Can insolvency practitioners afford to be generous?

The Australian bankruptcy regulator, AFSA, has published what it terms a series of “exemplar behaviour case studies [to] showcase examples of best practice from the insolvency sector”. One case study raises the issue of how much unremunerated work trustees perform and how and how that is paid for and by whom.

In one example, the bankrupt owned a property that was subject to a restraining order under what appears to be the Victorian Confiscation Act 1997, by which proceeds of crime are confiscated and from which victims may be compensated. The restraining order served to protect the interests of G, who had a compensation order in her favour; she was also the petitioning creditor. As it was not property that vested (s 58A), by some legal mechanics the restraining order was removed and the priority of G under the bankruptcy provisions was maintained. 

As AFSA reports,

“the trustee considered Ms G’s extremely complex situation and proactively took steps to limit the remuneration and other expenses (including legal fees) to $35,000, noting that the full remuneration and expenses well exceeded $84,000”.

Some would wonder why an independent insolvency professional would effectively concede $49,000 to a creditor? That was no doubt the trustee’s commercial decision on whatever basis, perhaps with some concession that the trustee could have handled the matter more efficiently. Some embarrassment at the extent of costly regulation with which the trustee must comply might be another motivator. But generally, the complexity of the law or the facts and the time taken is a reality that has to be dealt with and should be acknowledged and disclosed, and charged for. 

Unremunerated work

AFSA holds this and other case studies out as “real-life examples displaying best practice in culture, integrity and moral compass, [that] support public confidence in the personal insolvency system”, to be applied by registered trustees, and by the Official Trustee. This is done in the context of its latest AFSA statistics, pre-COVID-19,[1] showing the extent to which trustees are not properly remunerated.  These showed, for 2018-2019:

  • in 63% of bankruptcies administered by registered trustees, no remuneration was recovered at all, with an average of $4,804 drawn
  • in finalised cases in that year where remuneration was drawn, the average total remuneration was $29,532
  • over 30% of bankruptcies finalised in that year produced no remuneration in any year of the administration.

AFSA’s legal and policy answer to this is that lack of funds to pay a trustee’s remuneration is an inherent feature of their work and that trustees may validly set higher charge-out rates to accommodate those losses.[2]  Those high rates are then charged against moneys otherwise payable to creditors in the few bankrupt estates with assets. 

So, either the trustee pays, or, if they manage it well, the unrelated creditors in their other estates, unwittingly, pay. That seems to be the policy decision of the government and it may partly explain why the average dividend paid to unsecured creditors by registered trustees is just 2.37c/$. 

Law reform

The amount of necessary work properly done by trustees for which there are no or not enough funds is not reportable to AFSA – that is, the actual time spent in administering a bankruptcy is not reported or recorded.    

Perhaps it should be reported by trustees, as a matter of providing transparency and accountability in the operation of the personal insolvency system, including who supports and pays for it.  That information would also assist in monitoring the efficiency of the bankruptcy laws for the purposes of law reform. 

In the absence of the government asking for this information, perhaps the response lies with the industry itself, for its representative bodies to survey their trustee members and find out how much time is spent on matters for which there is no recompense, and then explain why, and how they recoup those losses.  It is over ten years since it was revealed that IPs personally funded disbursements of $1.4 million and remuneration of $47.3 million each year in corporate insolvency.[3] 

Information and data are needed for any law reform, in particular in insolvency. What little we have is that trustee fees represent around 25% of all realisations. That could provide a law reform response to increase the commission rate in the Rules (s 60-20). For example, the Official Trustee takes $4 000 plus 20% of the realised balance in each matter, acknowledging that most of its estates are assetless.[4]

As to the Official Trustee, it is interesting to speculate what exemplary fee concession it would have made in the case in question.

The UK

This AFSA case study usefully draws attention to the amount that trustees contribute to the system, financially, as well as attending to the public interest tasks inherent in insolvency.  This is a universal issue across jurisdictions. For a comparable comprehensive and instructive report on IP remuneration from the UK, see Insolvency fees and the cost of regulation – the details behind the headlines, R3, 2022.[5]

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[1] See Registered Trustee Remuneration in the Personal Insolvency System Best Practice Report, March 2020.  Remuneration in the personal insolvency system | Australian Financial Security Authority (afsa.gov.au)

[2] Remuneration entitlements of a registered bankruptcy trustee (IGPD6); Proper performance of duties of a bankruptcy trustee (IGPD14)

[3] Ex Memo to the ILRB 2015 at [9.53].

[4] Bankruptcy (Fees and Remuneration) Determination 2015

[5] R3 | Press, Policy & Research | Policy & Research | The Insolvency & Restructuring Profession

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