agreement administrators, acting as agents for financially vulnerable debtors, occupy important positions of trust. Inducing creditors to accept an unaffordable debt agreement, often at significant detriment to the debtor, represents an egregious breach of that trust.
I therefore submit that an imprisonment penalty for this type of offence is warranted. A maximum penalty of a term of imprisonment would provide a more effective deterrent to the commission of the offence, and better reflects the seriousness of the offence than a pecuniary penalty. An imprisonment penalty is in line with penalties for similar offences within the Corporations Act 2001, such as section 595 relating to the offence of giving or offering of an inducement to be appointed as a liquidator of a company.
However, I acknowledge the current penalty of three months' imprisonment does not comply with the Guide to Framing Commonwealth Offences (the Guide). I thank the Committee for bringing this matter to the Attorney-General's attention.
The Attorney-General will seek to amend new subsections 185EC(6), 185MC(6) and 185PC(6) to ensure compliance with the Guide by increasing the maximum penalty to six months' imprisonment.
Committee comment
2.23 The committee thanks the Acting Attorney-General for this response. The committee notes the Acting Attorney-General's advice that the penalties imposed by proposed subsections 185EC(6), 185MC(6) and 185PC(6) are intended to deter serious financial misconduct from which debt agreement administrators may earn substantial financial gain. The committee also notes the advice that entering into unaffordable debt agreements can have serious financial consequences for both debtors and creditors, and that debtors in particular may endure severe financial hardship by entering into agreements with unreasonable rates of return. The committee further notes the Acting Attorney-General's advice that debt agreement administrators occupy important positions of trust in relation to both debtors and creditors, and that inducing creditors to accept an unaffordable debt agreement—often at significant detriment to the debtor—is an egregious breach of that trust.
2.24 The committee further notes the Acting Attorney-General's view that, owing to the matters outlined above, an imprisonment penalty for the offences in proposed subsections 185EC(6), 185MC(6) and 185PC(6) is warranted. The committee also notes the Acting Attorney-General's view that a custodial penalty would provide a more effective deterrent to the commission of the offences in those provisions, and better reflects the seriousness of the offences, than a pecuniary penalty. The committee notes the Acting Attorney General's advice that a custodial penalty is in line with penalties for similar offences in the Corporations Act 2001 (Corporations Act). The committee also notes the example provided by the Acting Attorney General of a provision in that Act (section 595) carrying a similar penalty.
2.25 Finally, the committee notes the Acting Attorney-General's acknowledgment that current penalties in proposed subsections 185EC(6), 185MC(6) and 185PC(6) do not comply with the Guide to Framing Commonwealth Offences, and the Acting Attorney-General's advice that the Attorney-General will seek to amend those provisions to ensure compliance with the Guide by increasing the maximum penalty to six months' imprisonment. While noting the Acting Attorney-General's advice, the committee is concerned about the proposal to increase the penalties in proposed subsections 185EC(6), 185MC(6) and 185PC(6) to six months' imprisonment. The committee considers that where pecuniary penalties may appropriately be substituted for short terms of imprisonment doing so will minimise the risk of undue trespass on personal liberties. It is for this reason that where a term of imprisonment for less than 3 months is proposed, the committee seeks a detailed justification. However, the committee does not consider that it will be an adequate response to such an inquiry to raise the custodial period to 6 months imprisonment. In line with the committee's general expectations, a response must justify any custodial penalty by reference to similar offences in Commonwealth legislation.
2.26 In this instance, the committee notes that breaches of section 595 of the Corporations Act (provided as an example in the minister's response) attract a penalty of three months' imprisonment, 50 penalty units, or both. It is unclear to the committee why the offences in proposed subsections 185EC(6), 185MC(6) and 185PC(6)—which would appear to punish similar conduct—should attract a longer term of imprisonment. For this reason, the committee does not consider that the proposal to increase the term of imprisonment has been adequately justified.
2.27 The committee requests that the key information provided by the Acting Attorney-General be included in the explanatory memorandum, noting the importance of this document as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).
2.28 The committee draws its scrutiny concerns regarding the offences in proposed subsections 185EC(6), 185MC(6) and 185PC(6) to the attention of senators, and leaves to the Senate as a whole the appropriateness of:
• setting a custodial penalty of three months' imprisonment in relation to the offences in proposed subsections 185EC(6), 185MC(6) and 186PC(6) instead of a pecuniary penalty; and
• any proposed amendment, as outlined in the minister's response, to increase the maximum penalty for those offences to six months' imprisonment.
[1] See correspondence relating to Scrutiny Digest No. 5 of 2018 available at: www.aph.gov.au/senate_scrutiny_digest
[2] Schedule 1, item 21, proposed subsection 185C(4B). The committee draws senators’ attention to this provision pursuant to Senate Standing Order 24(1)(a)(iv).
[3] Pursuant to subsection 185C(1), a 'debt agreement proposal' is a written proposal for a debt agreement. Section 185C sets out the requirements for a debt agreement proposal.
[4] The 'Official Receiver' is a statutory appointee who acts as a trustee in bankruptcy for debtors in certain circumstances. Official Receivers are appointed by the minister under section 16 of the Bankruptcy Act.
[5] Explanatory memorandum, p. 15.
[6] Schedule 1, item 41, proposed subsection 185EC(6), Schedule 2, item 12, proposed subsection 185MC(6) and Schedule 2, item 16, proposed subsection 185PC(6) The committee draws senators' attention to these provisions pursuant to Senate Standing Order 24(1)(a)(i).
[7] Pursuant to section 185 of the Bankruptcy Act 1966, 'affected creditor' means a creditor who is a party to a debt agreement (in relation to a proposal to vary or terminate debt agreements) or would be a party to a proposed debt agreement (in relation to a debt agreement proposal).
[8] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, p. 41.
[9] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, p. 41
[10] Explanatory memorandum, pp 21, 28, 30. See also statement of compatibility, p. 7.
[11] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, p. 39.
[12] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, p. 41
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/other/AUSStaCSBSD/2018/136.html