Our article entitled ‘The Hidden Dimension of Business Bankruptcy in Australia’ is the first empirically-based analysis of business bankruptcy to be conducted in Australia. It has two principal objectives. The first is to identify key differences between debtors who declare business bankruptcy and those who declare non-business or ‘personal’ bankruptcy. The second is to explore the extent to which business and personal bankruptcies overlap, including the extent to which there might be a ‘hidden’ population of business debtors among those formally identified as personal debtors. This question is significant in light of the Australian Government’s imminent changes to bankruptcy law, which will reduce the period of bankruptcy from three years to one in a bid to promote entrepreneurship. Some commentators have suggested that these new laws may have ‘unintended’ or ‘perverse’ consequences, since they will make bankruptcy less onerous for both business and personal debtors. These critics suggest that the changes may lead to an increase in bankruptcy rates, or reduce the ‘disciplinary’ effect of bankruptcy, encouraging debtors to continue their excessive use of credit after discharge. In particular, they object to the broad application of the proposed reforms, pointing out that the vast majority of bankruptcies are non-business, or personal, in nature. Perceiving a risk that the measures will lead to an increase in personal bankruptcies, some commentators suggest that the new, shorter bankruptcy period should only be available to business debtors, or even specific groups of business debtors. Yet the Government has rejected these proposals, maintaining that the changes must apply to all debtors if they are to ‘decrease the stigma of failure and encourage a culture of… innovation’. Pointing out that many small business owners secure their business loans with personal assets, the Government contends that it is impossible to draw sharp distinctions between business and personal bankruptcy.
This article explores the characteristics of personal and business debtors, in order to determine whether or not it is feasible to draw a clear distinction between the two groups. It draws upon a unique database obtained from the regulator, the Australian Financial Security Authority (AFSA). The database contains the de-identified records of 28,675 Australian bankruptcies, made up of 6,158 business bankruptcies and 22,517 personal bankruptcies, commenced between 2007 and 2016. Through statistical analysis of this data, we outline the salient features of debtors who identify their bankruptcies as business-related. We find that, in general, there are striking differences between personal and business debtors. Business debtors are typically older than personal debtors, and more likely to have spouses and dependants. They are concentrated in certain occupational categories, particularly managerial, professional and trades occupations. We also find that there are stark differences between the financial profiles of business and personal debtors, with the former reporting much higher assets, incomes and liabilities at the time of bankruptcy, with a much higher incidence of tax and trade-related debts.
Yet we also find evidence of considerable overlap between the categories of business and personal bankruptcy. Within the population of personal debtors, there are clusters of debtors whose overall circumstances strongly resemble those of business debtors. In particular, there are striking similarities between business debtors and those in the personal bankruptcy sample who state that they have been company directors, members of a partnership or sole traders in the five years prior to bankruptcy. There are similar parallels between business debtors and those in the personal bankruptcy sample whose bankruptcies are attributed to ‘other causes or causes unknown’. We also identify some of the features of business bankruptcy among personal debtors who work as construction trades workers, the occupation most commonly cited by debtors in business bankruptcy. These findings suggest that there is a considerable cohort of debtors whose bankruptcies are currently defined as personal, but which are in fact wholly or partly business-related.
On the basis of these findings, we conclude that there is a pressing need for more comprehensive information regarding the causes of bankruptcy in Australia. We suggest changes to the Statement of Affairs lodged at the commencement of bankruptcy, to allow debtors to provide more detailed and accurate information about their circumstances. We also suggest that AFSA could create a new reporting category of ‘partly business-related bankruptcy’, to reflect the fact that many bankruptcies are due to multiple factors, some business-related and some personal. Finally, we conclude that there is little merit in restricting the Government’s proposed reforms to business debtors. Such an approach would be impracticable and unjustifiable, given the evidence that business activity appears to play a role in many nominally personal, or non-business, bankruptcies.
Lucinda O’Brien is Research Fellow in the Centre for Corporate Law, Melbourne Law School, The University of Melbourne.
Ian Ramsay is the Harold Ford Professor of Commercial Law, Redmond Barry Distinguished Professor and Director of the Centre for Corporate Law, Melbourne Law School, The University of Melbourne.
Paul Ali is Associate Professor and a member of the Centre for Corporate Law, Melbourne Law School, The University of Melbourne.