Debt Agreements – Disclosing debts and dealing with money

Recent statistics

The Australian Financial Securities Association (AFSA) recently published statistics¹ that indicate:

1. personal insolvency increased by 1.1% in the September quarter for 2016, compared to the September quarter for 2015. The most common causes cited were unemployment, lack of income and excessive use of credit; and
2. the use of debt agreements increased by 7.3% in the September quarter of 2016 to 3,307. This is the second highest number of debt agreements in a quarter on record.²

Despite the expectation in some quarters that debt agreements were becoming a less attractive option, given this recent set of statistics, an update on practice matters relating to debt agreements is warranted.

Engaging lead-generating firms

AFSA has recently raised concerns about the rise in the number of insolvency practitioners engaging lead-generating firms for a commission. These lead-generating firms allegedly ‘cold call’ individuals perceived to be at a high risk of insolvency, to promote entry into debt agreements. The lead-generating firms then allegedly sell this information on to insolvency practitioners, for payment.

This practice is contrary to the ARITA and PIPA codes of practice. Paragraph 5.3 of the PIPA Code states that a member must not accept any referral that contains or is conditional upon commissions.  Further, under AFSA’s Inspector General Practice Guidelines (Guidelines), registered debt agreement administrators (DAA) will be held responsible for any marketing or advertising done on their behalf, with such marketing and advertising undertaken by these lead-generating firms being contrary to the Guidelines.

AFSA has requested that DAAs who have engaged such lead-generating firms (which appear to be an increasing phenomenon across personal and corporate insolvency) to take immediate steps to cease their engagement. It follows that failing to do so may result in a breach of the professional codes and the Guidelines.

Certification duties of debt agreement administrators

Full disclosure requirements

Another current area of focus for AFSA is whether DAAs are properly disclosing all of a creditor’s debts. Recently AFSA was made aware of over 65 creditors whose debts were not disclosed under proposed debt agreements in the month of September 2016.  AFSA has stated that this issue is partly due to DAAs failing to carry out the necessary certifications. DAAs are required to certify that they have reasonable grounds to believe that:

1. the debtor is likely to be able to discharge the obligations created by the agreement as and when they fall due;
2. all information required to be set out in the debtor’s statement of affairs has been set out in that statement; and
3. all information required to be set out in the debtor’s explanatory statement accompanying the proposal has been set out in that statement.

To fulfill these certifications, DAAs must ensure they have reasonable grounds to believe that the debtor has made full and true disclosure and DAAs are entitled to examine bank and credit card statements, pay slips and employment history.

This is important for DAAs for two reasons. First, if a DAA does not certify these matters in a proposal the proposal will not be accepted.  Second, failing to disclose a creditor in the statement of a debtor’s affairs can be an offence under section 267(2) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), which states a person must not make a declaration that they know to be false.

Duty to maintain a single bearing bank account

A further area of concern for AFSA is whether DAAs are complying with their duty to maintain a single interest bearing account. All moneys received from debtors must only be deposited into a single interest bearing bank account, and not split between various interest bearing accounts.  Failing to do so may breach section 185LD(1) of the Bankruptcy Act, which states a DAA or registered trustee who is the administrator of a debt agreement must pay all money received from debtors under debt agreements to a single interest bearing bank account.  Failing to do so may be regarded as a breach of duty pursuant to section 185ZCA(2) of the Bankruptcy Act and the Court may make an order directing the Inspector General to cancel a person’s registration as a DAA.

Lavan comment

AFSA’s comments in relation to debt agreements highlights the importance for DAAs to comply with the law by ensuring:

1. they do not engage lead-generating firms;
2. they make the necessary enquiries to determine whether a debtor has made full and true disclosure of their claim; and
3. they deposit money from debtors into single interest bearing accounts only.
4. By our regular personal bankruptcy circular, Lavan will aim to keep practitioners up to date with any developments in the law and of particular practice issues. Please let us know if there are any topics you would like to hear more about.