Australian Bankruptcy Law

Contents Executive Summary 2 History of Australian Bankruptcy Law 3
The Beginning 3
The English Root 3
The Adaption and the Bankruptcy Act of 1966 5 The Debate 6
The Reform 6
For the Change 6
Against the Change 6
Conclusions & Recommendations 7 Citations & References 8

Executive Summary
The purpose of this report is to examine the history, and the development of the Australian Bankruptcy Law. Through reviewing historical information, the origins of the current Bankruptcy Law are explored. Furthermore, the development of Corporate Insolvency Laws in Australia from 1901 through to 2001 Corporations Act is studied.
The last part of this report reviews the ongoing debate on the need to relax the Corporate Insolvency & Bankruptcy Laws, in order to encourage entrepreneurship.
This is followed by a final conclusion on the topic of the Australian Bankruptcy Law, and recommendations on where it could head for the better.

History of Australian Bankruptcy Law
The Beginning
Before examining the development of any laws in Australia, one must review and accept the irony that, Australia began as a nation of convicts.
In the late 18th century, the British empire were being burdened by the increasing number of criminals, convicted of variety of crimes from petty theft, fraud, to even murder. Due to the limited landmass, King George III empowered Captain Arthur Phillip, commander of the First fleet, to sail out to Australia and establish the first British Colonial state on the shores of the new landmass. On 26 January 1788, Captain Arthur Phillip, along with about 700 convicts aboard his 11 fleets, landed at Sydney Cove and marked the beginning of a new colony.
As the first governor of Australia, he was the authority of the First Charter of Justice in the new colony. Although the administration of the British law was in place, it turned out to be arbitrary for the new penal colony as it was rudimental, and military in nature.
However, as free settlers began to arrive and establish themselves, towns were raised and societal systems were slowly brought up. By 1823, based on the English model, a court system for criminal and civil laws were established to maintain law and order among the growing population. The system and the laws being practiced were naturally British in nature but were catered towards the needs and specs of the new state, and the Australian Bankruptcy Law was no exception to this rule.

The English Root
The inception of the Australian Bankruptcy Law roots back to that of what existed in England as the new state was a penal colony of England. So, to study the origins, one must examine the origins of the Bankruptcy act of the mother nation.
To boost the economy by invigorating more merchants to trade in England, the legislation to imprison debtors who failed to pay their debts, was passed between 1283 and 1285. The punishment of imprisonment was deemed to be harsh but the objective of the legislation was not to support the general public, but to ease the minds of merchants so that they would be less reluctant to trade via credits in England.
By 1350, a writ of “capias ad respondendum” (Bathurst, 2014), could be acquired, which directed the sheriff to imprison the debtor until the day of the trial or repayment. Conceptually speaking, this is similar to today’s “creditor’s petition” whereby the creditor requests the court to declare a debtor bankrupt and pursue a hearing.
Pursuant to the legislation, after obtaining a judgement debt, the debtor was imprisoned until the repayments were made to each and every individual creditor. The noticeable difference to today’s law is that, the debtor had to face individual charges, as well as repayments from individual creditors, as opposed to a petition whereby the debt gets redistributed accordingly.
The idea of carrying out a collective administration and rateable repayment distribution only occurred during the Tudor and Stuart period in 1542 (Bathurst, 2014). The focal point of this act was that the repayments were to be made rate for rate in accordance to the creditors’ quantity of debts.
By 1571, the “Statue of Elizabeth” followed, and confined the practicing of the act solely to tradesmen as well as proclaiming bankruptcy as a legal status. Furthermore, in the same year, “Fraudulent Conveyances Act” was charted which rendered transactions conducted with the intent to defraud or delay creditors, were to be void (Bathurst, 2014). In other words, transfer of fund to a trustee as such or intentional hiding the amount beyond the reach of the reach of the creditors, is considered unlawful, therefore voided. This concept was the seed to the section 121 of the Bankruptcy Act 1966.
As the initial act was sought out to promote merchants and tradesmen to conduct business on British shores, nothing of the act was focussed on rehabilitating the debtor back to society. Of many punishments, losing an ear for failing to pay back a sum would have to be one of the harshest penalties, followed by imprisonment for life. It was only in 1705 when insolvent tradesmen were allowed to be discharged upon obtaining the approval from 4 out of 5 creditors. While it may seem trivial, it was the beginning of the shift towards the debtors’ rehab.
The bankruptcy legislations required a reform as the number of bankruptcies increased due to the increase in commercialisation and trades conducted through credits. The reforms occurred throughout the early 19th century beginning with the establishment of the Insolvent Debtor’s Court in 1813 to service the increasing number of bankruptcies. By 1825, insolvent tradesmen were able to file and declare themselves as bankrupt, and by 1838, the imprisonment of debtors before proceedings was eradicated. In 1831, a big step towards what resembles the current system occurred, whereby the Court of Bankruptcy was erected in place of the Insolvent Debtor’s Court.
The Court of Bankruptcy diminished the overlapping laws between insolvency and bankruptcy, as well as passing legislations that allowed the court to assign official supervisors to oversee the bankruptcy proceedings. It was around this time when the new Colonial states began to cry out for its own bankruptcy statutes.

The Adaption and the Bankruptcy Act of 1966
As the new colony prospered and became more economical, there was an increasing requirement to have laws which allowed accessible credit to booth the trades further. By 1823, the Supreme Court of New South Wales was created and administered the insolvency jurisdictions. Though the English eradicated imprisonment only in 1838, the new colony’s approach to bankruptcy was much more swift and logical from today’s point of view. This was partly due to the sheer number of debt recovery applications.
Between 1829 to 1830, a series of drought led to bad harvests and almost 2,000 applications of debt recovery. Compared to the population in New South Wales in the 19th century, that number was damaging. Due to that occurrence, the court focused more on drafting insolvency laws, which tailored towards the conditions and the needs of the state, as opposed to following the legislations of motherland. Debtors were allowed to be discharged under majority of creditors’ consent, and any form of imprisonment was subsequently removed by 1846. (Bathurst, 2014).
Although the basis of the England legislation was adopted, much of minor details were changed perhaps for the wellbeing of the infant colony. As opposed to focusing on repayment and punishment of debtors, the new colony’s legislation focused on appropriate responses to reintegrate the debtors back to commercial freedom. In other words, the adaption of the English Bankruptcy Legislation was revolutionary in a way because it was ahead of England in its manner.
However, this was only applicable in the New South Wales colony, as other colonies had their own adaptations and interpretations of various laws and principles from England. The lack of unity caused economic problems as interstate trades and transactions were restricted, which hindered the growth for all parties involved. It was time for unity.
On the New Year’s Day in 1901, six separate self-governing British colonies united to reform and became the unified state of the Commonwealth of Australia. Australia became a nation and the Commonwealth was final given power to legislate “bankruptcy and insolvency” per s 51 (xvii) of the Constitution (Bathurst, 2014).
However, they didn’t start off with a bang as the National Bankruptcy Legislation was only drafted in 1924, and after amendments, took another four years to officially commence. Furthermore, the 1924 Act created a Federal Court of Bankruptcy with a single judge in New South Wales, while in other states, they were left to use their Supreme Courts for jurisdiction. Another troubling factor was that the Act wasn’t unified as it was just a collection of legislation pieces from different states put together. Additionally, the 1924 Act did not clarify what constituted a debt, and left it for individual states to establish its own definition.
There were many loops holes and confusions created by the new Act more so than before. These issues were finally rectified to some degree by the Bankruptcy Act 1966. It consolidated all the legislations from different states, as well as establishing a centralised institution for the administration of bankrupts.

The Debate
As stated in the earlier part of this report, the origins of the Bankruptcy and Insolvency laws can be traced all the way back to the early 16th century, whereby the law was created in order to protect and encourage entrepreneurship. The original inception of the Act was to endorse trading.
The Reform
Fast-forward five centuries to the present day, from viewpoint of the Australian government, the current insolvency practices have forgotten its origin to some extent, and has put too much emphasis on stigmatising and penalising failed ventures (NISA 2016). Recently, the government has announced that proposals to reform the legislation regarding insolvency will be issued in order to strike a better balance between encouraging entrepreneurship and protecting creditors. The three major changes soon to be issued are as follows: * Reducing the current bankruptcy period from 3 years to 1 * Introduction of “safe harbour” for personal liability if an adviser is appointed to restructure and develop a turnaround plan for the company * Making “ipso facto” clause, which prevents contract terminations based on insolvency to be invalid if the company undertakes restructuring
In summary, the change is all about recovery. They are encouraging directors to amend their mistakes and restructure to fix the problems with the help from external advisors. It is a change that promotes rehabilitation of debtors, and allowing them to a fresh start. However, opinions are divided over the idea of relaxing the current insolvency laws in the country.
For the Change
Jason Harris of University of Technology Sydney, and Michael Murray of Queensland University of Technology is all for the reform as they are strong believers of the motives behind the change. They are in the opinion that, through time, the publics’ opinion of bankruptcy or unpaid debt has deteriorated to the point of it being a horrific crime. And because of that reason, majority would prefer stricter laws to prevent it from happening.
Jason and Michael believe, harsher punishments and penalties are not the solution but just a consequence. They believe in order to reduce bankruptcies, positive initiatives such as the reform needs to be moulded into the current system in order to help rehabilitate the broken ones. By doing so, it will be beneficial to the creditors as well as the debtors, but most of all, bankruptcy would deter any brilliant minds from creating their own start-ups.
Against the Change
Some are against the reform, or more so, see flaws in the reform suggested by the Turnbull government. According to Sarah Danckert from The Sydney Morning Herald, an estimated 10,000 bankruptcies occur every year, resulting in about 30,000 bankrupt debtors at a given time. Her view is that although there are many that goes through bankruptcy due to sheer bad luck and misfortune, many of them are simply poor directors with bad investment decisions. She concludes that many others involved in the bankruptcy aren’t benefited by the reform, and it is only a small minority that receives benefits. Furthermore, they could be others trying to rort the system for their own interest, which has dire consequences to many others.
Conclusions & Recommendations
After reviewing the history and the origins of the Australian Bankruptcy Law, it is evident that it has come very far since its introduction. Although many of its fine lines have been amended and reformed in order to befit the Australian requirements, its embryo still remains intact. Unfortunately, the publics’ negative perception of bankruptcy seems to have also remained. Since its birth, bankruptcy has been penalised severely through imprisonment or disfigurement of body parts. Although it is not to that extreme, debtors are scrutinized or publicly humiliated to the point of being unable to recover financially for the rest of their lives.
The law was initially drafted in order to encourage merchants to trade and entrepreneurs to kick start their ventures. And it should stay true to its intentions and carry more emphasis on helping people get out of debt as opposed to harshly penalising their mistakes. It should be in place in order to allow people to take calculated risks. After all, without risk, there is no return, period. Without entrepreneurs and small business owners, the Australian economy would be extremely stale and hindered. Though there may be a small number of people trying to exploit the system, you cannot throw away a whole box because of one bad apple.
A reform of the Insolvency law is to take place over the coming months, and it has divided the opinions of experts. Many are for the positive intention of the reform but many are also concerned about the effect it will have on the middle class investors. In this writer’s point of view, the reform should be carefully balanced between encouraging debtors to pursue, as well as easing creditors. Perhaps the best way to go about the change is focusing on the implementation as oppose to the actual change. Theoretically, the change in itself is relative simple and straightforward. Governing the change and reiterating the work over the next decade or so is perhaps the key. After all, it is the repetition of affirmations that leads to belief.