Climate Change and Personal Insolvency Law

Lucie O’Brien

To be ‘insolvent’ is to be unable to pay all your debts when they fall due.^[1] Today, the Australian personal insolvency system encompasses a range of legal processes designed to assist people in severe financial hardship. It offers immediate respite from debt recovery action and, over time, the prospect of release from debts that cannot be repaid. The system also aims to assist creditors by encouraging debtors to repay what they can. It seeks to distribute any available assets among these creditors, in a fair and orderly way, in proportion to the amounts they are owed. This process means that a single creditor can’t obtain an unfair advantage simply by being more aggressive or insistent than others. The personal insolvency system is governed by the Bankruptcy Act 1966 (Cth) and regulated by the Australian Financial Security Authority (‘AFSA’), within the Treasury portfolio.

As its name suggests, the personal insolvency system is designed for individuals. Legally, it is quite distinct from corporate insolvency, which deals with the failure of incorporated businesses.^[2] Yet in a practical sense, personal insolvency is often intimately connected to business activity. Many individuals who enter personal insolvency are owners of small businesses, either as sole traders, members of a partnership or as directors of proprietary companies. When a business fails, particularly a small business, it often leads to the personal insolvency of the business owners. The failure of a large corporation can also trigger personal insolvencies. It can cause many employees to lose their jobs and other smaller businesses to lose important contracts. The directors of a failed company can be held personally liable for the company’s debts if they are found to have engaged in insolvent trading.^[3] In this respect, so-called personal insolvency is not merely a consequence of private financial decisions but reflects broader trends and pressures in the economy.

In recent years, there has been increasing recognition that climate change can trigger business failures and, at the same time, cause serious financial harm to households and individuals. To date, much of this debate has focused on corporate insolvency, as discussed elsewhere in this volume.^[4] It is likely, however, that personal insolvency will also play an increasing role in mitigating the financial impacts of climate change on individuals, households and small businesses, as these impacts become more pervasive and severe. This chapter considers the past, present and possible future interconnections between climate change and personal insolvency, in the context of Australia’s unique climate and growing exposure to climate-related risks.