First Tranche Commencing 1 March 2017
1. What are the main changes that may affect me as a Registered Trustee when the first tranche of changes commences on 1 March 2017?
a. In terms of how the legislation is expressed, the introduction of the term “regulated debtor” in Division 5 of the Insolvency Practice Schedule (Bankruptcy)being a bankrupt, persons whose property is subject to control under Division 2 of Part X, a debtor under a Personal Insolvency Agreement or a deceased person whose estate is being administered under Part XI.
b. The requirement in Division 30 of the Insolvency Practice Schedule (Bankruptcy)to lodge an Annual Trustee Return (Form 32) within 1 month after the anniversary of registration as a trustee, giving certain information about the trustee’s practice including but not limited to details and evidence of insurance cover. From 1 March 2017 the form can be found here.
c. The requirement in Division 25 of the Insolvency Practice Schedule (Bankruptcy)to have adequate and appropriate fidelity insurance and professional indemnity insurance. See question 2 below in relation to what is adequate and appropriate.
d. For any of the trustee’s staff wanting to become registered as a trustee, changes to the experience and qualifications prescribed to become a registered trustee – further information can be found in Rule 20-1 of the Insolvency Practice Rules.
e. Greater disciplinary powers to the Inspector-General (and disciplinary committees) to suspend or cancel the registration of a trustee, or direct the trustee not to accept further appointments in certain circumstances. These powers are set out in Division 40 of the Insolvency Practice Schedule (Bankruptcy)
f. The Register of Trustees being publicly available (on the AFSA website) and displaying prescribed information in respect to the trustee’s registration and disciplinary record as set out in Division 15 of the Insolvency Practice Rules.
g. The requirement for trustees to notify the Inspector-General using an approved form, (Form 33), “Notification of Significant and Other Events” of certain prescribed events that may have a bearing on their capacity or suitability to practice as a trustee. From 1 March 2017 the form can be found here.
h. Industry bodies having the capacity to notify the Inspector-General in an approved form (Form 35), of possible grounds for disciplinary action. Section 40-100 of the Insolvency Practice Schedule (Bankruptcy) refers. From 1 March 2017 the form can be found here
i. Renewal of registration application by way of an approved form, (Form 31), “Application for Renewal of Registration”. From 1 March 2017 the form can be found here.
j. Performance Standards for Trustees from 1 March 2017 being in Division 42 of the Insolvency Practice Rules and incorporating a new standard on communication. Note also the new requirement for a trustee when notifying a bankrupt of their income contributions liability to notify them of their right to seek a review of the assessment by the Inspector-General within 60 days. A table comparing the old standards which were in Schedule 4A of the Bankruptcy Regulations 1996, with the new standards can be found here.
k. It is a condition on the registration of any person as a registered trustee, prospective from 1 March 2017, that the person undertake at least 40 hours of continuing professional education during each year that the person is registered as a trustee at least 10 hours of which must be capable of being objectively verified by a competent source. The requirement is contained in Division 20 of the Insolvency Practice Rules.
A new provision at section 100-5 of the Insolvency Practice Schedule (Bankruptcy) about assigning rights to sue which provides as follows:
(1) Subject to subsections (2) and (3), the trustee of a regulated debtor's estate may assign any right to sue that is conferred on the trustee by this Act.
(2) If the trustee's action has already begun, the trustee cannot assign the right to sue unless the trustee has the approval of the Court.
(3) Before assigning any right under subsection (1), the trustee must give written notice to the creditors of the proposed assignment.
(4) If a right is assigned under this section, a reference in this Act to the trustee in relation to the action is taken to be a reference to the person to whom the right has been assigned.
m. new provisions about Court oversight of registered trustees in Division 45 of the Insolvency Practice Schedule (Bankruptcy)
n. For a table showing the new provisions under the first tranche commencing 1 March 2017 and the provisions they are replacing see here.
2. What is the Inspector-General’s expectation in relation to insurance?
Professional Indemnity Insurance
The level of professional indemnity insurance to be taken out is expected to comply with the professional standards scheme of the national occupational association to which the trustee (or the trustee’s firm) belongs. If the trustee (or the trustee’s firm) does not belong to a national occupational association then a level of insurance equivalent with either of the schemes of Chartered Accountants Australia and New Zealand (CAANZ) or CPA Australia is considered adequate. Inspection-General Practice Statement 13 (IGPS13) refers.
There is no particular expectation about the level of fidelity insurance except that it is required to be adequate and appropriate for the trustee’s circumstances. The registered trustee is in the best position to assess what will be adequate and appropriate. However, in some cases they might find it helpful to engage external consultants, actuaries, brokers or advisers to undertake a risk assessment of their business and provide professional advice on the amount of cover they should obtain.
3. What are the more significant disciplinary changes?
a) Additional grounds for issue of a show cause letter
There are additional grounds for a show cause letter to be issued by the Inspector-General. Five examples of the new grounds are:
i. the trustee's registration as a liquidator having been cancelled or suspended
ii. the trustee owes more than the prescribed amount ($500) of notified estate charges
iii. the trustee is permanently or temporarily unable to perform the functions and duties of a trustee because of physical or mental incapacity
iv. the trustee is not a fit and proper person
v. the trustee has committed an act of bankruptcy
b) The power of the Inspector-General to direct a trustee to not to accept further appointments if earlier directions have not been complied with etc.
The Inspector-General may, in writing, direct a registered trustee not to accept any further appointments as a trustee, or not to accept any further appointments as a trustee during a period specified in the direction, if:
i. the trustee has failed to comply with a direction given to the trustee under section 40-5 (direction to remedy failure to lodge documents, or give information or documents); or
ii. the trustee has failed to comply with a direction given to the trustee under section 40-10 (direction to correct inaccuracies); or
iii. a (disciplinary) committee has decided under paragraph 40-55(1)(d) that the Inspector-General should give the direction referred to in that paragraph; or
iv. *the trustee has failed to comply with a direction given to the trustee under section 70-70 (direction to give relevant material); or
v. *the trustee has failed to comply with a direction given to the trustee under section 75-20(1) or (2) (direction to convene a meeting of creditors or comply with requirements in relation to such a meeting).
*Apply only from 1 September 2017.
c) The power of the Inspector-General to Suspend the registration of a Registered Trustee if:
i. the trustee is disqualified from managing corporations; or
ii. the trustee ceases to have adequate and appropriate professional indemnity insurance or fidelity insurance; or
iii. the trustee's registration as a liquidator has been cancelled or suspended, other than in compliance with a written request by the person to cancel or suspend the registration; or
iv. the trustee owes more than the prescribed amount ($500) of notified estate charges; or
v. the Court has made an order under section 90-15 that the trustee repay remuneration--the trustee has failed to repay the remuneration (note that section 90-15 commences on 1 September 2017); or
vi. the trustee has been convicted of an offence involving fraud or dishonesty; or
the trustee lodges a request with the Inspector-General in the approved form to have the registration suspended.
Second Tranche – commencing 1 September 2017
4. What are the main changes that may affect me as a Registered Trustee when the second tranche of changes commences on 1 September 2017 and do the changes apply to current administrations?
Part 3 of the Insolvency Practice Schedule (Bankruptcy) “General rules relating to estate administrations ´will apply to an administration of an estate that starts on or after the 1 September 2017 and to most ongoing administrations (but generally only in relation to new events). The new provisions in respect to remuneration apply to new administrations and in relation to a trustee of a regulated debtor’s estate under ongoing administration who is appointed, or who consents to act, on or after the commencement day. Ongoing administration of a regulated debtor's estate means an administration of a regulated debtor's estate that started before the 1 September 2017 and ends after that day.
For remuneration, the “Old Act” continues to apply in relation to trustees already appointed to an administration before 1 September 2017. Section 164 of the Old Act continues to apply in respect to remuneration if both trustees were appointed before 1 September 2017.
The main changes are:
a. the introduction of a new provision at section 70-50 of the Insolvency Practice Schedule (Bankruptcy) and the Insolvency Practice Rules at section 70-30 requiring particular information to be given to creditors at the same time as the trustee first communicates with the creditors in relation to the administration of regulated debtor’s estate.
(a) the name, date of birth, address and occupation of the regulated debtor;
(b) in the case of a deceased debtor – the legal personal representative of the debtor;
(c) the business name or name of any associated entity or related entity of the regulated debtor;
(d) the fact that the trustee has been appointed in relation to the regulated debtor’s estate;
(e) the date and type of administration;
(f) an outline of matters investigated by the trustee up to the date of the notice is given;
(g) if a statement of affairs of the regulated debtor is available – a summary of the statement;
(h) in relation to a bankrupt – advice about any possible contributions that the bankrupt is liable to pay in respect of a contribution assessment period, calculated in accordance with section 139S of the Act;
(i) any matters the trustee has identified as needing further investigation;
(j) the right of creditors to request information, reports and documents under sections 70‑40 and 70‑45 of the Insolvency Practice Schedule (Bankruptcy);
(k) the right of creditors to direct that a meeting of the creditors be held under section 75‑15 of the Insolvency Practice Schedule (Bankruptcy);
(l) the right of creditors to give directions to the trustee under section 85‑5 of the Insolvency Practice Schedule (Bankruptcy);
(m) the right of creditors to apply to the Inspector‑General for a review of the remuneration received by the trustee under section 90‑21 of the Insolvency Practice Schedule (Bankruptcy);
(n) the right of creditors to remove and replace the trustee under section 90‑35 of the Insolvency Practice Schedule (Bankruptcy);
(o) a declaration about relevant relationships.
b. New remuneration report provisions at sections 70-35, 70-45 and 70-47 of the Insolvency Practice Ruleswhich replace, respectively regulations 8.12A, 8.12B and 8.12C of the Bankruptcy Regulations 1996. Although certain additional information is required to be provided, remuneration claim notices will only have to be sent to creditors or a regulated debtor who elects to receive it.
i. Initial Remuneration Notices requiring in addition to what had previously been required under Regulation 8.12A “the method by which disbursements will be calculated”.
ii. Remuneration Approval Notices (referred to as Reports about remuneration to be given before remuneration determinations are made) now required to be sent to both the creditors and the bankrupt, requiring in addition to what had previously been required under regulation 8.12B, giving advice of:
- the right of the regulated debtor and creditors to elect within 20 business days of receiving this notice, whether they want to receive a remuneration claim notice under section 70‑47
- the periods at which the trustee proposes to withdraw funds from the regulated debtor’s estate in respect of the trustee’s remuneration;
- an estimated total amount, or range of total amounts, of the trustee’s remuneration;
iii. Remuneration Claim Notices now only required to be sent:
- if the remuneration exceeds the maximum default amount of remuneration, (i.e. exclusive of GST $5,000 – indexed to the CPI from 1 July 2017) and
- to those debtors and creditors (if any) who have elected to receive it and
- before finalising the administration (rather than when the claimed amount reaches the amount approved which previously was the case).
The Remuneration Claim Notice must show (with emphasis added):
(a) the total amount of remuneration claimed by the trustee;
(b) details of:
(i) the work performed for which remuneration is claimed; and
(ii) the method of calculating the amount of remuneration claimed; and
(iii) the amount of disbursements claimed; and
(iv) the method of calculating the amount of disbursements claimed;
(c) an explanation of any variation from the amounts set out in any report under
Section 70-45 in relation to:
(i) the remuneration claimed; and
(ii) the method of calculating the amount of remuneration claimed.
A remuneration claim notice must also include a statement advising the regulated debtor and the creditors that they may, within 20 business days after receiving the notice, request the Inspector‑General to review the amount of remuneration claimed by the trustee.
c. The funds handling provisions, similar to the existing provisions will, from 1 September 2017, be in Division 65 of the Insolvency Practice Schedule (Bankruptcy) Funds are still required to be banked within 5 business days into the estate administration bank account and penalty interest of 20% is, unlike before, clearly stated to be payable to the Commonwealth in relation to any amounts not banked exceeding $50 (or otherwise as prescribed). See also the offence provisions table – link below.
d. Court and creditor oversight of the trustee – there are new provisions replacing sections 176-179 of the Act. The new provision can be found in the Insolvency Practice Schedule (Bankruptcy).
At Division 45 “Court Oversight of Registered Trustee” which commences 1 March 2017 and Divisions 85 “Directions by Creditors” and Division 90 “Review of the administration of a regulated debtor's estate” both of which commence 1 September 2017.
e. The provisions about meetings of creditors in the Act currently in Division 5 of Part IV will be repealed with effect from 1 September 2017. Replacement provisions are in Division 75 of the Insolvency Practice Rules and Divisions 75 and 80 of the Insolvency Practice Schedule (Bankruptcy).
Of particular note in relation to the new provisions:
- an approved form to be used for all notices of meetings – which from 1 September 2017 can be found here
- rules around directions by creditors to a trustee to convene a meeting, including not needing to comply if the direction is unreasonable (as defined)
- a minimum ten business day notice period for meeting of creditors
- the trustee or the trustee’s representative, presiding at meetings of creditors, throughout the meeting (i.e. no election of president)
- a new definition of “resolution” – no longer just a majority in value but a majority in both number and value
- the ability of the trustee to exercise a casting vote unless the motion relates to the removal or remuneration of the trustee
- a new rule in relation to obtaining resolutions without a meeting such that a person objecting to the resolution being passed without a meeting being held, does not prevent the resolution passing unless that objector holds at least 25% in value of the debts
- a new requirement for trustees being proposed to replace another trustee to make a declaration as to relationships. See section 75‑265 Insolvency Practice Rules.
f. the maximum default amount for a trustee’s remuneration of $5,000 being indexed from 1 July 2017 onward based on the consumer price index (CPI) in accordance with section 60-15 of the Insolvency Practice Schedule (Bankruptcy).
g. Trustee choosing to be remunerated on a percentage basis having available higher maximum percentages:
- If the money received by the trustee does not exceed $30,000—20%; or
- if the money received by the trustee exceeds $30,000 but does not exceed $50,000—20% for the first $30,000 and 17.5% for the balance of the money received; or
- if the money received by the trustee exceeds $50,000—20% for the first $30,000, 17.5% for the next $20,000 and 15% for the balance of the money received.
h. a prohibition on trustees indirectly or directly deriving a profit or advantage from the estate other than as permitted in the legislation. See section 60-20 of the Insolvency Practice Schedule (Bankruptcy).
i. annual estate return re-badged as an annual administration return. See Section 70-5 of the Insolvency Practice Schedule (Bankruptcy).
j. A new power to the Inspector-General to requisition a meeting of creditors at Section 75-20 of the Insolvency Practice Schedule (Bankruptcy).
k. records of the administration being required to be kept for seven years from the end of the administration (defined as the discharge or annulment date in bankruptcies). See section 70-35 of the Insolvency Practice Schedule (Bankruptcy). The current provision (s312) applies to administrations that have ended (discharged/annulled) before 1 September 2017, but the requirement to keep records for 15 years (where property realised and some remuneration has been received) will be reduced to 7 years.
l. a requirement on a trustee who has been replaced, to provide the books of the administration to the incoming trustee within 10 business days or as agreed. See section 70-30 of Insolvency Practice Schedule (Bankruptcy). This change applies to replacements on or after 1 September 2017.
m. prescription in the Rules of when information is required to be given to the debtor and creditors in respect to requests for information. See Subdivision D of Division 70 of the Insolvency Practice Schedule (Bankruptcy) and Division 70 of the Insolvency Practice Rules. The changes apply to new and ongoing administrations.
o. a power for the Inspector-General to review a registered trustee’s remuneration on his or her own initiative (rather than by debtor/creditor application as is currently the case). This applies to all administrations after 1 September 2017 irrespective of when the remuneration was paid or payable. The current provisions of the Act will continue to apply to remuneration reviews already underway as at 1 September 2017.
p. A new prohibition on inducements to appointment which applies to any arrangements on or after 1 September 2017. See section 60-21 of the Insolvency Practice Schedule (Bankruptcy) and the offence table linked below.