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
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ISSN 1328-8091
© Commonwealth of Australia 2002
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