Doherty and Inspector-General in Bankruptcy - [2012] AATA 635

[2012] AATA 635

Division GENERAL ADMINISTRATIVE DIVISION

File Number

2011/5158

Re

Peter Doherty

APPLICANT

And

Inspector-General in Bankruptcy

RESPONDENT

DECISION

Tribunal
Ms N Isenberg, Senior Member

Date 21 September 2012

Place Sydney
The decision under review is affirmed.
.................[SGD]..........................
Ms N Isenberg, Senior Member
CATCHWORDS
DEBT AGREEMENT ADMINISTRATOR: Registration refused – whether Applicant has the ability including knowledge to satisfactorily perform duties – application of guidelines and practice directions – existing systems and controls inadequate for proposed increase in size of practice – insufficient audit trails – failure to respond to regulators requirements – decision under review affirmed.
LEGISLATION
Bankruptcy Act 1966, Ss 185LB(1), 185 LC, 185LE, 185LG(2), 185C(2D), 185QA, 186C, 186Q
CASES
Shi v Migration Agents Registration Authority [2008] HCA 31
SECONDARY MATERIALS
Practice Direction 13: Debt Agreement Administrators Guidelines relating to Certification Requirements (released 22 February 2010);
Practice Direction 16: Debt Agreement Administrators Guidelines relating to Administrator’s duty to notify the Official Receiver of six month arrears default (released May 2009)
Practice Direction 17: Debt Agreement Administrators Guidelines relating to Administrator’s duty to notify creditors of three month arrears default (released 12 February 2010)
REASONS FOR DECISION
Ms N Isenberg, Senior Member
21 September 2012
BACKGROUND

The debt agreement scheme was introduced as a form of insolvency administration outside bankruptcy which could be utilised by a person with low levels of debt, few assets and low income. A debt agreement administrator (DAA) assists the debtor in the preparation of documents, such as a debt agreement proposal, explanatory statement and statement of affairs, to be lodged with the regulator, Insolvency and Trustee Service Australia (ITSA), who is responsible for obtaining the approval of creditors. Once creditors accept a debt agreement, the DAA is authorised by the agreement to deal with property identified in that agreement. The DAA is required to pay all money received from debtors under agreement to a DAA trust account for the benefit of the debtor and creditors; must maintain payment and reporting systems for inspection by the regulator; and has a duty to inform creditors if a debtor fails to comply with the terms of the debt agreement.
A person may be an unregistered debt agreement administrator, but they may only administer up to five agreements. A registered debt agreement administrator (RDAA) does not have that limitation.
Mr Peter Doherty, the Applicant, has been an unregistered DAA since 2009. On 26 September 2011 he filed an application to become a RDAA but his application was refused on 28 November 2011. He seeks a review of that of that decision.
LEGISLATIVE SCHEME OVERVIEW
Division 8 of Part IX of the Bankruptcy Act 1966 (the Act) regulates, inter alia, the registration and deregistration of DAA. Section 186C of the Act provides:
Approval of application made by an individual
(2)       If:
(a)       the applicant is an individual; and
(b)       the application is not by way of renewal;
the Inspector‑General must approve the application if the Inspector‑General is satisfied that the applicant:
(c)       passes the basic eligibility test;…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2012] AATA 635
Decision Date: 21 September 2012

CaseChat Overview and Summary

In Doherty v Inspector-General in Bankruptcy, the applicant sought judicial review of a decision by the Inspector-General to refuse his application to be registered as a debt agreement administrator (RDAA). The primary concern was whether the applicant, Mr Doherty, possessed the necessary ability, including knowledge, to perform the duties of a RDAA. The Federal Court was required to determine whether the Inspector-General’s decision to refuse registration was lawful and reasonable.

The court examined the statutory criteria for RDAA registration under the Bankruptcy Act 1966, focusing on the meaning of ‘ability’ as it pertains to knowledge and practical skills. It was noted that the term ‘ability’ encompasses more than just knowledge; it includes the capacity to perform the duties consistently and reliably. The court considered the Inspector-General’s concerns regarding Mr Doherty’s current practices and his proposed scale of operations. Mr Doherty's existing system, which was sufficient for a small number of debt agreements, was found to be inadequate for a larger practice. The court highlighted Mr Doherty’s confusion during his demonstration, particularly regarding the handling of dishonoured cheques, and his overall unimpressive performance. These factors led to significant reservations about his ability to manage a larger practice effectively.

The court found that the Inspector-General’s decision was well-reasoned and aligned with the legislative intent to ensure a high standard of competency among RDAAs. Given the potential risks associated with larger-scale operations, the court upheld the Inspector-General’s decision to refuse registration. The court concluded that Mr Doherty had not demonstrated the necessary ability to satisfactorily perform the duties of a RDAA, particularly in the context of a larger, commercially viable practice.

The Federal Court affirmed the decision of the Inspector-General, refusing Mr Doherty's application for registration as a RDAA. The court's decision underscored the importance of robust systems and controls, especially as the scale of operations increases, to maintain the integrity of the debt agreement administration system.

Orders

Orders of the court

Full text does not contain this section.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Mr Richardson noted that in his systems, if a mistake was made in one of the trust ledgers, it would be picked up because he cross-references the trust ledgers against the cashbook and the bank account. Mr Richardson noted that the Act was mostly non-prescriptive in its accounting requirements. The issue is fundamental bookkeeping. He had made a number of recommendations to Mr Doherty based on standard accounting practice. Mr Richardson considered Mr Doherty’s small electronic system adequate but he would streamline some parts of it to ensure the process is sustainable, consistent, and not ad hoc. If it is not consistent and the practice develops to a large size, there is much more scope for error for not identifying defaults than there would be if there were a consistent practice an automated system that identified the arrears defaults. CONCLUSION It is clear from its context in s 186C(2)(d) of the Act ‘ability’ in is a broader concept than just “knowledge”. In determining whether the test is satisfied, it is necessary to have regard to the important function of regulation of a DAA. Mr Doherty himself referred to some examples of difficult circumstances of people that he would have to deal with as a RDAA and that is a reason why there needs to be a high standard set for the ability of RDAAs. “Ability” also has to take into account important public policy considerations, and they include ensuring the integrity of the entire DAA system and the performance of duties and obligations under the Bankruptcy Act. Fundamental to the Respondent’s concerns about Mr Doherty’s ‘ability’ is an apprehension that his current practices in his existing, unregulated role of not more than five debt agreements, will not suffice in a larger, commercially viable practice as a RDAA. His application for registration relates to his proposed practice which, he told the inspector, would consist of 50 debt agreements within six months. In evidence, he seemed to indicate that he had no way of telling how many matters he would undertake and appeared to have made little, if any, effort to work that out, given time and resources restraints. From his evidence he stated he wanted to run a viable business, that he has at least one debt of nearly $100,000; that he is running currently on a subsistence basis; and having regard to the setup costs including the cost of registration itself, I consider it likely that he will seek to run a business with as many debt agreements as possible. What Mr Doherty proposes appears to be a reactive system, in other words, to change his systems once there is a problem. In assessing the proposed system, I note his stated position that he will have no support staff other than those doing non-essential tasks, which, on his evidence, appeared to be somewhat minimal. On the basis of the Applicant’s evidence and his demonstration in particular, I had significant reservations about his existing system’s ability to deal with his anticipated practice size. In his demonstration, for example, he appeared confused as to how to deal with some types of entries – especially in relation to a dishonoured cheque - and whether they could be properly recorded with ‘a minus’, or if they should be recorded in different columns and appropriate formulae. His performance was unimpressive.

Ratio Decidendi

Legal Principle Established

Mr Doherty called Mr R.K. Richardson to give evidence. Mr Richardson, who is a part-time real estate agent and a property teacher at TAFE, teaching, amongst other subjects, trust accounting.CONSIDERATION The Respondent refused to register Mr Doherty as a RDAA because the delegate formed the view that Mr Doherty lacked the necessary ability (including knowledge) to satisfactorily perform the duties of a debt agreement administrator. In particular, the delegate considered that:·he failed to demonstrate sufficient understanding of the certification duties of a RDAA;·he failed to demonstrate adequate knowledge in relation to the accounting of debt agreement funds, including the necessary reconciliations required by a RDAA in relation to their fiduciary duties and the holding of a trust account that complies with the Act;·he lacked sufficient knowledge of his obligations to pay the interest charge to the Australian Government and displayed inadequate knowledge in relation to the calculation of the realisation charge;·he failed to demonstrate sufficient knowledge of his duties to inform creditors and ITSA of default payments; and·he failed to demonstrate a detailed knowledge of the relevant legislation.Assessment Process Ms Moodie gave evidence that the decision under review was made following a testing process which consisted of two stages:(i)an interview before a panel of three officers of the Respondent (the interview); and(ii)an inspection by two officers of the Respondent of his systems and controls (the inspection). The inspection followed the provision to the Applicant of a systems and controls questionnaire. Ms Moodie said that immediately prior to the interview candidates are given the written questions to which they are asked to respond at interview with the delegate and two other officers. Ms Moodie said that the questions are designed to determine whether a candidate has the ability to perform the role of a RDAA, understands the duties associated with the role and is able to carry them out, and has the necessary knowledge of the Act. There are no model answers. There is no ‘pass mark’. The legislation does not prescribe what precise answers should be given by an applicant for a RDAA at interview in order for the delegate, or the Tribunal, standing in the shoes of the decision-maker, to be satisfied as to the requisite level of ability. For that matter, the methodology of administering questions is also not prescribed. Nevertheless it is a legitimate means of assessing an applicant’s knowledge level and provides an applicant with the opportunity to outline how he or she will conduct their practice as a RDAA so that the decision-maker may form a view as to a candidate’s ability to satisfactorily perform the duties of a DAA. Ms Moodie’s evidence was to the effect that unless a candidate performs reasonably satisfactorily at interview he or she will not proceed to the next stage, namely being asked to complete the systems and controls questionnaire which precedes the inspection. Because Mr Doherty did progress to the next stage it was fair to assume then that his overall interview performance did not exclude him from consideration.

Division	GENERAL ADMINISTRATIVE DIVISION
File Number	2011/5158
Re	Peter Doherty
APPLICANT
And	Inspector-General in Bankruptcy
RESPONDENT

Tribunal	Ms N Isenberg, Senior Member
Date	21 September 2012
Place	Sydney