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1.1 The purpose of this document is to outline the Inspector-General in Bankruptcy’s regulatory role in regard to the recovery of expenses by a DAA in the course of administering a debt agreement.
The Bankruptcy Act
1.2 The Bankruptcy Act 1966 (the Act) sets out the legislative framework in relation to a DAA’s right to recover expenses in a debt agreement.
1.3 Subsection 185C(2) of the Act states in part:
“A debt agreement proposal must:
(a) identify the debtor's property that is to be dealt with under the agreement; and
(b) specify how the property is to be dealt with; …”
1.4 Section 185LA of the Act states in part:
“The duties of an administrator of a debt agreement include:
(c) dealing with the debtor's property in the manner specified in the debt agreement;
1.5 For a debt agreement proposal (DAP) given to the Official Receiver (OR) on or after 27 June 2019, the following two provisions also apply.
1.6 Subsection 185C(3B) of the Act states:
“A debt agreement proposal may also provide for the proposed administrator to be reimbursed expenses of a kind specified in the proposal that are incurred by the proposed administrator in administering any debt agreement resulting from the acceptance of the proposal”
1.7 Subsection 185LA(2) states:
“An administrator of a debt agreement has a duty not to be reimbursed for expenses the administrator incurred in administering the debt agreement unless those expenses are of a kind specified in the relevant debt agreement proposal as mentioned in subsection 185C(3B)”
1.8 The DAA can only deal with the property of the debtor, that is the payments received (in the vast majority of matters), in the manner prescribed by the agreement. The DAA must not pay any money out of the single account for any other purpose related to the administration of a debt agreement (unless in accordance with the Act, or at the direction of the Court). From 27 June 2019, a DAA who fails to only pay money out of the single account for the administration of the debt agreement, commits an offence of strict liability.
1.9 Any payment of an expense under a debt agreement where the DAP, or variation to the DAP, made no such provision, would be viewed as an unauthorised payment. We would consider this to be a failure by the administrator to comply with their duties.
1.10 The legislative framework is supported by the approved forms relating to debt agreements and clauses 3.36 to 3.37 of the Guidelines Relating to the Registration and Cancellation of Registration of a Debt Agreement Administrator under the Bankruptcy Act 1966 which summarise the duty of an administrator and what administrators’ systems must be capable of doing in relation to expenses.
Definition and types of expenses
2.1 Expenses which may be included in a debt agreement are those incurred directly in the administration of that debt agreement.
2.2 Examples of expenses include dishonour fees incurred as a result of a payment default by the debtor, stop cheque fees incurred when dividend cheques need to be reissued and expenses incurred in certification of a DAP (such as a valuation of an asset and searches to verify the eligibility of the debtor). As noted in paragraph 2.15 below any expenses incurred that a DAA intends paying from debt agreement funds must be clearly listed in the DAP and have creditor approval. If not, the expenses cannot be validly taken.
2.3 It is important to distinguish between the expenses incurred by the administrator in running his or her business and those incurred in relation to a particular debt agreement.
Incurred by the DAA
2.4 An expense which is incurred by a third party such as a broker is not an expense of the debt agreement. If an amount is owed in those circumstances at the time a debt agreement is proposed, then the third party to whom the amount is owed should be listed as an unsecured creditor in the DAP. For a (DAP) given to the OR on or after 27 June 2019, any payments already made, or to be made, from a DAA to a broker in connection with referring a debtor, must be recorded in the certificate a DAA must provide the OR with the DAP under 185C(2D) of the Act.
2.5 To be validly included in the DAP the expense must be incurred by the DAA.
2.6 One of the most common types of expenses incurred in a debt agreement administration is dishonour charges imposed by financial institutions. More often than not, these expenses have been borne by the DAA for a particular debt agreement which had not made provision for these expenses to be reimbursed.
2.7 To facilitate the recovery of dishonour charges from debt agreement funds, the DAP and explanatory statement form includes an automatic provision for the reimbursement of the dishonour fees.
The current version of the DAP includes the phrase:
'Note: dishonour charges incurred in the administration of the agreement with an authorised deposit-taking institution will be recovered from the debtor's payments.'
2.8 The inclusion of this phrase overcomes the difficulty debtors (and DAAs) faced in not being able to estimate dishonour charges at the time of submitting the DAP. It allows DAAs to recover any dishonour fee expenses that have been incurred in relation to a particular debt agreement from that administration’s funds.
2.9 This amendment does not apply to debt agreements which were based on previous versions of the DAP that did not include any provision for such an expense to be reimbursed from the debt agreement funds.
2.10 Where there have been multiple instances of dishonour fees incurred by an administration that will have a material effect on the dividend payable to creditors, it is expected that the administrator will notify creditors of this and the effect on the dividend rate. For guidance on the meaning of 'material effect' in this context please refer to paragraphs 4.1 - 4.3 below.
What is not an expense?
Expenses of running the DAA's business
2.11 Expenses of running the DAA’s business are not expenses of a particular debt agreement and cannot be included in a DAP. These expenses which can only be recovered as a general fixed amount charged across all administrations periodically, is considered to be remuneration. Such costs are unable to be recovered as an out of pocket expense. Examples include overheads such as rent, interest, rates, electricity, depreciation and wages.
2.12 Expenditure which is not traceable to a particular debt agreement is recoverable by the DAA from the administration funds as remuneration. Small amounts of expenditure which are not cost effective to trace to individual administrations should be treated as an overhead cost of running the administrator’s business. Overhead expenses of the administrator's business should not be allocated as expenses of particular debt agreements.
Costs of performing the duties of an administrator
2.13 Expenditure incurred by DAAs in performing their duties is recovered in the form of remuneration which has been approved by creditors. A DAA cannot claim the cost of performing their duties as an expense in a debt agreement. For example, the performance of specific functions such as processing dishonoured transactions or dealing with the assignment of debts are duties of administrators. The costs associated with performing those duties cannot be claimed as expenses.
Payments to a third party for performing the duties of an administrator
2.14 Payments for performing the duties of a DAA or for the expenses of the business made to third parties including related parties or in a non-arm's length transaction by the administrator are not expenses of a debt agreement.
2.15 The inclusion of expense items on the DAP, or subsequent variation, highlights the item to the attention of creditors. The expenses are approved by creditors if the DAP proceeds to an agreement or the variation is accepted. Creditor approval is essential if expenses are to be validly recovered by a DAA in a debt agreement.
3.1 There is provision on the DAP and the proposal for variation form for the inclusion of items and amounts for expenses. There are a number of fields within the online form where details of expenses may be disclosed, such as:
- Bank fees (including dishonour charges on the trust account)
- Expenses for determining asset values
- Expenses for determining the eligibility of the debtor
3.2 An estimate of the total amount of expenses to be incurred prior to commencement of the debt agreement needs to be entered. The online form then converts and prefills the form with the percentage amount.
4.1 If an expense is not included in the DAP and it is material in nature, administrators are encouraged to notify creditors and/or submit a variation for their consideration.
4.2 If the change in the expense amount is not material, then (subject to approval of the initial amount) it does not need further approval before it can be paid from the property of the debtor. If the initial expense has not been approved by creditors then any subsequent question regarding materiality is irrelevant.
4.3 What is material? As a general guide only, it is acceptable to regard an increase of less than 10% of the original expense amount as immaterial. Therefore if the initial approved expense was expected to be $140 then an increase of less than $14 would be immaterial and could be paid, in addition to the original expense amount. If there is an increase of greater than $14 then this is to be regarded as material. Creditor approval must be sought by way of variation before recovering the additional expense.
4.4 As a general guide, any right to reimbursement for out of pocket expenses in a particular administration is limited to actual expenses incurred in respect of that debt agreement and the administrator must be able to show:
(a) how it is directly attributable to the debt agreement;
(b) how it is of the same kind as that specified in the original proposal, and
(c) how the actual expense for a particular matter was calculated.
Debt agreement team (DAT)
5.1 The DAT may conduct compliance checks to ensure that in a sample of cases the expenses detailed on the DAP are specifically attributable to the debt agreement. For example, it is not acceptable for DAAs to state in a free text field on the DAP that:
“A flat fee of $50 per month will be taken in expenses for the life of the debt agreement.”
5.2 If the DAT believes an appropriate process has not been followed, the OR may either reject the proposal for processing or cancel it during voting. Intelligence on such matters is provided to AFSA Regulation and Enforcement (R&E) and feedback given to the DAA.
Regulation and Enforcement (R&E)
5.3 Section 12 of the Act provides staff within R&E (as delegates of the Inspector-General) with the power to conduct investigations. Where there are issues of concern identified either during the compliance program or through a complaint being made, R&E will examine the level and validity of expenses claimed by reference to these stated principles.
5.4 Where breaches of the law, including the Guidelines, or lack of record keeping are identified, a DAA will be asked to take appropriate remedial action including a change in practice. This may also lead to counselling or, in serious or systemic cases, to either litigation or disciplinary action being initiated. This may include conditions being placed on a DAA’s registration.
5.5 During inspections, R&E will examine the systems and controls a DAA has in place in respect to how expenses are recovered. This will include examining documented practices and checklists, and delegations. Where a DAA is relying on others to assist, R&E will examine documented practices about how the DAA supervises and trains employees, agents or brokers to properly perform the necessary duties and obligations on behalf of the DAA.
5.6 This practice direction outlines the principles informing the Inspector-General’s approach to regulating how and when DAAs may legitimately recover expenses in a debt agreement.
5.7 When there are other specific issues where clarification is required, following consultation with DAT, the Inspector-General will continue to develop policy and practice statements to assist practitioners.