Approving a trustee's fees

The Australian Financial Security Authority (AFSA) and the Australian Restructuring Insolvency and Turnaround Association (ARITA) have jointly developed a resource for creditors on trustee fees.

Approving a trustee’s fees

If you are a creditor in a bankruptcy or personal insolvency agreement you may be asked to approve the trustee’s fees.

This information sheet gives general information to help you understand the process of approving a trustee’s fees and your rights in this process. This information covers the approval of a trustee’s fees in a bankruptcy, personal insolvency agreement, controlling trusteeship, or a composition following the annulment of a bankruptcy. (Other forms of insolvency administration such as debt agreements and corporate insolvencies are beyond the scope of this information sheet).

About trustees

If a person goes bankrupt or enters into a personal insolvency agreement, an independent trustee is appointed to oversee the estate. They are called a ‘trustee in bankruptcy’, a ‘controlling trustee’ or a ‘trustee of a personal insolvency agreement’, depending on the type of administration involved. (In this information sheet they are all referred to as a ‘trustee’.)

The duties of a trustee are specified in legislation and trustees must adhere to certain standards while administering the estate.

All trustees are required by law to undertake certain tasks which may not benefit creditors directly (e.g. investigating whether any offences have been committed).

Trustee’s fees and costs

Trustees are entitled to be paid for the necessary work they properly perform in the administration.

A trustee is entitled:

  • to be paid reasonable fees, or remuneration, for the work they perform, once these fees have been approved, and
  • to be reimbursed for out-of-pocket costs incurred in performing their role (these costs do not need approval).

Commonly reimbursed out-of-pocket costs include:

  • legal fees
  • a valuer’s, real estate agent’s and auctioneer’s fees
  • trading costs involved in running the bankrupt’s business during the administration (e.g. for the purchase of stock)
  • stationery, photocopying, telephone and postage costs
  • retrieval costs for recovering the bankrupt’s computer records, and
  • storage costs for the bankrupt’s books and records.

Creditors have a direct interest in the amount of a trustee’s fees and costs, as these fees will generally be paid from the estate before any payments are made to creditors.

All fees must be approved in accordance with the Bankruptcy Act before they can be paid.

If there is a shortfall between the trustee’s fees and the assets available from the estate, in certain circumstances the trustee may arrange for a third party to pay the shortfall. As a creditor, you will be provided details of any such arrangement.

If there are not enough assets to pay the trustee’s fees and costs, and there is no third party payment arrangement, the trustee remains unpaid.

Calculating fees

A trustee may calculate their fees using one of a number of methods, such as:

  • on the basis of time spent working on the administration, according to hourly rates
  • a quoted fixed fee, based on an estimate of the costs, or
  • a percentage (usually of asset realisations) with the rate set under the Bankruptcy Act.

Charging on the basis of time spent is the most common method used. Trustees have a set of hourly rates that they will seek to charge. These rates are set to reflect the seniority, skills and experience of staff and, where applicable, the complexity and risks of the bankruptcy. They cover staff costs and overheads.

The trustee will keep time sheets noting the number of hours spent on the tasks performed.

Creditors have a right to question the trustee about the fees and the rates to be charged. They also have a right to question the trustee about the fee calculation method used and how the calculation was made. The trustee must justify why the chosen fee calculation method is appropriate for the estate.

Information you will receive

There are different types of remuneration reports that you may receive during the course of a bankruptcy or personal insolvency agreement. The table on the next page details the reports and when you might receive them.

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Document Information it contains When you will receive it - Bankruptcy When you will receive it - Controlling Trustee / Personal Insolvency Agreement
Initial Remuneration Notice (IRN)
  • A brief explanation of the types of methods that may be used to calculate fees.
  • The trustee’s chosen fee calculation method and why it is appropriate.
  • Details of the trustee’s rates, including hourly rates if time spent basis is used.
  • An estimate of the trustee’s fees.
Within 28 days after receipt by the trustee of statement of affairs (SOA). If SOA not received within 60 days, then must be sent within 7 days after the end of the 60-day period.

A controlling trustee is not required to send an IRN but is required to provide similar information in the report to creditors.

If the trustee of the personal insolvency agreement (PIA) was also the controlling trustee, an IRN is not required but the controlling trustee is required to provide similar information in the report to creditors.

If the trustee of the PIA was not the controlling trustee, then the IRN must be sent within 28 days of the signing of the PIA.

Remuneration Approval Notice (RAN)
  • A description of the work, including the details of particular tasks that have been undertaken.
  • A description of the work that will be undertaken.
  • The number of hours to be charged.
  • The hourly rates charged by the trustee and their staff.
  • The proposed total amount of fees.
  • A statement that the fees are necessary and reasonable having regard to the value and complexity of the estate.
  • A report on work that has been completed, that is in progress and that is yet to be undertaken.
Sent at the same time as the notice to creditors advising the date and time of the meeting at which approval of fees will be sought. If approval of fees is not being sought, a RAN will not be provided.

A controlling trustee is not required to send an IRN but is required to provide similar information in the report to creditors.

If the trustee of the personal insolvency agreement (PIA) was also the controlling trustee, an IRN is not required but the controlling trustee is required to provide similar information in the report to creditors.

If the trustee of the PIA was not the controlling trustee, then the IRN must be sent within 28 days of the signing of the PIA.

 

Remuneration Claim Notice (RCN)
  • The total amount of fees claimed.
  • Details of the work performed.
  • The names of the persons who performed the work.
  • The number of hours charged by each person.
  • The hourly rate charged by each person.
  • An explanation of any variation from the RAN.
  • A statement about rights to have the fees reviewed.
  • Details of the receipts and payments for the estate.

Within 14 days of any of the following events occurring:

(a) fees claimed reaches the amount approved as per the RAN, or

(b) fees haven’t reached the approved amount:

(i) when final dividend is declared, or

(ii) when administration of the estate is finalised and no final dividend will be declared, or

(c) when the trustee claims the statutory minimum or less (currently $5,000).

Same as bankruptcy.

Approving fees

The creditors’ (or committee) meeting gives creditors a chance to ask questions about the trustee’s fees. Fees are then approved by a vote of the creditors. Creditors may be asked to approve fees for work already performed and/or a fee estimate for work not yet carried out. If the work is yet to be carried out, the trustee must set a maximum limit (cap) on the future fee approval. For example, ‘future fees are approved calculated on hours worked at the rates charged (as set out in the provided rate scale) up to a cap of $X’.

If the fees for work done then exceeds this figure, the trustee will have to ask the creditors to approve a further amount of fees, after accounting for the fees already incurred.

If a trustee can’t get the creditors’ approval, an application can be made to the Inspector-General to approve their fees.

When there are limited funds available in the estate, or the trustees fees are below $5,000 excluding GST, a trustee is entitled to draw a one-off amount of up to $5,000 excluding GST, without creditor approval.

Who may approve fees?

Committee of inspection approval

A committee of inspection will generally only be established where there are a large number of creditors and/or complex matters which make having a committee desirable. Committee members are chosen by a vote of all creditors.

If there is a committee, the trustee will ask it to approve the fees. A committee makes its decision by a majority in number of its members present in person at a meeting, but it can only vote if a majority of its members attend.

In approving the fees, it is important that committee members understand that they represent all the creditors, not just their own individual interests.

Creditors’ approval

Creditors approve fees by passing a resolution at a creditors’ meeting. Creditors may vote according to their individual interests.

For approval of a trustee’s fees, a ‘poll’ is to be taken at the meeting (that is, rather than a vote being decided on the voices or by a show of hands, a count of each vote and its value is taken), and a majority in value of creditors present and voting, in person or by proxy, must agree. A poll requires the votes of each creditor to be recorded.

A proxy is a document whereby a creditor appoints someone else to represent them at a creditors’ meeting and to vote on their behalf. A proxy can be either a general proxy or a special proxy. A general proxy allows the person holding the proxy to vote how they want on a resolution, while a special proxy directs the proxy holder to vote in a particular way.

A creditor will sometimes appoint the trustee as a proxy to vote on the creditor’s behalf. A trustee, their partners or staff must not use a general proxy to vote on approval of their fees; they must hold a special proxy in order to do this. They must vote all special proxies as directed, even those against approval of their fees.

There are provisions for a resolution to be passed by creditors without a meeting. This still requires a majority in value of creditors voting to vote in favour of the resolution. A single creditor can require that a meeting be convened to consider the resolution.

Deciding if fees are reasonable

If you are asked to approve a trustee’s fees, your task is to decide if the amount of fees is reasonable, given the work carried out in the administration and the results of that work.

You may find the following information from the trustee useful in deciding if the fees claimed are reasonable:

  • the method used to calculate fees
  • the major tasks that have been performed, or are likely to be performed, for the fees
  • the fees/estimated fees (as applicable) for each of the major tasks
  • the size and complexity (or otherwise) of the administration
  • the amount of fees (if any) that have previously been approved
  • if the fees are calculated, in whole or in part, on a time basis:
    • the period over which the work was, or is likely to be performed
    • if the fees are for work that has already been carried out, the time spent by each level of staff on each of the major tasks
    • if the fees are for work that is yet to be carried out, whether the fees are capped.

ARITA’s Code of Professional Practice (Code) outlines the steps trustees should take to make sure they fulfil their responsibilities to creditors when asking creditors to approve fees, including when those creditors are acting in their capacity as committee members. The Code is available on the ARITA website at www.arita.com.au.

If you need more information about fees than is provided in the trustee’s report, you should let them know before the meeting at which fees will be voted on.

What can you do if you think the fees are unreasonable?

If you think the fees being claimed are unreasonable, you should raise your concerns with the trustee. It is your decision whether to vote in favour of, or against, a resolution to approve fees. You may also choose to not vote on the resolution (abstain).

You also have the power to put a resolution to the meeting to change the way the trustee is to charge fees, or the periods at which the trustee may withdraw funds. This power of creditors definitely applies in relation to the trustee’s fees for future work – it is less clear under law whether this power extends to fees for work that has already been performed. Any amending resolution must occur prior to the vote being taken on the resolution to approve fees. If the amended proposal is passed, the resolution is binding on the trustee. However, such an amendment may result in the trustee seeking to be replaced by another trustee.

If the trustee is seeking approval of remuneration via a resolution without a meeting, you can object using the form provided by the trustee and the proposal will not pass. If the trustee wants the proposal passed, a meeting will need to be convened and any creditor entitled to participate in the meeting has the right, before the vote is taken, to move an amendment to the way the trustee is to charge fees as discussed above.

The bankrupt or a creditor may apply to the Inspector-General for a review of fees claimed by a trustee. A review by the Inspector-General of a trustee’s claim for fees will cover the trustee’s fees and certain disbursements. The process of reviewing remuneration is explained in Inspector-General Practice Statement 16, which is available from the Australian Financial Security Authority (AFSA) website (www.afsa.gov.au).

You have 28 days after receiving a RCN from the trustee to give written notice to AFSA that you require a claim for fees to be reviewed. There is a form for this purpose on the AFSA website (www.afsa.gov.au).

Reimbursement of out-of-pocket costs

A trustee should be very careful incurring costs that must be paid from the estate; as careful as if they were incurring the expenses on their own behalf. Their report on fees sent to creditors must also include information on the out-of-pocket costs of the administration.

If you have questions about any of these costs, you should ask the trustee and, if necessary, bring it up at a creditors’ or committee meeting. If you are still concerned, you have the right to ask the trustee to have the expenses reviewed by the Inspector-General.

The trustee may (at their own initiative or at the request of a creditor or bankrupt) apply to the Inspector-General for a review of a bill of costs for services supplied to the trustee by a third party.

Queries and complaints

You should first raise any queries or complaints with the trustee or their firm. If this fails to resolve your concerns, including any concerns about their conduct, you can lodge a complaint with ARITA at www.arita.com.au or with AFSA at www.afsa.gov.au.

More information

The ARITA website contains the ARITA Code of Professional Practice which is applicable to all its members. The AFSA website contains information on trustees’ obligations in relation to fees, including Inspector-General Practice Statements 15 and 16 and Inspector-General Practice Directions 6 and 18. This information is relevant for all AFSA stakeholders or anyone affected by personal insolvency.

References

Information in this information sheet reflects collectively the requirements of the Bankruptcy Act 1966, Bankruptcy Regulations 1996, Inspector-General Practice Statements, Inspector-General Practice Directions and the ARITA Code of Professional Practice.

Important note: This information sheet contains a summary of basic information on the topic. It is not a substitute for legal advice. Some provisions of the law referred to may have important exceptions or qualifications. This document may not contain all of the information about the law or the exceptions and qualifications that are relevant to your circumstances.