Part 1 Amendments to Insolvency Act 2006
JO GOODHEW (National—Rangitata)
: I rise to take a very brief call on the Insolvency Amendment Bill. This bill has been considered by the Commerce Committee, in which I took some time to participate. It is an important bill in that it gives some certainty to a number of issues.
In Part 1 of the Insolvency Amendment Bill we find that insolvent gifts made within 2 to 5 years may be cancelled if the bankrupt is unable to pay debts. A gift by a bankrupt to another person may be cancelled on the assignee’s initiative if the bankrupt made the gift within the period beginning 2 years immediately before adjudication and ending 5 years immediately before adjudication, and if the bankrupt is unable to pay his or her debts.
Part 1 also covers the limits on recovery by stating that a reasonable person would not have suspected and did not have reasonable grounds for suspecting that, in the case of the insolvent gift, the bankrupt was or would become unable to pay his or her debts without the aid of the property that the gift is composed of. In terms of Part 1, this bill did not attract a lot of submissions at the select committee.
I conclude my comments by saying that we look forward to this bill passing through its Committee stage.
Hon LIANNE DALZIEL (Labour—Christchurch East)
: We did not get a lot of submissions on this part, in the sense that we received only 11 submissions in total—so
there were not a lot. But it is great to have the opportunity to have the Minister in the chair, Mr Power, now ready, willing, and able to answer some questions about—
Charles Chauvel: He didn’t on the last one.
Hon LIANNE DALZIEL: I know he did not answer questions on the last bill, and I am terribly sorry that I missed that failure to take a call on the question. But that does not matter.
On this particular issue there is a concern, which I have raised on more than one occasion, and I would like the Minster to respond to it. It is the fact that every single provision in this part was related to specific concerns that had been raised with the Minister in respect of concerns around insolvent gifts, limits on recovery, and issues around the no-asset procedure. However, absolutely no such concern was raised directly with the Minister in relation to the changes to the length of time a person is on the public register. In fact, that concern was noted, I think, for the Minister after it arose in an article in a newspaper. That is why we actually ended up with the feeling that because we had the bill at the Commerce Committee for a very short period of time, it may have resulted in so few people making submissions. Also, it was a relatively small, technical bill. There was no problem with the vast bulk of it, at all, except for this one issue that had been tacked on, yet that was the one that raised the most significant concerns about the difference between the no-asset procedure and bankruptcy.
In fact, the concern raised was that the way that the no-asset procedure was designed was to ensure that it was less punitive and less of a concern to people than a bankruptcy would be, and that was in order to give them that one-off chance in life to get back on their feet. The concern was that the length of time on the public register was actually part of the total package, and significantly increasing the total time to 4 years after the date of discharge was quite a substantial increase. The concern we had when we looked carefully at the regulatory impact statement was that the Privacy Commissioner was not very happy about the proposal, at all.
We were left, again, with the situation where this seemed to be a bit of an add-on to the legislation and it had not been through the same level of scrutiny as other bills that amended provisions relating to the privacy legislation—that it had not been through the same procedure, which one would expect. The Privacy Commissioner has continued to hold concerns about the changes to these provisions and the fact that they are being implemented alongside the rest of the bill, which we are more than happy to see go through under a relatively quick process. We are very happy about the whole process for everything else, but we ask ourselves again and again why this provision was added on and what benefit there is in undertaking such a significant change without adequate consultation.
The other matter is that I know that more than one of the submitters asked, if we are going to do that, why we do not use the no-asset procedure as an opportunity to do some work with people who have been caught out in the situation and ensure that as they come out of the no-asset procedure they are given access to good budget control mechanisms, so they do not get themselves into that situation again. Obviously, they cannot use a no-asset procedure again. But, again, this legislation recognises that multiple insolvencies go on, and the best thing we could be doing is assisting people so that they do not get back into this situation.
The no-asset procedure is a relatively new piece of legislation, and I would have thought it would be appropriate to review its operation in a considered way. It would be helpful if the Minister could respond to that question about why that change was added on.
KATRINA SHANKS (National)
: It is a pleasure to speak tonight to the Insolvency Amendment Bill, which we are obviously supporting. I would like to respond to what
Lianne Dalziel was talking about in terms of the length of time a debtor’s information remains on the public insolvency registers. This issue was discussed a lot at the Commerce Committee; it is an issue we took very, very seriously. In the case of a no-asset procedure, it is a big change for the term to go from 1 year to 5 years on the public insolvency registers. It is significant, and it does have a significant impact on those people who are going through this process and on the credit they can obtain in the 5 years they are on that register. In particular, we have to take into consideration those people who have gone through the no-asset procedure and who have fallen upon bad times in circumstances where it is not totally their fault they have entered the procedure. That can happen through redundancy, through sickness, or through injury, so it is important that we get it right. We did not take it lightly at the select committee. We got a lot of feedback, and the Privacy Commissioner had some very valid issues, which we discussed thoroughly. We looked at international trends. We talked to the officials. They are here today, and I would like to thank them very much for the hard work that they have put into this bill. They have worked very hard behind the scenes, and we asked a lot of questions to which they always came back with good answers in a really timely manner, without fobbing us off.
Hon Dr Wayne Mapp: Ha, ha!
KATRINA SHANKS: He laughs, beside me. The thing about lengthening the time to 5 years is that there is really no international average or consistency out there, when people are using a no-asset procedure, for how long debtors should be on it. It is a judgment call, in effect, and that is how we got to that term of 5 years. We also had to look at the balance between those who are debtors and those who are creditors, to ensure that those people who lend money have the right to know when someone has a bad credit record. So it was a hard decision to come to, but I think 5 years is a good place to be. We will run with that and see how it sits out there. At the moment it seems to be OK; we will see how it goes in reality when people using the no-asset procedure have been on the register for 5 years.
Around that issue, we also talked about multiple insolvencies. If debtors have multiple insolvencies—more than two of them, which could mean a no-asset procedure plus a bankruptcy—then instead of their being on the register for 7 years, we have made the term indefinite. That is also quite a big call for the committee to make, but I think it is a fair call. We have to ensure that the people who lend money to those debtors know exactly what their credit rating is, and whether they are a good risk or not. At the end of the day, if people keep on lending money to the same debtors, who cannot pay it back or who use it irresponsibly, those people who are lending the money need to be allowed to know the types of risks they are taking. Obviously, the interest would be calculated according to that risk.
The other thing I would like to talk about apart from the public register is the fraud section within Part 1, which provides that if someone has committed an offence under bankruptcy, the official assignee will terminate his or her no-asset procedure. That was a bit of a loophole; I think it is good that we have identified that loophole and that we are closing it.
There is also the issue of the discharge of joint debtors. I think people did not realise that many people have joint debts, in terms of their credit cards and trust accounts, and that people were putting their whole joint debt in the no-asset procedure and getting everybody’s debt written off, regardless of whose debt it was. That was another loophole we have closed. I think it is a really good loophole to have closed, especially in situations when one spouse goes into the no-asset procedure and the other spouse does not, because otherwise all of their credit cards could be taken in and written off as
well. That happens also with co-trusts and joint debtors and partners, so it is really good that we have closed that loophole.
The one thing we discussed in detail in the Commerce Committee that did not go into this bill was budgeting advice and whether that should be part of the no-asset procedure. We discussed it, because we know it is very important for those people who have problems with the way they spend money and budget, and who get themselves financial problems—
Hon SIMON POWER (Minister of Justice)
: Part 1 of this bill amends the Insolvency Act in order to prevent the potential discharge of fraudulent debts under the no-asset procedure process. That is an important point to make from the outset and one that I noted that many people commented on during the second reading debate. Rewarding dishonest behaviour was never the intention of the Act and clearly contravenes the fundamental policy objectives of insolvency legislation. The changes proposed would prevent fraudulent debts, and any penalties and interest that accrued, from being written off, and would apply retrospectively to debtors who were in the no-asset procedure process when the bill was introduced in the House. It is an unusual mechanism to apply retrospectively from the date a bill was introduced, but in this case it is a necessary one.
The bill also proposes to empower the official assignee to extend the period of discharge from the no-asset procedure by a maximum of 25 working days. This will allow more time for the official assignee to investigate any late information and creditors’ objections that are received in relation to a person’s entry into that process.
The bill in Part 1 also proposes to restore the official assignee’s ability to recover gifts made by a bankrupt, prior to his or her bankruptcy, to avoid payments to creditors. Therein lies the issue of the rights of the creditor. I accept and freely acknowledge that the reason for a different arrangement is that the kind of broader second-chance provisions of this process would allow a debtor further opportunity to carry on business arrangements at some earlier point than bankruptcy would allow, and without carrying the stigma of bankruptcy.
In these economic times, dealing with the balance of the interests between the creditor and the debtors is a difficult issue. That is the issue that the Hon Lianne Dalziel and my colleague Katrina Shanks have raised. However, as the Commerce Committee itself suggested, reliable information about the debtor’s history has to be critical to the creditor’s capacity to make decisions in a business environment with regard to those particular individuals. The ultimate length of time between bankruptcy and the no-asset procedure process will still have a distinction. That is important because the two processes represent two different approaches. But the reason for the increase was to acknowledge, in these particular circumstances and economic times, the fact that creditors are also entitled to rely on a certain amount of protection and reliability in the information that is available to them when making business decisions. As I say, these points are not raised without debate, but I think this balance is the right balance and we have erred on the side of caution for the creditors, in this case.
Hon LIANNE DALZIEL (Labour—Christchurch East)
: The problem is that the Minister of Justice, Simon Power, has not addressed the question I asked him.
Hon Ruth Dyson: That’s quite unusual!
Hon LIANNE DALZIEL: It is unusual for that Minister; he is usually pretty good. But on this occasion I feel somewhat let down. The reason that I feel somewhat let down—
Hon Simon Power: Not angry, just disappointed.
Hon LIANNE DALZIEL: —and disappointed—is that it is the second time this week—
Hon Simon Power: The second time?
Hon LIANNE DALZIEL: Well, no, last week was the one I felt really disappointed about. The reason I am a little bit concerned about the Minister’s failure to address the question is that we asked the officials where the second set of amendments had come from—the ones relating to the period of time that information on bankrupts stays on the public register. The amendments came from an article that was in the paper. It was entitled “Vanishing bankrupts spark call for change” and was published in the
New Zealand Herald
on 1 December 2008.
It seems that a number of options were presented to the Minister for him to look at. The officials set out a series of options. Option one was to permanently retain information on bankrupts for 7 years for both no-asset procedures and summary instalment orders. Option two was to permanently retain information on bankrupts on all three registers. Option three was to retain information for 7 years on all three registers. Option four was to retain information for 7 years on bankruptcy and no-asset procedures and to retain the status quo for summary instalment orders, which is 3 or 5 years, depending on the length of the summary instalment order agreement. Option five was to provide for the public registers to be searchable for individuals who have entered any of the three personal insolvency processes on two or more occasions. Option six was to provide for the public registers to be searchable for individuals who have entered the no-asset procedure and then bankruptcy, or bankruptcy on two or more occasions.
Then the report states that after a brief analysis of the above options, officials’ preliminary recommendations, subject to further discussions with the Office of the Privacy Commissioner, were to adopt options four and six above, as they would address, to a greater extent, the problem that was identified in the
New Zealand Herald
article. That is not how laws ought to be changed.
Officials also recommended that the Minister seek policy decisions on all of the proposed amendments to the Insolvency Act in February 2009. That is 2 months, over Christmas, after an article appeared in the
New Zealand Herald. I am sorry, but the process is bad. I cannot say that it is a good process.
When Labour was in Government we had an entire discussion document on insolvency law reform, which led to the Insolvency Act that we have in place today. I know that we made mistakes and that the bulk of this bill corrects major mistakes in the drafting and implementation of the Act that were not picked up. I appreciate the fact that the Minister has to use the time of the House in order to address those problems. But I still think we are entitled to an explanation as to why an entirely truncated consultation process did not involve any of the credit agencies, or the community-orientated services like citizens advice, budget advice, and all of those services that work with people on the ground.
The problem is that the consultation with the Privacy Commissioner identified serious concerns about making significant changes like this amendment bill proposes, when she herself is about to enter into a process of reviewing the code of practice that deals with how long the credit agencies can keep this information on their record. We could end up with the bizarre situation where the public record and the private record, as it were, of the credit agencies are contradictory to each other—not just a misfit but absolutely contradictory to each other.
That is what I was asking the question about. Why was this provision tacked on to this bill? It is not fair that this issue did not get the thorough consideration it would have had with the normal 6 months in the select committee, calling for submissions, and having some proper debate about it. In fact, it was a truncated process because of the other stuff in the bill, not because of this particular provision.
So tonight in the Committee I underline my disappointment, and the Minister was certainly on notice that I would raise this issue, as I did in the second reading of the bill. I would appreciate an answer to my question.
CLARE CURRAN (Labour—Dunedin South)
: I rise to take a call on Part 1 of the Insolvency Amendment Bill before the Committee. I wish to deal with the same issue that my colleague the Hon Lianne Dalziel raises, and also with the wider issue of insolvency and preventing insolvency in New Zealand, rather than just preserving the integrity of the new no-asset procedure.
The Commerce Committee heard, as members have heard, submissions about the impact of the recession on people’s lives, whereby they find themselves in circumstances, often through no fault of their own, where they have accumulated large amounts of debt that they are unable to repay. The no-asset procedure was an appropriate mechanism for them to be able to continue with their lives and be contributing members of society. It was essentially about providing them with an opportunity for a fresh start. That was the intent of the no-asset procedure.
I see the effects of this recession in my electorate, as, no doubt, every member in this House does, every day. In Dunedin, unemployment has doubled in the last 3 months, and has risen by 161 percent in the last year. Food banks in Dunedin are reporting a doubling, at least, of demand on last year’s level, and the citizens advice bureau and budget advisory service are also reporting increases in the issues that are emerging. Alongside that, there are worrying reports of a sharp rise in insolvencies across our community, especially among young people. This highlights the need for a wider focus on the causes of insolvency and the need for budgeting education for young people who are leaving school and also leaving home.
A recent report in late June in the
Herald on Sunday, entitled “Young, gifted and broke”, stated: “Teens aged as young as 16 are being declared insolvent as the number of people succumbing to debt balloons.” This article reported that “A 16-year-old, three 17-year-olds and 16 18-year-olds were among the 810 people under 25 declared insolvent in the 2009 financial year—more than double the 2005 figure.” The article said that insolvencies, which include bankruptcy and the no-asset procedure, “shot up by 77 percent overall, from 2986 in the year ending 30 June, 2005, to 5292 so far this year. The most dramatic jumps were in the youngest and the oldest age groups. New insolvencies among people aged under 25 rose by 114 percent, to 810. The figure for those aged 75 and older soared by 153 percent to 48. Many of the younger insolvents took advantage of the No Asset Procedure (NAP) scheme, which cancels most debt if it totals no more than $40,000 and the debtor has not previously been bankrupted or used NAP.” The article also quoted Auckland-based Presbyterian Support budget service manager Maureen Little, who believes that the no-asset procedure scheme should include compulsory budgeting education, which is something that a wider consideration of the causes of insolvency could consider.
Labour supports this bill, but it has expressed concern, as members have heard several times tonight, about the proposed change to lengthen the time that the debtor remains on the public register, from 1 year to 5 years in the case of the no-asset procedure, and from 7 years to indefinitely in the case of people with multiple insolvencies. We have concerns that lengthening the time that a no-asset procedure debtor remains on the public register will dilute the important distinction between the bankruptcy provisions and the no-asset procedure. That procedure was introduced, as members have heard, to provide the one-off opportunity for financially distressed individuals to avoid the stigma of bankruptcy and help them to rebuild their lives. We note that the provisions to lengthen that time were not an essential component of this
bill, and my colleague Lianne Dalziel has just talked about the fact that it came from one newspaper article. This bill was designed to deal with fraudulent debts.
JONATHAN YOUNG (National—New Plymouth)
: When things go wrong in business, as they sometimes do, good law exists to help minimise the flow-on effect of one person’s disaster becoming another person’s disaster. As we have just heard, there has been an increase in insolvencies in our nation. Unfortunately, like a stack of falling dominoes, we sometimes see the knock-on effects of financial disaster come to people. The Insolvency Act is just such legislation, to protect as much as possible the people who may be affected by the business failure of others.
The Insolvency Amendment Bill was introduced by the Minister of Commerce, the Hon Simon Power, back in March 2009 to amend the Act. In this amendment bill a number of areas are being attended to. The bill proposes to make changes. More specifically, the changes proposed relate to the no-asset procedure; insolvent gifts, which I will speak on this evening; and the bankruptcy public registers under the Act.
The no-asset procedure is not a “get out of jail free” card. Certainly, this amendment bill is being presented to the Committee to ensure that it is not such a “get out of jail free” card. Although the no-asset procedure is a softer option for people who encounter insolvency for the first time, and provides a one-off opportunity for people who go through financial distress to avoid the stigma of bankruptcy and to rebuild their financial lives, as the bill is presented their names will be recorded on the insolvency register, not only for the duration of time they are under the no-asset procedure but also for a further 4 years after final discharge. So there is accountability for people who go through such financial duress.
Many people who go about their business arrangements and who are seeking to make a living, particularly in times such as these, can lack business experience. As the previous speaker, Clare Curran, mentioned, the bill concerns not only young people but also elderly people, who perhaps are concerned about their retirement income. Activities can be entered into without due prudence and business awareness. It is important that people who are going to engage with people in business have the surety of confidence in their credit standing and their business procedures. People may go to the insolvency register and search this information out.
This bill covers three areas: fraudulent debts, the discharge period under the no-asset procedure, and insolvency gifts, which I want to touch on very briefly. When a person or company is in financial difficulty, an unscrupulous person may attempt to remove assets that would otherwise be sold to pay a creditor. They might gift money, land, a vehicle, or some goods that have realisable value. They might sell an asset to a friend or family member for a nominal amount, far less than its commercial value, in order to prevent that asset from being sold and the proceeds being given to a creditor. When the cupboard is bare, they will say to the creditors that they have no assets to sell in order to pay the creditors, and then seek to enter into a no-asset procedure. This amendment bill gives further powers to investigate a person who is entering a no-asset procedure solution, simply because provisions such as the no-asset procedure could be abused by unscrupulous people who want to get out of jail free, but, obviously, at a creditor’s cost.
The bill seeks to revert to the provisions in the Insolvency Act 1967 around gifts made in the 5 years prior to becoming bankrupt. These provisions put the onus of proving the debtor was solvent at the time of the gift on to the recipient rather than the official assignee. Thank you, Mr Chairman.
KEVIN HAGUE (Green)
: This is an area of law that touches New Zealanders at a most vulnerable time in their lives. It would therefore have been a helpful development for us to be able to pass this bill with unanimity. It seems that there is just one clause—clause 10(5)—that is standing in the way of us doing that. I invite the Minister this
evening to withdraw that clause so that this bill can pass with the unanimous support of all parties.
I have spoken previously in the House on a couple of occasions about this clause. It seems to me that the intent of the no-asset procedure is one of producing a clean slate. It is an attempt to remediate and move forward in a positive way, rather than have the punitive approach of bankruptcy. That approach is best supported by maintaining the 3-year provision
I have advanced three main arguments for the withdrawal of this clause. The first is the disproportionate effect that the extension of time on the register will have on young people—I am mindful of Clare Curran’s comments tonight—because that is an effect that is punitive in nature. The second objection that the Green Party has raised to this provision is that it provides a perverse incentive, in that the difference between the no-asset procedure and bankruptcy is blurred. This is a point that the Privacy Commissioner has drawn to Parliament’s attention. The consequence of that is that a person who is in financial trouble has less incentive to deal with his or her problems and to deal with his or her debt before those problems reach $40,000. It means that those people who extend credit may experience a worse problem as a result of this extension of time on the register than they would have experienced otherwise.
This is not simply a question of, as the Minister has said, balancing the interests of two parties: those extending credit and those who are in debt. In fact, the issue is that by extending the register we compromise the interests of those extending credit. The third and most important point is that one of the consequences of this extended time on the register is that those people who, because of that provision, will be unable to access mainstream credit will be forced into the arms—or perhaps we should say into the teeth—of loan sharks and disreputable lenders. That leads to a further vicious cycle of undesirable consequences.
I liked Jonathan Young’s analogy with dominoes. What we do by this apparently simple step of extending time on the register is create vicious cycles. We compound problems, and we set the dominoes falling. The Green Party opposes this provision, and will oppose this part of the bill.
RAYMOND HUO (Labour)
: I rise to take a call on Part 1. The bill aims to preserve the integrity of the new no-asset procedure, or NAP, by preventing the discharge of fraudulent debts and bankruptcy by restoring the official assignee’s ability to recover gifts made by a person prior to bankruptcy. It is, however, slightly disappointing, because I think it would be better to prevent more insolvency in New Zealand, not just to tidy up the small number of issues that have arisen since the Insolvency Act 2006. Asians are passionate about addressing cause and effect. This bill deals with effect. At this time of economic downturn, it would be necessary and much more helpful for the Government to have a plan to deal with the cause—namely, to have some solid economic plan to raise productivity and to prevent insolvency.
At the Commerce Committee we spent a considerable amount of time deliberating on issues relating to the no-asset procedure. The Privacy Commissioner, in her written submission, stated very firmly that her primary interest is to ensure that the bill strikes a reasonable and proportionate balance between privacy—the stated purpose of the no-asset procedure—and the changes to bankruptcy, and the legitimate need of the public to be informed of those who are subject to insolvency proceedings.
The no-asset procedure was first introduced in the Insolvency Act 2006 as an alternative to bankruptcy, and it involves debts being written off. It has two main purposes: firstly, to give individuals a fresh start, and, secondly, to allow individuals to avoid the stigma of bankruptcy. Under the current law, individuals are listed on the public register for 1 year. However, clause 10(5) requires individuals to be registered
for 4 years after their discharge from the no-asset procedure. This extends the period of time that an individual is listed on the public register from 1 year to 5 years. Listings from the register are regularly collected by credit-reporting agencies and included in credit reports. Credit providers, prospective employers, landlords, and insurers underwriting loans can access credit reports. No doubt, the longer the listing remains on the public register, the longer-lasting the effects on the individual will be.
It is the view of the Privacy Commissioner that a total of 3 years on the public register for a no-asset procedure debtor would be more consistent with the purposes of the procedure and more proportionate to the period for which individuals are publicly listed following bankruptcy. Otherwise, the important distinction between the bankruptcy provisions and the no-asset procedure would be diluted. Labour members believe that there should be further consultation on this part before we proceed to make what are significant changes to the public register provisions. Thank you.
- Bill to be reported without amendment presently.