Kelvin Thomson (Wills, Australian Labor Party, Deputy Manager of Opposition Business in the House) Share this | Hansard source

The background to the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 is that debt agreements were introduced in 1996 with the intention of providing consumer debtors with an option to enter into a formal arrangement with creditors as an alternative to bankruptcy. The number of these debt agreements has grown significantly in recent years. I understand that there were over 7½ thousand proposals in 2005-06, and just under 5,000 of those proposals resulted in debt agreements being made. Debt agreement administrators received over $55 million from debtors in 2005-06, of which approximately $38 million was paid to creditors. Over the course of the 10 years since 1996, administrators have been largely unregulated. There are no entry requirements. People can, however, be declared ineligible to be administrators on the basis that they have failed to properly perform their duties. Those duties are restricted to putting the agreement into effect and do not cover information and advice that they provide to the debtor before the agreement is made.

There has been, however, what could be described as a pretty high failure rate in relation to these debt agreements; I understand that it is more than one-third. The reasons given for that are, firstly, that the proposals from debtors are unsustainable, particularly where they are not fully informed about all their options, so the debt agreement that they enter into may not be a suitable one; secondly, that there is little allowance made in proposals for changes in circumstances—debtors are not always advised properly on budgeting and planning before committing to an agreement which typically lasts for at least three years; and, thirdly, that debt agreement administrators have been able to take their fees in priority to creditors, which can result in proposals being developed that might be attractive to creditors—and, naturally, creditors want the large settlement of 70c in the dollar or whatever—but which are unsustainable over the longer term.

So you can end up with a situation in which administrators get paid and creditors do not and the debtor may be worse off than before commencing the agreement. Finally, creditors can focus on the rate of return rather than on what the debtor can afford. That contributes to a high number of unsustainable offers and consequently to the high failure rate. It is my understanding that this proposal has been the subject of significant consultation and that creditors, debt agreement administrators and financial counsellors—that is to say, key stakeholders who have an interest in debt agreements—generally support the proposals before the House. The intention is to bring these changes in from 1 July this year. Creditors and administrators are now investing in the systems, making procedural changes and engaging in the training necessary to respond to this legislation.

What we will have from here on in is a formal registration system for debt agreement administrators based on their ability to properly perform their duties. There will be mandatory qualifications to ensure a minimum level of knowledge for all administrators. Their duties will cover pre-agreement work such as informing the debtor about alternatives, ensuring that the proposal is affordable over the promised term and ensuring that the debtor makes proper disclosure to creditors. It is hoped that this regulatory regime will add to the professional standing of administrators, provide clear guidance about what is expected of them and assist in addressing some of the concerns about the ability and conduct of some administrators.

It requires debt agreement administrators to be paid proportionately over the life of the agreement rather than in priority to creditors. The idea behind this is to provide an incentive for administrators to develop sustainable proposals and to assist debtors who run into trouble in the course of the agreement. It requires creditors to be paid proportionately based on their respective debts rather than negotiating different rates of return within an agreement. The idea behind this is to encourage creditors to focus on what the debtor can afford to pay rather than on the rate of return that they might prefer to receive. A debt agreement ought to be seen as a simple one-off offer to creditors which they can accept or reject rather than a series of individual offers which aim to meet the different demands of all the creditors involved.

The new regulatory regime also seeks to provide more effective mechanisms for dealing with default and meeting creditors’ expectations that the administrator be actively managing defaults and keeping creditors informed. The amendments require the administrator to notify creditors when a debtor defaults and has not rectified it within three months. An agreement will be automatically terminated if no payments are made for six months or the agreement is not completed within six months of the agreed term. It also applies the realisations charge and interest charge in a manner that is in accordance with the government’s cost recovery policy and the intention of recovering the cost of regulating the system.

It has been suggested that there are some concerns amongst debt agreement administrators about not being paid in priority to creditors and that this could affect their cash flow. The response to this is that the value of the amendment is that it provides an incentive for administrators to develop sustainable proposals and to assist debtors who run into trouble in the course of their agreement. Some creditors have expressed concerns about the requirement to be paid proportionately based on the size of their debts. These creditors are concerned that they will become involved in debt agreements which do not meet their expectations in terms of acceptable rates of return.

It ought to be noted in response to these concerns that debt agreements can currently provide for different rates of return to creditors and payments to creditors at different times. This complicates the system. It adds costs by requiring significant negotiation prior to developing proposals in order to try to meet creditors’ different demands. It excludes many debtors from the system who could afford to make payments which are greater than creditors might otherwise receive and it suggests or is based on the principle that debt agreement should be seen as a simple one-off offer to creditors representing the best offer the debtor can make and creditors then decide whether to accept that offer—and it is probably fair to say that this amendment is fundamental to the success of the overall reform package.

It is also the case that some creditors may be concerned that the government has not proceeded with the amendment that it was talking about back in July last year, which would have required administrators to defer payment of at least 15 per cent of their remuneration until the end of the agreement. The idea behind this amendment was to provide an additional incentive for administrators to focus on sustainability and to assist debtors to complete their agreements. However, it would have penalised administrators who are doing the right thing and in situations where a debtor’s failure to complete an agreement was outside the administrator’s control. The government’s case for the amendment is that a greater incentive will result from an amendment that requires administrators to be paid proportionately over the life of the agreement rather than in priority to creditors and that we do not want to see an additional compliance burden for creditors which would be difficult to monitor, could have outweighed the marginal benefits provided and indeed had the outcome that administrators increased their fees by 15 per cent to overcome its effect.

There has been some consultation and a process behind the legislation. The Attorney originally announced amendments in March 2006. There were amendments announced in July 2006. Further consultation and revised proposals occurred after July 2006 and we now have the legislation before the House.

The objects of this legislation—providing for enhanced regulation of debt agreement administrators, specifying the duties of a debt agreement administrator, encouraging creditors to make decisions based on the debtor’s capacity to pay, providing more effective means of dealing with defaults and seeking to streamline some of the provisions—I think are all things that we can support.

Schedule 1 contains provisions relating to the registration of debt agreement administrators. They will commence on the date of royal assent so that existing and prospective administrators can be registered prior to 1 July this year with the idea of administering debt agreements which will be subject to the new rules from that date and the official receiver will not be able to accept debt agreement proposals nominating an unregistered debt agreement administrator from that date unless the administrator is administering no more than five active debt agreements. Schedule 2 contains amendments which apply in relation to debt agreement proposals and resulting debt agreements from 1 July this year. This schedule contains all the amendments apart from those which deal with the registration of administrators.

We have got the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 and also the Bankruptcy (Estate Charges) Amendment Bill 2007. The companion bill extends the application of the realisations charge and interest charge to money received by debt agreement administrators under debt agreements under part IX of the Bankruptcy Act. The state charges cover the cost of regulating the system and what this bill is going to do is spread the cost recovery over a broader range of realisations. It is my understanding that the amount recovered will be the same and that it is essentially the same group of creditors who end up paying the charges, so I do not see this as a particularly controversial change. It is designed to give effect to the government’s cost recovery policy, the basic principle of which is that users of services provided by the government should generally pay for those services and that the price they pay should reflect the actual cost of providing the services.

In this case, the realisations charge and the interest charge recover the cost of regulating the personal insolvency system. The cost of regulating debt agreement administrators within that system is currently recovered through the realisations charge and interest charge as they apply to bankruptcies and personal insolvency agreements. The present situation means that the cost of regulating debt agreement administrators is effectively borne by creditors in bankruptcy and personal insolvency agreements. This is no longer considered appropriate as debt agreements make up a significant proportion of insolvencies in Australia and the cost of regulating the system should now be reflected by imposing these charges on money received from debt agreements. In practice, it is largely the same creditors paying the realisations charges in bankruptcies and personal insolvency agreements who cover the cost of regulating debt agreement administrators. Applying the charge to debt agreements will broadly result in the same creditors paying the same amount of money but over a larger range of administrations. This means that the rate of the realisations charge will be reduced following these amendments.

I note there was some media commentary on the legislation which we are debating. The Financial Review back on 16 February reported on a disagreement between the regulator, Insolvency and Trustee Service Australia, and debt administrators. The Financial Review reported that the regulator had blamed the way in which debt agreement administrators charged fees for the high failure rate of insolvency agreements. But the administrators of debt agreements rejected those claims about the impact of up-front fees. For example, one of the directors at Fox Symes, one of Australia’s biggest providers of debt agreements, expressed the view that:

... administrators put in an enormous amount of effort upfront and should be allowed to draw down fees as and when work is performed.

The Attorney responded to this article with a letter to the Financial Review, stating that the requirement in the bill:

... is that fees be taken over the life of the agreement rather than as a priority before creditors are paid ...

He made the point that the reforms:

... do not require that 15 per cent of fees be paid only once the creditors have been paid in full.

The Attorney has expressed the view that the reforms do not prevent administrators from charging up-front fees but:

... seek to regulate fees to administer a debt agreement that has been entered into. Administrators are still able to impose ‘upfront’ fees for services provided to the debtor before entering into the debt agreement.

I should not close a discussion about these issues without expressing concern about issues to do with insolvency and repossessions in Australia. In September last year figures were released which indicated that there has been a quite substantial jump in mortgage repossessions. Mortgage repossessions have been rapidly rising since around May 2002 for each of the various states and territories for which data has been collected. The data released in September last year indicated that mortgage repossession orders in New South Wales are now higher under this government than they were under Prime Minister Keating, who gets pilloried on these matters, back in 1990.

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