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Insolvency Law Reform Bill — First Reading
Insolvency Law Reform Bill
Hon JUDITH TIZARD (Acting Minister of Commerce) : I move, That the Insolvency Law Reform Bill be now read a first time. It is my intention that this bill be referred to the Commerce Committee. The bill is designed to give effect to the Government’s overall objectives, which were established at the outset of the extensive consultative process that preceded the introduction of this bill. The objectives were: to provide a predictable and simple regime for financial failure that can be administered quickly and efficiently without imposing unnecessary compliance and regulatory costs on its users and that does not stifle innovation, responsible risk-taking, and entrepreneurialism by excessively penalising business failure; to distribute the proceeds to creditors in accordance with their relative pre-insolvency entitlements; to maximise returns to creditors by providing flexible and effective methods of insolvency administration and enforcement that encourage early intervention when financial distress first becomes apparent; to enable individuals in bankruptcy to participate again fully in the economic life of the community; and to promote international cooperation in relation to cross-border insolvencies.
The bill, accordingly, repeals and replaces the Insolvency Act 1967 and amends the insolvency provisions of the Companies Act 1993. New Zealand’s personal insolvency or bankruptcy law was last reviewed in the 1960s, resulting in the enactment of the Insolvency Act 1967. This Act is now regarded by many as outdated, inflexible, and administratively inefficient. The current personal bankruptcy structure—and I am sure members standing in the aisles opposite will be very interested in this—does not reflect modern international practices in relation to personal bankruptcy.
Corporate insolvency law was amended to some extent by the enactment of the Companies Act 1993. However, some of the provisions of the Companies Act still lack clarity and certainty. Most important, current corporate insolvency laws do not provide for an effective alternative to winding up companies that would enable the rehabilitation of financially distressed companies, nor is there an effective mechanism to deal with the incidences of cross-border insolvency, which is important when creditors and assets of the insolvent company are located overseas.
That potentially discourages foreign investment in New Zealand, which is in itself a limiting factor to the growth of our economy. These problems are further exacerbated by an increase in the number of company liquidations and personal bankruptcies that have provided low returns, if any, to unsecured creditors. For an insolvency regime to work effectively, administrators who are competent and skilled in conducting those affairs are required. While the bill does not currently address the issue of practitioner regulation, work in that area is currently under way, and decisions are expected to follow late in 2006 after further consultation.
In light of that background I now propose to outline some of the main provisions and benefits of the bill. It will make the personal bankruptcy procedure undertaken by the Official Assignee more administratively efficient and cost-effective. It is also designed to provide debtors with better access to the bankruptcy regime and alternative bankruptcy procedures in times of financial difficulty, where the ultimate goal is to maximise returns to creditors. The introduction of an alternative to personal bankruptcy, known as the “no asset procedure”—or NAP—is administered by the Official Assignee over a 12-month period. This procedure is aimed at consumer debtors who do not have assets or any other means of paying their debts. It is not necessary to apply any of the punitive aspects of bankruptcy such as restrictions on overseas travel, or owning a business, to such debtors. Debtors will have only one chance of entering this procedure and it will apply only to debts up to $40,000.
The bill adopts the Australian voluntary administration regime for companies in financial distress, as an alternative to liquidation, that allows for a moratorium period so that administrators can assess the viability of the company to continue trading before a decision is made either to rehabilitate it by placing it in voluntary administration or to enter it into liquidation. If a decision to rehabilitate the company is made, a deed of company arrangement is executed between the company and its creditors, which forms the basis of the administration and contains details of creditors—
The ASSISTANT SPEAKER (H V Ross Robertson): I am sorry to interrupt the honourable member. Honourable members, the time has come for me to leave the Chamber for the dinner break. I shall resume the Chair at 7.30 p.m.
- Sitting suspended from 6 p.m. to 7.30 p.m.
Hon JUDITH TIZARD: As I was saying before the dinner break, the Insolvency Law Reform Bill, the first reading of which we are dealing with, adopts the Australian voluntary administration regime for companies in financial distress. This regime is an alternative to liquidation that allows for a moratorium period so that administrators can assess the viability of the company to continue trading before a decision is made either to rehabilitate the company by placing it in voluntary administration, or to enter into a liquidation. If the decision to rehabilitate the company is made, a deed of company arrangement is executed between the company and its creditors that forms the basis of the administration and contains details of creditors, the amount of debt, and the time over which the debt is to be repaid. Essentially this allows a company to have a voluntary plan to continue trading while managing its debts.
Improvements to the law relating to cross-border insolvency are also included in the bill. The bill adopts the United Nations Commission on International Trade Law model law on cross-border insolvency. The model law will provide effective and efficient mechanisms for dealing with cases of cross-border insolvency and debt recovery, particularly where assets of the insolvent company are held in an overseas jurisdiction. The model law will not come into force in New Zealand until Australia also adopts the United Nations Commission on International Trade Law model. Also, given that it is our largest and closest trading partner, Australia has announced that the model law will be included in its Corporate Insolvency Reform Bill, which is intended for introduction later this year.
Provisions in the bill have been introduced to restrict the abuse of phoenix company structures by directors of a failed company with the intention of defeating the legitimate interests of creditors. The bill proposes to restrict the directors of failed companies reusing the name of the failed company and it provides for criminal sanctions where the directors of a company act in bad faith to defeat creditors’ legitimate interests. The changes proposed in the bill will eliminate the potential benefit to the directors, thereby providing fewer incentives for directors to abuse phoenix company arrangements. The changes proposed in this bill strengthen New Zealand’s insolvency laws. In particular the bill brings our personal insolvency laws up to par with international standards. The changes proposed to corporate insolvency laws provide for an alternative to liquidation for financially distressed companies. They restore the integrity of phoenix companies and pave the way for cross-border insolvency proceedings when overseas creditors and assets are involved.
Overall, this is a balanced reform that not only meets the concerns of both creditors and debtors, but also has greater benefits for the New Zealand economy as a whole. I look forward to it being thoroughly examined by the Commerce Committee.
PANSY WONG (National) : I doubt very much whether anyone is any wiser after the delivery of that prepared speech by the Minister with responsibility for Auckland Issues. She really got into it with passion and commitment!
One of the stated objectives of the review of the insolvency law of 1967 by the Ministry of Economic Development is to provide a predictable and simple regime for financial failure. Financial failure usually becomes predictable in hindsight. So is business recovery. In every business people start off with the belief that their venture will be profitable, and most cannot be convinced that it is heading into trouble, even when that might become obvious to others. Risk taking and operating in an ever-changing environment is part of the norm of doing business. Every day suppliers and lenders take into account calculated risk before they decide whether they will supply goods, services, and credit to businesses. I wish the Minister could stay and give us some feedback after the passionate delivery of her speech, but unfortunately she was otherwise engaged. Every day business owners also take into account the calculated risk of whether they will carry on doing business with the aim of making a profit after paying off debts and suppliers. So failure and success are part of the nature of doing business.
The inherent risk-taking nature of doing business actually improves discipline on both lenders and borrowers to take those calculated risks into consideration in their decision-making process. Anyone who thinks that the passage of any law can make business failure or business recovery more predictable is hopeful, if not naive. Any measure that aims to convey a message that there will be Government intervention to prevent business failure or to assist business recovery will not work. Indeed, it would lead to unrealistic expectations, and, worst of all, we would find that a lot of the energy of business people would be diverted away from managing business risk to lobbying politicians. Heaven help them! It would be a waste of energy and it certainly would not be a recipe for a thriving economy.
The presence of this type of ideological and lofty statement throughout the legislation leads to some concerns that National members want to address seriously at the Commerce Committee. Let us examine some examples—and the officials can expect some of this type of questioning from the diligent National Party members on that committee.
Lindsay Tisch: A great committee!
PANSY WONG: The National Party is particularly fortunate in that our members all have business expertise and I am sure that this bill will benefit from that.
One example I will share with the public is that one of the aims of the bill is, apparently, modernisation. That sounds good! Apparently it proposes additional changes that would take into account the fact that the main reason for personal insolvency has changed from business failure to consumer spending - related reasons. Does that mean that insolvency due to consumer spending - related reasons will be treated differently from other types of business failure? Is business not supposed to cater to consumer demands? I think every business person knows that consumer demand changes and that he or she should cater for that. What is the relevance of that to creditors and lenders? How does it affect the way in which insolvency law operates? I am sure that my learned colleague Chris Finlayson might lend some weight in his speech to ask how consumer-related insolvency affect the implementation of insolvency law.
Another example is the statement in the explanatory note referring to distributing the proceeds to creditors in accordance with their relative pre-insolvency entitlement. That sounds reasonable until we see that it goes on to state: “unless it can be shown that the public interest in providing greater protection to one or more creditors outweighs the economic and social costs of any such priority;”. Does that mean that a Government agency will decide what is in the public interest and which type of creditor can override other groups? That type of subjective assessment will seriously undermine the discipline of risk-taking decisions made by creditors. It will also lead to an expectation by creditors for intervention by Government agencies rather than following long-established case law and practices.
One of the provisions of the law is meant also to maximise the return to creditors by providing flexible and effective methods of insolvency administration and enforcement that encourage early intervention when financial distress becomes apparent. Who will be this keen observer of any business that is facing apparent financial distress? What if a seller’s creditors want to call in the seller’s debts during a low-season business cycle? Who will decide when an early intervention is warranted? Once again, any attempt to legislate away risk and uncertainty in allowing the business cycle to run on is indeed full of danger and risk.
This bill also sets out to ensure that, with limited exceptions, a debtor’s assets will be distributed to all creditors equally in proportion to the size of their admitted claims. On the face of it, this would overturn some long-established understandings of priority creditors. That in itself should cause us to examine this issue very carefully in the select committee, because we know that the way to trouble is often paved with plenty of good intentions. This so-called good intention may lead to creditors no longer having confidence to extend credit to businesses. My parliamentary colleagues on this side of the House will soon expand more on those lofty provisions.
National supports the review of the Insolvency Act, because this law does date back to 1967. The bill contains provisions for simplified insolvency administration for personal bankruptcy, such as the no-asset procedure and the cross-border insolvency mechanism, which we support. We also like the stated intention of the bill to streamline the processes, to better align the processes of personal and business bankruptcy, and to appoint competent and bipartisan liquidators. But let us remember that insolvency comes at the end of a business process that no one plans for, and that it is an inevitable part of the risky nature of business. So the swift administration of the process to ensure that creditors, debtors, etc. can move on should be the aim of this legislation.
We will scrutinise in the select committee the bill’s lofty statements and provisions to ensure that their implementation would not be at the expense of, in particular, start-up businesses that want to borrow and want credit to be extended by their suppliers. We will support this bill to the Commerce Committee, but there is a lot of work to do on it yet.
MARYAN STREET (Labour) : It is my pleasure to support the introduction and first reading of the Insolvency Law Reform Bill. I welcome the comments made by my honourable colleague who spoke just before me regarding the support of the National Party for the introduction of this bill. Clearly it is time to review the Insolvency Act—an Act that is nearly 40 years old. Other amendments to additional legislation—namely the Companies Act of 1993—have followed from that review.
The circumstances in which businesses and individuals conduct their business have altered substantially since the 1960s—and, indeed, since 1993. It is time to modernise our insolvency regime. The Minister has referred already, in her speech, to the key provisions and benefits of this bill. They relate to the personal bankruptcy procedure, the no-asset procedure, companies in financial distress, cross-border insolvency, and abuses arising from the efforts of phoenix companies to defeat creditors’ legitimate interests.
I wish to focus, in the short time I have, on a couple of issues in particular. The first is the policy intention of this bill. The first intention is to modernise and streamline our personal insolvency procedures while keeping intact fundamental principles of insolvency law. This bill provides for individual debtors to engage in a voluntary administration regime, to enter a no-asset procedure, to spend less time in bankruptcy—that time is reduced from 3 years under current provisions, as I understand it, to 1 year under this bill—and to be able to recover more quickly from their errors.
In all of this the rights of creditors need to be protected, as well. Because the no-asset procedure is a one-off reprieve for small-time debtors who have got themselves into difficulty, criteria must be met. These are that such people have no assets from which to repay debt, that their total debts are between $1,000 and $40,000, that they have no other means to repay any amount, and that they have a clean financial record—which means that they have not previously been declared bankrupt or admitted to the no-asset procedure. This is not a way out of bankruptcy for repeat incompetents; it is a way back for individuals who have got into difficulties.
The second area I want to focus on in particular is that pertaining to companies in distress. Again, the policy intention is important. We all know of companies considered to have been good traders that have got into trouble with their cash flow. In order to address the issues around the rehabilitation or reconstruction of these companies we need once more to balance the interests of creditors and debtors. That balancing is at the heart of this bill. Phoenix companies—so named because they rise from the ashes of past failed companies and use their previous name or a name like it—must not be allowed to defeat creditors’ interests. But providing some means of rehabilitation for these companies so that they are able to re-enter the economic arena having satisfied obligations adequately and fairly is an important provision in this bill.
In addition to those two areas, I think the work in this bill that seeks to promote international cooperation in relation to cross-border insolvency is important. It seems to me that the key points of this bill are to do with balance, modernisation, and alignment of New Zealand’s processes with comparable ones overseas—and Australia’s processes in particular are referred to in the introduction to this bill. But, more important, best practice must be observed. We have an interest in protecting creditors, for sure. We have an interest also in modernising our procedures in order to enable individuals and businesses to get back on their feet, get up and trading, and get back into economic activity on a sound and accountable basis.
Like the speaker before me, I welcome the referral of this bill to the Commerce Committee. I particularly look forward to the Inland Revenue Department’s submission to the committee, because I think that that department will have items of significance relating to past business practices that will be important. But, most of all, I look to have this essential piece of law reform, which seeks to update very old legislation that has long since passed its use-by date in business practice, brought up-to-date and made to work in the interests of both creditors and debtors.
CHRISTOPHER FINLAYSON (National) : This bill deals with financial bankruptcy, not moral bankruptcy, so the Labour MPs opposite can generally relax. As my colleague Pansy Wong said, National supports the bill’s first reading and its referral to the Commerce Committee, although our members will want to raise a number of important issues during the select committee deliberation. As is apparent to anyone who picks up the bill, it is a leviathan piece of legislation, and it will be impossible to cover the entire bill in the course of a 10-minute address—
Russell Fairbrother: Give it a go; do your best.
CHRISTOPHER FINLAYSON:—so I really want to say something about Part 8, which amends the Companies Act 1993, and also to look at Part 9, which deals with cross-border insolvency.
First, for the benefit of my colleague Mr Fairbrother, I want to make a few preliminary points about the slowness of commercial law reform in this country—a point I think he would understand if he were Attorney-General. That really is evidenced by the cetacean-like gestation period of this particular reform.
Let us go back to May 2001, when the Law Commission published an advisory report to the Ministry of Economic Development, in which it outlined the importance of insolvency law. It is worth repeating what the report actually stated: “In a market economy”—and we are still that, notwithstanding the endeavours by members on the Government side of the House to turn us into a social democratic paradise—“some businesses will succeed while others will fail. When businesses fail they are unable to pay their debts, and creditors suffer a loss. The overriding purpose of insolvency law is to fix rules where the order in which creditors will be paid on insolvency is determined.” So insolvency law is a very important area of the law. Indeed, the Law Commission report referred to the comment of a leading commentator that insolvency law was the most crucial indicator of the attitudes of a legal system, and was arguably the most important of legal disciplines. Where there is not enough money to go around, it is the law that chooses whom to pay.
As Ms Street mentioned, the Insolvency Act was last updated in 1967, and it sets out the insolvency regime for individuals, both living and deceased. There have been only minor amendments to that statute since 1967. Company law, as she observed, is a little more up to date, because the Companies Act was passed in 1993, but certain areas relating to company insolvencies were put to one side until that area could be thoroughly reviewed by the Law Commission.
As I indicated, Part 9 of the bill deals with cross-border insolvency. The Law Commission wrote a paper on that subject as far back as 1999, and it was addressed to my colleague the member for Bay of Plenty when he was the Minister of Justice. It recommended that the model law be introduced into New Zealand law. The next piece of work was undertaken by the Law Commission in 1999. At that time it published a report on priority debts and the distribution of insolvent estates. Then, in the year 2000, the Law Commission was asked to do some further work and, as I said, it reported in 2001. It is only fair to acknowledge the huge contribution to that report by Paul Heath, then a Queen’s Counsel and now a justice of the High Court in Auckland.
Between those reports and today, there has been a gap of almost 5 years, and I believe that that is simply unacceptable. In such a critical area of the law, law reform must be able to be undertaken more expeditiously than has been the case there. It is almost incredible that such a critical piece of legislation would take almost 40 years to be overhauled—from the time of the Insolvency Act in 1967 to the introduction of this bill. It is not in the interests of the New Zealand economy for our law to become so outmoded. It is also an insult to the Law Commission, which has done some very good work in this area over the years. Something needs to be done with Law Commission reports, once they are published, to ensure the commission’s recommendations are brought into law quicker than has been the case with regard to this bill. That is why I am pleased that Sir Geoffrey Palmer is now president of the Law Commission, because I think he will do something about that.
Let us look at Part 8, which introduces a very important amendment to the Companies Act 1993. The general purpose of the legislation has been outlined by Ms Street and others, so I will not dwell on it here. It highlights the problems associated with the existing business rehabilitation procedures that are currently contained in the Companies Act. It seems that the Government was faced with the option either of moving toward the United States chapter 11 mechanism or opting for the Australian voluntary approach. It has decided to follow the Australian approach, based on the Corporations Act 2001, which makes sense given the closer economic relationship between Australia and New Zealand, and the general desirability of harmonising business law on both sides of the Tasman—although why it took so long to make that policy decision simply escapes me.
I imagine that the business community will be very interested in Part 8, and will want to make submissions to the select committee on issues raised by it. The ones I am particularly interested in relate to who can appoint an administrator, to the effect of the administrator’s powers—particularly the effect on directors, and, most important, to employees—and to how the administrator will investigate the company’s affairs. My preliminary review of those provisions indicates that the correct balance has been struck, and that this bill will become very valuable law. Rather than a chapter 11 procedure, which is too protective of the company, the provisions try to seek a balance between the interests of the company and the legitimate interests of the creditors. It seems unsatisfactory that a company like United Airlines, for example, can rely on chapter 11 protection for over 3 years while it tries to sort out its affairs, and that is particularly why I like the concept of the watershed meeting, which is set out in Subpart 8 of new Part 15A, inserted by Part 8 of the bill. Things need to be brought to a head reasonably promptly, and watershed meetings can be adjourned only in accordance with the provisions of new clause 239AZ, inserted by clause 454. Of particular importance, and warranting the attention of the select committee, will be new clause 239ABA, also inserted by clause 454, which sets out what creditors may decide at a watershed meeting.
Another important change introduced by the legislation is the new Part 9, which deals with cross-border insolvency. Again, it is appropriate to acknowledge the outstanding work done by the Law Commission in that area, chaired by Justice Baragwanath. I particularly acknowledge the work of the Rt Hon Justice Blanchard, a former law commissioner who is now a Supreme Court judge, and of Peter McKenzie QC, a barrister in Wellington, who is the former chair of the Securities Commission and who has made a huge contribution to insolvency law in his career, including his current work in revising the insolvency law of Mauritius. Cross-border insolvency cases have become more common in recent years, and they are often linked to international fraud. In fact, the Law Commission’s report refers to Lord Millet of the House of Lords saying, as far back as 1991, that international fraud is a growth business. As we know from events in recent days over the pledge card, domestic fraud is doing quite well, as well.
Cross-border insolvency occurs when an insolvent identity is placed in a form of insolvency administration in one State, but has debts or assets in another State. The problem is how the law will be applied so that the assets in that other State can be properly wound up for the benefit of creditors. It is one area of the law where New Zealand cannot act unilaterally, and that is why in schedule 5 we are looking to adopt the model law that has been developed by the United Nations Commission on International Trade Law. Schedule 5 follows the original text of that model very closely—perhaps not surprisingly—in order to strive for a satisfactory degree of harmonisation and certainty as between companies.
One issue that interests me, and I am sure the select committee may want to look at it, is that schedule 5 will not apply to a registered bank within the meaning of the Reserve Bank of New Zealand Act that is subject to statutory management under this legislation. I agree that probably it does not make sense to include banks that are in statutory management within the model law, but it is certainly an issue that the select committee will want to have a look at. It will arise in this way: the Reserve Bank may decide that because of the insolvency of a bank that has been placed into a formal insolvency regime in, for example, Australia, it needs to be placed in statutory management here. In such a case it will not make sense that the model law will apply to that bank in New Zealand in circumstances where it was placed in insolvency in Australia.
So those are very important questions. Insolvency law is an area of the law that, as I said, is overdue for reform, and I look forward to seeing submissions on those and other issues.
R DOUG WOOLERTON (NZ First) : I will take a short call to say that New Zealand First supports the passage of this bill to select committee, and will make just a couple of comments on it. One of the things that we cannot help note is that there has been a marked increase in the number of bankruptcies of what we shall call private people—not through a case of going broke through some enterprise they have started up, not through a turn for the worse of circumstances that their businesses, be they large or small, have been involved in, but just through sheer what I would call consumerism. They have gone out and spent and spent. I think that says a lot about our society. I think it is a tragedy and I am pretty sure that I know what sort of people end up in this situation. To me they need help at an earlier stage.
I am pleased to see that this legislation will encourage early intervention. It will encourage a more open and transparent system, and a system that will be a lot faster. Those are all things that we applaud. We want to see this bill go further so we will be supporting it to select committee.
NANDOR TANCZOS (Green) : I also intend to make a fairly short contribution to this debate and rise really to indicate, like other parties before us, that the Green Party will be supporting this bill to select committee. We want to draw particular attention to a number of things.
First of all there are clauses in the bill to allow for the voluntary administration of insolvency proceedings for companies, which will increase the survival chances of viable businesses, or at least maximise the return to creditors, and we support the provisions to do that. Currently insolvent companies are closed and sold off, and there are obviously consequent job losses, and creditors often lose out significantly. So we think this provision will benefit a large number of people. It allows creditors to collectively vote on a rehabilitation plan for a company. There has been some contention around whether it provides the potential for failed directors to deflect scrutiny of their own business conduct, and we think that that is something that the select committee should have a look at, but in general we think the provision is worth supporting. In that regard I was a bit surprised to hear the comments by Pansy Wong. Perhaps I am mistaken, but she seemed to be suggesting that business failure is only observable in hindsight.
Pansy Wong: Yes.
NANDOR TANCZOS: I find that a surprising idea. I do not know how it has been for the member, but certainly when I ran a business—in fact in all of the businesses I have ever run—I was intensely aware of the prospects of success or failure at any particular moment. When things got tight, as they inevitably did, and I think they probably do in all small businesses, I knew exactly how tight they had become.
Pansy Wong: How many businesses?
NANDOR TANCZOS: Quite a few actually; the member would be surprised. So I was a bit surprised by the comment that those things were only observable in hindsight, because I think that people who run businesses are acutely aware of the financial position of their companies. I think it is perhaps short-changing the business owners of New Zealand to suggest that they are not aware of those things.
We also support the establishment of criminal penalties for phoenix companies and directors who intentionally cause creditors material loss. We think that that is a positive step, so we support it. We support the idea of harmonising our insolvency law with Australia’s, and also the readdressing of the priority of debts, allowing for the principles of fairness and equity in determining payouts. I draw attention to clause 272, where those priorities are set out, in particular following the comments of Ross Wilson about the need for protection for workers when it comes to insolvency and the very serious situation workers often find themselves in. They have not always had a high priority.
Of course, all creditors are casualties when it comes to insolvency, but an employee is likely to be someone whose entire income is derived from that company through his or her job there. Therefore I think there does need to be some particular consideration for employees’ interests, and the provisions in clause 272(2) are something that we welcome. Clause 274(1), which increases the maximum amount that can be paid out in those circumstances from $6,000 to $15,000, is also something that we support.
So we support the bill to select committee. We think there are some issues that the committee needs to address, but essentially we are very welcoming of this long overdue revision of the insolvency laws.
HONE HARAWIRA (Māori Party—Te Tai Tokerau) : It seems that the current insolvency laws do not work properly, which means more costs for creditors and debtors, and more liquidations and bankruptcies, hence the need to change the law. While the business community and insolvency professionals have been kind of positive about this bill, there are a few points that I need to mention. One of them is the concept of planning for failure and recognising failure as an opportunity to improve on previous effort. Failure is not something to be feared. Indeed, if Colin James is to be believed, failure is a characteristic of our current financial situation. He said recently in a management magazine: “There is a growing anthology of Maori business, professional, artistic, and sporting success, but unfortunately it is swamped by failure.”
I am not in the habit of agreeing with Mr Colin James but I do agree with him when he says that failure within the Māori business community is a failure of the whole nation. He rightfully acknowledges the righteousness of the Māori Party philosophy, which is that what is good for Māori is also good for the nation as a whole. It is one thing to identify failure, it is another thing to put in place processes that do not just penalise failure, but also create new opportunities for growth. The Māori Party supports any initiative that does that.
This country’s personal bankruptcy laws were last reviewed in the 1960s, and our corporate insolvency laws were last amended in the early 1990s, but the business world today is very different to that of the 1960s or, indeed, to that of over a decade ago. We know that Māori were really hurt by the removal of tariff protections, the restructuring of the State sector, and the sale of forestry, the railways, and the telephone and electricity industries. It was also Māori workers in textile, clothing, footwear, car assembly, and meatworks who suffered. That was a crisis point in our business and economic growth. Māori whānau continue to suffer through ongoing globalisation.
The legacy of that betrayal of the Māori workforce lingers still. How do we know? It is easy, actually. At the start of this year unemployment for non-Māori was only 2.5 percent compared with a shocking 7.6 percent for Māori. The failure to provide, the failure to encourage, and indeed the failure to support endeavour is very much part of our experience. But we also know that Māori perspectives are relevant to successful business start-ups, that Māori business potential is under-recognised and underdeveloped, and that Māori business would benefit from early intervention and the opportunity for help to enable them to manage their way though difficulties, to stay afloat, or to limit the expense of bankruptcy.
We note the latest research by the Global Entrepreneurship Monitor, which listed Māori as the third most entrepreneurial people in the world. The study also identified a remarkable optimism and readiness for Māori to start a business. It unfortunately also noted a poor record in business survival. Again, the Māori Party is supportive of any efforts to enhance business survival and business growth. We also of course recognise that the most important thing is to try to prevent financial strife in the first place.
Although it is a bit outside the scope of this bill, the Māori Party believes that we cannot clearly identify business success or failure without also looking at our tax laws. Māori businessmen tell us that the company taxes for small businesses are too costly, while also noting, with some sarcasm, that the Government’s very own Inland Revenue Department always makes sure that it is at the head of the creditors’ queue. The Māori Party believes that the whole area of business tax needs urgent review to enable businesses to grow and to develop wealth for the whole nation. When we talk about wealth, we are talking about investment, research and development, and innovation, but also about the right to full employment and higher wages. We also note the changes to corporate insolvency proposed in the bill, which would provide for rehabilitation of viable insolvent companies and a better return for creditors. The Māori Party supports any efforts to modernise and improve processes that are unwieldy, burdensome, and costly for all parties.
Finally, the House should note that the biggest asset of Māori with untapped potential is the value of our human capital, and that is very much the case in the context of developing enterprises. The largest increases in the number of Māori aged between 15 and 24 years will occur before 2011, which means that the next 6 years will be crucial for developing the skills of this workforce. It is never too late to get it right. We must get it right for our young and for our future.
CHRIS AUCHINVOLE (National) : The National Party, and myself as a member of it, welcome the bill’s introduction, but with some reservations. Mine are in two respects: simplicity and enforceability. In terms of simplicity, I have regard, in particular, for small entrepreneurial businesses. Most small entrepreneurial businesses enjoy getting on with the job. Endless compliance and endless complications make their life untenable.
My experience in business extends to working with the New Zealand Dairy Board, a large corporate, milking cows with my brothers, and working as a small trader and a very proud member of the Export Institute based in Auckland. It is sobering to look up the figures today to find that only 4 percent of New Zealand businesses are engaged in exporting.
Dr Jackie Blue: Only 4 percent?
CHRIS AUCHINVOLE: Only 4 percent, I say to Dr Blue. There is a desperate need to encourage more business growth and more export growth. One of the restraints on entrepreneurial activity surrounds credit and creditors, and debt and debtors.
I agree with the earlier speakers, and particularly with the one who said that he had an ever-present eye on the financial state of his company. Being in an entrepreneurial business and dealing with a range of debtors who may or may not pay on time is a tightrope-walking exercise. Currently, there is a drive in New Zealand to encourage exports to the South Pacific. It is a drive that I really welcome on a personal basis, having spent perhaps two decades working in the countries of the South Pacific as an exporter from New Zealand.
One of the key comments from the experienced traders, when introduced to this new initiative, was that people should take care of the credit situation when dealing with some of the client base in the South Pacific. My own experience as a manager of the New Zealand Dairy Board’s South Pacific sales and marketing operation, and my subsequent decade as a sole trader exporting into the South Pacific, provided a range of knowledge in this field. As a supplier to Auckland-based Pacific traders, I was conscious that their problems could become mine. As a supplier to small trading businesses through Papua New Guinea, Micronesia, Melanesia, and Polynesia, we always had to be vigilant over the customers’ ability to make their payments. Members should please note that I did not say their ability to make their payments on time; I just said their ability to make their payments. That is no easy science in export trading, given the difficulties in communication, language differences, cultural difficulties, and the vagaries of small-business economies.
The proposed Insolvency Law Reform Bill will, in my view, assist with that, particularly in its definitions, but it will not be a panacea for easy trading without vigilance. It will not in any shape or form alter the disciplines of trading. One of the concerns that I have on this side of the House is the obvious limit to business experience on the other side of the House, and the seeming dependence that Labour has on regulation, legislation, political correctness, and bureaucratic compliance, as if those things change commercial realities—and they do not. Pirates exist today just as they did in the story books, and regulation often makes them more inventive than honest. Vigilance on the part of those in business is ever important and must be one of the instruments of successful trading.
To offer members a perhaps amusing incident, I well recall a communication that we once received from Guam, where a customer, who was on limited credit, demanded to know where his butter was, as he had already sent his cheque. He followed that by sending us a faxed copy of the cheque he had sent. In a classic case of Kiwi nous, one of the marketing lads whom I employed—he was a fair ripper—sent a fax back that read: “Here’s a photo of the butter you’ll get when we get the money you sent us a photo of.” Indeed, many are the tales that can be told, but particularly of the successful opportunities for business that exist within the Pacific Basin for trading with the many experienced and ethical businesses that exist there and that have been trading for decades.
The significance of the new opportunity offered by the Pacific Trade Expo—which should appeal to Mr Woolerton, because I believe that he supports exporting—from the New Zealand Pacific Business Council needs to be accompanied, though, by an understanding of what constitutes business practice beyond just buying and selling. The Insolvency Law Reform Bill goes some way to acknowledge and recognise that risk is a major feature of trading, and that overly stringent regulation can suffocate trade.
I have just attended a series of A and P meetings throughout the West Coast and Tasman districts. I have just completed a short burst last week of branch annual general meetings. Increasingly, without prompting, the conversation falls to the reign of suffocating stringent regulation that people are currently trading with. People are sick of it. Risk is part of business development and it is something I, as an exporter, along with every other exporter, engaged in all the time when in business. When we look at exporters and at their faces, it is not just laugh lines we see. Nothing could be that funny. Having recourse to justice in the case of customer insolvency is never much of a consolation and at best the situation is a mess.
However, I think the Insolvency Law Reform Bill offers to make it less of a mess than it was. But at best it will always be like doing the dishes after the party is over, and the definition of insolvency, at least where it technically occurs, has never been an exact science. I would have to say that in the case where customers are working on a continuous supply, it is difficult for small traders to know exactly when they might reach an insolvency point, because they are also dependent on the actions of others in paying them. I guess that the definition of insolvency, though, will improve and will assist in resolving some of the situations.
There are also signs of insolvency stress—signs that are well known to all who have engaged in trading, particularly international trading and exporting. Within the transaction we see on the other side of the House there seems to be increasing tension in the relationship between the parties concerned, which is a sure sign of difficulties. The principals of the parties appear less often and say less, another sign of difficulties emerging, and there is a reluctance to engage in conversation or to answer questions.
Having been a member only since September, may I say that my exporting instincts repeatedly lead me to the conclusion that there are serious systemic problems in the parties on the opposite side of the House. Frankly, if it were a commercial situation I do not think they could pay the bills. I do not think they will pay the bills. I think they will turn on their own and their associated parties when the bills come to a point of not being able to be met and work and programmes have to start being cut back.
A further feature of the Insolvency Law Reform Bill that I applaud on first sight during this first reading debate is the section on phoenix companies—companies that rise from the ashes and continue trading with the same directors, leaving behind them debts that were never to be paid out, prior to the features of this bill. Basically, there is a type of person in so-called business who uses bankruptcy and insolvency provisions as a device to avoid the true responsibility of his or her position. I will be pressing to see how the enforcement regime for this bill’s clauses will be instituted for the people we intend to assist and the people we intend to restrict. Once the bill has been referred to the Commerce Committee I do not doubt that it will emerge in a worthwhile form.
GORDON COPELAND (United Future) : I rise on behalf of United Future to take a fairly brief call in the first reading debate on the Insolvency Law Reform Bill. As other speakers have already said, it is timely that we as a Parliament grapple with what is a fairly formidable bill—about 290-plus pages—to overhaul and review New Zealand’s law relating to bankruptcy for individuals and insolvency and liquidation for companies.
I would like to pick up on one or two aspects of the bill in my brief remarks. Firstly, I am delighted that the bill will provide for the rehabilitation of viable insolvent companies where it is expected to result in a better return to the creditors of the insolvent companies. I certainly as an MP have had a number of suggestions from the business community that in New Zealand we should aim for a kind of chapter 11 situation, as it is known in the United States, whereby a company that realises that if it perseveres with its existing cost structure, etc., it will end up insolvent can, with the assistance of creditors and the law, continue trading, with a view to re-emerging as a viable ongoing enterprise. I think there is a lot merit in that.
United Airlines, which I have flown with quite a bit, is presently in a chapter 11 arrangement in the United States, and it would be devastating for the American consumers and people in many, many cities in that country if United Airlines had been forced into premature bankruptcy, rather than being given a chance to work its way through the situation, which it appears to be doing successfully. I think that is to be applauded.
The other thing I see in the Government’s overall objectives, which I likewise like, is that we need to ensure that our insolvency laws for businesses and bankruptcy laws for individuals do not stifle innovation but encourage responsible risk-taking and entrepreneurship rather than penalise people who, with the best of intentions, start off to improve their lot in life and make an important contribution to our economy and then find that they have come adrift.
We must continue to foster that number eight fencing wire, risk-taking Kiwi philosophy. I agree with the previous speaker, Chris Auchinvole. I also find a lot of businesses are now saying that they are stifled by the heavy hand of the State. I am thinking particularly of the way in which our occupational safety and health laws are administered on the ground—to eliminate risk. Indeed, business surveys of small and medium business indicate that occupational safety and health regulations are now their No. 1 oppressive, regulatory undertaking. Sometimes the thought behind it is good—we want to reduce industrial accidents—but the application of the law is aimed at stifling legitimate risk-taking, which is the lifeblood of business. So we need to ensure that we get those kinds of balances right. This bill does not address that issue particularly, but it is a very serious issue. Therefore I welcome a Government objective that says we have to recognise that business does include risk-taking and learn to live with it. After all, it is a proven fact of business in New Zealand, when we look around, that many businessmen and companies that go on to be very successful have been through one or more insolvencies or bankruptcies. Very often it is the very lessons that are learnt through that experience—and I am not saying it is a desirable outcome; just that it is a factual situation—that sow the seeds of being very successful in the long term. We need to bear that in mind.
Accordingly, I also commend the no asset procedure in the bill as an alternative to personal bankruptcy. The commentary on the bill states that it is designed to be less punitive to individuals and have significantly less social stigma attached to it. I think that also is a good thing. Again, we need to keep a balance, but as I have just said, the reality is that very often it is by going through bankruptcy or insolvency that we learn the lessons of life and then go on to be very successful. It is very, very important that we keep that door open to allow people to recover from such situations and go on to contribute positively to our society and our economy. Again, like Chris Auchinvole, I do draw the line at people who deliberately use our corporation law and our insolvency law to try to escape legitimate responsibilities to their creditors. As others have said, I think we need to be sure and shut the door and close loopholes on people who can, for example, deliberately, from day one, form a company with the idea that having done a couple of highly questionable projects—I am thinking, for example, of some of the leaky homes—they will then place that company into liquidation and walk away from their responsibilities. So that is the other side of the ledger and we, as I mentioned, need to take both into account and ensure that we have a balanced outcome. So with those few remarks I signal United Future’s support for this bill.
RUSSELL FAIRBROTHER (Labour) : I will not tarry long in my call. I welcome this bill and, as someone who has accepted instructions both, reluctantly, to prosecute bankruptcies, and, more enthusiastically, to defend them, I welcome the retention of the normal tests for defence of a bankruptcy and the move away from the punitive interpretation of bankruptcy. It must be remembered always that a bankruptcy is not an act of punishment of a debtor; it is a decision made by a court as to what is safe for the commercial community. It is an effort to strike a balance between someone who is having trouble paying the bills and the threat to the commercial community of that person’s continuing in business. I welcome, indeed, to the legislation four new bankruptcy provisions.
In my address today I do not intend to speak on company insolvency; others have concentrated on that. I want to go back to the personal bankruptcy provisions—a most important part of this bill. Clause 66 is significant even though it is brief. It is a direction that a court may order the non-advertising by an assignee of an adjudication if that matter is under appeal. One of the areas of adjudication in acting for people who have been placed into bankruptcy in a disputed circumstance is that the damage has often been done because the matter has proceeded to advertisement, even though a later annulment may occur. So I welcome clause 66, which follows the move away from a strictly punitive interpretation of our bankruptcy laws.
Clause 102 is an interesting addition to the legislation, and I hope it is one the select committee will spend some time on. It deals with after-acquired property. This is property that comes to a bankrupt person not by virtue of his or her estate but by other matters. Currently, the bankrupt can deal in that property until it becomes a matter of interest for the official assignee. Under clause 102, all after-acquired property automatically comes under the jurisdiction of the official assignee, as it should do.
Clause 117 deals with onerous property. It gives the assignee the ability to put other parties on notice that any interest they have in what they claim to be an asset no longer exists. There is a provision to dispute that with speed and with some responsibility attaching to it. The interesting new addition to the legislation, which should not be too onerous on anybody, is clause 155, which enables the assignee to require a bank to search its records for any business involving the name of the adjudicated person. That is a sensible addition in today’s modern society.
Clause 156 is an enlightened alteration to the present law. It brings in the right to retain a motor vehicle up to $5,000 and gives the right to have that amount increased. But, interestingly, instead of having the arbitrary maximum-value figures that a bankrupt person could retain for tools of trade and personal property, those limits have been removed and it becomes a matter of discretion for the assignee. I have to say that in practice the assignees have probably been applying a discretion rather than a strict interpretation of maximum values. This puts the practice, as I glean it to be, on to a sensible footing, so that the assignee can, in fact, appraise the bankrupt’s position and leave the bankrupt with minimal but necessary assets to live his or her life and to go about whatever lawful business he or she can pursue.
So with those few words I want to direct my thoughts towards the bankruptcy provisions of this bill. I reject my friend Mr Finlayson’s criticism of the speed. I note that in 1993 the insolvency provisions were touched on in what has now been proven to have been an inadequate way, but, of course, that was the under the National Government. This is a complete, comprehensive, omnibus bill, which means the Companies Act rewrites the bankruptcy laws and is, in some respects, much more invasive. It has taken a long time in gestation, as it should do. Let us hope that the select committee can work through the submissions with expedition and satisfy Mr Finlayson’s concerns.
DAVID BENNETT (National—Hamilton East) : After such great representations from the National Party from Pansy Wong, Chris Finlayson, and Chris Auchinvole, who have already spoken on points for and against the bill, we have yet to go into the detail of the bill, but that will come through in the select committee. However, there is a genuine need for reform of our insolvency law legislation. This legislation has suffered from a number of inefficiencies since its last review a generation ago. Insolvency laws are important in providing a framework where individuals and companies that are in trouble financially can, as a result of the law, repay the creditors of those entities and bankrupt individuals.
There are some underlying reasons for the need for change. First, since the 1960s there has been a change from individuals’ insolvency being caused by business failure to a situation of it being caused by overspending on consumer items. The movement towards a consumer society has meant that those who want to live a certain lifestyle but who do not have the means, have had to sustain that lifestyle through borrowing, and this has led to insolvency in some cases. Secondly, there has been a realisation that many of the processes involved are too restrictive and difficult to progress. Much of this relates to administrative processes and the need to align those with a much more efficient and effective system.
The first of those reasons relates to the consumer society that we now have, and that has been accentuated by the current Government’s economic policy, which has favoured a high exchange rate to encourage imports and individual consumption of consumer items. This Government favours a high exchange rate with little regard to the productive face of an export-led economy. It has presided over a continual increase in interest rates on consumerables that have to be repaid, leading to poor cash flows for individuals and families.
This Government has no qualms over increasing the availability of credit. Its student loans policy provides the incentive for young people to borrow more than they need. The Government-owned bank, Kiwibank, has the most lenient capital lending requirements in the retail housing market. This is a tax-and-spend Government that sends the wrong signals to hard-working Kiwis through its Working for Families package, which entails the entrapment of a new generation of New Zealanders into a path of dependency and reliance on Government cheque books. This Government has presided over the decline of a growing economy and has strangled the growth that would have enabled individuals to meet their debts.
The Labour Government of the late 1980s and the great National Governments of the 1990s set up this country with a strong economic base—a base that this Labour Government has strangled through its obsession with increasing compliance costs, overly restrictive labour laws, and an excessive taxation regime. There has been nothing to encourage growth—but encouraging spending is something this Government has done. The net effect of low growth and high spending is a higher rate of individual bankruptcy. This Government needs to take responsibility for providing an environment that encourages and downright promotes overspending by consumers. It is an environment complicated by a promise of a “chewing gum Budget” that sized tax cuts leading up to Christmas, but since Christmas those tax cuts have been downsized to nothing but a breath of broken promises from this Government. But people should not worry, because Cabinet papers supporting this legislation state that the bill complies with the rights and freedoms contained in the New Zealand Bill of Rights Act 1990 and the Human Rights Act 1993—that is all we need!
In essence, this bill provides, first, for companies that are in financial trouble to restructure under a voluntary administration regime. A form of voluntary restructuring is to be welcomed and, although not of the same effect as the US Chapter 11 bankruptcy examples, this will assist companies that have a prospect of rehabilitation. There is a welcome move of harmonisation, especially with Australia. However, there has been some disquiet among commentators over the bill’s failure to preserve tax losses under the voluntary regime. Combined with a requirement to keep Government debts, namely, PAYE and GST preferences, a priority, this may also limit the bill’s effectiveness.
Secondly, the bill strengthens the provisions relating to phoenix companies. As some have described, phoenix companies are where the directors of a failed company, for example company A, divert some or all of the assets to a second company, company B, at less than their economic value. This means that the legitimate creditors and company interests of company A can potentially be defeated—that is, a director of a failed company immediately transfers assets to a new company with a similar name, to the detriment of creditors. This bill bans failed directors from acting as directors of companies with such similar names, including trading names.
Thirdly, there has been a streamlining of the bankruptcy administration process. This includes the use of a no-asset procedure. This will be less punitive on individuals and will carry less social stigma. It would apply to first-time debtors who cannot repay their debts. Those are people who, generally through overspending on consumer debts, have become unable to meet their commitments. Those people are not adequately dealt with under the current law, and many of them are just living life on the edge. Sometimes they are unable to manage the difficult balancing act in the situation they get themselves into. Essentially, for those debtors who have found that they are unable to meet their commitments, bankruptcy was often onerous, and it sometimes had an overly restrictive effect on their ability to function in our society. Under the no-asset procedure, there will be a one-off opportunity for individuals with no assets to be subject to a 12-month—rather than the current 3-year—period. There will be an automatic discharge from the no-asset procedure 12 months after the date of admission.
Under the Cabinet briefing paper, discharged bankrupt people’s names are kept on the official assignee’s public register for the following reasons: first, knowing whether someone is discharged can affect that person’s creditworthiness, and it is useful for credit providers; second, it may assist the individual to make a fresh start after his or her discharge.
Overall, the bill proposes to provide a streamlined and more efficient regime for those with financial failure, with the minimum necessary compliance costs, and with no overly stifled business risk-taking through excessive penalties. It will distribute proceeds to creditors under their prior entitlements, unless public interest for greater protection of certain creditors outweighs the cost of such priorities. It will maximise returns to creditors by suppliers by a simpler and more flexible process. It will enable individuals in bankruptcy to participate fully in the economic life of the community, and it will bring closer alignment and regulation with international trading partners.
The bill does provide for reform in an area of overdue need. However, the Government needs to take responsibility for the increased potential of personal bankruptcies due to its economic policies over the last two terms.
- Bill read a first time.
- Bill referred to the Commerce Committee.referred to Commerce Committee