Doherty and Inspector-General in Bankruptcy
[2012] AATA 635
•21 September 2012
[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; and
(d) has the ability (including the knowledge) to satisfactorily perform the duties of an administrator in relation to debt agreements; and
(e) has such qualifications and experience (if any) as are prescribed by the regulations.
It was conceded Mr Doherty satisfied the basic eligibility test and that he has the requisite qualifications and experience as prescribed by the Regulations. Curiously, and unlike some other registration regimes, such as in relation to tax agents; trustees; and migration agents, there is no ‘fit and proper person’ test.
ISSUE FOR THE TRIBUNAL
Does Mr Doherty have the ability (including knowledge) to satisfactorily perform the duties of a RDAA?
The Respondent agreed that it was appropriate for the Tribunal, in reaching the correct and preferable decision, to assess Mr Doherty’s current ability in accordance with Shi v Migration Agents Registration Authority [2008] HCA 31, that is, the Tribunal is entitled to take into account facts and circumstances at the time of review.
THE TESTING PROCESS
The Inspector-General may, by legislative instrument, formulate guidelines for the purposes of s186C(6) and S186Q.
Relevantly, the Guidelines include the following provisions:
1.2 In order for a person to become registered it is necessary for them to pass a basic eligibility test, have mandatory qualifications and demonstrate they have the ability (including the knowledge) to immediately perform satisfactorily the duties of a debt agreement administrator. In making a decision, the Inspector-General's delegate will take into consideration information obtained by interviewing the applicant and an inspection of the applicant's systems and practices. If necessary, an applicant can also be required to complete a written examination.
2.7.1 The delegate's decision will focus on determining whether a person has the required level of ability (including knowledge) to properly perform the duties of a debt agreement administrator. The following discussion deals with the level of knowledge and business systems required to be demonstrated by an applicant for registration as a debt agreement administrator, consistent with the type of duties expected of an administrator..."
2.7.6 To properly certify that they have reasonable grounds to believe that the
debtor has made full and true disclosure of their claims in the proposal and accompanying explanatory statement and statement of affairs, the type of knowledge and business systems which the applicant will be required to demonstrate through the examination process is as follows:
An understanding of what enquiries can be easily made both from the debtor and other resources to be able to certify with assurance to the Official Receiver that they have a reasonable basis for believing that the debtor has properly disclosed their affairs.
For example an applicant will be expected to explain what evidence they will require from a debtor concerning income, expenses, liabilities and assets; what simple checks can be undertaken and what evidence they might retain;
During the inspection phase of the assessment, the Inspector-General will examine the systems and controls an administrator has in place in respect to these areas including:
their budgetary and assessment processes that will enable identification of the debtor's income and likely expenses during the period of the proposed agreement; and
- processes that will ensure they are able to explain to the debtor what their obligations are and the consequences of failing to meet those obligations.
The Inspector-General will examine documented practices and check lists, delegations and, where an applicant is relying on others to assist, how the applicant will properly supervise and train their employees, agents or brokers to properly perform these duties on their behalf.
An administrator has a duty to inform creditors when the debtor is in arrears for a period of 3 months. The administrator must also advise the Official Receiver when the debtor has not made a payment in terms of the debt agreement for a continuous period of 6 months and or when the debt agreement is not completed within 6 months of its due date for completion.
The payment monitoring and reporting system which will allow an administrator to quickly comply with these duties will be examined.
Money received under the debt agreement is considered to be held in trust for the benefit of the debtor and creditors. In general, an applicant will need to demonstrate both an understanding of, and have, proper money handling processes, records and controls in place including: data backup and contingency plans, basic book-keeping knowledge, correct banking processes, the ability to monitor unpresented and stale cheques, reconcile accounts and interest, monitor when dividends and fees are due and calculate and pay dividends and fees accurately.
Some of the specific elements to be considered are:
(i) Administrators are required to pay all money received from debtors under agreements to the credit of a single interest-bearing bank account that bears the administrator's name and the words "Debt Agreement Administration Trust Account".
(ii) Administrators must only pay into these accounts money received from debtors under debt agreements;
(iii) Administrators are entitled in their personal capacity to each payment of interest on the accounts, less the bank fees and charges (if any) paid or payable during the period that the interest relates. The interest is subject to the interest charge imposed by the Bankruptcy (Estate Charges) Act 1997.
Administrators must keep such accounts, books and records as are necessary to give a full and correct account of the administration of the debt agreement; and if required to do so by the inspector-General, make those accounts and records available for inspection by the Inspector- General;
When required, administrators must answer any inquiries about the debt agreement and cooperate with any inquiry or investigation made by the Inspector-General;
If they are to be remunerated, the administrator must maintain a separate record of money received, payments made and the balance of money held in relation to each debt agreements and at least once every 45 days, reconcile the balance held in the bank account with these records; and
Administrators must account for interest and bank charges.
2.7.21 The Inspector-General's delegate will assess an applicant's knowledge in
these areas and their systems and practices. An applicant will therefore need to maintain appropriate documentation such as a cash book, ledgers for each debt agreement and proper accounting for receipts, (including direct debits) and payments, (including cheques) both in the cash book and in a debtor's ledger, to enable them to determine quickly the amount received, paid out and the balance on hand for each debt agreement, and be able to account for interest.
A number of Practice Directions have been issued, including:
·Number 13 entitled "Debt Agreement Administrators Guidelines relating to Certification Requirements" released 22 February 2010;
·Number 16 entitled "Debt Agreement Administrators Guidelines relating to Administrator's duty to notify the Official Receiver of 6 month arrears default" released May 2009
·Number 17 entitled "Debt Agreement Administrators Guidelines relating to Administrator's duty to notify creditors of 3 month arrears default" released 12 February 2010
Relevantly, Practice Direction Number 13 includes provisions to the following effect:
“The purpose of this document is to outline the Inspector-General in Bankruptcy's regulatory role in regard to the principles on which a debt agreement administrator (DAA) has a duty to certify a debt agreement proposal that is lodged with ITSA's Debt Agreement Service (DAS). It provides details of the expectations of the Inspector-General in respect of this duty, including best practice principles surrounding the need to obtain and retain documentation. It is complemented by practical examples. The document also outlines the role of the Debt Agreement Service (DAS) in relation to an administrator's duty to properly certify.
The Bankruptcy Act 1966 sets out the legislative framework for a DAA's duty to certify. This framework provides a specific duty to properly certify in accordance with section 185C(2D) and the Legislative Instrument in clauses 2.7.2 to 2.7.9.
At the outset, it should be clearly noted that it is not the Inspector-General's role nor that of DAS to be prescriptive in advising what records must be sighted, obtained and retained in order to properly certify.
To properly certify that a DAA have reasonable grounds to believe that the debtor has made full and true disclosure of their claims in the proposal and accompanying explanatory statement and statement of affairs, they must have an understanding of what enquiries can be easily made both from the debtor and other resources to be able to certify with assurance to DAS that they have a reasonable basis for believing that the debtor has properly disclosed their affairs.
For example a DAA is expected to know what evidence they will require from a debtor concerning income, expenses, liabilities and assets; what simple checks can be undertaken and what evidence they will retain depending on the debtor's circumstances.
There is no prescribed requirement as to what enquiries a DAA should make to establish reasonable grounds to believe that the debtor has made full and true disclosure of their affairs. Full disclosure of all creditors is important to ensure that creditors are -
(i) Notified of the debt agreement proposal (DAP);
(ii) Fully aware of a debtor's current circumstances and make informed decisions;
(iii) Suspend collection action against the debt; and
(iv) Given the opportunity to provide details of their debt and vote.
In most cases it may be appropriate for the DAA to examine bank and credit card statements, review employment history and payslips, and ask if tax returns have been filed. Credit reporting records or creditors contacted to clarify amounts may also be needed.
This Practice Direction outlines the principles informing the Inspector-General's approach to regulating some of the day-to-day issues faced by DAAs certifying debt agreement proposals. It will be against these principles and the standards contained in the Legislative Instrument that a DAA's conduct of an administration will be assessed by ITSA Regulation.”
Practice Direction Number 16 includes provisions as follows:
“The purpose of this 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 (ie ITSA's Debt Agreement Service (DAS)) that a six 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 DAS in relation to this administrator's duty.
During annual inspections, BR will examine the systems and controls an administrator has in place in respect to:
(i) the system that will enable accurate identification of six month arrears default; and
(ii) processes that will ensure they notify DAS of the six month arrears default within 10 working days.
BR 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.”
Practice Direction Number 17 is drawn in similar terms to that of Practice Direction 16 but addresses the three month default obligations.
The Respondent acknowledged that the provisions contained in the Act are fundamental obligations in relation to the duties of a RDAA, and while the Guidelines and Practice Directions provide interpretive assistance they cannot derogate from, nor override, the clear intention and requirements of the Act itself.
The Hearing
The hearing took place over five days. At Mr Doherty’s request the following officers of the Respondent were made available for cross examination, and they were all cross-examined at length by Mr Doherty:
·Ms A.E. Moodie, the delegate, and chair of the interview committee, who has been a Chartered Practicing Accountant (CPA) for 32 years and who has worked in regulation with ITSA, where she has worked since 1992. She has lectured at university in accounting and auditing;
·Ms D.R. Luo, who is an inspector at ITSA and who has a Masters’ degree in accounting, and who assisted Ms Newland in the systems and control inspection;
·Ms M Robins, a senior inspector at ITSA who sat on the interview committee. She has a Diploma of Social Science (Justice), a degree in Criminal Justice Administration and a Masters of Professional Accounting. She has worked at ITSA for eight years.
·Ms K. Newland who was one of three panel members on Mr Doherty’s interview committee and was also the senior inspector conducting the inspection of his systems and controls in relation to the application. She has a Bachelor degree in Commerce with a major in accounting. She has 21 years’ experience in insolvency accounting including three years’ experience as an accountant with a chartered accounting firm dealing predominantly in insolvency administrations. She has 16 years’ experience at ITSA.
Mr Doherty, who is a former solicitor, gave evidence and adopted his Statement of Facts and Contentions as his evidence. He also relied on his evidence given in the course of cross-examination of the Respondent’s officers. He also provided a demonstration of his accounts-keeping.
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.
It appears that the second stage is concerned with practicalities. I accept that notwithstanding how good answers at the interview stage might be, a candidate would not have the ability to satisfactorily perform the duties of a RDAA if he or she were found to be inadequate in their systems and controls. That means a candidate must be able to apply the theory (‘knowledge’) that demonstrates their ‘ability’.
Ms Moodie said the most important aspects of the testing relate to duties of a RDAA: certification; three and six month arrears; the trust account; and understanding the various personal insolvency schemes that a person may enter into, so as to be able to advise whether a debt agreement is appropriate, or if bankruptcy would provide a better outcome. The questions are designed to draw out answers to gain an understanding of whether the applicant would be able to carry out the duties.
Ms Moodie’s evidence was that as a result of the interview, questionnaire and inspection the interview committee formed the view that Mr Doherty did not adequately answer the following questions: 1, 2, 14, 15, 16, 19, 24 and 25. (As a result of Mr Doherty‘s evidence the Respondent considered that questions 24 and 25 had now been adequately answered.) It appears that the Respondent took the view that it was expedient to relate the deficiencies to the actual questions Mr Doherty had been asked at interview.
There is some artificiality about a review which includes the exploration of an applicant’s level of knowledge. After all, the applicant has not only already had the benefit of seeing the questions the Respondent uses to test that knowledge, but has also had some months to reflect upon his answers and engage in further study if appropriate. Where an applicant such as Mr Doherty has also since that time engaged, albeit on a limited basis, in practice as an (unregistered) DAA, further opportunity to enhance one’s skills has been afforded. Continued inadequacy in that combination of circumstances must be given significant weight.
Mr Doherty provided a detailed Statement of Facts and Contentions in which he responded to the Respondent’s concerns about his ability. The Respondent submitted that, as a result of his evidence as outlined in his Statement of Facts and Contentions and his evidence before the Tribunal that the Tribunal could not presently be reasonably satisfied as to his current ability perform the role of a RDAA.
I did not think it appropriate for me to administer the test in the manner adopted by the Respondent. However Mr Doherty’s evidence in relation to the issues raised by the questions identified by the Respondent serve to inform my assessment of his overall ability to perform the role of a RDAA as well as his knowledge.
Mr Doherty’s Proposed Practice
The Respondent submitted, and I accept, that the regulator proceeds on the basis that a candidate proposes to run a reasonable size practice. The registration procedure, including testing and set-up costs, is expensive for a candidate so it is unlikely that the process is undertaken other than with a view to the candidate running a commercially viable venture, which Ms Moodie considered, would be a practice of about 100 to 200 administrations. She understood there to be about 100 RDAAs nationally and that, on average, each might manage 200 to 300 matters. Accordingly a candidate’s systems would need to be able to support a practice of that size.
Mr Doherty said he did not know how many files he would have in six months but assumed 50 was a reasonable estimate. He had not worked out - based on his five matters – how much time he would need to dedicate to each matter and how many he could realistically take on. He said he would engage in a continuous assessment of his methods as his practice grew.
All the ‘crucial work’, he said, would be done by him: discussions with the client and with creditors. Answering the phone and making appointments or looking after the general office procedures could be outsourced or given to non-professional staff. He would attend to the entire trust accounting procedure himself, as he does now, only using Mr Richardson’s recommendations, discussed below.
He did not actually think there was a point at which it would become unmanageable to do all of the crucial or professional work himself, because he would not take on further files if it started to get out of control. He agreed his proposal was for a reactive rather than proactive system.
He did not know to what size he wanted to grow the practice and he has no business plan. He said it should not be assumed he wanted it to be as large as possible. If registered, he said he would probably engage in some advertising to attract clients. If it proved too successful, attracting, for example, 100 clients all at once he would have to turn some away.
He did not accept that his current systems would need to be substantially altered if his practice were to increase to 20 matters.
Mr Doherty considered there to be a big difference between a RDAA imposing a limitation on themselves based on how they feel they will be capable of fulfilling the duties of a DAA and an artificial limitation imposed by ‘an outside body’, by which I understood him to mean the regulator. Having said that, Mr Doherty said he did not know what the upper limit of his capability would be. There is a natural limitation in a number of files that he could administer personally. He made it quite clear that he will not delegate essential elements of the DAA. He personally will look after all the trust accounting and will do all the certification and all the professional duties dealing with the clients. That means there is only going to be a limited number of files that he could undertake. He said he had successfully managed 500 or 600 legal files and they were more complex than debt agreements.
Mr Doherty referred to the disciplinary proceedings undertaken by the Law Society of New South Wales. While he was keen to point out that, on appeal, the Court of Appeal made no finding of dishonesty, it remained that Mr Doherty had not adequately managed his solicitor’s trust account.
Assessment Interview Questions 1 & 2
“What checks, enquiries and documentation would you undertake and obtain to be confident that proper disclosure has been made by the debtor on the explanatory statement, the debt agreement proposal and the statement of affairs (Question 1)
As a follow on to the preceding question, what checks, enquiries and documentation would you undertake and obtain to satisfy yourself that an offer proposed by a debtor is sustainable (Question 2)”
The relevant parts of the Act are sections 185LG(2), which provides that, if a person signs a certificate in relation to a debt agreement proposal, the person must ensure the certificate is correct. That, in turn, relates to section 185C(2D) of the Act, and the certificate must certify that the person consents; has given the debtor the information prescribed; and, having regard to the circumstances existing at the time when the debtor’s statement of affairs was signed and any other relevant matter, the person has reasonable grounds to believe that the debtor is likely to be able to discharge the obligations created by the agreement and has reasonable grounds to believe information has been provided. The relevant Guidelines are 2.7.7, 2.7.8, and 2.7.9 and these are set out above.
In the Respondent’s Statement of Facts and Contentions (at paragraph 40.5) there was a comment that at interview:
“No mention was made by the Applicant in answering these questions to seeking such items as a tax return, or contract of employment, or to ascertain the period of employment.”
In his Statement of Facts and Contentions Mr Doherty responded:
“…the Respondent fails to recognise the significance of the information contained upon a payslip. Each payslip provides information in regard to gross pay, net pay, deductions and an indication of what the deductions are for, whether there is any salary sacrifice arrangement, or automatic deductions, amount of taxation, ‘year to date’ (employment history for the year) financial summaries and employment status (whether they are permanent, casual or temporary etc) and as such fufils the requirements. The question related to the initial conference only and information disclosed on the payslip may lead to the request for further information.”
Ms Moodie’s evidence was that she would expect a DAA to find out what the income of the debtor is, what the expenses are, what assets and liabilities they have, and to obtain the necessary documentation to support those figures. In terms of income, in her experience, sometimes one payslip is not adequate. The DAA needs to obtain a number of payslips, or one or more tax returns, because people’s circumstances change over time. The DAA needs to ensure that the debtor is accurately nominating their income so that a proposed debt agreement will be affordable and sustainable. Information also needs to be provided about the person’s employment history, because again, sometimes people have a number of different jobs, and a tax return can also help establish a regular employment pattern.
Ms Moodie said that his response to ‘Ask if tax returns have been filed’ is unsatisfactory because sometimes people in difficult financial circumstances have not filed their tax returns for a number of years. She said if a DAA was told that tax returns had not been filed for a number of years, then they should be concerned about whether there a tax debt which has not been taken into account in the debt agreement.
Ms Moodie said if there is a mortgage on their house, the debtor should be required to bring in a statement showing what is outstanding on the mortgage. As to other expenses, a bank statement may show some expenses, but, there is other relevant information such as whether the person smokes, drinks, or has other expenses that might affect a debtor’s ability to sustain the agreement. At interview Mr Doherty was said to have failed to specifically discuss how he would determine the debtor’s expenses. Ms Moodie was concerned that Mr Doherty would ask the debtor to obtain a credit check. In her experience the RDAA arranges and pays for credit checks as part of the setup. She considered this to be good practice. Ms Moodie maintained that the Applicant’s answer is still deficient.
As far as the debtor’s property is concerned, Ms Moodie considered a curbside - as distinct from a formal - valuation was required to support the claimed value of the debtor’s property. She also considered a council rate notice to be acceptable, although not as accurate. Mr Doherty’s evidence was that he would rely on an examination of real estate websites to assess the value of the debtor’s property. He also considered that he had a good idea of property values in the area. Ms Moodie did not consider the websites to provide a sufficiently accurate valuation. Valuations are paid for by the DAA and the cost is recouped from the debtor, or the DAA may have a local real estate agent who might do them for nothing, producing a short curbside valuation on letterhead. She had never heard of a fee being charged for a curbside valuation.
At hearing Mr Doherty tendered his subscription to an online valuation service and a sample of a ‘valuation’ he had arranged using the service. Mr Richardson said the service is used extensively in the real estate industry and by valuers. He said the service is based on averages and depends on search parameters. He said the system should not be used in isolation and the parameters used in [Mr Doherty’s] sample were ‘quite loose’. The service does not value the property nor does it provide a particularly accurate assessment of the property’s value.
The Respondent submitted that an important issue is that the Applicant did not, and still does not, have a checklist, as set out in Guideline 2.7.9. In the decision under review it was noted, in that regard that the Applicant:
“Could not demonstrate an adequate list of the required documents a debtor would provide to assist the applicant to carry out his certification duties.”
Mr Doherty was reported as having said that he requires comprehensive documentation and a checklist is unnecessary.
Mr Doherty provided the following observations in his Statement of Facts and Contentions:
“Line 35 p. 2 of T8
“…I always ask them (the debtors) to bring in up to date statements of their debts, pay slips, formal identification in the form of a driver’s license or…some other ID, birth certificate or something to actually identify the debtor. I also get them to send off for a credit check, so they have that. Depending on what they are indicating their expenses are, I will verify that either by a bank statement or if they have got a car on finance I will want an up to date statement in regard to the finance company.”
Line 20 p. 3 of T8
“….I would want a copy of the mortgage statement, where it is up to. The bank statement usually would verify how much payments are being made. Probably even go so far as getting some shopping dockets, …electricity statements, water statements, Council rates if they own the home, so if they are renting I want to see a rental receipt. So virtually any expense I will attempt to verify with documentation…”
Paragraph 20 of Practice Direction 13 states
“There is no prescribed requirement as to what enquiries a DAA should make to establish reasonable grounds to believe the debtor has made full and frank disclosure of their affairs”.
Comment
There is no specific requirement in any Practice Direction that requires a Debt Agreement Administrator to have “list of the required documents a debtor would provide” for certification.
The response is appropriate as it complies with Practice Direction 13 and the assertion by the delegate is simply not tenable.”
In cross-examination Ms Newman said that being provided with a checklist by the DAA would assist the debtor to be able to provide the required information. When asked in cross-examination if that applied in all cases, such as when the debtor was illiterate, she said it would need to be addressed on a case-by-case basis.
In her report she noted she had asked Mr Doherty what he would do if he had more debt agreements. At that time he stated he would consider having a revised checklist.
Mr Doherty agreed in cross-examination that it would be a relatively easy task to prepare a checklist and conceded that, notwithstanding that he had been on notice for months of this criticism, he had done nothing whatsoever to prepare a checklist. He said he was happy to give an undertaking to the Tribunal to produce a checklist. He accepted that on the whole it would actually be of benefit to his intended future practice to have a checklist. He said that he had demonstrated that he was capable of handling large numbers of legal matters without a checklist and that he could do the same as a RDAA.
He said he had asked the Respondent to provide him with a checklist but it had not done so.
The Respondent in its Statement of Facts and Contentions at paragraph 40.3 states
“The Applicant’s answer to these questions makes it clear that he does not use a checklist for requesting documentation from debtors. The Applicant did not have (no propose to have) any system in place for debtors to know what documents they should bring with them to an interview.”
Mr Doherty responded:
“There is no specific requirement that the Applicant must use a checklist in respect to specifically verifying a debtor’s income (even Practice Direction 13 being the basis of the verification process does not specifically require a checklist). Further the Respondent does not appreciate that the very forms themselves the ‘Debt Agreement Proposal’ and ‘Explanatory Statement’ and the ‘Debt Agreement Statement of Affairs’ function as a checklist.”
Ms Moodie said that she accepted that the forms constitute a checklist, in terms of what needs to be filed with the debt agreement proposal, but they do not address what a debtor is to bring to the DAA, in terms of verifying their income and providing other financial information.
I observe that there is no legislative requirement for a RDAA to have a checklist. Even the Guideline to which the Respondent referred does not specifically require a checklist, although it notes that documented practices and checklists will be examined, as does Practice Direction 13 which notes:
“At the outset, it should be clearly noted it is not the Inspector General’s role, or that of DAS, to be prescriptive in advising what records must be cited, obtained, and retained, in order to properly certify.”
I note that Mr Doherty was not refusing to have a checklist but with only five debt agreements at the moment he considers there is little point in having a checklist. Ms Newman’s position was that he could have benefitted from the use of a checklist for five agreements and could have used a checklist from the start.
Ms Moodie maintained that Mr Doherty’s response is still deficient in that it would be preferable if there were a checklist, which included what the debtor should bring to the interview. She said that the size of the practice is relevant because presently, Mr Doherty’s practice is quite small. Her point was that with a maximum of five matters his system is manageable but if he becomes registered - and he has indicated his practice will grow - then she doubted it would suffice. In her view, once the volume reached beyond 20 matters his current system in respect of required documents would prove more difficult to manage without checklists. It was logical and efficient to have a checklist that could be given to debtors to tell them what to bring to the DAA.
Assessment Interview Questions 14, 15 and 16
How do you plan to monitor that the debtor is complying with the terms of the debt agreement (Question 14)
As a follow on from the preceding question, how do you calculate three month arrears default by a debtor and what reference material would you refer to ensure your process of calculating such is correct (Question 15)
And as a further follow on from the preceding question, how do you calculate six month arrears default be a debtor, what reference material would you refer to ensure your process of calculating such is correct and what are your obligations as an administrator when a 6 month arrears has been identified (Question 16)
Concerning three and six month arrears defaults, respectively, the relevant parts of the Act are s 185LB(1) and s 185LC, and the relevant Guidelines are found at 2.7.12.
Ms Moodie’s evidence was that if there is a three-month default creditors are informed the debtor was falling behind in their obligations under the agreement so they would have some idea of the status of the debt: 185LB. A six-month default triggers termination of the agreement and ITSA is informed: 185QA. The DAA must notify ITSA within 10 days of the occurrence. The consequence of delay in respect of notification of a six-month default is that the creditors may suffer prejudice because if the debt agreement is not going to be finalised, then the creditors may want to take further action in relation to their debt. Delay in notification by a DAA of a three-month default or a six-month default means the creditors are not kept informed of the possibility that the agreement may not be finalised.
Ms Moodie noted that DAAs have a duty to inform creditors, when the debtor is in arrears, before a period of three months, so it is an expectation that a DAA would understand that one of his core duties is to inform creditors when there are arrears for a period of three months and six months. She would expect a DAA to be able to demonstrate that they have in place a system that would identify if a debtor went into arrears. The system should flag when the payment is due, when the payment has been made, and alerts the DAA if it has not been made.
The Applicant at interview relied upon reference to a ‘summary information sheet’ for monitoring and calculation of arrears. The document is a simple Excel spreadsheet that appears to set out the status of the debt agreements; in other words, what is outstanding and what matters are up to date.
In his Statement of Facts and Contentions, Mr Doherty asserts:
“In respect of Question 15 there are 2 parts to the question.
The first part “How do you calculate three month arrears default by a debtor?” is answered at Line 13 p 22
Amount
“They only have to be behind by one dollar over a three month period to trigger a three month arrears default.
Line 16 to 19
Time
“….I go down the column to look at the dates of when the arrears first occurred, if they have not rectified it and it is over three months, three months and one day, then a letter goes out to the creditors.”
Paragraph 3 of Practice Direction 17 states
“A three month arrears default occurs when a debtor falls in arrears in respect to any payment and remains in arrears for a period of three months…..
It is the time period, not the amount, of the default that will determine whether a three month default has occurred…..A default may be as little as $1 if that is the amount of the arrears 3 months after the payments was due.”
Paragraph 4 of Practice Direction 17 states
“The three month arrears default occurs on the day immediately after the expiration of the three month period ie 3 months and one day.”
Ms Moodie did not regard the process described there, particularly under the heading ‘Time’, as being adequate because there is a 10-day period for notifying the creditors.
The process for identifying three-month arrears defaults was also said to be deficient because it is a manual process. With only five debt agreements this might work, but with a larger number, she thought there would be difficulties. Ms Moodie maintained that the summary information sheet is inadequate in terms of identifying arrears.
Quite some time was spent at the hearing examining the document and analysing the information it contained. In essence, the arrears are manually calculated, and that, of itself, provided scope for error.
In addition Ms Moodie said she was unable to follow some entries in the summary information sheet at all: it was not entirely clear from the face of the document as to "start" and "finish" dates of the debt agreement; nor the duration of the debt agreement; nor the obligations under the agreement. It was unclear as to the frequency at which payments at were to be made; how much was outstanding and for how long the debtor had been in arrears. Some assumptions had to be made. Ms Luo thought the summary information sheet contained less information than she had seen in other practices she had inspected.
At the inspection Mr Doherty agreed to add another column to the spreadsheet in respect of ‘Six Month Date Last Pay Proposed’ which had not previously been included at all.
Overall Ms Moodie did not regard the Excel spreadsheet as an appropriate system for monitoring compliance. She noted, for example, that in terms of the debtors ledger, the date of the payment is recorded, but there was no record that indicates when the payment is actually due to allow for some comparison between when the payment is made and when it is due, and then if it is not received, what the system is to flag that default. The ledgers do not automatically feed into the summary information sheet, which is a stand-alone document.
Mr Richardson noted that errors can occur, especially if someone is in a hurry. For example, they may enter a payment into the cashbook and forget to post it to the ledger.
From her inspection Ms Newland could not determine how Mr Doherty, firstly, would identify three and six month arrears defaults from the records that he maintained. She had concerns regarding the duplication of data between various worksheets, in particular that there may be inherent risk of human error by duplicating data between worksheets. His system did not show how Mr Doherty came to that date, how it could be identified that that was the arrears default start date. Neither was there a permanent record of a three or six month arrears default.
Mr Doherty said the first step was to identify there was a default. To do this he looks at the bank statement daily which will show if the client has made a due payment. If so he will update client’s ledger on a daily basis. He ‘ticks off’ who has paid and makes a notation on the bank statement. He can see ‘at the end of the week’ which debtor has not paid, but it was unclear what this step entailed. If the client had not paid, he diarises some defaults may be coming up so he can ‘keep an eye on it’ in case there is a three or six month default. He makes the entry after two months of default. In respect of other defaults and ‘makes a note’ in his personal – as distinct from the ‘firm’ - diary. Later in his evidence he said he uses daily bank statements, and that ‘personal diary’ was not the correct term. It is a ‘personal diary’ in that he is the one who monitors the payments. In terms of working out when that default has persisted for three months or more, he relies on the combination of the monthly summary information sheet, the daily bank statements, the daily running sheets, diary, and client ledger. Use of the summary information sheet which is prepared monthly means that all three steps could take place concurrently and would show what was outstanding at the end of the month. He did not check and calculate how many days each default has persisted each and every day. To do so would be a very cumbersome and onerous task. The summary information sheet does not, on its own, show for how many days a debt has persisted.
Mr Doherty submitted that it was up to the Respondent to suggest a better system. He said he understood that some systems are capable of automatically identifying three or six month arrears defaults but those systems are not freely available on the open market. They would have to be modified and specifically written. If he found something that is satisfactory when he has 75 files or 100 files, he will transfer over. He considered his present system to be very rigorous and thorough.
Ms Moodie said the regulator’s role is not to detect fraud but to ensure that the systems and controls are adequate so as to minimise the risk of that occurring. Mr Richardson acknowledged that it is important to have financial records kept in such a way that an independent third party such as the regulator can come in, read them and understand them. He accepted that, in relation to some aspects of Mr Doherty’s book-keeping, Mr Doherty’s input would be necessary for explanation. He had made some “small recommendations” that would make everything “crystal clear”.
In the summary information sheet, there is an absence of reference to due dates information. Ms Moodie regarded it as essential that such a system contains that information so that the actual payment can be compared to the due date.
Mr Doherty acknowledged that some of the duties performed by a DAA are fiduciary duties. He appreciated that there is a need for regulation of DAAs and accepted that his practice will be inspected from time to time in the future at the discretion of the Inspector-General. He generally accepted that he would need to fully cooperate with the Inspector-General in respect of such inspections.
He accepted that he must keep records which are necessary to give a full and correct account of the administration of a debt agreement. He also mentioned on several occasions that he has a higher duty because he is a solicitor.
In cross-examination of Mr Doherty, the Respondent sought to elucidate what system was used for identifying three and six month arrears defaults. Despite numerous questions directed to that end, the answers did not disclose a consistent system for doing so. In particular, what was not clear was the point at which the default was identified and then recorded in the diary. From his evidence it seemed that a diary was the vehicle used for bringing the three-month default to his attention, but it was not clear that there was a consistent process for getting information into the diary. While this ad hoc practice may suffice in one of the current size, it was readily apparent to me that such a system would be unmanageable in a practice of the intended size.
Assessment Interview Questions 19
Please explain a RDAA's duties regarding account reconciliations, how do you carry these out and what paper trails for audit purposes need to be kept and maintained.
The relevant obligations are found in section 185LE of the Act, and the primary one is:
“(a) keep such accounts, books and records as are necessary to give a full and correct account of the administration of the debt agreement;...”
The Guidelines make clear the requirement that a RDAA have appropriate money handling processes, records and controls in place.
Mr Doherty was asked at interview to explain a RDAA’s duties regarding account reconciliations and the paper trails necessary for audit purposes.
It was noted in the decision under review that his proposed reconciliation process was dependent upon the manual entry of data into a spreadsheet which was not closed off after any reconciliation.
His answer at interview was said to fail to provide a system to verify that he would be able to account properly for all the receipts and payments; be able to reconcile total balances back by bank reconciliation referable to bank account statement; or have in place a system capable of being audited.
Ms Moodie maintained that still to be the case. She observed that in her decision she found:
A series of spreadsheets did not contain an audit trail or any controls to prevent amendments, deletions to data after reconciliation has occurred.
Another deficiency in the existing system as described by Mr Doherty was that there does not appear to be a permanent record of when amounts are due, and when a default occurs.
One criticism was that the Applicant’s system does not have linked records. Mr Doherty agreed that Excel spreadsheets have the functionality to link a number of worksheets and that those linked worksheets could be a client ledger, summary information sheet, and trial balance. He also accepted that the functionality extended to linking a cell from one worksheet to a cell within another worksheet, and stated that he would be happy to do that now.
Another criticism is that the Applicant’s system doesn’t have a sufficient audit trail. In particular, Ms Newland, stated that his system ought to be closed off at various points in time and hard copies prepared and kept on the file. Mr Doherty claimed this was done at the end of the month, when he does the trust accounting, he prints off all the statements and puts them in the trust accounting folder each month. It had not been his practice to sign and date those records.
The Applicant did not accept however that there is a need to have an accounting system that cannot be retrospectively amended. He stated that he relied on the reconciliation the trial balance; the reconciliation of the unpresented cheques; and what is in the bank statement to ensure against errors.
Ms Moodie considered Mr Doherty had a lack of knowledge of basic accounting principles. In his evidence Mr Doherty referred on many occasions to his having had ten years trust accounting experience as a solicitor and is a registered real estate agent operating a trust account. He thought what was required as a DAA was simpler.
Mr Doherty alleged that the Respondent had not put forward an expert report on trust accounting. In view of the extensive experience of the Respondent’s officers who gave evidence, I reject that contention.
Ms Newland said that the principal accounting documents that are used by DAAs would be the client ledger account which would record the receipts and payments and historical balances of each client of the DAA; a bank reconciliation that is being conducted at least every 45 days; documentation to show how a DAA had identified and calculated three and six month arrears defaults.; documentation to show how the DAA had calculated and distributed dividends to creditors; the debt agreement proposal and explanatory statement and statement of affairs that would feed into those documents. She said that the recording of cash may be recorded via the client ledger account, or depending on the system that the DAA employs, a cash receipts and cash payments book or journal. There may also be a cashbook that records all the transactions for the trust account. There are, of course, bank statements.
A criticism is that Mr Doherty’s systems did not contain an audit trail or any controls to prevent amendments/deletions to the data after reconciliation had occurred. This raises the issue of whether his Excel-based system is going to be appropriate, given the projected practice growth. Ms Luo gave evidence that there are some practices of a larger scale that use Excel spreadsheets, but noted the proviso that they had protected programs, that is, ‘read-only’.
Mr Richardson observed that in terms of an audit trail one of the drawbacks of using Excel is that there is no permanent record of deletions or changes without reference to the bank statement. The trial balance ‘wouldn’t work’. He accepted that accounting software systems other than Excel have an audit trail feature, which would indicate each date and time upon which changes are made to the client ledger.
In re-examination, Mr Richardson noted that the use of a computer package does not guarantee protection against fraud. He said Mr Doherty had shown him some of the trust accounting procedures he had previously used as a solicitor and considered them to be more in keeping with established bookkeeping principles.
The view of Ms Newland, whose evidence I found impressive, was that a system of more than 20 files becomes unmanageable using Excel spreadsheets. In her opinion, when looking at RDAAs with 50 or 70 administrations the use of Excel spreadsheets becomes quite cumbersome and clumsy. It takes a significant amount of time for the regulator to inspect those documents to gain assurance as to their accuracy.
Ms Newland had observed one practice (which had combined two practices) with a total of about 70 administrations which had used Excel. The systems were found to be inadequate. Errors had been found in the bank reconciliation in terms of the transposition of data from one record to another which caused the regulator to have concern as to the accuracy of that information. The regulator had spent a significant amount of time addressing those concerns with that DAA to ensure that those procedures are improved. Ultimately that DAA was subject to disciplinary proceedings and was deregistered. At least part of that deregistration related to the lack of audit trails.
In the only other practice of 40 – 50 administrations which used Excel, the RDAA was subsequently to be found to have falsified documents.
The audit trail on an accounting software package known as MYOB would show the transactions that have occurred throughout and by whom it has occurred, and who created those transactions within MYOB.
Ms Moodie observed that other RDAAs use MYOB which she considered as having appropriate functionality to monitor compliance. She was unaware of other systems but stated that features of a system which she would regard as essential in order for a DAA to be able to monitor compliance required an audit trail. This was so that when inspections are carried out, the regulator can see that that is an accurate record of the ins and outs of the debtor's financial affairs in relation to the debt agreement; one that has a reporting system attached to it, so that each of the documents, like the debtor's ledger, doesn't stand alone from the trust account records. Every time that something is transcribed from one area to another, there is a chance of an error. The debtor's ledger needs to feed into the reconciliation of the trust account. For example, using MYOB in particular, an entry is unable to be deleted and a reversal must be entered, whereas Mr Doherty’s system allowed deletion and hence no audit trail.
Mr Richardson was not familiar with the MYOB accounting software because it is not widely used in the property industry. Mr Doherty said he regarded MYOB as a flawed system because the program takes out withdrawals before deposits regardless of the order that they are paid into the bank, and it is, in his view, ‘entirely unsatisfactory’. Ms Newland said she had never noticed that in the matters she had inspected with other DAAs.
Ms Newland regarded having an audit trail in regard to a simple reconciliation at the end of the month as good practice.
She was not familiar with whether an audit trail can be created in Excel to the same extent that other accounting packages may. To overcome that documents would have to be date stamped effectively and added to the documents by Excel using a field within Excel to put in the header or footer of the date the document is created or printed and the time that that occurred and then you could print that document as a hardcopy or as a PDF file to show that that was what was the receipts and payments as at that date. She stated it would be necessary to look to whether to lock various cells to prevent changing or deleting data, however, she felt even that would not be fool proof.
The figures in the summary information sheet, could be altered without any real trace. Indeed, in the course of Mr Doherty’s demonstration he made several changes to spreadsheets which formed part of his records.
Mr Doherty, in the course of cross-examination of Ms Moodie, noted that it would be his problem if he chose to manage a huge system manually. Ms Moodie disagreed and said that it was a consideration for the regulator as well because of the obligation to ensure that the trust funds are properly accounted for. It is an issue of the integrity of the process.
Mr Richardson made a number of recommendations to Mr Doherty and created templates for use for cashbook ledgers, trial balance and bank reconciliation, so that consistency of entry, balancing and notations would be maintained throughout the month.
The first recommendation is that each month a balance is brought down on the cashbook so that the final figure on the cashbook can be seen as to what has been spent. It appeared that the balances were not brought forward.
The second recommendation was to just set up some templates for the trial balance and the bank reconciliation so that they are in better order. Presently there is some lack of clarity in that the trial balance and the bank reconciliation have been mixed or the results of those have been mixed. He could figure it out himself but it needed Mr Doherty’s input to see explain it. In his report he said that Mr Doherty’s method was not the accepted method of balancing.
His third recommendation was for some new templates to be used for the cashbook and ledgers so as to be able to cross-reference a cashbook entry with the ledger. In the size of Mr Doherty’s present practice there is no need for cross-referencing but if Mr Doherty were anticipating within the next six months getting 50 matters, it would make things easier.
Initially Mr Doherty did not ask him to help implement the changes he had recommended but they have since spoken and Mr Doherty now thinks it’s a ‘most excellent idea’. Mr Richardson said he is prepared to implement the changes for Mr Doherty and give him some training. To date Mr Doherty had not yet asked him to do so. Mr Richardson said the changes would be easy to make.
If Mr Doherty were to implement his recommendations an external third party could look at the accounts without input from Mr Doherty and understand them.
Mr Doherty said he did not need instructions in how to use the templates because he knows how to use them. Mr Doherty said it is essentially the same as what he had been doing with the only difference being that Mr Richardson had linked one month to the next.
The proposed system still did not link all the documents and required manual cutting and pasting or manually retype an entry from one to another. Mr Doherty re-iterated that there was no requirement to do so. He understood that that was an ongoing criticism but re-iterated that no mistake had been found to date. When pressed he said he would ‘look into’ automatic links.
Mr Doherty was referred to Mr Richardson’s recommendation that if the trust account becomes larger then thought should be given to providing each client’s ledger with an identifying number so that it can be noted on the corresponding cash book entry, and then a space on the client’s ledger to note that the page number of the cash book where the original entry was made before being posted to that ledger. That recommendation had not been implemented, but he said he was willing to do so.
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.
‘Ability’, it was submitted by the Respondent, necessarily includes an ability to be regulated, that is, to accept the role of a regulator and to accept the requirement to submit to regulator’s requirements. While I do not agree with this interpretation, in my view, the preparedness to respond to a regulator’s reasonable requirements anchored in the Act and the Guidelines, is essential to the performance of the duties of a RDAA.
Somewhat belatedly, given that it is now some months since matters were brought to his attention, on the final day of hearing, Mr Doherty said that he was happy to adopt Mr Richardson’s recommendations, to do a checklist and to look at a computer program. He denied he had been uncooperative with the regulator. I specifically asked him, why I should come to a view that he would indeed do those things when, notwithstanding having been given those significant pointers, he had not done them in the intervening months. His response was to offer to give the Tribunal an undertaking to produce documents, including a checklist within a week. He would not submit those documents to the Respondent because he thought it would just ‘lead to further argument’. He contended that if the Respondent was really serious about this they would have produced a recommended checklist for him to use and told him what computer program to use. I reject his submission that the Respondent is responsible for providing him with what essentially are tools of trade. I also reject his offer to provide documents to the Tribunal – that is not the Tribunal’s role. His lack of preparedness to respond to requests from the regulator led me to the view that he had been unco-operative and would be likely to remain so.
Mr Doherty raised the issue of the Debt Genie litigation, wherein his DAA practice’s service company sued a client for unpaid fees. In the course of that litigation findings were made of misleading and deceptive conduct. Mr Doherty’s advertising had referred to ‘no interest, debt consolidation’ and, in essence, it was found that that reference in the advertising was misleading and deceptive, because the nature of the services being performed were not in the nature of debt consolidation at all. Mr Doherty was critical of the Local Court assessor’s findings and it was difficult to understand why Mr Doherty had raised the matter at all, when the Respondent had not relied on those findings either in the decision under review or until raised by Mr Doherty in the material he filed before the Tribunal hearing. The relevance, the Respondent submitted, was in relation to the duty of a DAA to inform clients of various matters concerning debt agreements. Fundamental to that, is not misinforming them about the basic nature of the service that is offered. I do not propose to review that matter in detail, especially as Mr Doherty did not agree with the Assessor’s findings. His evidence though was that he that he accepted his advertising should be amended. Notwithstanding that the decision was several months ago, it was only the day before the final day of hearing before me that he had changed the sign, that is, he did not remove the offending word which had been found to be misleading – “consolidations” - but merely added in the qualification, “with debt agreements”, which the Respondent submitted may not cure the problem that was identified in the Local Court hearing in any event. To me, this delay in reaction further suggests that Mr Doherty has a reluctance to admit that any course, other than that which he has chosen to adopt, may be preferable, or, as may be the case with his advertising, necessary.
Overall I am not confident that he will adopt the recommendations of Mr Richardson and that if he did so, it would be at a time when his practice had already come under strain. That strain necessarily puts both his clients and their creditors at risk.
The test requires more than mere latent ability. It requires Tribunal to be positively satisfied that not only can Mr Doherty perform the tasks satisfactorily, but that he will. In that regard, his past conduct in failing to respond to the regulator’s requirements suggests to me that, despite his experience in conducting matters to date, he does not have a preparedness to conduct matters as a RDAA in accordance with the legitimate requirements of the regulator.
As to the relevance of Mr Doherty’s experience, albeit with only a limited number of files, I observe Mr Doherty’s own analogy that his singing karaoke for 20 years does not make him a better singer. There was no allegation that Mr Doherty’s practice as an unregistered DAA has been unsatisfactory. It might be said that, in circumstances where an applicant to be a RDAA has adequately conducted a small number of matters to date, then, having regard to the on-going inspection regime and the cancellation rights available to the Respondent, that an appropriate course might be for the Tribunal to disregard the Respondent’s - or its own - apprehensions about Mr Doherty’s future ability to satisfactorily perform the duties of a RDAA. It seems to me that this ‘wait and see’ approach would be imprudent. In the meantime Mr Doherty would be responsible for managing the debts of many people, some of whom, on his own evidence, could be characterised as vulnerable. His ability must be assessed in the context of his proposed practice size. I am not prepared to accept that his systems, although having sufficed to date, would be adequate to make that transition. Neither am I prepared to accept his belated offers of undertaking to address perceived inadequacies and to adopt the advice of his retained adviser. These were simple things that could have been done to address those matters and it is frankly, inexplicable that he had not done so. It is trite to say ‘actions, speak louder than words’ but Mr Doherty had ample opportunity to amend his practice in light of the regulator’s observations and his adviser’s recommendations but he did not do so.
I find that Mr Doherty does not have the ability (including knowledge) to satisfactorily perform the duties of a RDAA.
DECISION
The Decision under Review is Affirmed.
I certify that the preceding 125 (one hundred twenty five) paragraphs are a true copy of the reasons for the decision herein of Ms N Isenberg, Senior Member.
...................[sgd]…….................................
Associate
Dated 21 September 2012
Dates of hearing
16, 17 18 April, 5 & 6 July 2012
Applicant In person Counsel for the Respondent Mr P Fary Solicitors for the Respondent Australian Government Solicitor
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