Section 77A and associated entities

AFSA receives a significant number of offence referrals relating to non-compliance of trustee notices issued under the provisions of section 77A of the Bankruptcy Act 1966 (77A notice). Non-compliance of a 77A notice is a complex area where we need to establish that a respondent of the notice is in possession of the books of the associated entity.  

Associated Entities

Associated entities are a common factor in the ongoing administration of any bankrupt estate. Associated entity, in relation to a person, is defined in the Act as

  1. an entity (other than a company) that is, or has been, associated with the person; or
  2. a company that is, or has been, associated with the person at a time when the company is, or was, as the case may be, a private company)

These definitions relate to past and present associations.   

The investigative powers conferred on trustees under the Act extend to associated entities of the bankrupt individual. Section 77A(2) allows a trustee access to books or specified classes of books of an associated entity of the bankrupt individual which are held by the receiver of the 77A notice and relevant to the trustee’s investigation.

Example 1: The extending line of associations

Recently, the provisions of 5C(2) had come into question in terms of the line of association. 

In this example, a bankrupt individual transferred their property to their defacto spouse. The defacto spouse subsequently sold that property to a third party. A trustee then issued a 77A notice to the legal representative of the third party, seeking books associated with the purchase of that property. There was no known or identifiable association between the third party and the bankrupt individual. There was also no identifiable association between the third party legal representative and the bankrupt individual. 

The third-party legal representative failed to comply with the provisions of the 77A notice.

The wording of the associated entity provisions suggest that it extends to the person who acquired or disposed of property because of dealing with the bankrupt individual. The most obvious and clearest interpretation is that this would be the person who acquired the property directly from the individual (i.e. the defacto spouse). Therefore, the associated entities are clearly only those that have some form of direct dealing with the bankrupt individual. In the above example, the 77A notice could not be enforced as there was no association between the bankrupt individual and the legal representative of the third party.  

This example would also extend to situations that involve companies, partnerships and trusts. 

Example 2: Associated entities, their agents or representatives

In another recent example, a trustee issued a 77A notice on a law firm acting for an associated company.

In this example, the bankrupt individual was the former director for a series of companies. Property was transferred between the associated companies that was relevant to the trustee’s investigations. A 77A notice was issued to the law firm acting for those companies, seeking books of the companies and books of the law firm. The law firm was a partnership and not a company, and did not comply with the provisions of the 77A notice.

There was a clear association between the bankrupt individual and the series of companies, however there was no identifiable association between the bankrupt individual and the law firm (specifically S5D). The 77A notice sought books of the companies, as well as books of the law firm in the single notice. It could not be adequately determined if the law firm held the books of the company and, as there was no association between the bankrupt individual and the law firm, the books of the law firm could not be requested under the notice provisions. Therefore, the 77A notice could not be enforced for non-compliance.  

It was recommended that the trustee reissue 77A notices to each specific company seeking the required books, which may, on response from the companies, confirm that those books are in the possession of the law firm. Once that occurred, a new 77A notice could be issued to the law firm to obtain the books of the associated entity.

Example 3: A third party has the required books

In another example of the complexity of associated entities and 77A notice requirements, a trustee had correctly issued a 77A notice to an associated company for that company’s financial records. The proper officer of the company informed the trustee that the books were held by their accountant and not in the actual possession of the company (77A(3)(b)). 

The trustee subsequently asked the accountant for the required books of the associated company. The accountant acknowledged that the proper officer had sent them a copy of the 77A notice and confirmed with the trustee that they had possession of the associated company books. The accountant did not comply with the 77A notice. 

77A(2) provides the power for the Trustee to obtain books in the possession of the person of whom the requirement is made. If the evidence demonstrates that the respondent to the 77A notice does not have possession of the books and they provide where the books were last or can be located, then the respondent has complied with the notice. In this example, the notice could not be enforced against the associated entity for not providing the books.  

The accountant had confirmed possession of books belonging to an associated entity of the bankrupt individual. However, the offence referral related to the non-compliance of the company because the accountant would not provide the books. The 77A notice was issued against the associated entity and not the accountant, therefore despite acknowledging the receipt of the 77A notice as given to them by the proper officer of the company, and confirming they had the required books, non-compliance of the 77A notice could not be enforced against the accountant.

In this example, the recommendation was that the trustee issue a new 77A notice to the accountant in the knowledge that the accountant had possession of the required books of the associated entity. 

Where there is no association – section 77C is the solution

There is no doubt that books of and/or held by third parties may be relevant to a trustee’s investigation into the administration of a bankrupt estate. In the first two examples, the most appropriate way the trustee could obtain the required books is through a section 77C notice issued by the Official Receiver under the provisions of 77C(1)(c) to ‘produce all books in the person’s possession relating to any matters connected with the performance of the functions….of a trustee under this Act.’

This is a commercial decision for the trustee in the administration of the bankrupt estate. 

77A Offence referrals – recommendations

It is important that all trustees ensure that they have a clear understanding of the associated entity provisions and the application this has on the enforceability of any 77A notice. AFSA will continue to assess all offence referrals related to non-compliance with 77A notices. Importantly, where there is no confirmed association in accordance with the associated entity provisions of the Bankruptcy Act 1966, or the provisions of section 77A(2) cannot be substantiated, then these offence referrals will be rejected as being unenforceable with recommendations to review the notice provisions or to seek a section 77C notice.   

Key tips:

  1. Understand who associated entities are and be sure of the link between the respondent and the bankrupt individual
  2. Seek only books from the associated entity in accordance with section 77A(2)
  3. Where it is evident that an associated entity’s books are located elsewhere, issue a new 77A notice to the respondent in possession of those required books
  4. Where there is no association, a section 77C notice can be used.  

For more information, please email enforcement [at] afsa.gov.au