Bankrupts still able to challenge trustee’s conduct

In a previous update¹ we notified you of a number of cases in both personal and corporate insolvency concerning the transitional arrangements relating to the Insolvency Law Reform Act 2016 (Cth) (ILRA).

One of those decisions related to section 179 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act),² which was directed to the control of trustees by the Court.

For now section 179 continues to apply and provides that:

• the Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may either remove the trustee from office and/or make such order as it thinks proper; and
• the Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs.

From September 2017 when the ‘tranche two’ changes of the law reform come into effect, there will be a suite of provisions which will replace section 179 of the Bankruptcy Act.

To understand these provisions you first need to know where to find them.  For that, you need to look in two places:

• the Insolvency Practice Schedule (Bankruptcy) (Schedule), which is inserted as Schedule 2 to the Bankruptcy Act – which can be found here https://www.legislation.gov.au/Details/C2016A00011; and
• the Insolvency Practice Rules (Bankruptcy) 2016 (Rules)– which can be found here https://www.legislation.gov.au/Details/F2016L02004,

                as well as the Bankruptcy Act itself (to see if any complementary provisions or general provisions about bringing applications to the Court are applicable).

Division 45-1 of the Schedule (which is already in effect), is a fairly generic provision allowing the Court to make orders that it thinks fit regarding a registered trustee, on its own initiative, or on an application by the Inspector General, or the registered trustee but not the bankrupt. 

When making the orders, the court may take into account:

• whether the trustee faithfully performed their duties;
• whether an action of failure to act by the registered trustee complies with the ILRA, or a court order;
• whether any person has suffered, or is likely to suffer, any loss or damage because of the trustee’s failure to act; and
• the effect on the public confidence in registered trustees as a group.

Division 90-15 of the Schedule, which commences on 1 September 2017, gives the Court broad powers in relation to orders that can be made and provides examples of such orders, including as to:

• the replacement of one trustee with another;
• the requirement for a trustee to repay remuneration or account for ‘losses’ to the estate because of any breaches of duty; and
• costs of any proceedings.

Relevantly, under this provision (as read with the Rules) any party (including the bankrupt) can bring an application provided they do so within 60 days of becoming aware of the trustee’s act, omission or decision.

The way in which the Courts will apply these interrelated provisions is yet to be seen, but it is expected that guidance will be found in the way section 179 of the Bankruptcy Act was applied, albeit that the new provisions appear to be somewhat broader than section 179.

As the Court noted in Szepesvary,³ in considering a section 179 application, the Court:

• must first consider whether it should inquire into the conduct of the trustee – this first step involves a broad discretion as to whether or not there are sufficient grounds to make an inquiry appropriate; and
• in making this assessment, is fundamentally concerned with the supervision of trustees, who are its officers, and the practical utility of an inquiry; and
• if an inquiry is undertaken, should assess whether the trustee should be removed from office and/or any other order made.

As can be seen from the above provisions, there may well be a range of outcomes available in future to disgruntled parties short of (but also including) removal from office, but with a focus still heavily on conduct.

Aside from the above, there are a range of related powers now in force favouring the Inspector General, including the ability to suspend a trustee’s registration⁴ and to direct a trustee not to accept further appointments.⁵

For example the Inspector General can direct a trustee not to accept further appointments if the trustee:

• fails to give information to debtors or creditors;⁶ or
• if a committee convened to consider the trustee’s registration decides to give the Inspector General a direction to do so. ⁷

Additionally, the Inspector General can suspend a trustee’s registration where the trustee:

• has been disqualified from managing a corporation;
• fails to have adequate insurance;
• owes more than the prescribed amount of estate charges; or
• fails to comply with a court order to repay remuneration to an estate.

Lavan Comment

The net effect of these provisions is a fairly comprehensive regime for the oversight of the conduct of trustees.

Helpfully, we expect that the cases around the regulation of trustee conduct will be applicable in the era of the ILRA.

However, as with any broad changes to any legislative framework concerning regulation in the area of insolvency (a recent example being the Personal Property Securities Act 2009), the bedding down of these changes are somewhat a case of ‘wait and see’.

It is important for practitioners in both corporate and personal insolvency to be aware of the timing and the substance of these changes (as well as where to find the legislative instruments themselves).

We will continue to provide updates on developments in the law throughout the year.  We also commend to practitioners the use of the comparative guides on the AFSA website, www.afsa.gov.au