1.1 The purpose of this document is to give guidance to registered trustees on their duties in handling funds and keeping records for regulated debtor estates they administer and the expectations of the Inspector-General in Bankruptcy (I-G) regarding best practice principles.
1.2 This practice direction applies to registered trustees and, where applicable, the Official Trustee1.
1.3 The legislative framework for trustees handling funds and keeping records is found in:
- the Insolvency Practice Schedule (Bankruptcy) (‘the Schedule) to the Bankruptcy Act 1966 (‘the Act’)
- the Insolvency Practice Rules (Bankruptcy) 2016 (‘the Rules’)
- Part 3 of Schedule 1 to the Insolvency Law Reform Act 2016 (‘Transition to the Insolvency Practice Schedule (Bankruptcy)’)
1.4 Registered trustees who are also members of the Australian Restructuring Insolvency and Turnaround Association (ARITA) and/or accounting bodies (CPA Australia, Chartered Accountants Australia and New Zealand, Institute of Public Accountants)2 are also subject to codes of professional practice which prescribe standards for keeping records:
- ARITA Code of Professional Practice3
- APES 320 Quality Control for Firms4
- APES 330 Insolvency Services5
1 The funds handling duties for the Official Trustee are covered in Part II, Division 1 of the Bankruptcy Act 1966.
2 Members of these bodies are bound by the code of ethics and standards set by the national Accounting Professional and Ethical Standards Board (APESB).
3 See clause 18.2 ‘Maintenance of Administration files’.
4 See paragraphs 93-105 ‘Engagement Documentation’.
5 See paragraphs 9.1-9.3 of section 9 ‘Documentation and quality control’.
Overview of funds handling and record keeping duties
1.5 Division 65 of the Schedule to the Act and the Rules which commenced on 1 September 2017 outline the funds handling obligations of registered trustees who administer a regulated debtor’s estate. This Division also applies to ongoing administrations (i.e. those started before 1 September 2017 that have not yet ended).
1.6 All money received by registered trustees on behalf of, or in relation to, a regulated debtor’s estate(s) on or after 1 September 20176 must be paid into an administration account within five business days after receipt, unless otherwise directed by the Court. Failure to comply is a strict liability offence with a penalty of 50 penalty units along with an interest penalty of 20% a year for any amount exceeding $50 for which the registered trustee is personally liable.
1.7 An administration account must be held with an authorised deposit-taking institution (ADI) and be interest-bearing.
1.8 If a registered trustee has an account opened before 1 September 2017 that complies with the Act (including regulations) as in force at that time, that account is taken on and after 1 September 2017 to be an administration account7.
1.9 No other money received by registered trustees8 must be paid into the administration account of a regulated debtor’s estate(s), unless otherwise directed by the Court. Failure to comply is a strict liability offence with a penalty of 50 penalty units.
1.10 Registered trustees must not on or after 1 September 20179 pay any money out of the administration account for a regulated debtor’s estate(s) otherwise than for purposes related to the administration of the estate or according to the Act or a direction of the Court. Failure to comply is a strict liability offence with a penalty of 50 penalty units.
6 Despite the repeal of former subsection 169(2) of the Act, it continues to apply to money received before 1 September 2017.
7 For the purposes of section 65-5 of the Schedule to, and subsection 280(5) of the Act.
8 Unrelated to the estate(s) of a regulated debtor.
9 Does not apply to money paid out of the administration account before 1 September 2017. Despite the repeal of former section 171 of the Act, it continues to apply to payments into or made before 1 September 2017.
Reconciliation of administration account
1.11 If registered trustees maintain a single bank account on or after 1 September 201710 for the estates of multiple regulated debtors they must:
- maintain separate records for each of these estates for money received, payments made and the balance of money held in relation to the estate; and
- reconcile the balance relating to each estate held in the account with the corresponding separate record at least once every 25 business days.
1.12 If registered trustees maintain separate bank accounts for each estate of a regulated debtor, the Inspector-General expects them to regularly reconcile the cash book with the bank records for each administration account, according to the amount of activity in the estate.
10 Does not apply to money received or payments made before 1 September 2017.
1.13 Registered trustees must deposit in a bank on or after 1 September 201711 bills of exchange, promissory notes and any other negotiable instrument or security payable to the regulated debtor or trustee as soon as practicable after they are received, unless otherwise directed by the Court. Failure to comply is a strict liability offence with a penalty of 5 penalty units. The bills, notes or other instruments must be delivered out on the signed request of the trustee.
11 Does not apply to negotiable instruments and other securities received before 1 September 2017.
Court directions on handling money and securities
1.14 The Court may give directions regarding the payment, deposit or custody of money and securities that are payable to, or held by, a registered trustee of a regulated debtor’s estate on application by a person with a financial interest in the administration of the estate.
1.15 A person with a financial interest in the administration includes:
- a creditor;
- the regulated debtor;
- the trustee; or
- any other person in prescribed circumstances.
1.16 The Court may give directions authorising a registered trustee of a regulated debtor’s estate to make payments (for a time and on the terms it thinks fit) into and out of a special bank account and for closure of the account (if it thinks it is no longer required).
1.17 Registered trustees must serve a copy of Court directions authorising them to make payments into and out of a special bank account with the bank where it was opened.
Inspector-General review of third-party payments
1.18 Registered trustees may apply to the I-G to review of a bill of costs for services provided by a third party before, on or after 1 September 2017 in relation to the administration of a regulated debtor’s estate. This process is outlined in Inspector-General Practice Statement (IGPS) 16 - Reviewing remuneration of trustees and costs of third party service providers12.
12 Despite their repeal, the former provisions of Act (and regulations) continue to apply to reviews started before 1 September 2017.
Consequences of non-compliance
1.19 Registered trustees who contravene or fail to comply with Division 65 of the Schedule to the Act in relation to a regulated debtor’s estate may:
- be liable to make payment of penalty interest13
- have all/part of their remuneration disallowed14
- be removed from office by the Court15; and/or
- have to pay any expenses due to their default16.
13 Section 65-5 of the Rules.
14 Subsection 90-60(2) of the Rules.
15 Paragraph 65-50(c) of the Schedule to the Act.
16 Paragraph 65-50(d) of the Schedule to the Act.
1.20 Division 70, Subdivision C of the Schedule to the Act which commenced on 1 September 2017 outlines the record keeping obligations of trustees who administer a regulated debtor’s estate. This Division also applies to ongoing administrations (i.e. those started before 1 September 2017 that have not yet ended).
1.21 Trustees of a regulated debtor’s estate must (unless they have a reasonable excuse):
- keep proper books in which entries of minutes of proceedings at meetings and other entries are made as are necessary to give a complete and correct record of the trustee’s administration of the estate17.
- ensure that the books are available at their office for inspection and permit a creditor (or another person acting on the creditor’s behalf) to inspect the books at all reasonable times.
1.22 Trustees of a regulated debtor’s estate operating a business previously carried on by the regulated debtor must:
- keep such books as are usually kept in relation to the carrying on of a business of that kind18; and
- permit a creditor (or another person acting on the creditor’s behalf) to inspect the books at all reasonable times.
1.23 Failure to comply with either of these obligations is a strict liability offence with a penalty of 5 penalty units.
17 Does not apply to events before 1 September 2017 that require entries or minutes to be made. Despite the repeal of former section 173 of the Act, it continues to apply to events before 1 September 2017 that require accounts and records to be kept.
18 Does not apply to events before 1 September 2017 that require entries in books to be made. Despite the repeal of former section 173 of the Act, it continues to apply to events before 1 September 2017 that require accounts and records to be kept.
Audit of administration books
1.24 The I-G may audit (or cause to be audited) the administration books19 or returns or books of a trustee:
- on the I-G’s own initiative
- at the request of the regulated debtor
- at the request of a creditor; or
- if ordered by the Court20.
1.25 If books of an estate are being audited the trustee must give auditor such books, information and assistance as the person reasonably requires (unless they have a reasonable excuse). Failure to comply is a strict liability offence with a penalty of 50 penalty units.
19 Applies to books of an ongoing administration of a regulated debtor’s estate whether or not they are kept under a repealed former provision of the Act or of the Schedule to the Act.
20 The order may be made on application of any person with a financial interest in the administration of the regulated debtor’s estate.
Transfer of administration books
1.26 Where there is a change in trustees of a regulated debtor’s estate on or after 1 September 2017, the former trustee must transfer to the new trustee any administration books which they possess or control21 within 10 business days from the day after the new trustee’s appointment (or other period agreed between them). The former trustee may take a copy of any part of the books before transferring them to the new trustee.
1.27 The new trustee must take possession or accept control of any administration books. After transfer, the new trustee must allow the former trustee to inspect them at any reasonable time and take a copy of any part of the books.
1.28 Intentional or reckless failure by a former trustee to transfer the books or a new trustee to allow the former trustee to inspect the books is an offence with a penalty of 50 penalty units.
1.29 A former trustee is not entitled to claim a lien on the administration books as against the new trustee entitled to them, but such lien is not otherwise affected.
21 Whether physical and/or electronic.
Retention of administration books
1.30 The last trustee to administer a regulated debtor’s estate must (unless they have a reasonable excuse) retain all books for a period of 7 years from the end of the administration that relate to the estate which they possess or control22. Intentional or reckless failure to comply is an offence with a penalty of 50 penalty units.
1.31 Despite this requirement, books given to the trustee by the regulated debtor may be returned to them within the retention period as directed by:
- a committee of inspection (if any); or
- otherwise by creditors’ resolution.
1.32 The trustee may return the books to the regulated debtor, or destroy them at the end of the retention period23.
1.33 If another provision of the Act (or any other law) requires all or part of the administrations books to be kept longer, then the trustee must retain the relevant books for that period24.
1.34 The trustee may at any time return to the regulated debtor (or destroy) any administration books of the estate that have been given to any trustee and that he/she thinks will not help the administration. However, the trustee may not do so if they know (or should reasonably know) that:
- another person had a lien over the books before taking possession of them
- another person has a legal right to possession of the books; or
- they cannot return/destroy them because of another provision of the Act (or any other law).
22 Applies to books for an ongoing administration whether or not they are kept under a repealed provision of the Act or the Schedule to the Act. Despite the repeal of former section 312 of the Act, it continues to apply for an administration of an estate that ended before 1 September 2017 as if the reference to 15 years was to 7 years instead.
23 As above. If a trustee is entitled under former section 312 of the Act to destroy or return books then they may be dealt with in that way, despite the Schedule to the Act.
24 For example laws relating to taxation may prohibit the destruction of some records.
2.1 Trustees should ensure that records kept for a regulated debtor’s estate exhibit a full, correct and informative account of the administration.
2.2 All receipts and payments related to a regulated debtor’s estate should be reflected in the accounts maintained for the administration. Therefore, every transaction in the bank statement for the administration account should also be recorded in the respective ledger/cash book for the estate to which it relates.
2.3 All payments from a regulated debtor’s administration will be verifiable by reference to appropriate supporting vouchers and original documents maintained on the estate file (either physical or electronic). Where trustees use one payment for bulk transactions to a particular entity, the records supporting the bulk transaction should adequately identify the individual estate to which the payment relates including the name of the regulated debtor, the amount attributable to each of them and the date of the payment. This also applies in circumstances where bulk receipts are received.
2.4 All funds received in relation to a regulated debtor’s estate should be deposited into the administration bank account and adequately described to enable identification of the transactions giving rise to the receipt of funds. Trustees should ensure that sufficient information is given to regulated debtors intending to make deposits by internet so that the funds received through online transactions are accurate and easily attributable to a particular estate to minimise the risk of having unidentified deposits.
2.5 In circumstances where a particular receipt has been reversed in the bank statement due to the payment being dishonoured, these transactions, being the deposit and the reversal entry, should also be reflected in the cash book/ledger for the regulated debtor’s estate to accurately reflect the transactions that have taken place.
2.6 Similarly, where a payment has been made and needs to be cancelled if the cheque or funds are returned and a replacement payment needs to be made, the cash book/ledger for the regulated debtor’s estate to which the payment relates should record the cancellation of the payment in question and the processing of the new payment.
2.7 Where an error is found and corrected in a regulated debtor’s estate’s ledger/cash book and/or the administration bank account, the identification of the error should be documented as well as the action taken to correct the error to maintain an audit trail as to how the error has been rectified. The file note recording the identification of the error and the action taken should be made on, or attached to, the document in which the error has been found.
2.8 Journal entries should not be used to correct an error in the ledger/cash book. If an error has been made when recording a receipt or payment in the ledger/cash book, the entry should be reversed and the correct entry made rather than using a journal entry to amend the entry.
2.9 Statements of receipts and payments forwarded to creditors shall accurately and meaningfully reflect the financial transactions of the administration. The statements should also be logical and simple to read by creditors and the regulated debtor to quickly determine the current status of the administration.
2.10 Trustees must make books of a regulated debtor’s estate available for inspection by the I-G25.
25 Paragraph 12(2)(a) of the Act.
2.11 To ensure the effective and efficient administration of a regulated debtor’s estate, trustees should maintain relevant books that provide an orderly trail for reviewing decision making processes, and aid inspection by AFSA Regulation and Enforcement.
2.12 The I-G expects trustees to maintain for each administration of a regulated debtor’s estate:
- separate files (either stored in physical or electronic form)
- a record of every significant step, including conversations
- adequate security26 (to prevent any unauthorised access)
2.13 Trustees will be able to produce all books relating to the administration of an estate in such a manner that the processes (including decisions made, actions taken and accounts maintained) are readily traceable and verifiable.
26 For electronic files, trustees should ensure they have data backup systems, contingency plans and systems to audit changes to records.
Regulation and Enforcement
3.1 Section 12 the Act gives AFSA Regulation and Enforcement27 the power to make inquiries and investigate the conduct of trustees. Where issues of concern are identified, AFSA Regulation and Enforcement will examine the adequacy and extent of accounts and records maintained by reference to this practice direction.
3.2 Where breaches of the law, or lack of adequate record keeping are identified, a trustee 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 disciplinary action being initiated (including conditions being placed on a trustee’s registration) and applications to the Court to enforce the requirements of the Act.
3.3 During annual inspections, AFSA Regulation and Enforcement will examine the systems and controls a trustee has in place in respect to handling funds and keeping records.
3.4 AFSA Regulation and Enforcement will examine the trustee’s documented practices and checklists, delegations and supervision of employees, agents or brokers engaged to assist in performing duties on their behalf.
3.5 All books relating to the administration of a regulated debtors’ estate being inspected should be provided during an inspection by AFSA Regulation and Enforcement, including records stored in physical or electronic format.
27 As delegates of the I-G under subsection 11(4) of the Act.
4.1 This practice direction outlines the I-G’s position on the duties of trustees in handling funds and keeping records for estates of regulated debtors which they administer. AFSA Regulation and Enforcement will assess a trustee’s compliance with these duties in the context of the law, principles and guidance outlined in this practice direction.
4.2 For more information please contact AFSA Regulation and Enforcement at regulation [at] afsa.gov.au or via 1300 364 785.