Practice Registration Interview Answers for Registered Trustees

Commencement of Administration

1.1 You become trustee after a sequestration order is made. The bankrupt’s solicitor calls you up and explains that his client is solvent and will be approaching the Court to have the sequestration order set aside. What approach do you take?

Answer:

1.1 Take precautions and don’t build up expenses unnecessarily – in case the bankrupt is successful in having the bankruptcy set aside. See Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44 (20 January 2006)

“42. It seems to me that a trustee who administers a bankrupt estate, in the knowledge that the bankrupt is challenging the validity of the sequestration order, must exercise caution when incurring expenses whilst the status of the bankruptcy remains uncertain.”

1.2 You are appointed trustee of a bankrupt estate involving a husband and wife with a corner store. What steps will you take at the start of the bankruptcy?

Answer:

  • Confirm ownership and check for encumbrances (bills of sale etc.), ascertain lease details
  • Check inventory, take control of banking and cash
  • Meet with bankrupt/ and employees
  • Insurance
  • Valuation
  • GST registration
  • Urgent assessment of whether to trade on or not
  • Creditor notice to be sent ASAP advising of appointment and decision on whether to trade on or not
  • Rule 42-30 of the Insolvency Practice Rules (Bankruptcy) 2016 (‘the Rules’) “Preliminary inquiries and actions”

Property

2.1 At the date of her bankruptcy, Ann and her husband Bill (who is not bankrupt), are the joint registered proprietors of a house property.  The bankrupt values the property at $550,000 in her statement of affairs and estimates that a sum of $230,000 is owing to the mortgagee.  As a registered trustee, what action would you take to secure your interest and what methods would you consider in realising it for the benefit of creditors?

Answer:

As registered trustee, to secure interest:

  1. Protect your interest in the property by lodging a caveat on the title, or filing a transmission application in respect of the bankrupt’s interest in the property
  2. Insure the property

Action required when considering realising the property for the benefit of creditors:

  1. Ascertain value of the property that the trustee owns (e.g. does the bankrupt own more or less than half?)
  2. Confirm the sum owing to the mortgagee
  3. If there is sufficient equity, consider either:
    1. Joining in a sale with the solvent proprietor, Bill, share the net proceeds
    2. Invite Bill to make an offer for the trustee’s interest based on a valuation
    3. Where Bill refuses to co-operate with the trustee, instituting legal proceedings by making an application to the Court for an order for partition and sale

2.2 How long will real property vest if it had been disclosed in the statement of affairs? How long will it vest if it had not been disclosed?

Answer:

If it was disclosed, the sixth anniversary of the day on which the bankrupt is discharged. See Section 129AA(3) of the Act. However, under section 129AA(4) of the Act, the trustee can provide a bankrupt a written notice to extend the revesting time. It must be provided to the bankrupt before the current revesting time, and there is no limit on the number of extension notices that the trustee may give.

If it was not disclosed, then a trustee can only make a claim within 20 years from the date on which a person became a bankrupt, see section 127 of the Act.

2.3 Joe decides to retire and receives a $350,000 lump sum payment from his superannuation fund. He deposits the money into a savings account where it remains when he later becomes bankrupt.

  1. Do the funds represent divisible property? What provision of the Bankruptcy Act 1966 is relevant?
  2. What if he received the $350,000 after the date of bankruptcy?

Answer:

  1. Yes, it is divisible property. Relevant provision is section 116(2)(d)(iv) of the Act.
  2. Yes the answer would be different. It would not be property divisible amongst creditors.

Income Contributions 

3.1 What enforcement options does a trustee have available to it where a bankrupt is not paying their assessed income contributions when due?

Answer:

3.2 Can a trustee issue an assessment for a contribution assessment period (in respect to a period during bankruptcy) after a bankrupt is discharged?

(i.e. can an assessment be carried out after discharge in respect to pre-discharge income)

Answer:

Yes, see section 139WA of the Act.

Annulments

4.1 You are a registered trustee of an estate where funds available to pay dividends are in excess of proved debts. You determine that there will be a surplus if all proved debts are paid. Prior to paying the dividend, what steps should you take?

Answer:

Consider whether the estate can be annulled under section 153A of the Act – by determining full costs, charges and expenses of the estate, including remuneration.
Determine any interest payable on interest bearing debts. This interest accrues from the date of bankruptcy up until the date the dividend is paid.

4.2 A bankrupt approaches you shortly before his discharge about putting an offer of composition to creditors. What factors will you need to consider?

Answer:

A discharged bankrupt cannot propose a composition (Quinn, Geoffrey Frank Michael v Official Trustee in Bankruptcy [1996] FCA 443), so urgency may be needed.

Consider:

  • Is the proposal bona fide? Is it sufficient in detail and of underlying commercial substance that it should be put to a meeting of creditors? See Labocus Precious Metals Pty Ltd v Thomas [2003] FCA 1154
  • Are there significant outstanding investigations completed so that the trustee can indicate whether the proposal would benefit the bankrupt’s creditors generally?
  • Is there adequate provision for payment of approved remuneration that is owing (but not yet paid) at the time the proposal is lodged? See rule 75-175(3) of the Rules.
  • Is there enough time for notice to be sent to creditors for a meeting? Notice of meeting to be given not less than 10 business days before the day of the meeting (rule 75-20 of the Rules) and the report must be sent at least 5 business days before the day of the meeting (rule 75-175 of the Rules)

Dividends

5.1 You are a registered trustee of an estate where dividends have been paid to creditors. These were paid after waiting for the expiration of the period required under the Bankruptcy Act 1966. There are no funds left for further dividends, and no further realisations are expected in the administration.

A creditor, ABC Bank, had initially acknowledged receipt of the Notice of Intention to Declare Dividend, but failed to send in their proof of debt in time. One month after paying the dividend, ABC Bank submits their proof of debt and requests they be paid a dividend. What do you advise this creditor?

Answer:

Since there is no expectation for further dividends in the administration, and the creditor has not met the required time-frame under the legislation, they have accordingly foregone their right to participate in a dividend.

Had, at the time ABC submitted their proof of debt, there been available money in the hands of the trustees, then ABC Bank is entitled to be paid out their dividends before that money is applied to the payment of a future dividend. Otherwise, they are not entitled to disturb the distribution of dividends already declared prior to submitting their proof.

See section 144 of the Act:

“Right of creditor who has not proved debt before declaration of dividend

A creditor who has not proved his or her debt before the declaration of a dividend is entitled to be paid, out of any available money for the time being in the hands of the trustee, dividends that he or she has failed to receive before that money is applied to the payment of a future dividend, but he or she is not entitled to disturb the distribution of a dividend declared before he or she proved his or her debt.”

Realisations Charge

6.1 During the course of a bankruptcy administration of which you are trustee you have realised assets totalling $50,000. On 1 May 2020, a number of artworks are sold for $30,000. You incurred auctioneer’s fees of $1,000 in selling these artworks. On 15 May 2020, you also sell the bankrupt’s boat to a third party for $20,000. There was a secured debt against this boat in the sum of $15,000. What are the relevant realisations charge calculations?

Answer:

Realisations charge for 2019-2020 financial year was 7% - Applicable rate can be found on the AFSA website here.

Calculation for artworks – 7% of $30,000 = $2,100

Calculation for boat – 7% of ($20,000 - $15,000) = $350

Antecedent Transactions

7.1 You are appointed trustee of a bankrupt estate at the date of bankruptcy on 1 January 2020. Your investigations reveal that the bankrupt transferred 500 Commonwealth Bank shares on 1 January 2019 to her husband for “love and affection”. There were no other known acts of bankruptcy or creditors petitions pending.

  1. What possible actions could you take in relation to this transaction?
  2. Would you answer differ if the transfer of shares happened on 31 December 2014?

Answer

  1. Undervalued transaction based on section 120 of the Act – recover the shares or their value from the husband. Issue demand for payment, apply to OR for issuance of 139ZQ notice, apply to court (if necessary)
    Possible transfer to defeat creditors? Further queries should be made to determine if the bankrupt was insolvent, or about to become insolvent, at the time.
  2. No longer caught by section 120 of the Act as transfer took place more than 4 years before the commencement of bankruptcy (Section 120(3) of the Act). Possible transfer done with intention to defeat creditors under section 121 of the Act, but would need to show bankrupt’s main purpose at the time of making the transfer was to defeat creditors (see paragraph 121(1)(b) of the Act), or alternatively, the bankrupt was insolvent or about to become insolvent.

Meeting of Creditors

8.1 A resolution for the removal of a trustee of a bankrupt estate is put at a meeting of creditors. Proxies are received from all 3 creditors, and their intentions to vote are as follows:

Creditor A

$5,000

In favour of removal of trustee

Creditor B

$10,000

In favour of removal of trustee

Creditor C

$50,000

Against removal of trustee

At the meeting of creditor, the trustee asks the creditors if any of them would like to request a poll. Creditor A requests a poll. The trustee takes a poll immediately, and the outcome was the above table.

  1. Has the resolution passed or not? Why or why not?
  2. Based on the above circumstances, does the trustee have any options that they could consider exercising under the Act or Insolvency Practice Rules (Bankruptcy) 2016?

Answer:

  1. No. Requires a resolution (not special resolution). The voting results in a ‘stalemate’ or ‘no result’ as the resolution is not passed by majority in number and value.
  2. Trustee may consider exercising a casting vote.

Rule 75-115(5) of the Rules – poll requested by trustee or creditor, then the trustee can exercise a casting vote in favour of the resolution, in which case the resolution is passed. Otherwise, the resolution is not passed.

NB: the trustee cannot exercise a casting vote against the resolution to have them removed as a trustee

8.2 A debt collection agency has submitted a Statement of Claim and Proxy form which discloses the debt owed to the original creditor being $10,000. Is there any other information you need before deciding whether to admit the claim for voting purposes at a meeting of creditors?

Answer

Evidence of the amount of consideration paid to the original creditor. See rule 75-110(4) of the Rules – Where a creditor has been assigned a debt and is present at the meeting (in person, telephone, proxy or attorney) and is voting on a resolution, the value of the creditor is to be worked out by taking the value of the assigned debt is to be equal to the value of the consideration that the creditor gave for the assignment of debt.

Offence Referrals

9.1 You are trustee of an estate with no reasonable prospect of asset realisations. You are made aware of several offences the bankrupt has committed that will require several hours of yours and your Senior Manager’s time in collating the necessary referral to AFSA Enforcement. How can you approach the preparation of a timely referral to Enforcement if there are no funds in the estate to pay for your time?

Answer

See section 19 of the Act – Trustees have a duty to consider and refer offences committed by a bankrupt.

But also consider if there is sufficient evidence to support the allegations or if the offending is considered minor or inconsequential. See Inspector-General Practice Statement 14 - Referring offences against the Bankruptcy Act 1966 to the Inspector-General or contact AFSA Enforcement directly on fraud.enquiries [at] afsa.gov.au (.)

Ethical / Fit and Proper

10.1 You have recently been registered to practice as a trustee and have been approached by a solicitor who can channel insolvency work to you.  You recognise this as an opportunity to establish yourself in the profession, but the solicitor requires some financial reward for this assistance.  What issues, if any, would you take into consideration?

Answer

Refer to ARITA Code of Professional Practice: Insolvency Services section 6.10:

“A Member must not accept an Appointment or perform an Administration that involves:

(a) referral or other commissions, or monetary or non-monetary benefits;

(b) spotter’s fees;

(c) understandings or requirements that work in the Administration will be given to a referrer; or

(d) any other such arrangements that restrict the proper exercise of the Member’s judgement and duties.”

Also see APES 330 at paragraph 3.26

“3.26 A Member in Public Practice shall not accept an Appointment or perform an Administration that involves:

(a) referral or other commissions, or monetary or non-monetary benefits;

(b) spotter’s fees;

(c) understandings or requirements that work in the Administration will be given to a referrer; or

(d) any other such arrangements that restrict the proper exercise of the Member’s judgement and duties.