Trustees' guidelines relating to handling funds and keeping records

Trustees' guidelines relating to handling funds and keeping records (IGPD5)

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  1. INTRODUCTION

    1. This practice direction provides guidance to registered trustees about:
      • their duties in handling money
      • keeping records for the regulated debtor estates they administer
      • the best practice expectations of the Inspector-General in Bankruptcy.
    2. This document applies to registered trustees and, where applicable, to the Official Trustee in Bankruptcy.
    3. The legislative framework for trustees handling money and keeping records is found in:
    4. Registered trustees who are also members of the Australian Restructuring Insolvency Turnaround Association (“ARITA”) and/or accounting bodies (CPA Australia, Chartered Accountants Australia and New Zealand and the Institute of Public Accountants) are also subject to codes of professional practice that prescribe standards for keeping records:
      1. ARITA Code of Professional Practice (see clause 18.2, Maintenance of administration files)
      2. the Accounting Professional and Ethical Standards Board (“APESB”) code of ethics and standards
      3. APES 320 Quality Control for Firms – paragraphs 93-105
      4. APES 330 Insolvency Services – paragraphs 9.1-9.3.
  2. HANDLING MONEY OVERVIEW

    1. Handling money

    2. Division 65 of the Schedule and the Rules, which commenced 1 September 2017, outline the handling of money obligations of registered trustees[1] who administer regulated debtors’ estates.  Division 65 also applies to ongoing administrations (i.e. those that started before 1 September 2017 that have not yet ended).
    3. All money received by registered trustees on behalf of, or in relation to, a regulated debtor’s estate on or after 1 September 2017[2] must be paid into an administration account within 5 business days after receipt, unless otherwise directed by a court.
    4. Failure to comply is a strict liability offence with a penalty of 50 penalty units, along with an interest penalty of 20 per cent a year for any amount exceeding $50 for which the registered trustee is personally liable.
    5. An administration account must be held with an authorised deposit-taking institution and be interest-bearing.
    6. If a registered trustee has an account that was opened before 1 September 2017 that complies with the Bankruptcy Act and Regulations as in force at that time, that account is taken, for the purposes of section 65-5 of the Schedule and subsection 280(5) of the Bankruptcy Act, on and after 1 September 2017 to be an administration account.
    7. No other money received by registered trustees[3] is to be paid into the administration account of a regulated debtor’s estate, unless otherwise directed by a court.  Failure to comply is a strict liability offence with a penalty of 50 penalty units.
    8. On or after 1 September 2017,[4] registered trustees must not pay any money out of the administration account for a regulated debtor’s estate other than for:
      • purposes related to the administration of the estate
      • according to the Bankruptcy Act or a direction of a court.
    9. Failure to comply is a strict liability offence with a penalty of 50 penalty units.
    10. Reconciliation of administration account

    11. If a registered trustee maintains a single bank account on or after 1 September 2017[5] for the estates of multiple regulated debtors, they must:
      • maintain separate records for each of these estates for money received, payments and the balance of money held in relation to the estate
      • reconcile the balance relating to each estate held in the account with the corresponding separate record at least once every 25 business days.
    12. Handling securities

    13. Registered trustees must deposit in a bank bills of exchange, promissory notes and any other negotiable instruments or securities payable to the regulated debtor or trustee on or after 1 September 2017.[6]
    14. These must be deposited as soon as practicable after they are received, unless otherwise directed by a court.
    15. Failure to comply is a strict liability offence with a penalty of 5 penalty units.
    16. Court directions regarding handling money and securities

    17. The Court may give directions regarding the payment, deposit or custody of money and securities that are payable to, or held by, a registered trustee of a regulated debtor’s estate on application by a person with a financial interest in the administration of the estate.
    18. A person with a financial interest in the administration includes:
      • a creditor
      • the regulated debtor
      • the trustee
      • any other person in prescribed circumstances.
    19. The Court may give directions authorising:
      • a registered trustee of a regulated debtor’s estate to make payments, for a time and on the terms it thinks fit, into and out of a special bank account
      • the closure of the account if it thinks it is no longer required.
    20. The registered trustee must serve on the bank a copy of Court order authorising payments into and out of a special bank account.
    21. Inspector-General review of third party payments

    22. Registered trustees may apply to the Inspector-General for review of a bill of costs for services in relation to the administration of a regulated debtor’s estate .  This process is addressed in Reviewing remuneration of trustees and costs of third party service providers.
    23. Consequences of non-compliance

    24. Registered trustees who contravene or fail to comply with Division 65 of the Schedule and the Rules in relation to a regulated debtor’s estate may:
      • be liable to make payment of penalty interest[7]
      • have all/part of their remuneration disallowed[8]
      • be removed from office by a court[9]
      • have to pay any expenses due to their default.[10]
  3. RECORD-KEEPING OVERVIEW

    1. Administration books

    2. Division 70, Subdivision C of the Schedule, which commenced on 1 September 2017, outlines the record-keeping obligations of trustees who administer a regulated debtor’s estate.  This division also applies to ongoing administrations that started before 1 September 2017 that have not yet ended.
    3. The trustee of a regulated debtor’s estate must, unless they have a reasonable excuse:
      • keep proper books in which entries of minutes of proceedings at meetings and other entries give a complete and correct record of the trustee’s administration of the estate[11]
      • ensure that the books are available at their office for inspection and permit a creditor (or another person acting on the creditor’s behalf) to inspect the books at all reasonable times.
    4. The trustee of a regulated debtor’s estate operating a business previously carried on by the regulated debtor must:
      • keep the books that are usually kept in relation to the carrying on of a business of that kind[12]
      • permit a creditor or a person acting on the creditor’s behalf to inspect the books at all reasonable times.
    5. Failure to comply with these obligations is a strict liability offence with a penalty of 5 penalty units.
    6. Inspector-General audit of administration books

    7. The Inspector-General may audit, or cause to be audited, the administration books[13] or returns or books of a trustee:
      • on their own initiative
      • at the request of the regulated debtor
      • at the request of a creditor
      • if ordered by a court.[14]
    8. If the books of an estate are being audited, the trustee must give the auditor the books, information and assistance that they reasonably require unless they have a reasonable excuse.
    9. Failure to comply is a strict liability offence with a penalty of 50 penalty units.
    10. Transfer of administration books following a change of trustee

    11. Where there is a change in trustee of a regulated debtor’s estate on or after 1 September 2017, the former trustee must transfer to the new trustee any administration books that they possess or control.[15]  This must be completed within 10 business days from the day after the new trustee’s appointment (or a different period agreed to).  The former trustee may take a copy of any part of the books before transferring them to the new trustee.
    12. The new trustee must take possession or accept control of any administration books.  After transfer of the books, the new trustee must allow the former trustee to inspect them at any reasonable time and take a copy of any part of the books.
    13. Intentional or reckless failure by a former trustee to transfer the books, or by a new trustee to allow the former trustee to inspect the books, is an offence with a penalty of 50 penalty units.
    14. A former trustee is not entitled to claim a lien on the administration books as against the new trustee entitled to them, but such lien is not otherwise affected.
    15. Retention of administration books

    16. The last trustee to administer a regulated debtor’s estate must, unless they have a reasonable excuse, retain all books for a period of 7 years from the end of the administration that relate to the estate which they possess or control.[16]
    17. Intentional or reckless failure to comply is an offence with a penalty of 50 penalty units.
    18. Despite this requirement, books given to the trustee by the regulated debtor may be returned to them within the retention period as directed by:
      • a committee of inspection (if any)
      • otherwise by creditors’ resolution.
    19. The trustee may return the books to the regulated debtor or destroy them at the end of the retention period.[17]
    20. If another provision of the Bankruptcy Act or another law requires all or part of the administrations books to be kept longer, then the trustee must retain the relevant books for that period.[18]
    21. The trustee may at any time return to the regulated debtor or destroy any administration books of the estate that:
      • the trustee thinks will not help the administration
      • have been given to any trustee.
    22. However, the trustee may not do so if they know, or should reasonably know that:
      • another person had a lien over the books before taking possession of them
      • another person has a legal right to possession of the books
      • they cannot return/destroy them because of another provision of the Bankruptcy Act (or any other law).
  4. THE INSPECTOR-GENERAL’S EXPECTATIONS

    1. Accounting records

    2. The trustee must ensure that records kept for a regulated debtor’s estate exhibit a correct, full and informative account of the administration.
    3. All receipts and payments related to a regulated debtor’s estate must be reflected in the accounts maintained for the administration.  Every transaction in the bank statements for the administration account should also be recorded in the respective ledger or cash book for that estate.
    4. All payments from a regulated debtor’s estate must be verifiable by reference to appropriate supporting physical or electronic vouchers and original documents maintained on the estate file.
    5. Where trustees use one payment for bulk transactions to a particular entity, the records supporting the bulk transaction will need to adequately identify the individual estates to which each payment relates.  The record will need to include:
      • the name of the regulated debtor
      • the amount attributable to each of them
      • the date of the payment.
    6. This also applies in circumstances where bulk receipts are received.
    7. All money received in a regulated debtor’s estate must be deposited into the administration bank account and adequately described to enable identification of the transactions giving rise to the receipt of money.  The trustee will need to ensure that sufficient information is given to a regulated debtor who intends to make deposits online to ensure the deposits are accurate and easily attributable to a particular estate.  This will help minimise the risk of unidentified deposits.
    8. If a receipt has been reversed in the bank statement due to a dishonoured payment, both the deposit and the reversal entry are to be accurately reflected in the cash book/ledger for the regulated debtor’s estate.
    9. Where a payment has been made that needs to be reversed, the money is to be returned and a replacement payment arranged.  The relevant books for the regulated debtor’s estate will need to record the cancellation of the payment in question and the processing of the new payment.
    10. Where an error is found and corrected in a regulated debtor’s estate books or the administration bank account, the identification of the error and the details of the remedial action taken are to be documented.  The file note recording the identification of the error and the action taken is to be made on or attached to the document in which the error has been found.
    11. Journal entries are not to be used to correct an error in the ledger or cash book.  If an error has been made when recording a receipt or payment in the ledger or cash book, the appropriate actions are to reverse the entry  and make a correct entry, rather than using a journal entry to amend the entry.
    12. Statements of receipts and payments forwarded to creditors shall accurately and meaningfully reflect the financial transactions of the administration.  The statements should also be logical, simple to read and help to quickly determine the current status of the administration.
    13. Subsection 12(2) of the Bankruptcy Act provides for the Inspector-General being able to require the production of books kept by a trustee.  As such, trustees must make books of a regulated debtor’s estate available for inspection on request .[19]
    14. File maintenance

    15. Trustees are to maintain relevant books that provide an orderly trail for reviewing decision-making processes.  These books will assist the Inspector-General when conducting an inspection.
    16. The Inspector-General expects trustees to maintain for each administration of a regulated debtor’s estate:
      • a separate file, either stored in physical or electronic form
      • a record of every significant step, including recording conversations
      • adequate security[20] to prevent any unauthorised access.
    17. Trustees need to be able to produce all books relating to the administration of their  estates.  These records should be maintained so that the processes, decisions made, actions taken and accounts maintained are readily traceable and verifiable.
  5. THE INSPECTOR-GENERAL’S ROLE

    1. Section 12 of the Bankruptcy Act gives the Inspector-General[21] the power to make inquiries and investigate the conduct of trustees.  Where issues are identified, AFSA will examine the adequacy and extent of accounts and records maintained by reference to this practice direction.
    2. Where breaches of the legislation or a lack of adequate record keeping are identified, a trustee will be asked to take appropriate remedial action.  This can include a change in practice and counselling.
    3. In serious or systemic cases, disciplinary action can be initiated.  These actions can include conditions being placed on a trustee’s registration and applications to a Court to enforce the requirements of the Bankruptcy Act.
    4. During inspections, the Inspector-General will examine the systems and controls a trustee has in place for the handling money and keeping records.  These inspections include:
      • documented practices and checklists
      • delegations and supervision of employees
      • agents or brokers engaged to assist in performing duties.
    5. All books relating to the administration of the regulated debtors’ estate being inspected should be provided during an inspection by AFSA, including records stored in physical or electronic format.

Footnotes

[1] The Official Trustee’s duties regarding the handling of money is covered in Division 2 of Part II of the Bankruptcy Act

[2] Despite the repeal of former subsection 169(2) of the Bankruptcy Act, it continues to apply to money received before 1 September 2017

[3] Unrelated to the estate(s) of a regulated debtor

[4] This does not apply to money paid out of the administration account before 1 September 2017.  Despite the repeal of former section 171 of the Bankruptcy Act, it continues to apply to payments into or made before 1 September 2017

[5] This does not apply to money received or payments made before 1 September 2017

[6] Does not apply to negotiable instruments and other securities received before 1 September 2017

[7] Section 65-5 of the Rules

[8] Subsection 90-60(2) of the Rules

[9] Subsection 65-50(c) of the Schedule

[10] Subsection 65-50(d) of the Schedule

[11] This does not apply to events before 1 September 2017 that require entries or minutes to be made.  Despite the repeal of the former section 173 of the Bankruptcy Act, it continues to apply to events before 1 September 2017 that require accounts and records to be kept

[12] This does not apply to events before 1 September 2017 that require entries in books to be made.  Despite the repeal of the former section 173 of the Bankruptcy Act, it continues to apply to events before 1 September 2017 that require accounts and records to be kept

[13] This applies to books of an ongoing administration of a regulated debtor’s estate whether they are kept under a repealed former provision of the Bankruptcy Act or kept under the Schedule

[14] The order may be made on application of any person with a financial interest in the administration of the regulated debtor’s estate

[15] Whether physical and/or electronic

[16] Applies to books for an ongoing administration whether or not they are kept under a repealed provision of the Bankruptcy Act or the Schedule.  Despite the repeal of former section 312 of the Bankruptcy Act, it continues to apply for an administration of an estate that ended before 1 September 2017 as if the reference to 15 years was to 7 years instead

[17] As above.  If a trustee is entitled under former section 312 of the Bankruptcy Act to destroy or return books then they may be dealt with in that way, despite the Schedule

[18] For example, laws relating to taxation may prohibit the destruction of some records

[19] Paragraph 12(2)(a) of the Bankruptcy Act

[20] For electronic files, trustees should ensure they have data backup systems, contingency plans and systems to audit changes to records

[21] A reference to the Inspector-General in this document also refers to a delegate of the Inspector-General