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Guidelines relating to administrators' duty to notify the Official Receiver of 6-month arrears default

Inspector-General Practice Direction 16 explains the guidelines relating to administrators' duty to notify the Official Receiver of 6-month arrears default.

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  1. Introduction

    1. The purpose of this practice document is to outline the Inspector-General in Bankruptcy’s regulatory role, in regard to the principles on which a debt agreement administrator has a duty to notify the Official Receiver that a 6-month arrears default has occurred.  It provides details of the expectations of the Inspector-General in respect of this duty, including best practice principles.  It is complemented by practical examples.  The document also outlines the role of the Official Receiver in relation to this administrator’s duty.

    2. Legislative framework

    3. The Bankruptcy Act 1966 sets out the legislative framework regarding an administrator’s duty to notify the Official Receiver of 6-month arrears default.  This framework provides a specific duty for an administrator to notify the Official Receiver in accordance with sections 185LC and 185QA of the Bankruptcy Act and the Legislative Instrument in clauses 2.7.12 to 2.7.13.

  2. Practical meaning and elements of the duty

    1. What constitutes a 6-month arrears default?

    2.  Six-month arrears default may occur in one of 2 ways:
      1. A debtor has made no payments for 6 months after a payment is due.  Note that this needs to be a continuous period of no payments for 6 months.
      2. The debt agreement has continued for 6 months past the completion date and the debtor has not completed all payments and obligations.
    3. Upon either i. or ii. above occurring, the debt agreement will be in “6-month arrears default”.  It is therefore an important duty of the administrator to notify the Official Receiver of this occurrence.
    4. The 6-month arrears default occurs on the day immediately after the expiration of the 6-month period – i.e. 6 months and one day.

    5. How to measure 6 months

    6. The 6-month time period is not to be measured or converted to days or weeks.  The 6-month period is only to be measured in calendar months.
    7. In cases where the last day for making a payment in the 6 calendar months falls on a public holiday, the 6 calendar month period is extended to the next working day.

    8. Notifying the Official Receiver

    9. Administrators are required to notify the Official Receiver within 10 working days of the default occurring.  The Official Receiver will apply compliance checks to verify that default has occurred because it has such an important effect on the debtor’s status.  The Official Receiver will decide if the 6-month arrears default has occurred and therefore the agreement terminated.  If the Official Receiver determines that the agreement has terminated, the debtor, creditors and the administrator will be notified of the termination.
    10. The debt agreement is terminated when the termination is recorded on the NPII.  It is not backdated to the date the 6-month arrears default actually occurred.
    11. Guidance in providing the detail that is to be included in the notification to the Official Receiver may be found in Debt agreements. Administrators are to submit notification of 6-month arrears defaults via debt agreements online.

  3. Practical examples

    1. Example 1 – No payments made for 6 months

      Xavier paid his $100 weekly payment for the first 5 months of his debt agreement.  Due to unemployment, Xavier stopped paying his weekly payment in June 2021 and the administrator was unable to locate him.  The administrator referred to her records to discover that the last payment made by Xavier was on 8 June 2021.  Therefore, the last payment that was due but that remained unpaid was on 15 June 2021.  The last day Xavier can make a payment to prevent the 6-month arrears default occurring is 15 December 2021.

      The 6-month arrears default occurred on 16 December 2021.  The administrator carried out her duty to notify the Official Receiver of this occurrence within 10 working days of 16 December 2021 – this was done on 22 December 2021.  The Official Receiver records the termination on the NPII on 23 December 2021.  The date shown on the NPII for the date of termination is 23 December 2021.

      The relevant dates in this example are as follows.

      Event Event
      8 June 2021 Xavier makes his last payment
      15 June 2021 Date late payment was due by Xavier
      16 September 2021

      3-month arrears default occurs

      (see Guidelines relating to administrators’ duty to notify creditors of 3-month arrears default)
      15 December 2021^ Last day Xavier can make a payment to prevent 6-month arrears default occurring
      16 December 2021 6-month arrears default occurs
      22 December 2021 The administrator notified the Official Receiver within 10 working days
      23 December 2021 The Official Receiver records termination on the NPII – this is the date the debt agreement is terminated

      ^ This date is not to be calculated from reference to days, e.g. 6 months * 30 days in a month = 180 days after 15 June 2008 nor from reference to weeks, e.g. 4.3 weeks in a month * 6 months = 26 weeks.

      Note that if Xavier made any payment(s) between 15 June and 15 December 2021 inclusive, the counting of the 6-month default period will start again from the date that payment is made.

      Example 2 – 6 months after completion date

      Yolanda regularly paid her debt agreement instalments but quite often paid slightly less than what was required.  Over time, this grew to her being 2 months in arrears and creditors have refused to approve variation proposals.

      The debt agreement was due to be completed on 21 August 2020.  Six months after the completion date (i.e. 21 February 2021), Yolanda is still in arrears and all the payments and obligations of the debt agreement have not been met.

      This date, 21 February 2021, is the last day Yolanda has to make all payments and complete all obligations in order to prevent 6-month arrears default occurring.

      The 6-month arrears default occurs on 22 February 2021.  The administrator is expected to carry out his duty and notify the Official Receiver within 10 working days of 21 February 2021, and he does this on 28 February 2021.  The Official Receiver records the termination on the NPII on 1 March 2021.  The date shown on the NPII for the date of termination is 1 March 2021.

      The relevant dates in this example are:

      Date Event
      21 August 2010 Completion date as shown on debt agreement proposal
      21 February 2011# Last day Yolanda can make all payments to complete the debt agreement and prevent 6-month arrears default occurring
      22 February 2011 6-month arrears default occurs
      28 February 2011 The administrator notified the Official Receiver within 10 working days
      1 March 2011 The Official Receiver records termination on the NPII – this is the date the debt agreement is terminated

      # Note this date is not to be calculated from reference to days, e.g. 6 months * 30 days in a month = 180 days after 21 August 2010 nor from reference to weeks, e.g. 4.3 weeks in a month * 6 months = 26 weeks
    2. The practical effect is to bring a debt agreement to an end automatically if the debtor is significantly in arrears and it appears that they have no intention of completing the agreement.  The debtor has the option when they fall significantly into arrears to propose a variation and inform creditors of their circumstances and why they should be given more time to pay.  There may be strong reasons in support of this, such as a period of unemployment between jobs or expenses associated with the birth of a child.  It is expected that administrators will take a leading role in working with debtors and creditors in times of default so all parties are aware of these alternatives to address the situation in the most appropriate manner.
    3. It is in the spirit of the legislation that creditors are kept informed of all material developments with respect to an administration.  In essence, administrators are facilitating the contract between the debtor and creditors and must not show bias to either party or their own interests.

  4. Consequences of breaches of this duty

    1. National Personal Insolvency Index and creditors

    2. An administrator failing to advise the Official Receiver of 6-month arrears default leads to a delay in recording the correct position on the NPII, thus adversely affecting the integrity of the personal insolvency system.  It is also a likely indicator that creditors are not being kept informed as to the progress of an administration.

  5. AFSA’s roles

    1. Enforcement and Practitioner Surveillance

    2. Section 12 of the Bankruptcy Act provides the Inspector-General[1] with the power to investigate where there are issues of concern either during the annual inspection program or through a complaint being made. Practitioner Surveillance will examine the level and thoroughness of the 6-month arrears duty being performed by reference to the principles in this practice document and the legislative framework outlined in paragraph 1.2 above.
    3. Where breaches of this duty or a lack of record keeping are identified, an administrator will be asked to take appropriate remedial action including a change in practice.  This may also lead to counselling or, in serious or systemic cases, , especially after AFSA Practitioner Surveillance intervention, to either litigation or disciplinary action being initiated.  This may include conditions being placed on an administrator’s registration.
    4. During annual inspections, Practitioner Surveillance will examine the systems and controls an administrator has in place in respect to:
      1. the system that will enable accurate identification of 6-month arrears default
      2. processes that will ensure they notify the Official Receiver of the 6-month arrears default within 10 working days.
    5. Practitioner Surveillance will examine documented practices and check lists, delegations and, where an administrator is relying on others to assist, how the administrator properly supervises and train their employees, agents or brokers to properly perform these duties on their behalf.

    6. AFSA Service Centre

    7. The Official Receiver[2] checks that the administrator has given the notification in the form required and that it is accurately completed.  The termination is then recorded on the NPII and the debtor, creditors and administrator are notified.
    8. If there is doubt or dispute about whether default has occurred, the AFSA Service Centre will make a compliance telephone call to the debtor, creditor and/or administrator to verify the situation.  Further information such as a status report may be requested.
    9. If the AFSA Service Centre believes an adequate process has not been followed, the matter will be referred to Enforcement and Practitioner Surveillance to ensure appropriate remedial action is undertaken.

  6. Conclusion

    1. This practice document outlines the Inspector-General position on some of the vexed questions relating to an administrator’s duty to notify DAT of a six month arrears default.  It will be against these principles and the legislative framework that an administrator’s performance of this duty will be assessed by AFSA Practitioner Surveillance.

Footnotes

[1] Officers in AFSA’s Enforcement and Practitioner Surveillance division act as delegates of the Inspector-General in Bankruptcy

[2] Officers in the AFSA Service Centre act as delegates of the Official Receiver