Bankruptcy and Insolvency
CorporateLegal30/03/2021 12:00:00 AM

Bankruptcy & Insolvency - AFSA Consultation on Transferring Bankrupt Estates to Trustees

The Australian Financial Security Authority (AFSA) is an executive agency which manages the application of bankruptcy and personal property securities laws.

AFSA recently ran a consultation on proposed changes to improve the effectiveness of transferring bankrupt estates from AFSA (the Official Trustee) to registered trustees. AFSA’s proposed changes relate to:

  • The principles for determining the type of work undertaken by the Official Trustee and private sector registered trustees, and
  • Streamlining the distribution of work to registered trustees.

AFSA’s focus will be on administering estates where there is a public interest. AFSA will distribute matters to registered trustees when certain criteria are met, and when a registered trustee is likely to consent to act in the matter. A set of standard criteria will be applied from the start of the bankruptcy, using information as disclosed in the bankrupt’s Statement of Affairs. This process will determine the estates which AFSA distributes. AFSA’s aim is to transfer matters early and streamline the process.

Background

AFSA’s role as the Official Trustee is an important regulatory tool which helps to ensure insolvency administrations have the appropriate scrutiny where registered trustees have not been appointed. However, AFSA does not have unlimited resources in its capacity as Official Trustee. Hence, AFSA needs to ensure that their Official Trustee obligations are primarily geared towards delivering system-wide benefits as opposed to benefits which only accrue to creditors in particular bankrupt estates.

The proposed changes in more detail

AFSA has released a proposal paper which explains the proposed changes in more detail. AFSA’s need to divert work, appropriately, to registered trustees, will be guided by overarching principles to determine where a particular bankruptcy administration should be administered by AFSA (as Official Trustee) or a registered trustee. These principles can then be used to divert work appropriately as well as deciding whether proposed transfers of work-in-progress from registered trustees should be taken on by AFSA.

Two proposed principles, which will govern both transaction level and practice level decision-making as to which matters AFSA should administer, are outlined below:

  • Principle 1 —AFSA will generally not administer matters where it is apparent, at the outset, that a registered trustee may consent to act in the matter.
  • Principle 2 — AFSA will investigate and administer matters where there is a public interest in doing so and in order to maintain stakeholder confidence in the insolvency system, even though the administration may not result in a financial return to creditors.

These 2 principles will be achieved through applying, at the start of the bankruptcy, standardised, objective criteria based solely on what is disclosed in the bankrupt’s Statement of Affairs without any further investigation by AFSA.

Criteria for transfer of estates to registered trustees

AFSA proposes that it will transfer estates to registered trustees based on the following criteria:

No. Asset  Criteria 
 1  Contributions  Contribution is greater than $5,000 per annum
 2  Preference payments  Date paid is less than or equal to 6 months before DOB and greater than or equal to $25,000
 3  Cash on hand at bank  Combined value is greater than or equal to $15,000
 4  Shares  Market value (including combined) is greater than $15,000
 5  Vehicles  Equity is greater than or equal to $20,000 
 6  Other assets  Equity is greater than or equal to $30,000
 7  Deceased estate  Estimated value of benefit is greater than or equal to $20,000
 8  Real estate  Equity is greater than or equal to $40,000
 9  Financial assets  Market value (combined value) is greater than $20,000
 10  Money owed to the bankrupt(book debts)  Amount owed is greater than or equal to $25,000
 11  Interest in assets owned by others  Yes, and the value is greater than or equal to $40,000
 12  Sold or transferred assets  Date transferred is less than or equal to 5 years and the value is greater than or equal to $40,000
 13  Lump sums paid to super  Lump sum paid to super in the last 5 years and the value is greater than or equal to $25,000
 14  Trusts  Assets or distribution is greater than or equal to $25,000

AFSA will operate a new national panel of trustees to which registered trustees will be invited to join. AFSA intends to maintain the existing limits in relation to remuneration for registered trustees for estates transferred from AFSA (that is, the remuneration cannot exceed the median industry rates which are reviewed annually).

AFSA will aim to transfer estates to registered trustees as quickly as possible after a bankruptcy application is accepted. The process for transfer of estates to registered trustees will continue to be based on s 181A of the Bankruptcy Act 1966 (Cth). As is currently the case, each estate selected for transfer, will be offered to the next registered trustee on the panel. The registered trustee will be asked to confirm their capacity to take on the matter and confirm that there are no known conflicts of interest. If the registered trustee is unable to take on the matter due to capacity or conflict issues, that registered trustee will retain their place in the queue and be offered the next available estate. The bankrupt estate in question will also be notified of the proposed transfer.

Criteria for AFSA to administer estates

AFSA will continue to investigate estates which fail to meet the criteria listed above if there is a public interest in doing so. The criteria for deciding which bankruptcies ought to be investigated by AFSA, in their capacity as Official Trustee, may include:

  1. Significant unexplained deficiencies in the estate
  2. Estate may not result in a return to creditors
  3. Previous known misbehaviour of the debtor
  4. Complaint, or tip-off, regarding a bankrupt
  5. Identified inconsistency between disclosures made by a debtor and the profile of the debtor (for example, disclosed income/assets versus occupation does not match or raises questions)
  6. Disclosed source of information/advice on the bankruptcy application is from known untrustworthy operators in the industry
  7. The particular factual scenario in question, provides AFSA with the opportunity to test a point of law which requires clarification.

Next steps

The consultation process closed on 12 March 2021 and AFSA is expected to release a report on their findings, and next steps, shortly.

AFSA intends to measure the effectiveness of these revised arrangements against the outcomes achieved in estates which have been transferred (such as realisations, dividends and remuneration). The data required for this analysis will come largely from Annual Administration Returns. Because this data will not be fully available until well over a year after the new process is implemented, AFSA will seek to have regular dialogue with industry bodies in order to obtain more timely feedback on how the new system is operating.

Sources: AFSA article, Improving how we transfer bankrupt estates to registered trustees, 15 February 2021, accessed 30 March 2021.

AFSA paper, Distribution of bankrupt estates between the Official Trustee and registered trustees, 15 February 2021, accessed 30 March 2021.

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