1.1 The purpose of this practice statement is to explain the approach taken by the Inspector-General in Bankruptcy when dealing with a registered trustee’s request for approval of remuneration pursuant to subsection 162(4) of the Bankruptcy Act 1966 (the Act).
1.2 A basic principle of the personal insolvency regime is that creditors (as the ordinary cost bearers) should have primary control over remuneration in the administration of the personal insolvency estate. However, there are circumstances where it may not be practical or cost-effective for the trustee to seek creditors’ approval of remuneration and there may be cases in which the trustee and creditors disagree about the amount of remuneration sought. There may be other cases where none of the creditors vote in respect to a trustee’s proposal for remuneration. In all of these circumstances rather than having an impasse delaying the administration, trustees can apply to the Inspector-General to decide their remuneration.
1.3 If the trustee wishes to draw remuneration in excess of the statutory minimum of $5,000, the trustee must have the full amount of the proposed remuneration fixed by creditors or the committee of inspection pursuant to subsection 162(1) or approved by the Inspector-General pursuant to the subsection 162(4A) of the Act. The statutory amount is not subject to indexation and is effectively exclusive of GST. Pursuant to subsection 161B(1A) the statutory minimum amount is increased by 8.4% if the trustee’s remuneration is consideration for a taxable supply (this will usually be the case).
1.4 This process only applies to bankruptcies, compositions and schemes of arrangement that commence, or section 188 authorities and personal insolvency agreements that are executed on or after the commencement date for Schedule 1 of the Bankruptcy Legislation Amendment Act 2010, namely 1 December 2010. This includes personal insolvency agreements that are executed on or after 1 December 2010 where the section 188 authority was signed prior to that date.
1.5 This practice statement does not relate to the Official Trustee’s remuneration. The Official Trustee is remunerated as determined by the Minister by legislative instrument and does not require approval by creditors.
2.1 In order for the Inspector-General to consider an application by a registered/controlling trustee under subsection 162(4), the trustee will need to satisfy the Inspector-General that one or more of the circumstances set out in Regulation 8.09 exist. In order to do so, the trustee will need to provide supporting evidence as appropriate. This regulation states:
'Circumstances to be shown by trustee – Regulation 8.09
- creditors or the committee of inspection reject a resolution relating to remuneration put forward by the trustee at a meeting of creditors (refer section 64U);
- creditors or the committee of inspection reject a proposal relating to remuneration put to creditors under section 64ZBA;
- creditors fail to vote on a resolution or proposal relating to remuneration put forward by the trustee (for example, because there is no quorum at a creditors’ meeting, or there is no response to a proposal put forward under section 64ZBA);
- it is not cost-effective to seek creditor approval (for example, it may not be cost-effective where the value of the assets in the estate is so small that the expense of holding a creditors’ meeting or putting forward a proposal under section 64ZBA is impractical or cannot be justified); or
- it is not practical to seek creditor approval (for example, it may not be practical to seek creditor approval where the bankruptcy is annulled and there are no longer any creditors to vote on a remuneration proposal – trustees sometimes need to perform ‘tidying up’ tasks after an annulment and/or may have done some limited work before annulment for which they have not yet sought creditor approval).'
Form of the trustee’s application
2.2. The trustee’s application to the Inspector-General to approve remuneration must be made in writing and must include supporting evidence as required. For a suggested format see Form 29 on the AFSA website. The application must:
- contain a single proposal capable of being approved by the Inspector-General
- state which of the prescribed circumstance(s) under regulation 8.09 applies and provide evidence of the prescribed circumstance being relied on for the application
- explain why:
- any work already performed by the trustee was necessary
- any work proposed to be performed by the trustee will be necessary
- the proposed remuneration for the work or proposed work, is appropriate for the particular administration
- contain evidence of the trustee’s statement to the creditors under subsections 64U(5) and 64U(5A) if applicable
- include a copy of any notices issued by the trustee to the creditors and bankrupt under subsection 162(6A).
3.1 Where the Inspector-General has determined that the trustee’s application is in accordance with subsection 162(4) and regulation 8.10, the Inspector-General will proceed with deciding the trustee’s remuneration, taking into account the following factors (see Regulation 8.11):
- whether the trustee has followed the procedure contained in section 64U or 64ZBA for estimating remuneration, including adequately describing to creditors the work performed or to be performed
- whether the trustee has given the required notices to the bankrupt and creditors concerning remuneration, required to be given under the regulations
- whether the trustee has explained why the work performed or to be performed was or is likely to be necessary
- whether, taking into account the nature and complexity of the work, the proposed remuneration is commensurate with:
(i) the work already performed, or
(ii) the work proposed to be performed
- any other relevant matters.
Further information about the factors which may be taken into account by the Inspector-General when deciding the remuneration can be obtained from IGPS16, IGPD6 and the ARITA Code of Professional Practice.
3.2 The matters considered by the Inspector-General in a case will vary depending on the circumstances under which the application is made. For example, if the trustee has satisfied the Inspector-General that it is not cost effective or practical to seek creditors’ approval, it will not be necessary for the Inspector-General to consider whether the trustee has followed the processes contained in section 64U or 64ZBA. However, it is expected that in such a case the trustee will provide the Inspector-General with the information the trustee would have otherwise been required to provide to the creditors.
'Other relevant matters' at regulation 8.11(f) may include (but are not limited to) some or all of the following:
(a) whether the proposal, if it has been put to creditors for a vote, was rejected and the specific composition of the votes cast
(b) whether the trustee has a high rate of rejection of remuneration proposals by either creditors or the Inspector-General
(c) where the proposal has been rejected, whether the trustee attempted to negotiate a lower amount with creditors that they would be willing to accept. This may involve seeking approval for a lesser amount than was originally sought.
(d) whether sufficient time was given to creditors to vote on the proposal (i.e. sufficient notice of the meeting or if s.64ZBA used, sufficient time for voting)
(e) whether if a proposal was sent to creditors by way of s.64ZBA proposal, there was any follow up with creditors to elicit a response
(f) whether the amount the trustee is seeking approval for is materially different to the estimate given in the initial remuneration notice
(g) for retrospective approval, whether it is apparent that work has been performed unnecessarily or improperly or that charging is unreasonable
3.3 Essentially, the Inspector-General will be concerned to ensure that the trustee has followed the correct procedure in estimating his/her remuneration and explaining the basis of the estimate, along with the correct procedure for notifying creditors and the bankrupt of the rates and methods of the proposed remuneration. It will not be within the Inspector-General’s remit to consider the reasonableness of the trustee’s hourly (or other time-based) rate, although this may be something that creditors consider when voting on remuneration. If a proposal is rejected, the trustee may have to demonstrate to the Inspector-General that they have attempted to negotiate an amount that is acceptable to creditors.
3.4 Also, the Inspector-General should be satisfied that the trustee’s proposal includes only the remuneration for work that is likely to be necessary and reasonable and, before deciding to undertake the work, the trustee has compared the cost likely to be incurred with the value and complexity of the administration. The trustee’s application to the Inspector-General must explain why the proposed remuneration for the work performed or work yet to be performed is appropriate for the particular administration (see subregulation 8.10(e)(iii)).
3.5 It will be open to the Inspector-General to:
(a) approve the amount the trustee has sought approval for or
(b) reject the amount the trustee has sought approval for and either
(i) substitute a lesser amount than the amount the trustee has sought approval for or
(ii) make no substitution (with the effect that remuneration remains unapproved).
The Inspector-General may seek further information before deciding the application. Section 12 of the Act allows the Inspector-General to make such inquiries and investigations as the Inspector-General thinks fit with respect to the administration of or the conduct of a trustee in relation to (among other things) a bankruptcy, composition, scheme of arrangement, controlling trusteeship or personal insolvency agreement. This function will enable the Inspector-General to seek from the trustee any additional information required to decide the trustee’s application.
3.6 In the event that the Inspector-General does not agree with the amount of remuneration sought by the trustee, the Inspector-General will be able to approve a lesser amount than that which is sought. If such a situation arises, the Inspector-General will inform the trustee of that proposed decision and give the trustee an opportunity to bring any further matters to the Inspector-General’s attention prior to the decision being made.
The Inspector-General will acknowledge the application within 5 working days and endeavour to make a decision on the trustee’s application within 20 working days. This time frame may be extended if the Inspector-General requires further information from the trustee.
The trustee is entitled to draw remuneration once it is approved by the Inspector-General, in accordance with the terms of the approval. However, trustees should be aware that the amount they are entitled to claim from the estate may be reduced following a review by the Inspector-General, conducted pursuant to section 167 and Bankruptcy Regulations 8.12D to 8.12O, even if the total amount claimed is within the amount approved by the creditors or the Inspector-General. This is consistent with the general principle that trustees are only entitled to reasonable remuneration for work that is necessary and is properly performed.
6.1 Written notice of the Inspector-General’s decision will be given to the registered or controlling trustee, the bankrupt or debtor, and the creditors as required by subsection 162(4B). In the event that the application is not approved, the trustee may choose to put a revised remuneration proposal to creditors or seek to vacate the office by the methods provided in Division 5 of Part VIII of the Act (resignation under section 180 or replacement by another trustee (pursuant to sections 181 or 181A)).
6.2 Prior to notifying creditors of the decision, the Inspector-General will contact the trustee to establish the correct list of creditors in the event that the trustee became aware of additional creditors that were not disclosed by the bankrupt or debtor on their statement of affairs.
6.3 Creditors who are dissatisfied with a decision of the Inspector-General to approve a trustee’s remuneration application may consider removing the trustee and appointing another registered trustee (under section 181 or 181A of the Act). Pursuant to section 164 of the Act, where two or more trustees act in succession, their remuneration and expenses are to be divided between them if necessary, on a basis that they agree on and that is endorsed by a resolution passed at a meeting of the creditors.
7.1. There is no right to seek a review by the Administrative Appeals Tribunal (AAT) in relation to the various decisions that can be made by the Inspector-General pursuant to section 162. However, judicial review by the Federal Court or Federal Circuit Court may be sought pursuant to the Administrative Decisions (Judicial Review) Act 1977.
7.2 Annexure A contains a flowchart of the process relating to approval of remuneration by the Inspector-General.
The trustee must give the bankrupt and the creditors a notice that complies with Regulation 8.12C when the remuneration claimed reaches the amount approved by the Inspector-General or, if the amount claimed doesn’t reach the amount approved by the Inspector-General, then at the time the trustee declares a final dividend or at the time the administration of the estate is finalised and the trustee determines that no final dividend will be declared. Further guidance on the remuneration claim notice is contained in Inspector-General Practice Direction 18.
Annexure A - Trustee Remuneration Approval process by Inspector General - Subsection 162(4).
Note 1: Compliance requirements for a trustee's application (See Form 29)
- Contain a single proposal
- Application must contain information specified in subsections 64U(5) and S64U(5A), if applicable
- Include copies of notices issued to creditors and bankrupt under subsection 162(6A)
- Trustee's statement regarding prescribed reason(s) for approval application under regulation 8.09 (refer note 2)
Note 2: Circumstances where trustee may make an application to the Inspector-General for fees approval
- Remuneration resolution rejected by creditors/committee of inspection at the creditors' meeting
- Rejection of remuneration approval sought under section 64ZBA by the creditors
- The creditors' failure to vote at the meeting or failure to respond to proposal under section 64ZBA
- Not cost-effective to seek approval of remuneration through any other alternative processes
- Not practical to seek creditors' approval (e.g. there are no longer creditors to vote for remuneration incurred after bankruptcy annulment)