BANKRUPTCY (ESTATE CHARGES) AMENDMENT BILL 2007 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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BANKRUPTCY (ESTATE CHARGES) AMENDMENT BILL 2007

2004-2005-2006-2007 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES BANKRUPTCY (ESTATE CHARGES) AMENDMENT BILL 2007 EXPLANATORY MEMORANDUM (Circulated by authority of the Attorney-General, the Honourable Philip Ruddock MP)

BANKRUPTCY (ESTATE CHARGES) AMENDMENT BILL 2007 SECTION 1 - GENERAL OUTLINE 1. The purpose of this Bill is to extend the application of the realisations charge and interest charge to money received by debt agreement administrators pursuant to debt agreements under Part IX of the Bankruptcy Act 1966. The amendments are all contained in Schedule 1 of the Bill. Financial Impact Statement 2. The amendments made by this Bill will have no significant financial implications for the Commonwealth. The amendments will result in additional revenue of approximately $0.7m per year which will partly offset the additional costs to the Commonwealth of the amendments made by the Bankruptcy Legislation (Debt Agreements) Bill 2007. 3. The overall impact on fees and charges of the amendments to be made by this Bill and the Bankruptcy Legislation (Debt Agreements) Bill 2007 will be detailed in a revised Cost Recovery Impact Statement to be published by the Insolvency and Trustee Service Australia prior to 1 July 2007. Section 2 - Policy objectives 4. The principal purpose of the amendments to be made by this Bill is to apply the realisations charge and interest charge to debt agreements. This will give effect to the Government's Cost Recovery Policy. 5. The basic principle of the Government's cost recovery policy 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 those services. Where it is inefficient or inequitable to recover costs directly from the individual using the service, costs may be recovered through levies imposed on industry or a defined group of beneficiaries. Where cost recovery is inappropriate or counterproductive to the Government's personal insolvency policies, the cost should be borne by the Government. 6. The realisations charge and 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. This means that the cost of regulating debt agreement administrators is effectively borne by creditors in bankruptcies 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 that system should be correctly reflected by imposing these charges on money received from debt agreements. 7. In practice, it is largely the same creditors who are paying the realisations charge 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 the rate of the realisations charge will be reduced following these amendments.

8. The current rate of the realisations charge was calculated taking account of projected revenue from the interest charge. The interest charge is payable by trustees in bankruptcies and personal insolvency agreements and requires the trustee to remit to the Commonwealth interest they receive on monies realised in those administrations. Effectively, this is money which would otherwise be payable to creditors. However, it would be complex for trustees and administrators to calculate interest for each estate and apportion this between creditors. The requirement to remit interest to the Commonwealth as a way of meeting part of the costs of regulating practitioners provides a benefit to creditors which should be reflected in setting the rate of the realisations charge. The interest charge is currently not payable by debt agreement administrators. The amendments will impose the charge on administrators and is supported by an amendment in the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 which will require administrators to deposit debt agreement monies into a single, interest-bearing account. That is the same requirement which currently applies to trustees.

Section 3 - Notes on sections Section 1 - Short Title 9. The Bankruptcy (Estate Charges) Amendment Bill 2007 (the Bill) proposes amendments to the Bankruptcy (Estate Charges) Act 1997. Section 1 of the Bill provides that, when the Bill has been enacted, it will be known as the Bankruptcy (Estate Charges) Amendment Act 2007. Section 2 - Commencement 10. Section 2 will provide that the Act commences on 1 July 2007. Section 3 Amendments 11. Section 3 is a drafting device to allow all the amendments proposed to be made to the Act to be set out in a Schedule. The items in the Schedule will amend the Act and will have effect according to their terms. Notes on the Schedule items follow. SCHEDULE 1 Interest charge 12. Item 1 will amend subsection 5(1) to apply the interest charge to interest received by debt agreement administrators. Subsection 5(1) currently requires a trustee to pay to the Commonwealth any interest earned in his or her personal capacity from the account required to be established under subsection 169(1B) of the Bankruptcy Act 1966 (the Bankruptcy Act). That subsection requires a trustee to open a single interest-bearing account into which all money received as the trustee of a bankrupt estate or personal insolvency agreement must be deposited. Subsection 5(1) is the mechanism for requiring interest earned on that account to be paid to the Commonwealth. 13. Following amendments to be made to the Bankruptcy Act by the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007, a registered debt agreement administrator or registered trustee administering debt agreements will be required to open a similar account for debt agreement receipts. The amendment to subsection 5(1) will require the administrator or trustee to pay interest earned on that account to the Commonwealth. Realisations charge 14. Item 2 will insert new paragraph 6(1)(ab) to apply the realisations charge to debt agreements. Subsection 6(1) currently requires payment of a charge by trustees in bankruptcies and personal insolvency agreements. The new paragraph will add debt agreement administrators to the list of people liable to pay the charge. 15. The amount of the charge is determined by legislative instrument approved by the Minister and is calculated on cost recovery principles to recover the cost of regulating the personal insolvency system.

16. Item 3 will insert new subsection 6(1B) to provide that the realisations charge is not payable by a person in respect of a debt agreement where the administrator is the debtor to whom the debt agreement relates. Application of amendments 17. Item 4 will provide that the amendments apply in relation to a debt agreement made as a result of the acceptance of a debt agreement proposal given to the Official Receiver on or after 1 July 2007.

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