Tremain Chris: Insolvency Law Reform Bill — Second Reading 
Tremain Chris: Insolvency Law Reform Bill — Second Reading 
[Volume:633;Page:5179] 
CHRIS TREMAIN (National—Napier) 
: 
 I rise to speak on the second reading of the Insolvency Law Reform Bill. Before I do that I wish to commence by pointing out section 6A of the Tax Administration Act which makes it clear that it is the Commissioner of Inland Revenue’s statutory duty “to collect over time the highest net revenue that is practicable within the law”. This section of the Tax Administration Act outlines the Inland Revenue Department’s statutory obligations that lie at the very heart of why the National Party will vote against the Insolvency Law Reform Bill. Voluntary administration lies at the very heart of the Insolvency Law Reform Bill. In fact voluntary administration is being introduced under this bill in accordance with New Zealand’s obligations under the Memorandum of Understanding on Coordination of Business Law signed by Australia and New Zealand in 2000. 
In a nutshell National believes that voluntary administration has significant merit but only under the right conditions. This is a very important point and one that I intend to elucidate on. National believes that the retention of the Inland Revenue Department’s priority above unsecured creditors coupled with the responsibility which I talked about before to collect over time the highest net revenue that is practicable within the law will ensure that the department votes in favour of liquidation and recovery itself as opposed to supporting voluntary administration. This is a very important point. When the Inland Revenue Department sits in a position of priority and is able to make the decision to go with liquidation versus voluntary administration I am sure that we will see many situations whereby liquidation stays in place and the voluntary administration procedure—on which we in the Commerce Committee spent so much time and hard work looking at the options—will not be implemented. That is a key point. 
National believes that without Inland Revenue Department support voluntary administration is doomed from the start and that is why we will not support this bill. The minority view from National reads that all submitters on voluntary administration provisions “were unanimous in their view that unless the Government addresses the issue of priority status for IRD the voluntary administration scheme will be severely compromised.” That was the summary of submissions. The minority view further states: “We do not believe that Parliament should pass another piece of redundant legislation when there is a groundswell of opinion from practitioners who believe that it will not work without the removal of Inland Revenue’s priority status.” 
I would like to review some of the merits of voluntary administration when it has worked in countries where the priority has been reduced. As I said earlier voluntary administration was introduced under the auspices of the Memorandum of Understanding on Coordination of Business Law signed by Australia and New Zealand in 2000. It aims to replace the seldom used compromise scheme that is already available to New Zealand companies that are in financial stress. Currently if we look at the compromise situation that is already available in the law we see that it is seldom used because the incentives to get majority creditors to consent to a compromise are just not there. In addition to that with the priority status that the Inland Revenue Department already has the compromise situation just does not eventuate because we see liquidation happening time and time again before a position of compromise can be reached. 
Voluntary administration was introduced into Australia in the early 1990s and many other jurisdictions have now introduced it but in different ways. In the Commerce Committee we compared it only to the Australian model and there was this insistence that if we were to get rid of the Inland Revenue Department priority we had to bring in additional director liability when in fact in other jurisdictions that was just not the case. I believe that as a select committee we did not look hard enough at the different options from different jurisdictions. 
Effectively voluntary administration allows an insolvent company the court or secured creditors to put a company into voluntary administration and to appoint a voluntary administrator. While under voluntary administration there is a stay on creditor enforcement so the merits are excellent in that it allows a company potentially to trade out of a difficult situation. The administrator manages the company calls the meetings of the creditors and develops a restructuring plan on which creditors are able to vote whether they will go forward with that plan or put the company into liquidation. A majority of creditors determine whether the company is restructured or as I have said placed into liquidation. That has proven popular in Australia but only with the Australian tax authority’s drop in priority. 
Directors in New Zealand now have a number of unappealing options and that is why the voluntary administration scheme has been put in place. The options that face them include first requesting that the bank appoint a receiver; secondly appointing a liquidator; thirdly attempting an out-of-court restructuring—we could count on the fingers of one hand the number of those that happen—and fourthly attempting a creditor compromise which I have already canvassed this evening and said has been very ineffective across New Zealand companies. 
In the main the four options currently available have no prospect of retaining any level of shareholder value. The unsecured creditors do not get paid and of course they lose another customer and employees lose jobs which is not what we are all about. In contrast voluntary administration provides directors shareholders and creditors with a process that protects the company from enforcing remedies during a reasonably short period. In effect it provides a breathing space for that company to get on with its business or to restructure to allow it to go forward. 
During that period the voluntary administrator develops a restructuring plan that potentially allows the business to maintain enterprise value and to deliver a better outcome for creditors employees directors and shareholders. On the face of it it appears to have merit. In fact it does have merit—it has been proven in other countries to have merit—but as I have mentioned previously the Inland Revenue Department becomes a critical factor in its success or failure. And what have we done as a select committee? Despite all of the evidence we have left the Inland Revenue Department’s priority status in place. Can members believe it? That is what has happened and that is why National is voting against it. 
In any voluntary administration the Inland Revenue Department is likely to be the significant creditor. Why would that be? Well one can continue to run a business for some time without paying GST PAYE and fringe benefit tax but it is very difficult to run a business when it gets into a difficult situation without paying the telephone bill and the power account—without paying the core essentials of running a business—because the business will be closed down overnight. But one can get away without paying PAYE GST and provisional tax over a period of time. 
If the Inland Revenue Department priority is retained as it has been in this bill the Inland Revenue Department will be compelled to evaluate its recovery from entering into a voluntary administration versus entering into liquidation. Guess what every time it will choose liquidation. Remember that if a company is put into liquidation the Inland Revenue Department priority debt ranks ahead of all other unsecured creditors. Under voluntary administration unsecured creditors will be expected to be treated pari passu—that great legal term meaning to be treated equally—with the Inland Revenue Department. By retaining Inland Revenue Department priority there is a statutory incentive to vote against voluntary administration in favour of liquidation to ensure that the Inland Revenue Department gets better recovery. 
As I said earlier section 6A of the Tax Administration Act ensures that the Inland Revenue Department has a statutory duty to vote for liquidation to ensure that it collects the highest net revenue. If the Inland Revenue Department is compelled to vote against voluntary administration I cannot see how it will have the success that it has had overseas. 
I realise that my time is running out. I could speak for a lot longer on this subject. The National Party stands firm in its corner on the basis that voluntary administration will not succeed without a change in the priority status of the Inland Revenue Department and that is why we are voting that way.