Hon SIMON POWER (Minister of Commerce)
: I move,
That the Insolvency Amendment Bill be now read a third time. The Insolvency Amendment Bill aims to maintain the integrity of the personal insolvency processes to maximise returns to creditors. The bill amends the Insolvency Act 2006 in three major areas: firstly, in respect of the no-asset procedure, or NAP; secondly, in respect of the insolvent gift provisions; and, thirdly, in respect of the public register provisions in the Insolvency Act.
The no-asset procedure was introduced as an alternative to bankruptcy in December 2007 as part of the Insolvency Act 2006. Debtors have to meet stringent criteria before entry is granted to that process. The bill explicitly provides that all debts that have been obtained as a result of a fraudulent act or behaviour are not discharged under the no-asset procedure process. This mirrors the bankruptcy provisions in the Act, and ensures that debtors are granted relief from pecuniary liabilities arising contractually, not from liabilities that have their origin in fraud.
The bill also contains further provisions to strengthen the official assignee’s ability to investigate possible concealment of assets in relation to a no-asset procedure debtor. For example, the official assignee will be able to extend the period of discharge from the no-asset procedure by a maximum of 25 working days, to undertake a thorough investigation of any late information or objections that are received regarding a debtor’s entry to the no-asset procedure process.
With regard to the insolvent gift provisions, the bill restores the longstanding presumption that a debtor is technically insolvent for a period of time before he or she files an application for formal bankruptcy. Therefore, any gifts made in the 2-year period leading up to a person’s formal bankruptcy may be cancelled. The experience of the official assignee has shown that it is within this period that most debtors shift their assets to trusts, family members, and friends, to avoid paying the debts they are responsible for.
The bill provides a so-called brightline rule regarding the treatment of insolvent gifts, which will be easily understood, administered, and enforced by the official assignee for the benefit of the creditors of the bankrupt. For example, contingent liabilities such as guarantees will now be included in the assessment of the solvency status of a debtor at the time the debtor makes a gift to a third party, such as family members and friends. Any asset or money recovered will be added to the general pool of assets and funds, for distribution to all creditors according to their pre-insolvency entitlements.
Finally, the bill makes changes to the length of time that information on no-asset procedure debtors is retained on the public register. The public registers are
administered by the official assignee and are searchable online for a limited time—currently 1 year for a no-asset procedure and 7 years for bankruptcy. The bill proposes that information on no-asset procedure debtors will remain on the public register for 4 more years—a total of 5 years. Also, the details of debtors who have been through multiple insolvency processes—for example, a no-asset procedure followed by one or more bankruptcies—will be permanently retained on the public register.
There will, of course, always be debate over whether extending the no-asset procedure time period from 1 year to 5 years strikes the right balance and, in particular, whether it undermines the rehabilitative objectives of that process. There is no international consensus in terms of how long information about a personal insolvency proceeding should be kept on the public register. Australia, for example, keeps a record of all personal insolvency proceedings on the public register indefinitely and it is searchable for a fee. The State grants individuals who are discharged from a no-asset procedure the privilege of becoming debt free after only 1 year. Creditors are entitled to get something valuable in return, which is reliable information about a debtor’s previous insolvencies over a reasonable period of time as a means of ascertaining creditworthiness. This is not achieved by deleting the no-asset procedure details after 1 year, particularly in the current economic climate where the flow of credit has been negatively impacted.
Further excessive limitations on the information on the public register create a cost to the economy, because they impede prudent lending practices and increase business risks. From a public interest perspective, it is appropriate that the information is made available on the no-asset procedure and bankruptcy public registers for a longer period of time. The need to assist creditors and financiers in making high-quality business decisions is particularly important in the current economic environment where, on the one hand, the number of personal insolvencies is increasing, and, on the other hand, the credit market is contracting.
I thank the Commerce Committee for its valuable contribution to the development of this bill and the Opposition for its constructive discussions of particular aspects of it. In addition, and in particular, I thank officials for the work that has gone into drafting this legislation and for overseeing its passage through its stages up until today. I commend the Insolvency Amendment Bill to the House.
Hon LIANNE DALZIEL (Labour—Christchurch East)
: I rise to support the third reading of the Insolvency Amendment Bill. I do so with a sense of disappointment, because as usual the Minister of Justice made statements in the House that he did not quite back up by working with Opposition members, even when the suggestion was made to him that it would be a good idea to work more collaboratively on some of these matters, as we did with the then Opposition when we were in Government. In the area of commerce, where there is a need to rely on rules that are appropriate to the particular circumstances, I think it is better to work together to get the rules right rather than to work in a less constructive way. So I express some disappointment in the Minister for adopting a somewhat arrogant approach, which was not really the way he behaved when he was the Opposition spokesperson.
The Opposition will support the bill because we agree with the primary provisions within it, which are to amend the no-asset procedure to prevent the discharge of fraudulent debts under the no-asset procedure, and to allow the official assignee to extend the time a person is under the no-asset procedure when late information in relation to a debtor’s entry, including valid objections, is received just prior to a debtor’s expected date of discharge. The Opposition also agrees with the provision that better protects the interests of creditors by strengthening the ability of the official assignee to cancel gifts in appropriate circumstances. I agree very much with the
Government that there is a risk of people shifting their assets before moving into a no-asset procedure. That is a risk that is identified in the law in respect of bankruptcy, and it is sensible that we amend the law in this way to resolve the same issue for the no-asset procedure.
What concerned the Opposition with regard to this bill was the proposal to change the period of time that people on the no-asset procedure would remain on the public register. The House needs to understand that a very deliberate decision was made to have a very different time frame for being on the public register for a no-asset procedure because it is much more rehabilitative in its nature than bankruptcy. So it was really important for people to be on the public register for the no-asset procedure for a much shorter period than the period to be on the bankruptcy register. This bill, changing the no-asset procedure from 1 year to 5 years, actually brings that time period far too close to the bankruptcy provision of 7 years. That is the point of difference between the Opposition and the Government on that particular matter.
It is really important for the House to understand that members of the Commerce Committee quite rightly asked submitters whether they could think of particular circumstances where people had got themselves into financial circumstances where they had up to $40,000 worth of debt, where they would be applying for the no-asset procedure, and where there was not a sense of fault applying to the individual. We were all quite taken aback with the submissions we received from the citizens advice bureaus, because they really did provide to us real-life examples of people who had done everything to protect themselves against the potential for harm, financial loss, and financial ruin—certainly, in the case of one of the women who was provided as an example. We were all touched by those examples, because they were not people who needed to be punished for doing the wrong thing. They had tried to protect themselves by taking out insurance, which was challenged. The individual ended up with significant financial problems, and on a benefit, at a time when she had to meet the costs of an operation as well. People do get themselves into those circumstances, and this no-asset procedure is designed to give them a helping hand to get over those circumstances and to then get on with their lives. That is why Labour, when in Government, designed the no-asset procedure—to give people this one-off chance to get their life back on track.
I do not think it is ruined by extending it to 5 years, but I would have preferred to see the Privacy Commissioner’s compromise position of 3 years. As she said, that would be more consistent with the purposes of the procedure, and more proportionate to the period for which individuals are publicly listed following bankruptcy. I think a compelling argument was put to us.
The problem was that this bill was not before us for very long and we did not get a lot of time to look at it. In fact, I think it is ironic that we are dealing with the bill now, in October, when we had to rush it through the select committee process in order to have it reported back to the House, so it could be dealt with very quickly. It is probably a little unfortunate that we did not have time to carve off the no-asset procedure issue. I think we could have come to a better result if we had been able to carve it off and deal with it separately, and I expressed that view in the second reading.
I am not sure whether I was here for the Committee stage, but, certainly, I now re-emphasise the view that sometimes it is better to look at the motive behind the different amendments and to see whether it is essential to deal with them in one moment. I can understand why the Minister included the no-asset procedure part in the bill. When one is a busy Minister and one has a passing train, one tends to throw on an extra carriage if possible. But that particular part of the bill did not come from the same place that the other parts came from. The other parts came from detailed recommendations that had
come from officials, and that had been raised as serious issues that had arisen as a result of some unintended consequences of the no-asset procedure when it was brought in. We are happy to support those recommendations.
The change to the no-asset provision came from somebody reading an article in the newspaper and deciding that it probably was not right that people were not on the public register for very long, because the credit-rating agencies were not very happy about it. Well, I do not think that is a very good basis for policy change. I think we need a far more considered approach. It would have been quite easy to carve off this part of the bill and report it back separately from the select committee. That, to me, would have had a much better outcome, and would have been a much better process, as well. We would have had the time to deal with that particular issue. I accept that it would have had to be dealt with separately, because the Minister did make it very clear when he introduced the bill that the fraudulent debt write-off provisions would apply from the date that the bill was introduced, not from the date that it was passed. In effect, the passage of this bill will mean that those provisions are backdated, anyway.
There was not a need to be so quick on the no-asset procedure from a point of process, nor from the point of recognising that there are people who get themselves into financial trouble through no fault of their own. I think of all of the people at the moment who have lost their money through Blue Chip and through financial investments in finance companies that they thought were secure investments. We are going to insist on this change to the no-asset procedure, when basically they have to face up to the fact that they have got to that stage in their lives where they thought everything was secure, only to find that it is not.
With that expression of disappointment in the Government, the Labour Opposition will support the passage of the bill, and will hope that in future the Government will look to a better process for provisions like the one I have mentioned tonight.
PESETA SAM LOTU-IIGA (National—Maungakiekie)
: I also rise to support the Insolvency Amendment Bill. I acknowledge the work that the Minister and the officials have put into formulating the bill. I also acknowledge my colleague the chair of the Commerce Committee, Lianne Dalziel, and the point that she made regarding the length of time spent on public insolvency registers. There was some debate in that area, and in the end I think the balance between the interests of debtors and creditors was weighed up.
I rise to support the bill because, basically, the procedure provides a one-off opportunity for those who are financially distressed to avoid the stigma of bankruptcy and rebuild their financial lives over time. As has already been stated in the first two readings of the bill, but which I will reiterate quickly, the key amendments are that it prevents fraudulent debts under the no-asset procedure from being cancelled when a person is discharged from that procedure. It is a pretty basic, fundamental principle of law, which has been established over centuries, that one should not profit from one’s fraudulent activities.
I am also happy to refer to the provisions of the Insolvency Act around the gifts made in the 5 years prior to a person becoming bankrupt. Again, the balance was to place the onus on creditors to prove that the debtor was solvent at the time the gift was made, rather than on the official assignee, so it is a very sound amendment to the Act.
As the previous speaker stated, the most controversial point was around extending the period of time that a debtor’s name would remain on the no-asset procedure and the bankruptcy public registry. In the end it really came down to balancing the interests of debtors, who, understandably, seek to move on with their lives, and those of creditors, who require reliable, accurate information about a debtor’s history as the basis on which
to make informed business decisions. It was not easy to come to the decision regarding the 5-year period, but in the end I think it was the appropriate decision.
This bill, which amends an Act passed 3 years ago, is consistent with the overriding policy objectives of the personal insolvency legislation. It removes the potential for people to be rewarded for their dishonesty, and it implements amendments that reduce the workload of the official assignee. It is required to maintain the integrity of the personal insolvency processes. Hence I support this bill.
RAYMOND HUO (Labour)
: The Insolvency Amendment Bill is generally a good bill. It aims to address four key issues that have arisen since the Insolvency Act 2006 was enacted. Firstly, the bill aims to close a potential legal loophole and prevent fraudulent debts from being written off. Secondly, it amends the public insolvency register to lengthen the time that information about a debtor remains on the public registers, from 1 year to 5 years in the case of a no-asset procedure, and from 7 years to indefinitely in the case of multiple insolvencies—that is to say, in the case of two or more bankruptcies, or of a no-asset procedure plus a bankruptcy. Thirdly, the bill will also restore the official assignee’s ability to recover gifts made prior to bankruptcy in order to avoid making payments to creditors, and will extend the period available to the official assignee in which to decide whether to terminate a no-asset procedure process. Therefore the amendment should make it easier for creditors to make better-informed lending decisions, particularly in tough economic times. That all sounds valid, and generally this bill is good, but I do have some concerns and observations, and wish to spend some time elaborating on them in this debate on the third reading of the bill.
Making laws in all areas, whether civil or criminal, is a central part of the work of Parliament, and the laws that are so made often have a catch-all effect. A statute is the express will of Parliament, which reflects the views and the will of our constituency across the board. So to put my contribution in that context, my first concern is that the difference between bankruptcy and the no-asset procedure may become diluted.
The no-asset procedure was first introduced by the Insolvency Act 2006 as a less punitive option than bankruptcy. There are two main purposes: to give individuals a fresh start, and to allow individuals to avoid the stigma of bankruptcy. To satisfy the Insolvency Act criteria for entering into the no-asset procedure, a debtor must have no realisable assets, must have a total debt of not less than $1,000 and no more than $40,000, and must have no means of being able to repay the debts. A no-asset procedure is currently discharged after 12 months, whereas a bankruptcy is discharged after 3 years. Bankruptcies are currently held on a person’s credit file for 7 years, making it difficult or virtually impossible to gain access to credit. Therefore, entering into the no-asset procedure is meant to provide a fresh start for such people and to help them become contributing members of the community again, without the stigma of bankruptcy.
I appreciate there may be two possible scenarios. One scenario is bona fide debtors who need help, and whom we should help to become contributing members of the community. The other scenario, on the other hand, which has been cited in the media, is people who may think a no-asset procedure is a quick way to sort out a debt that they cannot pay. They may regard it in the same way as what the media has described as the view of Generation X: it views credit as being something like free money, or as being a sort of substitute for parental generosity. At the Commerce Committee officials did a thorough analysis of that issue.
To some extent I understand the underlying reasons for us to tighten up on those debtors’ credit files. However, let us look at the two case studies put together by the Association of Citizens’ Advice Bureaux in its submission. Case study 1 was that of a single professional woman with an income of over $50,000 who had to go on an
invalids benefit because an illness that had been controlled for 10 years flared up. She was in debt to her bank and to a finance company, but had insurance on both loans to cover that specific illness. The bank paid out on the insurance, but the finance company did not. Within 3 months of the change in her circumstances, her only solution was to apply for the no-asset procedure, with a $29,000 debt. The only creditor was the finance company. Just imagine, through no fault of her own she had no choice but to resort to the less punitive no-asset procedure, but her name will stay on her credit file, if this bill becomes law, not for 12 months, but for 5 years. I say that will have a huge impact on her ability to rehabilitate her financial life.
Case study 2 involves a young couple with three kids under 8 years old. They had credit contracts on cars, a TV, etc., and they rented their home. They were encouraged by the bank to consolidate their finances, which they did with a personal loan. They got into further debt, and the bank refinanced them by putting all of their debts on to a credit card. The couple separated subsequently. The credit card was in the male’s name only.