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Bills Digest No. 151 2001-02
Bankruptcy (Estate Charges) Amendment Bill 2002
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Bankruptcy
(Estate Charges) Amendment Bill 2002
Date Introduced:
21 March 2002
House:
House of Representatives
Portfolio:
Attorney-General
Commencement:
Royal Assent. However, items 1 to 10, 12 and
13 of Schedule 1 commence immediately after the commencement of the Bankruptcy
(Estate Charges) Amendment Act 2001.
Purpose
To
- amend the Bankruptcy (Estate Charges) Act 1997 to close an
apparent loophole in relation to charges on amounts received by solicitors
acting as controlling trustees.
- amend the Bankruptcy (Estate Charges) Amendment Act 2001 to
tie its commencement to the proposed Bankruptcy Legislation Amendment
Act 2002 rather than the now lapsed Bankruptcy Legislation Amendment
Bill 2001.
Two Bills were introduced in 2001 to amend bankruptcy
legislation. The Bankruptcy Legislation Amendment Bill 2001 aimed to make
various changes designed to make bankruptcy more difficult, encourage
the use of alternatives to bankruptcy and to address abuses of the bankruptcy
system. The Bankruptcy (Estate Charges) Amendment Bill 2001 sought to
make various adjustments in respect of 'realisation' and interest charges.
Under section 6 of the Bankruptcy (Estate Charges)
Act 1997, a realisation charge is payable by the trustee, whether
the Official Trustee or a private registered trustee, to the Commonwealth.
The charge is payable on the administration of all bankrupt estates including
deceased estates, and also in relation to deeds of assignment, deeds of
arrangement or compositions entered into by debtors under Part X of the
Bankruptcy Act 1966. It is not payable on Part IX debt agreements
or compositions or schemes of arrangement under Division 6 of Part IV
of the Bankruptcy Act 1966.
Under section 169 of the Bankruptcy Act 1966,
a trustee is obliged to pay any trust monies that he or she receives into
an interest bearing account. The trustee is entitled, in his or her personal
capacity, to any interest earned less bank fees and charges paid or payable.
Under section 5 of the Bankruptcy (Estate Charges) Act 1997 these
interest payments are payable by the trustee as a charge to the Commonwealth.
The main issue addressed by this Bill is an apparent
loophole in the application of charge obligations to solicitors acting
as 'controlling trustees' under the Bankruptcy Act 1966.
Generally, the Bankruptcy Act 1966 provides for
two types of trustees in bankruptcy. These are the Official Trustee in
Bankruptcy and persons who are registered as trustees under the Act. However,
there is a third category of person who may perform a similar role in
relation to arrangements with creditors outside bankruptcy under Part
X. Under section 188 a debtor may, before their property is sequestrated,
authorise the Official Trustee, a registered trustee, or a solicitor to
act as a 'controlling trustee' for the purpose of calling a meeting of
the creditors and taking control of the debtor's property. In performing
these functions, these trustees have the same obligations as other trustees
(section 210).
Thus, all 'controlling trustees', including solicitors,
are subject the various obligations under the Bankruptcy Act 1966.
But are all 'controlling trustees', specifically solicitors, subject
to the charge obligations under the Bankruptcy (Estate Charges) Act
1997?
The obligation to bank trust monies and the entitlement
to interest, less fees and charges are expressed to apply to 'controlling
trustees', including solicitors, 'as if the debtor were a bankrupt' and
'the controlling trustee were the trustee of the estate of the bankrupt
debtor'. However, the obligation to pay the realisation charge is only
imposed in relation to monies 'received by a trustee' (subsection
6(1)). Similarly, the obligation to pay the interest charge only applies
in relation to interest 'to which a trustee is entitled' (subsection
5(1)).
Under section 4 of the Bankruptcy (Estate Charges)
Act 1997, any expressions used in that Act have the same meaning as
in the Bankruptcy Act 1966 'unless the contrary intention appears'.
While 'trustee' is not defined, the expression 'the trustee' includes
various trustees in bankruptcy and a trustee of a deed or composition
under Part X (Bankruptcy Act 1966, section 5). Implicitly, none
of these include a 'controlling trustee' because their functions exist
outside bankruptcy and precede deeds and compositions under Part X.
A strict reading of the Bankruptcy (Estate Charges)
Act 1997 might suggest that, while solicitors may act as controlling
trustees, they need not pay realisation and interest charges because they
are not 'trustees' for the purposes of the Bankruptcy Act 1966.
Moreover, a strict reading might suggest that the other
trustees (the Official Trustee and registered trustees) need not pay these
charges because they are not 'trustees' when they act as 'controlling
trustees' for the purposes of the Bankruptcy Act 1966.
However, at least two contrary arguments may be made.
First, it seems clear from the text of Bankruptcy (Estate Charges)
Act 1997 that the obligation to pay realisation and interest charges
is intended to apply to controlling trustees (subsection 5(2)). Moreover,
there is no suggestion from the scope purpose and object of the relevant
provisions that solicitors were intended to be excluded. In other words,
a 'contrary intention appears' for the purposes of interpreting 'trustee'.
Second, while the expression 'the trustee' clearly includes trustees in
bankruptcy it also includes, paradoxically, 'the trustee of a trust'.(1)
A solicitor acting as a controlling trustee would, in common law, be a
trustee of a trust.
On the other hand, extrinsic materials surrounding the
relevant provisions may suggest that the obligation to pay charges
was only ever intended to apply to registered trustees.(2)
At the same time, the focus on registered trustees may be explained by
the fact that, prior to the relevant amendments, solicitors were not able
to act as 'controlling trustees'.(3) On this basis, it would
be understandable for the extrinsic materials only to refer to registered
trustees.
A more complete background to these provisions is given
in the Bills Digest of the Bankruptcy Legislation Amendment Bill 2001.(4)
Schedule 1, items 1–10 amend the Bankruptcy
(Estate Charges) Act 1997 to provide that the realisation and interest
charges are payable not by a 'trustee' but by a 'person' in relation to
amounts received or interest entitlements under the Bankruptcy Act
1966.
Items 12 and 13 provide that these amendments
apply to amounts that are received or interest entitlements that arise
after the commencement of the amendments.
Item 11 amends the Bankruptcy (Estate Charges)
Amendment Act 2001 to ensure that its commencement is tied to the
commencement of the proposed Bankruptcy Legislation Amendment Act 2002.
From a layperson's perspective it might be reasonable
to wonder how the loophole could have arisen. After all, as indicated,
a solicitor acting as a controlling trustee would, as a matter of common
law and under statutes applying to legal practitioners, be deemed to be
a trustee of the debtor's estate. Moreover, it is worth noting, they would
be subject to various obligations in respect of banking trust monies and
dealing with the interest earned. For present purposes, the key obligations
are that solicitors must bank trust monies and rarely, if ever, are entitled
to receive interest from those monies in their personal capacity.(5)
It is against this background that the relevant amendments
were framed. The Bankruptcy Legislation Amendment Act 1997 and
the Bankruptcy (Estate Charges) Act 1997 permitted solicitors to
act as controlling trustees and displaced the rules relating to trust
accounts. It gave them a personal right to interest which was meant to
be caught by the interest charge.
The intention, as demonstrated by the treatment of registered
trustees, was to divert any interest on trust monies away from potential
beneficiaries, including debtors, creditors and law societies (and their
beneficiaries, such as community legal centres),(6) to the
Insolvency and Trustee Service of Australia (ITSA). Indeed, the stated
intention of the Government was to introduce 'a package of measures …
that increased cost recovery for [ITSA]'.(7)
However, given the loophole, the effect may have been
to give solicitors an unusual gift which could not be recovered by debtors,
creditors, law societies or the Commonwealth. This might be expected to
frustrate all stakeholders, except perhaps insolvency solicitors.
As suggested, there may be a similar argument in relation
to registered trustees. And, as indicated by the provisions above, similar
considerations apply to the realisation charge.
Moreover, if controlling trustees cannot be compelled
to pay the interest and realisation charges, it might be argued that any
solicitor, and potentially any registered trustee, who has paid those
charges between 1997 and 2002 ought to be able to recover those amounts.
In this context, it may be significant that the financial impact of the
loophole is unclear.
- Section 5, Bankruptcy Act 1966, definition of 'the trustee',
paragraph (e).
- 'The interest charge is a new charge imposed in respect of interest
earned by funds held in trust by registered trustees in relation to
estates and other matters administered by them. The introduction of
the proposed charge will place these estates on the same footing as
estates administered by the official trustee, where funds held on behalf
of estates and debtors are held in the common investment fund and the
interest is paid to Consolidated Revenue': Bankruptcy (Estate Charges)
Bill 1996, Explanatory Memorandum, p. 1. A similar reference
to 'registered trustees' appears in the Second Reading Speech: Daryl
Williams MP, Bankruptcy (Estate Charges) Bill 1996, Second Reading Speech,
House of Representatives, Debates, 9 October 1996, p. 5087.
- '[Prior to the 1997 Amendments] section 188 of the Act provide[d]
for a debtor to sign an authority in accordance with the prescribed
form authorising a registered trustee to call a meeting of the debtor's
creditors and to take control of the debtor's property. The debtor [could]
also execute an authority in favour of a solicitor. The solicitor's
functions [were] to call a meeting of the debtor's creditors [ie the
solicitor never became a trustee pursuant to bankruptcy legislation]':
Bankruptcy Legislation Amendment Bill 1996, Explanatory Memorandum,
pp. 163-164.
- Katrine Del Villar, Bankruptcy Legislation Amendment Bill 2001, Bills
Digest No. 8 2001-2002.
- For example, under the Legal Practitioners Act 1970 (ACT) all
monies received by a solicitor from or on behalf of a client are deemed
to be held in trust (section 87). However, the solicitor may exercise
a lien over those funds in respect of his or her fees and charges. All
trust monies must be paid into a trust account (section 91). Ordinarily,
they are paid into the solicitor's general trust account. However, they
may also be paid into a special trust account or they may be invested
on the client's instruction (section 92). Significantly, the solicitor
must seek instructions from the client on this issue where the
balance on the trust account is likely to exceed $5 000 over a 3 month
period (section 93).
- As indicated, trust monies are ordinarily deposited in a solicitor's
general trust account, particularly if the funds are held for less than
3 months. Interest from trust accounts, or amounts in lieu of interest
earned, are paid to the Law Society of the Australian Capital Territory
under section 129 of the Legal Practitioners Act 1970. The Law
Society customarily makes payments to organisations such as Community
Legal Centres. Assuming that a controlling trust lasted for less than
3 months, most of the interest payable to the controlling trustee would,
if not for the amendment to section 169 of the Bankruptcy Act 1966
be payable to the Law Society, and ultimately to beneficiaries of the
Law Society.
- Daryl Williams MP, Bankruptcy (Estate Charges) Bill 1996, Second Reading
Speech, House of Representatives, Debates, 9 October 1996, p.
5087.
Nathan Hancock and Mark Tapley
24 May 2002
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
© Commonwealth of Australia 2002
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Published by the Department of the Parliamentary Library, 2002.
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