Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

A proposed change of focus of the Australian Official Trustee in Bankruptcy

The Australian Official Trustee in Bankruptcy (OT) has sought comment on a significant refocus of its legal responsibilities by way of proposing new criteria to distribute some of its bankruptcy trustee work to Australia’s 200 private sector registered trustees (RTs).  

The OT refers to its lack of unlimited resources and its need for its work to be “primarily geared towards delivering system wide benefits as opposed to benefits that only accrue to creditors in particular bankrupt estates”.

It proposes two “overarching principles” to determine whether a particular bankruptcy should be administered by the OT or by RTs:

  1. 1 The OT will generally not administer matters where it is apparent at the onset that a registered trustee may consent to act in the matter/administration.
  2. 2 The OT will investigate and administer matters where there is a public interest in doing so and to maintain stakeholder confidence in the insolvency system although the administration may not result in a financial return to creditors.

It is proposing “standardised, objective criteria” and based solely on what is disclosed in the bankrupt’s statement of affairs. These criteria include amounts of income contributions, preferences, cash, shares, cars, debt owed and so on.

The OT says it will continue to investigate estates which do not meet those criteria and where the public interest is involved. Relevant criteria are significant unexplained deficiencies in an estate; the debtor’s previous known misbehaviour; a complaint or tip off about the bankrupt; inconsistencies between disclosures made by a debtor and such a debtor’s profile; involvement of “known untrustworthy operators”; or an opportunity to test a point of law that requires clarification.

The reverse is contemplated, when an RT might transfer an estate to the OT, with examples given where the matter is of significant public interest which the incumbent RT is “unable to progress due to capacity/capability constraints (financial, physical or scale)”, or where the incumbent RT is exiting the industry and no RT is willing to take on the estates.  As to the former, some bankruptcies can become so consuming – for reasons of vexatious litigation or such – that they are validly beyond the capacity of a RT.

In this arrangement, AFSA is also proposing to direct a greater share of estates to the approx 10% of female trustees, with an initial target of to transfer 20% of estates to them, with an aim of increasing that rate over time. That quota system is presumably in accord with Australian law and government policy.

AFSA also says that the effectiveness of these revised arrangements will be measured against the outcomes achieved in estates which have been transferred (such as realisations, dividends and remuneration). No time is yet set.

See Improving how we transfer bankrupt estates to registered trustees | AFSAsandpit It calls for comment by 12 March 2021.

Comment

It is not clear what is behind this change, if anything other than better allocation of resources.  But these background issues might be relevant.

As with many comparable jurisdictions, the number of personal insolvencies in Australia, bankruptcies in particular, have fallen to their lowest ever. Australia imposed legislative hurdles on creditors’ applications for bankruptcy in 2020 and effectively prevented bankruptcy notices from being issued. But the numbers were falling even before 2020.  That fall in business must have impacted the OT – for one thing, bankruptcy notices and other fees are a significant source of its revenue.  The OT mainly handles assetless consumer bankruptcies although with the majority of Australia’s small businesses – SMEs – operating as sole traders, there may be more business-related estates. The law imposes a long 3-year period of restriction on bankrupt business owners, which is under review and should reduce the work required in an estate.

The bankruptcy industry itself also suffered a significant drop in work in 2020, with a high proportion of firms accessing government assistance, to the concern of AFSA.  Even before that, the industry’s financial position did seem fragile.  AFSA reported on trustee remuneration in 2020 revealing that in 2018–19, in 63% of bankruptcies administered by RTs, no remuneration was recovered at all, with the average remuneration drawn in each matter being $4,804; and that 31% of bankruptcies finalised in that year produced no remuneration in any year of the administration.

That is significant given that these are estates willingly taken by RTs, including from the OT under the existing panel arrangement.  Nevertheless, in context, trustees were paid $88m in fees in 2018-2019 in paying out $67m to unsecured creditors.  That still translates into an average RT dividend payment of only 2.53c/$.

Given these low current outcomes, AFSA’s proposed review of the outcomes achieved in transferred estates  as to “realisations, dividends and remuneration” is unlikely to show any significant average increase in dividends, although RT remuneration should properly increase.

One conclusion from this is that the underfunding of the bankruptcy system has created a rather opaque cross-subsidisation arrangement whereby the small number of bankrupt estates with assets are effectively funding the non-paying estates of the RTs.  According to AFSA’s proposed approach, those estates should properly be administered by AFSA, which has commission based remuneration, necessarily taken from estates with assets, a variety of cross-subsidisation.

More broadly, there does not seem to be any overall consistent policy in relation to insolvency administration in Australia. There is a large proportion of assetless insolvent companies in Australia, comparable to the number of assetless bankruptcies, but we have no official receiver in corporate insolvency to deal with those.

That inconsistent and unclear policy will be the subject of further comment, which this initiative of AFSA has usefully prompted.

References are throughout www.murrayslegal.com.au

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One Response

  1. I refer to your comment about remuneration earned by RTs on transferred estates. nil return jobs are why the insolvency industry has, essentially, speculative rates. Mr Murray, you should comment now on why AFSA wishes to control RTs remuneration with fixed rates.
    You also mention AFSAs attempt to mamipulate participants in insolvency administration. Comment should be made regarding whether gender based allocation is even legal. in any case, active female RTs are probably 5% of the industry and afsa wish to allocate 30% of jobs to them. i assume afsa has determined the profit sharing arrangements of these 10 active female trustees. some, i know, are saleried and superprofits from staff who would be male, are then sent to shareholders. ill considered, sexist agenda. support and flexibility of CPE would be more accepted.

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