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 AFSA Regulation and Enforcement, which oversees registered trustees in private practice, AFSA's trustee function (the Official Trustee), registered and unregistered debt agreement administrators and solicitors who act as trustees in personal insolvency agreements. AFSA Regulation and Enforcement acts independently from the Official Trustee and reports directly to the Chief Executive and Inspector- General in Bankruptcy.
1.2 One strategy employed by AFSA Regulation and Enforcement as delegate of the Inspector-General is to monitor the standard of bankruptcy trustees and debt agreement administrators and their administrations through an annual inspection programme. This may include for example:
- an annual inspection of administrations, systems and practices
- attending some meetings of creditors
- reviewing the quality of trustee decisions
- targeted or strategic investigation
- 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 annual programme of inspection of administrations, systems and practices and attending meetings of creditors.
2.1 The purpose of AFSA Regulation and Enforcement's annual inspection programme 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 pro-active 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 programme is that, while an inspection of a sample of administrations cannot be expected to identify all instances of defalcation, it is a valid preventative control to minimise the risk of fraud.
2.4 Accordingly, AFSA Regulation and Enforcement has built into in its inspection programme tests of the systems and controls of trustees. The following aspects of AFSA Regulation and Enforcement's annual inspection programme should be noted:
- the AFSA Regulation and Enforcement file sample is computer-generated and, whilst targeted to higher risk estates, includes a sizable computer based random sample. As a consequence any file, including one inspected in previous periods, could be 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
- AFSA Regulation and Enforcement 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 AFSA Regulation and Enforcement 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 AFSA Regulation and Enforcement programme.
Arranging the inspection
2.6 AFSA Regulation and Enforcement 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 either a summary of their systems and controls or an update of changes since the date of last inspection.
2.7 As a control to minimise the incidence and risk of fraud, AFSA Regulation and Enforcement's policy regarding the timing of notice provided to trustees and debt agreement administrators is to provide details of the specific files to be inspected 24 hours before the commencement of the inspection. If AFSA Regulation and Enforcement identifies 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 Regulation previously identified fraud where the provision of a longer preparation time frame adopted 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 chair and to ensure some privacy with access to a power point.
Determining the sample and scope of the inspection
2.10 In determining the size of the sample of files to inspect, AFSA Regulation and Enforcement will undertake a risk assessment of the practice. Practitioners are rated in accordance with the quality of their systems and controls and the prior quality of practices and procedures.
2.11 An evaluation is undertaken of a practitioner’s systems and controls in the first year of inspection and details are maintained on the AFSA Regulation and Enforcement practitioner file. During the second and third years of inspection the evaluation is updated. During the fourth year of inspection a complete reevaluation will be undertaken to ensure any significant changes have been documented and included in the assessment.
2.12 Key elements of the practitioner’s risk assessment that will be used to determine the size and scope of the sample include:
- the structure of firm
- the qualifications and experience of support staff
- an assessment of systems and controls
- their history of justified complaints
- their prior inspection results
- the quality of prior decisions subject to Inspector-General review (for trustees only).
2.13 The rating defines the minimum number of administrations to be sampled and will also be used to identify issues or the attributes AFSA Regulation and Enforcement wishes to more closely examine.
2.14 The second element of the sampling is the computerised selection of the files to inspect. AFSA Regulation and Enforcement's 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.
2.15 While the Part IX sample is largely random in nature, some attributes may be examined. For example, AFSA Regulation and Enforcement will include in its inspection sample administrations where:
- the debt agreement proposal (DAP) has been rejected or cancelled by AFSA’s Debt Agreement team (DAt)
- practice queries were raised on processing of the DAP by the DAt
- variations and terminations have occurred
- the fees charged are outside the normal range.
2.16 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
2.17 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 AFSA Regulation and Enforcement inspector, particularly if there is an area where the practitioner seeks additional feedback. The practitioner’s response to 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.
2.18 It is preferable that queries 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 AFSA Regulation and Enforcement, including who AFSA Regulation and Enforcement inspectors should contact for clarification of issues during the interview. If the practitioner feels that this may be too disruptive, arrangements can be made to collate queries for discussion at the exit
interview for responses either at that time or later.
2.19 AFSA Regulation and Enforcement 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 regional AFSA Regulation and Enforcement Director or the Regulation and Enforcement National Manager.
2.20 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 systematic problem or identifies a weakness in supervision or training.
2.21 AFSA Regulation and Enforcement will inspect each estate or administration for compliance. It will then compile and analyse the results to assess whether there are systemic issues or control weaknesses.
2.22 The inspection at the practitioner’s office will be completed by way of exit interview. Feedback will be given about the quality of the administrations inspected. Any preliminary errors and observations noted and discussed throughout the inspection will be raised at the exit interview and the practitioner will be given the opportunity to comment. AFSA Regulation and Enforcement 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.
2.23 Records are made and retained of discussions and comments made both at the entrance and exit interviews.
Reporting of non-compliance
2.24 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 based both on the level of seriousness (the category) and their descriptive nature.
2.25 If any breach or non-compliance with the law is identified, AFSA Regulation and will Enforcement consider:
a. the nature of the breach
b. the seriousness of the effect of a failure to comply, including the impact on a particular estate or individual
c. whether the practitioner has previously failed to comply and the practitioner’s performance history.
2.26 The majority of practitioners are willing to comply and view the inspection programme 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 their behaviour/conduct brings the integrity of the profession in disrepute will be subject to disciplinary action.
2.27 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 sections 155H, 186K or 186L or at least have their registration suspended or conditions placed on it. In the case of a solicitor controlling trustee or unregistered debt agreement administrator 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 repeat errors are made in the same area.
These are one-off practice or procedural errors and non-compliance errors that are not systemic and 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
2.28 After attending the offices of the practitioner, AFSA Regulation 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. AFSA Regulation and Enforcement may also sample and seek verification from debtors as to the amount paid.
2.29 Once information is complete the practitioner will be provided with a draft inspection report seeking comments about any issues raised. The report will outline the overall results of the inspection, any provisional errors or systemic issues as discussed at the exit interview, any observations of significance discussed at 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 AFSA Regulation and Enforcement Director responsible.
2.30 The practitioner’s response is generally expected within 14 days. The inspection is completed once the practitioner either responds to the inspection report or elects to not respond.
2.31 The practitioner’s risk assessment rating is then updated for future inspections and AFSA Regulation and Enforcement will monitor any specific administrations requiring remedial action.
2.32 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 of where AFSA Regulation and Enforcement is able to provide specific details to others include:
- where the information has been obtained for a specific purpose and allowed for under Bankruptcy legislation (an example of this would be provision of information to Parliament)
- 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
2.33 There is a range of strategies available to AFSA Regulation and Enforcement should it determine that a breach of legislation or duty or other non-compliance has occurred (see IGPS1 Regulatory Framework). These relate to all practitioners and include:
i. guidance—making practitioners aware of systemic problem areas and the correct practice or law individually and collectively
ii. individual feedback—by far the most effective means to achieve timely remedial action
iii. counselling of the practitioner
iv. changing in the risk classification of a practitioner. This will lead to a larger sample of files being selected for future annual inspections
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 administrators and solicitors who act as controlling trustees). See also IGPS8 and IGPS9 dealing with involuntary cancellation of registration.
3.1 AFSA Regulation and Enforcement, as delegate 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 its inspection programme, irrespective of whether there are matters warranting attendance by AFSA Regulation and Enforcement.
3.2 Attendance at a sample of meetings provides AFSA Regulation and Enforcement 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 perceptions.
3.3 In addition, AFSA Regulation and Enforcement examines both section 189A and subsection 73(2) reports and, if it has any queries or concerns, 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 AFSA Regulation and Enforcement's normal inspection programme involving trustees are conducting meetings it will endeavour to attend no fewer than one meeting for every trustee each year.
3.5 The issues and performance of trustees in Part X matters generally is analysed by the Inspector-General and reported to Parliament annually.
3.6 The following information documents the criteria that AFSA Regulation and Enforcement is to utilise in determining which creditors’ meetings are attended and the protocols and processes to be used.
3.7 The term 'trustee' is utilised in this Practice Statement to represent registered trustees, the Official Trustee and solicitor controlling trustees.
The legislative framework
3.8 Subsection 12(4) of the Act provides authority for the Inspector-General to attend and participate in meetings of creditors. This subsection states:
(a) is entitled to attend any meeting of creditors held under this Act; and
(b) subject to section 64ZA, is entitled to participate in any such meeting as the Inspector-General thinks fit.”
Criteria for attending
3.9 AFSA Regulation and Enforcement may attend where there appears to be an inherent risk to the credibility of the personal insolvency system posed by the administration in 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
ii. AFSA Regulation and Enforcement has concerns as to the validity of a creditor’s claim and the creditor can affect the outcome of the meeting.
3.10 Meetings may also be attended when:
i. the trustee has a history of poor-quality reports and meeting practices or is inexperienced in chairing meetings
ii. the trustee is inexperienced and has not conducted a creditors’ meeting in the last 12 months
iii. the debtor’s statement of affairs 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
- that they controls 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.
3.11 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.
3.12 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. AFSA Regulation and Enforcement has reason to suspect that full and true disclosure of information was not made.
In regions 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 circumstance,s AFSA Regulation and Enforcement will exercise judgement as to which meetings are attended.
Prior to the meeting
3.13 Attendance is likely to be in person but may at times occur through teleconference if those facilities are available.
3.14 AFSA Regulation and Enforcement 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.
3.15 AFSA Regulation and Enforcement 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. AFSA Regulation and Enforcement 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
3.16 Usually two AFSA Regulation and Enforcement representatives will attend the meeting although each case will be treated on its merits.
3.17 Should matters not be addressed to AFSA Regulation and Enforcement's satisfaction, the AFSA Regulation inspectors may intervene in meetings, raise issues and seek clarification from the debtor, creditors or the trustee.
3.18 Confrontational and/or adversarial behaviour by parties at the meeting will not result in any reaction from AFSA Regulation and Enforcement at the time of the meeting. However, where appropriate, feedback will be provided at a later opportunity.
3.19 If questions are to be asked at the meeting by AFSA Regulation and Enforcement, 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 AFSA Regulation and Enforcement intervention. This would be the case with non-compliance with the law where immediate remedial action is necessary by the trustee.
3.20 A record will be made of those cases where the trustee or their staff has attempted to hinder AFSA Regulation and Enforcement's proper involvement at the meeting. Consideration will be given after the meeting as to whether further action is warranted.
3.21 As part of AFSA Regulation and Enforcement's educative role, where appropriate feedback will be provided to the trustee on the quality of the meeting processes.
3.22 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 annual inspection and meeting attendance strategies used by AFSA Regulation and Enforcement to monitor the quality of registered practitioners operating 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.