Insolvency Law Reform Bill

I wish to reflect the comments of the chair of the Commerce Committee, Katherine Rich, in an earlier part of the debate on this legislation, in acknowledging the significance of that committee. The Commerce Committee addresses very important aspects of New Zealand life. For those of us on this side of the House for whom business is the lifeblood of New Zealand, the whole aspect of business is important. One could be forgiven for thinking that the significance of business to the present Labour Government, and to its supporting satellite parties, is merely an opportunity to provide a means of distributing wealth from wealth’s creators to the recipients of the present Government’s largesse—those whom the Government considers to be more deserving of getting the money than the workers who earn it.

Indeed, I think this is a most pertinent time for Labour to consider the Insolvency Law Reform Bill, as it has been suggested to me that one of Labour’s major concerns at the moment is its likely insolvency if it is obliged to pay back the election pledge card money, which was drawn from the tax take as if it were the property of the Labour Party. It was certainly spent as if it were. Oh for the days of President Harry Truman, who famously displayed on his desk a sign that declared: “The buck stops here!”. I guess one could be forgiven for thinking the present administration has a sign that says: “The buck stops over there, or anywhere, or everywhere, but not here.”

The select committee works in the best interests of commerce—not just the good bits, but the bad bits, and also the sad bits. It is a reality that from time to time businesses falter, and stumble into failure. On those occasions there is a group of very skilled people—and we were privileged to meet a number of them at the select committee—who are insolvency practitioners. They are required to bring a semblance of order or closure to businesses when they go into difficult times. We often hear quoted a “new business failure rate”, but sometimes it is quite illusionary to concentrate on that, because the activity that the new businesses have been engaged in are often carried on. Even though the original company has failed, the activity is often carried on by other companies.

The present change to the law looks at voluntary administration, which is a new system, and I will speak about that in a moment. It effectively puts a stay on creditor closure when companies get into a difficult situation. It looks at establishing administrators who can restructure companies, working on the basis of the agreement of a majority of creditors. It is certainly an excellent idea, and certainly better than the four systems we presently work with. It allows a sensible and mature approach to company difficulties.

However, the Insolvency Law Reform Bill is borrowed legislation. It has been taken from Australia. The voluntary administration part of it is essentially a good means of allowing a company to recover from an insolvent situation through effective, appointed administration, given the approval of at least 50 percent of a company’s creditors who are owed at least 75 percent of the debts. Those creditors would have to approve any plan for voluntary administration. So it is not a device that a company can use to shelter in, hide under, or avoid its true responsibilities. It is a good system, and it is an Australian one.

To make sure that the administration is untrammelled, it embodies a requirement—and I think that this is a significant point—to take away the pre-emptive rights, or priority status, of the Government, with regard to repayment. I am sure that the members on the benches to my left will be really gripped with this bit. At present in New Zealand the Inland Revenue Department uses a priority that in the case of it being owed at least 26 percent of the debt, it would be able to defeat any plan for voluntary administration. As a preferred creditor, the department would receive the proceeds of liquidation before unsecured creditors, but in a voluntary administration it would receive the same proportion of what it was owed as other creditors. That is a major change.

The other special quality associated with the Government is that the Inland Revenue Department is in a special position, in that it has access to company information well beyond that available to other creditors. In the Australian jurisdiction, as well as the priority being removed, an added responsibility is also imposed on directors. In the event of a voluntary administration being called for by Government tax agencies, directors are obliged to respond to the requirement within a specific period or take full liability for the company’s debts.

Those two parts of the Australian legislation were presented to us at the Commerce Committee and were seen as being in tandem. I am not quite sure why they were seen as being inseparable by some Labour members of the select committee, but that is how they were seen by those members.

For myself, I recall raising the point that if we wished to stick to the true spirit and purpose of voluntary administration, then I had a little difficulty with the aspect whereby if a company did not want to accept it, it became punitively compulsory. I could, though, easily understand how the withdrawal of priority to the Government could give good effect to a voluntary administration system. Let us remember that this system works for the majority of companies and their creditors, and the difference between it and normal liquidation or bankruptcy is that it allows a period of administered control, so that the company can get back on its feet. That is certainly to the advantage of the creditors in the long term, and to the business of New Zealand in the long term, as well.

There were two occasions during my own business career when I had problems of certain complexities, when customers were clearly getting into financial difficulties. Like many other small business operators in New Zealand, I underpinned my operation with a mortgage on my home. If the business part failed, we were not just out of a job; we would have been out of a home, as well. So business carries with it a fair level of personal responsibility and anxiety. Running a business is a risk, but I was in it on the basis that the buck stopped with me, and that my creditors would be safe. I can tell the House that I know which system I would be happier with—voluntary administration or liquidation? Give me voluntary administration any day!

The Labour members were fine towards voluntary administration until it came to the crunch of making a tough decision. The Minister of Commerce, the Hon Ms Lianne Dalziel, in speaking to the bill earlier, cited her reluctance to adopt a loss of priority for the Inland Revenue Department. Her reluctance was caused by the tandem requirement in Australia for directors to accept personal responsibility for debt levels, if they failed to use voluntary administration after being advised of clear problems by the department.

On the select committee, Labour member Shane Jones was particularly emphatic that he felt that the present structure of director protection from personal liability should be protected. If I can remember the phrase he used, he said that we should avoid “piercing the corporate veil”. I think it is highly commendable that Labour’s Mr Shane Jones expressed such a view. It is a view that other Labour caucus members, trade unionists, and Labour supporters would normally associate with a National policy. Perhaps Shane is positioning himself as a better choice than the Hon Trevor Mallard as Labour’s sub for the Hon Dr Cullen as Minister of Finance.

These changes are probably perceived as dealing with the reality of a situation of insolvency. However, I wish to voice concerns about the direction that our situation of credit, debt, and insolvency is going. Although on the one hand we have a Labour-led Government that boasts we have a debt-free Government, we have domestic and personal debt levels that our grandparents would have been appalled by. We have a prediction that changes in investment practices could affect the flow of investment dollars into New Zealand. “Maybe we will not have a soft landing.”, is what economists are now saying, so what will happen to personal debt levels?

I read this morning an article by Allister Heath in the August issue of The Spectator on the effect of lenient bankruptcy rules introduced into the UK 2 years ago. The article states: “… insolvency [has become] a lifestyle choice for tens of thousands of feckless consumers.” Corporate bankruptcies in the UK have declined by 3.3 percent over the past year under the sort of legislation we intend to introduce here, but personal insolvencies, which follow on, have surged forward by 66 percent. There has been a surge of specialist growth in individual voluntary arrangement advisers—people who advertise widely. In New Zealand such a development will be a natural and an inevitable consequence of an easy credit arrangement.

To conclude, I say I am disappointed that we have failed to grasp the nettle of bringing in full insolvency changes. We have not grasped the nettle firmly enough, so our commercial communities will continue to be stung. Thank you, Mr Assistant Speaker.