Bankruptcy Trustee – Good Cop or Bad Cop?

For most bankruptcies, the trustee will be viewed as neither good cop nor bad cop, but rather as an ordinary accountant performing a statutory/practical function. That said, sometimes our bankrupt clients have expectations that as trustees our role is predominantly to serve them. This is absolutely part of the role however, the law also imports serious obligations upon trustees to creditors as a major stakeholder group and for good reason. Equally, a creditor may view the trustee as lacking independence if the consequences of bankruptcy appear to protect the bankrupt at the expense of creditors.

Trustees have multiple professional qualifications to undertake these “officer of the court” roles, with typically a decade or more of full-time on the job training/experience before being registered as a trustee by the Australian Financial Security Authority (AFSA) – akin to the role of the Australian Securities and Investments Commission (ASIC) when it comes to liquidators who in turn work in the corporate insolvency space.

When things “go well” for the bankrupt, they may retain the family home – a common scenario when there is low or no equity in the property, so a deal is done with the trustee to avoid third party sale and in the meantime the family continue to pay the mortgage.

On the other hand, trustees may be viewed as more confrontational when:

  • the bankruptcy was initiated by court determination at the application of a creditor rather than the free will of the bankrupt;
  • registering a caveat/claim over the family home and potentially initiating its sale;
  • collecting income contributions – a process which follows a legislative regime as to the calculation so in theory it should be consistently applied nationwide, though there will be instances where differences will arise based upon the research, information assumed and interpretations made by the trustee, especially when there are shortcomings in the information provided by the bankrupt; and
  • seeking to overturn lump sums paid by the bankrupt or assets transferred into their superannuation or to family members.

Educating bankrupts, non-bankrupt spouses and creditors about these scenarios is part of the job for the trustee and his/her staff.

The Bankruptcy Act identifies a number of offences which trustees are required to report to AFSA. AFSA then consider whether to refer to the Commonwealth Director of Public Prosecutions (CDPP). It’s fair to say that many of the offences are minor and capable of being resolved between the trustee and the bankrupt. Indeed, AFSA has recently recommended that trustees not refer minor offences and instead utilise the “objection to discharge” process to extend bankruptcies from 3 years to as much as 8 years to help facilitate compliance with the legislation and to promote better compliance by bankrupts going forward. It is also then open to the trustee to “withdraw the objection” and allow for the bankrupt to be discharged/released from bankruptcy sooner than the 8 years.

For the more serious offences, including where members of the public are harmed as a result of the actions, then AFSA and the CDPP prosecute the offence in an appropriate court. While the outcome of some prosecutions appears to do little more than a slap on the wrist, there are instances where the outcome for respondent bankrupts and third parties includes incarceration and findings that the person (who may be a professional adviser) is not fit and proper for their business occupation.

Our offices are always happy to confer in relation to these scenarios and to help facilitate the proper and fair operation of the legislation.


Article written by Malcolm Field (Director) – SV Partners Perth

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