Veronique Ingram in IGPS 10.1 also states the performance and duty of a Trustee is considered a " discretion" under S 134 of the Bankruptcy Act and therefore is not a breach of the Bankruptcy Act
INSPECTOR-GENERAL PRACTICE DIRECTION 14
PROPER PERFORMANCE OF
DUTIES OF A TRUSTEE; Issued 30 March 2010
Updated 13 February 2013 If you have any comments, suggestions or queries on a matter referred to in this Practice Direction, 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 4000Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 2 CONTENTS 1. ACKNOWLEDGEMENTS 3
2. INTRODUCTION 3
3. THE LEGISLATIVE FRAMEWORK 4
Section 155H 4
Section 12 5
Section 19 6
Schedule 4A Performance Standards for Trustees 6
4. TRUSTEES AS FIDCUCARIES AND OFFICERS OF THE COURT 8
The Rule in Ex parte James 9
Independence and avoiding conflicts of interest 11
Impartial and Fair 11
Efficient and Commercial 13
Sequestration Orders being challenged 14
5. PRINCIPLES THAT CAN BE CONCLUDED 15
General Fiduciary Principles 15
Specific Principles 16
When delegating matters to staff 16
When dealing with information 16
When claiming assets 17
Contributions 17
Remuneration, costs and dividends 17
Filing Objections 18
6. CONCLUSION 19
7. ANNEXURE A – CASE LAW TRUSTEE DUTIES 20Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 3 1. ACKNOWLEGEMENTS 1.1. Sections of this Inspector-General Practice Direction are based on papers presented by well-known and widely-respected persons in the area of insolvency law and practice at ITSA’s 7th Bankruptcy Congress in Sydney in October 2008. These individuals and links to their papers are shown below. Their papers were delivered as part of a Congress panel that discussed the topic
"Understanding your Responsibilities and Performance Standards – are Trustees and practitioners in the firing line?" Justice Peter W Young AO
Michael Murray
Andrew Robinson
The content of these papers has been instrumental to the development of this Inspector-General Practice Direction. 2. INTRODUCTION 2.1. Mr Robert Sanderson, Past President of INSOL International, in launching the IPA Code of Professional Conduct stated1: 1 IPA National Conference 2008 2 Dean-Willcocks v Companies Auditors and Liquidators Disciplinary Board (2006) FCA 1438 (8 November 2006)"It is global societies’ increasing expectations of professionals that they will do the right thing for the right reason and this expectation has never been higher. It is no longer globally acceptable for insolvency professionals who have lost sight of the intent of the legislation, and who try to fit around the rules, to say ‘I followed the rules’." 2.2. This coincides with a belief by some practitioners that ITSA Regulation on behalf of the Inspector-General in Bankruptcy, in undertaking the regulatory function, is only entitled to focus on compliance by personal insolvency trustees ("trustee") with the Bankruptcy Act 1966 ("the Act") and the Bankruptcy Regulations 1996, along with undertaking the duties of a trustee as set out in the Bankruptcy Act. This is part of the Inspector-General’s role but only one aspect. 2.3. In a 2006 disciplinary hearing
2 the Federal Court said it will have regard to professional standards and codes of conduct in determining whether the standard of performance of an insolvency practitioner is proper and adequate. In his defence the practitioner argued that the Regulator (that is, the Companies Auditors and Liquidators Disciplinary Board ("CALDB")) had to "point to a particular legislative provision imposing the duties and obligations in respect of which there has been a failure to perform." The Court rejected that saying at paragraph 26, ….."The interpretation advanced for the applicant, in my view, is too narrow in requiring the identification of a specific duty directly imposed by legislation. The level of Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 4 performance called for is that of "adequacy." The standard is that the duty must be performed "properly." The provision is designed to enable a Board representative of the commercial and accounting communities (ie. CALDB) to consider whether the function has been adequately and properly carried out. To assess this, it is permissible, in my view, to have regard to the standards operative in the relevant sphere of activity." 2.4. Therefore it is not just the Act and Regulations the Inspector-General will expect
compliance with, it is professional standards (eg APES 330 Insolvency Services), Codes of Professional Conduct (eg IPA Code of Professional Practice) and Inspector-General Practice Directions, like this document, that need to be complied with.
2.5. Section 155H of the Act: "Consideration of Involuntary Termination of Registration" requires the Inspector-General to consider whether a trustee has failed to exercise powers of a registered trustee properly or has failed to carry out the duties of a registered trustee properly. 2.6. Therefore, in making an assessment under section 155H, the Inspector-General will consider not only whether the trustee has exercised powers and carried out duties, but that such action was undertaken
properly. 2.7. This paper outlines the existing legislation that guides a trustee, explores the meaning of "properly" by reference to the common law covering the fiduciary duties of a trustee and clarifies the Court’s and the Inspector-General’s expectations of trustees in this regard. Annexure A lists the cases referred to in this paper with internet links to most of them.
3. THE LEGISLATIVE FRAMEWORK Section 155H 3.1. Section 155H is the basis on which the Inspector-General can decide to convene a Committee to consider whether a trustee is in breach and whether these breaches warrant the cancellation of the trustee’s registration or the imposition of conditions.
3.2. The relevant paragraphs are: 155(1) The Inspector-General may ask a registered trustee to give the Inspector-General a written explanation why the trustee should continue to be registered, if the Inspector-General believes that:
(f) the trustee has failed to exercise powers of a registered trustee properly or has failed to carry out the duties of a registered trustee properly; or (g) the trustee has failed to comply with a standard prescribed for the purposes of subsection (5)
3. 3 The standards are prescribed by regulation 8.34A and set out in Schedule 4A to the RegulationsInspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 5 Section 12 3.3. While this section essentially provides certain powers to the Inspector-General it also imposes a duty on trustees (and debt agreement administrators). The relevant provision is s12(1A) which provides: (1A) Where the Inspector-General requests a registered trustee or the administrator of a debt agreement, for the purposes of subsection (1), to provide a report as to the operation of this Act, the registered trustee or administrator, as the case may be, shall forthwith provide the report requested. 3.4. The term "for the purposes of subsection (1), to provide a report as to the operation of this Act", is to be read broadly to apply to situations where a registered trustee or for that matter a debt agreement administrator, has been formally requested under subsection 12(1) to provide a report irrespective as to whether it relates to a particular estate, their personal insolvency administration practice as a whole, or any other purpose under the Act, including in particular the provision of the annual estate return information. 3.5. It is implicit in this that to properly carry out this duty the registered trustee or debt agreement administrator has an obligation to provide a timely and accurate report.
3.6. Subsection 12(2) states that:
(2) For the purposes of discharging his or her functions under this Act, the Inspector-General may:
(a) require the production of any books kept by an Official Receiver or by a trustee; and (b)
require a trustee to answer an inquiry made to him or her in relation to any of the following matters in which the trustee is, or has been, engaged: (i) a bankruptcy;
(ii) the control of property under an authority given under section 188;
(iii) an administration under Part XI;
(iv) a personal insolvency agreement, scheme of arrangement or composition; and
(c) at any time investigate the books of a trustee;
3.7. Hence the trustee has a duty to assist ITSA Regulation by allowing reasonable access to books and records and accurately answering any enquiry within a reasonable time frame.
3.8. Subsection 12(4) states: (4) 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. 3.9. It is implicit in subsection 12(4) that a trustee should not engage in conduct that prevents or attempts to prevent ITSA Regulation from attending and participating Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 6 ). ITSA Regulation will comply with its published protocol when attending such meetings. Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 7 3.14. This Practice Direction does not set out all of Schedule 4A, but focuses on those standards that are not prescriptive, but rather use subjective terms (highlighted for ease of reference) to describe conduct expected: "2.2 Duty to act honestly and impartially (1) The trustee must act honestly and impartially in relation to each administration, including not signing, or associating himself or herself
with, a document that the trustee knows, or ought reasonably to know, is
false or misleading.
(2) The trustee must not include in any document prepared by the trustee a
clause that disclaims the trustee’s responsibility for the document’s
authenticity.
2.3 Conflict of interest If, during an administration, it becomes apparent that the trustee has an actual or potential conflict of interest
in relation to the administration, the trustee must, as soon as practicable after becoming aware of the conflict of interest:
(a) notify the creditors, the person who appointed the trustee, a committee of
inspection or the court, as appropriate, of the conflict of interest; and
(b) take appropriate steps to avoid the conflict of interest.
Examples of conflicts of interest
1. The appointer or, in the case of a sequestration order, the bankrupt is or was a client of the trustee or the trustee’s firm in relation to a financial, trust or insolvency planning matter.
2. The trustee or a member of the trustee’s firm is a personal friend, relative or business associate of the debtor.
2.8 Realising assets The trustee must realise only those assets:
(a) that will give a cost-effective return to creditors; or (b) that contribute to the payment of the costs of the administration; or
(c) that may be realised in accordance with a personal insolvency agreement.
2.9 Ownership or interests in assets In determining the ownership of, or an interest in, an asset that is part of
divisible property, the trustee must act reasonably and claim only the amount that
fairly represents the interest in, or value of, the asset. 2.11 Disposal of property The trustee must act independently and impartially in undertaking transactions and dealings relating to the disposal of the property of a bankrupt, debtor or
deceased person.
2.13 Costs incurred to be necessary and reasonable In conducting an administration, the trustee must:
(a) incur only those costs that are necessary and reasonable; and (b) before deciding whether it is appropriate to incur a cost,
compare the amount of the cost likely to be incurred with the value and complexity of
the administration.
Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 8 3.6 Creditors’ views to be considered The trustee must consider the views of creditors in relation to whether moneys held by the trustee should be:
(a) applied to conduct further investigations in relation to the administration;
or
(b) distributed as a dividend.
3.7 Distribution of estate funds (1) The trustee must distribute estate funds in a timely manner, having regard to: (a) the complexity of the administration and the claims of creditors; and
(b) the amount of funds available for distribution; and
(c) the need to retain funds in the estate or property to meet existing or
expected commitments.
(2) The trustee must make an interim distribution of dividends to creditors unless
an existing or expected commitment is likely to account for a significant level of
the available funds from the estate or property.
4.5 Income and contribution assessment (1) The trustee must, as soon as possible after all necessary information has been made available, make an assessment of: (a) the income of a bankrupt in respect of a contribution assessment period;
and
(b) the contribution that the bankrupt is liable to pay.
(2) The trustee must:
(a) act
fairly and reasonably in determining the time for payment of contributions liability; and (b) if full payment within the contribution assessment period or before discharge would cause hardship to the bankrupt, consider giving the bankrupt an extension of the time for payment of contributions liability.
(3) The trustee must give the bankrupt a copy of the assessment of income and
contributions liability, setting out and explaining the basis on which the amount of any contributions liability has been calculated."
3.15. The terms highlighted in the Performance Standards set out in paragraph 21 set the context for the following paragraphs of this Practice Direction. The duties and responsibilities of trustees as fiduciaries and officers of the Court are often couched in very subjective terms, making it a challenging aspect of personal insolvency law. Notwithstanding this, practitioners can obtain guidance from the Schedule 4A Performance Standards and case law precedents led by Ex parte James and the other cases listed in Annexure A to this Practice Direction. 4. TRUSTEES AS FIDUCIARIES AND OFFICERS OF THE COURT 4.1. A trustee in bankruptcy is classed as a fiduciary. "Fiduciary" is a term that may be defined in various ways but, essentially, it involves a person who has an obligation to act on behalf of another, subject to certain duties. In particular, a person who is a fiduciary generally owes two types of duties to those with whom he or she is in professional contact.Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 9 4.2. These are: a duty to use care and skill and; a duty to act in good faith. 4.3. The duty to use care and skill is allied to common law obligations. A person may be under a contract whose terms, express or implied, require that person to use skill and care. Furthermore, such a person may owe a duty of care under the law of negligence. The way in which the common law duties are vindicated are by an award of damages to the person damaged by the conduct. With the breach of a statutory duty in the nature of a fiduciary duty, the remedy may be set out in the relevant statute or it may be an order that the defaulting fiduciary restore the fund or person to the state it or he/she would have been in but for the breach.
The Rule in Ex parte James 4.4. A trustee must act justly. They are considered officers of the Court and in exercising powers and discretions and making decisions no lesser standard is to be expected of them than of a court or judge. This principle is referred to as the rule in Ex parte James6. 6 Ex parte James, Re Condon (1874) LR 9 Ch App 609 at 614 (and also see Re Hurt; Ex parte Hurt (1988) 80 ALR 236 at 240)
7 Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd (2007) 64 ACSR 31 8 Re Houston (Bankrupt) [2008] FCA 1519 9 Foyster v Prentice [2008] FMCA 757 (11 June 2008)4.5. The rule requiring a trustee to act justly or fairly can apply even in situations where this may not otherwise be strictly required by law – for example where some property has come into the hands of the bankrupt which was never intended to be property of the bankrupt, but, in law, is his property7. 4.6. In such circumstances, for the rule in Ex parte James to operate, it has been suggested that four requirements must be met. These are: that the bankrupt estate has been enriched by the relevant transaction; that the claimant is unable to submit a proof of debt in the ordinary way; an honest person would consider it unfair for the trustee to retain the money in question; and the rule only operates so as to nullify an enrichment of the bankrupt estate. 4.7. The rule in
Ex parte James was referred to in two relatively recent cases, Re Houston (Bankrupt)8 and Foyster v Prentice9. 4.8. In the
Houston case the trustees sought the court’s directions pursuant to subsection 134(4) of the Act in order to call upon the executors of a deceased estate, of which the bankrupt was a beneficiary, to make an in specie distribution. It was held that it was not unfair nor unconscionable conduct of the trustee in the sense of Ex parte James, to call upon and receive the in specie distribution notwithstanding the consequences of leaving the bankrupt with a post bankruptcy capital gains tax liability and the Australian Taxation Office with Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 10 . Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 11 Independence and avoiding conflicts of interest 4.13. A trustee is precluded from having a personal interest or a duty to a third party which conflicts with his or her fiduciary duty and duty as a trustee18. 18 Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 19 Re Lamb; Ex parte Registrar in Bankruptcy (1984) 1 FCR 391 20 Southern Hotels Pty Ltd in the matter of Temple [2000] FCA 1406 21 Pascoe (Trustee) v Deltawiz Pty Ltd, in the matter of Deltawiz Pty Ltd [2003] FCA 1100 22 Starkey as Trustee of the Estate of Peter John Dance v Rondo Building Services Pty Ltd [2005] FCA 1081 23 Re Partridge (unreported FCA Lockhart J 22 September 1982) 24 Boral Montoro Pty Ltd v McLachlan [2007] FMCA 5334.14. In Re Lamb19 at 24, Sweeney J said: "The objects of the Act are of public importance and it is of great importance to the community that the role given by the legislature to a trustee, is fulfilled only by persons who are, and who are seen to be, completely independent."
4.15. In carrying out his or her duties, a trustee must not only act independently, but must be seen to act independently. Therefore, if a conflict of interest arises the trustee must avoid or remove that conflict if it raises any perception of partiality. The test is whether there might be, in the eyes of a reasonable person, a perception of conflict. Where there is an actual or potential conflict of interest the trustee must notify the relevant parties and take appropriate steps to avoid the conflict of interest. (see Southern Hotels20, Pascoe v Deltawiz21 and Starkey v Rondo22). See also Schedule 4A Performance Standard 2.3 and IPA Code of Professional Practice for Insolvency Practitioners Section 6 for further guidance. 4.16. In
Re Partridge23, cited in the Southern Hotels, Starkey and Boral Montoro (see paragraph 38) cases, Lockhart J stated that a trustee:
"must be scrupulously careful to ensure that he never allows himself to be placed in a position of conflict or potential conflict. A registered trustee must not only be impartial; he must be seen to be impartial". 4.17. In the case of Boral Montoro Pty Ltd v McLachla24n the proposed trustee was a partner of a firm that was a creditor of the debtor. The debtor was applying to persuade the Court not to appoint that trustee. At paragraph 15, Wilson FM concluded, …"The solicitor for the petitioning creditor advised the court that the firm would not prove in the bankruptcy thereby seeking to dispel any suggestion of a conflict. However the matter is not so simple, the appearance of such a conflict already exists and is not dispelled by such an intended course of action." Impartial and Fair 4.18. As stated in Schedule 4A Performance Standard 2.2, a trustee must act honestly and impartially in relation to each administration.
4.19. A trustee plays a central role in the administration of estates under the Act and is under a general duty to exercise the powers committed to him or her in such a Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 12 fashion that the objects of the Act, including those of equality between creditors and fairness to bankrupts and debtors are served (see Re Lamb). 4.20. The minimum standard required of the trustee is that he or she shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt (see Mannigel v Aitken25). 25 Mannigel v Aitken (1983) 77 FLR 406 at 408-409 26 Adsett v Berlouis (1992) 37 FCR 201 27 Re Campbell; ex parte Official Trustee (1987) 13 FCR 326 at 329 28 Doolan v Dare [2004] FCA 6824.21. The trustee’s responsibility to the bankrupt of fairness and equality of interests between the bankrupt and his or her creditors and providing the best surplus possible are sometimes forgotten. On occasion trustees have only focussed on providing the maximum return to creditors. The fact that a trustee has to consider more than the interests of the creditors was reaffirmed in Adsett v Berlouis26where Northrop J concluded: "
the trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act, (Re Campbell; ex parte Official Trustee27)." 4.22. Justice Spender in Doolan v Dare28 at paragraph 37 provided a summary of relevant case law and commentary on the duties of a trustee as follows: "It is clear that the trustee has an obligation to administer the estate in the interests of the creditors and the bankrupt.
The High Court approved the following statement of principle in The Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 83 at 99:
‘Where a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settler or without giving a real or genuine consideration to the exercise of the discretion.’"
38 In my judgment, the payment of the dividend was motivated not by a consideration of the interests of the creditors or of Mr Doolan but by a consideration of the trustee’s own self-interest, and her conduct in borrowing the funds and declaring the dividend was for an improper purpose.
39 In Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1, a judgment of Finn J, His Honour referred to the standard required of a trustee. His Honour said at 81:
‘... if a fiduciary is one expected to act in another’s interest in a particular matter, Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 13 that person is (informed consent apart) precluded from having a personal interest or a duty to a third party which conflicts with his or her duty to that other in that matter
- irrespective of whether that interest or duty actually deflects the fiduciary from the loyal performance of that duty. And so it can be said "[a] man of integrity can be a defaulting fiduciary without ceasing to be honest": J. Glover, Commercial Equity: Fiduciary Relationship, Butterworths, Sydney, 1995, para 5.24.’
40 In Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, a judgment of the High Court, Mason J, as he then was, said at 103:
‘The rule that a fiduciary is not entitled to make a profit without the informed
consent of the person to whom the fiduciary duty is owed is not limited to profits
which arise from the use of the fiduciary position or of the opportunity or
knowledge gained from it for it is said that the basis of this rule is the fiduciary
may not place himself in a situation where his duty and his interest conflict:
Consul Development Pty. Ltd. v. O.P.C. Estates Pty. Ltd. (1975) 132 C.L.R. 373,
at p. 393.’
His Honour continued at 107:
‘A fiduciary is liable to account for a profit or benefit if it was obtained (1) in
circumstances where there was a conflict, or possible conflict of interest and duty,or
(2) by reason of the fiduciary position or by reason of the fiduciary taking
advantage of opportunity or knowledge which he derived in consequence of his
occupation of the fiduciary position.’" 4.23. A trustee will not be allowed to retain monies for distribution where it would be contrary to fair dealing to do so (see Re Tyler29). 29 Re Tyler; Ex parte Official Receiver [1907] 1 KB 865 30 Growden v Committee under Part VIII of the Bankruptcy Act [2008] AATA 604Efficient and Commercial 4.24. In accordance with paragraph 19(1)(j) of the Act a trustee has a specific duty to "administer the estate as efficiently as possible…" Further, and pursuant to paragraph 19(1)(k) of the Act, a trustee also has a specific duty to act "…in a commercially sound way." 4.25. At paragraph 74 of the decision in Growden v Committee under Part VIII of the Bankruptcy Act
30 it is stated: "The Tribunal, in undertaking this exercise, has concentrated on assessing whether the answers provided by the applicant were satisfactory for the purpose of his registration as trustee in bankruptcy. His lengthy discursive answers are antithetical to efficiency and s19(1)(j) of the Act requires an estate to be administered as efficiently as possible by avoiding unnecessary expense. If the applicant spends time carrying out the administration of an estate by researching and utilising novel interpretations he claims are available under the Act, rather than utilising more readily understandable and accessible provisions then efficiency will decline and expense will rise. Additionally creditors, the bankrupt Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 14 and the courts, when considering reports prepared by the applicant, are likely to experience some difficulty determining why he is relying on obscure combinations of provisions when more readily comprehensible and better known provisions are available. Such usages are also not consistent with performing the functions of a trustee in a commercially sound way." 4.26. The trustee is not obliged to take steps which would be unrealistic or expensive. Citicorp Australia Ltd v Official Trustee in Bankruptcy31. 31 Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 at 561 32 Boensch v Pascoe [2007] FCA 1977 at paragraph 41 33 Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44 34 Kyriackou v Shield Mercantile Pty Ltd [No 2] [2004] FCA 13384.27. In Boensch v Pascoe32 the Court said, … "A trustee does not (thereby) become disabled from an efficient and, if necessary robust, administration of an estate because his own fees may depend on the outcome." 4.28. It has been recognised by the Courts that a trustee cannot expect to recover all their costs and remuneration in every bankruptcy and that the scale of fees set by a trustee for themselves and their staff reflect this risk. In Vaucluse Hospital Pty Ltd v Phillips33Riethmuller FM said: "…t must also be borne in mind that undertaking the role of trustee is a function that a trustee embarks upon aware of the inherent risk that he or she may not be remunerated. If an estate contains no assets that can be realised then the trustee will remain without remuneration, unless creditors are prepared to fund investigations. Prescribed remuneration rates are higher than the scale fees for similar work carried out in the course of litigation, presumably (at least in part) to recompense trustees for the risk inherent in the function.
The result is that a lack of remuneration ‘may be an incident of the risk associated with the performance of the trustee's duties in the period between the sequestration order and the expiry of the 21 days’: see Garrett v Deputy Commissioner of Taxation [2005] FMCA 19 at [34] per Lindsay FM. It is certainly a well accepted incident of the risk inherent in the performance of the trustee’s duties in assetless estates." Sequestration Orders being challenged 4.29. The trustee’s duty to act in a commercially sound way should be given increased attention when there is an appeal against the making of a sequestration order.
4.30. Trustees are faced with the challenge of securing the bankrupt’s assets and administering the estate while being cognisant of the fact that there have been cases where the court has not made provision for trustees fees to be paid where the sequestration order has been set aside (as opposed to the order being annulled by the Court, which is dealt with in section 154 of the Act).
4.31. In Kyriackou v Shield Mercantile Pty Ltd [No 2]34, in the Federal Court, a bankruptcy notice that had led to the making of a sequestration order was later Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 15 declared invalid, and therefore set aside. Because the sequestration order had been wrongly made in the first place, Weinberg J, at paragraph 40 stated, "It would be quite wrong, in my view, to burden Mr Kyriackou, who is the successful applicant in this proceeding, with the costs of administering the estate that should never have been made the subject of a sequestration order. Regrettably, that leaves the Official Trustee with no obvious and immediate recourse against either the appellant or the first respondent. It also leaves him with what might be considered a legitimate sense of grievance. He may be out of pocket for doing no more than what he was required by statute to do." Weinberg J concluded at paragraph 42, "It seems to me that a trustee who administers a bankrupt estate, in the knowledge that the bankrupt is challenging the validity of the sequestration order, must exercise caution when incurring expenses whilst the status of the bankruptcy remains uncertain." 4.32. In Pattison v Hadjimouratis35, which was decided by the Full Federal Court, a 35 Pattison v Hadjimouratis (2006) 155 FCR 226sequestration order was also set aside. The key factors in this decision were, first, that the trustee was on notice at a very early stage that the bankrupt disputed his bankrupt status and intended to make an application to the court. This early notice meant that the trustee was "required to exercise caution in incurring expenses." The second factor was that the debtor was solvent and wished to pay his debts. As such, it was thought to be "unfair" to burden the debtor with the costs of administering the estate. The trustee in bankruptcy was left to pursue his remedies at general law. However, Jacobson J noted that where a sequestration order is "on foot", it is open to the court to annul it rather than setting it aside. 5. PRINCIPLES THAT CAN BE CONCLUDED General Fiduciary Principles 5.1. In summarising these cases we can determine some basic principles on what is proper performance of duties and proper exercise of powers.
5.2. A trustee must act justly. Trustees are officers of the Court and in exercising powers and discretions and making decisions no lesser standard is to be expected of them than of a court or judge. This is referred to as the rule in Ex parte James. They have a general duty to exercise the powers committed to them in such a fashion that the objects of the Act, including those of equality between creditors and fairness to bankrupts and debtors, are served. 5.3. A trustee must act with a high duty of care, reasonable prudence and diligence,
demonstrating competence of a high order, honesty, independence and impartiality to a standard that commands and retains the confidence of the Court, of the creditors and debtors in personal insolvency proceedings and of the general community.
Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 16 5.4. A trustee needs to have regard to the interests of the creditors, the bankrupt and the community.
5.5. A trustee must not act in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the interests of the creditors or without giving a real or genuine consideration to the exercise of the discretion.
5.6. A trustee is precluded from having a personal interest or a duty to a third party which conflicts with his or her duty - irrespective of whether that interest or duty actually deflects the trustee from the loyal performance of that duty. The test is whether there might be, in the eyes of a reasonable person, a perception of conflict. Where there is an actual or potential conflict of interest the trustee must notify the relevant parties and take appropriate steps to avoid the conflict of interest. Specific Principles 5.7. We can now overlay some of these general principles with the Schedule 4A Performance Standards for Trustees and the specific roles undertaken by a trustee in bankruptcy: When delegating matters to staff 5.8. Pursuant to Schedule 4A Performance Standard 2.5 the trustee must ensure that his or her employees comply with the Performance Standards.
5.9. Trustees need to consider when they should act personally, and when and how far they may delegate matters to staff. Generally speaking, where an important or material decision has to be made or policy needs to be set, the trustee must do so personally. That is not to say that he or she should not get advice from others or receive reports from members of staff, but the decision must be made personally.
5.10. However, with administrative, routine or mechanical tasks, the trustee is expected to use common sense in having the task performed as economically as practicable. When dealing with information 5.11. A trustee must comply with section 16A of the Privacy Act 1988 when dealing with information relating to an administration. Note: Section 16A of the Privacy Act 1988 provides that an organisation must not do an
act, or engage in a practice:
(a) that breaches an approved privacy code binding the organisation; or
(b) to the extent (if any) that the organisation is not bound by an approved privacy code
— that breaches a National Privacy Principle.Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 17 The National Privacy Principles are set out in Schedule 3 to the Privacy Act 198836. 36 Schedule 4A Performance Standard 2.4. See also Own Motion Investigation v Bankruptcy Trustee Firm [2007] PrivCmrA 5 37 Own Motion Investigation v Bankruptcy Trustee Firm [2007] PrivCmrA 5 38 Schedule 4A Performance Standard 2.8 39 Schedule 4A Performance Standard 4.5(2)5.12. The resolution to the Privacy Commissioner’s investigation in Own Motion Investigation v Bankruptcy Trustee Firm37was as follows: "The Commissioner recommended that the trustee firm take steps to prevent general internet users from browsing the bankruptcy files, for example by securing the information using password protection. The Commissioner also recommended that the trustee’s opinion on whether bankrupts had breached the Bankruptcy Act be removed from the file made available to creditors.
The trustee firm agreed to these recommendations and, once satisfied that they had been implemented, the Commissioner closed the own motion investigation on the basis that the trustee firm had adequately dealt with the matter." When Claiming Assets 5.13. A trustee must act independently and impartially in undertaking transactions and dealings relating to the disposal of the property of a bankrupt, debtor or deceased person and when claiming assets must act reasonably and claim only the amount that fairly represents the interest in, or value of, the asset. 5.14. A trustee must realise only those divisible assets
(a) that will give a cost-effective return to creditors; or
(b) that contribute to the payment of the costs of the administration; or
(c) that may be realised in accordance with a personal insolvency agreement
38 and in doing so needs to maximise the return both to creditors, maximise any
possible surplus to the bankrupt and demonstrate fairness. Contributions 5.15. A trustee must:
(a) act fairly and reasonably in determining the time for payment of contributions liability; and
(b) if full payment within the contribution assessment period or before discharge would cause hardship to the bankrupt, consider giving the bankrupt an extension of the time for payment of contributions liability
39. Remuneration, Costs and Dividends 5.16. In conducting an administration, a trustee must:
(a) incur only those costs that are necessary and reasonable; and (b) before deciding whether it is appropriate to incur a cost, compare the amount
of the cost likely to be incurred with the value and complexity of the
administration; and
Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 18 (c)consider the views of creditors in relation to whether moneys held by the
trustee should be applied to conduct further investigations in relation to the administration; or distributed as a dividend40. 40 Schedule 4A Performance Standards 2.13; 2.7(1) and 3.6 41 Adsett v Berlouis (1992) 37 FCR 201 paragraphs 53-54 42 Refer IGPD 11 43 Frost v Sheahan [2008] FCA 10735.17. As stated in Inspector-General Practice Direction 6 at paragraph 35,
"Similarly, in the administration of Part IV estates an issue of concern is the appropriateness or otherwise of a trustee arranging with the debtor to be
remunerated or indemnified by the debtor or related third party in return for
consenting to act as trustee on a debtor’s petition bankruptcy."
5.18. A fundamental principle in bankruptcy administration is that a trustee is entitled to be indemnified for their reasonable remuneration and costs from trust funds41. 5.19. IGPD 6 goes onto say at paragraphs 40 and 41 that,
"the only circumstances where I might accept such a payment as valid is where
the trustee has: informed the debtor of the income contribution regime and that any other payments or surety is purely voluntary; and informed the debtor of alternative choices of trustees, should the debtor not be prepared to voluntarily make the payment; and reports to creditors on the source and basis of the funds; and does not endeavour to execute legally enforceable contracts concerning the payment and does not pursue the debtor for any payment other than as
prescribed in section 161B; and takes remuneration in accordance with section 162. This position has been endorsed in the IPA Code of Professional Practice at
pages 22 23,paragraph 6.10(b)." Filing Objections 5.20. The discretion to object to the bankrupt’s discharge must be applied sensibly and not oppressively. Misuse of this power would occur when it is used to punish the bankrupt42. 5.21. In
Frost v Sheahan43 it was decided that it was unacceptable for a trustee to extend a bankruptcy on the basis the bankrupt was a high income earner and an extension would realise more income contributions. It was stated at paragraph 35, …In my opinion, the fact that there will be a further CAP is not a factor to be taken into account. It is a consequence of an administration continuing, but not a reason to continue it." Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 19 6. CONCLUSION 6.1. This paper outlines a broad principles-based framework which is aimed at clarifying the conduct that the Inspector-General expects of trustees, including the Official Trustee. Annexure A lists the cases referred to in this paper with internet links to most of them.
6.2. When it is found that a trustee has erred and not properly performed their duties or exercised their powers, the principles embodied in both the ITSA Regulation error category system44 and the Schedule 4A Performance Standards, are a guide as to what the Inspector-General will consider namely: 44 Refer IGPS 11 paragraph 30(a) the importance of the duty or power exercised incorrectly;
(b) the seriousness and impact of the action, including the impact the failure to comply has on a particular estate or related parties and on the integrity of the personal insolvency system; and
(c) a trustee’s performance history - whether the trustee has previously failed to comply, been advised and continues to make the same errors.
6.3. Action which may be taken depends upon the seriousness of the breach. One-off errors in judgement of little importance or impact, breaches that are minor and temporary and technical errors that have little or no impact on the quality of the administration or parties are to be dealt with through reporting, discussion, persuasion, guidance, education and training.
6.4. In the most serious matters where trustee conduct demonstrates a pattern of indifference to the legislative requirements, a lack of knowledge of the law and a disregard for standards published as a guide to practitioners, such conduct is inconsistent with the high standard expected of a trustee and would not be tolerated by the Court, nor should the Inspector-General tolerate such conduct. This is so even where there is no bad faith or dishonesty on the trustee’s part. In such cases strong disciplinary action will be taken. Inspector-General Practice Direction 14 – Proper Performance of Duties of A Trustee 20
| ANNEXURE A – CASE LAW TRUSTEES DUTIES No |
ACLC 1, 412
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