Tremain Chris: Insolvency Law Reform Bill — In Committee 
Tremain Chris: Insolvency Law Reform Bill — In Committee 
[Volume:634;Page:6053] 
CHRIS TREMAIN (National—Napier) 
: 
 Thank you Mr Chairperson for the opportunity to speak on Part 8 and to talk specifically about voluntary administration which is at the heart of this legislation. Voluntary administration provides a company that is experiencing difficulty with a new means to trade out of that position. Indeed it is a means of encouraging that company to move on. In that regard I echo the thoughts of both Pansy Wong and Katherine Rich. National supports the intent of voluntary administration and acknowledges that it has worked in other countries. But—and I say a big “but” in this regard—it has worked only under certain conditions. 
The key condition which is where National finds itself voting against Part 8 is the priority status of the Inland Revenue Department. In all other countries where voluntary administration has been implemented the priority status of the Inland Revenue Department has been reduced to that of ordinary unsecured creditors. In fact this information was clearly disclosed to us at the submission process in no uncertain terms. A piece from the Chapman Tripp council newsletter states: “The recent submissions to the Commerce Select Committee on the Insolvency Law Reform Bill almost uniformly sought amendment of Inland Revenue’s preferred creditor status on insolvency.” So the submissions almost uniformly sought amendment of the Inland Revenue Department’s priority status. That point goes to the very heart of National’s position which is to vote against Part 8. 
Let me explain exactly why that is. Another Act the Tax Administration Act gives the Inland Revenue Department a clear sense of its responsibility to the New Zealand taxpayer. In particular I refer to section 6A(3) of that Act which makes it clear that it is the statutory duty of the Commissioner of Inland Revenue to “collect over time the highest net revenue that is practicable within the law…”. It is the responsibility of the Commissioner of Inland Revenue to implement that policy. So we have a situation whereby in one Act it is the responsibility of the Inland Revenue Department to collect under all circumstances the highest amount possible yet in another breath this legislation tries to implement voluntary administration where the Inland Revenue Department needs to be a partner in that situation. In our opinion that creates a very difficult situation indeed. 
Voluntary administration lies at the very heart of the Insolvency Law Reform Bill. In fact voluntary administration has been introduced under the bill in accordance with New Zealand’s obligations under the Memorandum of Understanding on Coordination of Business Law of 2000. I would be interested if the Minister took a call later on and gave us a little bit more information on that memorandum. 
In a nutshell National believes that voluntary administration has significant merit but as I have said only under the right circumstances. National believes that the retention of the Inland Revenue Department’s priority above unsecured creditors coupled with the responsibility to collect over time the highest net revenue that is practicable within the law will ensure that the Inland Revenue Department votes in favour of liquidation and recovery for itself as opposed to supporting voluntary administration. Therein lies the problem. We believe that without the Inland Revenue Department’s support voluntary administration is doomed from the start and that is why we do not support the bill. 
The minority view from National reads as follows: “All the submitters on this provision were unanimous in their view that unless the Government addresses the issue of the priority status for IRD the voluntary administration scheme will be severely compromised.” That view echoes the Chapman Tripp newsletter that I mentioned before. The minority view goes on to state: “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.” 
Let me just cover a little information on voluntary administration. It was introduced under the 2000 Memorandum of Understanding on Coordination of Business Law. [ 
Interruption 
] I am pleased to hear that the Minister will take a call on that later on and speak with a little bit more depth on that particular memorandum. It aims to replace the seldom-used compromise scheme already available to companies that are in financial stress. A lack of incentives to get a majority of creditors to consent to compromise has been the reason for the lack of use of that part of the older legislation. Voluntary administration was introduced into Australia in the early 1990s and it has had a degree of success there. But I must say as I have said earlier that that success came with the priority status of the Australian office of taxation being reduced. 
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 the company is under voluntary administration there is a stay on creditor enforcement which is the means with which a company can trade itself out of a difficult situation. It stops that ongoing situation of creditors ringing day after day to hound people into paying their bills. That is indeed a difficult situation to get into. In the voluntary administration situation the administrator manages the company calls meetings of creditors and develops a restructuring plan on which creditors are able to vote. A majority of creditors determines whether the company is to be restructured or put into liquidation. Like I said this system has proven very popular in Australia. 
The opportunities directors in New Zealand have without voluntary administration are pretty unappealing at this point in time. They are to request that the bank appoint a liquidator to appoint a liquidator and to attempt an out-of-court restructuring. I spoke to some of these issues in the debate on Part 5 tonight when my learned colleagues spoke about compositions proposals no-asset procedures and summary instalment orders which we covered off in some depth earlier on. In the main there is no prospect of retaining any level of shareholder value. If one looks at the balance sheet of a company that is bankrupt one sees that in most cases there are a heck of a lot more creditors than assets. When one goes out to try to sell one has to move the stock to move the debtors. If people are able to get 25 percent of their stock value they are lucky. Debtors use this situation as a means to evade paying their bills under the guise that there was a problem with the service in the first place. 
In contrast voluntary administration provides directors shareholders and creditors with a process that protects a company from enforcing remedies during a reasonably short period. It provides breathing space. During that period the 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. I have to say that employees have to come into this whole thing in a big way because they are often the unsung heroes in this situation. Having worked for a company for years and years they can find themselves at the end of the line in terms of getting paid. 
On the face of it voluntary administration seems to have merit but as I have previously mentioned the Inland Revenue Department becomes a critical factor in its success or failure. In any voluntary administration the Inland Revenue Department is likely to be a significant creditor. If we look at some of the situations that Pansy Wong alluded to earlier we find an example where the Inland Revenue Department was the main creditor. In this situation which was written about by Keri Welham the Inland Revenue Department was a creditor to the tune of $1.2 million but to other creditors the total was $160000. If people think the Inland Revenue Department will not take preferential status fairly seriously in that example they have to be joking. As I say the department is likely to be the main creditor. 
A person could continue to run a business for some time without paying GST PAYE and fringe benefit tax but could not run a business for very long without power telephone and other core operational products. If the Inland Revenue Department’s priority status is retained as it has been in this bill then it will be compelled to evaluate its recovery from entering into the voluntary administration scheme versus entering into liquidation. As I said earlier the Taxation Administration Act makes it clear that the Commissioner of Inland Revenue has a statutory duty to collect over time the highest net revenue that is practicable within the law. We must remember that if a company is put into liquidation the Inland Revenue Department has priority status.