The Australian bankruptcy regulator – AFSA – has been making inquiries about the financial health of bankruptcy trustee firms during what AFSA terms ‘the challenges presented by COVID-19’. Those challenges have been exacerbated by the protective legislative responses to COVID-19 but the reality is that bankruptcies were falling in numbers the years up to the beginning of 2020 and the financial viability of that line of work may well have been in question even then.
The fact that in 2019–20, bankruptcies fell to their lowest annual level since 1989–90 did not suddenly just happen in 2020.
AFSA’s earlier review of trustee remuneration in March 2020 showed that trustees wrote off significant percentages, apart from legitimate work done for which no remuneration was claimed simply because there was no point in doing so. Instances where trustees have hundreds of thousands of unpaid work in progress are anecdotal but frequent.
AFSA’s March 2020 report found that in 2018–19, ‘in 63% of bankruptcies administered by registered trustees, no remuneration was recovered at all. The average remuneration drawn by registered trustees in each matter in 2018–19 was $4,804, including matters in which no remuneration was drawn’.
In finalised cases where remuneration was drawn, the average remuneration was $29,532 and in those finalised cases, 31% of bankruptcies produced no remuneration in any year of the administration’.
This was of course before the impact of COVID-19.
The fact that bankruptcy trustees do earn money from their work seems to be cross-subsidised – propped up? – by high charge out rates that are set to recoup those losses such that creditors of estates where there are assets pay a premium for the work done by trustees. That might explain the average 2.53c/$ paid by trustees. That is in effect comparable to the approach taken by the Official Trustee, which charges on a high commission basis; its average dividend is 0.91c/$.
The difficulty with either approach is the negative and positive behavioural dis/incentives given by each.
AFSA’s next review of remuneration of trustees should delve deeper into a more secure and equitable basis of remuneration.
It is not only trustee firms that are impacted by COVID-19. With the effective ban on the issue of bankruptcy notices – issued by AFSA at a fee of $470, with various add-ons – AFSA has lost a significant source of its revenue. Its revenue from bankruptcy notice fees to 30 June 2020 (including only just over 3 months of the COVID-19 restrictions) was $2.201m, compared with $3.275m in 2018-2019 and $3.833 in 2015-2016.
The revenue for 2020-2021 showed other falls, and will be much less again, including because of the increase in the threshold to issue a bankruptcy notice and a petition to A$10,000.
The dramatic drop in Official Trustee work overall in 2020 is evident. There have been suggestions that AFSA might therefore take on a role in relation to small business insolvencies impacted by COVID-19, also given what appears to be an increasing proportion of ‘business bankruptcies’.
But that is another topic.