Insolvency Law Reform Bill

Part 3 concentrates on the very detailed technical procedures of the duties and responsibilities of the assignee, and how the assignee will supervise where an organisation has gone into liquidation. Part 3 also lays out whom the preferential creditors are. I will concentrate on two aspects of those provisions. I know that the Minister in the chair, Lianne Dalziel, is well known for her willingness to answer queries and address issues, and I look forward to that. A lot of the people who raised the issue, who are actually unsecured creditors, rightly will be quite cynical about legislation that has so many detailed provisions about what an assignee can do, etc. Will the end result be beneficial? Is there anything left for the unsecured creditor after a bankruptcy?

I will share with members a very high-profile case, which is one of the many bankruptcies that happen in a year. This high-profile bankruptcy happened in Wellington to a restaurant called Kopi. What happened is quite interesting. The proprietors owed the Inland Revenue Department $1.2 million in unpaid PAYE and income tax, and also related penalties and interest. The Dominion Post article on this high-profile bankruptcy included an interview with an unsecured creditor, a Richard Young of Molesworth Fruit Supply. He wrote off $28,000 that was owed by the restaurant proprietor, and he reckoned that his chances of winning first division Lotto are higher than getting his money back. I am sure that Richard Young’s statement would be echoed quite frequently by unsecured creditors.

I think maybe the Minister might like to take a call to say that we have gone through all the deliberation stages, and whether there was anything that she felt has been seen as a significant improvement to the legislation whereby the assignee would be better able to look after the interests of unsecured creditors. They are not the only ones who mentioned that winning first division Lotto would be easier than getting any residual money from a bankruptcy.

The other issue I want to return to is the $1.2 million owed by the couple to the Inland Revenue Department in unpaid PAYE, income tax, and penalties. The bankruptcy record shows that the liquidators were appointed on 20 February 2005, but apparently the proprietors stopped paying PAYE deductions from their employees’ pay packets in 1998. They had stopped payment for 3 years. Then, in the tax years ended March 2002 and 2003, they paid only a fraction of their personal income tax, and one of them paid nothing at all in 2002. We all know that failing to pay PAYE is an offence, as is the persistent non-payment of personal tax. I wonder why the Inland Revenue Department had not instigated any action against this couple for the non-payment of taxes for 3 years from 1998.

Part 3 continues to protect the Inland Revenue Department’s secured preferential creditor status, and I think the Minister might like to take a call and say why an entity such as the Inland Revenue Department is so lax in terms of compliance action. We are being asked today, in this Committee of the whole House, to approve this part that includes a provision to continue to protect the Inland Revenue Department’s position as a secured creditor. I emphasise that this is not a single example. A powerful department like the Inland Revenue Department has all the tools at its disposal. If it had taken action to liquidate the company earlier, it might be that the unsecured creditors and other creditors would have benefited from it.

That is not an isolated case. Let me share another case with the public. I am sure that my very good, hard-working colleague from the West Coast, Chris Auchinvole, would join me in citing this case. This is a company on the West Coast that went into liquidation. During the hearing in the High Court at Greymouth, the very, very good mining town, Justice Christiansen described the Inland Revenue Department as lurking in the background like a shark, waiting to consume failing companies. Why did he say that? He said that because this was an attempt by the department to liquidate a possum skin company, called Gray Fur Trading.

Justice Christiansen said that the company owed almost $200,000 in overdue income tax and GST. That is fair enough. But the court was told that almost half of that amount, $100,000, was added on in penalties. The initial debt was closer to $90,000, but it had ballooned since 2003, and the department did not take any action or correspond with that company until October 2004. A powerful Government department did not take action that could have benefited unsecured creditors, and then, on the initial debt of $90,000, it charged $110,000 more to liquidate the company. In the event, nobody benefited. We on this side of the Chamber need to be convinced why the department’s preferential creditor status needs to continue to be protected.

Then, of course, recently the department released a discussion document and said it was going to waive some penalty tax. If a company can prove that it has taken reasonable steps to address or reassess its tax position, the department might be a bit lenient in terms of the penalty test. I do not think it is good enough. I think the fact that National members on the Commerce Committee put up a very strong case for questioning the department’s continued protected preferential creditor status has somehow led the department now to issue a discussion document about being a bit lenient on certain penalties incurred by those companies.

Those two very high-profile examples are not untypical. In fact, they are quite representative of the position, because liquidators, the people involved in the insolvency petitions, have come before our committee and said that lots of times they have felt for the unsecured creditor. They said that the position of companies was aggravated largely because, for example, the department failed to take early action or, alternatively, the department’s preferential creditor position has made sure that it does not take very quick action to recover some of those payments, which do not even belong to the department or to the company because the company is simply a collecting agent.

Part 3 is made up of 10 subparts, but really does not contain a great deal that is new to the Insolvency Act 1967, which this bill is designed to replace. If one looks at the various clauses of all 10 subparts, one finds that most of those clauses simply re-establish the position that was quite clear under the Insolvency Act. So there is not a great deal that I really want to say about this part, and I will just make a couple of brief comments about some of the newer provisions. The first concerns clauses 117 to 121, which provide for various provisions relating to disclaimers of onerous property. I will just pause on those for a couple of minutes and explain what onerous property is about. When an official assignee takes over the affairs of a bankrupt, he or she may make a decision to disclaim onerous property. In other words, the assignee may decide not to take certain steps in relation to an unprofitable contract or in relation to the property of a bankrupt that is unsaleable, if to take on those obligations would create a burden on the official assignee that would be regarded as onerous.

Those provisions are brought across from certain provisions of the Companies Act 1993, particularly sections 269 and 270 about the power to disclaim onerous property. There are a couple of minor changes to clause 117(4). In particular, the definition of onerous property can include: “a litigation right that, in the opinion of the Assignee, has no reasonable prospect of success or cannot reasonably be funded from the assets of the bankrupt’s estate;”. All that means is that if the bankrupt was party to litigation in which he or she was seeking damages, or a declaration, or whatever, the official assignee could decide that the proceeding did not have a reasonable prospect of success so there was no real point in taking it over.

That is really the only thing I want to say about the first subpart of Part 3. I think the provisions are brought together reasonably well, although, for the reasons that my colleagues have advanced, because of major flaws that we see in other parts, we will not be supporting the bill.

Subpart 2 sets out the duties of the bankrupt, and, as I say, largely re-enacts what is already in the Insolvency Act 1967. Subpart 3 outlines, importantly, those provisions that deal with control over the bankrupt during a bankruptcy. There are very real limitations on what the bankrupt can do, once he or she becomes bankrupt, and those provisions include, if necessary, prohibiting the bankrupt from entering or continuing on in business, and seizing the bankrupt’s property—indeed, the bankrupt must vacate land or buildings if required to do so.

Subpart 4 deals with the provision for the bankrupt during bankruptcy. Obviously, the fact that a person is bankrupt does not necessarily mean he or she shall be reduced to being a beggar; the bankrupt may retain certain assets, within reason. That is all dealt with perfectly rationally in that subpart.

Subpart 5—again, nothing new here—deals with the powers of the assignee and the court to examine the bankrupt and others. Clause 182 brings across a provision relating to the privilege against self-incrimination that states: “A person is not excused from answering a question because the question may incriminate or tend to incriminate that person.” Subpart 6 is a very important subpart that deals with the status of a bankrupt’s contracts. It re-enacts those provisions reasonably clearly, explaining what exactly can happen to contracts that may have been entered into by the bankrupt.

Subpart 7, “Irregular transactions before adjudication”, contains one or two new provisions, and the only area I want to pay any attention to is clauses 202 and 203, which deal with insolvent gifts. If a bankrupt gifts something to another person, that gift may be cancelled on the assignee’s initiative if the bankrupt made the gift within the 5 years immediately before adjudication and the bankrupt was unable to pay his or her debts immediately after making the gifts. Those are important provisions designed to get around the prospect of gifting in order to avoid the consequences of bankruptcy.

That is really all I wanted to say. Perhaps I should just briefly say that subpart 8 sets out the very great powers of the assignee once he or she assumes responsibility for the property of a bankrupt. Subpart 9 simply deals with creditors’ claims. I think there is virtually nothing new there; some provisions are brought across from equivalent sections in the Companies Act 1993. Finally, perhaps I should refer to subpart 10 of Part 3, which deals with the powers of the court.

So, really, there is nothing very important in this part that has not been brought across either from the Insolvency Act 1967 or the Companies Act 1993. It is all fairly routine stuff. As I said earlier, we have major issues of principle with Part 5 and Part 8—which seeks to deal with the new concept of voluntary administration—for reasons that will be developed when we deal with those parts. That is why we are opposing the bill.

The question was put that the amendments set out on Supplementary Order Paper 62 in the name of the Hon Lianne Dalziel to Part 3 be agreed to.

Amendments agreed to.