New rules on the application process to become a trustee in bankruptcy have applied from 1 March 2017. Briefly, they involve an applicant having accounting and commercial law qualifications, some years of experience, no serious ‘form’, experience, knowledge and ability, and otherwise being fit and proper. An interview is required, and possibly an exam. This commentary may assist those applying, and those assessing the applicants.
Before examining the new process, it is worthwhile to have an understanding how applicants have been assessed in the past.
Trustees have an honoured position in law, being given significant power and authority to administer bankrupt estates. The process of applying to become a trustee has always been quite rigorous.
Applications used to be made to the Court, trustees initially appearing before an experienced bankruptcy judge, with the Official Receiver there with his report, and the trustee. Often the judge would question the trustee. Written reasons were issued on matters of debate and these now appear in the law reports. These decisions remain instructive on the standards expected of those applying to be trustees and on the process of assessment.
There has always remained a right of appeal to a higher court, but the Administrative Appeals tribunal (AAT) has had this jurisdiction now for a long time. In some cases, there has been a further appeal from the AAT to the Federal Court or the Federal Circuit Court.
In these reported cases, it is useful to read of the thinking processes that are applied in deciding on someone’s registration.
In particular, in undertaking administrative review of a selection committee’s decision, the AAT stands in the place of the committee as the original decision maker and must reach its decision on the material both before the committee, and any other relevant material. It issues detailed reasons for its decision.
That is why reasons for decision are important, and why the committees in bankruptcy, and in corporate, should give reasons for their decision and publish them if they are instructive: s 20-25 Bankruptcy Schedule. The reasons need not be as fulsome as those of a judge, but in cases of discipline, they may be lengthy.
The committee system
Returning to the history, the law developed that Official Receiver would ask a number of senior trustees to nominate four trustees, from which the OR selected one to be on an interview committee to produce a report for the Official Receiver.
It was in 1996 that the court was removed from this and other processes, and the present committee system was adopted in bankruptcy. This change need not be seen as any lessening of the importance of the role, or of the decision being made.
The trustee nominated to the interview committee was to be chosen by the then IPAA. That right remains, for ARITA to choose the trustee to sit on the committee: s 20-45.
That arrangement properly avoided the government or the regulator nominating the independent professional member of the committee, putting that responsibility on the profession itself.
The right has never been for ARITA to only choose an ARITA member. There may be instances where it would not be appropriate for an ARITA member, or a member of CAANZ, to be appointed. Nor does the nominee represent ARITA. In effect, the experienced trustee gives the committee the expert view on an issue for which it might otherwise have needed expert evidence.
An applicant for registration must satisfy a number of up-front requirements which will be explained in what should be joint guidance from ASIC and AFSA for practitioners.
New trustees (and liquidators) must have:
- relevant tertiary qualifications in accounting and commercial law
- two course units of tertiary study or its equivalent in insolvency, at post-graduate standard;
- 4000 hours (3 years) of ‘relevant employment’ at a senior level;
- adequate and appropriate insurance; and
- continuing professional education.
There are some other issues to be satisfied, that in the past 10 years the applicant has not been convicted of an offence of fraud or dishonesty, or been an insolvent, or had their registration as a trustee or liquidator cancelled other than voluntarily. The applicant must not now be disqualified from managing corporations, must be a fit and proper person and be a resident in Australia.
There is no restriction on an applicant being an employee, the government declining to follow case law concerns on that issue.
The real assessment is as to knowledge and ability, each of which have been the subject of some analysis in the case law, not dealt with here.
But these may be dispensed with provided the committee is satisfied that a person would be suitable to be registered if the person complies with any conditions specified by the committee: s 20-20, 20-35 Bankruptcy Schedule. See Crowe and Committee Convened by the Inspector-General in Bankruptcy  AATA 200, discussed below.
A written exam is an option if the committee is not quite satisfied of the interview performance.
Interview by committee
An interview committee is convened comprising an experienced trustee, a representative of the regulator and a nominee of the government.
The registered trustee is nominated by ARITA. That trustee must be independent, that is, have had no relevant connection with the applicant either positive or negative. A past employer would not be appropriate, nor someone with whom the applicant has had some personal connection, or professional dispute.
The same disconnection is required in relation to the Attorney-General’s nominee.
The AFSA nominee is the chair, usually a lawyer, for example AFSA’s general counsel.
The interview by the committee would typically be conducted in assessing how the applicant would handle certain fact situations.
To offer some real world sense to the process, it would unfair not to give the applicant some reading time to know what those topics are before the interview commences. One AAT decision records that the applicant was asked 168 questions in respect of five topics from a total of 23 available.
Reading time arose on a review of a committee’s rejection of an applicant before the AAT in Crowe  AATA 200.
As the decision records, counsel for the Inspector-General handed the applicant a number of questions intended to be put to him. The questions set out some facts and then followed one or more questions in relation to that factual matrix.
The AAT then asked the barrister
“whether it would be fair if we were to give him 10 minutes to just quietly look through the questions?”
Counsel resisted, saying he could ask for more time as questions were asked.
Assessing off the cuff interview responses
In its decision in Crowe, the AAT noted that the expert did give a view on each question, although he qualified this by suggesting that, in practice when confronted by a matter with which he was unfamiliar or unsure he would seek legal advice, even if this required adjourning a convened creditors’ meeting.
The AAT concluded that
“even an experienced practitioner would not attempt to provide advice or take action in the administration of a bankruptcy without taking care to be sure of the legal situation”, agreeing with the expert that no-one “whether they be very experienced practitioners or those within the bureaucracy or whatever have all the answers to your questions”.
The other expert explained the reality of practice, that she would use the Bankruptcy Act on a regular basis, and would have to hand reference information such as the Australian Insolvency Mangement Practice (Ferrier Hodgson/CCH), and the then ITSA guidance.
“If I’m doing a report it would be very rare that I would not refer to two or three major sections of the Act in finalising a report, combined with the fact that if I get a query … I would want to familiarise myself with the Act before I put the question to the solicitor.”
Assessing the applicant from their interview performance
The point of this is that an interview cannot replicate actual performance in practice, and this should be taken into account. In its assessment, the AAT said that while the applicant appeared to be nervous, and gave sometimes rambling answers,
“at no time did [the AAT] detect any seriously implausible responses nor any suggestion that although the specific statutory provision eluded him at the time, if given a practical situation he would not have been able to pursue appropriate research and if necessary seek legal advice to be assured of the correct answer”.
He demonstrated that he would deal competently with the sort of situations portrayed by the various questions, if encountered in practice.
As the AAT concluded,
“it is not so much a question of whether the applicant will be, upon registration, as good a trustee as say [the experts], but whether he now has the qualifications, experience and capacity which will fit him for the office of trustee in bankruptcy”.
And even if
Interestingly, the AAT went the next step, saying that if it were found to be wrong in its conclusion about the applicant’s knowledge, its decision should stand notwithstanding, relying upon what is now s 20-20(5) Bankruptcy Schedule, that is, “even if not satisfied” of an applicant’s knowledge, an applicant may still be registered. The AAT was satisfied that the applicant would “build on his knowledge in a professional and competent manner”.
White & Fotheringham
A similar outcome occurred in White & Fotheringham v Companies Auditors Board  VR 743 where the Board had rejected the applicants as liquidators, with expert witnesses saying that the two applicants should not be registered, one reason being they had no experience in dealing with fraud. The Judge disagreed. He noted that the two experts were
“old hands at liquidations: they have had long experience of great value to them, and no doubt they have learnt, if I may use the expression, all the tricks”.
The Judge went on to say:
“I have no doubt that [the two experts] have a good nose for frauds, but I should think both the appellants, from the evidence they have given to me, also have a fairly good nose for this sort of thing. And the question is not whether these two appellants will be immediately as good liquidators as [the experts], they obviously will not be. But the question is whether they have the experience and whether they have the capacity which will fit them for the office of liquidator. And I think that on the evidence before me I can only come to one conclusion as to that matter, and that is that they have the experience and capacity that will fit them for the office, and that they, therefore, should be registered”.
One note of caution comes from a witness to the 2010 Senate committee inquiry into ASIC’s regulation of liquidators, that applicants
“with genuinely fraudulent intentions would probably be quite impressive at interview”.
What questions might be asked
One could imagine a range of different fact scenarios. As much as we have on the record is the list of questions asked an applicant, and the “model answers” in Growden and Committee Under Part VIII of the Bankruptcy Act  AATA 604. Most of these are set out here, at the end, along with the committee’s model answers, based on the then law. A full reading of that decision is helpful.
The AAT’s assessment
The AAT did say that clearly not every question needed to be answered in accordance with the model answers provided. It was expected that the main points raised by the questions would be covered.
However it criticized the applicant for his
“discursive and sometimes obscure deviations and forays into fanciful scenarios that not only obfuscated those questions he correctly, or party correctly answered, but also demonstrated often incorrect or incomplete knowledge of the area about which he was asked”.
The style of these answers was seen as “antithetical to efficiency” given that s 19(1)(j) of the Act (now Bankruptcy Rules Division 42) requires an estate to be administered “as efficiently as possible by avoiding unnecessary expense”.
In the end result, while the applicant did answer a majority of answers correctly, the AAT decided that correct answers in 50% of the questions asked was enough. The applicant failed to meet all the statutory criteria. The full reasons of the AAT for rejecting the application are not covered here.
While as the AAT says answers to questions are not decisive, the questions in Growden may not be as focused as are required under the new law. Even if they are, some might think that the questions should involve more complex and strategic problems, and from a wider perspective than just bankruptcy law.
Given the experience required, the applicant should having a working knowledge not only of the Bankruptcy Act and Schedule 2, the Bankruptcy Rules and Regulations, but also other laws and disciplines that often encroach upon bankruptcy – family law, real property, trusts, and general asset protection. To these might be added proving insolvency, or a “main purpose” under s 121, PPSA issues for sole traders, tax including capital gains tax, contingent claims and debts not provable. In particular, the new duties and requirements under Bankruptcy Rule 42 should be known; and the various roles of AFSA, including the new powers of the Inspector-General and the role of the Official Receiver in estate administration, policy and reform issues about bankruptcy, some of the major or recent cases, the ARITA Code or APES 330, cross-border bankruptcy, and commercial law and accounting issues concerning bankruptcy; and general corporate insolvency.
It would be useful to pick out issues from the last several issues of the Personal Insolvency Regulator and note the guidance, case comments and new developments, about which the committee might expect the applicant to be aware.
Questions might also be asked by the committee based on the applicant’s exposure to external administrations and receiverships, in particular as they interact with bankruptcy. Part X and Part IX and Part XI should be known be able to be explained and the various options open to a debtor.
Now that the term “ethical” appears in the law (s 1-1), fact situations based on ethical or ex parte James issues would be useful – what if the ATO mistakenly pays the estate a $50,000 GST refund? What if the bankrupt appears to have mental capacity issues? Or is dealing in criminal drugs? How do you manage a bankrupt house hoarder’s possessions? What issues of concern might exist in assigning a s 120 claim under s 100-5. In what circumstances might a trustee also be the liquidator of the bankrupt’s company? The interaction of the pending obligations of accountants under the International Code of Ethics with the practice of being a trustee might be asked.
Care is needed with factual scenarios. In its decision in Crowe, the AAT noted that one expert in fact thought the questions were inadequate, because they needed to be supported by more information to allow a proper response.
Some other issues include dealing with personal mental health issues of bankrupts, what legal issues arise in a vested company shareholding, and rights of a trustee in family law. Instructing lawyers, and dealing with the courts are other topics. Pre-insolvency advisers is another topic. Some policy and law reform questions might be useful – a one year period of bankruptcy, trusts, debt agreements reform, and the restrictions on bankrupts. Knowledge of current issues – bankrupt parliamentarians – might also be asked.
For applicants, there is a need to give focused and practical answers to interview questions, by reference generally to the law and practice, and, where appropriate, with an emphasis on the high level fiduciary and ethical responsibilities of trustees. Knowledge of the broader issues in bankruptcy law, practice and policy would assist.
Committee members will recognise that the reason interviews are maintained, and introduced into the liquidator registration process, is that they allow an assessment of an applicant’s ‘ability’ to perform as a trustee, which is generally seen as the attribute that is the real task of the committee to assess. Experience can be confirmed, knowledge can be tested, but, as the AAT said in Crowe, ability refers to broader issues of professional behaviour, integrity and the capacity to act authoritatively and competently. Correct answers to questions, and experience and qualifications may not be enough.
Some more issues are found in part 2, here.
Any comments, please contact Michael Murray.
Much of this applies equally to applications for registration as a liquidator, but some particular issues there will be explained shortly.
For applications to be a receiver, see here.
The questions and answers in Growden
What are the types of administrations you might be required to administer as a registered trustee in bankruptcy?
The model answer
Interim Receiving Order Part IV s50 Regs 4.05 – 4.08, court, on application of a creditor after debtors fail to comply with Bankruptcy Notice can order the Official Trustee or a Registered Trustee to take control of debtor’s property until bankruptcy etc; Bankruptcy Part IV – Sequestration Order from creditor’s petition s52 – debtor’s petition ss55-57 Reg 4.05 – 4.19- Debt agreement Part IX s185 – 185Z. Arrangement with creditors for debtors with liabilities, assets and income below threshold amounts [ss185C(4)] Reg 9.- Part X, Personal Insolvency Agreement s188 – arrangement between creditors and debtor – no limit/threshold amount as for debt agreement.Administration Order – Part XI – basically bankruptcy of a deceased estate See Reg 11. Statutory Trustee – sale of joint property pursuant to s38 of the Property Law Act.
What action would you take to investigate potential preference payments, when there are no funds in the estate and the creditor that received the possible preference is a creditor that sends out regular work.
The model answer
The committee would expect the applicant’s answer to cover a discussion of Performance Standard 2.3, conflict of interest and that he would give consideration to not acting as trustee in this administration.
Under what circumstances would you register for GST as a representative of an incapacitated entity? When would you be entitled to claim input tax credits?
The model answer
The committee would expect the applicant’s answer to cover whether there was a situation in existence where an entity was registered or was required to be registered for GST. An entitlement to input tax credits is for any credible acquisition to the extent that it is required for a credible purpose. The GST Act excludes an acquisition from being a credible purpose if of a private or domestic nature. A review of the ATO rulings should also be used as a guide.
The applicant was asked a subsidiary question “what are you going to do about raising your invoices for the fees that you are going to charge in relation to that registration?” He was prompted by a further question as to what he would do about a fee of $8000 for submitting a BAS return.
What are the five ways in which a bankruptcy may come to an end?
The model answer
The committee would expect the applicant’s answer to cover:
- Automatic discharge 3 years after date of filing statement of affairs – s149
- Upon withdrawal of an objection – s149J
- Annulment by the Court where it is satisfied that the petition ought not to have been presented or a sequestration order ought not to have been made – s 153B
- Where trustee is satisfied that debts have been paid in full, the bankruptcy is annulled on the date of the last payment – s 153A
- Upon the passing of a special resolution at a meeting of creditors accepting a composition or arrangement, the bankruptcy is annulled – ss 74(5).
You have realised sufficient funds in an estate to enable you to pay a dividend to creditors. What steps do you take to facilitate the dividend being paid?
The model answer
– Advertising of dividend (S.140(3) & (5)
– Waiting 21 days pursuant S.140(7)
– Adjudication of POD, marked admitted or rejected (PS3.4)
– PODs admitted in correct estate (PS3.3)
– Sufficient evidence to support the claim (PS3.5)
– Evidence of check with bankrupt if creditor not listed on S of A or if amount greater than amount disclosed by bankrupt
– Evidence of check to ensure dividend cheques paid to address disclosed on POD and/or authorised address by creditor.
As controlling trustee you have to prepare a report to creditors on a debtor’s proposal. What sources would you have available to prepare the report and what should the report contain.
The model answer
The usual sources are interview the debtor, debtor’s statement of affairs, discussions with creditors and searches (eg. real property, motor vehicles).
The controlling trustee must summarise and comment on the information available on the debtor’s affairs, and in respect of the debtor’s proposal, state whether the creditors’ interests would be better served by accepting the proposal or by the bankruptcy of the debtor. (s189A).
What time limits, if any, does a trustee have to deal with assets that vest?
The model answer
See S 129AA
There are now performance standards in place which apply to Trustees (including Controlling Trustees). What do you consider to be the purpose of these standards?
The model answer
The committee would expect the applicant’s answer to cover that the standards are in place to ensure that trustees (including controlling trustees) act at all times in accordance with the powers and duties under the Act and Regulations and in relation to the practice of bankruptcy law generally; and to ensure that an administration to which the standards apply is carried out consistently to a high standard.
What is the consequence of a Trustee (including a Controlling Trustee) failing to comply with one or more of the standards?
The model answer
The committee would expect the applicant’s answer to cover that the standards are prescribed for the purpose of subsection 155H(1), which deals with involuntary termination of registration. Repetitive breaches and or a breach with serious consequences could give rise to a disciplinary response.
As a Trustee (including a Controlling Trustee), are you entitled to be remunerated and if so, what is the source of that entitlement?
The model answer
Requirements of the Act: s162; s64U; Reg 8.12; Schedule 4A – Standard 2.13 to 2.16; PINS 7.3 (Capping). (The AAT noted that this answer appeared to be wrong).
A bankrupt says that he shares a house property with this 2 children, who are not bankrupt and who pay the mortgage on the property. What factors would you take into account when calculating the bankrupt’s income for the purposes Division 4B of the Bankruptcy Act.
The model answer
Assess benefit of living in the house rent free as part of the income of the bankrupt.
You have recently been registered to practice as a trustee and have been approached by a solicitor who can channel insolvency work to you. You recognise this is an opportunity to establish yourself in the profession, but the solicitor requires some financial reward for this assistance. What issues, if any, would you take into consideration?
The model answer
The committee would expect the applicant’s response to cover a discussion on the relevant performance standards including PS 2.3 Conflict of interest.