House of Representatives

Explanatory Memorandum

Circulated By Authority of the Attorney-General, the Honourable Robert Mcclelland MP

SCHEDULE 1 - REMUNERATION OF TRUSTEES OF ESTATES OF BANKRUPTS

Amendments relating to creditors' meetings

22. Items 1 to 6 will amend section 64U which deals with the procedure for dealing with trustee remuneration at a meeting of creditors.

23. Item 1 will repeal subsections 64U(2) to (4). Subsection 64U(2) refers to remuneration as prescribed by regulations pursuant to subsection 162(4). Subsection 162(4) is being repealed so subsection 64U(2) will no longer be required. Subsections 64U(3) and (4) are being replaced by new subsections 64U(5) and (5A) without any change to their respective meaning.

24. The amendments to be made by items 2 to 6 are consequential upon the repeal of subsection 64U(2) and will make no substantive change to the operation of the section.

Creditors' resolutions without a meeting where resolution relates to remuneration

25. Item 7 will amend section 64ZBA which provides for creditors' resolutions without a meeting. The amendments will clarify that this process can used for a resolution relating to the trustee's remuneration and set out the requirements for a notice relating to such a proposal. These requirements will be set out in subsection (2A) and are in line with existing requirements relating to notices the trustee must give when the proposal is considered at a meeting of creditors (see section 64U).

26. Item 8 will amend subsection 64ZD(1) to replace a reference to subsection 64U(4) with a reference to subsection 64U(6A). This is consequential upon the amendment made by items 1 and 4 and will result in no substantive change in meaning.

Minimum amount of remuneration payable

27. Items 9 to 11 will amend section 161B which provides that a trustee is entitled to a minimum amount of remuneration.

28. Item 9 will amend subsection 161B(1) which currently provides that, where the remuneration payable to a trustee would be less than a specified amount (the 'statutory minimum'), the trustee is entitled to remuneration of that amount. This minimum amount is considered to be nominal and the amendment will increase it to $5000 (or another amount prescribed by regulations). This higher amount recognises that every trustee is required to undertake certain basic tasks in administering an estate and that it is unnecessary and not cost effective to require the trustee to obtain the approval of creditors for that minimum amount in every case. In effect, the trustee will be able to draw remuneration of $5000 in every estate without the approval of creditors.

29. Item 10 will amend subsection 161B(1A) to remove the reference to section 304A which deals with indexable amounts. As the statutory minimum is being changed to a fixed $5000, it will no longer be subject to indexation.

30. Item 11 will repeal subsections 161B(2) and (3). Subsection 161B(2) currently allows the trustee to recover the statutory minimum directly from the bankrupt if there are insufficient assets in the estate. This is inconsistent with the general principle that a trustee should be remunerated from the estate. Subsection 161B(3) currently refers to section 304A which deals with indexable amounts. As the statutory minimum is being changed to a fixed $5000, it will no longer be subject to indexation.

Remuneration where there is no creditors' resolution

31. Item 12 will repeal subsection 162(4) which currently provides an entitlement for a trustee to be remunerated as prescribed by the regulations where the remuneration has not been fixed by creditors or the committee of inspection. Regulation 8.08 provides for a default remuneration scale based on the IPAA Guide to Hourly Rates published by the Insolvency Practitioners Association of Australia. The IPAA last issued that Guide on 18 June 1999 and does not intend to revise or reissue it. The use of a default scale has been judicially criticised on the basis that it undermines effective price competition.

32. In place of the current default scale for remuneration, a new process will be introduced to deal with circumstances in which it is not practical or cost effective to seek creditor approval for remuneration (for example, where the amount sought is relatively small or creditors do not respond to a remuneration proposal put forward by the trustee). There is a need for a process which provides certainty to the trustee that remuneration is approved before they commence time consuming and expensive work in administering the estate. New subsections 162(4), (4A) and (4B) will allow the trustee to apply to the Inspector-General to decide the trustee's remuneration. The circumstances in which the trustee may make such an application and the matters to be considered by the Inspector-General in making a decision will be prescribed in regulations. However, it is intended to be available where it would not be cost effective to seek creditor approval or where the creditors have not responded to a proposal relating to remuneration. It would also be available where the creditors have rejected a proposal from the trustee relating to remuneration. In general terms, when making a decision on an application from a trustee, the Inspector-General will need to be satisfied that the trustee has followed the correct process in notifying creditors and estimating remuneration (including ensuring that tasks are charged at the appropriate rate for the level of staff expected to undertake the work), that the work has been adequately described to creditors, that the estimate of remuneration appears commensurate with the tasks to be performed and that the work appears necessary and reasonable. It is not intended that the Inspector-General will be making any decisions relating to the hourly rates charged by a trustee.

33. The amendments will not provide a mechanism for review of the Inspector-General's decision. If a trustee is not satisfied with the decision, it is open to the trustee to vacate the office by the method provided in the Act, or put a revised remuneration proposal to creditors. Likewise, creditors who are unhappy with a determination of the Inspector-General have the option of replacing the trustee under section 181.

Review of remuneration and costs

34. Item 13 will repeal section 167 which currently provides for taxation of costs of a person other than the trustee who provides services in relation to the administration of an estate. The process for taxing remuneration of a trustee is currently set out in regulations. The amendments made by item 13 will provide for a single process for reviewing remuneration and costs which will replace the current taxation regime for both.

35. To support the new process, item 13 will also introduce new section 166 which will require the trustee, in relation to the payment for services provided by another person in relation to the administration of an estate, to give such notices to the bankrupt and creditors as are required by the regulations. This is consistent with the current requirements for notices relating to the remuneration of the trustee.

36. The process for reviewing remuneration and costs will be established in new section 167. However, this section will set out principles and a broad framework with details of the process to be prescribed in regulations. Section 167 will provide a power to make regulations for the following purposes:

•

subsection (1) - the Inspector-General reviewing decisions relating to a trustee's remuneration and allowing the bankrupt or a creditor to apply for such a review;

•

subsection (2) - the Inspector-General reviewing a bill of costs for services provided by a third party in relation to the administration of an estate and allowing the trustee to apply for such a review;

•

subsection (3) - the process for conducting such reviews including the Inspector-General's powers, provision of information and documents by the trustee or a third party, the decisions which the Inspector-General may make in relation to the review and the notification of decisions by the Inspector-General; and

•

subsection (4) - repayment of any amounts of remuneration which the Inspector-General decides are excessive.

37. Subsection 167(5) will provide that the amount of any excess as determined by the Inspector-General is recoverable as a debt due to the bankrupt estate - this can be recovered by the Inspector-General by action against the trustee in a court of competent jurisdiction.

38. Subsection 167(6) will allow the trustee, the bankrupt or a creditor to appeal to Court from a decision of the Inspector-General. If the decision affects a third party under subsection (2), that third party will have the same right of appeal.

39. Subsection 167(7) will provide that subsections (3) and (4) do not limit subsections (1) and (2). This is intended to ensure that the review processes established by subsections (1) and (2) can be as broad as necessary. For example, the regulations may provide, in relation to the processes, that the Inspector-General can:

•

reject an application which is frivolous or vexatious;

•

extend the time for making an application in certain circumstances;

•

conduct the review in writing, or conduct interviews, or conduct a hearing; or

•

consider material other than that provided by the parties.

40. A significant difference between the new review process and the current taxation process is that it will be free to the applicant. The costs will be recovered through the realisations charge as part of the broader cost recovery arrangements applying to the Insolvency and Trustee Service Australia.

Definition of 'indexable amount'

41. Items 14 to 16 will amend section 304A which provides for the indexation of certain amounts under the Act. Paragraph (i) of the definition of 'indexable amount' refers to remuneration payable under 161B (minimum entitlement to remuneration). As section 161B is being amended to provide that the minimum remuneration is a fixed amount of $5000 or another amount prescribed by the regulations, indexation is no longer necessary. The amendments made by items 14 to 16 are consequential upon the repeal of section 161B.

Application of amendments

42. Item 17 provides that the amendments made by the Schedule will apply in relation to bankruptcies for which the date of bankruptcy is on or after the day on which this item commences. That is, the amendments apply prospectively only.