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 Inspector-General’s Introduction This report provides statistical and other information on the operation of the Act during 2008–09 pursuant to section 12 of the Bankruptcy Act 1966. Personal insolvency activity Total personal insolvency activity in 2008–09 reached a new high with 36,487 bankruptcies, debt agreements and personal insolvency agreements made. That is an increase of 11% over the 2007–08 year. The number of new debt agreements (8,567) comprised 23.5% of total personal insolvency activity. These figures continue to reflect the confidence that larger institutional creditors have in the debt agreement system. This confidence is further illustrated by creditors’ acceptance of more than 86% of all debt agreement proposals. These comprise a wide range of dividends estimated from 30 cents in the dollar up to 80 cents in the dollar net return to creditors. There were 27,483 new bankruptcies during the year. This is the highest number of bankruptcies recorded, and is a 6% increase on those reported in 2007–08 and 4% more than the historical peak of 26 376 experienced in 1998-99. In contrast, the number of new personal insolvency agreements remained at 1% of total activity with 437 new agreements being recorded in 2008-09. These numbers follow an established pattern. The overwhelming majority (92%) of new bankruptcies originated from voluntary debtors’ petitions and 8% from creditors’ petitions (91% and 9% respectively in 2007–08). Likewise, the Official Trustee (represented by the Insolvency and Trustee Service Australia) administered the majority of bankruptcies (86%) while 14% were again administered by private registered trustees. Debt agreements and personal insolvency agreements continue to be administered almost totally by private sector practitioners, all of whom must be registered under the Act. The bankruptcy registry role is a key function of ITSA. The Official Receiver issued 10,612 bankruptcy notices, a 5.5% increase from 10,060 in 2007–08. Those notices enable creditors to petition for bankruptcy where the debtor fails to comply and 2,113 bankruptcies arose from a creditor’s petition. The Official Receiver also issues notices on behalf of trustees to help them recover property and obtain information to assist in the administration of their estates. In 2008–09 the Official Receiver issued 362 notices on behalf of trustees. It was pleasing to note that creditors received an increased level of dividends in 2008–09. In bankruptcies, the total amount of dividends paid to creditors was $46.5m, represented by $28.6m in registered trustee bankruptcies and $17.9m from Official Trustee bankruptcies. Importantly, the value of returns to creditors through debt agreements has continued to grow and this year amounted to $75.5m from $57.3m in 2007–08, a 32% increase. The main causes of personal insolvency have continued the pattern of previous years. The information about causes of personal insolvency is drawn from the statements of affairs provided by bankrupts and debtors – that is, bankrupts and debtors select from a list what they believe caused their insolvency. In non-business (consumer) bankruptcies, ‘unemployment or loss of income’ (33%) continues to be the main cause attributed by bankrupts when responding to questions on the Statement of Affairs, followed by ‘excessive use of credit’ (25%). For business related bankruptcies the main cause attributed by bankrupts is ‘economic conditions affecting industry, including competition, credit restrictions, falls in prices or increases in costs. That cause represented 47% of all business related bankruptcies, a significant increase on the 30% who reported this reason in 2007–08. In debt agreements, ‘excessive use of credit’ is attributed as the main cause in 43% of matters followed by ‘unemployment or loss of income’ at 35%. Only a small proportion of debt agreements were categorised as business related (4%). Chapter 2 of this report contains more detail about the causes of personal insolvency as well as data relating to age profile, gender and occupational status. Further detailed analysis of the circumstances of debtors is contained in the ITSA publication “Profiles of Debtors 2007” which is available on ITSA’s website. Regulation and enforcement The Inspector-General has a number of statutory responsibilities in the areas of regulation and enforcement. The regulatory responsibilities are aimed at ensuring high national standards of practice and procedure. On behalf of the Inspector-General, ITSA’s Bankruptcy Regulation branch oversees registered trustees, the Official Trustee, debt agreement administrators and solicitors who act as controlling trustees acting in personal insolvency administrations. The Branch licences registered trustees and debt agreement administrators. When inspection of trustees’ or debt agreement administrators’ practices identifies unsatisfactory standards, the registration of the practitioner is reviewed or, alternatively, disciplinary proceedings are pursued. This year one trustee’s registration was cancelled and disciplinary action (resulting in deregistration) was taken against one debt agreement administrator. The Inspector-General’s enforcement responsibilities in connection with investigating alleged offences under the Act are carried out by ITSA’s Bankruptcy Fraud Investigation Section. The success of this function in recent years is reflected in the high number of referrals of alleged offences (988 in 2008–09). Prosecution action this year resulted in 239 offenders being found guilty, and of those 203 were convicted while 36 other offenders received non-conviction based bonds. Legislative amendment There were no amendments made to the bankruptcy legislation in 2008–09. However, prior to the transfer of policy and legislation responsibilities to the Attorney-General’s Department on 1 February 2009, ITSA progressed the preparation of amendments announced by the Attorney-General in March 2008 relating to the effectiveness of the offences provisions in the Bankruptcy Act 1966, and amendments announced by the Attorney-General in May 2008 to improve the regime for the remuneration of registered trustees under the Bankruptcy Act 1966. Veronique Ingram Inspector-General in Bankruptcy September 2009 1. Objectives of the Bankruptcy Act 1966 The objectives of the Bankruptcy Act 1966 are to:
2. General administration of the bankruptcy system The Insolvency and Trustee Service Australia (ITSA) is an executive agency in the Attorney-General’s portfolio that administers and regulates Australia’s personal insolvency system. ITSA’s outcome is to provide a personal insolvency system that minimises the impact of financial failure on the community, produces equitable outcomes for debtors and creditors, and enjoys public confidence through application of bankruptcy laws, regulation and trustee services. ITSA is responsible for administering the Bankruptcy Act 1966 and the Bankruptcy (Estate Charges) Act 1997. The Bankruptcy Act sets out the law of Australia relating to the bankruptcy and insolvency of individuals, deceased debtors and partnerships. The Bankruptcy Act creates the roles of:
ITSA performs all of these roles. The Inspector-General is responsible for the general administration of the Bankruptcy Act. The Inspector-General has powers to regulate bankruptcy trustees and debt agreement administrators, review decisions of trustees and investigate allegations of offences under the Act. The Inspector-General is also ITSA’s Chief Executive. An Official Receiver in each state and territory in Australia operates public bankruptcy registry services and has compliance and coercive powers to assist bankruptcy trustees to discharge their responsibilities. The Official Trustee in Bankruptcy is a statutory corporation which administers bankruptcies and other personal insolvency arrangements when a private trustee or other administrator is not appointed. Personal insolvency activity Table 1: Personal insolvency activity Provides a summary of personal insolvency activity under the Bankruptcy Act, broken down by the type of administration; Part IV – Bankruptcies, Part XI – Deceased estates, Part IX – Debt agreements and Part X – Personal insolvency agreements (figures in italics refer to 2007–08).
Table 2: Bankruptcies by quarter Provides a quarter-by-quarter comparison of bankruptcies for the year by state or territory. The quarterly figures are broken down further into a) business and b) non-business bankruptcies (figures in italics refer to 2007–08).
Table 3: Bankruptcies by district Shows the distribution of bankruptcies between debtors’ petitions and creditors’ petitions. A debtor’s petition refers to a petition presented by a debtor or debtors against themselves. A creditor’s petition refers to a petition presented by a creditor against a debtor. As more than one person may become bankrupt on a single petition (e.g. persons in partnership or with joint debts), this table also shows the actual number of people who became bankrupt. A registered trustee is an individual, registered under the Bankruptcy Act, to carry out the duties of a trustee in bankruptcy. The Official Trustee is the government equivalent of a registered trustee (figures in italics refer to 2007–08).
Business and non-business personal insolvencies Personal insolvencies can be categorised into:
FIGURE 1: BANKRUPTCY NUMBERS  Table 4: Proportion of business to non-business personal insolvencies Provides a historical breakdown of the proportion of business to non-business personal insolvencies based on information provided by the debtor.
 Note: Debt agreements did not come into effect until December 1996. Causes of personal insolvency Tables 5 and 6 show the main causes of business and non-business personal insolvencies, as given by debtors. These causes of bankruptcy are self-attributed from a list on the Statement of Affairs and may be shortened throughout this publication for ease of representation. For example ‘economic conditions affecting industry’ refers to ‘economic conditions affecting industry, including competition, credit restrictions, fall in prices or increases in cost’. Note: The tables following in this chapter are not necessarily reconcilable with the total number of proceedings administered under Parts IV and XI of the Act. This is chiefly because bankruptcy proceedings involving two or more partners are treated as one administration. Personal details such as cause, however, are published for each of the partners. Table 5: Causes of personal insolvency – non-business related Shows the main cause of insolvency (as stated by the bankrupt or debtor on the Statement of Affairs) with regard to non-business related personal insolvencies (figures in italics refer to 2007–08).
Table 6: Causes of personal insolvency – business related Shows the main cause of insolvency (as stated by the bankrupt or debtor on the Statement of Affairs) with regard to business-related personal insolvencies (figures in italics refer to 2007–08).
Occupational status Table 7 provides details of the occupational status of bankrupts and insolvent debtors in proceedings under the Bankruptcy Act for the year ended 30 June 2009 by occupational groups. It should be noted that the occupational status for bankrupts and insolvents is self-attributed and is subsequently classified from information provided by the individual using the Australian Standard Classification of Occupations (ASCO). As the Bankruptcy Act operates in relation to individuals, the classification of an insolvent debtor’s occupation into business or non-business is based on the individual’s occupational status before formal insolvency. Therefore, for example, data identified under ‘business’ does not indicate the number of businesses that have become bankrupt; it indicates the number of individuals who have become bankrupt as a result of a proprietary interest in a business. Data identified under ‘non-business’ indicates the number of individuals who did not have a proprietary interest in a business before entering a proceeding under the Act. Table 7: Occupational groups Shows the occupational classification, as stated on the Statement of Affairs, of bankrupts and debtors (under a debt agreement or personal insolvency agreement) by a) business and b) non-business.
* Code 99888A is a new code not previously reported. In last year’s annual report, data from this code was incorrectly recorded against code 1200 (Specialist managers) which inflated the number of debtors in this category. Occupants of code 99888A are non-earning debtors and should be categorised under more specific codes in the “Other” group such as unemployed, retired, pensioner etc. However, as the current data does not permit this specific breakdown, a new category has been created for this report. Gender Table 8: Gender Shows the gender of bankrupts and insolvent debtors.
Age profile Table 9: Age profile linked to causes of personal insolvency Shows an age breakdown of the causes of personal insolvency (business and non-business).
Searches of the bankruptcy register Searches of the National Personal Insolvency Index (NPII), showing details of personal insolvency activity under the Act, can be obtained through ITSA’s index search agents who are contracted to provide NPII data or upon written request to an ITSA office. From 1 July 2009, searches of the NPII will only be available to the public through index search agents. The agents providing direct online access to the NPII are the Centre for Information Technology and Communications, Espreon and Australian Business Research. In 2008–09, 309,799 searches of the NPII were recorded, of which 292,823 were through agents. This compares with 343,855 searches conducted in 2007–08. Assistance to trustees to gather information and recover property During 2008–09, Official Receivers issued 362 statutory notices (398 in 2007–08) to help trustees recover property or gather information, and to enforce payment of contributions. Table 10: Official Receiver notices Shows the number of statutory notices issued by the Official Receiver in 2008–09
Commonwealth funding assistance pursuant to section 305 Section 305 of the Act allows the Minister － currently the Attorney-General － on the application of the trustee of a bankrupt estate or of a personal insolvency agreement, to direct, in an appropriate case, that the Commonwealth underwrite the cost of proceedings or enquiries about the estate or the examinable affairs of the bankrupt or debtor. The Minister has delegated the power to make a direction under section 305 to senior ITSA officials. In exercising their discretion under section 305, the delegates have regard to the following guidelines approved by the Attorney-General in March 2005. Funding may be approved where: (a) either:
(b) the actions of the bankrupt or debtor give rise to the inference that the bankrupt or debtor is intentionally breaching their obligations or duties under the Act; or (c) a significant question of law has arisen that requires resolution. Funding will ordinarily not be approved for instituting proceedings unless:
Table 11: Section 305 activity Shows the number of applications for funding under section 305 received and approved in the past 15 years. It also shows the gross amount paid out under all approvals, including those still in place from earlier years.
3. Bankruptcies under Part IV and Part XI Administrations Note: In this and subsequent chapters, there may be differences between the opening balance shown in this year’s report and the closing balance shown in last year’s report, as ITSA’s database allows for retrospective adjustments to data upon which reports are based.Table 12: Official Trustee administrations Shows details of the number of administrations being handled by the Official Trustee in each bankruptcy district (figures in italics refer to 2007–08).
^ ‘Finalised’ refers to administrations where all necessary work has been completed, whether or not the bankrupt has been discharged. Note: The difference in number of administrations on hand at 30 June 2008 and 1 July 2008 arises mainly from transfers of administrations between the Official Trustee and registered trustees. Table 13: Registered trustee administrations Shows details of the number of administrations being handled by registered trustees in each bankruptcy district (figures in italics refer to 2007–08).
^ ‘Finalised’ refers to administrations where all necessary work has been completed, whether or not the bankrupt has been discharged. Note: The difference in number of administrations on hand at 30 June 2008 and 1 July 2008, arises mainly from transfers of administrations between registered trustees and the Official Trustee. Note: The figures for registered trustees in the following tables have been compiled from information provided in their annual estate returns. Not all trustee information was available at the time at producing these tables and as such, will not be included in the final figures. Contributions Division 4B of Part VI requires that a bankrupt who derives income above a specified amount during the period of their bankruptcy pay a contribution towards their bankrupt estate. The income level is determined with reference to the pension rate in the Social Security Act 1991 and with regard to the Consumer Price Index. The minimum income for compulsory contributions is referred to as the base income threshold amount (BITA), with appropriate increases to this amount where the bankrupt has dependants. At 30 June 2009, the BITA was $41,824. A bankrupt’s income is assessed against the BITA every 12 months in order to determine their liability to make contributions. A bankrupt who does not earn enough to be liable for compulsory contributions may still choose to make a voluntary contribution towards the debts of their estate. Table 14: Contribution assessments Shows the number of bankrupts who are liable to contribute and the amount of actual contributions (including voluntary contributions) collected (figures in italics refer to 2007–08).
Dividends When sufficient funds are recovered during the administration of an estate, the trustee will make a distribution of those funds to the creditors of the estate. This payment is referred to as a dividend. When the trustee expects to recover further funds, they may choose to pay an interim dividend to creditors, rather than delay payment of the entire dividend until all funds are received. Once all funds are received the trustee pays a final dividend to creditors. Table 15: Dividends: Official Trustee and registered trustees Shows the number of bankruptcies in which interim and final dividends for Part IV and Part XI matters were paid by the Official Trustee and registered trustees (figures in italics refer to 2007–08).
Trust monies held by trustees All money received by trustees, in their capacity as trustee of a Part IV bankruptcy, Part IX debt agreement, Part X personal insolvency agreement or Part XI administration of the estate of a deceased person, is required to be paid into a separate, interest-bearing account. These funds are referred to as ‘trust funds’. The Official Trustee holds these trust funds in the Common Investment Fund (CIF). Registered trustees maintain separate accounts for each administration. Interest earned by trustees on these trust funds is paid to the Commonwealth to partially offset the cost of administering the bankruptcy system. In the year ended 30 June 2009, investments from trust funds held by the Official Trustee earned $1,245,912 and by registered trustees $1,805,432. Table 16: Monies administered by the Official Trustee in administrations under Parts IV and XI Shows receipts, payments and amounts held by the Official Trustee in the CIF – Part IV bankruptcies and Part XI administrations of deceased estates (figures in italics refer to 2007–08).
^ Trustee remuneration disclosed is inclusive of GST. Table 17: Monies administered by registered trustees in administrations under Parts IV and XI Shows receipts, payments and amounts held by registered trustees – Part IV bankruptcies and Part XI administrations of deceased estates (figures in italics refer to 2007–08).
^ Trustee remuneration disclosed is inclusive of GST. Table 18: Rate of return in bankruptcy administrations that were finalised during the year Shows the average rates of return being achieved in bankruptcies administered by the Official Trustee and registered trustees (figures in italics refer to 2007–08).
Annulments Once bankrupt, a debtor’s bankruptcy will be ended by either discharge or an annulment. Annulments may be obtained in several ways:
Table 19: Section 74 annulments Shows the number of bankruptcies annulled following acceptance of a special resolution by creditors (figures in italics refer to 2007–08).
Table 20: Section 153A annulments Shows the number of bankruptcies annulled by full payment, as certified by trustees (figures in italics refer to 2007–08).
Table 21: Section 153B annulments Shows the applications to the Federal Court and Federal Magistrates Court for annulment and the result (figures in italics refer to 2007–08).
Discharge Section 149 provides that, in the ordinary course of events, a bankrupt is automatically discharged from bankruptcy three years after the date on which they filed their Statement of Affairs. Section 149A extends the period of a person’s bankruptcy to five or eight years in circumstances where an objection to discharge has been lodged by the trustee. The grounds upon which an objection may be lodged are set out in section 149D. Table 22: Objections to discharge Shows the number of objections lodged and dealt with (figures in italics refer to 2007–08).
4. Debt Agreements under Part IX Role of the Debt Agreement Service The Debt Agreement Service (DAS) is a business line in ITSA. The services the DAS delivers are:
In delivering these services the DAS:
The debt agreement system Debt agreements result from creditors voting to accept a proposal to compromise debts of debtors with unmanageable debt. To be eligible to propose a debt agreement a debtor must be insolvent and have unsecured debts and assets (not exempt in bankruptcy) below $83,647 and after-tax income below $62,735 (as at 30 June 2009). Debt agreement proposals are received from debt agreement administrators who provide debtors with information on options to deal with unmanageable debt and the consequences of these options. The administrator assists the debtor to prepare proposal forms and must certify that reasonable grounds exist that the debtor is likely to be able to pay the amount offered and has disclosed all information required. After the DAS checks the debtor’s eligibility, further compliance checks are made to ensure the debtor is insolvent; the proposal clearly shows the debtor’s offer to creditors; conditions in the proposal are able to be met within seven days of acceptance by creditors; and the debtor has disclosed information to enable creditors to make an informed voting decision. The DAS compliance program aims to improve knowledge and practice relating to debt agreement proposals. Compliance telephone calls are made by DAS employees to debtors and administrators to clarify proposals and check compliance with requirements and to creditors to check their claim and voting eligibility. The DAS has published nine Practice Statements which describe the way ITSA performs functions and exercises powers conferred on the Official Receiver under the Bankruptcy Act and also distributes a bi-monthly newsletter to clients. Conducting the vote The number of debt agreement proposals accepted for voting increased by 26.7% in 2008–09, from 8,309 in 2007–08 to 10,528. The Official Receiver rejected 825 proposals in 2008–09 and cancelled 370 proposals during the voting period using a power introduced in the 2007 reforms. The reasons for cancellation were that creditors were not disclosed or under-disclosed or material information was omitted. The DAS works closely with creditors and meets regularly with major creditor clients to provide information on their individual response and acceptance rates and improve their support of the debt agreement system. The DAS organises a six-monthly major creditor forum to enable progress of the debt agreement system to be monitored by large institutional creditors, the Australian Bankers Association and the Australian Finance Conference. Administrators endorsed the importance of the major creditor forum and individual visits to improve support for the debt agreement system in the 2009 client opinion survey. Major creditor forums were held in September 2008 and March 2009. Administration of debt agreements The administration of debt agreements is carried out by registered debt agreement administrators, registered trustees and the Official Trustee. Only administrators with more than five debt agreements made on proposals lodged from 1 July 2007 must be registered. There are 58 registered debt agreement administrators and seven registered trustees administering debt agreements. The importance of debt agreements in terms of levels of recovery to creditors is illustrated by the amount of dividends paid to creditors – $75.5m in 2008–09 compared with $57.3m in 2007–08. Debt agreement proposals and new debt agreements made Debt agreement proposals are lodged with ITSA. Non-complying proposals may be rejected. Complying proposals are sent to creditors for voting and may be cancelled during the voting period (which is 35 days). Table 23: Part IX debt agreements: proposal status Shows the number of debt agreement proposals received by state of residence of the debtor, the number accepted/rejected by the Official Receiver for sending to creditors for their vote, the number cancelled by the Official Receiver during the voting period and the number accepted/rejected by creditors (figures in italics refer to 2007–08).
Table 24: Part IX debt agreements: estimated rates of dividends Shows the estimated rates of dividends for debt agreement proposals and debt agreements made as well as the number of debt agreements resulting from accepted proposals (figures in italics refer to 2007–08).
Debt agreements varied, terminated and completed A debtor subject to a debt agreement may propose a variation to the debt agreement if circumstances change. The debtor or a creditor may propose a termination of the agreement when there is no likelihood of it being completed. The debt agreement is terminated if the debtor has not made a payment due for six months. A debtor completes their agreement when they complete all their obligations and payments due. A creditor applied to the court about one debt agreement made during 2007–08 where the debtor failed to disclose a significant debt. The court held the debt agreement void and made a sequestration order against the debtor. This case has been included in the number of agreements terminated by creditors. Table 25: Part IX debt agreements: status of debt agreements Shows debt agreements received, varied, ended and terminated by state or territory (figures in italics refer to 2007–08).
New agreements made in 2008–09 may include some proposed prior to 1 July 2008. Debt agreement activity Substantial amendments to the debt agreement system were implemented on 1 July 2007. The new system requires the registration of debt agreement administrators who administer more than five debt agreements and prescribes their duties. The administrator must provide a certificate with each debt agreement proposal confirming they have reasonable grounds to believe that the debtor is likely to be able to discharge the obligation created by the agreement when they fall due, and that the debtor has made full disclosure and is aware they will be released from their debts on completion of the agreement. One result of the new system is a significant reduction in the termination rate of debt agreements compared with the old system. Table 26: Part IX debt agreements: outcome for proposals lodged since 2003–04 The following analysis of debt agreement proposals lodged is carried out each financial year. This table is designed to track each proposal over the course of its life cycle and to give a progressive summary of the outcome of each proposal and the debt agreements not yet completed at the end of each year. For example the percentage of agreements completed would increase each year.
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