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Insolvency Bill, Companies Amendment Bill, Insolvency (Cross-border) Bill — Third Readings
Companies Amendment Bill
Insolvency (Cross-border) Bill
Hon LIANNE DALZIEL (Minister of Commerce) : I move, That the Insolvency Bill, the Companies Amendment Bill, and the Insolvency (Cross-border) Bill be now read a third time. These bills repeal and replace the Insolvency Act 1967, amend and add to the corporate insolvency provisions in the Companies Act 1993, and create new legislation on cross-border insolvency. These bills are designed to provide for an insolvency regime that is simple, predictable, and efficient to administer, without imposing unnecessary compliance and regulatory costs on its users. It is designed to promote innovation—
The ASSISTANT SPEAKER (H V Ross Robertson): Would members leaving the Chamber please show some courtesy to the member trying to address it. It is common courtesy. Thank you.
Hon LIANNE DALZIEL: These bills are designed to promote innovation, responsible risk-taking, and entrepreneurialism by not excessively penalising business failure. They are designed to distribute the proceeds to creditors in an equitable manner and in accordance with their relative pre-insolvency entitlements. They are designed 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. They are designed to enable individuals in bankruptcy to participate fully again in the economic life of the community. Finally, they are designed to promote international cooperation in relation to cross-border insolvencies.
These bills represent an important step in the Government’s economic transformation agenda. They promote business investment, greater innovation, and economic growth by providing effective and efficient ways to deal with the financial failure of both individuals and companies. More specifically, the Insolvency Bill makes 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, with the ultimate goal of maximising returns to the creditors.
The Insolvency Bill also introduces an alternative to personal bankruptcy known as the no-asset procedure, which is aimed at consumer debtors. Many of the punitive aspects of bankruptcy, such as restrictions on overseas travel and on owning a business, are not applicable to consumer debtors. This 12-month procedure for forgiving debt is a once-only chance for consumer debtors. I believe it will make those who offer credit to individuals who are unlikely to repay it much more cautious about doing so. I am disappointed that the National Party extends the principle of personal responsibility only to those who end up in unmanageable debt and not to those who extend credit without undertaking appropriate steps to secure their interest.
The Companies Amendment Bill adopts the Australian voluntary administration regime for companies in financial distress. This regime is an alternative to liquidation. It allows for a moratorium period for the administrators to assess the viability of the company to continue trading before making a decision to either rehabilitate the company by placing it in voluntary administration or enter into liquidation proceedings. 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 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. Even if that is unsuccessful in terms of resolving the matter and a liquidation follows, evidence from Australia shows that the returns to creditors are indeed greater than they would be otherwise.
Opposition members spent most of their time on the involuntary administration sections of the bill, due to the provisions that maintain the Crown’s priority as a preferential creditor in the bill. I wish to reiterate a couple of points. First, the Inland Revenue Department is an involuntary creditor. It does not have a choice about which entities it deals with. It cannot secure its interests in any way other than through the preference. Secondly, PAYE, GST, resident and non-resident withholding tax, child support, and student loan payments are all collected on behalf of the department.
Opposition members did not spend time talking about the Australian-style director penalty notice provisions that have replaced the Crown’s preferential creditor status in Australia. I can only assume that they agree with making the director of a company personally liable for that company’s tax debts if he or she does not take appropriate action to pay the Inland Revenue Department within a certain time period, as occurs in Australia. I believe that the case has not been made to warrant such a significant increase in directors’ liability, because it would further erode the fundamental concept of limited liability that underpins our company laws.
Provisions have been introduced in the bills to restrict the abuse of phoenix company structures by directors of failed companies with the intent to defeat the legitimate interests of creditors. The Companies Amendment Bill proposes to restrict the reuse of the failed company name and provides for criminal sanctions where the director has acted in bad faith to defeat creditors’ legitimate interests. The changes proposed in the bill eliminate the potential benefits to directors and, therefore, provide fewer incentives for directors to abuse phoenix company arrangements.
Improvements to the law relating to cross-border insolvency are included in the Insolvency (Cross-border) 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 it is adopted by Australia, given that Australia is our largest and closest trading partner. Australia has announced that the United Nations Commission on International Trade Law model law will be included in its corporate insolvency reform bill, which is intended for introduction late this year.
Further changes were made to these bills at the Committee stage in response to issues raised by businesses and other Government departments. Those changes are largely technical in nature and will improve efficiency for those administering the regimes. A number of minor amendments that were necessary to better target some of the provisions and to ensure the efficacy of others are included—for example, consequential amendments made as a result of the enactment of the KiwiSaver Act, and the extension of the jurisdiction of associate judges to all personal and corporate insolvency matters.
I commend again the Commerce Committee for its tremendous work in fine-tuning these bills, and I thank those who made substantive submissions on the bills. I also thank the officials for their tireless efforts in engaging with the sectors throughout the process. They made it a very open and transparent process and, at the same time, delivered a discussion document on whether to regulate insolvency law practitioners. And, just to use this speech as another little advertising opportunity, submissions for the discussion document close on 2 February next year.
These bills are an important part of the Government’s wider business law reform programme and its economic transformation agenda. They create an appropriate business environment for attracting investors, enhancing the integrity of insolvency practitioners, and, ultimately, assisting in economic growth by providing confidence to business investors that sound insolvency regimes are in place to deal with business failures. I commend these bills to the House.
PANSY WONG (National) : Business failure is a difficult time for all concerned but, unfortunately, it is an integral part of operating a business. National agrees with the objectives, as outlined by the Minister of Commerce, of the major review of insolvency law that has been carried out since May 1999, and that has resulted in this current legislation. The objectives—rightly so—are to make a simple and predictable regime, to maximise the returns to creditors, to not stifle innovation, and also to encourage businesses to work their way back. The Minister credits this legislation as complementing the Government’s objective of economic transformation. Business recovery has to be a major part of that, and that is why National has spent so much time discussing the centrepiece of the original Insolvency Law Reform Bill, the voluntary administration scheme. This scheme is aimed at giving people who have taken responsible risks, but have ended up in the unfortunate position of being insolvent, an opportunity to recover their businesses.
During the review undertaken by the officials, they concluded that New Zealand’s current business rehabilitation law is seldom used, and seems to serve little real purpose, either in terms of salvaging businesses that are essentially sound but have got into difficulties, or in terms of increasing the returns to creditors. They found that assisting business recovery was difficult. The reasons are that, at the moment, during a situation of insolvency only four options are available. The first is that the bank appoints a receiver. Usually, that means the business assets are sold, the bank calls on the directors’ personal guarantees, and nothing is left for anyone else. The second option is to appoint a liquidator. Once again, the business assets are sold, and, usually, the amount recovered is quite insignificant in terms of benefiting other creditors, particularly unsecured creditors, or in terms of enabling the business to work itself out of that situation. Option three is to attend an out-of-court restructuring, which is always difficult because it requires all creditors to agree. The last option is to attempt a creditors’ compromise. Unfortunately, because there is no provision at the moment for a moratorium—during which the creditors do not enforce payment—it is quite difficult for all the creditors to adhere to not enforcing payment.
So we know that the current law does not help businesses get out of a difficult financial position. But the Commerce Committee members learnt during the very useful and informative submissions from the many submitters that, in many instances, the major creditor is the Inland Revenue Department.
At this juncture I would like to pause to acknowledge formally the generosity of the submitters, who largely were involved in insolvency practice. They provided sound and technical submissions, with practical illustrations, to the committee. I am sure that I speak on behalf of all its members when I say that we found them very beneficial, and we are indebted to them. I also acknowledge the work done by the officials and the support they gave, because the original bill was very large and technical.
Many submitters quoted examples that they had seen of the Crown preference for outstanding PAYE and GST being of such a substantial amount that it would not allow the company to trade into the future. The Minister tries to defend the Inland Revenue Department by saying that it is not a voluntary creditor, but one has to question why the department allows individual businesses to get behind with that money, which they hold in trust for, and collect on behalf of, taxpayers. Why does it allow a business to hold on to it for so long that it becomes a problem for that business and for other people? The department should be more proactive in enforcing the collection of those deductions, which, technically, are trust money held by the business.
The slackness of the department’s attitude has a lot to do with it. The fact that the department knows that it enjoys preferential creditor status is the reason, it was suggested by many submitters, the department is a bit relaxed about enforcing those payments. The department knows that it enjoys preferential creditor status if a business gets into trouble. Therefore, it allows the directors or proprietors to start to use that money, which does not belong to them, as cash flow in order to cover the problems of the business. One could argue that if the Inland Revenue Department were to take action more promptly, it either would minimise the losses of all the other creditors, or might force the company to take action in those difficult times.
One high-profile reported business failure concerned a Wellington restaurant. The Kopi restaurant went into liquidation, and it was reported that it had not handed over PAYE deductions for 3 years. It took another 3 years for the Inland Revenue Department to take any action. One supplier, who was owed $28,000 by that restaurant, has described his chance of recovering his debt as being less than that of winning a first division lottery ticket. One has to be fair to unsecured, small creditors. They do not have the benefit of being able to refuse to give credit to a lot of their customers. So who is looking after their interests? Certainly, we know that the Labour Government does not care about them.
In another court case, in Greymouth, Judge Christiansen described the Inland Revenue Department as “lurking in the background like a shark waiting to consume failing companies”. The reason he made that statement was that the failed company that was the subject of the case had initially owed the Inland Revenue Department $90,000, but eventually penalties etc. took that debt to $200,000. There was nothing left for any unsecured creditors.
The conclusion is that the current business recovery options do not work. One of the key decisions that the officials recommend is to introduce voluntary administration. The Minister continues to misrepresent the situation. The voluntary administration scheme is not modelled completely on the Australian case, and it is not true that National would jump on the idea of increasing the directors’ liability. The Commerce Committee was presented with the option of limiting the Inland Revenue Department’s preferential creditor status to a time period or to a certain type of deduction, and I found it offensive that some Labour members stopped the select committee from continuing to debate a real, viable option.
I also want to pose a question to United Future, which claims that it is looking after small-business people: why is United Future choosing to protect the Inland Revenue Department ahead of small businesses—and the same goes for New Zealand First? We understand that Labour, of course, is trying to protect the inland revenue. It is famous for grabbing as much tax as possible, which it can then use to bribe all sorts of sectors, or even to produce its pledge card for electioneering purposes. National opposes the legislation because we believe that the Inland Revenue Department’s interests should not be placed ahead of small-business people. Unsecured creditors and business people who genuinely get into trouble should be given a real chance of working themselves out of those financial difficulties.
KATHERINE RICH (National) : As I rise to make a contribution to these third readings, I would first like to thank the officials, who I think worked very studiously and thoroughly with the Commerce Committee. As chairperson of the select committee, I thank all the members who partook in the process. We are very fortunate that there are no duds on the Commerce Committee, and that all its members are very thoughtful, capable people.
I would like to make a few comments about some of the changes that the select committee was not able to make. One of the aims of this legislation was to look at different ways of encouraging business rehabilitation—to hopefully save more businesses from difficult times and to allow for situations where businesses have run into problems of failure. The select committee spent quite a lot of its time working on the voluntary administration regime, which we have virtually adopted from Australia and, of course, which we also took some guidance on from the United Kingdom. I have real concerns about the implementation of a voluntary administration procedure, because I believe, for two reasons, that it has been nobbled before it has been implemented.
The first reason is that because of ideology the Government has refused to reconsider the issue of preferential treatment for the Inland Revenue Department. We heard some very good arguments from submitters who came along to the select committee and said that the voluntary administration regime would be hampered if that issue were not dealt with, because the Inland Revenue Department would have no motivation to agree to a deed of company arrangement. In fact, submitters said that the Inland Revenue Department would be motivated to vote against a deed of company arrangement, because it would be likely to get more money as a result of its preferential creditor status than if it were part of a deed of company arrangement where it would have no special treatment, and in fact would be lined up with everybody else.
When we looked at the Australian and the UK models, we found that both those models had given away the Crown preferential status and had seen no ill effect. In fact, in Australia in particular the voluntary administration regime has been successful, and very little money has been put at risk on behalf of the Crown. When we asked officials who came to talk to us how much money was actually at stake, they told us that the figure was $5 million. I do not think that that is a large amount of funding when we weigh up the issue of trying to save some businesses from liquidation and moving them into an alternative regime where they can hopefully trade out of their difficulties. So that issue could potentially affect the success of this regime, and we will be watching very closely to see whether that is the case.
The second issue relates to some concerns about the qualifications of liquidators. This concern has not been addressed properly at the select committee level or during the Committee stage. One of the major accountancy firms put in a submission that said that if a firm satisfied the definition for being a liquidator as written in this bill, that would basically lock out the major firms from undertaking some of the more complex and large liquidations in New Zealand. The bill is worded in such a way that the definition relating to firms having an ongoing business relationship with any of the secured creditors is so vague that many of our best larger firms would not be able to undertake that work.
One of the firms argued a recent case—that of Feltex. The major secured creditor for Feltex, as we all know, was the ANZ. If we look at all the major accounting firms—like Deloittes, PricewaterhouseCoopers, etc.; I am sure members know the list—we will see that very few will not have some kind of continuing business relationship with the ANZ. We are a country of 4 million people. We have only a small number of banks and a small number of accountancy firms. They work together very closely in a continuing business relationship but, by the way this bill is worded, potentially they will be locked out from taking on the role of liquidator in some of our larger and more complex cases. As a country we cannot afford to have that situation, because we suffer from a skill shortage as it is, without making the pool of talent even smaller.
I understand that accountancy firms will be watching very carefully the interpretation of this definition, and those firms have an intention of challenging some of the law in the event that they are precluded from undertaking that work. It is quite a serious omission and could undermine the voluntary administration regime. The last thing I think the Government wants, as we enter into a voluntary administration regime, is for there to be some high-profile court cases and challenges, and for the regime not to be successful. So the Government has taken a real risk by refusing to listen to what was good, reasonable, common-sense advice from the sector—that is, from those involved in undertaking this kind of work on a day-to-day basis as opposed to some of those who advised us and who look at it from a less practical point of view. That is something we should be concerned about.
The second area, and it relates to the Insolvency Bill, is the introduction of the no-asset procedure. Although I can understand why the Government sees this procedure as a method of tidying away some of the administratively burdensome cases where New Zealanders have racked up huge amounts of debt but have no ability to repay—no money coming in and no prospect of ever delivering any payment to those to whom they owe money—we think this bill sends exactly the wrong message to New Zealanders who put themselves in that situation. This bill actually says that if someone wants to enter into a hire purchase agreement, or some kind of debt arrangement up to $40,000, that person can potentially get a “get out of jail free” card or a “get off the hook” card. We think that that sends entirely the wrong message.
But it is a message we are also seeing delivered from this Government in a number of other areas. The child support area is just such a one. The grand solution for dealing with child support debt being well over $1 billion was not to get the money but to let people off the liability. We are seeing a version of that approach in this bill.
So I think there will be teething problems with this legislation, and certainly we will be watching very carefully the behaviour of the Inland Revenue Department, because it has the power and the ability to undermine totally the success of the voluntary administration regime. If the department is to vote continually against a deed of company arrangement so that companies cannot enter into that kind of regime, and instead just send companies to liquidation where the department thinks it can get more money, then basically it cuts out from underneath the regime its potential for success before it even starts. So we will be watching that matter very carefully.
We will also be watching the interpretation of the provisions relating to the qualifications of liquidators, because the last thing that National wants is for major accountancy firms—firms that have the skills and the understanding to do the complex liquidation work and take on larger cases—to be locked out of working in some liquidations, simply because they have ongoing business relationships with banks. I think that the Minister would be being naive if she did not think that some people will question the position of some liquidators in any way they can, and this might be a provision in the legislation that causes all sorts of difficulties for those firms engaged in that area of work. It is a major omission, and one that could potentially undermine the success of the whole regime. In terms of the National Party’s position, I say that we of course will not be supporting this bill, given there are so many unanswered questions.
MARYAN STREET (Labour) : I rise to speak to the third reading of the insolvency law reform legislation, with pleasure. It has been good to watch this legislation go through the select committee process in the Commerce Committee, and emerge in the way that it has. I congratulate Katherine Rich, the chair of the committee, on her expert handling of the legislation, despite the fact that in the end the National Opposition has chosen to oppose the legislation. In fact, National takes exception to only two measures. The first is the no-asset procedure in Part 5 of the Insolvency Bill. The second is new Part 15A, “Voluntary administration”, in the Companies Amendment Bill.
I wish to respond to some points that Katherine Rich has just made. The first is on the no-asset procedure. Indeed, more than one National Opposition speaker has been concerned about the kinds of messages that a no-asset procedure may send to people by forgiving debts of up to $40,000. They have said it could be open to abuse and is not a good signal to send out to the market. But I want to reiterate that debtors will be required to meet stringent criteria for entry into the no-asset procedure. Those criteria include the debtor having no realisable assets, the debtor not having previously been admitted to the no-asset procedure—in other words, it is a once and once only procedure—the debtor not previously having been adjudicated bankrupt, and the debtor having total debts, excluding student loans, of between $1,000 and $40,000, and also, under the prescribed means test, the debtor having no means of repaying any amount towards those debts. So with the debtor having no realisable assets with which to pay his or her debts, the creditors do not have anything to gain if he or she were to be made bankrupt.
It is important to note also—because some of the concerns have been that this measure sends out the wrong signals to young people—that student loan debt is not included in the calculation of the $40,000 threshold. It is not written off under the no-asset procedure. That is because it is assumed that a no-asset procedure debtor has no cash assets or ability to earn. If he or she did have cash assets or earning ability, that person would not be considered for this procedure, to begin with. In addition to those eligibility criteria, the official assignee has the overall discretion to allow a debtor entry into the no-asset procedure. Similarly, if the debtor has misled the official assignee or concealed assets, the official assignee can immediately terminate the no-asset procedure and apply for a preservation order over the assets, which would be in force until the debtor was adjudicated bankrupt. We consider those provisions to be perfectly satisfactory for the particular circumstances where the outstanding debts are not the kinds of debt that are incurred by multinationals or corporate clients in any way.
The second issue that the National Opposition members have taken exception to is the process of voluntary administration set out in the Companies Amendment Bill. In particular, they take exception to the preferential creditor status of the Inland Revenue Department. There is an important principle here, and at the risk of repeating something that the Minister said in her third reading speech, I do want to reiterate this important principle: the Inland Revenue Department is an involuntary creditor. It does not have a choice about whom it deals with. Firstly, it cannot secure its interest in any other way than through preference, and, secondly, PAYE, GST, and all of the other things that are extracted by the Inland Revenue Department on behalf of the people of New Zealand, like child support payments and student loan payments, are collected on behalf of the Inland Revenue Department.
One of the things that Opposition members have not said, when they have talked about their opposition to the Inland Revenue Department’s preferential status, is that the alternatives in the UK and in Australia were, as I understand it, to make directors personally liable for all debts, including debts to their equivalents of the Inland Revenue Department. If the paripassu principle were to be applied without the Inland Revenue Department having priority creditor status, then the Inland Revenue Department would be lining up along with everybody else, but in the meantime the directors of companies would be made personally liable for that liability.
It may be that in Australia and in the UK there is a large enough pool of director talent for that not to be an issue of concern, but in New Zealand we struggle to find capable and competent directors of companies, without simply recycling the same people over and over through the corporate structures. If our small pool of director talent was suddenly to be made personally liable for Inland Revenue Department takings as well, then I think fewer and fewer people of ability and insight would put themselves forward for directorships in New Zealand. That would not be to anybody’s benefit, because what we are trying to avoid here is companies going into bankruptcy and into liquidation. We are trying to apply a process that allows them, through voluntary administration, to work their way out of their current predicament and, in fact, to get back into a trading arrangement that allows them to continue to pay tax and therefore meet Inland Revenue Department liabilities.
In fact, the Opposition had no amendments to make to this part of the legislation. It is reported in the select committee’s commentary on the Insolvency Law Reform Bill, at the front of the bill, that the majority considered it appropriate to retain the Crown priority and recommended no amendment to the legislation. The fact that no cogent alternative has come from Opposition members leads me to think that their opposition, on the grounds of the voluntary administration procedure and the Inland Revenue Department’s preferential creditor status, is simply a hollow gesture and not one that they seriously wish to take up. Without mentioning in detail the law that covers Inland Revenue Department activity, I say there are critical principles about the payment of dues on behalf of New Zealand people that need to be maintained in the voluntary system. We have heard of methods by which the Inland Revenue Department could improve its performance, and those were registered by the department, which was only too willing to mention them in the course of the select committee’s consideration of submissions.
The voluntary administration system is a very good system. We have modified it, unlike Australia and the UK, to fit our own circumstances in New Zealand, and I commend this legislation to the House.
HONE HARAWIRA (Māori Party—Te Tai Tokerau) :Tēnā koe, Mr Speaker. Tēnātātou katoa i te Whare. The other day I was reading an article about Frank Acheson, judge of the Tokerau district, North Auckland, and president of the Tokerau District Māori Land Board back in the 1920s. The article provides a good starting point for discussion on these bills. Judge Acheson had a whole host of ideas with which to address Māori poverty in the north. He believed that the only way to deal with poverty was to establish long-term development schemes through which Māori could develop their remaining tribal lands. One such scheme was a dairying project up Shane Jones’ way, in the far north.
Acheson’s decisions as a judge were variously described as being innovative and alarming. He was involved in a series of Māori claims to the foreshore and ruled that the Native Land Court could issue title, a decision backed by the Court of Appeal in 2003. He prepared a report for NgātiWhātua in which he concluded that the Ōrākei block should have been protected from alienation. He insisted that he could take judicial notice of the Treaty of Waitangi in the case of Lake Tangonge, near Kaitāia. In his 1929 judgment on Lake Ōmāpere he ruled that Māori customary law recognised the ownership of lakes, that in 1840 Lake Ōmāpere was the property of Ngāpuhi, and that Ngāpuhi’s rights were protected by the Treaty of Waitangi. Judge Acheson had his flaws—we all do. But for all that, he was a far-sighted and exceptional New Zealander who did his bit to create a history we could all be proud of. That is, of course, until 1943, when he was suddenly, inexplicably, and compulsorily retired. Why? Because of the alleged insolvency of the Tokerau District Māori Land Board.
The case of Judge Acheson shows us that being innovative, progressive, and enterprising is no guarantee to a positive business outcome. It also proves that if one’s spirit of enterprise takes one down the road that is scorned by the mainstream, then that mainstream will happily use any shaky financial situation to close one down. These bills are supposed to enable people like Acheson to deal with financial difficulty and to still be open and innovative. The Māori Party welcomes the opportunity for people to bounce back from insolvency and fully participate again in economic life. It was an opportunity Frank Acheson was deprived of. His efforts to protect Māori customary land were right, and will be remembered through the commitment that the Māori Party has made to repealing the Foreshore and Seabed Act and to giving the Māori Land Court the right, again, to consider Māori land title applications.
That opportunity to start again is a vital part of these three bills. Of course, it is better if we can stop people getting into strife in the first place. We note the advice from the Federation of Māori Authorities, which has spoken out continually about how business success is limited by our Draconian tax laws, which are so costly and cumbersome that small businesses just cannot keep up. The Federation of Māori Authorities also suggested that the Government set up some early intervention strategies for businesses in difficulty. I cannot help but recall the findings from the Global Entrepreneurship Monitor that, although Māori are innovative and enterprising, only 37 percent of Māoribusinesses survive beyond 3 years, compared with 62 percent for non-Māori. If the Government were to adopt the Federation of Māori Authorities’ proposals for early intervention, Māori businesses, and thereby the whole economy, would benefit. The Māori Party would be keen to see how the Minister responds to this positive suggestion.
On top of that, of course, there is the dreaded Inland Revenue Department, which likes to tax poor people for every dollar they earn while allowing the corporates to get away with their tax scams. The department has placed itself at the head of the creditors’ queue that forms when companies go belly up. The Commerce Committee also recommended a number of options to make for easier wind-ups, such as allowing judgments to be handled electronically rather than in person—which kind of reduces the human dimension, the kanohi ki te kanohi, but provides another choice.
I would like to return to the idea of Crown priority, whereby the Inland Revenue Department gets first cut in insolvency cases. I raise this in the context of the Government’s recent victim, Te Wānanga o Aotearoa. It was said to be near bankruptcy last May, when the Minister of Education said that the wānanga was in danger of not being able to pay its staff and a lot of its creditors. In announcing the crisis, the Minister said: “the financial situation at the wananga is so precarious that I am obliged to take all action available to me under the Education Act for the sake of the students, staff, and creditors. To not do anything would be irresponsible.”
Yet, just a few months later, the Waitangi Tribunal found that in fact the Government had breached its Treaty obligations by forcefully limiting the type and range of education that the wānanga could provide, by undermining the wānanga’s authority, by failing to ensure that partnership agreements were concluded, by taking control of the institution, and by failing to ensure continuing consultation. I raise the wānanga case because to have instituted Crown priority would have only made the problem worse and ignored the real issue—the breach of the Government’s Treaty obligations.
Crown priority was dropped in the UK in 2003 to encourage businesses to get back on their feet and to ensure that creditors were paid out, as well—moves that the Māori Party wholeheartedly supports. Our emphasis throughout this whole debate has been based on our kaupapa of manaakitanga, whanaungatanga, and kotahitanga, in order to limit the damage to positive business relationships, to support business rehabilitation, and to encourage people to get back on their feet, rather than punish them for their efforts. We welcome the introduction of more flexible ways of dealing with insolvency. We encourage consideration of positive early intervention. We support a review of business tax to facilitate greater employment, better wages, and higher investment, research, development, and innovation.
We urge the Government to heed the call of the Global Entrepreneurship Monitor to provide support to Māori businesses after the initial flush of business start-up has worn thin. As Pita Paraone has often said, what is good for Māori has to be good for the country. Kia ora tātou katoa.
GORDON COPELAND (United Future) : I am pleased, on behalf of United Future, to take a call on the third reading of these three bills: the Insolvency Bill, the Companies Amendment Bill, and the Insolvency (Cross-border) Bill. They are significant third readings, because the original bill was some 328 pages—one of the larger bills that has come before Parliament this year.
As is well known, this legislation sets out, really, to rewrite and update the law in New Zealand around issues of personal failure through bankruptcy, and company failure through insolvency, receivership, and liquidation. It is timely that we are bringing that law up to date because, as other speakers have mentioned, it is important for the sake of the prosperity of New Zealand that we do all we can both to limit the occasions on which businesses come under stress and failure and to ensure that those that do are given a reasonable chance to get back on their feet quickly, to carry on, and to become successful companies.
The history of entrepreneurship in the international business community is resplendent with examples of people who have gone through a personal bankruptcy or a personal company failure, have learnt—the hard way—through that experience, and have gone on to be very successful business people later on. So that is the spirit, I think, that underlies the Insolvency Bill in particular—that we recognise that very often if people are able to be given a second chance, they can go on and be successful long term. And to the extent that those people are successful long term, of course, our country itself becomes more successful in terms of its economy.
I want to mention a few things at this third reading debate. First of all, voluntary administration provisions have been introduced. As others have said, this legislation marks a new path that New Zealand is following. It is a path that has also been introduced in Australia, and it is a path that we think can usefully contribute to those goals I have already outlined, in terms of making our businesses successful long term.
In the course of examining the original bill, the Commerce Committee looked at the Chapter 11 arrangements that apply in the United States of America. We have, of course, seen some famous examples of companies going into Chapter 11 situations and coming out the other side. I remember the Chrysler resurrection story, and the famous television photograph of Lee Iacona—
Craig Foss: Iacocca.
GORDON COPELAND: —yes, I will get the pronunciation right, thanks to the member Craig Foss—handing over a cheque to the US Government for, I think, about $385 million, and saying: “Chrysler is an old-fashioned borrower; we actually repay our debts.” We looked at Chapter 11 arrangements and concluded that they are actually designed for large corporations. New Zealand, on the other hand, is a country of small businesses, with something over 90 percent of our businesses employing fewer than 20 people, and I think about 84 percent employing fewer than five. So we really are a country of small businesses. For that reality, we felt that the voluntary administration approach is a better one to take, given our circumstances.
The hope, of course, is that through this new law people will be able to recognise problems quite early. In response to the member Hone Harawira, I say that I do not see any practical way in which the Crown can get involved in businesses coming under stress. I do not think that is a practical reality. I do not think that is something the Crown should do; it is something, rather, that the directors of a company under stress and the owners themselves should take some action on, as early as possible. One of the aims of this legislation is for people to identify problems early, go into voluntary administration, and, hopefully, go through that and come out the other side stronger, and go on to have successful companies.
I think the answer to Hone Harawira’s statistics about the failure of Māori businesses—their very high failure rate after 3 years—is actually the United Future policy, which the Māori Party might join us on, of giving business start-ups a conditional tax holiday for the first 2 years of their operation. Very often, it is the cash-flow impost of that first 2 years of taxation that actually tips a company over the edge into failure. I think that would be a much more positive way of addressing the problem, rather than looking for the Crown to get involved. The Crown, fundamentally, should not be involved in trying to run businesses, or anything of that sort. We have the whole history of the 20th century to prove that fact unambiguously. Indeed, if United Future had its way, we would also apply that policy to our State-owned enterprises.
However, I diverge from the insolvency legislation, and I will come back to it. I want to touch on the question of Crown priority. I do not know whether there is much more to say about that except that, as others have said, the Commerce Committee gave this whole matter very, very serious consideration. We had to do that, because virtually every experienced insolvency practitioner in the country came to us and said that that provision had to go. We therefore went back to the Inland Revenue Department time after time after time. I think we had about four reports from the Inland Revenue Department in trying to get round the problem. But, as Maryan Street has advised the House, in the end we really thought that, no, it would not work. To remove Crown priority would be to attack the basis of entrepreneurship in this country. Entrepreneurship depends on our encouraging people to become directors of companies. That is what drives company growth.
As well, limited liability means exactly that for directors—they have limited liability. To give them unlimited liability, or to impose on them unlimited liability in respect of unpaid taxes, would simply be to scare them away. We would put our business growth backwards, which is contrary to the intent of the legislation. We also asked in our report back to Parliament why target just companies if we are going to go down that road. We would probably see the growth of trading trusts, trading cooperatives, and other structures, if we were to single out just companies for special treatment, and to hold their directors liable for unpaid taxes.
However, in our report back to the House we suggested that the Inland Revenue Department itself should intervene once two consecutive payment periods in respect of PAYE, GST, or child support have passed. There are different timings for the payment of those taxes in different organisations, but when two periods have passed in which the taxes have not been paid, at that point the Inland Revenue Department should be obliged to notify company directors that those taxes have not been paid. We sought—and received—assurances from the Inland Revenue Department that it will adopt those procedures. It is important that it does, and Parliament needs to monitor that. We need to look at this again to see whether it is actually happening, because it was part of the balance that we put into this whole mix.
The majority of us were saying that, yes, the Crown priority should be retained but we want it balanced by Inland Revenue Department intervention to notify directors. I personally know of situations where taxes were not paid and the directors of the company did not know that that was the position. If they were to be advised of that position, which we are suggesting should happen, then at that stage they would have the opportunity to intervene to sort out the problem or go into voluntary liquidation. That was part of the balance we came to.
It is similar with so-called phoenix companies. I wonder where that terminology came from. “Phoenix” means something that rises from the ashes. These companies are not designed to rise from the ashes; they are designed to go out of business deliberately through voluntary liquidation at the expense of all the creditors. That is what a phoenix company is. It is a rort. It needs to be brought to an end, and this legislation is an advance from that point of view.
Overall, in conclusion, I just want to say that I think the select committee and this legislation have struck a fair and balanced approach between a number of competing interests. I think it is a job well done, and United Future intends to support it through to enactment. Thank you.
CHRISTOPHER FINLAYSON (National) : As other National members have said, we oppose the third readings of the legislation arising from the Insolvency Law Reform Bill, because we say there are a number of flaws in it. We think there is a lot of good in it, too—and I will cover some of that good material as well as the bad—but the failure to address two key issues means, regrettably, that we have to oppose it.
Maryan Street in her third reading speech said that National members’ opposition to the legislation was hollow. Well, it is not so. We have major concerns about voluntary administration, as it is to be enacted, because of the position of the Inland Revenue Department. If that member wants an example of hollowness, she could have listened to the Minister Lianne Dalziel’s third reading speech. In it the Minister regurgitated the usual Labour Party tripe about economic transformation. It is one of the unfortunate aspects of this year—and I am sure Mr Chauvel will learn it if he stays in this place a while—that there is constant repetition of a Labour Party litany: economic transformation, national identity, and I think the third one is welfare for families. Well, economic transformation will be impeded because of the flaws in this legislation.
In my first reading speech, I mentioned those who have contributed over the years to the reform of insolvency law. I mentioned the Law Commission and Justice Blanchard. I also mentioned Peter McKenzie, former chair of the Securities Commission and probably New Zealand’s leading expert in this field. Now that the legislation looks as though it will come into effect I hope Mr McKenzie will find time to re-write Spratt and McKenzie’s Law of Insolvency. As a former law clerk, staff solicitor, and partner of Mr McKenzie, I grew tired of listening to his excuse for not updating his book, which was that the law was shortly to be changed. That can no longer be regarded as an excuse. It is one he ran for about 20 years.
A close analysis of this legislation shows that the reform is not all that dramatic. For example, in the Committee stage I analysed Part 3 of the original bill, which comprises 10 subparts. Very few of the clauses in those 10 subparts actually introduce new provisions. Rather, they re-enact the existing law and practice from the 1967 Act or adopt provisions that have their genesis in the Companies Act 1993. I must say that one reform I can live with is that the procedure for bankrupting debtors is finally to be updated. For 20 years we have been awaiting the abolition of the bankruptcy petition procedure, and now it finally goes. I suppose it is better late than never.
As I said, very few points of contention, in regard to this legislation, exist between the National Party and other parties, but they were not properly addressed by the Committee. Other than the contribution by Mr Fairbrother on the no-asset procedure, no Labour MP made any contribution. It makes one wonder whether there is any point to a debate in this House. Certainly, for Labour not to join issue on, in this case, two points of principle is very disappointing indeed. So what were the two contentious issues? As my friends on the National Party side have said, there were two. The first relates to the no-asset procedure and the second to voluntary administration.
The first, the no-asset procedure, is to be found in Subpart 4 of Part 5 of the original bill. Several of my colleagues at the Committee stage questioned how this procedure was consistent with notions of individual responsibility, and we have heard some of those arguments again this afternoon. But I also questioned the usefulness of the procedure, especially given the other procedures in Part 5. I also noted that bankruptcy is in fact a discretionary remedy, and I refer members to clause 37. So in some cases the court may decline to bankrupt the debtor because it would be pointless to do so. One wonders why the debtor would bother to go through the no-asset procedure rather than simply oppose the application that he or she be made bankrupt.
The second one, which is of major importance, is Part 8 of the original bill, which introduces Part 15A to the Companies Act 1993. It is called the voluntary administration procedure and essentially adopts the equivalent Australian legislation but fails to deal with the critical issue of the Inland Revenue Department’s position. The Inland Revenue Department status could undermine the effectiveness of voluntary administration. Members have heard the various arguments from other speakers this afternoon and I will not repeat them. But I will say this: every submitter on this provision was very, very clear that unless the Government addressed the issue of the priority status for the Inland Revenue Department, the voluntary administration scheme could be compromised.
As Katherine Rich said, National is going to pay very close attention to this particular innovation in practice to see whether some amendment will be required—and I think it will be needed sooner rather than later. I think it is a very unfortunate situation where every submitter on a bill thinks something in it should be altered, the Opposition agrees and tries to engage the Government in a principled debate on the issue, and not one Government member actually addresses the issue in the Committee stage.
Hardly any mention was made, in most stages of the original bill, of Part 9, which concerns cross-border insolvency. It is now a separate bill. It really is one of the most interesting aspects of the legislation. The Law Commission published a report on cross-border insolvency in 1999, and I think it even went to the last National Minister of Justice of that period, the Hon Tony Ryall. Obviously, in an election year there was no time to act on the report, but I am surprised that it has taken about 7 years for this Government to act on it. It was a good report and, frankly, it could have been acted upon within about 12 to 18 months. That report sets out some very useful reasons why we need the model law and why we need this kind of private international law reform.
The report noted that there were three broad policy factors in favour of reform: the globalisation trend factor, the fiscal factor, and the efficiency and fairness factor. Factors that weighed against reform were the sovereignty factor and the adequacy of the existing law. Well, there is no doubt that the existing law is not adequate, and with globalisation and greater interaction between New Zealand companies and individuals, and overseas companies and individuals, there does need to be a move in this area; this is one part of the insolvency law reform package that National is happy with.
I am also pleased, and it is just a very minor point, to note clause 493 of the original bill. It is a minor amendment but one that is being replicated in other legislation these days. This highly artificial distinction between Commonwealth countries and foreign countries now goes and we simply refer to the jurisdiction of the High Court to act in aid of overseas courts. It is a distinction that has been hanging around for many years and makes very little sense at all.
So at the end of the day this reform is long overdue. It represents the fruits of the labour of the Law Commission over many years. I have mentioned the good work of many speakers. Much good is achieved in this legislation but, as usual with this Government, it contains mistakes in certain respects. It is very disappointing that these mistakes were pointed out by the Opposition and by many submitters but simply ignored because, as usual, this Government knows best. It ignored what it was advised and simply failed to debate the issue. That is the reason why National will be opposing this legislation and why we oppose the third readings.
CHARLES CHAUVEL (Labour) : I rise in support of the third reading of this legislation. I joined the Commerce Committee on 3 August, only a week before the committee reported back the Insolvency Law Reform Bill, so, unfortunately, I did not have the opportunity to participate deeply in the consideration by the committee of the legislation. But my having joined the committee, and having taken an interest during my time in the House in these matters and in the business before the committee, it is something that I have had the chance to consider somewhat.
I think it is a great shame that the National Party is not supporting the legislation. It is apparent from the report back from the committee that there are really just two rather thin pretexts for this lack of support, and they are, as the previous speaker Christopher Finlayson said, an objection to the no-asset procedure scheme, and also objections to the fact that the voluntary administration regime will not do away with the Crown priority for the Inland Revenue Department.
It was interesting to attend a meeting in Christchurch with the Minister Lianne Dalziel last week of the Insolvency Special Interest Group practitioners—a group of accountants and lawyers who came together and wanted to discuss provisions of the legislation and associated matters. The interesting thing was that almost to a person those practitioners were highly supportive of the legislation and were quite happy to acknowledge it as the most thorough reform to be attempted in this area for some time. They really did welcome it, and they also welcomed the Minister’s announcement, made to them, that there would be a proposal to regulate the insolvency practitioner profession. Obviously, it is important, particularly with the advent of the voluntary administration regime, that only the most ethical and capable practitioners, be they accountants or lawyers, should be practising in this field.
I will say one or two words about the Crown priority issue. I know that my colleagues on this side of the House have already mentioned the matter, but I think if one looks at the history of insolvency law reform, one can see quite plainly that whether the idea of retaining the Crown priority for the Inland Revenue Department works is very much in the department’s hands. If the Inland Revenue Department uses its priority in the voluntary administration regime responsibly, if it allows companies in trouble to trade out rather than insisting on a very strict revenue-gathering approach, then the reality is that the regime has a good chance of success. If the Inland Revenue Department is responsible about its powers, which we all hope it will be, then the voluntary administration regime as contained in the legislation should work fine. The reality is, of course, that if it does not—if a responsible approach is not taken by the Inland Revenue Department to the powers and the priority it retains—then no doubt this House and the Commerce Committee will have to look at the legislation and the provisions again.
To me that is an appropriate way of looking at this sort of change. It ought to be incremental. A radical step such as removing the Inland Revenue Department’s priority ought not to be taken in a hurry. One ought to see whether it can be made compatible with this new voluntary administration regime. If it can, well and good. If it cannot, there is the opportunity for further consideration.
I think this is an appropriate juncture at which to welcome this legislation. Many members of the profession, both accountants and lawyers who are working in the insolvency field, welcome it. I welcome it. It is a shame that the National Party is playing politics with it.
LINDSAY TISCH (National—Piako) : It is interesting that the last speaker talked about playing politics with this issue. We are approaching it from a very pragmatic point of view. We supported many of the parts of the Insolvency Law Reform Bill. There were only two parts in particular that we had difficulty with, and they were Part 5 and Part 8.
The centrepiece of the legislation is the voluntary administration scheme, which will replace the seldom-used compromise scheme. National members stated in our minority report that the scheme is aimed at enabling companies in financial trouble to trade out of their difficulties. The lack of incentives, and the difficulty in getting the consent of a majority of creditors, have been cited as reasons for not utilising compromise schemes in the past.
There were a number of submitters, and they were unanimous in their view that unless the Government addressed the issue of the priority status for the Inland Revenue Department, the voluntary administration scheme would not work. In fact, it would be severely compromised. That was the point we made at the time, which came up during the Committee stage when we sought some clarity about this matter, and when we asked for the Minister in the chair at the time to give us some guarantees, which were not forthcoming. So, overall, we will be voting against this legislation.
The other area we had great difficulty with was the newly introduced no-asset procedure scheme, whereby an individual can choose to enter the scheme for 12 months in return for a write-off of up to $40,000, at the expense of creditors. This reminds me of the period during 1987-88 when the Government of the day introduced the mortgage discounting scheme. I was formerly a farm appraiser in the Rural Banking and Finance Corporation and was called back during that period of the mortgage discounting scheme to look at situations where mortgagors were having great difficulty. There was a downturn in farm incomes, land values had slumped, and some farmers had negative equities, so the mortgagees—the lenders—would call the mortgagor to account around the table, and we would look at how we could refinance, and try to work or trade our way through, in some of those areas. At that stage the Rural Bank was giving $40,000 for farmers to walk off their farms so they could buy houses in town. That was Government money in those days, because the Rural Bank was a Government-owned operation. The Government is no longer involved in that sort of lending, and rightly so; it should not be involved. But in those days it was a very important way of being able to give a small contribution, and one could actually buy a house for $40,000 in town. So there were negative equities and no assets—the liabilities far exceeded what the assets were—and that was an example in point.
But when we look at what this measure is doing, whereby debtors can now write off up to $40,000, the question has to be asked about who will pay. Who will fund this? While it is all very well for Government members to say that it will allow businesses to grow and proceed, and that they will be successful in the long run, the chances are that that will not happen. I was involved in a restructuring role for many years and I can tell members that a lot of businesses failed, not because their prospects were not good but because they were overcapitalised and underfunded, or because they did not understand what the market was saying to them. That is the reason why businesses fall over, and the people involved should not have been in business to start with.
It has been so easy to get into business, and many people have gone into it for the wrong reasons. A lot of people who have been made redundant and come out with huge redundancy payments have bought themselves a business. What they have done is buy themselves a job, but they may not have the skills or the business acumen to be there. That should never be allowed to happen but it does happen, because it is very, very easy for people to start businesses in New Zealand.
So National’s concerns are, first, the voluntary administration scheme and, secondly, the no-asset procedure. We think that that is wrong; it sends the wrong messages. We ask where the responsibility actually lies. Does it mean that anyone who gets into trouble now will be able to opt out because of the new regime?
As I said at the beginning, we actually agreed with most parts of this legislation, but the Government did not take heed of what submitters said. It did not take heed of the questions we asked during the Committee stage, which were about issues that we had identified and that submitters had identified. But those issues were not addressed. On that basis, National will be voting against the third reading of these bills.
|Ayes 71||New Zealand Labour 50; New Zealand First 7; Green Party 6; Māori Party 4; United Future 3; Progressive 1.|
|Noes 48||New Zealand National 48.|
|Bills read a third time.|