The industry comprising debt agreement administrators as a whole has been extensively criticised over the years and if its major critics could be relied upon it has been an industry perceived as bereft of the basic instinct of commercial morality. Those who have committed offences both perceived and real have brought disrepute to the industry and as occurs so often the few have branded the many.

It is this essay’s view that the introduction of Part IX was poorly conceived the legislation poorly drafted and although the concept was one of social justice and a reduction in bankruptcy filings; the latter has failed. But, in the absence of well considered and well drafted legislation it is not reasonable to later point a finger at those who commence business based on availability of process. It is reasonable however to expect that those engaged in insolvency practices will engage it in an ethical and moral manner.

In September 2005 a total of thirty eight individuals and corporations operated as debt agreement administrators. The number currently stands at twenty seven and that includes three registered trustees. By 30 June 2009 that number may again be diminished by operators exiting the industry but this may a good omen as it will leave those in the industry who are legitimate and prepared to meet the challenges legally, morally and ethically.

The Bankruptcy Legislation Amendment (Debt Agreements) Act 2007 was long overdue and may prove to be a cadre from which the damage done can be repaired. Further regulatory steps need to be taken to either rein in or discard broker participation in the process. Indeed it is these peripheral advisors who must bear responsibility for many of the systems past failings.

As administrators exit the industry or are for other reasons deregistered new entrants will emerge to replace them. It will be the second generation administrators, cognizant of the law and professional standards who will take upon themselves the task of relinquishing previous behavior. As this occurs it would be advantageous to seek admission, as a group of professionals, to the Insolvency Practitioners Association.

Basic eligibility test

The test is one of ineligibility rather than eligibility and in the old law was expressed in the regulations. The requirement not to be ineligible has been moved to the Act at S186A in the new law and the regulation repealed. The test is the same as the old law but now with the provisions of S186K giving the Inspector-General scope to cancel registration in the event that the basic eligibility test can no longer be passed by the grantee.

The affect of introducing the eligibility test in amendments effective 1 December 2004 was that a number of administrators were forced from the industry for failing to meet the test of solvency in the previous ten years now set down S186A(1)(a) and/or (b).

Application process.

Registration, other than by way of renewal, must be made in the approved form accompanied by supporting documentation (if any) and provision is made for both individual and corporate application. The regulations make no provision for specific supporting documentation.

The application process provides a mechanism for the regulator to see behind the applicant and serves to ensure that applicants are closely scrutinized before registration is granted and as a national police certificate is also to be submitted applicants with criminal records for dishonesty are disbarred.

Information as to the process is available on the ITSA website. At A. of this document the Agency states “ITSA has strict licensing regimes aimed at ensuring that only suitably qualified persons who will be able to immediately perform the duties if successful are registered to practice as bankruptcy trustee or debt agreement administrators.” In considering an application to become a registered debt agreement administrator the document outlines the eligibility test discussed and goes on the state that a Committee consisting of a delegate of the Inspector-General and another public official is formed to consider the application; and Applicants are examined as to their capability to perform the duties.

• experience, knowledge and abilities relevant to dealing with insolvency and bankruptcy matters;
• engagement in relevant employment on a full-time basis for a total of not less than two years in the preceding five years;
• demonstrate completion of three years study in accountancy and two years study in commercial law; and
• the ability to perform satisfactorily the duties of a registered trustee immediately after registration.

Duties of administrators.

For the first time since the inception of debt agreements in 1996, the duties of a debt agreement administrator have been enshrined in law. The duties are somewhat basic and no more than a reasonable person in business would adopt without legislative intervention. The introduction of Division 3A however sets a bench mark for those operating in the industry and gives clear notice that some behavior will no longer be tolerated. However:

S185LC(3)(b)(i) and (ii) are rational inclusions as debt agreements have in the past, been permitted to remain fresh in the absence of discharge by payment of the obligation. This manner of control will assist the Official Receiver maintain the National Personal Insolvency Index on a more up to date footing.

S185LD. On the requirement that an administrator maintain a separate bank account in respect of contributions of the debtor:

The necessity to maintain a separate bank account for debtor’s contributions may cause consternation to a few administrators who, under the old law, kept these monies in their operating accounts, some fraudulently using them for their own purposes. It is an inclusion that is well and truly overdue and one that will give comfort to both debtors and creditors.

Of concern is that the legislation makes no provision for these monies to be audited.

Certification

S185C(2D) is an onerous duty imposed on the administrator and more so if debt agreement proposals are to be administered from the introduction of a broker. It does serve however to ensure that the administrator questions the content and veracity of work received from an exterior source.

Most onerous is the requirement to certify S185C(2D)(b). Historically brokers have failed to impart information prescribed by Regulation 9.01 and this has been the root cause of much of the criticism leveled at administrators.

Qualifications of debt agreement administrators

Effective 1 July 2009 administrators must possess, as a minimum, qualifications prescribed in Regulation 9.02(a).

It prescribes that an administrator must hold as a minimum Certificate IV in Financial Services (Accounting) from an Australian college of advanced education.

This is likely to have some impact on the continuation of a number of administrators in practice not only as a result of unsustainable cash flows imposed by S185C(3A) but the future event necessity to gain minimal accounting qualifications. However the qualifications prescribed fall far short of those required from a person wishing to become a registered trustee insofar as a registered trustee is required to show:

During the financial year 2007/2008 one debt agreement administrator claims 3,152 new administrations in its portfolio and that it distributed $29.4 million to creditors in that period.

When volumes of public monies to this degree are involved and, in the hands of questionably qualified administrators one would reasonably expect that any new legislation would have applied a higher bench mark for continued registration.

Fees and charges – Remuneration of administrator

S185C(3A) prescribes the manner in which an administrator may take remuneration. Prior to enactment fees and charges of an administrator were generally taken either as an up front fee prior to processing or as a priority payment from contributions to the agreement by the debtor. This immediate source of income enabled administrators to engage in substantial advertising campaigns not only in the print media but also audio and visual and was the root source of new business. Whilst fees may be taken by an administrator up to the time of acceptance of a proposal for a debt agreement for the “front end” work involved these monies are usually applied to the work undertaken by brokers and the administrator may see little or nothing of these funds. Fees to administer the agreement once in place are relegated to the debt agreement, but not as a creditor with rights of future recovery, but merely as an obligation imposed by the agreement. No doubt this is to underpin the concept that fees can only be taken on the basis of work done and those fees are to be collected over the period of the agreement. Cash flows previously derived have dried up suddenly leaving administrators no choice but to reduce advertising expenditure.

It is interesting to observe that ITSA does nothing in regard to informing the public at large other than by way of its web site preferring to leave promulgation of debt relief to the commercial sector. Ironic then that the manner in which fees may be taken has been regulated so severely.

Additionally, the legislators have made no provision to regulate the fees and charges of brokers. This is disappointing as is the apparent unwillingness to impose some form of licensing on brokers.

(a) provide for enhanced regulation of debt agreement administrators;
(b) specify the duties of a debt agreement administrator;
(c) encourage creditors to make decisions based on the debtor’s capacity to pay;
(d) provide more effective means of dealing with default by the debtor; and
(e) simplify, streamline and clarify a range of provisions to improve the operation of the legislation.

At paragraph 6. Regulation Impact Statement the Memorandum supports the view of this essay concerning the commerciality of the process by stating. “It was originally intended that debt agreements could be administered by anyone including the debtor personally or a friend or family member. However, in practice, most debt agreements are administered by a commercial administrator who charges a fee for the service.” It goes on to state “debt agreement administrators are largely unregulated”; and

at paragraph 9. “Creditors have expressed a significant lack of confidence in the system which derives largely from their lack of confidence in debt agreement administrators”; and

at 11. “The broad objective of the amendments to be made by this Bill is to restore creditor confidence in the system by ensuring that debt agreement administrators are used in appropriate cases and that they are capable administrators who can assist debtors and properly account for and handle money on behalf of creditors.” Then at

12. “More particularly, the aim of the reforms are:

• to ensure debtors are properly informed and make a realistic assessment of what they can offer creditors;
• to ensure creditors are fully informed about offers made by debtors and to encourage creditors to view debt agreements as an offer by the debtor to reach a collective agreement based on their ability to pay rather than an attempt to meet the competing demands of individual creditors; and
• to ensure administrators have the necessary capabilities to perform their duties.” Then at;

Section 2 – Policy objectives.

29. “The overall purpose of the amendments is to:

• provide a system of registration of debt agreement administrators based on their ability to perform duties as set out in the Act;
• remove financial incentives for debt agreement administrators by ensuring they focus on developing proposals which are affordable and in the interests of both debtors and creditors;
• encourage creditors to make decisions on debt agreement proposals based on the debtor’s capacity to pay rather than what rate of return they expect to receive;
• ensure creditors have sufficient reliable information to make informed decisions about debtor’s proposals;
• provide more effective mechanisms for dealing with default by the debtor; and
• simplify, streamline and clarify the provisions to make debt agreements work more effectively.

1. “the debt agreement administrator can charge fees ‘up front’ and as a deduction from payments” (sic).
2. “the money to be made from Agreements has created a new industry.”
3. “Many Agreements fail before they are concluded. Since the commencement of Part IX, the annual rate of Agreements exiting the system due to termination (failure) has ranged from 60% to 75%”
4. “The key identified causes of problems debtors experienced with Agreements are:
   1. Inadequate information about Agreements given to debtors prior to signing and Agreement proposal”
   2. Lack of information provided to debtors about other possible options;
   3. Lack of information given to debtors about the effect of an Agreement on their credit report;
   4. Lack of trained and/or experienced Administrators;
   5. Poor service provided by Administrators;
   6. Aggressive marketing and pressure selling of Agreements by Administrators;
   7. Unsuitability of many Agreements from the start;
   8. Misleading conduct by some Administrators; and
   9. Excessive fees charged by some Administrators.”

The paper however also states inter alia “Community based financial counsellors do not generally take on the role of Administrator for a range of reasons including concerns about holding clients’ monies”.

This comment alone may be seen to support a view that some jealousy may exist within the ranks of community service agencies as to the role of administrators.

• timely distribution of dividends to creditors;
• bogus creditors being added to proposals, by administrators;failing to process a proposal until up front fees had been paid;
• deliberately not disclosing creditors on statements of affairs.

Both the process and the methods were being highly criticised by major stakeholders including some administrators and it became evident that further and additional changes needed to be made if the Part IX regime was to survive. In May 2003 further regulatory amendments were made and in particular the requirement that administrators were proscribed from acting in that capacity if that person had been discharged from bankruptcy in the previous 10 years, proposed a debt agreement or Part X or submitted a S188 in the previous 10 years.

Regulatory controls were also put into place causing the actions of administrators to be subjected to the scrutiny of Bankruptcy Regulation Branch, a division of the office of the Inspector-General in Bankruptcy. These amendments saw the exit of a number of administrators from the industry and a further number being denied the authority to act in that capacity.

• declarations that they engaged in misleading and deceptive conduct and false representations;
• declarations that they engaged in unconscionable conduct; and

injunctions, order for remedial action, refunds, community service, and costs.

Publicity was afforded the action with comments also made concerning the practices of brokers in the industry regarding “front end” practices, fee structures, failure to inform debtors and aggressive advertising practices. This action though ultimately settled out of court brought public discredit to the industry and may well have been the catalyst for further reform.

Commerciality took a further step when administrators started utilising the services of brokers. The broker’s role was and remains today that of facilitator of debt agreements and many promote their services in the print, audio and visual media, undertake the tasks of formulating and collating both the proposal and statement of affairs then on selling the client to an administrator to administer, if accepted, for a fee or commission.

The veracity of proposals submitted were under constant attack from creditors and broking services only exacerbated growing difficulties arising from and associated with the collation and formulation of debt agreement proposals. Manipulation of statutory thresholds, exclusion of select creditors thereby denying them voting rights, and excessive brokerage fees being amongst the crescendo of complaints. Brokers, but by way of vehement criticism of the administrator, were accused of lacking a modicum of commercial morality. Easy fees, a market place filled with desperate and insolvent potential clients seeking remedy opened the door, but to the detriment of the system ethics were left at the door.

Bankruptcies in Australia have been ever increasing and in an endeavour to stem the numbers the Australian Federal Government legislated and introduced a further and innovative Part to the Bankruptcy Act 1966 titled Part IX-Debt Agreements in 1996.

The intent of Part IX was to introduce a low cost alternative to debtors to settle indebtedness by way of a legally binding agreement between debtors and creditors and touted as a flexible alternative to bankruptcy on the web site of the Insolvency Trustee Service Australia (ITSA). At the time of its inception and contrasting with Part X, Part IX did not specify that the administration of a debt agreement must be undertaken by a registered trustee or the Official Receiver and whilst not discounting these fiduciaries the legislation specifically authorised another person to undertake the administration; but without expressing any particular requirement or qualification. In fact S185C(2)(c) was interpreted to include an administrator who could be the debtor, a family member of a debtor, a creditor or any other person not excluding a commercial enterprise. Entrepreneurs seized upon what appeared to be an opportunity to service a new niche industry and within a short time businesses were established, both as sole trader, partnership and corporate ventures, offering assistance to those in financial distress gain relief from indebtedness utilising the new legislation.

Lacking any regulatory direction or control and in the absence of any set criteria in the statute as to who may engage in administering debt agreement services a new commercially based insolvency industry emerged. But, from the outset the system appeared doomed by the ongoing complaints of community based agencies, creditors at large and participating debtors concerned by the manner in which the new mechanism was managed, the fees and charges applied by operators, entry into the new industry by undesirables and allegations of manipulation of statutory information. In an attempt to remedy the situation that arose and in an attempt to give validity to the system, Part IX has been amended on a number of occasions with a view to tightening the regulatory grip on the commercial element. Ultimately, The Bankruptcy Legislation Amendment (Debt Agreements) Act 2007 was enacted requiring a debt agreement administrator to be registered and subject to a more rigid regime.

The purpose of this paper is to analyse and evaluate the registration of debt agreement administrators. In order to do so this essay considers the issue retrospectively leading to its existing form and offers discussion concerning observations of an industry that has grown rapidly and unexpectedly.