Guidelines relating to administrators' duty to notify creditors of 3-month arrears default

Guidelines relating to administrators' duty to notify creditors of 3-month arrears default (IGPD17)

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  1. INTRODUCTION

    1. The purpose of this document is to outline the Inspector-General in Bankruptcy’s expectations in relation to debt agreement administrators’ duty to notify creditors that a 3-month arrears default has occurred, including best practice principles.
    2. Legislative framework

    3. The Bankruptcy Act 1966 sets out the legislative framework regarding administrators’ duty to notify creditors of a 3-month arrears default, in particular section 185LB and clauses 3.36 of the Bankruptcy (Registration and Cancellation of Registration of a Debt Agreement Administrator) Guidelines 2020 (“the Guidelines”).
  2. PRACTICAL MEANING AND ELEMENTS OF THE DUTY

    1. What constitutes a 3-month arrears default?

    2. A 3-month arrears default occurs when:
      1. the debtor defaults on one payment (or more than one payment) due under the debt agreement
      2. the debtor does not rectify the arrears when a subsequent payment is due.  This will trigger the 3-month “test time”
      3. a 3-month arrears default will then occur if, throughout the 3 month “test time”, the debtor remained in arrears.  The threshold value of the arrears that will trigger a 3-month arrears notification will depend on when the debt agreement came into force.  This is discussed below.
    3. The 3 months arrears default occurs on the day immediately after the expiration of the 2-month period, i.e. 2 months and one day.
    4. How to measure 3 months

    5. The 3-month time period is not to be measured or converted to days or weeks.  The 3-month period is only to be measured in calendar months.
    6. In cases where the last day for making all arrears payments in the 3 calendar months falls on a Saturday, Sunday or a public holiday, the 3 calendar month period is extended to the next business day.
    7. Notifying creditors

    8. It is the Inspector-General’s expectation that administrators keep creditors informed of all material developments with respect to the debtor’s affairs and any event that may impinge on the ability of the debt agreement to continue.  The debtor has the option when they fall into arrears to propose a variation and inform creditors of their circumstances and why they should be given more time to pay.  There may be valid reasons such as a period of unemployment between jobs or expenses associated with the birth of a child.  It is expected that administrators will take a lead role in business with debtors and creditors in times of default so all parties are aware of the various alternatives to address the situation.
    9. Consistent with the policy underlying the legislation, creditors should be kept informed of all material developments with respect to an administration.  In essence, administrators are facilitating the contract between the debtor and creditors and must not show bias to either party or their own interests.
    10. Debt agreements that commenced before 27 June 2019

    11. The following is applicable for debt agreements that come into force before 27 June 2019.
    12. The administrator is required to notify creditors within 10 business days of the default occurring.  The notification to creditors is only required at most once every 3 months.  If there is more than one missed payment in one 3-month period (i.e. ‘overlapping’), the administrator is not required to notify creditors on the occasion of every missed payment within the 3-month period.
    13. It is the time period, not the number of missed payments, that is important.  This means that there does not have to be 3 months’ worth of overdue payments.  A default may be as little as $1 if that is the amount of the arrears 3 months after the payment was due.  Administrators are to take the total value of the arrears and circumstances of the debtor into account when preparing the content of their default notice to creditors.
    14. The clock starts ticking for the 3-month period when the first default occurs.  However, if there is a missed payment that is also made good in the 3-month period and the total arrears is nil at the end of this 3-month period, the administrator is not required to notify creditors.  The question to be asked is whether the debtor was in arrears for the entire time in a 3-month period.
    15. In assessing whether the administrator’s duty to notify creditors has been invoked, each 3-month test period must be reviewed in isolation.  In effect, each 3-month period stands on its own.  If there have been no missed payments in a particular 3-month period, the administrator is not required to report.  Where a payment has been missed that triggers the commencement of the 3-month test period and if that payment or other missed payments during the period have not been made up by the end of the period, it is expected that the administrator will not only report on the amount of arrears for that 3-month period but also the cumulative total of arrears to that point.
    16. Debt agreements commencing on or after 27 June 2019

    17. The following is applicable for debt agreements that come into force on or after 27 June 2019.
    18. The administrator is only required to notify creditors of a default when the amount of arrears is significant, having regard to the value of the payments due and the cost of notifying creditors.  The 3-month arrears default occurs if the amount of arrears at the end of the 3-month period is over a specified threshold:
      • the total amount that the debtor was in arrears exceeds $300 or 20% of the total of all of the due payments at the beginning of the 3-month period, whichever is higher, or
      • if the total of all of the due payments was $300 or less, no payment was made in that period to reduce any of the due payments.
    19. Where the arrears over the 3-month period is over the threshold, but is rectified by the end of the 3-month period, the administrator is not required to notify creditors.  The question to be asked is whether the debtor was in arrears over the threshold for the entire time in a 3-month period.
    20. Notifications to creditors must be sent within 10 business days of the default occurring.  Notifications to creditors are only required at most once every 3 months.  Where the arrears exceeds the threshold more than once in a 3-month period, the administrator is not required to notify creditors on the occasion of every missed payment within the 3-month period.
    21. In assessing whether the administrator’s duty to notify creditors has been invoked, each 3-month test period must be reviewed in isolation.  In effect, each 3-month period stands on its own.  If there have been no missed payments in a particular 3-month period, the administrator is not required to report.
    22. Reporting systems for 3-month arrears defaults

    23. The Bankruptcy Act requires the administrator to run 2 different 3-month arrears notification systems, depending on whether a debt agreement was/is in force before or after 27 June 2019.  To ensure no unnecessary regulatory burden is imposed, administrators may use one notification system for all debt agreements so long as it meets the 3-month arrears notice requirements of both pre- and post-27 June 2019 debt agreements.
    24. To meet both 3-month arrears notification requirements, the administrator will need to send an arrears notification, regardless of when the debt agreement commenced, when the debtor:
      • has defaulted on one or more payments and did not rectify the arrears by the next due payment
      • throughout 3-month period, was in arrears to any value, and
      • remained so at the end of the 3-month period.
    25. The notification letter sent should then clearly state:
      1. the date the debt agreement commenced
      2. the date of defaulting payment
      3. the amount of arrears at the end of the 3-month period following the defaulting payment
      4. 20% of due payments for the 3-month period
      5. total due payments for the 3-month period
      6. the arrears at the end of the 3-month period
      7. the cumulative total of arrears up to the date of the letter
      8. information about whether or not the notification letter is considered a formal notice under section 185LB of the Bankruptcy Act, for example:
        “If the debt agreement commenced prior to 27 June 2019, this message is to be treated as a 3-month arrears default notice under section 185LB of the Bankruptcy Act 1966.
        If the debt agreement commenced on or after 27 June 2019:
        • in the event that the total arrears in the 3 months since the defaulting payment is greater than $300, or exceeds 20% of the due payments for the 3-month period; or
        • in the event that the total due payments at the beginning of the 3-month period was $300 or less, and no payment was made in that period to reduce any of the due payments, then this message is to be taken as a 3-month arrears default notice under s185LB of the Bankruptcy Act 1966.”
    26. Further information that an administrator may also refer to in the notification letter includes the last payment made by the debtor and any arrangements in place, or to be put in place, for rectifying the arrears.  It is assumed that, when administrators only have post-27 June 2019 debt agreements, they will implement a system based only on the new thresholds.
    27. Major and minor defaults

    28. While having regard to the level and severity of arrears, administrators are expected to provide creditors with concise information.  Administrators may choose to develop precedents which allocate the default as major or minor.
      1. Major – creditors are advised that the debtor is in arrears and administrators may recommend creditors take appropriate action, e.g. the debtor was made redundant then skipped without trace and the administrator has learned the debtor has changed bank accounts.
      2. Minor – creditors are advised that the debtor is largely compliant with payments, is only slightly in arrears and administrators may recommend to creditors that no action be taken, e.g. debtor has unexpected car repairs that has meant he has missed one week of payments.  All other payments have been made on time and the one week of payments is slowly being made up with extra payments.
  3. PRACTICAL EXAMPLES

    1. Example 1 – Major default

      Adelaide’s debt agreement commenced on 4 September 2017.  She had agreed to pay $200 per week over 3 years.  Her first payment was due 11 September 2017.  Adelaide paid her $200 weekly payments for the first month of her debt agreement but then stopped paying towards the end of October 2017.

      The administrator referred to their records to discover that the last payment made by Adelaide was on 23 October 2017.  Therefore, the last payment that was due but that remained unpaid was on 30 October 2017.  The last day Adelaide has to pay all accrued arrears and to prevent the 3-month arrears default occurring is 30 January 2018.

      The 3-month arrears default occurred on 31 January 2018.  The administrator carried out their duty to notify creditors of this occurrence within 10 business days of 31 January 2018 – this was done on 5 February 2018.  The administrator advised creditors that the agreement was $2800 in arrears and that the debtor has skipped without a trace and, to their knowledge, it was unlikely that the debtor will bring payments up to date.  Informed of the debtor’s affairs and the considerable amount of arrears, the creditors resolved to terminate the debt agreement.

      The relevant dates in this example are:

      Date

      Event

      4 September 2017

      Adelaide’s debt agreement commences.  She is required to pay $200 per week over 3 years

      11 September 2017

      Date first payment due and paid by Adelaide

      23 October 2017

      Adelaide made her last payment

      30 January 2018^

      The last day Adelaide had to pay all accrued arrears to prevent the 3-month arrears default occurring

      31 January 2018

      The 3-month arrears default occurs

      5 February 2018

      The administrator notifies creditors of the
      3-month default within 10 business days

      ^ Note this date is not to be calculated from reference to days, e.g. 3 months * 30 days in a month = 90 days after 30 July 2016 nor from reference to weeks, e.g. 4.3 weeks in a month * 3 months = 13 weeks

      Example 2 – Minor default

      Brian’s debt agreement commenced on 23 April 2016.  He is required to pay $100 per week over 4 years.  Brian’s first payment was due 30 April 2016.  Brian regularly pays his instalments but is paying $95 per week rather than the $100 required.

      It wasn’t until 29 May 2016 that the administrator discovered that Brian was making the incorrect payment amount.  After being notified, Brian immediately switched payments to $100 per week and has maintained these since.  However, despite maintaining the $100 per week payment, Brian has not paid the accrued arrears of $25 from the first 5 weeks of the debt agreement.  The last day Brian has to pay the accrued arrears of $25 is 30 July 2016.

      On 31 July 2016, the 3-month arrears default occurs.  The administrator has a duty to report this 3-month arrears default to creditors and did so within 10 business days – this was done on 7 August 2016.  The administrator advised creditors that the agreement was $25 in arrears and that the debtor had inadvertently paid the wrong amount for the first 5 weeks but has since paid the correct amount and has agreed to make good the arrears.  Informed of the debtor’s affairs and the small amount of arrears that were since brought up to date, creditors resolved to allow the debt agreement continue.

      In February 2017, Brian missed one weekly payment due to personal issues.  He missed the payment that was due on 18 February 2017 but then made good these arrears on top of his normal payment on 4 March 2017.  All other payments were maintained for the rest of the 3-month period, which began on 18 February 2017.  On 19 May 2017 (i.e. 4 months and one day after 18 February 2017), the administrator is not required to report to creditors because the arrears have been rectified within the 3-month period.

      On 16 June 2018, Brian paid $50 rather than the required $100 and did not rectify this shortfall.  The 3-month arrears default occurs on 17 September 2018 and the administrator needs to report to creditors within 10 business days of this date.  The administrator contacted Brian and he immediately paid the $50 arrears amount into the administrator’s trust account.  In the notification to creditors sent on 19 September 2018, the administrator advised that, while the 3-month arrears default had occurred, the amount was only $50 and this amount had since been paid by Brian.  It was the administrator’s recommendation that the administration continue.

      The relevant dates in this example are:

      Date

      Event

      23 April 2016

      Brian’s debt agreement commences.  He is required to pay $100 per week over 4 years

      30 April 2016

      Date first payment due by Brian

      30 July 2016#

      Last day Brian has to pay the accrued arrears of $25

      31 July 2016

      3-month arrears default occurs

      7 August 2016

      The administrator notifies creditors of the
      3-month default within 10 business days

      16 June 2018

      Brian pays $50 rather than the required $100 and is therefore $50 in arrears

      17 September 2018

      3-month arrears default occurs

      19 September 2018

      The administrator notifies creditors of the
      3-month default within 10 business days

      # Note this date is not to be calculated from reference to days e.g. 3 months x 30 days in a month = 90 days after 30 July 2016 nor from reference to weeks e.g. 4.3 weeks in a month x 3 months = 13 weeks

      Example 3 – Post-27 June 2019 debt agreement

      Charlotte’s debt agreement commenced on 24 September 2019.  She is required to pay $120 per week over 3 years.  Although Charlotte begins the agreement paying $120 per week from 22 October 2019, she regularly pays $95 per week instead.  Despite the administrator informing her that she was accruing arrears, Charlotte continues to pay $95 per week.  Therefore, the last payment that was due but that remained unpaid would be 22 October 2019.  The last day by which Charlotte has to pay all accrued arrears to prevent a 3-month arrears default occurring is 22 January 2020.  Charlotte only enters a payment arrangement to rectify her arrears, by increasing her payments to $125 per week, on 28 January 2020.

      The 3-month arrears default occurs on 23 January 2020 only if the arrears is the higher of either $300 or 20% of the total of all due payments since the beginning of the 3-month period.

      For the 3 months preceding the default, the total due payments during this period were $1680.  20% of this amount is $336, which would be the applicable threshold as it is over $300.

      The total arrears during the 3-month period were $350.  This exceeds the threshold and results in a 3-month arrears default occurring on 23 January 2020.

      The administrator has a duty to report this 3-month arrears default to creditors and does so within 10 business days – this is done on 30 January 2020.  The administrator advised creditors of the arrears and that a payment arrangement was in place and creditors resolve to allow the debt agreement to continue.

      Note the relevant dates in this example are:

      Date

      Event

      24 September 2019

      Charlotte’s debt agreement commences.  She is required to pay $120 per week over 3 years

      1 October 2019

      Date first payment due and paid by Ms C

      22 October 2019

      Charlotte makes payments of $95 per week

      22 January 2020@

      Last day Charlotte has to pay the accrued arrears

      23 January 2020

      Date 3-month arrears default occurs

      30 January 2020

      The administrator notifies creditors of the
      3-month default within 10 business days

      @ Note this date is not to be calculated from reference to days, e.g. 3 months * 30 days in a month = 90 days after 19 October 2019 nor from reference to weeks, e.g. 4.3 weeks in a month * 3 months = 13 weeks

      Example 4 – Post-27 June 2019 debt agreement

      Using the same example above, if Charlotte decided to regularly pay $100 per week from 22 October 2019 instead of $95, the total arrears during the 3-month period would have been $280.  Since this amount does not exceed the threshold (i.e. $336), the administrator would not have a duty to report a 3-month arrears default

  4. CONSEQUENCES OF BREACHES OF THIS DUTY

    1. Debtors and creditors

    2. Failing to advise creditors of a 3-month arrears default leads to delays in informing creditors as to the correct status of the administration.  It adversely affects the integrity of the personal insolvency system and could be an indicator that creditors are not being updated.  Creditors want to know when the 3-month default is occurring and have a right to be informed as expeditiously as possible.
    3. Administrators

    4. AFSA will closely monitor administrators to ensure that they carry out this duty properly.  Any identified breaches will require immediate rectification.  Systemic breaches, especially after our intervention, may lead to one of the remedial actions listed in Involuntary cancellation of debt agreement administrator registration at paragraph 3.3 being undertaken.  This includes disciplinary action.
  5. AFSA’S ROLES

    1. AFSA Service Centre

    2. The Official Receiver[1] is in regular contact with creditors through the annual Registered Debt Agreement Administrator Forum.  The AFSA Service Centre will report to Enforcement and Practitioner Supervision when creditors raise concerns about whether 3-month arrears reports are being sent by an administrator(s).
    3. Enforcement and Practitioner Supervision

    4. Section 12 of the Bankruptcy Act provides the Inspector-General[2] with the power to investigate where there are issues of concern either during the inspection program or through a complaint.  The Inspector-General will examine the level and thoroughness of the 3-month arrears duty being performed by reference to the principles in this practice direction and the legislative framework outlined in paragraph 1.2 above.
    5. Where breaches of this duty or a lack of record keeping are identified, the administrator will be asked to take appropriate remedial action, including a change in practice.  This may also lead to counselling or, in serious or systemic cases, to either litigation or disciplinary action being initiated which could include conditions being placed on the administrator’s registration.
    6. During inspections, the Inspector-General will examine the systems and controls that an administrator has in place in respect to:
      1. the system that will enable accurate identification of 3-month arrears default
      2. processes that will ensure creditors are notified of the 3-month arrears default within 10 business days.
    7. The Inspector-General will examine documented practices and check lists, delegations and, where an administrator is relying on others to assist, how they properly supervise and train their employees, agents or brokers to properly perform these duties on their behalf.

Footnotes

[1] Officers in the AFSA Service Centre act as delegates of the Official Receiver

[2] Officers in AFSA’s Enforcement and Practitioner Supervision division act as delegates of the Inspector-General in Bankruptcy