Insolvency Law Reform Bill

I move, That the Insolvency Law Reform Bill be now read a second time. The bill will reform New Zealand’s personal and corporate insolvency laws. It will streamline the personal bankruptcy process and provide individual debtors with greater alternatives to bankruptcy. The bill encourages investment and innovation by providing a new business rehabilitation regime, known as voluntary administration, for New Zealand companies that are insolvent or on the verge of insolvency. The adoption in the bill of the United Nations Commission on International Trade Law model law on cross-border insolvency further encourages foreign investment, and promotes efficiency in conducting cross-border insolvency cases for the benefit of New Zealand creditors.

The Commerce Committee has considered the bill and reported back in support of the key principles behind it. The committee has recommended a number of amendments to better reflect the policy intent of the bill. I would like to discuss some of those changes, because I think the committee has assisted a great deal in fine-tuning this bill.

The committee has recommended some important refinements to the proposed new no-asset procedure scheme. The Official Assignee will be able to apply to the court for a preservation order over the assets of a debtor who misled the Official Assignee or concealed assets at the time of making an application for entry to the no-asset procedure. Assets would be subject to the preservation order until the application for the debtor’s adjudication of bankruptcy is heard by the court. This will prevent the assets from being on-sold or dissipated, and will therefore preserve the assets for the future benefit of creditors.

The committee recommended a further change to the no-asset procedure that relates to the creditor’s right to object to a debtor’s entry into the no-asset procedure. Creditors are no longer restricted to a set number of days within which they can object to a debtor’s entry into the no-asset procedure. Therefore, creditors can raise objections while a debtor is in the process, thus providing a check on the debtor’s honesty and integrity. The changes recommended by the committee not only tighten the no-asset procedure and prevent abuse of the process for the benefit of all creditors, but also protect, in my view, the integrity of the no-asset procedure.

The committee has also recommended that a summary instalment order register be established for debtors who are in summary instalment arrangements with their creditors to pay the debts. This register would be maintained in the same way as the current bankruptcy register and the proposed new register for debtors under the no-asset procedure. The register will alert potential creditors that a debtor is currently subject to a summary instalment order, and assist them in making an informed decision before entering into a credit transaction with the debtor.

On the issue of appointment of liquidators, the committee recommended that a company be restricted from going into voluntary liquidation and appointing a debtor-friendly liquidator at the eleventh hour when there is a pending creditor’s application to wind up the company before the court. The bill now provides that a company can voluntarily liquidate and appoint a preferred liquidator within 10 working days of receiving a notice from the court advising that a creditor has applied to wind up the company. The petitioning creditor will have the ability to ask the court to review the appointment of the liquidator chosen by the company. This amendment to the bill allows for a liquidator to be appointed who is objective and looks after the interests of the creditors. This amendment also preserves the company’s right to place itself into voluntary liquidation to prevent further deterioration of the company’s financial affairs and assets, to the future benefit of all creditors.

The changes in the bill to voidable transaction provisions have raised concerns amongst practitioners that it would be costly for a liquidator to set aside transactions and charges, as the liquidator would have to start a court proceeding where a creditor objects to a liquidator’s decision to make a transaction void. I agree with the committee’s recommendation that when a notice of objection to a transaction is lodged, it should contain full particulars of the reasons for objecting, as well as specifying the documents that substantiate the objection. This should assist the liquidator to make an informed decision on whether to pursue the matter further in court, to make the transaction void or uphold the transaction as valid. This will reduce the liquidator’s costs and give creditors more certainty in their dealings with the insolvent company.

In addition to the amendments I have already highlighted, the committee has recommended a number of other amendments that clarify the policy intent of the bill, some of which I will mention briefly. The committee has recognised that solvent liquidations do not pose any risks to creditors, and has allowed the solvent company to appoint a person as a liquidator if that person, or that person’s firm, has provided professional services to the company in the previous 2 years. In order to safeguard the interests of creditors, these persons cannot be appointed as liquidators in an insolvent liquidation.

The bill now, where appropriate, reflects the terminology and definitions used in the Personal Property Securities Act 1999, thus avoiding confusion for practitioners. With the increased threshold for entry into the summary instalment order process under the bill, the committee has recommended that the supervisor should provide, at the request of the Official Assignee, any document under the supervisor’s possession or control that relates to the debtor’s property, conduct, or dealings. This provides a check on the supervisor, and is consistent with the Official Assignee’s responsibility for administering the summary instalment order process under the bill.

Recognising that a bankrupt can still make payments towards his or her debts while in bankruptcy, the committee has proposed that the bankrupt be obliged to disclose any change in his or her income to the Official Assignee. This will allow the Official Assignee to adjust contributory payments being made to creditors by the bankrupt. Liquidators currently have the responsibility of reporting any offences committed by the company, or any director, officer, or shareholder, to the relevant authorities. The committee recommended that the same responsibility should be extended to administrators of the proposed new voluntary administration regime.

I would also like to mention the recommendation of a majority of the committee to maintain the Crown’s priority as the preferential creditor in the bill. Under the Companies Act, the Inland Revenue Department is listed as the preferential creditor, which means that the payment to the Crown of PAYE, GST, resident and non-resident withholding tax, child support, and student loan payments are prioritised over payments to unsecured creditors of the insolvent company. One of the main objections to the retention of the Inland Revenue Department’s preference was the concern that it could undermine the new voluntary administration regime proposed in the bill. I agree with the recommendation of the majority of the committee that retention of the Inland Revenue Department priority will not undermine the new voluntary administration regime.

I further agree with the committee’s recommendation that the Australian-style director penalty notice provision—which is the quid quo pro, if the National Party is saying that that is what we should do—should not be adopted in New Zealand to replace the Crown’s preferential creditor status. If the National Party’s position is that there should be Australian-style director penalty notices, then I am happy to inform New Zealand business that that is the position of the National Party. The director penalty notice provisions make the director of the company personally liable for the company’s tax debts, if he or she does not take the appropriate action to pay the Australian Taxation Office within a certain time period. The select committee was concerned—by a majority, and, in my view, rightly so—that not only would that be a significant increase in directors’ liability, and walking away from the whole principle of limited liability companies, but it would erode the fundamental concept that is the premise of our company law.

The committee received a number of submissions recommending the regulation of insolvency practitioners. Officials are currently working on a discussion document for public consultation on this issue, which will be released in the next few months. It is expected that any policy proposals on the regulation of insolvency practitioners will be reported to Cabinet mid to late next year.

The Insolvency Law Reform Bill is an important part of the Government’s economic transformation agenda. This becomes evident when we look at the objectives that have been set and achieved through the legislation: to encourage investment by providing a predictable and simple insolvency regime that can be administered quickly and efficiently for the benefit of local and overseas investors; to promote innovation and entrepreneurialism by providing companies with alternatives to liquidation; to promote international cooperation in cross-border insolvency cases where assets of New Zealand companies are held in different jurisdictions; and to provide better returns to creditors involved in both personal and corporate insolvencies.

I wish to thank members of the Commerce Committee for their work in considering this bill. I know they gave it detailed consideration. I would also like to acknowledge the helpful contribution of submitters. I commend this bill to the House.

I rise to speak on the second reading of the Insolvency Law Reform Bill. I would like to acknowledge the comments from the Minister Lianne Dalziel regarding the work the Commerce Committee did. There was a lot of unanimity around the table, in particular amongst members who have a long-term desire to create a business environment within our country where we can minimise the number of insolvent liquidations and attempt to increase the number of business successes, as opposed to failures.

The bill deals with a regime when things do not go well in business. I know the Minister talked about solvent liquidations, but when the rubber hits the road for a lot of businesses we need very good rules in order to be able to deal with business situations when things do not go to plan and people are looking down the barrel at a failure. I think this bill does aim to deal with situations when things do not go to plan either in business, where the bill aims to look at changes to the Companies Act 1993, or when things do not go well for individuals, by reviewing the Insolvency Act of 1967. I accept that as we have seen changes to law over a period of four decades, it was time for another look at rules relating to insolvency.

National opposes the bill because there are some areas that it thinks require additional work. For us, the key question is whether the new regime of voluntary administration will work. It is a new regime for New Zealand and, although the committee looked at the processes put in place in Australia, National has some concerns about the differences in the scheme as proposed for New Zealand.

There was quite a bit of discussion about retaining the Inland Revenue Department’s status as a preferential creditor under schedule 7 of the Companies Act 1993. That was an area that consumed almost every submission. All the submitters who came before the committee said that they agreed with having a new voluntary administration procedure, but they had concerns about putting in place the new regime and retaining the Inland Revenue Department’s preferential status. The thinking behind the Crown priority is that the Crown should have the ability to have first call on any moneys and, in particular, moneys collected through tax, such as PAYE, GST, resident and non-resident withholding tax, child support, and student loans, deducted by the company from wages and salaries.

The thinking behind the preferential status is that the Inland Revenue Department does not have any choice when extending that credit, and so there was concern from officials and, as we heard, the Minister about changing that position. All the submitters said to our committee that if it did not address the issue, the whole efficacy of the voluntary administration regime would be affected. They said the Crown priority undermines the effectiveness of the proposed voluntary administration scheme and that the Inland Revenue Department will be put in a position where it will vote against deeds of company arrangements amongst creditors, and against any firm going into voluntary administration procedures. The argument they gave was that the Inland Revenue Department, in having Crown priority, has every incentive to push a company into liquidation, because if it does that it has first call on the money. In moving into a voluntary administration regime, the Inland Revenue Department has the status of any other creditor, and is therefore treated as any other creditor and does not have any special status. So although the Inland Revenue Department could imagine it could get 60 percent of its debt repaid under the current regime, its concern was that on moving into a voluntary administration regime where it would stand side by side with a long list of other creditors it would lose its special status, and there would be no incentive to get its debt repaid.

Submitters also argued that the Inland Revenue Department is an inefficient tax collector and, in fact, if it continues to retain its Crown priority status, it does not have any incentive to go out and collect the money. I am not sure about that as an argument, because the Inland Revenue Department will get criticised for going too hard on businesses, as well as going too soft.

The final point, which I think is the major one, is that although New Zealand is basically copying the regime in Australia, we are not copying it on the issue of Crown priority. Therefore, we are out of step with Australian and British insolvency law, as they have not retained the Crown priority. When Inland Revenue Department officials came before the committee, it asked them how much would be at stake in respect of taxpayers’ money if we removed the Crown priority—the committee was trying to balance up the benefits of taking away the priority, and, hopefully, moving more companies into a voluntary administration regime and saving more, allowing them to trade out of their difficulties. The amount was a very small amount. The Inland Revenue Department officials said there was only about $5 million of taxpayers’ money at stake, and the committee felt it was worth considering further, very carefully, the issue of Crown priority, because, when it looked at the benefits of ensuring that the voluntary administration regime worked, it thought there was merit in doing that.

The committee listened very carefully to what submitters said and they were unanimous on this point. So I am interested that the Minister said that although she has listened to information from submitters, she is not prepared to budge on that point. I would ask her what she knows that the committee did not, and what advice she has received that rebuts, or is at odds with, the advice the committee received from industry practitioners—people who are involved in insolvency situations every day. The issue of Crown priority is one of the reasons why the National Party will not be voting for this bill—albeit that we will watch its progress with interest.

Another point we thought was worthy of seeking change on was related to the watershed meeting that creditors have before voting on a deed of company arrangement. In Australia, a total of 50 percent of creditors, who must make up 50 percent of the value of a debt, must be in agreement in order to move to a deed of company arrangement. Here in New Zealand we set the bar a lot higher, requiring that 50 percent of creditors, representing 75 percent of the value of the debt, have to be in agreement before moving into the voluntary administration regime. Many practitioners said that was setting the bar far too high, and that it would be almost impossible to ensure that this benchmark was met in order for companies then to vote on moving to a voluntary administration.

Finally, there was a huge area of concern to us about the move to a no-asset procedure for individuals. The National Party thinks it sends the wrong message about personal responsibility when the Government says to people that they can rack up $40,000 worth of debt, and that once in their life they will have the opportunity to write it off totally—no questions asked, all is forgiven. Our view is that a lot of young people, in particular, many with student loans, could use this as an opportunity just to get rid of their debt and start afresh. We believe that people need to understand the implications of taking out debts. To remove people’s responsibility for repaying them sends the wrong kind of message. When has the answer to issues of debt been to forget about that debt, and to say that all is forgiven and there will be no consequences? We think that this is a wrong step for this country. The National Party has concerns about this bill and hence will be opposing it in its second reading.

I rise to speak on the second reading of the Insolvency Law Reform Bill. Before I do that, I wish to commence by pointing out section 6A of the Tax Administration Act, which makes it clear that it is the Commissioner of Inland Revenue’s statutory duty “to collect over time the highest net revenue that is practicable within the law”. This section of the Tax Administration Act outlines the Inland Revenue Department’s statutory obligations that lie at the very heart of why the National Party will vote against the Insolvency Law Reform Bill. Voluntary administration lies at the very heart of the Insolvency Law Reform Bill. In fact, voluntary administration is being introduced under this bill in accordance with New Zealand’s obligations under the Memorandum of Understanding on Coordination of Business Law signed by Australia and New Zealand in 2000.

In a nutshell, National believes that voluntary administration has significant merit, but only under the right conditions. This is a very important point and one that I intend to elucidate on. National believes that the retention of the Inland Revenue Department’s priority above unsecured creditors, coupled with the responsibility, which I talked about before, to collect over time the highest net revenue that is practicable within the law, will ensure that the department votes in favour of liquidation and recovery itself as opposed to supporting voluntary administration. This is a very important point. When the Inland Revenue Department sits in a position of priority and is able to make the decision to go with liquidation versus voluntary administration, I am sure that we will see many situations whereby liquidation stays in place and the voluntary administration procedure—on which we in the Commerce Committee spent so much time and hard work looking at the options—will not be implemented. That is a key point.

National believes that without Inland Revenue Department support, voluntary administration is doomed from the start, and that is why we will not support this bill. The minority view from National reads that all submitters on voluntary administration provisions “were unanimous in their view that unless the Government addresses the issue of priority status for IRD, the voluntary administration scheme will be severely compromised.” That was the summary of submissions. The minority view further states: “We do not believe that Parliament should pass another piece of redundant legislation when there is a groundswell of opinion from practitioners who believe that it will not work, without the removal of Inland Revenue’s priority status.”

I would like to review some of the merits of voluntary administration when it has worked in countries where the priority has been reduced. As I said earlier, voluntary administration was introduced under the auspices of the Memorandum of Understanding on Coordination of Business Law signed by Australia and New Zealand in 2000. It aims to replace the seldom used compromise scheme that is already available to New Zealand companies that are in financial stress. Currently, if we look at the compromise situation that is already available in the law, we see that it is seldom used, because the incentives to get majority creditors to consent to a compromise are just not there. In addition to that, with the priority status that the Inland Revenue Department already has, the compromise situation just does not eventuate, because we see liquidation happening time and time again before a position of compromise can be reached.

Voluntary administration was introduced into Australia in the early 1990s, and many other jurisdictions have now introduced it, but in different ways. In the Commerce Committee we compared it only to the Australian model, and there was this insistence that if we were to get rid of the Inland Revenue Department priority, we had to bring in additional director liability, when, in fact, in other jurisdictions that was just not the case. I believe that as a select committee we did not look hard enough at the different options from different jurisdictions.

Effectively, voluntary administration allows an insolvent company, the court, or secured creditors to put a company into voluntary administration and to appoint a voluntary administrator. While under voluntary administration there is a stay on creditor enforcement, so the merits are excellent in that it allows a company potentially to trade out of a difficult situation. The administrator manages the company, calls the meetings of the creditors, and develops a restructuring plan on which creditors are able to vote whether they will go forward with that plan or put the company into liquidation. A majority of creditors determine whether the company is restructured or, as I have said, placed into liquidation. That has proven popular in Australia, but only with the Australian tax authority’s drop in priority.

Directors in New Zealand now have a number of unappealing options, and that is why the voluntary administration scheme has been put in place. The options that face them include, first, requesting that the bank appoint a receiver; secondly, appointing a liquidator; thirdly, attempting an out-of-court restructuring—we could count on the fingers of one hand the number of those that happen—and, fourthly, attempting a creditor compromise, which I have already canvassed this evening and said has been very ineffective across New Zealand companies.

In the main, the four options currently available have no prospect of retaining any level of shareholder value. The unsecured creditors do not get paid and, of course, they lose another customer, and employees lose jobs, which is not what we are all about. In contrast, voluntary administration provides directors, shareholders, and creditors with a process that protects the company from enforcing remedies during a reasonably short period. In effect it provides a breathing space for that company to get on with its business or to restructure to allow it to go forward.

During that period the voluntary administrator develops a restructuring plan that potentially allows the business to maintain enterprise value and to deliver a better outcome for creditors, employees, directors, and shareholders. On the face of it, it appears to have merit. In fact, it does have merit—it has been proven in other countries to have merit—but, as I have mentioned previously, the Inland Revenue Department becomes a critical factor in its success or failure. And what have we done as a select committee? Despite all of the evidence, we have left the Inland Revenue Department’s priority status in place. Can members believe it? That is what has happened, and that is why National is voting against it.

In any voluntary administration the Inland Revenue Department is likely to be the significant creditor. Why would that be? Well, one can continue to run a business for some time without paying GST, PAYE, and fringe benefit tax, but it is very difficult to run a business when it gets into a difficult situation without paying the telephone bill and the power account—without paying the core essentials of running a business—because the business will be closed down overnight. But one can get away without paying PAYE, GST, and provisional tax over a period of time.

If the Inland Revenue Department priority is retained, as it has been in this bill, the Inland Revenue Department will be compelled to evaluate its recovery from entering into a voluntary administration versus entering into liquidation. Guess what, every time it will choose liquidation. Remember that if a company is put into liquidation the Inland Revenue Department priority debt ranks ahead of all other unsecured creditors. Under voluntary administration, unsecured creditors will be expected to be treated pari passu—that great legal term meaning to be treated equally—with the Inland Revenue Department. By retaining Inland Revenue Department priority there is a statutory incentive to vote against voluntary administration in favour of liquidation to ensure that the Inland Revenue Department gets better recovery.

As I said earlier, section 6A of the Tax Administration Act ensures that the Inland Revenue Department has a statutory duty to vote for liquidation to ensure that it collects the highest net revenue. If the Inland Revenue Department is compelled to vote against voluntary administration, I cannot see how it will have the success that it has had overseas.

I realise that my time is running out. I could speak for a lot longer on this subject. The National Party stands firm in its corner on the basis that voluntary administration will not succeed without a change in the priority status of the Inland Revenue Department, and that is why we are voting that way.

Tēnā koe, Mr Deputy Speaker. I stand on behalf of New Zealand First to take a call on the second reading of the Insolvency Law Reform Bill. I say from the outset that New Zealand First supports this reform bill. The introduction of voluntary administration brings New Zealand into line with Australia, the United Kingdom, Asia, and Europe. We believe that it is in New Zealand’s interests to adopt a statutory procedure capable of delivering increased returns to creditors from corporate failure. The introduction of similar legislation in Australia saw the immediate take-up of voluntary administration. It is now the dominant proceeding over liquidations and receiverships.

New Zealand First is aware of concerns that the Inland Revenue Department retains its preferential creditor status. If the House gives this issue a bit of thought, rather than react as some parties have done, members will see that there can be no other fair way to go. If other creditors are given precedence over the Inland Revenue Department, then all New Zealanders suffer from the reduction in funds available for services provided by the Government.

New Zealand First is a party that has always wished to protect the New Zealand tax base. We are a party that advocates positive Government intervention on behalf of businesses and exporters. We are pleased to note that after examination of this bill, the Commerce Committee recommended that it be passed, but with some amendments. As a party, New Zealand First campaigned for excellent public health and education. Those things can be provided only by taxation, and the protection of the tax base is in the interest of all New Zealanders. Therefore, we believe that it would be unwise to remove the Inland Revenue Department’s preferential creditor status in the bill.

New Zealand First continues to support this bill, particularly with the amendments recommended by the select committee. We note there is a continued and marked increase in the number of bankruptcies of those we shall call private people—not through a case of their going broke through enterprises they had started up, or through a turn for the worse in circumstances their businesses, large or small, had been involved in, but just through sheer consumerism. They had gone out and spent. Unfortunately, that is something that has become symptomatic for many people here in New Zealand.

The bill is important because it brings into line consistency with other legislation, particularly in the area of the Personal Property Securities Act 1999. It is intended that this bill should be consistent with that particular Act. A number of submitters in the select committee process, we understand, raised some of the differences in terminology between the bill and that Act. The other Act this bill is providing some consistency with is the Companies Act 1993, and I note that the select committee recommended there should be some changes in order to bring the bill into line with the Companies Act. Another Act that this reform bill will align is the Lawyers and Conveyancers Act 2006.

In conclusion, I say that New Zealand First supports this bill in its second reading, notwithstanding some of the comments made by those who intend to oppose it. Kia ora.

Tēnā koe, Mr Deputy Speaker. Tēnā tātou i te Whare. This bill assumes we need change because the current insolvency laws are not working properly and everyone is losing out, particularly with the growing number of businesses going under. So, as with every other issue the Māori Party addresses, we want to look at the bigger picture and consider the changes being proposed here.

In speaking to the Insolvency Law Reform Bill, I would like to paraphrase the words of one of the world’s greatest citizens, Dr Martin Luther King. When the architects of this great land signed up to the Treaty of Waitangi, they were signing a promissory note to which every citizen of Aotearoa was to fall heir: a promise that all peoples of this land would be guaranteed inalienable rights. It is obvious today that New Zealand has defaulted on its promissory note insofar as her citizens of colour are concerned, for instead of holding the sacred obligation Māori have been given a bad cheque—a cheque that has come back marked “Insufficient funds”. But we refuse to believe that the “Bank of Justice” is bankrupt.

We come to the debate on the bill with those words ringing in our ears. How can we say the “Bank of Justice” is pushing Māori to the brink of bankruptcy when so many Māori workers are underutilised, and when the massive levels of unemployment for Māori can be described by the Business Roundtable as both economically wasteful and socially damaging?

Members should make no mistake: like the proposer of this bill, we welcome the introduction of systems for dealing with bankruptcy and the imposition of minimum costs without stifling innovation. But the bigger question remains. An article by the chairman of the New Zealand Business Roundtable in yesterday’s Dominion Post summed the issue up best: “Today the general unemployment rate is down to 3.6 per cent, yet the Maori unemployment rate remains more than 8 per cent, the same as the general rate in 1994. Worse, the Maori youth unemployment rate is a tragic 18 per cent.” Yet how rarely do we hear politicians and commentators saying that that rate is unacceptably high. Well, this is one political party and we are four politicians, but we have been saying for the last 12 months that the rate of Māori unemployment is unacceptably high.

When we look at this bill, surely the most important thing to look at in terms of these changes is how to prevent financial strife from happening in the first place. But our current tax laws themselves are a big part of this strife—too many, too costly, and too clumsy. It is a wonder that more small businesses do not fall over. We need to review our business tax system to help businesses grow, just as we also need to support growth in employment, higher wages, investment, research and development, and innovation. As part of that review we must also ask why the Government insists that it always be first in line to get its money back, while everyone else can wait.

We agree with the amendments to the voluntary administrative regime, whereby a bankrupt company voluntarily puts its affairs into administration to either help save the business or help the creditors get a decent return. But we know that submitters to the Commerce Committee were also concerned that giving the Government first dibs on creditors’ money would make it harder for businesses to agree to the voluntary administration process in the first place, because they would always be second in line.

The Māori Party will support the second reading of this bill because we believe that small businesses will benefit from early intervention and appreciate the help to manage their way through hard times. Initiatives in the bill will help many businesses to stay afloat or wind up, with minimum costs and better returns for creditors, and will allow people to move on. These initiatives will help Māori to enhance their responsibilities, while maintaining an open door to future innovation and growth.

The Māori Party continues to defend Māori rights and advance Māori interests for the benefit of this great nation of ours, Aotearoa. Although things are tough, just like the great Dr Martin Luther King we too refuse to believe that the “Bank of Justice” is bankrupt. Kia ora tātou.

I rise on behalf of United Future to take a call on the Insolvency Law Reform Bill. It is an important bill, because it revises and updates New Zealand law in relation to both personal bankruptcy and company liquidation or insolvency. I think it is very important to put this bill in some sort of context when it comes to companies and insolvency.

It is, I think, very much a public-good goal to ensure as much as we can that when companies that are growing encounter difficulties, we have a method that will enable as many of them as possible to go through that experience and come out the other side without going out of business altogether. Under the current regime, statistics show that companies that go into receivership almost always end up in liquidation. Unlike regimes, for example, in the United States, and in particular under its chapter 11 provisions, and now in Australia with its voluntary administration scheme, our companies do not get a second chance very often to go on and be successful. That is tremendously important, because there are many, many examples around the world of very successful businesses and very successful businessmen or businesswomen who have been through an insolvency or a bankruptcy in their lives. They say it was the lessons they learnt through that experience that gave them the expertise next time around to be successful.

It is much, much more efficient to our economy if an orderly process can be worked through. That is what the voluntary administration, which is at the heart of this bill in many ways as far as companies are concerned, is all about. It is about endeavouring to ensure there is a system in place whereby, through a voluntary process, the directors of the company and others can get together and decide to go through that period of administration. When we look at that from the point of view of creditors, I think the outcome for them is pretty much the same as it is for the Commissioner of Inland Revenue—namely, that creditors want, over time, to have the money they are owed paid to them in full, 100c in the dollar, and also to have an ongoing business relationship with that company into the future. In a very real sense I believe that the interests of creditors, and the interests of the Crown through the Commissioner of Inland Revenue in respect of what is called the Crown priority, are aligned to some extent, and therefore they should, hopefully, act in concert when it comes to voluntary liquidation.

As other speakers have mentioned, a lot of the time at the Commerce Committee was taken up with debating the question of Crown priority. Let me concede immediately that it is true that the practitioners who came to the select committee spoke with some passion about the need for New Zealand to do away with Crown priority. They gave us instances of companies that had gone into liquidation, and only at that point did the creditors who were supplying those companies find that the Inland Revenue Department was owed taxes, such as PAYE, GST, family support, and other payments, some of which had been outstanding for several years. During all that time other creditors had continued to trade with those companies, completely oblivious to the fact that they were heavily in debt and getting further into debt to the Inland Revenue Department week by week.

On the front page of the Dominion Post here in Wellington about a month ago, there was a classic example of that situation. Right on the front page was a story about a well-known woman who ran a number of restaurants in Wellington, including Kopi, a Malaysian restaurant, and several others. Her businesses had gone into liquidation. It was revealed that for a 3-year period—I believe the time was from about 1997 to 2000—those companies had not paid any PAYE, GST, or other payments of that sort over to the Inland Revenue Department, yet the department had let those companies continue to trade. There on the front page of the Dominion Post were the figures, which showed that that group of companies then owed the department about $1.3 million, and all other creditors combined were owed, I think, about $260,000. That was a classic case right here in Wellington that demonstrated the problem with the Crown priority—namely, that it is unfair to creditors who are just completely unaware there is a problem with a company not having paid its GST.

Therefore, the committee gave the matter of Crown priority very, very serious consideration. We went back to the department not once, not twice, but three or four times, I think. Finally, we had the commissioner himself write us a letter, stating in black and white that the department, under this new legislation, would cooperate with a voluntary administration regime. Let me say that United Future, for one, therefore decided to go with the Crown priority, based on the written assurances given to us by the commissioner himself. It will now be up to the department to follow through on that commitment and to ensure that it becomes partners with the other creditors in voluntary liquidations, and that it does not rely on the Crown priority itself to impede, or in any way delay, that process. That will be the test, and only time will tell whether the department delivers on it.

However, in addition to that, I inform the House that we have also, to some degree, moved towards a system somewhat similar to that of Australia in relation to Crown priority. With reference to Crown priority, we set out in our commentary, very clearly, the following words: “Submitters believe this is an unfair and unjust outcome for such creditors. They argue that if trade creditors had been aware of the tax arrears they would, in all likelihood, have initiated a liquidation order themselves at an earlier date, thus mitigating their ultimate loss. Some of us therefore believe that when PAYE, GST, child support, and other similar payments due to Inland Revenue are unpaid for two consecutive ‘payment due’ dates,”—that is, one misses two payments of PAYE or two payments of GST—“Inland Revenue should be obliged to notify company directors of the position. This will ensure that directors are aware of the tax arrears and encourage early intervention, which may take the form of corrective action or consideration of voluntary liquidation.”

I need to say that that was a bit more than just a recommendation from the committee, because we called officials in from the Inland Revenue Department and discussed it with them, and they quite readily agreed they would adopt the practice henceforth. They will revise their manuals, and so forth, so that when two payment periods for GST or PAYE have been missed, they will then notify the directors of that company that the GST or PAYE has not been paid, and they will encourage the directors to address the issue immediately. I think that that is probably not a bad compromise between the complete removal of the Crown priority, which many submitters wanted, and the evidence presented to us that that would probably have been a risk to the Crown revenue. So I think the committee made a reasonable compromise and I, for one, hope we will see that initiative followed through in reality.

Debate interrupted.

The House adjourned at 10 p.m.