Personal Insolvency Regulator - April 2010

Personal Insolvency Regulator

Included Inside This Issue
	1. Inspector-General’s Column a. RDAA Professional Development Day and Major Creditor Forum b. Bankruptcy Law Amendment Bill (BLAB) 2009
	2. Regulatory Activity Summary – 9 months to 31 March 2010
	3. Debt Agreement Practitioner’s Association & Bankruptcy Reform
	4. Controlling trustee applies for sequestration, and becomes trustee
	5. A new Professional Standard for Insolvency Services
	6. Assigning property to undischarged bankrupts
	7. Section 254 of the Act and Unidentified Moneys
	8. Trustee Information Sessions
	9. ITSA Regulation Registrations Officers – Update a. Professional Indemnity Insurance b. RDAA Registration renewals
	10. ITSA’s Enforcement Unit
	11. Advertising Creditors Meetings – an update
	12. Online Services for Trustees: Release 2
	13. Release of IAIR Comparative Study
	14. Trustees Seeking Directions from the Court
	15. Meet the Regulation People
	16. ITSA’s Resources

a. RDAA Professional Development Day and Major Creditor Forum

Both days were well attended by relevant stakeholders and the RDAA Professional Development Day even broke new ground in having representatives from the Financial Counselling industry exchange perceptions of the debt agreement profession in open and robust discussion.

This session was complemented by a presentation from the Debt Agreement Practitioner's Association (DAPA) who provided an update on its activities and developments - including that the DAPA has now joined the Bankruptcy Reform Consultative Forum.

ITSA encourages all Practitioners to get behind both the IPA and the DAPA in order that all views may be heard as the personal insolvency system evolves and future legislative amendments are considered.

An important component of both days was the open forum sessions and, flowing from these sessions, ITSA undertook to communicate common themes to relevant stakeholders.

The main messages communicated by Debt Agreement Administrators were for creditors and these were:

• Creditors need to appreciate the debt agreement system is based on affordability and shouldn’t apply any pre-determined criteria, nor use the weight of their vote to seek higher returns or influence other voting behaviours.
• Creditors need to appreciate variations are time consuming and can add extra costs.
• Creditors need to continue to engage in communication with RDAAs and information must be provided when a debt has been sold so the correct creditor is subsequently identified and paid.
• Creditors need to look at long term, not short term agreements (as in finish times) i.e. will the debt agreement be completed on time regardless of arrears and they also need to be flexible to accommodate those debtors who may have fallen slightly behind (sometimes due to unavoidable circumstances), but who still wish to see their debt agreement through to completion.

Of particular interest to the Major Creditors was the outcome of a self-evaluation exercise undertaken by Debt Agreement Administrators on the debt agreement profession as a whole and what level of confidence there was in the market for debt agreements. An identical self-evaluation exercise was undertaken by the Major Creditors and it delivered almost identical findings – i.e. showing 60-70% confidence in the level of professionalism in the debt agreement market.

Not surprisingly the main messages communicated by Major Creditors were for Debt Agreement Administrators and these were:

• Creditors wish to work more closely with administrators to improve the debt agreement system.
• The Creditor group saw benefit in having more direct contact with the RDAA group and ITSA is willing to assist in this regard.
• Creditors expressed that, given the fees being charged by administrators, they expect to see quality and viable proposals. Creditors remain concerned that sometimes the preparatory work hasn’t been done to match the level of fees charged. Creditors still regularly see debt agreement proposals with missing debts and an apparent lack of attention to detail.
• In addition, Creditors often have debt agreement (DA) debtors complaining to them that they didn’t realise a debt agreement would affect their credit rating and they believe too much reliance is being placed on just sending debtors the prescribed information rather than explaining the overall implications of entering into a DA with the debtor.

Further to my last message on 2 February 2010 about the Bankruptcy Legislation Amendment Bill 2009 the Senate granted its Legal and Constitutional Affairs Committee an extension of time until 23 February 2010 for reporting on the Bill. Fifteen submissions were received. Public Hearings were held in Sydney on 28 January 2010. Witnesses included Insolvency Practitioners Australia; the Australian Institute of Credit Management; the Consumer Credit Legal Centre; the Consumer Action Law Centre (Vic); Australian Financial Counselling and Credit Reform Association (AFCCRA); and (jointly) ITSA and the Attorney-General's Department.

The Committee’s Report was tabled on 24 February 2010. The majority of the Committee recommended that the BLAB 2009 be passed.

We are currently awaiting advice on the legislative program in the Senate for the Budget session. If passed it is expected the Bill would commence later in the year.

Submissions and transcripts of the Public Hearings and the Report are available here www.aph.gov.au.

Veronique Ingram, Inspector-General in Bankruptcy and Chief Executive

• Inspector-General Reviews received in the 9 months year to date in 2009-10 are more than the number received in each of the entire financial years in 2007-08 and 2008-09. The increasing number of bankruptcies over the last three years goes some way to explain this increase.
• AAT matters received in the 9 months year to date in 2009-10 are also greater in number than those received in each of the entire financial years in 2007-08 and 2008-09.
• Additionally, there has been a proportionate increase in the number of complaints received in the 9 months year to date 2009-10, but a decrease in the number of complaints found to be justified. ITSA’s examination of this trend indicates that practitioners are complying with the law, but that some complainants still feel compelled to complain. Our research indicates this increased level of complaint making goes to both communication issues and a lack of understanding on the part of bankrupts and debtors in most cases – i.e. that many bankrupts and debtors still do not fully appreciate the raft of ramifications and obligations applicable to them once they become bankrupt or enter into a Part IX or Part X agreement.
• Tied in with the above dot point is that one of the major inspection errors across all practitioners continues to be a lack of communication – practitioners are reminded of Article 4 from the September 2009 PIR in this regard.
• Significantly more intervention and corrective action has been required by Regulation in the 9 months year to date 2009-10, when attending Part X and Section 73 meetings. Trustees and their employees are reminded of the Trustee Information Session (and related handouts) given in November 2009 on this topic.
• The number of registered trustees has decreased to 209 as at 31 March 2010 mainly due to voluntary de-registrations in the period.
• One registered debt agreement administrator and one registered trustee were also subject to adverse committee decisions during the 9 months year to date to 31 March 2010. However, seeing as how each of these decisions is subject to appeal before the Administrative Appeals Tribunal, further details cannot be provided at this point in time.

• Provide greater incentives for debtors to enter into voluntary agreements;
• Provide an education process to better educate debtors on the options available to avoid bankruptcy;
• Empower the Official Receiver or a delegate of the Inspector-General with a discretion to review and override a dissenting creditors’ votes if the proposal is in the best interests of all creditors generally;
• Streamline reporting to creditors to enhance confidence in the system;
• Regulate set-up fees, but elevate them to a priority payment in the proposal.

Michael Murray

The decision in Holbrook v Muntz [2010] FMCA 105 involved a failed Part X proposal and an application by the controlling trustee – Kim Holbrook - for the debtor to be made bankrupt. The debtor resisted the bankruptcy. As well, the debtor claimed there was a conflict of interest preventing Holbrook becoming trustee. Timing and other issues also arose.

Application under s 221(1)(c) made as controlling trustee

Holbrook’s application was made under s 221 of the Bankruptcy Act, which relevantly says that where a Part X agreement does not proceed, the controlling trustee may apply to the court for a sequestration order against the debtor’s estate. An initial question was whether the controlling trustee remained in that role – if the controlling trusteeship has ended under s 189(1A), they are no longer the controlling trustee and they are unable to apply under s 221: Borck v Williamson (1994) 49 FCR 16.

Holbrook did remain the controlling trustee at the time he filed the application on 29 September 2009. He consented to the trusteeship on 29 May 2009. The first creditors’ meeting was held on 3 July 2009 and was then adjourned a number of times but ultimately, on 3 September 2009, a special resolution under s 204(1) failed to pass, including any resolution releasing the controlling trustee. Hence, Holbrook was entitled to bring the application under s 221(1)(c) because none of the required special resolutions had been passed within four months from the date the meeting of creditors was called.

Although the four months period was not then due to expire til 3 November, it was clear that none of the s 204 resolutions would or could ever be passed – once a s 204 resolution has been put and determined, that resolution cannot be put again either at that meeting or any adjourned meeting: Re Ringuet (1986) 11 FCR 45.

Independence

In opposing the appointment, the debtor claimed that Holbrook had a conflict of interest because his fees would be payable by him in his capacity as trustee in bankruptcy.

The Court said there was no conflict for these reasons:

• the application for a sequestration order was made in his capacity as controlling trustee, not as a creditor;
• the controlling trustee’s fees had already been fixed at creditors’ meetings, and were not susceptible to further increase because the controlling trustee’s authority ended on 21 September 2009, and there would of necessity be no further creditors meetings;
• those fees would be afforded the priority dictated by s 109(1)(b) of the Bankruptcy Act, and would not be susceptible to change by the trustee in bankruptcy;
• the sole creditor, the ATO, did not object to the appointment of the controlling trustee as trustee in bankruptcy; and
• no further payments of controlling trustee’s fees were required personally from the debtor.
• The Court then said that even if there were a conflict, the advantages of appointing the same person as controlling trustee outweighed any detriment caused by any possible conflict, because there would be a general saving to creditors by appointing a person who has already spent time in investigating the debtor’s affairs. Indeed, the appointment was “entirely sensible” from both a:
• practical viewpoint, given the controlling trustee’s knowledge of the debtor’s affairs; and
• a costs viewpoint, given that there would inevitably be costs savings by reason of the controlling trustee’s appointment as trustee in bankruptcy because of his knowledge of the debtor’s affairs and the reports he had already prepared in his capacity as controlling trustee. As the Court said, part of the purpose or intent of Part X is to reduce costs and fees.

An interesting point arises if the controlling trusteeship has ended under s 189(1A). In such a case, the former controlling trustee may be able to apply as a creditor, in respect of unpaid fees. That would involve an application under s 44 of the Bankruptcy Act, based on, for example, an act of bankruptcy of signing the s 188 authority (s 40(1)(i)), assuming any petition was presented within 6 months. That would give a different slant to the application, in that the former controlling trustee would not so much be exercising their statutory authority to see through the controlling trusteeship to bankruptcy; rather they would be pursuing their rights as creditor to be paid from the debtor bankrupt’s assets. Independence may more readily arise as an issue in such a case.

The debtor did argue in this case that Holbrook had made the s 221 application for no other reason than to secure the payment of his fees as a priority creditor. The Court said that was not supported by any evidence and was in fact “an assertion so lacking in foundation that it ought never to have been made” [28].

Opposition to the sequestration order

As to the debtor’s various grounds of opposition to the sequestration order itself, Mr Muntz argued that he had only the one creditor, the ATO, though for a debt in excess of $600,000, that there was ‘no public morality issue’ and he wanted to continue to try to settle his on-going litigation with the ATO. As the court pointed out however, Mr Muntz had paid nearly $500,000 into his superannuation fund in the midst of his litigation with the ATO, effectively preventing him being able to pay his tax debt. The Court concluded:

“[This] payment made for his own benefit, is conduct which weighs heavily against him, and in favour of the issuance of the sequestration order. That is particularly so where the issuance of the sequestration order might result in the recovery of some of those monies for the benefit of a creditor, namely the Tax Office”.

Comment

Although there was a challenge to independence in this case, there was no basis to it – controlling trustees invariably become trustees. But it is useful at times to go back to the basics, as the court did in this case, in analysing why it was not relevant. In other facts and circumstances, it could be. For information and guidance on practitioner independence, see Schedule 4A, Performance Standards for Trustees including Controlling Trustees at 2.3; the IPA Code of Professional Practice; and APES 330 Insolvency Services (formerly APS 7), which commences on 1 April 2010.¹

Other issues in the case show that while Part X is there to deal with valid agreements with creditors outside bankruptcy, the law recognises that bankruptcy can provide a more appropriate mechanism to pursue investigations and asset recovery, assuming that funding to do this is available: see Stedman v DCT [2000] FCA 336.

Other points to note from the decision are that:

• there are important timing and status issues under s 221;
• applications under s 221 may also be made by the Inspector-General and a creditor; and
• an application under s 221 could be made by a solicitor who takes on a controlling trusteeship, though a registered trustee would then be required to be appointed under any sequestration order made.

• Bankruptcy annulled in 1992 by the Official Trustee. Surplus of $56,000 paid to the bankrupt in November 1992. The cheque was never banked by the bankrupt so the Official Trustee paid the funds into consolidated revenue pursuant to section 254.
• Bankrupt died early November 2008.
• Daughter of the bankrupt found correspondence from the Official Trustee amongst her mother's possessions including the surplus cheque not banked.
• In her capacity as administrator of her mother's deceased estate the daughter made a successful application under subsection 254(3) of the Act to recover the surplus of $56,000 for the benefit of the deceased estate.
   
  Please also refer to the September 2009 article written by Inspector Brett Hereward (Regulation – Southern Region) for further important information on this section of the Act.
   
  You can access this article at this link.

Our aim, in the second half of 2010, is to also deliver information sessions across the country on the topic of income assessments and the incoming infringement notice regime. This is in direct response to your feedback that you would appreciate further guidance in these areas.

Further updates on Regulation and Enforcement’s ongoing educational role in the industry will be provided as we move forward and as the roll-out dates for all aspects of the BLAB become known. If you have any queries in the interim or ideas for topics you would like covered in future information sessions, please do not hesitate to contact Tim Cole, Regulation's Practice Manager at: tim.cole@itsa.gov.au / 1300 364 785.

Jeff Hanley
National Manager
Regulation and Enforcement

Form 24A	Application for Registration as a Debt Agreement Administrator (Individual or Person with Overall Management Responsibility)		PDF
Form 24B	Application for Registration as a Debt Agreement Administrator (Company)		PDF

If RDAAs have any queries regarding any aspect of the renewal the process, please no not hesitate to contact either Cheryl Spriggs or Kellie Rosser – via email at registrations.officer@itsa.gov.au or by telephone on 07 3360 5916 or 07 3360 5404. 

Kellie Rosser Registrations Officer Regulation and Enforcement

Cheryl Spriggs Registrations Officer Regulation and Enforcement

Mark Findlay is the Regulation Business Manager of Central Region (NSW/ACT/SA). Mark joined ITSA, or the Official Receivers’ Office as it was then known, in 1991 after a period in the Australian Navy.   Mark has worked in most of the main business lines within ITSA, but has spent the majority of his career in bankruptcy administration.  Mark joined Regulation in August 2008 upon the retirement of his predecessor, Mike Barr.   Mark enjoys his role and is keen to contribute to increasing the level of knowledge and standards of Administration of trustees, administrators and their staff.   Mark is a CPA and holds a Bachelor of Commerce and a Diploma of Financial Planning.