Archive | Insolvency law

Insolvency discussion document out for discussion

Shorter bankruptcy term one of the proposals

The Ministry of Economic Development (ex Commerce) registration & insolvency division released discussion documents today for a review of both personal and corporate insolvency law.

Among the recommendations is a proposal to shorten the three-year bankruptcy period to one or two years, but with more post-bankruptcy monitoring.

Submissions on the tier one discussion documents close on 6 April.

B>More on this subject on Saturday.

Continue Reading

Insolvency law document out for discussion

Shorter bankruptcy term one of the proposals

The Ministry of Economic Development (ex Commerce) competition & enterprise branch released discussion documents on Friday for a review of both personal and corporate insolvency law.

Among the recommendations is a proposal to shorten the three-year bankruptcy period to one or two years, but with more post-bankruptcy monitoring.

Submissions on the tier one discussion documents close on 6 April.

The first batch of issues for discussion, tier one, “are discrete problem areas of a technical nature which are causing unnecessary costs or have recently been the subject of consideration by the Law Commission,” the ministry says.

The four issues, discussed separately, are bankruptcy administration, voidable transactions, priority debts in distribution of insolvent estates, and phoenix companies.

The second tier issues are: the role of the state and enforcement mechanisms, voluntary administration procedures, directors’ duties, insolvent partnerships, statutory management, and harmonising personal and corporate insolvency law into a single statute.

The ministry said the second tier issues were generally broader, more fundamental, and dealt with the structure and objectives of insolvency law.

The discussion paper is a low-key document which includes a great deal of background putting issues in context, sometimes making recommendations and at others saying the ministry doesn’t have a view but awaits submissions.

The papers in full can be found on the website of the Ministry of Economic Development, formerly Ministry of Commerce, http://www.med.govt.nz/ri/insolvency/tierone/index.html. The ministry says it welcomes submissions on any of these papers. Comments and questions should be sent to the Insolvency Law Review, Ministry of Economic Development, PO Box 1473, Wellington (or email [email protected]) by 6 April 2001.

This article, minus the careful contextual detail by the ministry team headed by Martin Fowke, takes you through the recommendations on bankruptcy administration, priority, voidable transactions, phoenix companies, and a list of questions on which the ministry wants further submissions.

Recommendations

Bankruptcy administration

That the doctrine of relation back be removed, and the rules of voidable transactions be relied on to achieve the same purpose. To remove this doctrine, the bankruptcy should begin at the point of adjudication, not the time the act of bankruptcy was committed.

Introduce a financial audit, instigated by a request for solvency assessment form (RSA form), and a 14-day stay of proceedings that begins when the RSA is filed with the Assignee. The ministry has no recommendations to make in terms of financial counselling. It seeks comments on this issue.

Increase the threshold of debt for a summary instalment order from $12,000 to $40,000, providing for private administrators to run part XV proposals and summary instalment orders, and increasing the commission for private administrators to 10%.

The ministry doesn’t have a preferred solution on post-adjudication proceedings for estates with no assets for distribution and seeks comment on issues and options for reform of this area.

Bankrupts who have not been involved in commercial misconduct should receive an automatic discharge after one or two years, instead of the present three years. The ministry seeks comment on which discharge period is preferred.

Repeat or fraudulent bankrupts should not qualify for automatic discharge until after three years.

Income payment orders (IPOs) could be used for debtors who experience a significant increase in assets or income after discharge from bankruptcy.

Priority

The ministry supports the introduction of a priority that will provide incentives to creditors to help liquidators in preserving the assets of an insolvent estate.

The ministry should continue to assess the fiscal impact of the proposal to introduce a new priority for costs associated with unsuccessful compromise.

A new priority should not be established for the costs of remedying environmental damage unless further submissions reveal a case for such a priority.

Priority should not be afforded to holders of gift vouchers.

The Law Commission could see no legitimate basis to question the priority given to secured creditors. The ministry agrees with this assessment. However the commission recommends the definitions of “secured creditor” in the Insolvency and Companies Acts should be harmonised, and that only persons with perfected security interests under the Personal Property Securities Act and those with registered mortgages over land should be considered as secured creditors for insolvency law purposes. The ministry seeks submissions on this proposal.

Voidable transactions

Voidable transactions provisions in the Insolvency Act should, like those in the Companies Act, set aside transactions based on their effect, regardless of the intention, motive or knowledge of the debtor or the recipient of the transaction.

The ordinary course of business exception should be removed and replaced with a simple rule that will achieve greater certainty. This should be coupled with a shorter time period so as to minimise the likelihood that any injustices will result from the application of a more rigid rule.

Personal and corporate insolvency voidable transactions law should be harmonised into a single law.

The ministry considers there are strong policy arguments in favour of replacing the existing voidable transaction provisions with one provision that would cover all types of voidable transactions. The ministry seeks submissions on whether a single provision could be achieved, with careful definition of terms, to cover any depletion of the insolvent’s assets, that enables another person to receive more than they would have in the liquidation. Could such a provision be effective regardless of whether the recipient is a creditor, the beneficiary of a gift, the grantee of a security, or a person acquiring an asset for less than the market value?

The ministry does not propose that any amendments be made to section 47 of the Matrimonial Property Act 1976 at this time.

Section 60 of the Property Law Act provides that every alienation of property with intent to defraud creditors is voidable. The ministry says this section should be retained.

New Zealand should enact a provision that is in line with the United States “net effect” provision (not the Australian “running account” principle). The provision should not, however, include the defence of “ordinary course of business” exception or the requirement of insolvency contained in that provision. Further, the New Zealand provision should be phrased more widely than the American provision so that it encapsulates all types of depletion of assets rather than just payment of a pre-existing debt.

There should be one period in which transactions may be set aside unless there is a strong justification for a different time period. The ministry recommends that the period in which payments may be recovered be six months from the date of filing the application commencing formal insolvency procedures.

The High Court masters should have jurisdiction over all matters relating to voidable transactions.

The notice system contained in section 294 of the Companies Act and rules 700ZJ and 700ZK of the High Court Rules should be retained and used as the single process for challenging voidable transactions. Voidable transaction matters should remain within the jurisdiction of the High Court.

Insiders should be treated more severely with regard to voidable transactions by extending the length of time within which insider transactions may be challenged to two years rather than the six months generally.

The existing defence should remain available to recipients who, acting in good faith, have altered their position in reliance on the receipt of the transaction and would suffer such hardship as a result of having to repay it that it is inequitable to require repayment. The court would be given the power to order either partial or no return of the transaction in such a situation.

Phoenix companies

Sections 297 and 298 of the Companies Act, which specify as voidable the transactions most likely to arise in phoenix company situations, could be amended to make it easier for liquidators to take action under those sections, putting the onus of proof on the receiver of the assets to demonstrate that the assets were not acquired at undervalue. The ministry does not support this option.

In insolvencies, most enforcement action is undertaken by liquidators/receivers and during the insolvency. Another option is to allow creditors to also take certain enforcement action, and before the insolvency. Provision could be made, for example, for creditors to apply to the court before insolvency to challenge the consequences of a company transferring business or assets. The ministry does not support this option.

Lawyers could be able to operate on a contingency fee basis when enforcing insolvency provisions.

Criminal penalties could be available to the courts where directors are shown to have acted in bad faith to defeat creditors’ legitimate interests.Legislative Options

The ministry’s assessment of the phoenix company problem, and its conclusions regarding the most appropriate options for addressing that problem, are preliminary only and should not be seen as implying the ministry is closed to alternative views. To this end, the following briefly identifies possible legislative options to protect creditors’ rights including:

Strengthening voidable transactions provisions, for example, to counter efforts to transfer assets from an ailing company to a related company.

Restricting owners’/directors’ involvement in companies following insolvency.

Restricting the use of company names following insolvency.Although the ministry welcomes comment on these options, or any other legislative solutions, it says it favours in the first instance addressing barriers to more effective enforcement before addressing the legislative issues.

Questions for further submission

The ministry has highlighted a list of questions on which it wants further submissions:

Administration costs: Should the Insolvency Act be amended so the priority is extended to include remuneration granted to those helping the Official Assignee or liquidator in an official capacity?

Employee-related claims: Should the priority afforded to employees in respect of any arrears of salary and wages and related earnings be retained?

Will a solution based on the European Union acquired-rights directive resolve the problems associated with the sale of a going concern?
Should priority be extended to redundancy payments?

Apprentices: Should apprentices be afforded the same priority as that presently offered to employees?

Revenue-related claims: Should the priority of gst, customs duty and levies under the Fisheries Acts and the Radiocommunications Act (in corporate insolvency and personal bankruptcy) be abolished?

Should the preferential status of resident/non-resident withholding tax (in corporate insolvencies under the Companies Act) be retained and extended to personal bankruptcies under the Insolvency Act?

Is it feasible to abolish specific priorities and replace them with a single provision based on clause 2(d) of the seventh schedule of the Companies Act?

Reorganisation costs: Should the Insolvency Act be amended to provide that the actual expenses incurred by those assisting the Official Assignee or liquidator (in an official capacity) be afforded priority?

One of the key themes of the ministry’s tier two review papers is the development of a corporate rescue culture. In this context, should a new priority be introduced for costs associated with unsuccessful companies?

The papers in full can be found on the website of the Ministry of Economic Development, formerly Ministry of Commerce, http://www.med.govt.nz/ri/insolvency/tierone/index.html. The ministry says it welcomes submissions on any of these papers. Comments and questions should be sent to the Insolvency Law Review, Ministry of Economic Development, PO Box 1473, Wellington (or email [email protected]) by 6 April 2001.

Continue Reading
WordPress Appliance - Powered by TurnKey Linux