19 Jan 2009 Posted in Parliamentary speeches and responses
- Madam Deputy Speaker, I beg to move, “That the Bill be now read a second time”.
Objective of Bill
- Madam, our bankruptcy regime seeks to give creditors their rights whilst at the same time seeking to give debtors an opportunity to make a fresh start in their financial matters. In 1995, we enacted the present Bankruptcy Act to protect creditor interests without stifling entrepreneurship and enterprise, and to improve the administration of the affairs of bankrupts.
- After a person is adjudged a bankrupt, the financial embarrassment and social stigma that he faces can make it difficult for him to keep his job and, if he loses it, to secure a new one. He then faces even greater financial hardship and cannot contribute as much to his bankruptcy estate as he would have had if he had kept his job. As a result, creditors receive a smaller dividend payout.
- Currently, a debtor facing a bankruptcy application can avoid bankruptcy by entering into a voluntary arrangement or VA with his creditors. This arrangement is, however, court-based, requiring the debtor to obtain the Court’s sanction at various stages of his proposal, as well as the support of creditors holding at least 75 per cent in value of the debts. Hence, whilst the Voluntary Arrangement may be useful to debtors who manage businesses or who have large debts, and whose proposals may not be so straightforward, it can be cumbersome and costly for debtors who are wage earners with smaller debts.
- Where a debtor has a regular income and his debts are not large, a better alternative would be to have a non court-based approach that gives him a reasonable opportunity to pay off all or some of his debts through a repayment plan over a period of time. By avoiding bankruptcy through this debtor-driven scheme, the intention is that the debtor will keep his job and apportion part of his monthly income towards repaying his debts. The aim is that creditors will receive no less than what they would have otherwise received had the debtor gone into bankruptcy. The benefit for the debtor is that if he successfully meets his financial obligations under the repayment plan, he will avoid the stigma and restrictions of bankruptcy. But the point is: he has to do his part; for example, adjust his lifestyle or spending habits so that repayments are made. Hence, these amendments to the Bankruptcy Act to introduce the Debt Repayment Scheme or “DRS”. They take into consideration the feedback we had received from a public consultation on an earlier version of the Bill.
- Madam, as the DRS is intended to be a pre-bankruptcy scheme, we propose to insert its provisions under a new Part VA of the Act. Let me now take the House through the salient features of this new Part inserted by Clause 8 of the Bill and I will refer to the other key amendments of the Bill where relevant.
Salient Features of the Bill
Division 1 - Preliminary
- Division 1 of the new Part VA defines the various expressions used in the DRS. Specifically, under the scheme, all unsecured and liquidated liabilities would be taken into account in determining a debtor’s debts.
Division 2 - Proposal for DRS
- Division 2 covers how a debtor is considered for the DRS and a debt repayment proposal formed and approved.
- Currently, the High Court can make a bankruptcy order against a debtor if the total unsecured debt under a bankruptcy application, whether filed by the creditors, either singly or jointly, or by the debtor through a self-petition, exceeds $10,000. So I would like to make a point of clarification here, which is that a debtor who owes several creditors in total more than $10,000 can be made a bankrupt even though the debt owed to each creditor is less than $10,000. Now, under the DRS, if the debtor meets certain criteria, the Court will adjourn the bankruptcy application for up to six months, and refer the matter to the Official Assignee.
- Madam, the criteria to be eligible for the DRS are as follows. First, the debtor’s unsecured debts, whether the bankruptcy application is filed by a single creditor or by several creditors or by himself, totals $100,000 or less. In setting this limit, we sought to balance the objective of helping a sincere wage-earning debtor meet his financial obligations - bearing in mind his ability to make payments pursuant to the DRS - and the need to ensure that his creditors are treated fairly for their forbearance in obtaining a bankruptcy order against the debtor. And our assessment is that $100,000 would be an appropriate amount for an average wage earner.
- Madam, of the current stock of bankrupts, about 42 per cent of them had debt liabilities of $100,000 or less when they were made bankrupt. Over the past five years, the average number of bankrupts per year was about 3,200. Hence, based on this first criterion alone, that is, $100,000 or less, about 1,300 debtors would be eligible to be considered for the DRS every year. But, of course, some will be eliminated from consideration as they would not be employed - because you need to be a wage earner - or they have business-related debts.
- Secondly, in the preceding five years, the debtor must not have been a bankrupt, or on a VA or the DRS. This is because the DRS is designed to help wage-earners who have genuinely fallen into financial difficulty. It is not intended to be a scheme that debtors can use repeatedly to avoid repaying their debts in full.
- Thirdly, the debtor, at the point of the bankruptcy application, was not a sole proprietor or a partner in a business partnership. Sole proprietors and partners are excluded as they are unlikely to be assured of a regular income stream to see through a debt repayment plan under the DRS. These debtors are also likely to require new credit in the course of their business. These recurring debts would cause the total debts to exceed the proposed $100,000 limit and make it difficult to apportion a fixed amount towards regular debt repayment.
- Section 56B empowers the Official Assignee or OA to review the suitability of a debtor for a DRS based on the factors above. If the debtor qualifies, the OA will administer and supervise his affairs through an administrator from the Insolvency and Public Trustee’s Office or IPTO. Section 56C requires the creditors to file their proofs of debt and the debtor to file a Statement of Affairs and a debt repayment plan not exceeding five years. In deciding on the maximum length of repayment period, we sought to ensure that the time required for the debtor to obtain a fresh start was balanced against the time needed for creditors to recover some, if not all, the debts owed to them.
- Section 56D empowers the OA to examine the debt repayment plan proposed by the debtor and to make the appropriate modifications to ensure that the interests of the creditor are not prejudiced. The OA will then call for a meeting of creditors, which the debtor must attend, for them to provide any input or information to the Administrator. The OA will consider this input in deciding whether to approve the plan as it is or after further modifications. If the debtor or any creditor thinks that the approved plan unfairly prejudices his interests, he may appeal to an Appeal Panel. The Appeal Panel will either confirm the OA’s approval of the plan or make appropriate modifications to it and this decision will be final.
Division 3 - Commencement & Administration of the DRS
- Madam, after a DRS commences, section 56F prevents creditors from commencing or proceeding with any action against the debtor for any outstanding debt provable under the scheme except with the leave of the Court. The OA will distribute the debtor’s repayments to the creditors on a pari passu basis.
- Section 56H allows the OA to modify an approved plan if there is a material change in the financial situation of a debtor; so, for example, when a debtor becomes the beneficiary of a large inheritance, which changes his debt repayment capability, or if more debts are proven after the DRS commences or if the debtor changes jobs.
- For most of these modifications, the repayment period for the modified plan cannot exceed 5 years. However, in two situations when specific new debts are proven amounting to less than $50,000, the repayment period may be extended by up to another two years, that is to say, up to seven years from five years. The first involves claims for a shortfall after a secured creditor realizes a security. So, for example, the debtor may default on his monthly repayment for a housing loan which has his house as collateral. The lender may decide to sell the house, and file a claim for any resultant shortfall. The second situation involves contingent and unliquidated liabilities that crystallize after the DRS effective date. So, for example, the debtor may be the guarantor for a friend’s loan contract signed before the DRS effective date. If his friend defaults on the loan, the DRS debtor then becomes liable for the value of the loan under the terms of the contract.
Division 4 - Cessation of the DRS
- Madam, if the debtor completes the repayment plan, section 56N empowers the OA to issue him a certificate of completion. When this happens, the debtor will be released from all his debts which are proved under the DRS, which thereafter ceases.
- However, there are a few scenarios where the DRS would be considered to have ceased but with the debtor not deemed to have completed the scheme, remaining liable for debts under it. I have described the first scenario above where specific new debts more than $50,000 surface in the two situations highlighted. The debtor is then issued a certificate of inapplicability.
- The second scenario is where the debtor does not abide by the terms of the repayment plan or fails to fulfill his duties under it. Section 56M then empowers the OA to issue the debtor a certificate of failure.
- And the third scenario is when the debtor completes the DRS, but it is subsequently discovered that the debtor had failed to disclose all his property, had not informed the OA of the disposal of his property, or had obtained the approval or modification of his debt repayment plan by means of fraud, false representation or concealment of material facts. Section 56O then empowers the OA to revoke the certificate of completion that had been issued.
- When the OA issues a certificate of inapplicability or a certificate of failure, or revokes a certificate of completion, a debtor will be presumed to be unable to pay off his debts. Any creditor who has proved his debt under the scheme may then rely on this presumption to commence bankruptcy proceedings against the debtor in respect of that debt. [Clause 9]
- In summary, Madam, the Debt Repayment Scheme seeks a “win-win” outcome for both a debtor and his creditors. On one hand, the creditors are likely to receive at least the same amount if not more than what they would receive had the debtor gone into bankruptcy. On the other hand, the debtor will get an opportunity to remain in employment. In addition, if he dutifully meets his financial obligations under the repayment plan, he will be able to avoid the stigma of bankruptcy and have a fresh start. In addition, the DRS will imbue in debtors the responsibility and discipline needed to avoid future financial embarrassment.
- Madam, I beg to move.
DRS press release (0.02MB)
Last updated on 26 Nov 2012