The Personal Insolvency Regulator (PIR) is a quarterly newsletter from AFSA’s independent Regulation and Enforcement division.
COVID-19 – Effective communication is now more important than ever
In April, AFSA released guidance for debt agreement administrators and practitioners in relation to COVID-19 and its effect on our stakeholders.
Personal insolvency numbers have remained low since the temporary changes to Commonwealth bankruptcy law came into effect in March 2020. However, the results of a recent survey by ARITA indicates that the profession expects a significant rise in insolvencies in late 2020.
With a potential influx of individuals into personal insolvency, now is an important time for practitioners to consider the effectiveness of their communication with debtors and creditors. Typically, the majority of these debtors will be new to the system, with little or no prior knowledge of insolvency. Understandably, it may be a confusing and stressful time for people and they are likely to be vulnerable. All this may impact on a person’s ability to understand the complexities of personal insolvency, and what the trustee or administrator requires of them.
We anticipate that if insolvency numbers increase, so may the enquiries and complaints to practitioners. The number of enquiries and complaints to AFSA may also rise.
We encourage practitioners to take stock sooner rather than later to ensure that their staff and their processes will be ready to meet any increased demand in what could be a rapidly changing environment.
We also encourage practitioners to revisit the relevant Inspector-General’s expectations relating to these issues:
- IGPD 22 – Effective practitioner communication; and
- IGPS 10 - Complaints handling process for complaints against practitioners and debtors.
National Manager – Regulation and Enforcement
Staying vigilant during COVID-19
It is important to keep in mind that everyone is vulnerable to fraud, regardless of the circumstances. Certain events, such as those we are currently facing as a consequence of COVID-19, heighten the risk of fraud.
The three main factors that increase the risk of fraud are:
- Opportunity, and
It is fair to say that the economic and societal impacts of the COVID-19 crisis have increased the likelihood that all three of these risk factors can occur simultaneously.
Financial pressure has increased at this time for a large number of Australian professions and businesses. Working from home arrangements, and other practices that are outside the norm, can provide the opportunity for fraud. And, notwithstanding the significant personal and professional consequences of committing fraud, inappropriate conduct can be easier to try and rationalise when immediate livelihoods are at risk.
As you continue to alter your workplace practices to adapt to the changing climate, it is important that you consider how to protect yourself and your clients from fraud. We take this opportunity to ask that practitioners ensure that you have strong controls in place to minimise the risk of fraud, as well as an appropriate action plan if you do identify anything suspicious.
Not only can fraud significantly impact your business – it can also have major consequences for the reputation of the personal insolvency system as a whole. It is important that AFSA and practitioners work together to maintain the community’s confidence in the system.
If you have any concerns about suspicious activity, you can report these to AFSA via the tip off form at afsa.gov.au. At AFSA, we are continuously strengthening our monitoring of indicators of increased fraud risk.
It is also important to note that the COVID-19 crisis and its associated stresses may have an impact on the mental health of both you and your clients. The Insolvency Mental Health Awareness Program, designed specifically for practitioners, is available on the AFSA website. Free support and resources are also available from not-for-profit organisations such as Beyond Blue and Lifeline.
Thank you for your support and understanding during this challenging time.
National Manager – Regulation and Enforcement
Reminder to practitioners about Annual Administration Returns
The Annual Administration Returns (AAR) lodgement period is fast approaching.
The due date for this year’s AAR is Tuesday 4 August 2020. The due date for the payment of realisations charge is also Tuesday 4 August 2020.
Guidance on the AAR process can be found on the Practitioner AAR online landing page. This page has links to various resources to assist practitioners in meeting their obligations. The resources include, IG practice documents, user guides, and FAQs.
We appreciate that COVID-19 has resulted in disruption to insolvency practitioners, and that this may have implications on practitioners meeting their obligations. If you anticipate that you will have problems in meeting your obligations in the context of COVID-19 then we request that you please advise us of this.
We’re here to assist practitioners, so if you have any queries, or are after some guidance, then please to do not hesitate to contact us at email@example.com
Senior Inspector – Regulation
Effect of COVID-19 on prosecutions
Understandably the COVID-19 pandemic has impacted on the running of courts as they have taken steps to comply with local and national health advice and implement social distancing measures.
Given offending pursuant to the Bankruptcy Act 1966 is prosecuted in State and Territory courts across the country, this has meant different practices have been put in place depending on the jurisdiction the matter is being heard in. COVID-19 risks have meant that many non-urgent summary hearings and jury trials have been adjourned.
Generally, speaking in person appearances have been limited with courts taking advantage of different technologies to allow appearances via video link and where that is not possible via telephone. Challenges in relation to tendering documents have been overcome by the parties, with consent, emailing documents to the court in advance of appearances.
Specific information in relation to the practices in place in particular jurisdictions can be found on court websites. Overall the CDPP has found that those involved in the criminal justice system have shown flexibility, a willingness to embrace new technologies and a commitment to ensuring that wherever possible matters continue to be progressed during this time.
In line with local and national government advice, courts are beginning to plan a return to the “new normal” with more face-to-face appearances and the resumption of jury trials. The speed at which this progresses is dependent on a number of factors including the effects of easing of restrictions.
The CDPP is hopeful that after the pandemic, where appropriate, there will continue to be an increase in remote appearances including by witnesses given the efficiencies this can deliver and that the technologies that provide for this have been tested.
Commonwealth Director of Public Prosecutions
Unlicensed financial advice to debtors by Debt agreement administrators– early access to superannuation
Debt agreement administrators need to remember that financial advice must only be provided by qualified and licensed financial advisers or financial counsellors. Debt agreement administrators who do not hold the requisite licence are not authorised representatives of an Australian Financial Services Licensee and do not enjoy any exemption under section 911A of the Corporations Act 2001.
This reminder is provided in the context that, as part of the Federal Government’s COVID-19 economic response package, the Australian Tax Office (ATO) has implemented a measure to allow individuals affected by COVID-19 to access their superannuation early, up to $10,000 in 2019-2020 and a further $10,000 in 2020-2021.
In the current COVID-19 environment with many debtors suffering reduced incomes, it may be very tempting for debt agreement administrators to advise debtors to access their superannuation early to make any payments due towards their debt agreements. However, doing so may constitute ‘financial product advice’.
What is financial product advice?
A recommendation or a statement of opinion, or a report of either of those things, constitutes financial product advice under s766B of the Corporations Act if:
(a) it is intended to influence a person or persons in making a decision about a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products, or could reasonably be regarded as being intended to have such an influence; and
(b) it is not exempted from the definition of ‘financial product advice’.
Giving such financial product advice to a debtor to access their superannuation early may:
- constitute unlicensed financial advice in contravention of section 911A of the Corporations Act and
- not be in the best interests of individuals in contravention of section 961B of the Corporations Act.
The Corporations Act imposes significant penalties for a contravention of section 911A.
If debtors are in need of advice regarding their superannuation, they should consider the information available on the ASIC Moneysmart website and seek the advice of a licenced financial adviser or financial counsellor.
Director – Regulation
Lessons learned: Techniques for reducing remuneration approval applications
Since 2010, the Inspector-General has had the power to approve a trustee’s remuneration. This power is generally exercised where a trustee has sought creditor approval, but has been unsuccessful. An analysis of our data tells us that the applications are increasing and are not evenly spread amongst the trustee population – that is, some trustees make numerous applications and others make only a few or none. Where possible it is our preference for the ‘market’ to price and approve a trustee’s remuneration. After all, it is the creditors who generally bear this cost (section 153A annulments are the exception) and on whose behalf the work is being carried out. We wanted to understand the apparent disparity by learning from trustees who make few or no applications.
Please note: AFSA does not draw a negative inference about trustees who have cause to make numerous applications for approval. There are a variety of reasons as to why it might be necessary to make applications for approval, and it is part of a bigger picture concerning creditor disengagement.
Mr Stewart Free was one of the trustees who responded to our questions. He has agreed for us to share his responses, which are reproduced below.
Do you have any general comments or tips you can share about your capacity to have remuneration approved?
When there is an engaged creditor, usually a person (in their own capacity or a private company) it is important to communicate with them. Generally engaged creditors are more likely to respond to reports both positively and negatively.
Unfortunately there are a lot of cases where only banks, credit providers and ATO make up the vast majority of creditors. In these cases there are a select few banks and credit providers that will never respond irrespective of the amount of times you call them. It is better to give these creditors more time to respond i.e. 20 business days instead of 15 business days. This will result in a greater chance of a response. The ATO for instance, have advised that they generally take 28 days to respond.
The amount charged also needs to be reasonable compared to the work done. You should be able to justify your charges and the approval sought should be commensurate to the work done.
Do you find following up Remuneration Approval Reports with a telephone call helps?
Yes. Calendar reminders are generally set approximately a week before the due date at which time staff follow up reports and kindly request a response from creditors in cases where no response has been received.
Do you find that a creditor’s willingness to approve remuneration is a form of return from investing in developing trusted working relationships?
Do you find that debt-purchasing creditors who are unwilling to disclose their consideration and therefore unable to vote represent a barrier?
I have generally found debt-purchasing creditors not to be helpful.
These type of creditors are not particularly active in responding to fee approvals unless it is in a S73 or PIA and when they do respond in these scenarios, certain debt-purchasing creditors never disclose the consideration that they purchased the debt resulting in their inability to vote.
Do you find there is a difference between creditors’ attitudes depending on whether the administration type is a DP or a CP?
No, not really. Petitioning creditors can be as unresponsive as banks. However, if the petitioning creditor is responsive, they will usually respond to reports both positively and/or negatively depending on the case and the work done.
Senior Inspector – Regulation
Coronavirus Economic Response Package
The ATO is committed to supporting the Australian community to get through this difficult time and to access the help on offer. We know that many businesses and communities are being heavily affected by the challenging economic conditions created by the outbreak of COVID-19.
The ATO is administering six economic stimulus measures to support businesses and individuals during the COVID-19 pandemic:
- allowing individuals to access their superannuation early
- reducing superannuation minimum drawdown rates
- assisting eligible employers, sole traders and other entities to pay their employee’s salary or wages via JobKeeper payments
- providing cash flow assistance for employers
- increasing the instant asset write-off, making more businesses eligible
- backing business investment by accelerating depreciation deductions.
Enrolment is now open for the government's $130 billion JobKeeper Payment scheme. The scheme supports businesses significantly affected by the coronavirus to help keep more Australians in jobs.
The JobKeeper Payment supports eligible employers and other entities affected by COVID-19 to pay their employees a minimum of $1,500 per fortnight to help keep more Australians in jobs.
Employers need to pay all eligible employees a minimum of $1,500 (before tax) per fortnight to claim the JobKeeper payment. This will be paid to the employer in arrears each month by us.
Enrolments closed on 31 May 2020 for the initial JobKeeper period, from 30 April 2020 until 31 May 2020. Find out more by visiting ato.gov.au/jobkeeper.
Cash flow boost
Eligible employers will receive between $20,000 and $100,000 in cash flow boost amounts, delivered as credits in the activity statement system, when they lodge their activity statements up to the month or quarter of September 2020.
There is no need to apply - if an employer is eligible, they simply lodge their activity statements and the credits will be automatically applied.
The cash flow credit will be applied to reduce liabilities arising from the same activity statement e.g. PAYGW and GST payable. Any excess credit will be refunded, rather than offset against any existing tax debts employers have.
If eligible employers are due to receive a refund, the ATO will generally pay it within 14 days.
Find out more by visiting ato.gov.au/cashflowboost.
Early access to super
Eligible individuals financially affected by COVID-19 can access some of their superannuation (super) early. Individuals will not pay tax on amounts released and will not need to include them in their tax return.
Eligible Australian and New Zealand citizens and permanent residents can access up to $10,000 in superannuation before 30 June 2020. They will also be able to access up to a further $10,000 from 1 July 2020 until 24 September 2020.
Individuals can only submit one application in each of the financial years, even if they do not receive the full $10,000 per financial year.
Eligible temporary residents can apply to access up to $10,000 of their super until 30 June 2020.
For more information about economic stimulus measures administered by the ATO, visit ato.gov.au/coronavirus or call 13 72 26.
Bronwyn Du Mont
Director, Debt — Significant Debt Management
Australian Taxation Office
Trends with untrustworthy advice
AFSA, through its Regulation and Enforcement (R&E) staff, have been recently engaging in work investigating instances of untrustworthy advice being provided to bankrupts and debtors and have seen some trends worthy of being on the lookout for. The trends include:
- Advisors are actually calling creditors such as banks and the ATO and asking them to abstain from voting to assist their clients in gaining annulments. While there is nothing unlawful in doing that, it clearly demonstrates the lengths some advisors will go to achieve the outcome they want. In another matter, the advisor was trying to eliminate all of the creditors from voting so that the only creditor left was the advisor who was looking to vote for zero cents in the dollar return to creditors in an estate where there was concealed equity in a property.
- The use of fabricated caveats and mortgages in bankrupt estates in an attempt to soak up equity. While it poses a hurdle and hindrance to realising properties, once the bankrupt and or creditor is asked to provide satisfactory evidence of the loan subject of the caveat/mortgage, they are unable to do so, ending with the caveat/mortgage being withdrawn.
- Using fabricated creditors in PIAs and Compositions where bankrupts seek to include false debts in their statements of affairs or put one forward at the last minute before the creditors meeting is held. Their objective is to be able to rig the voting and gain the approval of 50% in number and 75% in value. In most cases, as with the use of fabricated caveats, once the creditors are asked to show one or two levels of proof, they aren’t able to and withdraw it.
In terms of dealing with pre insolvency advisors it would assist R&E if trustees and their staff could ask debtors and bankrupts what advice and instructions they were given by the advisors and document it in the event it becomes relevant at a later time. While R&E are aware some advisors tell their clients not to speak with trustees, their staff or AFSA, they do have an obligation to engage and answer questions relevant to their administration.
If any suspicious activity is identified trustees and staff should feel free to contact R&E for assistance. R&E are continually adding information into our intelligence holdings so please feel free to send an email to the fraud enquiries email box (firstname.lastname@example.org) so that it can be included and searchable.
Assistant Director – Enforcement
Case note: The annulment of a bankruptcy when a bankrupt’s tax affairs are not up to date
The Federal Circuit Court handed down its decision on 29 April 2020 in Yeo & Rambaldi as Trustees of the Bankrupt Estate of Sandles v Sandles  FCCA 988 (29 April 2020)
The trustees Messrs Yeo and Rambaldi had approached the Court for guidance as to when to annul the bankruptcy, in the context of a tax audit being underway; and for directions and orders that they were acting reasonably in choosing to sell particular assets of the bankrupt.
On the question of when to annul the bankruptcy in the context of a tax audit the decision confirmed the Inspector-General’s well-publicised stance that trustees in bankruptcy should not unnecessarily delay the annulment of a bankruptcy because the bankrupt’s tax affairs are not up to date. The Court said:
[the Bankruptcy Act] provides a mechanism by which the trustees may ascertain whether all of the bankrupt’s debts have been proved, including debt owed to the ATO, prior to annulling the bankruptcy.
63. The trustees have placed considerable evidence of their dealings with the ATO in order to ascertain whether quantum of the tax liabilities have been fixed. If it is still the case that there is no final response from the ATO, then, as submitted, the appropriate course is to follow the legislative pathway outlined in section 145 of the Act.
64. As to whether there is a delay in the annulment depends on the response by the ATO to the notice sent by the trustees in accordance with the Act. The question of what is a reasonable time for the response to the notice is a matter for the trustees.
The court accepted the Inspector-General’s submissions that seeking directions concerning the sale of assets was not warranted, stating that:
Trustees are in the best position to make enquiries to ascertain the best approach to take regarding the realisation of the bankrupt’s assets. If the Court was to review the question and seek evidence, it would have to seek evidence from an agronomist or some other qualified person. This would have to occur in the context of a Court hearing with all the attendant costs and expenses. It also strikes the Court that these questions are ones for the trustees to investigate and answer and if the question is complex… they are paid to answer difficult questions.
The trustees’ application for directions was dismissed.
The Inspector-General’s submission that the trustees had not made ‘full and fair disclosure to the Court’ was rejected by the Court. The Court stated that the trustees placed such information and evidence as was available to them at the time the application was made.
The Inspector-General did not seek to have the trustees pay the Inspector-General’s costs but did seek that the trustees personally meet the trustees’ own costs of the application.
The Court dismissed the trustees’ application to have their costs met by the estate and ordered that parties would bear their own costs. The trustees’ own costs will be met by the trustees personally, not by the estate.
Guidance for Registered Trustees – Rates for Time Based Charging
For AFSA’s 2019-20 Insolvency Compliance Program, a sample of administrations were reviewed for possible remuneration issues and delays in administrations. A common finding was that trustees and senior staff were completing low complexity work, but charging for these tasks at a senior level charge rate.
In administrations where this issue was found, the trustees refunded remuneration corresponding to the areas of concern with over-charging. Where a trustee is not willing to reduce their remuneration, the Inspector-General may conduct a review based on his own initiative, depending on the circumstances and facts.
- Trustees spending excessive time drafting reports to creditors
- Trustees spending excessive time reviewing reports to creditors – supervising and reviewing work is essential, however, concerns were raised where increased WIP entries possibly indicated rework.
- Trustees calculating income contributions and drafting assessments – rather than reviewing
- Trustees spending excessive time on file reviews – These refer to large WIP entries with minimal descriptions e.g. numerous entries of “Review status of bankruptcy” at 1 or 2 hours
- Senior staff spending excessive time on reviewing simple correspondence
- Trustees and senior staff completing administrative tasks
Relevant Legislation and Guidance Documents
AFSA expects the nature and complexity of the task to determine the rate charged to an administration. See Rule 42‑65 of the Insolvency Practice Rules:
“42-65 (2) The registered trustee must ensure that time billed for a task undertaken in conducting an administration is charged at the appropriate rate for the level of staff who would be reasonably expected to undertake the task”
Inspector-General Practice Statement 16 - Reviewing remuneration of trustees and costs of third party service providers also warns that such remuneration practices could potentially lead to a remuneration review being performed:
“3.11 Examples of the type of issues that may be considered sufficient to justify a [remuneration] review are:
the trustee is a sole practitioner and has charged principal rates for all the tasks carried out in the record of chargeable time that relates to his/her most recent remuneration claim. Many of the tasks were routine and would be expected to be charged out at a lower rate.”
There are going to be times where trustees and senior staff will need to take on low complexity work. For instance, where there are understaffing issues or limited resources in a firm. This is especially so with the impact COVID-19 has had on staff resources in insolvency firms.
There are also times that require trustees and senior managers to increase their involvement. Highly complex administrations require senior staff to properly supervise lower level staff to make sure appropriate steps are taken to recover property or collect contributions.
Should you, as a trustee or a senior manager, need to take on less complex work, it is expected that the hourly rate should be adjusted to reflect the level of staff that would have been appropriate for completing that type of task. To ensure the remuneration drawn is necessary and proper, consider:
- Adjusting hourly rates as you enter WIP entries – Is the hourly rate appropriate for the complexity of work undertaken? For example:
- For highly complex income contributions, a trustee may be required to be more involved in the calculations. This work can be charged at a senior manager rate, whereas a review can be charged at a trustee rate.
- For work on reports to creditors, a trustee may be required to draft the report because they are more acquainted with the complex issues involved. This work can be charged at a senior manage rate, whereas the review and signing of the reports can be charged at a trustee rate.
- Adjusting hourly rates when you are performing your regular review of timesheets
- Implementing average rates per task area – See paragraph 8.2.2 PSI 8: Remuneration of the ARITA Code of Professional Practice
- While working on Report to Creditors, the senior manager of a firm needs to go on carer’s leave suddenly. The report to creditors of a highly complex administration is half completed and due in a week. The trustee decides to draft the remainder of the report, as she knows all the complex issues and thinks she will take less time completing the report than another junior staff member.
After the report is completed, she reviews the WIP for time spent on the report and finds that 20 hours was charged. 12 hours of this was attributed to the trustee at a Director/Trustee rate at $595 per hour – 10.5 hours for drafting and 1.5 hour for reviewing. The trustee decides to lower her charge rate for the 10.5 hours drafting to a manager rate at $440 per hour.
- A trustee runs a small firm made up of himself and two other staff. One acts in the full time manager role, and the other, part time administration role. Knowing that he and the manager will need to take on tasks of lower complexity here and there, the trustee establishes set average rates to use when recording WIP entries:
- Trustee tasks: $500 per hour
- Manager tasks: $350 per hour
- Administrative tasks: $200 per hour
The trustee includes an explanation of how average rates work in the remuneration reports to creditors.
Assistant Director Technical
Am I still required to lodge my annual administration return while COVID-19 restrictions are in place?
Yes, all statutory returns are still required. If you are having difficulties complying with these requirements due to the coronavirus situation, get in touch with our team as soon as possible via email at email@example.com
I’m finding it difficult to administer an estate due to the coronavirus crisis – I can’t get access to essential information. What can I do?
AFSA has decided to avoid section 77AA searches for the time being, in response to the crisis. Our staff will work with trustees on an alternate solution wherever available. If an estate cannot be progressed, you will need to document your reasons clearly to help inform both creditors and the Inspector-General of the delay.
What can I do about holding a creditor meeting? Can it be delayed until after restrictions ease?
Under the Bankruptcy Act, proposals other than to consider a composition or personal insolvency agreement can be put to creditors without a meeting – however, if a meeting is absolutely required we recommend an electronic option, conducted in accordance with the Insolvency Practice Rules.
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