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1.1 The regulatory responsibilities of the Inspector-General in Bankruptcy are aimed at ensuring high national standards of bankruptcy practice and procedure. These functions are undertaken by the AFSA Regulation and Enforcement division (R&E), which oversees registered trustees in private practice, AFSA's trustee function (the Official Trustee), registered debt agreement administrators and solicitors who act as trustees in personal insolvency agreements. R&E acts independently from the Official Trustee and reports directly to the Chief Executive and Inspector-General in Bankruptcy.
1.2 One strategy employed by R&E staff, as delegates of the Inspector-General, is to monitor the standard of bankruptcy trustees and debt agreement administrators and their administrations through an annual compliance program. This may include for example:
- an inspection of administrations, systems and practices
- attending some meetings of creditors
- reviewing the quality of trustee decisions
- targeted or strategic compliance monitoring
- reviewing the complaints made against the practitioner in the period
- surveying debtors and creditors.
1.3 This practice statement articulates the Inspector-General’s practices and expectations when monitoring practitioners through the program of inspection of administrations, systems and practices and attending meetings of creditors.
2.1 The purpose of R&E’s inspection program is to examine the quality of administration by practitioners with particular emphasis on:
- compliance with legislation and common law requirements
- proper performance of statutory and fiduciary duties and functions in accordance with legislation and standards
- financial records, billing and money handling practices
- control and system weaknesses and other areas of risk.
2.2 This is a proactive process aimed at providing constructive feedback to practitioners to improve compliance and practice. However, it should be recognised that on occasion issues may be identified that warrant further investigation and the adoption of more reactive strategies, including disciplinary proceedings, to obtain compliance and remedial action.
Fraud control issues
2.3 An important benefit of this program is that, while an inspection of a sample of administrations cannot be expected to identify all compliance issues, it is a valid preventative control to minimise the risk of fraud.
2.4 Accordingly, we have built into our inspection program tests of the systems and controls of practitioners. The following aspects of the inspection program should be noted:
- the file sample is selected on the basis of risk and the spread of types of estates. At least one file is randomly selected.
- the random sample can include estates where no assets were shown as realised and no funds recorded and could therefore include estates where there may have been deliberate omissions
- estates with assets, contributions or dividends are closely examined and the transactions followed through the course of the administration to final payments/dividend. This may well include tracing a series of cheques to the accounts to which they are presented
- on a sample basis, contributions may be reconciled with the bankrupt’s payment records
- we may contact both creditors and debtors on a sample basis (and in some cases may contact banking institutions) to verify transactions and that claims are properly recorded and authentic
- practitioners will be required to reconstruct any files unable to be located and we will treat the inability to do so within a reasonable time frame as a serious breach of duty.
2.5 As an added deterrent to possible employee fraud it is the Inspector-General’s expectation that practitioners will inform their employees of these aspects of the inspection program.
Arranging the inspection
2.6 R&E aims to provide practitioners with at least seven days’ notice of the date of its attendance for inspection. A mutually convenient date and time to inspect will be coordinated with the practitioner. At this time the practitioner will be requested to complete and provide documents evidencing their systems and controls or an update of changes since the last inspection.
2.7 As a control to minimise the incidence and risk of fraud, our policy regarding the timing of notice provided to practitioners is to provide details of the specific files to be inspected 24 hours before the commencement of the inspection. If we identify older files that may be archived, 48 hours’ notice will be provided to allow for file retrieval.
2.8 This practice is used with all practitioners including the Official Trustee. AFSA has previously identified fraud where the provision of a longer notice period provided a trustee’s employee the time to remove, alter and forge records prior to the inspection.
2.9 AFSA is required to comply with workplace health and safety legislation in providing its employees with a healthy and safe work environment. With this in mind and to ensure both privacy and efficiency in undertaking inspections, practitioners are requested to provide either an office with a workstation and office chair or a workstation and office chair with access to a power point and some level of privacy.
Determining the scope of the inspection
2.10 R&E generally use a standard number of files to inspect to ensure a minimum number of files are included in the sample size.
2.11 An evaluation is undertaken of a practitioner’s systems and controls during the first inspection or after obtaining this information from the practitioner via a questionnaire, and details are maintained as part of the practitioner risk profile. This is updated as new data is made available and specifically after each inspection. This data will form part of information used to select the areas to examine during an inspection.
2.12 The second element of the sampling is the targeted selection of the files to inspect. Our methodology is based on a number of risk attributes. For example, attributes in a Part X personal insolvency agreement or a Part IV bankruptcy might include:
- estates where the extent of assets realised is greater than a certain amount
- estates where the percentage of remuneration is greater than a certain amount
- estates where dividends have been paid
- estates with high amounts of liabilities
- Part Xs with a low percentage dividend.
2.13 While the Part IX sample is largely random in nature, some attributes may be examined. For example, administrations may be selected where:
- the debt agreement proposal (DAP) has been rejected or cancelled by AFSA’s Debt Agreement team (DAT)
- variations and terminations in the first 6-12 months have occurred
- the fees charged are outside the normal range.
2.14 It should be noted that in every inspection there will also be some files which will be randomly chosen. These may display no identifiable attributes and may include estates previously examined.
Undertaking the inspection
2.15 The inspection commences with an entrance interview with the registered practitioner. This interview is an opportunity for the practitioner to discuss matters or technical areas of interest with the R&E inspector, particularly if there is an area where the practitioner seeks additional feedback. The practitioner’s response and documents provided from the systems and controls questionnaire will also be discussed at the entrance interview. It is therefore important that the practitioner is present at this interview.
2.16 It is preferable that queries identified during the inspection be informally discussed and, where possible, clarified with the practitioners or their nominee during the inspection. To minimise any disruption to workflow, the practitioner should outline the protocols they require of our staff, including who inspectors should contact for clarification of issues during the inspection. If the practitioner feels that this may be too disruptive, arrangements can be made to collate queries for discussion at the exit interview or for response at a later time. .
2.17 Our inspectors are required to maintain a professional, independent and courteous approach. If during the inspection a practitioner is concerned as to the conduct of the officer or the inspection process they should raise these concerns directly either with the local AFSA Regulation Director or the Regulation and Enforcement National Manager.
2.18 If a possible error is found (see the 'Reporting of non-compliance' section below) further testing may be carried out to determine whether the error is a one off occurrence, a systemic problem or if it identifies a weakness in supervision or training.
2.19 We will inspect each selected estate or administration for compliance. We will then analyse and compile the results to assess whether there are systemic issues or control weaknesses.
2.20 The inspection will be completed by way of exit interview. Feedback will be given about the quality of the administrations inspected. Any preliminary errors and/or observations noted and discussed throughout the inspection will be raised at the exit interview and the practitioner will be given the opportunity to comment. We will also provide comments about any issues identified by the practitioner at the entrance interview plus any issues of best practice where greater efficiencies could be achieved.
2.21 Records are made and retained of discussions and comments made both at the entrance and exit interviews.
Reporting of non-compliance
2.22 In providing feedback and to make overall conclusions as to the standard of practice, any identified areas of non-compliance—referred to as errors—are compiled and reported. Errors are classified by the level of seriousness (the category) and by a descriptor e.g. conflict of interest.
2.23 If any breach or non-compliance with the law is identified, we will consider when determining the category of error
a. the nature and circumstances of the breach
b. the seriousness of the effect of a failure to comply, including the impact on a particular estate or individual
c. the relevant prior conduct of the practitioner.
2.24 The majority of practitioners are willing to comply and view the inspection program as an opportunity to obtain feedback about the quality of their administrations. However, there is an expectation that practitioners who regularly fail to comply with the Bankruptcy Act and Regulations without a reasonable explanation, who regularly diverge from acceptable practice or whose behaviour/conduct brings the integrity of the profession into disrepute, will be subject to disciplinary action.
2.25 To assist in assessing the seriousness and relevant regulatory response and to alert practitioners of the issues and possible repercussions, non-compliances are classified as either Category A, B or C depending on the level of seriousness.
These are very serious errors or breaches requiring immediate attention and include fundamental breaches and lack of controls that are likely to bring into question the integrity of the system. These include any repeat occurrences of serious breaches identified in previous inspections as category B errors. These matters will generally give rise to legal action, referral to fraud investigators, consideration as to whether the practitioner should have their registration cancelled under Division 40 of the Insolvency Practice Schedule to the Act (the Schedule), 186K or 186L of the Act or at least have their registration suspended or conditions placed on it. In the case of a solicitor controlling trustee or unregistered debt agreement administrator1 this would result in action which could result in them being declared ineligible to act.
These are serious or systemic errors that will have a material impact on the administration and require timely remedial action. The practitioner should be counselled and timely remedial action taken. These include where in prior inspections breaches were identified and either not remedied or repeated errors are made in the same area.
These are one-off practice or procedural errors and non-compliance errors that are not systemic or don’t have a significant impact on the administration, dividends, creditors, debtors’ rights or system integrity but should be brought to the attention of the practitioner and monitored.
Finalising the inspection
2.26 After undertaking the inspection (either on site or remotely), inspectors may write to a sample of creditors in administrations identified during the inspection where the practitioner’s records show a dividend has been paid to creditors. This verification is to ensure that the creditors are bona fide and that they received and banked dividend cheques or payments. Inspectors may also sample and seek verification from debtors as to the amount paid.
2.27 Once our analysis and review is complete the practitioner will be provided with an initial inspection report seeking comments about any identified issues. The report will outline the overall results of the inspection, any provisional errors or systemic issues or observations of significance as discussed either at or after the exit interview, and any remedial action that may be required. In cases where serious or systemic issues appear to have been identified, the report will be reviewed and issued by the responsible Director.
2.28 The practitioner’s response is generally expected within 14 days. The inspection report is finalised once the practitioner either responds to the inspection report or elects to not respond. The response will be taken into account in determining the final errors or observations to be made in the final report. This report is then issued to the practitioner to finalise the inspection. This report may require certain remedial action to be undertaken.
2.29 The practitioner’s risk profile is then updated and R&E will monitor any specific administrations requiring remedial action.
2.30 The Inspector-General is bound by the Privacy Act 1988 and will maintain the confidentiality of individual inspection results unless Privacy Act exceptions apply. Exceptions allowed for under privacy legislation or where AFSA Regulation and Enforcement is able to provide specific details to others include:
- where there has been consent by the practitioner
- information required by a law enforcement agency
- where the information has become public knowledge, for example through publishing of a court or Administrative Appeals Tribunal judgment.
Possible actions when breaches are identified
2.31 There is a range of strategies available to R&E if a breach of legislation or duty or other non-compliance has occurred (see IGPS1 Regulatory Framework). These strategies relate to all practitioners and include:
i. guidance—making practitioners aware of systemic problem areas and the correct practice that is expected under law – either individually or to all
ii. individual feedback—by far the most effective means to achieve timely remedial action
iii. counselling of the practitioner
iv. changing in the risk profile of a practitioner
v. formal investigation and reporting under section 12, for example to creditors, police or professional bodies such as ARITA, CAANZ, CPA or Law Council
vi. special audit of accounts
vii. imposing penalties for realisations and interest charge breaches
ix. involuntary cancellation or registration proceedings (or illegibility proceedings in the case of unregistered debt agreement administrators2 and solicitors who act as controlling trustees). See also IGPS8 and IGPS9 dealing with involuntary cancellation of registration.
3.1 R&E staff, as delegates of the Inspector-General, attend a sample of meetings of creditors in both Part X matters and section 73 proposals for all trustees involved as part of the compliance program, irrespective of whether there are matters warranting our attendance.
3.2 Attendance at a sample of meetings provides R&E with an opportunity to monitor and report on the standard of controlling trustees in Part X administrations and trustee meeting practices generally. It also provides an effective and efficient method of monitoring debtors’ Part X proposals and addressing creditor queries and concerns.
3.3 In addition, we examine reports sent to creditors under section 189A and rule 75-175 of the Insolvency Practice Rules (Bankruptcy). If any queries or concerns are identified, we will discuss matters with the trustee and may attend the meeting, taking an active role if needed. Often issues are clarified or problem areas rectified before creditors are asked to vote at the meeting.
3.4 Irrespective of whether a criterion detailed below is evident or not, as part of our normal compliance program involving trustees who are conducting meetings, we will endeavour to attend no fewer than one meeting for every trustee each year.
3.5 The following information documents the criteria that we use in determining which creditors’ meetings are attended and the protocols and processes to be used.
3.6 The term 'trustee' is utilised in this Practice Statement to represent registered trustees, the Official Trustee and solicitor controlling trustees.
The legislative framework
3.7 Section 75-30 of the Schedule provides authority for the Inspector-General to attend and participate in meetings of creditors. This section states:
“(1) The Inspector-General is entitled to attend any meeting of creditors held under this Act
(2) Subject to any provision of this Act (including any provision in relation to voting),the Inspector-General is entitled to participate in any meeting of creditors held under this Act.”
Criteria for attending
3.8 R&E may attend meetings where there appears to be an inherent risk to the credibility of the personal insolvency system posed by the administration for which the meeting is being held. This would be the case where:
i. it is suspected that creditors have not been properly informed, either because the debtor has not provided complete or accurate information or the trustee’s report is deficient
ii. the debtor is high profile with sizeable debts and there is public interest in the matter
ii. R&E has concerns as to the validity of a creditor’s claim and the creditor can affect the outcome of the meeting.
3.9 Meetings may also be attended when:
i. the trustee has a history of poor-quality reports and meeting practices
ii. the trustee is inexperience or does not regularly conduct creditors’ meetings
iii. the debtor’s statement of affairs3 or information from some other source indicates:
- the debtor may have been involved in a high income occupation such as doctor or barrister, but displays little in the way of assets or income, and the offer to creditors is relatively small
- antecedent transactions
- the debtor may have recently possessed substantial income, assets or they control trusts or private companies.
AND the s189A report contains no or inadequate discussion of those issues
AND the trustee has been requested to provide further advice but a satisfactory response has not been provided.
3.10 Meetings may also be attended when:
i. a creditor lodges a complaint prior to the meeting
ii. there are related-party creditors whose vote can affect the outcome or there is a high number of creditors who may vote but don’t wish to participate in a dividend, particularly where there is a substantial creditor likely to be affected.
3.11 Meetings may also be attended when:
i. the debtor has been bankrupt or entered into a Part IX or Part X twice or more in the 10 years preceding the current section 188 authority
ii. the debtor’s creditors exceed $1million and their proposal would provide an insignificant return
iii. R&E has reason to suspect that full and true disclosure of information was not made.
In locations where a large number of meetings are held per annum it may not be possible to attend all meetings exhibiting one or more of the above criteria. In these circumstances we will exercise judgement as to which meetings are attended.
Prior to the meeting
3.12 R&E staff will inform the controlling trustee or trustee of the meetings it will be attending prior to these meetings. Where possible at least 24 hours’ notice will be given.
3.13 We will consider whether the issues identified warrant attendance at the meeting or can be resolved through prior discussion (either by telephone, email or direct meeting) and action. We will consult with the trustee and raise queries and concerns privately prior to the meeting if possible. Every attempt will be made to resolve these issues prior to the meeting. Intervention may lead to a supplementary report or clarification of contentious issues at meeting.
At the meeting
3.14 Usually two R&E representatives will attend the meeting although each case will be treated on its merits.
3.15 Attendance is likely to be in person but may at times occur through teleconference if those facilities are available.
3.16 Should matters not be addressed to our satisfaction, the inspectors may intervene in meetings, raise issues and seek clarification from the debtor, creditors or the trustee.
3.17 Confrontational and/or adversarial behaviour by parties at the meeting will not result in any reaction from our staff at the time of the meeting. However, where appropriate, feedback will be provided at a later opportunity.
3.18 If questions are to be asked at the meeting by our staff, every effort will be made to provide a list of those questions to the trustee prior to the meeting. The aim is not to 'ambush' the trustee at the meeting although issues may arise or events occur at the meeting that require immediate intervention. This would be the case with non-compliance with the law where immediate remedial action is necessary by the trustee.
3.19 A record will be made of those cases where the trustee or their staff has attempted to hinder our proper involvement at the meeting. Consideration will be given after the meeting as to whether further action is warranted.
3.20 As part R&E’s educative role, where appropriate feedback will be provided to the trustee on the quality of the meeting processes.
3.21 Any specific patterns of inappropriate meeting processes will be recorded and any requirement for remedial action communicated to the trustee.
4.1 To contribute to the transparency of decision-making in the Australian Public Service, this Practice Statement has outlined the proactive compliance and inspection strategies used by AFSA Regulation and Enforcement to monitor the quality of administrations under the Bankruptcy Act. It has set out what AFSA undertakes to do, the basis of related decisions and what AFSA expects of practitioners in these areas.
1 Only applicable until 27 September 2019 – all administrators will require registration from that date
2 Unregistered debt agreement administrators will require registration from 27 September 2019
3 From 1 January 2020, the debtor’s petition and statement of affairs were combined into the Bankruptcy Form. The Bankruptcy Form is also used by a person made bankrupt via sequestration order, in place of the former statement of affairs. References in this guidance document to a statement of affairs can be taken to also refer to the Bankruptcy Form.