A balanced insolvency system

Wednesday, April 3, 2019

Over the last couple of months we’ve been talking about what it takes to keep the personal insolvency system in balance, so it operates in a fair manner that people can have confidence in.

Hamish touched on this in his recent speech to trustees and Gavin spoke about the potential harm caused by untrustworthy advisors and the importance of us all working together to detect fraud.

Today I want to speak to creditors about your role in helping to keep the system operating in a fair manner. As creditors, you have an inherent interest in the outcome of insolvency administrations.

The Bankruptcy Act gives creditors rights—and by effectively exercising these rights, you can:

1. Support the insolvency system to work most effectively

A modern, credit-based economy requires a sound insolvency system. A healthy system should balance debtors meeting their obligations while also getting relief from unmanageable debt; with creditors receiving fair dividends, and trustees charging reasonable fees and expenses.

But this requires all impacted parties to be actively engaged. As creditors, you play an important counterbalancing role in the insolvency process, through constructive use of your voting rights. Constructive use involves making an informed decision that takes into account whether insolvency is the right option in the circumstances—and whether the proposed details seem reasonable.

2. Ensure oversight of a part of the insolvency process that is hidden from regulators like AFSA

As creditors, you play an important role in making the system fair. You receive correspondence from trustees about fees and procedures, which regulators are not privy to. This places you in the approval process and gives you visibility of potentially unfair or illegal behaviour.

In recent AFSA research, creditors said that while many private trustees are good at their jobs and, for the most part, highly professional, their fees are uniformly—and in some instances— unaccountably high.

As one interviewee put it:

The fees for trustees are outrageous—it’s a combination of busywork and overcharging.

Some also said that estates and projects felt overly handled. They were suspicious about the way in which a large number of trustee staff appeared to ‘touch’ investigations.

Yet smaller creditors (individuals and small businesses) didn’t feel able or confident to challenge the basis on which trustees charge fees. Some didn’t have a standard or benchmark by which to judge or argue whether the trustee fees were warranted. Others felt it wasn’t ‘in their commercial interest.’ If they felt fees were too high, they just abstained from voting.

As creditors, you have an opportunity and a responsibility to improve this situation. Play an active role in the insolvency system:

  • use your creditor vote constructively
  • speak up early and report any concerns to AFSA at the time they arise.

Paul Shaw

Acting Deputy Chief Executive & Chief Operating Officer