Insolvency Law Reform Bill

The substantial issue in Part 8 is the introduction of a very positive move known as voluntary administration. The voluntary administration scheme was introduced in Australia in the early 1990s. Since then many different jurisdictions, such as Britain, have introduced similar business recovery procedure schemes. The voluntary administration scheme’s advantage is that it allows an insolvent company, the court, and secured creditors to put a company into voluntary administration and to appoint an administrator. While the company is in voluntary administration, the creditors agree not to enforce repayment, which allows time for the company to work itself back into a solvent state.

All the submitters who came before the Commerce Committee felt very positive about that step, because currently in New Zealand we do not have a voluntary administration procedure. This means that the director of a company that is not doing well can only either request the bank to appoint a receiver, which usually means that the receiver sells the business and, in many cases, the bank calls on the director’s personal guarantee—there is no prospect of maintaining shareholders’ value, and the creditors lose a customer—or a liquidator can be appointed, where usually, once again, trade creditors lose a consumer, and the shareholders’ value is not maintained, or there is out-of-court restructuring. This is difficult, because out-of-court restructuring requires all the creditors to agree on a position, and if even one creditor is opposed, then the whole thing will not fly. The last option is rarely used and is termed a creditors’ compromise, because of the fact that there is no provision that while creditors agree to compromise, all of them would agree not to call back their loan.

So the advantage of the voluntary administration scheme is that it allows all these people to work together in order to make sure a company that might be in a difficult situation temporarily can work itself out of it. The reason it is successful in Australia is that where creditors agree to go into this voluntary administration, they all have to agree to be treated equally. Nobody has a preferential status. That is where things went very wrong in New Zealand.

The Inland Revenue Department will retain its preferential creditor status, which it has under the current legislation. One hundred percent of the submitters who came before the select committee said that it would not work, for several reasons. The first was that they reckoned that a lot of companies got so far into an insolvent state because the Inland Revenue Department did not call on them to pay, for example, PAYE, GST, or the liable-parents’ payment. That money does not belong to the company or to the Inland Revenue Department; it is actually trust money that the company collects and is supposed to pass on to the department. In one of the cases that I have just shared with the public, one company failed to pay PAYE for 3 years, and it took the department 3 years to take action. In the meantime the company was using trust money, basically, for its cash flow. The other reason submitters say the scheme will not work is that if the department enjoys preferential creditor status why would it agree to voluntary administration, where it would not enjoy that status? Officials from the Inland Revenue Department made a submission to the Commerce Committee and told us that under this preferential creditor status that the department enjoys, it collects only about $5 million a year. So if this Labour Government is serious about making it work, it should remove the department’s preferential creditor status.

I rise to speak to Part 8 and I would like to touch on an amendment that I have put on the Table. It arose out of the select committee process but was ignored at that stage. Although I totally agree with the role of business rehabilitation and the aim of voluntary administration, one of the concerns raised by one of the leading accountancy firms was that one of the definitions we have of who can and cannot be a liquidator is far too wide. As a result I have spoken with representatives from PricewaterhouseCoopers, and they continue to hold the view that one of the provisions, new section 280(1)(cb), which is to be inserted by clause 471(1), is written so widely that some of the major accountancy firms could actually be blocked from doing some of the larger and more complex liquidations in this country.

We are a small country, we have only 4 million people, and our major firms will have established often continuing business relationships with a number of clients. I totally understand the aim of defining who can be appointed to be a liquidator, because we do not want some cowboy or someone who has a super-friendly relationship with the company directors and who can, as a result of good relationships, push things through for the benefit of the failed company, but we do need to be able to ensure that our major accountancy firms are able to conduct their work.

New paragraph (cb) of section 280(1) states: “(cb) a person who has, or whose firm has, within 2 years immediately before the commencement of the liquidation, had a continuing business relationship (other than through the provision of banking or financial services) with the company, its majority shareholder, any of its directors,”—and this is the main bit—“or any of its secured creditors, unless, within 20 working days before the appointment of a liquidator, the board of the company resolves that the company will, on the appointment of the liquidator, …”. The concern is that our major accountancy firms may or may not have a continuing business relationship with some of the other creditors involved in the liquidation, but they do have an ongoing business relationship with the main banks. For example, the liquidation arm of PricewaterhouseCoopers may be involved in a liquidation, but that firm may be providing to one of the major banks ongoing business services, advice, or some kind of service that means the firm has a continuing relationship with the bank, which is, of course, one of the secured creditors.

We have only a certain number of major firms in this country that can do the kinds of liquidations that are more complex and take more time—not the small mum and dad liquidations—and we have only a handful of banks. So if we look at all the major firms, the chances are that they will have an ongoing business relationship with a bank that is likely to be one of the secured creditors in many of these situations. The last thing we want to do is limit the pool of skilled and experienced professionals who are able to undertake the medium to large, complex liquidations in this country.

This clause may have the unintended consequence of locking out those firms that have the expertise to deal with the big liquidations—the Feltex liquidation, and the other liquidations that we have seen in this country. We are not so concerned about the small, mum and dad operations, which can be dealt with at arm’s length. It is the more complex ones where we rely on the skills and expertise of our top firms that are at issue.

As we know, there are only a handful of banks in this country and they will have continuing business relationships with the top firms—PricewaterhouseCoopers, Deloitte, Anderson Lloyd Caudwell—and I am sure that the Minister in the chair, Pete Hodgson, knows their names. This is a serious concern that was put forward by those firms during the select committee process, and I am unsure as to why this matter was ignored during that process.

Thank you, Mr Chairperson, for the opportunity to speak on Part 8, and to talk specifically about voluntary administration, which is at the heart of this legislation. Voluntary administration provides a company that is experiencing difficulty with a new means to trade out of that position. Indeed, it is a means of encouraging that company to move on. In that regard I echo the thoughts of both Pansy Wong and Katherine Rich. National supports the intent of voluntary administration and acknowledges that it has worked in other countries. But—and I say a big “but”, in this regard—it has worked only under certain conditions.

The key condition, which is where National finds itself voting against Part 8, is the priority status of the Inland Revenue Department. In all other countries where voluntary administration has been implemented, the priority status of the Inland Revenue Department has been reduced to that of ordinary, unsecured creditors. In fact, this information was clearly disclosed to us at the submission process, in no uncertain terms. A piece from the Chapman Tripp council newsletter states: “The recent submissions to the Commerce Select Committee on the Insolvency Law Reform Bill almost uniformly sought amendment of Inland Revenue’s preferred creditor status on insolvency.” So the submissions almost uniformly sought amendment of the Inland Revenue Department’s priority status. That point goes to the very heart of National’s position, which is to vote against Part 8.

Let me explain exactly why that is. Another Act, the Tax Administration Act, gives the Inland Revenue Department a clear sense of its responsibility to the New Zealand taxpayer. In particular, I refer to section 6A(3) of that Act, which makes it clear that it is the statutory duty of the Commissioner of Inland Revenue to “collect over time the highest net revenue that is practicable, within the law…”. It is the responsibility of the Commissioner of Inland Revenue to implement that policy. So we have a situation whereby in one Act it is the responsibility of the Inland Revenue Department to collect, under all circumstances, the highest amount possible, yet, in another breath, this legislation tries to implement voluntary administration where the Inland Revenue Department needs to be a partner in that situation. In our opinion that creates a very difficult situation indeed.

Voluntary administration lies at the very heart of the Insolvency Law Reform Bill. In fact, voluntary administration has been introduced under the bill in accordance with New Zealand’s obligations under the Memorandum of Understanding on Coordination of Business Law of 2000. I would be interested if the Minister took a call later on and gave us a little bit more information on that memorandum.

In a nutshell, National believes that voluntary administration has significant merit, but, as I have said, only under the right circumstances. National believes that the retention of the Inland Revenue Department’s priority 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 Inland Revenue Department votes in favour of liquidation and recovery for itself, as opposed to supporting voluntary administration. Therein lies the problem. We believe that without the Inland Revenue Department’s support, voluntary administration is doomed from the start, and that is why we do not support the bill.

The minority view from National reads as follows: “All the submitters on this 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.” That view echoes the Chapman Tripp newsletter that I mentioned before. The minority view 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 Inland Revenue’s priority status.”

Let me just cover a little information on voluntary administration. It was introduced under the 2000 Memorandum of Understanding on Coordination of Business Law. [Interruption] I am pleased to hear that the Minister will take a call on that later on, and speak with a little bit more depth on that particular memorandum. It aims to replace the seldom-used compromise scheme already available to companies that are in financial stress. A lack of incentives to get a majority of creditors to consent to compromise has been the reason for the lack of use of that part of the older legislation. Voluntary administration was introduced into Australia in the early 1990s, and it has had a degree of success there. But I must say, as I have said earlier, that that success came with the priority status of the Australian office of taxation being reduced.

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, which is the means with which a company can trade itself out of a difficult situation. It stops that ongoing situation of creditors ringing day after day to hound people into paying their bills. That is indeed a difficult situation to get into. In the voluntary administration situation the administrator manages the company, calls meetings of creditors, and develops a restructuring plan on which creditors are able to vote. A majority of creditors determines whether the company is to be restructured or put into liquidation. Like I said, this system has proven very popular in Australia.

The opportunities directors in New Zealand have without voluntary administration are pretty unappealing at this point in time. They are to request that the bank appoint a liquidator, to appoint a liquidator, and to attempt an out-of-court restructuring. I spoke to some of these issues in the debate on Part 5 tonight, when my learned colleagues spoke about compositions, proposals, no-asset procedures, and summary instalment orders, which we covered off in some depth earlier on. In the main, there is no prospect of retaining any level of shareholder value. If one looks at the balance sheet of a company that is bankrupt, one sees that in most cases there are a heck of a lot more creditors than assets. When one goes out to try to sell, one has to move the stock to move the debtors. If people are able to get 25 percent of their stock value, they are lucky. Debtors use this situation as a means to evade paying their bills, under the guise that there was a problem with the service in the first place.

In contrast, voluntary administration provides directors, shareholders, and creditors with a process that protects a company from enforcing remedies during a reasonably short period. It provides breathing space. During that period, the 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. I have to say that employees have to come into this whole thing in a big way, because they are often the unsung heroes in this situation. Having worked for a company for years and years they can find themselves at the end of the line in terms of getting paid.

On the face of it, voluntary administration seems to have merit, but, as I have previously mentioned, the Inland Revenue Department becomes a critical factor in its success or failure. In any voluntary administration, the Inland Revenue Department is likely to be a significant creditor. If we look at some of the situations that Pansy Wong alluded to earlier, we find an example where the Inland Revenue Department was the main creditor. In this situation, which was written about by Keri Welham, the Inland Revenue Department was a creditor to the tune of $1.2 million, but to other creditors the total was $160,000. If people think the Inland Revenue Department will not take preferential status fairly seriously in that example, they have to be joking. As I say, the department is likely to be the main creditor.

A person could continue to run a business for some time without paying GST, PAYE, and fringe benefit tax, but could not run a business for very long without power, telephone, and other core operational products. If the Inland Revenue Department’s priority status is retained, as it has been in this bill, then it will be compelled to evaluate its recovery from entering into the voluntary administration scheme versus entering into liquidation. As I said earlier, the Taxation Administration Act makes it clear that the Commissioner of Inland Revenue has a statutory duty to collect, over time, the highest net revenue that is practicable within the law. We must remember that if a company is put into liquidation, the Inland Revenue Department has priority status.

It was Charles Dickens in David Copperfield who stated: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” That is absolutely true of the 3,000-plus people, or companies, who file for bankruptcy in New Zealand every year. It does not matter what has driven them to bankruptcy—although the public tends to have more sympathy for those who have poor health or unemployment than those who have got there through extravagance or gambling—it all ends in misery.

This legislation covers both company and personal insolvency. I will consider Part 8 from the point of view of small business and the voluntary administration regime. New Zealand is a country of small businesses; over 300,000 New Zealanders are sole traders or owner-operators. We rely on those businesses for much of the economic health of this country, but by its very nature, small business is risky. It is risky, because resources are limited. It is risky, because profits are small. It is risky, because the business environment is very volatile for small companies. Small businesses are particularly vulnerable, because it takes only a small hiccup to go from being profitable to making a loss; and going from a loss to bankruptcy can be frighteningly quick.

One of the biggest vulnerabilities of small businesses is their tendency to trade with other small companies. A case of insolvency in one business can trigger a domino effect, and a series of small businesses can be unwittingly drawn into a financial disaster. Sole traders and small owner-operators are often undercapitalised. To finance business growth, they often borrow against personal assets—more often than not the family home. They also, perhaps unwisely, offer personal guarantees to secure business lending. It is a risk that big business and corporates would never countenance, but one that small-business owners are forced to accept, and take for granted. Mostly, of course, there is no problem, but occasionally things turn sour, and that is where this legislation comes into play.

To help small businesses survive difficult times, National supports a voluntary administration regime for companies with financial problems, similar to a scheme being used very successfully in Australia. It makes sense to allow administrators to assess the viability of a company, and, if possible, allow it to have a voluntary plan to trade its way out of trouble, while managing its debts. This seems a sensible and mature approach to company difficulties, and any way to avoid a bankruptcy, and all its destructive side effects, should be considered very seriously.

As noted by Chris Tremain, the system is working well in Australia but we have already heard that the major difference between Australia’s legislation and the bill we are debating tonight is that Australia’s tax department waits in line, along with other creditors involved in liquidation. The Labour Government is not prepared to accept this as a reasonable option, and I understand all its arguments, but it seems to me that a voluntary administration will come into being only if there is a good chance of that company trading out of its problems. If it is good enough for creditors to be prepared to take the risk, then it should be good enough for the Inland Revenue Department to take that risk too, particularly in light of the difficulties that small businesses face and the domino effect within companies that trade with each other.

It is a reality that, from time to time, businesses falter and stumble into failure. Small businesses are especially vulnerable. It would be good if the House could introduce legislation that would support innovation and responsible risk-taking and entrepreneurialism by giving a viable company a second chance, and, with time, the opportunity to make good.

The Government is showing, again, its double-handedness as it comes to light in Part 8. There was a glimmer of this as we were discussing Part 5 in relation to the no-asset register. Then we spoke of the Government seeming to have a double standard, in that it will not extend the opportunity of joining a no-asset register to those with a student loan, but any old debtor to a small business, who qualifies, can join up. The Government seems to be in the business of forgiving the debts of those who owe to commerce, but not to the Government.

Part 8 is a case of “here we go again”. The Government will not relinquish the Inland Revenue Department’s pre-emptive or priority status for the Inland Revenue Department. That will severely compromise, in our view, the effectiveness of the voluntary administration scheme. Let us remember, it is a voluntary administration scheme. I felt compelled, during one of the Commerce Committee meetings, to say that the difficulty that the Government seems to have with “voluntary” is that everything is voluntary until such time as one does not want to do it, then it becomes compulsory. If we are going to have voluntary, then the “voluntary” bit has to go right through to the very end, otherwise it becomes a bitter end.

No one could have doubted the sincerity of the submitters who came before the Commerce Committee. These people, for the most part insolvency practitioners, are people with a tough job. They are constantly being exposed to the stress of others, and, I would guess in every case, having to deal with something that is in every way a mess. For about a decade I worked in a little office in Albert Street in Auckland. It was in the same building as, I think, two or three insolvency practitioners. I used to see their clients going up in the lift and I used to see their clients going down in the lift. The difference in the journeys was that they clearly looked relieved—and in many ways saddened, but none the less relieved—that their immediate responsibility had been handed over to the insolvency practitioners.

From my memory of it at the select committee, every insolvency practitioner who appeared before it insisted, beseeched, asked the committee to ensure that the reduction in the Inland Revenue Department’s priority in insolvency matters be adopted as part of the bill, as it is in Australia. I wonder whether that is the memory of other members of the committee. I can see them nodding in agreement. It was. They did not do this on the basis of not liking the Inland Revenue Department. These are real people, and they are in the commercial financial world. It is that by having the priority—and most creditors are not aware, very often, that there is a problem—when the problem begins the department can be aware of it and it is not seen as being overly energetic in taking a company into insolvency. I am not suggesting that is a good thing or a bad thing, but the reality is the department is the creditor that takes people into insolvency eventually, and this allows poorly organised businesses to use moneys that should be paid to the department, to extend their commercial credit extension beyond redemption and recovery. That is one of the key practical bits.

The purpose of voluntary administration is at the heart of the bill. We hear of the early failure of new businesses in New Zealand. It is an oft-repeated statistic. New business has a very high rate of failure. But the reality is that while the individual business might fail, the activity that it started with often continues.

This has been a fascinating bill to be part of in the discussion process, because I personally believe in it. In my own commercial experience I have engaged in this sort of thing without it being part of the legislation. The creditors got together and worked with a debtor to see whether we could put something together because we knew that if we did not we were not going to get much out of it. The voluntary system of administration is a good one, in my mind. It works, but it works only if there is an incentive for all. The object is to save companies, but by being weak-kneed I think the Government has lost the opportunity.

I hate to interrupt my learned colleague, because I am sure the quality of his speech was a lot better than the quality of mine will be, but none the less I rise to speak to Part 8, which deals with voluntary administration. This should have been very good legislation, and Part 8 should have been a very good part of it. But unfortunately it is flawed, because the Inland Revenue Department is retaining and clinging to its priority status. This means we do not have a level playing field, which is unfair, and means that this legislation is flawed.

I am somewhat surprised that despite all the submissions to the contrary, this Government has still insisted on retaining the spurious Inland Revenue Department priority. A Government that values the opinion of Chapman Tripp so very, very highly in other matters has disregarded its opinion in regard to Part 8 and in relation to the Inland Revenue Department’s priority. Way back as early as April 2006 it said in its Counsel brochure, which we all received a copy of: “We consider the likely effectiveness of this procedure, given the policy decision to retain Inland Revenue’s priority in liquidation. We conclude that by retaining this priority there is a significant statutory incentive for Inland Revenue to vote against voluntary administration and in favour of liquidation in order to make a better recovery. It is our concern that if the first wave of voluntary administrations are undone by Inland Revenue voting against restructuring and rehabilitation plans, then the new voluntary administration regime may well lose the confidence of the market.”

I have a fear that that will indeed happen. In its Counsel magazine Chapman Tripp went on to say: “In any voluntary administration Inland Revenue will be a significant creditor. If the Inland Revenue priority is retained, Inland Revenue will be compelled to evaluate its recovery out of voluntary administration against its recovery out of a liquidation. If a company is in liquidation, the Inland Revenue priority debt ranks ahead of all other unsecured creditors. In voluntary administration, unsecured creditors will expect to be treated equally with Inland Revenue, in accordance with the pari passu principle (which provides that all creditors in a class are treated equally).” By retaining Inland Revenue priority there is a statutory incentive for Inland Revenue to vote against a voluntary administration and in favour of liquidation to make a better recovery. It may even be that Inland Revenue decides that notwithstanding the general merits of a voluntary administration restructuring plan … it has a statutory duty to vote in favour of liquidation and priority recovery because”—as Mr Tremain has already pointed out—“the Commissioner’s statutory duty is ‘to collect over time the highest net revenue that is practicable within the law’ (section 6A Tax Administration Act 1994). If Inland Revenue is compelled to vote against voluntary administration restructuring plans, then the prospects of New Zealand’s voluntary administration regime achieving the success of its Australian counterpart are slim. The opportunities that voluntary administration provides to maintain value for all stakeholders, may be lost to the commercial community.”

The fatal flaw in this bill, and in this part of the bill, is the clinging to the Inland Revenue Department’s priority status. If the department becomes the preferred creditor it will receive the proceeds of liquidation before other unsecured creditors. Why would it vote for a voluntary administration that would then put it pari passu with other creditors, when it can easily outvote the other creditors and easily have its preferred status?

Can I repeat some of our minority view in the commentary on the bill. Yes, we agree that the centrepiece of the bill is the voluntary administration scheme, which replaces the seldom used compromise scheme. I can vouch, as a practitioner of 29 years standing, that the compromise was seldom used.

As we have heard in a number of great speeches from the National side, the voluntary administration regime has not exactly been a real problem. It is just part of the implications of it that we find quite difficult to contest. I think Nicky Wagner summed it up very well when she said it was good enough for creditors, but not good enough for the Inland Revenue Department. That makes us think: “Well, why is there a different rule for the IRD?”. The reason must be that this Government feels that the Government is in a higher position than the ordinary New Zealander. The Government sees that it has a greater role than New Zealanders do on the street. It has always been a historical fact that Governments can tax, and they can willingly impose taxes, and people have to pay them. We cannot get out of paying our taxes, and Governments have the ability to implicate people and make them pay a tax.

It does the same with local government. It pushes services on to local government, which then in turn has to rate ordinary New Zealanders to pay for those services. We do not have a choice in our taxation system. We have to pay the taxes that are imposed upon us. That is something that has occurred throughout history, and it is why we have Governments. It is how Governments are funded. But then why does the Government also want to have priority on the other side of the ledger? It is not good enough for the Government just to have the ability to tax; it is also good enough for the Government to have the ability to take money on the other side, through the Inland Revenue Department and preferential claims when a business may go under. Why cannot the Government sit there, like any other business or creditor, when it has the ability to tax over and above an ordinary creditor?

This is something I think this Government needs to look at very closely in its legislation. I look at the reasons why this was put forward in the office of the Minister of Commerce. It said it was “to ensure that the current business rehabilitation regime will enhance business confidence.” Well, it will not enhance business confidence if we are giving a priority to the Government over ordinary creditors.

Another big thing this legislation was supposed to do was to ensure that overseas investors were not deterred from investing in New Zealand. Well, they will certainly be deterred if they know that the Government has a higher priority than their creditor ranking would have. It also said that it is “to ensure that New Zealand adopts an international best practice for business rehabilitation.” Certainly, there are aspects of the voluntary administration regime that we do favour. But that regime needs to be one that is consistent with overseas practice, and this is not.

The press release from the Minister says that “the voluntary procedure will bring New Zealand into line with other OECD countries.” It would be great if we could do that with a few other things, like employment law, and have a probationary period. But it said that it “has been adopted from the Australian voluntary administration regime, which has had the advantage of benefiting business rehabilitation involving trans-Tasman organisations.” That is all very good rhetoric, but will it be followed up? The reality is that this legislation is different from Australia’s. How can the Minister say in her press release that we are doing what Australia and the other OECD countries want and do, when we are doing the opposite?

For example, Australia abolished the priority status of the Australian tax office in the early 1990s, while the UK followed suit in 2002. This is not consistent with the Minister’s press releases. The Minister says we will be following OECD best practice in doing what we are doing. The reality is we are not following OECD best practice; we are just feathering the caps of a Government that wants to have the ability not only to tax but also to have priority status when a business goes under. Why would the Government want to do that when it has an $11.5 billion surplus? How much money do Government members actually need to be sitting on to make them happy? How many big buildings in Wellington do they need? How many statues to their Government do they need to erect to be happy? They need to keep on going because they need to build up their war chests for an election campaign to buy off New Zealanders.

That is the reality of why they want to have preferential status. They are not looking after New Zealand business people; they just want to build up the money so they can go out there and bribe at the next election. Or maybe they want the money to pay off a few debts they have carried over from this election, by way of a few payments to certain organisations that will in turn repay them through financial assistance. It is all part of this Government knowing what is best for ordinary New Zealanders. It believes that it knows what to do.

I will briefly address the Committee on Part 8, and say, as has been said by some of my colleagues on this side of the Chamber, that this part really is the centre point of the insolvency law reform package that we have been dealing with tonight. It is the most significant reform in this bill. The policy decision of the Government that underpins it is that the voluntary administration regime should be aligned as closely as possible with the Australian provisions unless there is a very, very good reason to depart from them. As I understand it, this policy decision was made in accordance with New Zealand’s obligations under the 2000 Australia - New Zealand Memorandum of Understanding on Coordination of Business Law.

The real issue for determination tonight—and I would be grateful if one of the Government members said something about it—is that although we are purporting to introduce basically the Australian procedure, we have left one major element out. That element concerns the priority of the Inland Revenue Departmentm, which will have the effect of messing up the entire procedure.

The objects of voluntary administration that are set out in new section 239A of Part 15A, which will be inserted into the Companies Act by clause 454, are laudable. They propose that voluntary administration will maximise “the chances of the company, or as much as possible of its business, continuing in existence;”, and, if that is not possible, then voluntary administration will manage matters in such a way as to ensure that there is “a better return for the company’s creditors and shareholders…”. The procedures are all reasonably straightforward, and I have no real objection to them culminating in what Subpart 8 refers to as the “watershed meeting”, which is the crunch meeting when the company’s creditors must determine what will be the future of the company.

As my colleagues have said, when one is dealing with a voluntary administration, one finds that nine times out of 10 the Inland Revenue Department will be a major creditor, if not the most important creditor. I am sure that the Inland Revenue Department, armed with its priority for revenue debt, will be compelled to evaluate its recovery out of the voluntary administration regime, as opposed to its recovery out of a liquidation. I refer members to Subpart 10 of Part 3, which deals with the distribution of assets, and, in particular, to clause 272 on priority of payments. The Inland Revenue Department is compelled to evaluate its recovery because, as we well know, if a company is in liquidation, the department debt will rank ahead of all other secured creditors. In a voluntary administration, the department debt will rank equally in accordance with all unsecured creditors. So the Inland Revenue Department will have to decide whether it is content with that state of affairs or whether it is better to place the company in liquidation.

I refer very briefly to what the distinguished law firm Chapman Tripp said about this issue. We all know that the Government pays a lot of attention to Chapman Tripp, as it did last week. Chapman Tripp said: “If the first wave of voluntary administrations are undone by the Inland Revenue voting against restructuring and rehabilitation plans, then voluntary administration will lose the confidence of the market. Australian businesses involved in New Zealand voluntary administrations will be incredulous that our procedure departs so markedly from theirs. However, what is most disappointing and ironic is that the most significant risk to the government ambition of introducing and implementing a successful rehabilitation procedure will be the government itself.” I particularly refer to the fact that Chapman Tripp says that Australian businesses “will be incredulous that our procedure departs so markedly from theirs.”

So the only question I have for the Minister—or for any Government member who is prepared to take a call—is why the Government, when introducing this mechanism that is adopted from the Corporations (Investigation and Management) Act 2000 and the Australian Corporations Act 2001, has chosen to treat the Inland Revenue Department in the way it has. It will undermine the effectiveness of the new regime.

Following on from Mr Finlayson, it is good to take a call on Part 8. I think everyone would fundamentally agree that something such as this Insolvency Law Reform Bill needs to happen, as there have not been any substantial changes to the insolvency legislation since 1967. But the reality is that Part 8 is the fundamental part in this whole bill that will turn things upside down.

Those people who were fortunate enough to sit on the Commerce Committee know that most of the submitters—I think close to 100 percent of those who submitted—had concerns about the priority status of the Inland Revenue Department. What I cannot understand is why the Government has not addressed that in Part 8. That is the biggest concern to me with this part. All creditors should be treated equally. That is, fundamentally, I would have thought, a common-sense principle, but, no, under this part the Inland Revenue Department gets its dibs on its loot, no matter what. The Inland Revenue Department can vote to put someone into liquidation, and it seems to me that that is fundamentally flawed and unfair. It seems to me that it is very like bully-boy tactics.

We heard earlier from Mr Bennett about high taxation being used to build up a big war chest for the next election, about how this Government is very much about big tax, and about how there will be a big lolly scramble in 2008. But, in essence, we do not want to see in Part 8 the Inland Revenue Department being the first cab off the rank and having the ability to force people into liquidation.

I refer to the National Party’s minority view in the select committee report, because I think it is really important. Following on from the point I made earlier, all the submitters on this provision—I am talking about voluntary administration—were unanimous in their view that unless the Government addresses the issue of the priority status of the Inland Revenue Department, the voluntary administration scheme will be severely compromised. That should send alarm bells around this Chamber. The minority view states: “The select committee did not pursue in-depth ways to ensure that the centre-piece of the bill will be effective to the satisfaction of New Zealand National members.”—in other words, we were unheard; the committee did not listen. “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.” In other words, the committee has not listened to National’s minority view.

I think it is important to look across the Tasman to our Australian counterpart. It has abolished the priority status. When we look across to the UK, we see that it has ditched priority status. We do not seem to be following the OECD’s best practice. We seem to be out on a limb with Part 8. Fundamentally, parts of this bill are necessary, but Part 8 is of great concern to me, and should be to many of us in the Chamber. That is why National cannot support Part 8.

I wish to round out my arguments earlier on this evening on Part 8 of the Insolvency Law Reform Bill. I spoke at length about voluntary administration, and how it does appear to have merit—in fact, we have seen that it does have merit overseas. I spoke, in depth again, about the level of priority status, and I think it would be inept of me not to discuss the full consideration that the Commerce Committee had—particularly given that Maryan Street, who was at those meetings, is here in the Chamber with us tonight. In terms of the points that Shane Jones made regarding why priority status was left where it was, I will cover those off in some detail.

As I have said, on the face of it the idea of voluntary administration appears to have merit, but as I have previously mentioned, the Inland Revenue Department becomes a critical factor in its success or failure. In any voluntary administration the Inland Revenue Department is likely to be the significant creditor. Why? Well, a person can run a small business by putting off paying the PAYE, by putting off paying the GST, and by putting off paying the fringe benefit tax, but a person cannot keep his or her business going by putting off paying the power, the telephone, and all those items for which, if he or she stopped paying the bills, it would unfortunately mean he or she would not have a business. So what tends to happen is that the department ends up being a significant creditor in many of the situations we are talking about.

If the department’s priority is retained, as it has been in the bill, the department will be compelled to evaluate its recovery from entering voluntary administration versus entering liquidation. As I have said previously, section 6A of the Tax Administration Act ensures that the commissioner is required to collect tax over anything else—that is his or her priority. By retaining the department’s priority, there is a statutory incentive to vote against voluntary administration in favour of liquidation, to ensure the department gets better recovery. If the department is compelled to vote against voluntary administration, I cannot see how it will have the success it has been able to achieve overseas.

How did voluntary administration have success overseas? In Australia, the Australian Taxation Office priority was amended, but at the same time director responsibility was increased. We did discuss that point in the select committee, but we have not rounded it out tonight. Here is how it works. If a company has failed to pay tax that it is required to collect, then the Australian Taxation Office can issue the directors with a notice requiring the directors to, firstly, comply with its remittance obligations; secondly, make an agreement with the Australian Taxation Office; thirdly, appoint an administrator; or, lastly, appoint a liquidator. The key point is that if the company does not take one of those steps within a 14-day period, each director can be personally liable for the unpaid amount of tax the company is required to collect.

Shane Jones argued vociferously in defence of the corporate veil. He argued—and I understood his point on this—that if we actually increased the directors’ liability, then we would discourage more directors and more entrepreneurs from getting into business. He made the point that if we are to have economic transformation in this country, we do not want to increase the barriers to, and risks of, directorship. Shane Jones did not want to increase director liability, so he voted in favour of retaining the department’s priority status. I argued that we did not need to follow the Australian model, and that we could have removed the department’s priority status and kept director responsibility unchanged. The select committee seemed unable to cover that—why we could lower the department’s responsibility and not increase director responsibility. One can bet that in this instance the department would be far more vigilant with regard to late PAYE and GST remittances, and that as a result, companies would not be allowed to get to the point where liquidation was the only option.

Other alternatives that were not fully debated included, firstly, reducing the department’s priority to a limited period only—say, a specific period of 3 to 6 months prior to liquidation or receivership—and, secondly, the English approach, which eliminated the Crown priority completely in 2002, on the basis that the fiscal cost to Treasury was insignificant. This is a key quote that I think we will end this part of the debate on: “The state could not maintain the priority, because the government could not get any sympathy from the private sector over its long delay in collecting back taxes … such rank inefficiency merely confirmed to private creditors that government needed stronger incentives to keep abreast of creditor delinquency…”. That was the point.

So, in summary, National believes that for voluntary administration to work effectively, the department’s priority needs to be removed or limited. We believe that the retention of the department’s priority will lead to difficulties in implementing the key component of the bill. We believe that we did not explore other alternatives enough. Thank you.

The question was put that the following amendment in the name of Katherine Rich to clause 471(1) be agreed to:

to omit from paragraph (cb) of section 280(1) the words “or any of its secured creditors”.