Door Closing on No-Asset-Procedure Cheats

The Government is moving to close loopholes in the No-Asset-Procedure (“NAP”) established under the Insolvency Act 2006, and make the period NAP debtors remain on the public register comparable to that for bankruptcy.

The proposals (under the Insolvency Amendment Bill) are timely for businesses dealing with the effects of the recession and increasing bad debts, and have been welcomed by credit reporting agencies.

The NAP is intended to give qualifying debtors a one-off chance to avoid the stigma of bankruptcy. Bankrupts cannot carry on a business or travel overseas for a minimum of 3 years without consent, and their names stay on the public register for 4 years after discharge.

In contrast, NAP debtors can do virtually what they like after 1 year, their names are removed from the public register, and they cannot be pursued further for unsecured debts subject to the NAP.

To qualify for the NAP you need to have:

• no realisable assets (excluding $1000 cash, “personal and household effects”, tools of trade, and a vehicle worth under $5000);
• total debts between $1000 to $ 40,000;
• no way of repaying; and
• not been previously admitted to the NAP or bankrupted.

The NAP is a popular option, as the figures show:

The total amount written off under the NAP from 3 December 2007 to 20 July 2009 was $ 93,701,559.17.

Creditors can object to a debtor’s entry into the NAP if bankruptcy has been applied for and it is likely this is a better option, or if the debtor has:

• concealed assets with the intention of defrauding creditors;
• engaged in conduct that would be deemed an offence if they were declared bankrupt; or
• obtained credit by fraud.

This has not stopped unscrupulous individuals from gifting assets to protect them from creditors, or incurring fraudulent debts during the NAP period and having the debts written off on discharge from the NAP.

The Bill (before the Committee of the whole House at time of writing) would give the Official Assignee power to cancel gifts made in the period leading up to entry into the NAP, and the definition of realisable assets would include insolvent gifts. The Official Assignee would be allowed to extend the time period a debtor is under the NAP to allow for further investigation.

Fraudulent debts under NAPs undischarged as at 10 March 2009 would remain enforceable, to which can be added interest and penalties. As in bankruptcy, partners (including business partners, co-trustees, joint debtors and guarantors) would not be released when a debtor is released from the NAP. The public register for multiple insolvencies would record each insolvency, either bankruptcy or NAP, excluding those under the Insolvency Act 1908.

It was proposed to extend the time an NAP debtor remains on the register to 5 years in total, and indefinitely for multiple insolvencies. There has been debate about the interests of both debtors and creditors, input from the Privacy Commissioner favouring 3 years in total, and Labour Party members wanting more public consultation on the point. The upshot was that the provisions regarding the public register were to be separated from the rest of the Bill.

These proposed changes will help protect businesses from fraudsters and bad debtors, however basic self-help measures are also recommended, including:

• limiting the amount of credit extended;
• checking the NAP, summary instalment order and bankruptcy public registers; and
• taking security where appropriate and possible.

By Michael Battersby / Pauleen Corpuz - First Published in Business to Business August 2009 Issue, Vol. 18, No. 8