Debt agreement administrators' guidelines to certification requirements

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Inspector-General Practice Direction 13 explains Debt agreement administrators' guidelines to certification requirements.

  1. Introduction

    1. The purpose of this practice document is to outline the Inspector-General in Bankruptcy’s regulatory role in regard to the duty debt agreement administrators (“administrators”) have to certify debt agreement proposals that are lodged with the Official Receiver.  This practice document incorporates changes contained in the Bankruptcy Amendment (Debt Agreement Reform) Act 2018 (“the Debt Agreement Act”).  The majority of the changes contained in the Debt Agreement Act commenced on 27 June 2019.[1]
    2. This practice document includes best practice principles about the need to obtain and retain documentation.  It is complemented by practical examples and outlines the expectations of the Inspector-General in respect of setup fees and the requirement to disclose certain information to debtors before they sign a debt agreement proposal.
    3. The Bankruptcy Act 1966 (“the Bankruptcy Act”) sets out the legislative framework regarding administrators’ certification duties.  This framework provides a specific duty to properly certify in accordance with sections 185C and 185M and the Bankruptcy (Registration and Cancellation of Registration of a Debt Agreement Administrator) Guidelines 2020 (“the Guidelines”).
    4. At the outset, it should be clearly noted that it is not the role of the Inspector-General and the Official Receiver to advise which records must be sighted, obtained and retained in order to properly certify.
  2. Setup fees

    1. Before entering into a debt agreement, an administrator will usually charge an upfront setup fee to certify the debt agreement proposal.  Setup fees are often paid progressively by the debtor before the proposal is voted on by creditors.  If the proposal is accepted by creditors, any amount outstanding at that time is then paid through the debt agreement at the same rate of return as other creditors.
    2. The period of time for a debtor to repay a setup fee before a proposal is lodged should:
      1. not be extended to a period longer than the amount of time it takes for the administrator to perform their certification duties
      2. not be used as a trial run or test period to ascertain whether a debtor can meet payment obligations under a debt agreement.
    3. The Inspector-General would generally expect this period not to extend beyond 3 months between the time of first payment and the time the proposal is accepted by creditors.
  3. Disclosure of information to debtors

    1. From 1 January 2021, the administrator must disclose prescribed information to a debtor within a particular time frame before the debtor signs the proposal.  This is part of an industry-wide condition of registration determined by the Minister pursuant to subsection 186F(4) of the Bankruptcy Act.
    2. Administrators must comply with a 2-stage process of disclosure to ensure debtors receive information that will help them make informed decisions.  An administrator can provide this information verbally or in writing using the “additional information sheet” with the “prescribed information sheet”.  Each administrator will be required to add their own relevant information to the document, such as fees and complaints handling processes.  The information provided to debtors must be factual and objective.
    3. At least 5 business days before a debtor signs a proposal, the administrator must provide the debtor the following stage 1 information:
      1. information about how a debt agreement operates and the consequences of entering into one
      2. alternative options
      3. information about how a debtor can access free financial counselling services
      4. that entering a debt agreement proposal with the Official Receiver is an act of bankruptcy
      5. the consequences of failing to make payments required under a debt agreement
      6. an estimate of the remuneration payable to the administrator for work performed preparing the proposal and to administer the debt agreement (if it is accepted by creditors)
      7. an estimate of realisations charge payable by the administrator to AFSA in administering the debt agreement
      8. the fee payable to the Official Receiver for lodging a debt agreement
      9. information about the role of the Inspector-General in relation to administrators.
    4. At least one business day before a debtor signs a proposal, the administrator must provide the debtor with the following stage 2 information:
      1. alternative options (instead of entering into a debt agreement)
      2. the consequences of lodging a debt agreement proposal with the Official Receiver
      3. information about sources of financial advice or guidance for people contemplating entering a debt agreement
      4. that giving a debt agreement proposal to the Official Receiver is an act of bankruptcy
      5. the amount of remuneration payable to the administrator for work performed preparing the proposal and to administer the debt agreement (if accepted by creditors and the debtor makes all payments required under the agreement)
      6. the amount of realisations charge payable by the administrator to AFSA in administering the debt agreement (if the debtor makes all payments required under the agreement)
      7. the fee payable to the Official Receiver for lodging a debt agreement
      8. information about the role of the Inspector-General in relation to administrators
      9. information about internal and external dispute resolution processes available to the debtor in relation to the conduct of an administrator
      10. information about how a debtor can make a complaint to the Inspector-General in relation to the conduct of an administrator.
    5. In order to comply with the new disclosure of information requirement, it is expected that  the administrator will apply one of the 2 options listed below:
    6. Option 1:

      • Stage 1 information – The administrator verbally provides the stage 1 information at least 5 business days before a debtor signs a debt agreement proposal.
      • Stage 2 information – After providing the stage 1 information, the administrator provides the stage 2 information by providing the prescribed information and additional information sheet (indicating the fees are a final calculation) to the debtor at least one business day before a debtor signs a debt agreement proposal.

      Option 2:

      • Stage 1 information – The administrator provides stage 1 information by providing the prescribed information and additional information sheet (indicating the fees are an estimate) at least 5 business days before a debtor signs a debt agreement proposal.
      • Stage 2 information – After providing the stage 1 information, the administrator provides the prescribed information and additional information sheet (indicating the fees are a final calculation) to the debtor at least one business day before a debtor signs a debt agreement proposal.
    7. The administrator must make a record of the above disclosure to the debtor within 2 business days of giving the information.  This can be recorded as a written file note or call record and it must be retained by the administrator for 6 years from the day a debt agreement is made.  The retention of this information will assist the Inspector-General should any investigations or inquiries be made for any conduct between the period of first contact between the administrator and the debtor and the signing of the proposal.
  4. Overview of duty to certify

    1. Debt agreement proposals

    2. Pursuant to subsection 185C(2D) of the Bankruptcy Act, at the time a proposal is lodged with the Official Receiver, the administrator is required to certify:
      1. the administrator must consent to deal with the identified property in the way specified in the proposal
      2. the administrator has given the debtor the information about alternative means of dealing with financial difficulty as prescribed by the Bankruptcy Regulations
      3. the administrator has reasonable grounds to believe that the debtor is likely to be able to discharge the obligations created by the agreement as and when they fall due having regard to the circumstances in existence at the time when the debtor’s statement of affairs was signed by the debtor
      4. the administrator has reasonable grounds to believe that all information required to be set out in the debtor’s statement of affairs and proposal explanatory statement, has been set out and they have a reasonable basis for believing that the debtor has properly disclosed their affairs to creditors.
    3. For proposals lodged with the Official Receiver on or after 27 June 2019, the following also apply:
      1. where a broker has referred a debtor to the administrator, the administrator must specify the nature of their relationship with the broker, and set out any payments made or to be made to the broker
      2. where a related entity of the administrator is an affected creditor, the administrator must specify the name and nature of their relationship with the affected creditor.
    4. An administrator is required to ensure the certification provided to the Official Receiver with the proposal is correct.  If an administrator does not certify these matters in a proposal, the proposal will not be accepted.  The administrator must complete the certificate using the online form.
    5. For single creditor proposals, practitioners should be aware that the Official Receiver has a published policy in relation to how it deals with this class of proposals – see Debt agreements.
    6. The Official Receiver will have the power to refuse to accept a proposal or variation proposal lodged after 27 June 2019 where it is believed that it will cause undue hardship to a debtor.
    7. Variations

    8. For proposals lodged after 27 June 2019, any subsequent variation proposals must be certified by the administrator that the debtor will discharge their obligations under the varied agreement.
    9. Where a variation proposal is made to extend a debt agreement for up to 5 years pursuant to subsection 185M(1DB) of the Bankruptcy Act, the administrator must provide a certificate stating that they have reasonable grounds to believe that the debtor has suffered a substantial change in circumstances not foreseen at the time of the proposal.  They must also certify that the debtor is not likely to discharge their obligations under the original agreement.
  5. Inspector-General expectations

    1. Consent

    2. It is essential that an administrator consents to act.  Should the creditors accept the debtor’s proposal, the completed consent allows an administrator to act as soon as the debt agreement commences.
    3. The administrator must sign the certification to consent.  An electronic signature is acceptable, however the signature must be that of the administrator.  The administrator cannot delegate the signing of the certificate to another person.
    4. Prescribed information

    5. The administrator must give the debtor the prescribed information and ensure the debtor reads, understands and signs the form.  It is expected that administrators will explain the meaning of the prescribed information to debtors and answer any questions debtors have.  A sample of debtors is checked through the course of the Inspector-General’s inspection program.
    6. The original of the signed prescribed information form must be retained on the administrator’s file, either in paper or electronic form.
    7. It is particularly important that administrators explain the effect of personal insolvency administrations on credit agency reporting and the record on the National Personal Insolvency Index (“NPII”).  Administrators should also explain that lodging a proposal is an act of bankruptcy, even if the proposal is not accepted by creditors, and that creditors could use this to apply to the court to make the debtor bankrupt.
    8. In assisting the debtor to make informed choices about alternative means of dealing with financial difficulty, the administrator will need to be capable of providing debtors with information about the options available to them.  This includes, but is not limited to, the Bankruptcy Act, general bankruptcy concepts relevant to a debtor formulating a proposal, the explanatory statement and completing a statement of affairs that discloses income, property and liabilities.  It is expected that an administrator will be able to explain to a debtor what the differences are between the various options and the consequences.
    9. To be capable of doing this, the type of general insolvency and business knowledge expected of the administrator includes the following matters:
      1. A basic knowledge of the Bankruptcy Act.  In particular, an administrator needs to know the options and their impact on a debtor.  This includes the bankruptcy, personal insolvency agreement and debt agreement options available under the Bankruptcy Act, how people become bankrupt, what property a bankrupt could retain, bankrupts’ and creditors’ rights, income contributions and a general awareness of antecedent transactions.
      2. A detailed knowledge of debt agreement legislation detailing the duties of administrators, including legislative requirements for administrators to cooperate with the Inspector-General’s inquiries and investigations.
      3. A general knowledge of other financial and banking options available including refinancing, mortgages, informal arrangements and banking industry hardship provisions.
      4. Knowledge of common business structures such as companies, partnerships, trusts and sole traders, the liability and tax implications arising from these structures, commercial and financial transactions and documents, including leases, hire purchase, guarantees, caveats, mortgages and other security, and basic contract law.
    10. Affordability and sustainability

    11. To properly certify that an administrator has reasonable grounds for believing that the debtor is likely to be able to discharge the obligations created by the agreement as they fall due, they are expected to demonstrate the following abilities based on their knowledge and business systems:
      1. to evaluate financial choices and understand money and debt, including how to budget and plan
      2. to recognise and competently inform debtors on life events that affect every day financial decisions, including events in the general economy
      3. to determine what budgeting processes are needed to assist the debtor
      4. how they plan to assist the debtor determine what they can afford to pay.  For example, does the administrator plan to use supporting systems such as the Australian Bureau of Statistics Expenditure Survey or Household Income and Labour Dynamics in Australia research to assist or determine whether the debtor’s disclosed expenses are reasonable?
    12. Administrators must look behind the budget supplied by the debtor and apply independent tests such as allowance for lifestyle expenses, copies of payslips to verify all sources of income including overtime, allowances and the nature of employment.  Where a debtor is employed on a casual basis, it is expected that an administrator would require further evidence (such as copies of payslips over a longer period of time) to establish the debtor’s level of income compared to a debtor working full time.  It is not acceptable to certify that the debtor can afford what is being proposed without a detailed review of the debtor’s budget.
    13. Full disclosure

    14. To properly certify that an administrator has reasonable grounds to believe that the debtor has made full and true disclosure of their claims in the proposal and accompanying explanatory statement and statement of affairs, they must have an understanding of what enquiries can be easily made both from the debtor and other resources.
    15. For example, an administrator is expected to know what evidence they will require from a debtor concerning income, expenses, liabilities and assets; what simple checks can be undertaken and what evidence they will retain depending on the debtor’s circumstances.
    16. There is no prescribed requirement about the enquiries an administrator should make to establish reasonable grounds that the debtor has made full and true disclosure of their affairs.  Full disclosure of all creditors is important to ensure that creditors are:
      1. notified of the proposal
      2. fully aware of a debtor’s current circumstances and make informed decisions
      3. suspending collection action against the debt
      4. given the opportunity to provide details of their debt and vote.
    17. In most cases, it is appropriate for the administrator to examine bank and credit card statements, review employment history and payslips and ask if tax returns have been filed.  Credit reports or direct contact with creditors to clarify amounts may also be needed.
    18. Disclosure of brokers

    19. A broker is any person or corporation who acts as an intermediary or agent and facilitates a debt agreement proposal with the administrator as an administrator of the agreement.  An administrator must disclose in the proposal any broker who refers a debtor to them.  The details that must be disclosed include the name of the broker, the nature of the relationship with the broker and any payments made or to be made to the broker for the referral.
    20. It is imperative that administrators are open and frank in their disclosure of brokers to ensure that all referral arrangements are accounted for and that affected creditors are fully informed when voting on whether to accept the proposal.
    21. Disclosure of related entities

    22. To ensure that the voting process is transparent, the administrator must disclose any related entity that is an affected creditor in the proposal.  It must state the name and relationship between the affected creditor and the administrator.  For proposals lodged with the Official Receiver on or after 27 June 2019, creditors who are related entities of the administrator will not be invited to vote on proposals, and any votes made by a related entity to the administrator will be disregarded by the Official Receiver.
  6. Reasonable grounds to certify

    1. Most certifications will require the administrator to take reasonable grounds to certify.  It is not possible to be too prescriptive in outlining what constitutes reasonable grounds as each debtor’s circumstances vary and will require different levels of verification.  This is to be monitored and assessed on a case-by-case basis.
    2. For example, if a debtor has a house and vehicle, it is not always expected nor mandatory that the administrator has completed property and vehicle searches and received appraisals before formulating the proposal.  What would be reasonable depends on the circumstances.  The same approach is applicable for certifying variation proposals.  Where there has been a material change in the value of an asset, the administrator would be expected to conduct searches before formulating the variation proposal.  Administrators may also consider adding a file note to explain their decision not to complete searches where they believe it is not required.  Regarding the major asset items it would be reasonable for the administrator to check the extent of the secured debt with the debtor and whether it is separate or joint, and ask the debtor to explain the basis on which a particular value was estimated.  Depending on the responses further enquiry may be required.  This is particularly relevant if the debtor resides and has property in a different state to that of the administrator.  If the debtor did not comply, the administrator may form the opinion that the certification required under subsection 185C(2D) of the Bankruptcy Act should not be given and the proposal could not be lodged with the Official Receiver for processing.
    3. A breach of the certification duty will arise if:
      1. the Inspector-General looks at records retained and has concerns about the quality, extent of questioning and verification by the administrator before certification (e.g. the prescribed information being provided, the accuracy of information or the sustainability of the proposal; monitoring of staff brokers or agents)
      2. administrators are unable to present evidence to show they verified issues that are clearly inconsistent or that appear to AFSA as dubious before they certified.
    4. Administrators and AFSA need to assess each on a case-by-case basis based on what is reasonable in the debtor’s circumstances.
    5. Reasonable grounds – assigned debts

    6. Determining which creditors vote on a proposal is ultimately a responsibility of the Official Receiver and delegates of the Official Receiver make such decisions when processing a proposal.  However, in doing this, reliance is placed on the information disclosed by the debtor and certified as complete by the administrator.  The Inspector-General has certain expectations of administrators in relation to assigned debts, to ensure that proposals and variations to debt agreements are properly managed.
    7. Administrators need to be aware of the legislative limits within which they conduct their enquiries and ensure this aligns with and complements the statutory role and responsibility of the Official Receiver.  Division 2 of Part IX of the Bankruptcy Act establishes that only the Official Receiver is empowered to undertake certain assessments and determine who may vote on a proposal.  As such, an administrator’s certification duty does not extend to making those assessments or decisions.  The certification duty of the administrator pursuant to subsection 185C(2D) does not provide license for a forensic investigation scrutinising the validity of an assigned debt.  It should not be confused with formalities required for the transfer of legal title under the various Conveyancing Acts operating in the States and Territories.
    8. The administrator must have reasonable grounds to believe that the assignee has been assigned the debts.  In this regard the following principles apply:
      • The administrator is entitled to receive evidence that an assignment has been effected.  However, an agreement for assignment does not need to take any particular form.  The administrator could be satisfied where it is provided evidence of an agreement that enables it to identify the personal information of the debtor and reasonable details of the assigned debt (such as the amount outstanding, relevant account numbers where available and consideration paid by the assignee for the debt).
      • The administrator must have regard to the substantive effect of the documentation that is provided and must not have undue regard to the form in which it is provided.  As equitable assignees are capable of being a party to a debt agreement, it follows that assignments do not have to meet the legal title requirements before an administrator can be satisfied that the assignment is effective.
      • A single agreement may relate to more than one assignment of debt.
    9. In determining the owner of a debt, consider what the debtor understands of their financial affairs.  However, when conducting their enquiries, administrators may become aware of assignments before the debtor received formal notice, so administrators may have more up-to-date information.  Generally speaking, the debtor will be the best source of information about the existence of debts, and creditors will be source of information about the owner of debts.  When in doubt, it is open for the administrator to contact the assignee and for the assignor to clarify who they believe is the owner of the debt.  This should resolve most questions about ownership.  If, after this action, there remains doubt, the administrator should advise the Official Receiver when submitting the proposal.  If creditors are aggrieved by the decision of the administrator, they may complain to the Inspector-General.
    10. The duties of an administrator described above can be distinguished from those duties relating to assignments occurring after a proposal has been accepted.  Where a debt is assigned during the administration of the agreement, the Official Receiver’s involvement is limited.  Therefore, it falls solely to the administrator to establish the owner of the debt and to whom dividends should be paid.  Even so, administrators are encouraged not to take an approach of form over substance to the assessment, particularly where the assignee and the assignor are not disputing the assignment.  The principles in paragraph 6.6 are still relevant once a proposal has been accepted, and would reflect a reasonable approach by an administrator.
    11. Stage of agreement

      Assignment information

      How to treat the assignment

      Outcome

      Pre-debt agreement proposal

      Debtor is aware a debt has been assigned.  Notice provided to administrator

       

      Administrator includes assignee as creditor in the proposal

      Debtor is not aware of assignment or hasn’t understood what it means.  Fails to advise administrator of assignment

       

      Administrator can accept information from debtor and include original creditor in the proposal

      Post-debt agreement proposal

      Administrator becomes aware during voting period that debt was assigned pre-acceptance of the proposal

      Principles reflected in this practice document apply

      Administrator notifies the Official Receiver

      The Official Receiver becomes aware during voting period that debt was assigned pre-acceptance of the proposal

      The Official Receiver determines whether there has been an effective assignment

      The Official Receiver includes assignee as creditor

      Debt is assigned during voting period

      The debtor, Official Receiver or administrator may become aware of this, principles reflected in this practice document apply

      The administrator notifies the Official Receiver

      -or-

      the Official Receiver  includes assignee as affected creditor and accepts vote

      After debt agreement is in force

      Debt is assigned

      Principles reflected in this practice document apply

      Assignee is now a party to the debt agreement, entitled to dividends

    12. Certification requirements in the event of natural disasters and/or pandemics

    13. It is noted that in the event of natural disasters and pandemics, the impacts on individuals may include the disruption of, or loss of work or income, loss or damage to accommodation and restricted ability to communicate. In order that affected debtors are not unduly disadvantaged, administrators should be proactive in discussing with them the potential to vary the debt agreement.
    14. It is noted that there may be consequent difficulties for administrators complying with their certification duties if there is a requirement for debt agreements to be varied. In these circumstances, the Inspector-General will apply a practical approach to certification. As it is likely to be more difficult for administrators to obtain written evidence in the event of natural disasters or pandemics, it may be appropriate in these circumstances for administrators to rely on file notes to document the debtor’s circumstances and/or administrators’ decisions.
    15. Administrators are also encouraged to take into consideration the impact of the natural disasters or pandemics on the affected debtor’s ability to meet their obligations under the agreement, and accordingly act with extra sensitivity and empathy in this regard. For example, if the debtor is in arrears with respect to their debt agreement as a result of the impact of floods and a variation of the debt agreement is required, make sure requests for variation are dealt with promptly and that creditors are made aware of the debtor’s circumstances. If the debtor loses their job or their circumstances materially change due to the disruption caused by a natural disaster or pandemic, this will constitute the requisite substantial, unforeseen changes needed to extend a debt agreement from 3 to up to 5 years.
  7. Retention of documentation

    1. Documentation collated in support of a proposal and in the course of certifying is not to be forwarded to the Official Receiver when filing the proposal.  On occasion, the Official Receiver may request documentation for review.
    2. Administrators are not committing a breach of their certification duty if they decide to keep only minor documentation provided that, on review by the Inspector-General, the information retained is sufficient to conclude the certification was reasonably made.  This is with the exception of records that must be retained to comply with industry-wide conditions of registration relating to disclosure of information to debtors.  Administrators are required to exercise sound judgment on a case-by-case basis, which is best illustrated by 2 examples.
  8. Practical examples

    1. Consent

    2. This element of the certification does not lend itself to a practical example.
    3. During inspections, the Inspector-General will review during inspections to ensure that only those that are authorised to consent do so.
    4. Prescribed information

    5.  
    6. Affordability and sustainability

    7.  
    8. Full disclosure

  9. AFSA’s roles

    1. The Official Receiver (AFSA Service Centre)

    2. Officers in the AFSA Service Centre, as delegates of the Official Receiver, check that administrators have given the certification in the approved form and that they contain all mandatory elements.
    3. The AFSA Service Centre will apply compliance checks largely by phoning debtors in a sample of matters to ensure that they have gone through an adequate process and been informed in relation to essential issues such as the prescribed information, fees and budget preparation.
    4. If the AFSA Service Centre believes an adequate process has not been followed, a decision may be made to either reject the proposal for processing or cancel it during voting.  Intelligence regarding such matters is provided to the Inspector-General and feedback given to the relevant administrators.
    5. The Inspector-General (Practitioner Supervision)

    6. Officers in AFSA’s Practitioner Supervision team act as delegates of the Inspector-General.  Section 12 of the Bankruptcy Act provides the Inspector-General with the power to investigate and make inquiries where there are issues of concern either during an inspection or through a complaint.  This power extends to any conduct of an administrator from the first point of contact between them and the debtor.  Practitioner Supervision will examine the level and thoroughness of certification performed by reference to these stated principles and the Guidelines.
    7. Where breaches of the law, including the Guidelines, or lack of record keeping are identified, the administrator will be asked to take appropriate remedial action including a change in practice.  The breaches may also lead to counselling or, in serious or systemic cases, to either litigation or disciplinary action being initiated, including conditions being placed on the administrator’s registration or cancellation of registration.
    8. During inspections, Practitioner Supervision will examine the systems and controls an administrator has in place in respect to:
      1. the budgetary and assessment processes that will enable identification of the debtor’s income and likely expenses during the period of the proposed agreement
      2. processes that will ensure they are able to explain to the debtor what their obligations are and the consequences of failing to meet those obligations.
    9. Practitioner Supervision will examine documented practices, checklists, delegations and, where an administrator is relying on others to assist, how the administrator properly supervises and trains their employees, agents and/or brokers to properly perform these duties on their behalf.
  10. Conclusion

    1. This practice document outlines the principles informing the Inspector-General’s approach to regulating some of the day-to-day issues faced by administrators in certifying debt agreement proposals.  It will be against these principles and the standards contained in the Guidelines that administrators’ conduct of an administration will be assessed by Practitioner Supervision.
    2. When there are other specific issues where clarification is required, following consultation with the AFSA Service Centre, Practitioner Supervision will continue to develop policy and practice documents to assist practitioners.

Footnotes

[1] The Debt Agreement Act gives the Minister power to make legislative instruments including instruments relating to the payment to income ratio (a new debt agreement eligibility requirement).  If this instrument is made, this practice document will be updated to reflect the relevant amendments becoming operative