IGPS 11 Monitoring and Inspection of Bankruptcy trustees and administrators

MONITORING AND INSPECTION OF
BANKRUPTCY TRUSTEES AND
DEBT AGREEMENT ADMINISTRATORS
Released 1 September 2008
Updated 1 February 2013

If you have any comments, suggestions or queries on a matter referred to in this Practice
Statement, please contact us on 1300 364 785 or at regulation@itsa.gov.au or by mail
addressed to:
Practice Manager – Regulation
Insolvency and Trustee Service Australia
PO Box 10443
Adelaide Street
BRISBANE QLD 4000



CONTENTS
1. INTRODUCTION 3
2. INSPECTION OF ADMINISTRATIONS AND SYSTEMS 3
Fraud control issues 3
Arranging the inspection 4
Determining the sample and scope of the inspection 4
Undertaking the inspection 5
Reporting of non-compliance 6
Finalising the inspection 7
Possible actions when breaches are identified 8
3. ATTENDING MEETINGS OF CREDITORS


Introduction 9
The legislative framework 9
Criteria for attending 9
Prior to the meeting 10
At the meeting 10
Post-meeting 10
4. CONCLUSION 11


1. INTRODUCTION
1.1. The regulatory responsibilities of the Inspector-General in Bankruptcy are aimed
at ensuring high national standards of bankruptcy practice and procedure.
These functions are undertaken by ITSA Regulation, which oversees registered
trustees in private practice, ITSA’s trustee function (the Official Trustee),
registered and unregistered debt agreement administrators and solicitors who
act as trustees in personal insolvency agreements. ITSA Regulation acts
independently from the Official Trustee and reports directly to the Chief
Executive and Inspector-General in Bankruptcy.
1.2. One strategy employed by ITSA Regulation as delegate of the Inspector-General
is to monitor the standard of bankruptcy trustees and debt agreement
administrators and their administrations through an annual inspection program.
This may include for example:
 an annual inspection of administrations, systems and practices
 attending some meetings of creditors
 reviewing the quality of trustee decisions
 targeted or strategic investigation
 reviewing the complaints made against the practitioner in the period
 surveying debtors and creditors.
1.3. This Practice Statement articulates the Inspector-General’s practices and
expectations when monitoring practitioners through the annual program of
inspection of administrations, systems and practices and attending meetings of
creditors.
2. INSPECTION OF ADMINISTRATIONS AND SYSTEMS
2.1. The purpose of ITSA Regulation’s annual inspection program is to examine the
quality of administration by practitioners with particular emphasis on:
i. compliance with legislation and common law requirements
ii. proper performance of statutory and fiduciary duties and functions in
accordance with legislation and standards
iii. financial records, billing and money handling practices
iv. control and system weaknesses and other areas of risk.
2.2. This is a pro-active process aimed at providing constructive feedback to
practitioners to improve compliance and practice. However, it should be
recognised that on occasion issues may be identified that warrant further
investigation and the adoption of more reactive strategies, including disciplinary
proceedings, to obtain compliance and remedial action.
Fraud control issues
2.3. An important benefit of this program is that, while an inspection of a sample of
administrations cannot be expected to identify all instances of defalcation, it is a
valid preventative control to minimise the risk of fraud.
2.4. Accordingly, ITSA Regulation has inbuilt into in its inspection program tests of
the systems and controls of trustees. The following aspects of ITSA
Regulation’s annual inspection program should be noted:Inspector-General Practice Statement 11 – Monitoring and inspection
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 the ITSA Regulation file sample is computer-generated and, whilst targeted
to higher risk estates, includes a sizable computer-based random sample.
As a consequence any file, including one inspected in previous periods,
could be selected
 the random sample can include estates where no assets were shown as
realised and no funds recorded and could therefore include estates where
there may have been deliberate omissions
 estates with assets, contributions or dividends are closely examined and the
transactions followed through the course of the administration to final
payments/dividend. This may well include tracing a series of cheques to the
accounts to which they are presented
 on a sample basis contributions may be reconciled with the bankrupt’s
payment records
 ITSA Regulation may contact both creditors and debtors on a sample basis
(and in some cases may contact banking institutions) to verify transactions
and that claims are properly recorded and authentic
 practitioners will be required to reconstruct any files unable to be located and
ITSA Regulation will treat the inability to do so within a reasonable time
frame as a serious breach of duty.
2.5. As an added deterrent to possible employee fraud it is the Inspector-General’s
expectation that practitioners will inform their employees of these aspects of the
ITSA Regulation program.
Arranging the inspection
2.6. ITSA Regulation aims to provide practitioners with at least seven days’ notice of the
date of its attendance for inspection. A mutually-convenient date and time to
inspect will be coordinated with the practitioner. At this time the practitioner will be
requested to complete and provide either a summary of their systems and controls
or an update of changes since the date of last inspection.
2.7. As a control to minimise the incidence and risk of fraud, ITSA Regulation’s policy
regarding the timing of notice provided to trustees and debt agreement
administrators is to provide details of the specific files to be inspected 24 hours
before the commencement of the inspection. If ITSA Regulation identifies older files
that may be archived, 48 hours’ notice will be provided to allow for file retrieval.
2.8. This practice is used with all practitioners including the Official Trustee. ITSA
Regulation previously identified fraud where the provision of a longer preparation
time frame adopted provided a trustee’s employee the time to remove, alter and
forge records prior to the inspection.
2.9. ITSA is required to comply with workplace health and safety legislation in providing
its employees with a healthy and safe work environment. With this in mind and to
ensure both privacy and efficiency in undertaking inspections, practitioners are
requested to provide either an office with a workstation and office chair or a
workstation and chair and to ensure some privacy with access to a power point.
Determining the sample and scope of the inspection
2.10. In determining the size of the sample of files to inspect, ITSA Regulation will
undertake a risk assessment of the practice. Practitioners are rated in Inspector-General Practice Statement 11 – Monitoring and inspection
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accordance with the quality of their systems and controls and the prior quality ofpractices and procedures.
2.11. An evaluation is undertaken of a practitioner’s systems and controls in the first
year of inspection and details are maintained on the ITSA Regulation practitioner
file. During the second and third years of inspection the evaluation is updated.
During the fourth year of inspection a complete re-evaluation will be undertaken
to ensure any significant changes have been documented and included in the
assessment.
2.12. Key elements of the practitioner’s risk assessment that will be used to determine
the size and scope of the sample include:
 the structure of firm
 the qualifications and experience of support staff
 an assessment of systems and controls
 their history of justified complaints
 their prior inspection results
 the quality of prior decisions subject to Inspector-General review (for
trustees only).
2.13. The rating defines the minimum number of administrations to be sampled and
will also be used to identify issues or the attributes ITSA Regulation wishes to
more closely examine.
2.14. The second element of the sampling is the computerised selection of the files to
inspect. ITSA Regulation’s methodology is based on a number of risk attributes.
For example, attributes in a Part X personal insolvency agreement or a Part IV
bankruptcy might include:
 estates where the extent of assets realised is greater than a certain amount
 estates where the percentage of remuneration is greater than a certain
amount
 estates where dividends have been paid
 estates with high amounts of liabilities
 Part Xs with a low percentage dividend.
2.15. Whilst the Part IX sample is largely random in nature, some attributes may be
examined. For example, ITSA Regulation will include in its inspection sample
administrations where:
 the debt agreement proposal (“DAP”) has been rejected or cancelled by
ITSA’s Debt Agreement team (“DAt”)
 practice queries were raised on processing of the DAP by the DAt
 variations and terminations have occurred
 the fees charged are outside the normal range.
2.16. It should be noted that in every inspection there will also be some files which will be randomly chosen. These may display no identifiable attributes and may
include estates previously examined.
Undertaking the inspection
2.17. The inspection commences with an entrance interview with the registered
practitioner. This interview is an opportunity for the practitioner to discuss matters or technical areas of interest with the ITSA Regulation inspector,
particularly if there is an area where the practitioner seeks additional feedback.
The practitioner’s response to the systems and controls questionnaire will also
be discussed at the entrance interview. It is therefore important that the
practitioner is present at this interview.
2.18. It is preferable that queries be informally discussed and, where possible, clarified
with the practitioners or their nominee during the inspection. To minimise any
disruption to workflow, the practitioner should outline the protocols they require
of ITSA Regulation, including who ITSA Regulation inspectors should contact for
clarification of issues during the interview. If the practitioner feels that this may
be too disruptive, arrangements can be made to collate queries for discussion at
the exit interview for responses either at that time or later.
2.19. ITSA Regulation inspectors are required to maintain a professional, independent
and courteous approach. If during the inspection a practitioner is concerned as
to the conduct of the officer or the inspection process they should raise these
concerns directly either with the regional ITSA Regulation Business Manager or
the Regulation and Enforcement National Manager.
2.20. If a possible error is found (see the “Reporting of non-compliance” section
below) further testing may be carried out to determine whether the error is a oneoff occurrence, a systematic problem or identifies a weakness in supervision or
training.
2.21. ITSA Regulation will inspect each estate or administration for compliance. It will
then compile and analyse the results to assess whether there are systemic
issues or control weaknesses.
2.22. The inspection at the practitioner’s office will be completed by way of exit
interview. Feedback will be given about the quality of the administrations
inspected. Any preliminary errors and observations noted and discussed
throughout the inspection will be raised at the exit interview and the practitioner
will be given the opportunity to comment. ITSA Regulation will also provide
comments about any issues identified by the practitioner at the entrance
interview plus any issues of best practice where greater efficiencies could be
achieved.
2.23. Records are made and retained of discussions and comments made both at the
entrance and exit interviews.
Reporting of non-compliance
2.24. In providing feedback and to make overall conclusions as to the standard of
practice, any identified areas of non-compliance – referred to as errors – are
compiled and reported based both on the level of seriousness (the category) and
their descriptive nature.
2.25. If any breach or non-compliance with the law is identified, ITSA Regulation will
consider:
a. the nature of the breachInspector-General Practice Statement 11 – Monitoring and inspection
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b. the seriousness of the effect of a failure to comply, including the impact on a
particular estate or individual
c. whether the practitioner has previously failed to comply and the practitioner’s
performance history.
2.26. The majority of practitioners are willing to comply and view the inspection
program as an opportunity to obtain feedback about the quality of their
administrations. However, there is an expectation that practitioners who
regularly fail to comply with the Bankruptcy Act and Regulations without a
reasonable explanation, who regularly diverge from acceptable practice or their
behaviour/conduct brings the integrity of the profession in disrepute will be
subject to disciplinary action.
2.27. To assist in assessing the seriousness and relevant regulatory response and to
alert practitioners of the issues and possible repercussions, non-compliances
are classified as either Category A, B or C depending on the level of
seriousness.
Category A
These are very serious errors or breaches requiring immediate attention and
include fundamental breaches and lack of controls that are likely to bring into
question the integrity of the system. These include any repeat occurrences of
serious breaches identified in previous inspections as category B errors. These
matters will generally give rise to legal action, referral to fraud investigators,
consideration as to whether the practitioner should have their registration
cancelled under sections 155H, 186K or 186L or at least have their registration
suspended or conditions placed on it. In the case of a solicitor controlling trustee
or unregistered debt agreement administrator this would result in action which
could result in them being declared ineligible to act.
Category B
These are serious or systemic errors that will have a material impact on the
administration and require timely remedial action. The practitioner should be
counselled and timely remedial action taken. These include where in prior
inspections breaches were identified and either not remedied or repeat errors
are made in the same area.
Category C
These are one-off practice or procedural errors and non-compliance errors that
are not systemic and don’t have a significant impact on the administration,
dividends, creditors, debtors’ rights or system integrity but should be brought to
the attention of the practitioner and monitored.
Finalising the inspection
2.28. After attending the offices of the practitioner, ITSA Regulation may write to a
sample of creditors in administrations identified during the inspection where the
practitioner’s records show a dividend has been paid to creditors. This
verification is to ensure that the creditors are bona fide and that they received
and banked dividend cheques. ITSA Regulation may also sample and seek
verification from debtors as to the amount paid to the practitioner.Inspector-General Practice Statement 11 – Monitoring and inspection
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2.29. Once information is complete the practitioner will be provided with a draft
inspection report seeking comments about any issues raised. The report will
outline the overall results of the inspection, any provisional errors or systemic
issues as discussed at the exit interview, any observations of significance
discussed at the exit interview and any remedial action that may be required. In
cases where serious or systemic issues appear to have been identified, the
report will be reviewed and issued by the ITSA Regulation Business Manager
responsible.
2.30. The practitioner’s response is generally expected within 14 days. The inspection
is completed once the practitioner either responds to the inspection report or
elects to not respond.
2.31. The practitioner’s risk assessment rating is then updated for future inspections
and ITSA Regulation will monitor any specific administrations requiring remedial
action.
2.32. The Inspector-General is bound by the Privacy Act 1988 and will maintain the
confidentiality of individual inspection results unless Privacy Act exceptions
apply. Exceptions allowed for under privacy legislation of where ITSA
Regulation is able to provide specific details to others include:
 where the information has been obtained for a specific purpose and allowed
for under Bankruptcy legislation (an example of this would be provision of
information to Parliament)
 where there has been consent by the practitioner
 information required by a law enforcement agency
 where the information has become public knowledge, for example through
publishing of a court or Administrative Appeals Tribunal judgment.
Possible actions when breaches are identified
2.33. There is a range of strategies available to ITSA Regulation should it determine
that a breach of legislation or duty or other non-compliance has occurred (see
IGPS1 Regulatory Framework). These relate to all practitioners and include:
i. education – making practitioners aware of systemic problem areas and the
correct practice or law individually and collectively
ii. individual feedback – by far the most effective means to achieve timely
remedial action
iii. counselling of the practitioner
iv. changing in the risk classification of a practitioner. This will lead to a larger
sample of files being selected for future annual inspections
v. formal investigation and reporting under section 12, for example to creditors,
police or professional bodies such as IPA, ICAA, CPA or Law Council
vi. special audit of accounts
vii. imposing penalties for realisations and interest charge breaches
viii. litigation
ix. involuntary cancellation or registration proceedings (or illegibility
proceedings in the case of unregistered debt agreement administrators and
solicitors who act as controlling trustees). See also IGPS8 and IGPS9
dealing with involuntary cancellation of registration.3. ATTENDING MEETINGS OF CREDITORS
Introduction
3.1. ITSA Regulation, as delegate of the Inspector-General, attend a sample of
meetings of creditors in both Part X matters and section 73 proposals for all
trustees involved as part of its inspection program, irrespective of whether there
are matters warranting attendance by ITSA Regulation.
3.2. Attendance at a sample of meetings provides ITSA Regulation with an
opportunity to monitor and report on the standard of controlling trustees in Part X
administrations and trustee meeting practices generally. It also provides an
effective and efficient method of monitoring debtors’ Part X proposals and
addressing creditor queries and perceptions.
3.3. In addition, ITSA Regulation examines both section 189A and subsection 73(2)
reports and, if it has any queries or concerns, will discuss matters with the
trustee and may attend the meeting taking an active role if needed. Often issues
are clarified or problem areas rectified before creditors are asked to vote at the
meeting.
3.4. Irrespective of whether a criterion detailed below is evident or not, as part of
ITSA Regulation’s normal inspection program involving trustees are conducting
meetings it will endeavour to attend no fewer than one meeting for every trustee
each year.
3.5. The issues and performance of trustees in Part X matters generally is analysed
by the Inspector-General and reported to Parliament annually.
3.6. The following information documents the criteria that ITSA Regulation is to utilise
in determining which creditors’ meetings are attended and the protocols and
processes to be used.
3.7. The term “trustee” is utilised in this Practice Statement to represent registered
trustees, the Official Trustee and solicitor controlling trustees.
The legislative framework
3.8. Subsection 12(4) of the Act provides authority for the Inspector-General to
attend and participate in meetings of creditors. This subsection states:
“The Inspector-General:
(a) is entitled to attend any meeting of creditors held under this Act; and
(b) subject to section 64ZA, is entitled to participate in any such meeting as the
Inspector-General thinks fit.”
Criteria for attending
General criteria
3.9. ITSA Regulation may attend where there appears to be an inherent risk to the
credibility of the personal insolvency system posed by the administration in
which the meeting is being held. This would be the case where:
i. it is suspected that creditors have not been properly informed, either
because the debtor has not provided complete or accurate information or the
trustee’s report is deficientInspector-General Practice Statement 11 – Monitoring and inspection
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ii. the debtor is high profile with sizeable debts and there is public interest
iii. ITSA Regulation has concerns as to the validity of a creditor’s claim and the
creditor can affect the outcome of the meeting.
Trustee-specific criteria
3.10. Meetings may also be attended when:
i. the trustee has a history of poor-quality reports and meeting practices or is
inexperienced in chairing meetings
ii. the trustee is inexperienced and has not conducted a creditors’ meeting in
the last 12 months
iii. the debtor’s statement of affairs or information from some other source
indicates:
 the debtor may have been involved in a high income occupation such
as doctor or barrister, but displays little in the way of assets or income
and the offer to creditors is relatively small
 antecedent transactions
 the debtor may have recently possessed substantial income, assets or
that they controls trusts or private companies
AND the s189A report contains no or inadequate discussion of those issues
AND the trustee has been requested to provide further advice but a satisfactory
response has not been provided.
Creditor-specific criteria
3.11. Meetings may also be attended when:
i. a creditor lodges a complaint prior to the meeting
ii. there are related-party creditors whose vote can affect the outcome or there
is a high number of creditors who may vote but don’t wish to participate in a
dividend particularly where there is a substantial creditor likely to be
affected.
Debtor-specific criteria
3.12. Meetings may also be attended when:
a. the debtor has been bankrupt or entered into a Part IX or Part X twice or
more in the 10 years preceding the current section 188 authority
b. the debtor’s creditors exceed $1million and their proposal would provide an
insignificant return
c. ITSA Regulation has reason to suspect that full and true disclosure of
information was not made.
In regions where a large number of meetings are held per annum it may not be
possible to attend all meetings exhibiting one or more of the above criteria. In
these circumstances ITSA Regulation will exercise judgement as to which
meetings are attended.
Prior to the meeting
3.13. Attendance is likely to be in person but may at times occur through
teleconference if those facilities are available.
3.14. ITSA Regulation will inform the controlling trustee or trustee of the meetings it
will be attending prior to these meetings. Where possible at least 24 hours’
notice will be given.Inspector-General Practice Statement 11 – Monitoring and inspection
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3.15. ITSA Regulation will consider whether the issues identified warrant attendance
at the meeting or can be resolved through prior discussion (either by telephone,
email or direct meeting) and action. ITSA Regulation will consult with the trustee
and raise queries and concerns privately prior to the meeting if possible. Every
attempt will be made to resolve these issues prior to the meeting. Intervention
may lead to a supplementary report or clarification of contentious issues at
meeting.
At the meeting
3.16. Usually two ITSA Regulation representatives will attend the meeting although
each case will be treated on its merits.
3.17. Should matters not be addressed to ITSA Regulation’s satisfaction, the ITSA
Regulation inspectors may intervene in meetings, raise issues and seek
clarification from the debtor, creditors or the trustee.
3.18. Confrontational and/or adversarial behaviour by parties at the meeting will not
result in any reaction from ITSA Regulation at the time of the meeting. However,
where appropriate, feedback will be provided at a later opportunity.
3.19. If questions are to be asked at the meeting by ITSA Regulation, every effort will
be made to provide a list of those questions to the trustee prior to the meeting.
The aim is not to “ambush” the trustee at the meeting although issues may arise
or events occur at the meeting that require immediate ITSA Regulation
intervention. This would be the case with non-compliance with the law where
immediate remedial action is necessary by the trustee.
3.20. A record will be made of those cases where the trustee or their staff has
attempted to hinder ITSA Regulation’s proper involvement at the meeting.
Consideration will be given after the meeting as to whether further action is
warranted.
Post-meeting
3.21. As part of ITSA Regulation’s educative role, where appropriate feedback will be
provided to the trustee on the quality of the meeting processes.
3.22. Any specific patterns of inappropriate meeting processes will be recorded and
any requirement for remedial action communicated to the trustee.
4. CONCLUSION
4.1. To contribute to the transparency of decision-making in the Australian Public
Service, this Practice Statement has outlined the proactive annual inspection and
meeting attendance strategies used by ITSA Regulation to monitor the quality of
registered practitioners operating under the Bankruptcy Act. It has set out what
ITSA undertakes to do, the basis of related decisions and what ITSA expects of
practitioners in these areas.