Directive No. 5R4

Estate Funds and Banking

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Date: March 18, 2010

The Office of the Superintendent of Bankruptcy (OSB) has amended Directive No. 5R3, Estate Funds and Banking.

The Annual Banking Report (ABR) has been amended to correct discrepancies in the data capture of the information presented. Schedule 2, Electronic Fund Transfer (EFT) — Authorization Agreement, is now Schedule 3. Schedule 3, Annual Banking Report, is now Schedule 2. Finally, paragraph 6(3) of the Directive now provides additional details on pre-filing deposits from debtors.

Coming into Force

This Directive comes into force on March 31, 2010.

Enquiries

If you require further information, please do not hesitate to contact the OSB office nearest you.

James Callon
Superintendent of Bankruptcy

Issued: March 18, 2010

(Supersedes Directive No. 5R3 issued on August 14, 2009, on the same topic)

This Directive applies to individual and corporate trustees licensed pursuant to section 13 of the Bankruptcy and Insolvency Act (the Act) and to administrators of consumer proposals as defined in section 66.11 of the Act. For ease of reading, the term "trustee" in this Directive is to be read as including an administrator.

Interpretation

    1. In this Directive,
      • "Act" means the Bankruptcy and Insolvency Act;
      • "bank" means a bank as defined in section 2 of the Act;
      • "consolidated trust account" means a bank account operated pursuant to paragraph 155(g) or subsection 66.26(2) of the Act;
      • "control ledger" means a record maintained by the trustee that reports the balance of funds held in an estate trust account. In the case of a consolidated account, such record will show the control ledger balance as the sum of all sub-ledger balances;
      • "electronic payment" means the payment of dividends or disbursements from an estate trust fund to another party by means of an approved system as described in paragraph 16 of this Directive;
      • "estate" means a bankruptcy, a proposal filed under Division I or Division II of Part III of the Act, a notice of intention, or an interim receivership under section 46 or section 47.1 of the Act;
      • "estate trust funds" means funds received by a trustee that belong to an estate, including any moneys advanced in payment of fees for services not yet rendered or money advanced in payment of disbursements to be made that are not subject to a third-party agreement;
      • "Rules" means the Bankruptcy and Insolvency General Rules made pursuant to subsection 209(1) of the Act;
      • "sub-ledger balance" means the balance of funds for each estate that comprises a consolidated bank account;
      • "transaction posting report" means an accounting record maintained by the trustee showing all banking transactions (credits and debits) posted to an estate account during a specific time period, and the account balance;
      • "transfer account" means an approved bank account with a banking institution other than the bank having custody of a trustee's consolidated trust account;
      • "trust account" means an account with a bank into which estate funds are deposited and held in trust by a trustee.
    2. The coming into force date for that part of the definition of "estate" in paragraph 1(1) that refers to a "proposal filed under Division I" and a "notice of intention" shall be held in abeyance until further notice.

Purpose

  1. This Directive, issued pursuant to paragraphs 5(4)(b) and (c) of the Act, imposes upon a trustee the minimum standards for the accounting for and the proper custody of estate trust funds. The main applicable sections of the Act are subsections 6(2), (3) and (4), sections 25, 26, 27 and 66.26, paragraphs 155(g) and 14.01(1)(f), and Rules 65, 67, 101, 103, 128 and 129.

Principles

  1. Section 25 of the Act imposes a duty on a trustee to deposit forthwith in a trust account all moneys received for an estate. The trust account shall be held at a bank, provided that federal or provincial law guarantees deposits of that institution, and that such law protects depositors from the loss of money on deposit with that institution.footnote ¹

    Subsection 25(1.3) of the Act also dictates that, except for paying dividends and charges incidental to administering the estate, a trustee shall not withdraw any funds from the trust account of an estate without the permission, in writing, of the inspectors or, on application, the Court.

    When withdrawing funds from the trust account of an estate the trustee must comply with the rules governing fees and disbursements drawn in summary administration bankruptcies and consumer proposals.

    Trust account funds are to be kept intact and not commingled with non-estate funds and in the case of consolidated trust accounts, not commingled with estates of administration types other than that type for which the account was approved.

Banking and Accounting Records

    1. A trustee has a fiduciary relationship with an estate under its administration. As such, a trustee has a duty to control and account for the funds under his or her administration in accordance with the Act.
    2. For each estate trust account under a trustee's administration, the trustee shall maintain, at a minimum, up-to-date books and records, including the control ledger, of estate funds showing:
      1. all receipts and disbursements of estate trust funds, including the name of the payer or payee, the date, nature of payment and the amount;
      2. duplicate deposit slips, duplicate receipts for cash deposits, cancelled cheques, bank statements, passbooks, and all other documents of deposit; and
      3. for consolidated trust accounts, a calculation of the balance within the consolidated account, which we refer to as the control ledger, produced on the same day as the bank statement.
    3. The trustee shall complete and sign the reconciliation of all trust accounts, monthly, within forty-five (45) days of the bank statement date.
    4. The trustee shall advise the Designated Senior Bankruptcy Analyst, in writing, of all outstanding errors that have not been corrected within seventy-five (75) days of the bank statement date.
    5. Each monthly trust account reconciliation must be supported by:
      1. an original detailed monthly bank statement for each trust account, supported by cancelled cheques and deposit receipts;
      2. the trustee's transaction posting report for the month;
      3. a complete listing of all outstanding cheques, including the cheque number, payee, amount and date of issue, an explanation regarding any cheques outstanding for longer than six (6) months, and a complete listing of outstanding deposits;
      4. a complete and detailed listing of all other reconciling items;
      5. the name and signature of the individual preparing the bank reconciliation;
      6. the name and signature of the trustee approving the bank reconciliation, and the date of that approval.
    6. In addition to the supporting evidence listed in paragraphs 4(5)(a) to (f), reconciliation of all consolidated trust accounts must include the control ledger, which in turn is comprised of a listing of the component sub-ledger balances. Outstanding cheques or deposits that are reconciling items in a consolidated account must be identified by sub-ledger in order to ensure sub-ledger balances are accurate.
      1. The monthly trust account reconciliation must be accompanied by a report of any estate trust funds invested pursuant to paragraph 6(2) of this Directive. The report will indicate the trust account to which the investment belongs and the monetary value of the investment.
      2. Investment instruments must bear the name of the trust account to which they belong, and must be held in the same bank where the related estate trust account resides.

Electronic Banking and Accounting Records

    1. A trustee may keep banking and accounting records in electronic media format subject to paragraph 5(2) of this Directive.

Computer Records for Books of Original Entry

    1. A trustee who maintains banking and accounting records for trust accounts in an electronic format shall ensure that the system used:
      1. is capable of producing on demand a hard copy of the records of original entry at any given date;
      2. shows, at a minimum, details required by paragraph 4(5) of this Directive;
      3. provides a complete audit trail of transactions.
    2. For greater clarity, the period of retention for electronic banking and accounting records shall be the same as required for "hard copy" records.

Computer Bank Reconciliation

    1. A trustee who keeps trust records in an electronic format shall produce and keep a printed copy of the bank reconciliations referred to in paragraphs 4(2), (5) and (6).

Backup Copy

    1. A trustee who keeps trust records in an electronic format shall maintain a backup copy of the electronic records that shall be updated each business day, and stored in a secure manner at an off-site location on a weekly basis.

Handling Estate Trust Money

    1. A trustee shall:
      1. protect estate trust funds from loss, misappropriation or defalcation by establishing adequate security arrangements and internal controls;
      2. immediately advise the Designated Assistant Superintendent, in writing, of any defalcation or misappropriation of estate trust funds;
      3. deposit estate funds without undue delay in a bank, in a trust account, in the name of the estate or that of the trustee in the trustee's capacity as trustee of the estate (for example, the estate of John Doe or Joan Smith — trustee to the estate of John Doe);
      4. periodically review and evaluate the internal control system to ensure that it functions adequately with the appropriate safeguards;
      5. ensure that all cheques issued from a trust account are consecutively numbered, or in the case of electronic payments, use consecutive trace numbers;
      6. ensure that cheques drawn on a trust account are not made payable to "cash", "bearer" or other such non-specific recipient;
      7. ensure that all cheques drawn on a trust account are signed by at least one authorized trustee;
      8. not pay any of his or her personal or general office expenses from a trust account;
      9. make reasonable efforts to obtain a competitive rate of interest on all trust accounts;
      10. ensure that all interest earned on summary administration estate funds, whether held in a trust account or other investment certificate referred to in paragraph 6(2), which has not been offset by reasonable bank service charges, forms part of the assets of the estate, and is allocated monthly;
      11. not permit an estate trust account to be overdrawn, and immediately correct any transactions that inadvertently place the account into an overdraft position;
      12. disclose on the statement of receipts and disbursements the total amount of interest earned for each estate;
      13. in the event that the trustee's general account is charged a transaction fee by the bank for a non-sufficient fund cheque, be permitted to recover this transaction fee from the person responsible and deposit it to the estate trust account, in which circumstance the trustee is permitted to reimburse the general account from the consolidated bank account for the amount of the transaction fee;
      14. inform the Designated Senior Bankruptcy Analyst promptly of any change to the type of banking or accounting system used for trust accounts;
      15. inform the Designated Senior Bankruptcy Analyst, within five (5) business days, of any change in the name and address of a bank where estate trust funds are held;
      16. be permitted to offset reasonable bank fees (other than non-sufficient fund charges) against interest earned by a summary administration or a Division II Proposal trust account provided the amounts are clearly disclosed on the monthly bank reconciliation, and be permitted to offset bank fees related to investment certificates against interest earned on those certificates provided this is also clearly disclosed;
      17. not be permitted to offset bank fees described in paragraph 6(1)(p) beyond the generated interest.
    2. A trustee may invest estate moneys in appropriate investment certificates where such funds are not immediately needed for distribution of dividends to creditors, or for the day-to-day administration of the estate. Such investment certificates must be guaranteed against losses and should not be used in cases where service charges and related costs exceed the interest that would accrue had the funds remained in an estate trust account. Investment certificates are to be held at the same branch of the financial institution where the related trust account is held.
    3. Pre-filing deposits from debtors are not considered to be estate trust funds until a bankruptcy has been accepted or a proposal or notice of intention has been filed. Such deposits are to be held separately by the trustee in a trust account, clearly identified for that purpose only or in a separate trust account containing the aggregate of all these funds held, provided the accounting records in respect of the account fully document deposits and withdrawals. Such deposits are not to be held in a consolidated estate trust account or individual estate trust account, until such time as a proceeding under the Act has been registered.
    4. The coming into force date for that part of paragraph 6(3) that alludes to a "proposal filed under Division I" and a "notice of intention" shall be held in abeyance until further notice.

Electronic Banking

      1. A trustee may move funds (such as fees) electronically from an estate trust account to another of the trustee's accounts (such as a general account).footnote ²
      2. No transfer of funds as described in paragraph 5(a) shall be permitted unless the electronic transfer system used by the trustee produces a confirmation from the financial institution that shall contain:
        1. the number of the trust account from which the money is drawn;
        2. the name, branch and address of the financial institution from which the money is drawn;
        3. the number of the account to which the money is transferred;
        4. the name, branch and address of the financial institution to which the money is transferred; and
        5. the time, date and details of the transfer.

Consolidated Trust Account

    1. An individual trustee may, with the approval of the Designated Assistant Superintendent, operate only one consolidated trust account for summary administrations, pursuant to paragraph  155(g) of the Act, and only one consolidated trust account for consumer proposals, pursuant to subsection 66.26(2) of the Act, provided that the trustee:
      1. submits a request in writing with the information required in paragraph 8 and obtains prior written approval of the Designated Assistant Superintendent in the locality of the trustee; and
      2. maintains, in good order, a bank account and accounting system providing for, and disclosing, equitable monthly distribution to each of the individual estate accounts of all the interest earned by the consolidated trust account.
    2. Consolidated trust accounts are to be used exclusively for their intended purpose. Sub-accounts or separate accounts, including clearing accounts, dividend accounts, expense accounts, etc., are not permitted.
    3. Where the trustee does not comply with the requirements of this Directive, the Designated Assistant Superintendent may revoke approval to operate a consolidated trust account.
    4. A trustee may reapply to the Designated Assistant Superintendent for approval to operate a consolidated trust account after a revocation under paragraph 7(3) has occurred.

Operating a Consolidated Trust Account

    1. An individual trustee shall submit the following along with the written request to the Designated Assistant Superintendent to operate a consolidated trust account:
      1. a complete description of the accounting and banking systems and procedures, whether manual or electronic;
      2. a complete description of the backup procedures, manual or electronic, to allow for the recovery of accounting records in the event of destruction of same;
      3. the name and address of the branch of the bank where the consolidated trust account will operate;
      4. a description of the type of bank accounts to be operated;
      5. a copy of the current banking agreement;
      6. a description of the method by which the bank calculates the rate of interest payable on a consolidated trust account;
      7. a description of the method by which interest is to be calculated and attributed monthly to individual estate accounts; and
      8. the details of bank charges applicable to the consolidated trust account and the method by which said charges will be disposed of.
    2. A trustee shall keep a copy of the original approval for a consolidated account and copies of any subsequent revisions or approvals.

Corporate Trustee

    1. For corporate trustees, paragraphs 7 and 8 of this Directive shall apply to each individual trustee, except in those cases where a corporate trustee operates a consolidated account as described in paragraph 9(2).
    2. A corporate trustee may, upon written request and with the written permission of the Designated Assistant Superintendent, operate one consolidated bank account for summary estates, and/or one consolidated bank account for consumer proposals, for all or some of its trustees. In any such arrangement, however, individual trustees will be linked to said account as being responsible for specific estates contained therein. A named trustee will be designated by the corporate trustee as the principal contact for the purposes of banking questions. This in no way relieves a corporate trustee of its responsibilities.
    3. Where a corporate trustee operates an approved consolidated account as described in paragraph 9(2), paragraphs 7, 8 and 10 apply to the corporate trustee.
    4. For greater clarity, an individual trustee who is linked to a multi-user corporate account as described in paragraph 9(2) shall not be permitted to also operate consolidated accounts pursuant to paragraph 7(1) of this Directive.

Annual Banking Report

    1. A trustee must complete and deliver to the Designated Senior Bankruptcy Analyst on or before May 31 of each year a report that shall contain:
      1. for the benefit of each bank holding trust accounts as at April 30 of that year, a signed request for a bank confirmation as set out in Schedule 1 of this Directive;
      2. a master control list of all trust accounts open as at April 30 of that year showing the account number, name and address of the banking institution, the name and the Superintendent's estate number of each estate, and balances on deposit at April 30; and
      3. the information required pursuant to paragraph 10(1)(a) presented in conformity with the form found in Schedule 2 of this Directive.
    2. A trustee shall include, along with the first annual banking report submitted pursuant to this Directive, a description of the software programs (either commercially available or proprietary) used to administer estate trust funds. Thereafter, the trustee shall promptly inform the Designated Senior Bankruptcy Analyst of any changes to the type of software used for this purpose as required by paragraph 6(1)(n).

Maintaining a Transfer Account

    1. Notwithstanding paragraph 6(1)(c) of this Directive, exceptional circumstances may arise where a trustee is unable to deposit funds immediately into the estate's trust account as the Act requires. (For instance, a trustee may have an establishment in a town that does not have a branch of his or her bank.)
    2. A trustee may, with prior written approval of the Designated Assistant Superintendent, operate a transfer account subject to such terms and conditions as the Designated Assistant Superintendent may impose.

Undistributed Interest

    1. Any amount of monthly interest earned on a consolidated trust account that is too small to be rateably apportioned to the individual estates may be carried forward to the following month, where it will form part of the next month's interest allocation. Such amounts of unallocatable interest shall be clearly identified on the monthly reconciliation.
    2. Any amount of interest earned on a non-consolidated trust account that cannot be allocated to that account shall be remitted to the Superintendent as an undistributed asset as provided for in Directive No. 18 (Unclaimed Dividends and Undistributed Funds).

Deposit Insurance

  1. A trustee shall take necessary steps to ensure that estate funds are insured under the Canada Deposit Insurance Corporation Act (CDIC) or equivalent provincial deposit insurance legislation.

Change of Status of Estate from Summary to Ordinary Administration

  1. Where an estate is converted from a summary to an ordinary administration and the estate funds therein were previously held in a consolidated trust account, a trustee shall immediately open a separate trust bank account into which he or she shall transfer all of the estate funds.

Foreign Moneys

  1. Subject to subsection 25(1.2) of the Act, the provisions of this Directive also apply to moneys in foreign countries, with such modifications as the circumstances require.

Electronic Payments and Related Records

    1. A trustee may make application, in writing, for approval to make payments electronically from a trust account rather than by signed printed cheque. Such application shall:
      1. be made to the Designated Senior Bankruptcy Analyst;
      2. include an acknowledgement of the Superintendent's power to receive bank confirmations or other pertinent bank information regarding electronic transactions upon request;
      3. describe, to a degree of detail acceptable to the Designated Senior Bankruptcy Analyst, how the proposed electronic payment system and internal controls meet or exceed the requirements specified in this Directive; and
      4. include a contingency plan outlining how the trustee will deal with payment system service interruptions or malfunctions in order to continue to make required payments and maintain proper books and records.
      1. Where the Designated Assistant Superintendent approves a trustee's application to utilize electronic payments, that approval shall be in writing.
      2. Where the trustee does not comply with the requirements of this Directive, the Designated Assistant Superintendent may revoke approval to utilize an electronic payment system.
    3. The trustee is well advised to retain on file a copy of the application referred to in paragraph  16(1) and the written approval referred to in paragraph 16(2) while the electronic payment system is being used.
    4. For the purposes of making electronic payments, a trustee must utilize the services of a bank as defined under section 2 of the Act.
    5. An acceptable electronic payment system shall, as a minimum:
      1. send an electronic payment together with remittance information relating to that payment, including the estate name and estate number to which the payment relates, the account number from which the payment was drawn and a description of the nature of the payment;
      2. transmit payment and remittance information together directly from the trustee to the bank, with the bank confirming payment details directly to the creditor/recipient. The payment system may send the remittance details by email, facsimile or other electronic formats;
      3. use consecutively numbered payment trace numbers as generated by the trustee's accounting system to clearly identify each payment as to amount, payee, estate name and number, date of payment and nature of payment (i.e. dividend, other type of disbursement);
      4. provide for secure transmission of payment and remittance information;
      5. satisfy the requirements set out in paragraph 4(2) of this Directive relating to proper books and records, with such allowances for electronic equivalents of paper-based records as are reasonable;
      6. ensure that the account reconciliation requirements set out in paragraphs 4(5) and 4(6) of this Directive can be satisfied;
      7. ensure that requirements for handling trust moneys as set out in paragraph 6(1) of this Directive can be satisfied. In particular, trustees must indicate how they intend to ensure that payments made via the electronic payment system can only be approved by a licensed trustee in accordance with the requirements of paragraph 6(d) of Directive No. 4, Delegation of Tasks;
      8. not compromise the trustee's ability to comply with any other requirement of the Act, Rules or directives;
      9. not permit the alteration of information relating to statements or reports of transactions (i.e. not permit banking records to be overwritten);
      10. allow printing of electronic statements or reports regarding payment transactions;
      11. provide the trustee with prompt notification of unsuccessfully completed electronic payments;
      12. use unique identifiers for each individual with access to the electronic payment system;
      13. keep records showing which trustee(s) initiated each electronic payment.
    6. Where the trustee receives notification of an unsuccessfully completed electronic payment, measures shall be taken within five (5) business days to deal with the problem.
    7. The trustee shall obtain the consent of a creditor/recipient to receive payments electronically;
      1. such consent shall be provided to the trustee in the form set out in Schedule 3;
      2. the trustee shall keep all consent documents in a separate file designated for this purpose for the period of time prescribed by the Rules for retention of estate documents or for the duration of the consent period, whichever is longer;
      3. the trustee shall take steps to ensure that consent documents are kept in a safe and secure manner;
      4. a creditor may revoke consent to receive electronic payments by sending written notification to the trustee.

Coming into Force

  1. This Directive comes into force on March 31, 2010.

Enquiries

  1. For any questions pertaining to this Directive, please contact your local OSB office.

Footnotes

  1. To be eligible for deposit insurance protection, deposits must be payable in Canada, in Canadian currency. If estate funds are situated abroad, a trustee, with the Superintendent's permission, may deposit such funds in a financial institution, which is similar to a bank, in that country, as per subsection 25(1.2) of the Act.(return to the footnote reference 1)
  2. For greater clarity, electronic fund transfers of dividends and disbursements to another party are subject to the provisions of paragraph 16 of this Directive. (return to the footnote reference 2)

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