PIR Newsletter - June 2021

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The Personal Insolvency Regulator (PIR) is a quarterly newsletter from AFSA.

Finalising Personal Insolvency Administrations

From July 2021 AFSA will use data analytics to monitor the number of aged administrations held by registered trustees.

Administrations should be progressed as quickly as circumstances will allow. Trustees are reminded to regularly monitor and review the age of their administrations, and if appropriate, should finalise them.

When should a practitioner finalise an administration?

Trustees will need to exercise their judgment in finalising administrations. In some cases, administrations can be finalised before the bankruptcy discharge date. In other cases, it may be finalised well beyond the discharge date.

When deciding whether to finalise an administration, trustees should consider the following tasks:

  • Sending creditors notice of bankruptcy and a report on the likelihood of a dividend (paragraph 19(1)(c))
  • Carrying out preliminary inquiries and actions, and informing the person who is bankrupt of their obligations
  • Informing creditors of the outcome of inquiries
  • Taking action to recover and realise property, including divested assets, or other antecedent transactions for the benefit of the estate (paragraph 19(1)(f))
  • Assessing and collecting income contributions or noting when no further contribution is expected
  • Paying dividends to creditors after giving appropriate notice of intention to declare, and dealing with proofs of debt (paragraph 19(1)(c) and sections 140 and 145)
  • Sending all necessary remuneration notices when due
  • Identifying and referring evidence of offences (paragraphs 19(1)(h) and (i))
  • Lodging any required statutory returns e.g. to AFSA or ATO
  • Settling complaints, reviews or litigation involving the estate.

What are the effects of finalising administrations?

Under section 184 of the Bankruptcy Act 1966, a registered trustee will be released from office at the end of 7 years from the date noted on the NPII that the administration of an estate is finalised. This release will have the same effect as an order under section 183 of the Act.

Practitioners can finalise administrations on the Practitioner AAR Online site.

If there are any questions about finalisations, please email regulation@afsa.gov.au

A gambling case? Think again!

Not everything that involves gambling makes for a gambling offence referral to AFSA. There are several factors that determine whether a person with a gambling habit has committed an offence. Section 271 of the Bankruptcy Act 1966 legislates that a person who becomes bankrupt due to gambling or hazardous speculation commits an offence that can be prosecuted.

There are several considerations when deciding if a case is a genuine gambling issue. For a case to be referred as a gambling offence, gambling must have materially contributed to the person’s insolvency. Just because someone has gambled doesn’t mean gambling is the reason for their insolvency.

Check out the stories of John and Jane below; only one is a legitimate gambling offence.

  • John owes $1.2 million dollars to a range of creditors. He has a great job and earned $145,000 over the past year. After a few trips to the casino, he gambled $24,000 of his earnings. John didn’t make his debt repayments.
  • Jane owes $14,000 as she took out as a misguided personal loan last year. Unfortunately, Jane lost her job and with no other sources of income, ended up selling her house, receiving $400,000 in profit. After a month, Jane’s balance from the sale of her property was $0 – all lost in gambling. She filed for bankruptcy against the $14,000 she owed.

Both John and Jane lost a lot of money gambling but only Jane’s case should be referred as a gambling offence under s271. While John’s gambling didn’t help his situation, it was only a small part of the reason why he didn’t make his debt repayments. In Jane’s case, her gambling was the reason she didn’t make her payments as she had the funds and the ability to pay from the profits of the sale of her house.

Referring a gambling offence for prosecution

AFSA’s Inspector-General Practice Statement 6, which indicated that AFSA would avoid referring a person for prosecution if they were willing to state that they had a gambling problem, was repealed in 2020. One of the reasons for its repeal was that some people were intentionally abusing the personal insolvency system by claiming a gambling problem when they didn’t have one.

As IGPS6 no longer exists, it shouldn’t be used to decide about referring a matter to AFSA for enforcement action.

Public interest factors are important when assessing any offence referral, including gambling. For example, a true gambling addict who can show evidence of their addiction may have mitigating circumstances for their situation. This might mean that it isn’t in the public interest to pursue an investigation.

For more information, please read IGPS14 or email regulation@afsa.gov.au

Annual Administration Returns - Reminder

The Annual Administration Returns (AAR) lodgement period is fast approaching. This year’s AAR are due Wednesday 4 August 2021. The due date for the payment of realisations and interest charge is also 4 August 2021.

We appreciate that the COVID-19 pandemic may have had a disruptive effect for some insolvency practitioners. If you cannot meet your AAR obligations, please email regulation@afsa.gov.au as soon as possible.

Guidance on the AAR process can be found on the Practitioner AAR online page. This page includes links to resources to help practitioners meet their obligations, including Inspector-General practice documents, user guides and FAQs.

We’re here to assist practitioners, if you have any questions please email regulation@afsa.gov.au

New Resources for Practitioners

As part of AFSA’s ongoing role to provide guidance to personal insolvency practitioners, we have published the following new Inspector-General guidance tools on our Practice Resources page:

  • Meetings of creditors
  • Supervised accounts
  • Hardship applications
  • Objections to discharge
  • Income contributions

Our Official Receiver and Official Trustee Practice Statements have also been updated as well as several IGPS and IGPD documents. For more information please visit the AFSA website or email regulation@afsa.gov.au.

Intelligence Update

AFSA is enhancing its intelligence capability to help understand potential harms and risks in both the insolvency and PPSR systems and to monitor trends. The work includes:

  1. Reviewing and analysing objections (to discharge from bankruptcy) data for the past five years
  2. Liaising with Registered Trustees (RTs) to gain their perspective and insight into issues affecting the industry including potential harms

The first project looked at various aspects of the objection process including usage by trustees, why objections are used heavily by some trustees and less often by others, and whether objections lead to corresponding offence referrals. A sample of RTs were asked to share their ideas about how the system could be improved. Thank you to all trustees that participated and we are currently preparing the implementation plan.

If you are looking to report suspicious activity, please use AFSA’s tip-off form. To share general intelligence or insights, please email  intelligence@afsa.gov.au.

Four-time prosecution for failure to file Statement of Affairs and proactive compliance

The Statement of Affairs is a critical element of bankruptcy in Australia and failing to file an SOA is a serious compliance offence. Where necessary, AFSA pursues criminal charges against those who are deliberately misusing the system and failing to file their required information.

In one ongoing case, a bankrupt person has been charged four times after continually failing to file his Statement of Affairs. Mr Graeme William Monk was made bankrupt by the court for unpaid debts to the ATO in 2007. On 18 March 2021, Mr Monk was prosecuted for the fourth time in relation to his failure to file the same required Statement of Affairs.

In this most recent prosecution in Frankston Magistrates Court, Mr Monk was convicted and sentenced to 120 hours of community service. In sentencing, Magistrate Charles Tan indicated that the obligation to file the Statement of Affairs was "live and pending" and that if he fails to file it and is prosecuted again, imprisonment is a real possibility.

Our records identify a possible 214 people who have been prosecuted for failing to file an SOA where the SOA remains unfiled. If compliance is not achieved after AFSA makes contact again, the matter will be referred to the CDPP for consideration of prosecution.

Before contacting offenders, AFSA staff will contact the trustee. This will ensure that trustees are aware that offenders may be contacted and trustees can also raise any concerns about the proposed action.

For more information, please email enforcement@afsa.gov.au

ATO and Tax Practitioners Board update

ATO online services - new topic selections added

The ATO continue to improve services provided to insolvency practitioners. The following new topics have recently been added to the website:

  • New insolvency advice - all appointments
  • SB restructuring
  • Simplified liquidation

To find out more visit ato.gov.au/OSB.

Tax treatment of net capital gain on disposal of CGT asset by trustee in bankruptcy

Where a trustee in bankruptcy has disposed of a capital gains tax (CGT) asset and has derived a net capital gain, section 254 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the trustee in bankruptcy is responsible for the payment of the tax. 

Section 254 of the ITAA 1936 is to be read in conjunction with section 106-30 of the Income Tax Assessment Act 1997 (ITAA 1997).  While section 106-30 of the ITAA 1997 makes a capital gain or loss that has been derived by a trustee in bankruptcy attributable to the bankrupt individual instead of the trustee for CGT purposes, section 254 of the ITAA 1936 makes a trustee answerable as the individual taxpayer.

This means that the trustee in bankruptcy will need to:

  • report the net capital gain by lodging a return in their representative capacity and be assessed thereon;
  • retain the requisite amount of CGT upon being issued a notice of assessment; and
  • pay tax on the relevant capital gains.

The ATO has published guidance material to support insolvency trustees in understanding their obligations under section 254 of the ITAA 1936.  In particular, Practice Statement Law Administration - Insolvency - collection, recovery and enforcement issues for entities under external administration (PS LA 2011/16) provides that:

  • The trustee will be required to apply for a separate tax file number (TFN) and to lodge separate trust income tax returns to account for any income, profits or gains derived by the insolvent estate.
  • A trustee is required to retain amounts sufficient to pay tax which is or will become due in respect of the income, profits or gains. He or she is required to make the returns and shall be assessed in respect of that income, or those profits or gains, in his or her representative capacity.

Additionally, the ATO publishes an annual legislative instrument titled the “Lodgment of income tax returns for the year of income” (2017 and prior years) or “Notice of Requirement to Lodge a Return for the Income Year” (from 2018 onwards), which is registered in the Federal Register of Legislative Instruments.  These legislative instruments set out the lodgment obligations of taxpayers.  Particularly relevant for trustees, the legislative instruments require a trustee to lodge a trust return where he or she has derived income (including capital gains).

Insolvency practitioners: Do you need to register as a tax or BAS agent?

Insolvency professionals that provide designated tax agent services may need to register as a tax agent with the Tax Practitioners Board, even if the tax services are offered as part of a broader insolvency matter.

For more information visit tpb.gov.au.

Case notes

Sarina v O’Shannassy (No 2) [2021] FCCA 338

Bankruptcy – application under s 306(1) or s 33(1)(b) of the Bankruptcy Act 1966 (Cth) (Act) for an order to vary bankruptcy notice by removing the post office box address of the creditor and substituting a street address – whether it is an essential requirement to the issue of a bankruptcy notice that it not specify a post office box as the creditor’s address – such requirement is essential and its non-fulfilment, although a defect or irregularity, is not a formal defect or irregularity amenable to being cured under s 306(1) or s 33(1)(b) of the Act – interim application dismissed and bankruptcy notice set aside.

In this matter there was no dispute that the bankruptcy notice was invalid because it specified a post office box rather than a street address as the creditor’s address. The issue was whether the Court had power to amend the bankruptcy notice and so cure the defect under either:

  1. s 306(1) of the Bankruptcy Act 1966 (Cth) (Act) or
  2. s 33(1)(b) of the Act.

Mr Sarina, the recipient of the notice, submitted the defect was beyond these powers or, if it was within power, the Court should not cure the defect. Mr Sarina relied on the judgment of Lee J in Metledge v Hopkins [2020] FCA 561.

In Metledge Lee J held that the necessity to identify an address at which payment of the debt could be made (or an offer can be made to secure or compound the debt) is an “essential matter” but that a post office box could not constitute such address and, for that reason, the bankruptcy notice was “invalid” (citing Nugent v Brialkim Pty Ltd (1985) 61 ALR 725). Explaining this Lee J noted that it was:

difficult to see how it could be said that [a post box] amounts to a place where the debtor could make payment or offer to secure or compound the debt. Make the payment or offer to whom? The postmaster? A postal clerk? The present circumstance is quite different from the not uncommon situation where an address is given for payment at the address of a creditor’s solicitor.

While accepting the Federal Court decision of Metledge was binding on the Federal Circuit Court several reservations were noted, in particular:

  • the principle Lee J cited from Nugent that the address given should be one which during the relevant period it is reasonably practicable for the debtor to make payment or to offer to secure or compound did not appear to be based on the construction of any legislative text
  • the test that the notice must include an address at which it was ‘reasonably practicable’ for the debtor to pay their debt does not sit comfortably with the High Court’s judgment in James  v Federal Commissioner of Taxation [1995] HCA 75 which simply said the notice “merely gives an address at which the debtor may, at his option, seek out the creditor and pay him”.
  • it did not have brought to its attention that the prescribed form of bankruptcy notice contained the words “name and address, including telephone, fax and email address if appropriate” which suggested that with those options to contact the creditor then any practical obstacle to seek out and pay the debt demanded was not significant, and that in any event:

A bankruptcy notice specifying a post office box as the address at which the debt can be paid would constitute a representation to the debtor that the creditor will accept payment of the debt by the debtor posting or delivering to the post office box cash or a cheque (assuming it is reasonable to interpret the demand for payment as payment by means other than cash) without any further need for the debtor to contact the creditor.

While noting the concerns about the binding precedent the decision was that the notice received by Mr Sarina was invalid. The court then had to determine whether the recording of a post box could be characterised as a ‘formal defect or irregularity” such that any injustice that may arise from it could be cured under s306.

Section 306

The court noted that the issuing of a bankruptcy notice under s 41 of the Act is a “proceeding under” the Act, and that s 306(1), therefore, is capable of applying to a bankruptcy notice. The High Court in Adams v Lambert [2006] HCA 10 considered the scope of s 306(1) and from its reasoning the “correct question” is whether the “correct completion of the form prescribed by the regulations in every respect is a requirement made essential by the Act”; and it is difficult to answer that question in the affirmative where the irregularity “could not have misled the [debtor] as to what it was necessary to do in order to comply with the requirements of the notice”.

Applying those principles the Federal Circuit Court went on to say:

The question is whether, having regard to the legislative purpose of the provision with which the bankruptcy notice has not complied, and the significance or importance of the defect or irregularity, compliance with the requirement from which the bankruptcy notice has departed is a requirement which the Act makes essential. And the difficulty … is that in Metledge Lee J held that the Act requires that the bankruptcy notice specify as the creditor’s address an address that is not a post office box, and the Act renders the satisfaction of that requirement an essential condition to the validity of a bankruptcy notice…as the High Court held in Adams, a bankruptcy notice’s not complying with a requirement that is essential to its validity cannot be characterised as a “formal defect or an irregularity.

The Court concluded that specifying a post box is a defect or an irregularity that cannot be cured under s 306 of the Act. For that reason, the bankruptcy notice was invalid.

Paragraph 33(1)(b) of the Act – the Court may “at any time allow the amendment of any written process, proceeding or notice under this Act”

While a power expressed in broad language, in Skouloudis v St George Bank Ltd [2008] FCA 1765 it was held that the power is only available to authorise the amendment of a bankruptcy notice if the notice can properly be characterised as a notice under the Act. A bankruptcy notice that is a nullity cannot be so characterised.

The Federal Circuit Court observed that by specifying an address that is a post office box, the bankruptcy notice is invalid and, for that reason, was not a notice under the Act. This power was therefore not available to permit the Court to amend the bankruptcy notice to substitute an address for the creditor that is not a post office box.

Summary

The defect or irregularity constituted by the bankruptcy notice specifying a post office box address, therefore, was not a formal defect or a formal irregularity. That meant that the bankruptcy notice was invalid, and was not a notice under the Act which, in turn, means that neither s 306 nor s 33(1)(b) of the Act were available to cure the defect or irregularity.

Francis and Inspector-General in Bankruptcy [2021] AATA 644 (22 March 2021)

Bankruptcy – annulment of bankruptcy – review by Tribunal of decision of Inspector-General in Bankruptcy of contribution assessment – all outstanding debts met – Trustees released – consideration of difference between annulment and discharge of bankruptcy – application dismissed under section 42B of the Administrative Appeals Tribunal Act 1975 (Cth)

Practice and procedure – bankruptcy – annulment of bankruptcy – decision sought by the applicant no longer of any practical effect and serves no other legitimate purpose – application has become frivolous and vexatious – application dismissed under section 42B of the Administrative Appeals Tribunal Act 1975 (Cth)

Background

On 28 April 2014, the Trustees issued the applicant with a notice of contribution assessment under section 139P of the Bankruptcy Act 1966 (Cth) (the “Act”). The applicant requested the respondent review the Trustees’ decision. On 30 June 2014, a delegate of the respondent wrote to the applicant advising that they had decided to set aside the Trustees’ assessment and to make fresh assessments. The applicant sought review of the respondent’s decision before the Tribunal. Separately there was a sequence of further legal proceedings relating to an annulment that was sought, the sale of a property, and after the applicant became a beneficiary of her will, proceedings in relation to the deceased estate.

On 16 June 2017, the Trustees received $850,000 from the deceased estate. After further property sales the bankruptcy was annulled. The respondent made an application to have the matter dismissed pursuant to sections 42B(1)(a) or (c) of the AAT Act on the basis that the bankruptcy was now at an end and that a review of the decision relating to the contributions assessment was therefore obsolete and that, as a consequence, the application lacked any practical effect and was futile. The applicant continued to resist the dismissal.

Consideration

In Re Farnan and Inspector-General in Bankruptcy [2007] AATA 1199 the Tribunal dismissed an application for a review of a decision by the Inspector-General to affirm an objection by the trustee on the basis that as the applicant had since become discharged from the bankruptcy there would no longer be any utility in reviewing the decision of the Inspector-General thus enlivening the discretion conferred on the tribunal by s42B(1) of the AAT Act to dismiss the application for review.

Given the annulment the Tribunal accepted the respondent’s contention that there is no mechanism under the Act for the applicant’s previous bankruptcy to be revived. The Tribunal accepted the Inspector-General’s submissions on the distinction between annulment under s 153A of the Act 1966, and discharge under s 149. It went on to note that:

17. In this respect there is an important distinction to be made between a bankruptcy brought to an end as a consequence of an annulment pursuant to section 153A of the Bankruptcy Act …and the effect of a discharge of a bankrupt pursuant to section 153(2)(aa) of the Bankruptcy Act where the discharge has been affected pursuant to section 149 of the Bankruptcy Act.

18. In respect of [s149], the Bankruptcy Act includes [s139R] which renders a former bankrupt still potentially liable to pay an income contribution following the discharge of their bankruptcy .... However, in the case of an annulment pursuant to section 153A there is no equivalent provision to section 139R. … The Tribunal is satisfied that a liability to meet an outstanding contribution assessment is only available in respect of a person who is either a bankrupt or a discharged bankrupt but not in respect of a person whose bankruptcy has been brought to an end as a consequence of being annulled.

Conclusion

The Tribunal concluded that given it was satisfied that the review of the decision sought by the was no longer of any practical effect and would serve no other legitimate purpose and in that sense has become frivolous and vexatious within the meaning of section 42B(1)(a) of the AAT Act and should be dismissed.

PERGOLETO v CHANDLER & ORS [2021] SASC 30 (24 March 2021)

Application pursuant to Inheritance (Family Provision) Act 1972 (SA) – estate fully distributed – extension of time required – applicant a bankrupt – other causes of action vest in the trustee.

The case includes an interesting discussion about the principle that ‘family provision’ type applications are personal to the bankrupt and hence do not vest.

Background

The applicant commenced proceedings seeking remedies pursuant to the Inheritance (Family Provision) Act 1972 (SA) (“the IFP Act”). The applicant was one of the children of the deceased who died leaving a will. A grant of probate was made and the entire estate was distributed shortly thereafter in accordance with the terms of the will. The proceedings were commenced out of time. The applicant sought an extension of time.

The effect of bankruptcy

The fact that the applicant was an undischarged bankrupt was relevant to the application. The period of bankruptcy had been extended to eight years. Accordingly, he remained an undischarged bankrupt.

When a person becomes bankrupt their property forthwith vests in the trustee in bankruptcy. Property of a bankrupt includes a chose in action. The Court went on to note that it might be thought, therefore, that the claim of the bankrupt under the IFP Act would vest in the trustee but that it appears that may not be the case. In Collicoat & Ors v McMillan & Anor Ormiston J said:

It is probably sufficient to say that it has been accepted that the right to make a claim for further provision itself does not pass to the official trustee but is a personal right and thus the official trustee is not in this case nor in others a relevant party to the application, although from time to time the official trustee may have a right to intervene to protect an interest already given: see Re Estate of Robert Frangos (unreported, Court of Appeal, 7 July 1995). Because of the personal nature of the claim the better view appears to be that an order should not be made if it will not in fact benefit the applicant. If an order for further provision, intended as it is to provide for a person’s maintenance and benefit, would invariably go to his creditors and provide no other benefit to the applicant, then it would not seem appropriate to exercise the discretion at the second stage of the enquiry even if a decision were made that the testator had otherwise failed in the distribution of his or her estate to make adequate provision for proper maintenance and support: see McLeod v. Johns [1981] 1 N.S.W.L.R. 347 at 348.

Dart J noted that the authorities cited in support of the principle all trace the position back to the case of Coffey v Bennett [1961]VR 264  but that decision was made at a time when the Bankruptcy Act 1924 (Cth) was applicable. It turned on the proposition that the common law of bankruptcy excluded certain property from vesting in the trustee. One such type of property was an IFP Act‑type claim. His Honour noted that in contrast the provisions of the current Bankruptcy Act are perhaps more prescriptive than the 1924 Act. As mentioned above, a chose in action ordinarily vests in the trustee. There are exceptions in s116(2)(g). However, Dart J suggested that:

14. It would appear that there is a cogent argument that a cause of action under the IFP Act does not fall within the definition provided within the property excluded by s 116(2)(g). It is not a claim for damages or compensation for personal injury or wrong done to the applicant.

16. The question becomes whether it is appropriate to exclude causes of action, other than those specified in s 116(2)(g), from vesting in the trustee upon the making of the sequestration order. Arguably not. Nonetheless, it has to be accepted that there are a number of authorities which suggest that an IFP Act action does not vest. It is not a matter that needs to be resolved for the purposes of this matter, the action being out of time in any event. It is a matter that would most appropriately be resolved by an intermediate appeal court.

Dart J went on to note that even if the cause of action was pursued by the bankrupt and it was apparent an order for provision would go to the creditors, then following Ormiston, it may not be appropriate to order provision from the deceased estate. And added that because “after acquired property” vests in the trustee as soon as it is acquired by the bankrupt, then even if a bankrupt could prosecute a claim and obtain a provision, the fruit of the litigation would immediately vest in the trustee on the Court making such an order.