AFSA Publishes "warning" about bankruptcy trustees

The Australian Financial Security Authority (AFSA) has recently published a fact sheet containing options for debtors to avoid bankruptcy appointments and reduce the potential for fees and costs to be incurred.

On Monday, 9 July 2018 AFSA released a copy of a notice entitled “Warning—you may be declared bankrupt” (AFSA Warning).

AFSA has stated that it “encourages” creditors to include the AFSA Warning with any bankruptcy notice served on a debtor, and “hope[s] that the inclusion of this document with all [bankruptcy notices] means that issues can be resolved more efficiently.”

The AFSA Notice informs debtors of the potentially severe personal consequences of bankruptcy, and illustrates possible rights and remedies that may be available to the debtor as alternatives to bankruptcy. 

However, the AFSA Notice also includes the following statements:

• “When you are made bankrupt, a bankruptcy trustee has an obligation to investigate your financial affairs, take control of and sell your property, and make decisions about continuing legal actions you may have commenced.”
• “Private sector bankruptcy trustees generally belong to accounting firms and charge at professional rates. Their fees and costs can quickly add up, and may reach thousands, or even tens of thousands, of dollars in a relatively short time.”
• “The fees and costs that a bankrupt must pay is determined by the trustee and the creditors you owe money to. As a bankrupt, you have no say in the setting or approval of the trustee’s fees and costs.
• “Your only option is to request a review of fees after the trustee has been paid, and a review may only result in a slight reduction, or none at all.”

In our experience, most trustees are conscious of their professional obligations around fees and accountability, but clearly AFSA has identified that these are matters that should be drawn to the attention of potential bankrupts nonetheless.

It is presently not compulsory for creditors to include a copy of the AFSA Notice with bankruptcy notices.  Nonetheless, the possibility remains that AFSA may make service of this notice (or a notice in substantively similar terms) a compulsory aspect of the bankruptcy process in the near future.  An analogous example of a statutorily imposed warning to a debtor can be found in the recently legislated Order 4AA of the Supreme Court Rules,¹ which requires writs commencing actions against mortgagors to enclose a notice to the mortgagor that, amongst other things, failure to respond to the writ may result in a mortgagee taking possession of and selling the mortgaged property.

Lavan comment

Personal bankruptcy can have serious consequences.  It is important that debtors served with a bankruptcy notice are aware that they may be able to resolve their situation without bankruptcy – including by challenging their debt in court, or through proactively engaging with creditors through a sustainable payment plan.

Service of the AFSA Notice may become compulsory in the near future.  Bankruptcy trustees and insolvency practitioners now have the opportunity to constructively engage AFSA regarding the drafting and content of any notice to debtors (whether voluntary or compulsory) with regard to the demonstrated integrity, fairness and competence of privately appointed bankruptcy trustees.

AFSA has welcomed public comment on the AFSA Notice, and submissions regarding the AFSA Notice (and/or its addition to the bankruptcy process) can be made to stakeholders@afsa.gov.au by 30 July 2018.