Insolvency Law Reform Bill

As will be apparent from the material before members, National has some real difficulties with this bill. There is no doubt that it was well-intentioned legislation and I think it is always a tragedy when commercial legislation of some significance does not attract support across the Chamber. Clearly, it was intended that this legislation have that support.

I simply note, in dealing with Part 1, that the concerns of National are set out in a minority report that appears in the commentary on the bill. It is noted there that National opposes the bill, and in saying that the bill is being touted as the first major review of company and personal insolvency law in four decades, those members of the National Party who participated in the deliberations of the Commerce Committee enter their reservations. Those reservations are substantially centred on the concept of voluntary administration, and we also have reservations in respect of the no-asset procedure. There will be an opportunity to talk on those two issues later in the context of the legislation.

It is interesting to reflect on why it was seen as necessary to change the title from “bankruptcy” to “insolvency”. Bankruptcy has a very settled meaning—a meaning that is well established in history—and insolvency is somehow seen as a softer and in some sense a more kind word. Bankruptcy, which is of course what insolvency is, is a legally declared inability or an impairment of ability of an individual to pay his or her creditors. It can arise in two main ways. First of all, a declared state of bankruptcy can be requested by creditors, in an endeavour to recoup a portion of what they are owed, but in the overwhelming majority of cases, the bankruptcy is initiated by the bankrupt individual or organisation.

I have said that this concept of insolvency has a long history. Without getting involved in that history to any great extent, it is interesting that in the Old Testament, Moses’ laws prescribed one “holy year” that should take place every half a century when all debts were eliminated amongst the Jews, and all debt slaves were freed due to the heavenly command. Of course, in Ancient Greece, as the Minister in the chair, the Hon Lianne Dalziel, nodding wisely, will know, bankruptcy did not exist. If a father owed—and since only locally born adult males could be citizens, it was fathers who were legal owners of property—and he could not pay, his entire family of wife, children, and servants were forced into what was called debt slavery until the creditor recouped losses via their physical labour. Many city states in Ancient Greece limited debt slavery to a period of 5 years, and debt slaves had protection of life and limb, which regular slaves—mostly war prisoners—did not enjoy.

Finally, just on these historical matters, and I will be able to deal in greater substance with other parts of the bill at later calls, the word “bankruptcy” is formed from the ancient Latin “bancus”—a bench or a table—and “ruptus”, which means broken. A bank originally referred to a bench that the first bankers had in public places, in markets and fairs, on which they tolled their money and wrote their bills of exchange—that type of activity. So when a banker failed, he “broke his bank” to advertise to the public that the person to whom the bank belonged was no longer in a position to continue his business. This practice was very frequent in Italy, and it is said that the term “bankrupt” is derived from the Italian “banca rotta”—a broken bench. But enough of that.

Part 1 covers, in a preliminary way, some key provisions and I will turn to those now. First of all, clause 3 has interpretation provisions, and possibly of some relevance is the definition of “current summary instalment order”.

It is my pleasure to rise to speak to this Insolvency Law Reform Bill, and to have been on the Commerce Committee during the progress of this bill—which the previous speaker was not. I would like to get to the point of the National Opposition’s minority view on this bill, because there was much more unanimity on this bill around the select committee table than would be indicated by National’s blanket opposition to the bill as it stands.

There were two points on which National decided to oppose this bill just for the sake of it. One was to do with the issue of voluntary administration and it hinged around the creditor status of the Inland Revenue Department. This status means that when a company goes into liquidation or elects to go into a voluntary administration regime, the department has the first call upon the moneys owing. I will explain, in case members opposite do not understand the significance, just what that means in practical terms.

First of all, the department’s priority status is absolutely essential. If workers in a company that is going under are to receive the payments due to them, the department has a claim on PAYE, GST, child support payments, and other welfare payments that are due to it. It seems to me that it is right and proper to retain the department’s creditor status in order to ensure that the moneys due—as those moneys are—are not misappropriated by companies and allowed to be used to pay for other things. We did hear examples of companies that have not paid PAYE, but have banked that money for 1, 2, or 5 years, and have used it to employ additional staff. That is not correct by any yardstick or measure.

Those were particular examples, but there is a general principle at issue as well—that is, the department has entitlements that must be observed. When we looked into some of the examples, we found that the department could perhaps improve its processes. Even by its own admission it said it could improve its processes for extracting the entitlements that are due. So we tightened up provisions in this legislation to ensure that where payments due were defaulted on for two pay periods or more, they were then brought to the attention of the directors, so that the directors did not go on blindly with the default position and not pay the due entitlements. That is an example of a particular application of the department’s creditor status.

Beyond that, and I alluded to this earlier, is the general principle of the Inland Revenue Department’s creditor status. The department is required by law to make sure that it receives the entitlements due to it—and that is the basis of the department’s priority—so there is no reason for the Opposition to oppose this bill on that count.

In speaking to the Insolvency Law Reform Bill, I would like to make some comments in rebuttal of the previous speaker’s concentration on the Inland Revenue Department’s status, and, in particular, the priority in relation to wages. The Inland Revenue Department’s four-pronged priority status remains—it is not just in relation to wages but also to GST and withholding taxes. It is interesting to note that the Law Commission report itself recommended abolition of this priority, yet for some reason the bill retains it. If we look at some of the criticisms made in commentary relating to the Inland Revenue Department’s priority status, we see that they include such comments as: “New Zealand’s decision to retain the Inland Revenue priority is out of step with Australia and the United Kingdom, offends the pari-passu principle and could be seen to incentivise inefficient tax collection. For these reasons alone, the decision to retain the Inland Revenue priority is a poor policy decision and should be revisited.” Yet that seems to have been ignored in this bill.

It has been commented that the policy decision in relation to the Inland Revenue Department requires consideration because it conflicts with the goals of introducing a business rehabilitation regime and harmonising trans-Tasman business laws. Unless reconsidered, the Inland Revenue Department, voluntary administrators, and general unsecured creditors will have great difficulty in effectively implementing the new voluntary administration procedure. Some have said that while the Inland Revenue Department still has preference the voluntary administration will be a waste of time. One of the questions that has been raised is why an administrator would bust a gut to trade a company out of trouble just so that it can pay the Inland Revenue Department. In fact, one of the final verdicts on voluntary administration is that it will create a new dimension for the insolvency industry, but it will not be a panacea.

The main problem with insolvency, as we all know, is that there is rarely enough money to pay all the creditors everything they are owed. Insolvency law provides a system that kicks into place in the event of financial failure, and if we look at why businesses or people become bankrupt or insolvent, or go into liquidation, we see that it is not all because of reckless or irresponsible trading. According to 2004-05 figures, about 3,000 people filed for bankruptcy that year. Of those, 15 percent attributed their bankruptcy to the excessive use of credit facilities, extravagance, gambling, or speculation; 35 percent to unemployment or loss of income; 10 percent to relationship breakdowns; another 10 percent to ill health or absence of health insurance; and the final 10 percent to adverse legal action or the incurring of liabilities due to giving personal guarantees as collateral for bank loans or failed businesses. Personal guarantees, as we well know, are often secured by way of collateral mortgages, and therefore such guarantors do not rank as unsecured creditors and do not have to line up in the queue.

With any financial failure there is only so much money to go around, and not all creditors will get their money back. Some are secured and are the lucky ones; others need to line up and get a proportion. Under this bill the new voluntary administration procedure is introduced, and this is one of the most significant reforms in the bill. It is not unlike the receivership provisions we have in existence at the moment. Some of the problems that often surround receiverships are the cost of those receiverships and the stigma attached to them. It is not unlikely that a stigma will also be attached to voluntary administration under this new regime.

Under the bill, when a company enters into voluntary administration an administrator is appointed to operate the company. Again, that is similar to a receiver under the existing receivership rules. The administrator reports to creditors and, at the end, holds a meeting of creditors to determine whether the company shall be liquidated, returned to the directors, or be entered into a restructuring plan. There are similarities with the receivership regime, but under this new bill the deed of company arrangement requires approval from 50 percent of creditors receiving 75 percent of the value of a company’s debt. Effectively, this means that a creditor holding 26 percent of that debt can quite easily defeat that deed of company arrangement, which in effect defeats the liquidation. If the Inland Revenue Department, for example, were that creditor, then it would be able to defeat any plan for voluntary administration. As a preferred creditor, it is also able to receive the proceeds of liquidation before unsecured creditors.

The Australian experience, which has been used as a comparison in many cases, indicates that most companies entering into the voluntary administration arrangement are in fact subsequently liquidated. However, the argument in favour of it is that it may provide a more orderly liquidation and the opportunity to negotiate with creditors. In theory, it allows the directors to refocus from, if you like, the firefighting to active business improvement, so that the company may then be able to trade out of its difficulties. But it is certainly not the panacea that the bill purports it to be. The Inland Revenue Department’s four-pronged priority is certainly an issue we take issue with, and on that basis National is opposing this bill.

I would like to speak later in relation to the no-asset procedure scheme, but I am aware of the time restraints and I will let my colleagues take further calls on this part of the bill.

Insolvency laws are fundamental to the efficient operation of the State and, indeed, they have been with us since time immemorial. Under the Roman law of the Twelve Tables creditors might, as a last resort, cut the debtor’s body into pieces, each of them taking his or her proportionate share. Even among the Jews, whose legislation was of a comparatively humane character, the harshness of bankruptcy law was illustrated by the Old Testament story of the woman who sought the help of Elisha, saying: “Thy servant, my husband, is dead; … and the creditor is come to take unto him my two sons to be bondmen.” I am not suggesting that we have provisions like that in this legislation—and indeed we do not.

The Insolvency Law Reform Bill is a reform of the 1967 legislation, and let it be stated quite bluntly that, without doubt, insolvency law reform is much needed. Personal bankruptcy laws are currently set out in the 1967 Insolvency Act, and they were developed at a time when bankruptcy laws affected more the individual trader. But modern personal bankruptcy tends to be consumer debt - driven, and certainly this legislation recognises that shift in society.

Certain parts of the legislation, I think, are positive, but the bill founders for the reason that National speakers have said—that is, that the centrepiece of the bill, as the minority report says, is voluntary administration. That is the real heart of the new legislation, and the voluntary administration scheme, which will replace, as the minority report says, the seldom-used compromise scheme—and I know from my time in practice that it was very seldom used—will not work, because of the issue of the priority status for the Inland Revenue Department. As the minority report says, unless the Government can address that issue, the voluntary administration scheme will be severely compromised. That is why we in the National Party are going to have to divide the Committee on those issues.

That is a shame because, as I said, there are some major amendments that are worthwhile. There is amendment of the voidable transaction provisions; amendment of the liquidation provisions of the Companies Act to counter perceived abuses since that Act was passed in 1993; introduction of rules and prohibitions on the use of phoenix companies; modernisation of the laws of personal insolvency—and when we come to Part 2 on the procedure for declaring people bankrupt I will say something about what I think are useful improvements there; as my friend Ms Wilkinson also said, introduction of a no-asset procedure for individuals; and, what I find particularly interesting, concerning what I call the conflict of laws issues of bankruptcy, introduction of the model law on cross-border insolvency.

But if National is to support the bill, the issue of the Inland Revenue Department priority will need to be addressed. I went back and looked at the Law Commission’s 1999 paper, which dealt with some of these issues. In particular, the 1999 report dealt with priority debts in the distribution of insolvent estates. The Law Commission recommended that the priority given to the Inland Revenue Department should not remain. It recommended abolition of the priority for GST, customs duties, and levies under the Fisheries Act and Radiocommunications Act, and it recommended limiting the PAYE priority, but only to PAYE in respect of unpaid wages. It recommended that unpaid PAYE relating to previously paid wages should not have priority, and that the priority should be retained in certain limited circumstances. So the Law Commission was in favour of that. Moreover, New Zealand’s decision to have this model of legislation is out of step with both Australia and the United Kingdom, countries with which we have very close legal and trading relationships. For reasons that I will develop later in the debate, this model offends the pari passu principle, and really, as I will say later, incentivises inefficient tax collection. So it is a poor policy decision. It needs to be revisited. There were opportunities during the select committee hearings to look at those issues, and they were not looked at. As a result of that, the legislation is flawed. The Inland Revenue Department’s priority will severely erode the effectiveness of the new voluntary administration procedures.

Those are preliminary comments; as we get into the substance of the parts, I can deal with some of those arguments in detail. But I say in closing that it is a shame that after 40 years—when there is a major need for insolvency law reform because the business laws of our country need to be kept up to date—and after all this time and all this work, a couple of provisions in this bill will render it inefficient and impractical law, and that is why National is opposing it.

I rise with pleasure to take a brief call on the Insolvency Law Reform Bill. I listened with interest to the previous speakers, Kate Wilkinson and Chris Finlayson, and I thank Chris very much for the history lesson around the earlier ways of solving insolvency difficulties. I am pleased that the legislation as proposed by the Labour Government does not include some of those more historic means of sorting out these problems.

I think it is a shame that National is in a position whereby it has to oppose this legislation. Law that has been on the book for such a considerable length of time clearly needs to be revised, and it is a pity, because a reasonable idea around voluntary administration has actually been corrupted by this legislation, which is basically incompetent. The legislation introduces voluntary administration, which is a process used widely around the rest of the world, but it will fail in this country because the submissions to the Commerce Committee have been largely ignored, despite the fact that the committee did not receive a lot of submissions—there were 11 submissions only. I understand from National members on the select committee that they were significantly in support of the principle of voluntary administration but said that where it will fail is in the greed of the Government and the Minister of Finance in maintaining the priority status of the Inland Revenue Department.

I think the Minister in the chair, Lianne Dalziel, should take a call in the Committee stage and tell us what other countries around the world have established insolvency legislation incorporating voluntary administration while still retaining the priority right of the revenue department of that country to get the first claws on the money. I would be grateful if the Minister would answer that question, because I suspect the legislation is before the House, with special preference being maintained for the Inland Revenue Department, for no other reason than the Minister of Finance being able to come in at question time and crow about a Budget surplus of $11.5 billion. Surpluses of that magnitude, it seems to me, are one good reason why, in this legislation, the Minister in charge, Lianne Dalziel, could have given thought to accepting the work of the select committee and the well-researched, well-regarded submissions received by the committee acknowledging that voluntary administration could work and, in fact, would work if the principle of priority status being given the Inland Revenue Department were removed. That is the major point that I want the Minister to take a call on.

It is all very well for the National members of Parliament to come in and work hard at opposing the bill in the Committee stage, but a Minister who either does not understand the legislation or just cannot be bothered answering the questions legitimately raised by National members is, frankly, not good enough. So I say to the Minister that she should give us a very simple answer to the questions I have raised. Which, of the countries where voluntary administration works, and works successfully, have maintained a preferential status for the revenue department of those countries? That is the essence of the debate. That is the reason the National Party finds itself having to oppose the legislation. It simply will not work practically or fairly, because of that preference being retained by the Inland Revenue Department.

As we debate this bill it is important to look at the history behind the legislation, which has been thoroughly exposed by some of our great members with legal minds, and also some of the reasons why one would want to have legislation such as this. When one puts such strength and urgency on the Inland Revenue Department’s ability to retain first call on the money, the question must be raised that David Carter just raised: why would one want to do that? It is quite simple. The Government wants to retain these huge Budget surpluses so that in election year it can have a big spend-up to buy the votes of ordinary New Zealanders. It has done that before and it will do it again. This is just another example of the tax-and-spend Government we have here today.

But there is another reason the Government wants to build up finances: so that it can pay for its election campaigns. Today we have seen evidence of that in the Auditor-General’s report. It is good that we have the former president of New Zealand First, Doug Woolerton, in the Chamber to make comments about the Government’s spending. Look at this. New Zealand First took $90,540 in 2005 and $59,906 in 2006. A total of $150,446 of hard-working New Zealanders’ money went to those guys so that they could sit in those cushy chairs. That is what this legislation is about. It is about raising money. It is about paying for their own election campaigns, and that is shocking.

💬 Hon David Carter: It is corruption.

It is corruption, corruption on a grand scale across the whole of that side of the Chamber. But when one has that corruption one has to look at the reality of what this bill actually means for individuals out there who are dealing with high credit. We have a Government that has provided an economy that has high interest rates and a high exchange rate. That has encouraged people to buy a lot of consumer goods—all that increase in availability of credit. The student loan scheme is another example. It is teaching the wrong lessons to young New Zealanders about the availability of credit. Kiwibank will loan 100 percent of mortgages. Those kinds of things open credit availability for ordinary New Zealanders, and that is when people get into trouble, and that is when they need legislation that looks after them and looks after the companies and individuals who supply money to them.

If one walks down the streets of New Zealand, these clothes traders are quite obvious—basically, trucks that go around selling very expensive clothing in the poorest areas of our country. It is very difficult to see how a Government can allow that kind of increase in personal debt, and at the same time allow the Inland Revenue Department to have first preference over ordinary New Zealanders who have high debt levels. What have those New Zealanders got? They have a Government that looks after the Inland Revenue Department, and does not attack the high debt that gets those New Zealanders into trouble. If they did not have this high debt, they would not need legislation such as this. But, no, this Government is quite happy to let that happen, because it does not care about those people. It knows best. It knows so well that it does not even follow the international examples. It is willing to walk away from the Australian example.

That is why National members are opposed to this bill. There was the ability for this Government and this country to have taken on board some of the lessons learnt internationally—lessons in regard to voluntary administration, and lessons that would enable all New Zealanders to work a way out of any problems they may encounter.

The CHAIRPERSON (Hon Clem Simich): Would the member please come back to clauses 3 to 6.

💬 Hon Clayton Cosgrove: What clause is the member on? Tell us.

Clause 3, “Interpretation”, clause 4, “Rights and powers under other Acts not affected”, and clause 5, “Act binds the Crown”. Well, an Act binding the Crown! That would be an unusual thing in this Parliament, would it not? Imagine if those members were actually bound by something in legislation! They would just change the legislation. Why bind oneself; just go and write another one a year later! They do not need to be bound by legislation. I thank those members for allowing us to look at the binding of legislation.

💬 Chris Tremain: Retrospective!

Yes, let us just do retrospective legislation. That will keep everyone happy. But do these guys want us to go through how the Act will bind the Crown? Clause 6 explains that corporations and other entities are not subject to this Act.

I rise to speak to Part 1 of the Insolvency Law Reform Bill, but before I do that I will just outline the legislation that is the key reason why National is not supporting the voluntary administration regime. It is section 6A of the Taxation 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 …”—and Mr Woolerton might want to listen to that little clause again, because he obviously was not listening. It is section 6A of the Taxation Administration Act, which he probably has not taken much time to read during his time in Parliament. That is a very important point, because it sets the Inland Revenue Department’s priority to collect, above all others, what is owed to it in terms of PAYE, GST, and various other things. Section 6A of that Act outlines the department’s statutory obligations, which lie at the very heart of why National will vote against this bill.

Voluntary administration lies at the very heart of this bill. In fact, voluntary administration has been introduced under this bill in accordance with New Zealand’s obligations—and this may be news to Mr Cosgrove, as well—under the 2000 Memorandum of Understanding on Coordination of Business Law. In a nutshell, National believes that voluntary administration has significant merit, but only under the right conditions, because it is only with the Inland Revenue Department having it on a level playing field with non-secured creditors that voluntary administration will work.

National believes that the retention of the Inland Revenue Department’s priority status above unsecured creditors, coupled with the responsibility to collect over time the highest net revenue that is practicable within the law, will ensure that the department will be in favour of liquidation and recovery for itself as opposed to supporting voluntary administration. We believe that without the department’s support, voluntary administration is doomed from the start, which is why we do not support this bill.

The minority view from National states: “All the submitters on [the voluntary administration] provision were unanimous in their view that unless the Government addresses the issue of the priority status for IRD, the voluntary administration scheme will be severely compromised.” It goes on to state: “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 the Inland Revenue’s priority status.”

Let us review some of the merits of voluntary administration. As I said to Mr Cosgrove, when I enlightened him on this legislation, voluntary administration was introduced under the 2000 Memorandum of Understanding on Coordination of Business Law. It aimed to replace the seldom-used compromise scheme already available to companies in financial distress. A lack of incentives to get a majority of creditors to consent to a compromise has been the reason for the lack of use of that part of the older legislation.

Voluntary administration was introduced in Australia in the early 1990s. It has had some degree of success there, largely because the Australian office of taxation has had its priority status reduced—and we will talk about the reasons why that was able to happen over there later on. Many other jurisdictions have now introduced it. I think that is one of the reasons why we did not look at some of the other jurisdictions, such as the United Kingdom, where voluntary administration had been introduced without increasing director responsibility or liability, which is what happened in the Australian model.

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 the company is under voluntary administration, there is a stay on creditor enforcement. I think that is a key point, because the voluntary administration process allows a business to trade out of a difficult position and gives it time to review its profitability and its ability to trade out, and to restructure its balance sheet and move on. The administrator manages the company, calls meetings of creditors, and develops a structuring plan on which creditors are able to vote. A majority of creditors determines whether the company is restructured—

I move, That the question be now put.