Insolvency Amendment Bill — First Reading 
Insolvency Amendment Bill — First Reading 
[Volume:652;Page:1954] 
Insolvency Amendment Bill 
First Reading 
Hon SIMON POWER (Minister of Commerce) 
: 
 I move  
That the Insolvency Amendment Bill be now read a first time. 
 At the appropriate time I intend to move that the Insolvency Amendment Bill be referred to the Commerce Committee for consideration that the committee report finally to the House on or before 12 May 2009 and that the committee have the authority to meet at any time while the House is sitting except during oral questions during any evening on a day on which there has been a sitting of the House and on a Friday in a week in which there has been a sitting of the House despite Standing Orders 187 and 190(1)(b) and (c). 
This bill amends the Insolvency Act 2006 in order to address a small number of significant issues that have arisen since it came into effect in December 2007. Unfortunately—and hence the shortened time frame for the select committee to consider this matter—these changes have become even more pressing in the light of the expected impact of the current economic downturn on rates of insolvency. Having said that by introducing changes designed to preserve the integrity of the personal insolvency processes—namely the new no-asset procedure and bankruptcy—this bill is also timely because it aims to provide more protection for creditors and potential creditors. 
The no-asset procedure or “NAP” was introduced as an alternative to bankruptcy in December 2007 as part of the new Insolvency Act. Debtors may be eligible for a no-asset procedure if they have no realisable assets that can be sold to pay their creditors they have not entered into a no-asset procedure or a bankruptcy process before and they have debts of between $1000 and $40000 with no other means to repay them. 
By enabling individual debts of up to $40000 to be written off the intention of the no-asset procedure was to grant financially distressed people relief from liabilities that were incurred contractually. However the Act does not explicitly exclude the discharge of fraudulent debts leaving open the possibility that debts such as fraudulent social welfare payments could be wiped under this regime. Rewarding dishonesty was never the intention of the Act and clearly contravenes the fundamental policy objectives that underpin insolvency laws. The changes proposed in this bill stop fraudulent debts from being written off and will apply retrospectively to debtors who were in the no-asset procedure process when this bill was tabled in the House 3 days ago—a slightly unusual step but a necessary one—and to those who have entered no-asset procedures since them. 
To further protect the integrity of the no-asset procedure the bill also proposes to empower the official assignee to extend the period of discharge under a no-asset procedure by a maximum of 25 working days. This allows more time for the official assignee to investigate any new information or creditors’ objections that are received at the eleventh hour in relation to a person’s eligibility for the no-asset procedure. When the no-asset procedure allows someone to forgo up to $40000 in debts it is essential that any new information that may relate to concealed assets or debts can be brought to the attention of the official assignee right up to the day that person is discharged—hence the change. Such information could lead to the no-asset procedure process being terminated if an entrant is found to be concealing assets or debts from the official assignee. 
The bill also proposes to restore the official assignee’s ability to recover gifts made by a bankrupt prior to his or her bankruptcy. The insolvent gift provisions in the Act were inadvertently weakened in the 2006 insolvency law reform making it difficult for the official assignee to deal with gifts made to a third party in the period leading up to a person’s bankruptcy. The changes proposed in this bill will ultimately ensure that creditors are not out of pocket as a result of those gifts being made. The bill will allow contingent liabilities to be included in the assessment of the bankrupt’s insolvency at the time of making the gift and will cancel any gifts that are made in the 2-year period prior to a person’s bankruptcy. This 2-year time frame is consistent with the longstanding presumption that an individual is technically insolvent for a period of time before he or she files for formal bankruptcy proceedings. It is often within this period that those individuals shift assets set up trusts etc. to avoid paying creditors. The bill shifts to the recipients of gifts the onus of proof of a debtor’s solvency for the purpose of gifts made in the 2 to 5-year period before he or she was adjudicated bankrupt by the official assignee. 
Finally the bill proposes to increase the length of time a debtor’s information is kept on the no-asset procedure public register. Currently someone under the no-asset procedure regime remains on the register only for as long as the no-asset procedure lasts which is 1 year. The bill increases the time period on the register to 5 years from the date of entry. I will be interested in the select committee’s views on that matter. Furthermore where a person has been through multiple insolvencies it is proposed that his or her information will be permanently retained on the register. This information will be publicly available enabling credit-rating agencies and providers of credit access to make informed decisions about doing business with these individuals. 
Costs incurred by businesses that transact with bad debtors become a drain on the economy particularly as these costs are eventually passed on to everybody else. The changes proposed in the bill will strengthen New Zealand’s personal insolvency laws. I commend this bill to the House. 
Hon LIANNE DALZIEL (Labour—Christchurch East) 
: 
 I am happy to follow the Minister in speaking on the Insolvency Amendment Bill and to confirm to him that the Opposition will be supporting the referral of this bill to a select committee. But I cannot give an assurance beyond the referral to the select committee. This is not because of the first three items that the Minister identified in respect of this bill but because of the fourth. I will run through them. I downloaded the Cabinet paper off the Internet before I came to the House just to make sure that I had got it right in terms of the nature of these amendments in the bill. 
The first amendment is the provisions that were identified in the Cabinet paper as preventing the discharge of fraudulent debts under the no-asset procedure and we are very happy to see that addressed in the bill. The second amendment is to allow the official assignee to extend the no-asset procedure period when an objection is received just prior to a debtor’s expected date of discharge from the no-asset procedure. There is no problem with that. It is a very good strengthening of the existing law. The third amendment protects the interests of creditors of bankrupts by strengthening the ability of the official assignee to void gifts made by a debtor in the 5 years leading up to his or her bankruptcy. Again I am very happy with this. 
It is a strengthening of the provisions in the legislation. These all obviously have come from the Ministry of Economic Development. The ministry obviously has provided advice to the Minister stating that these matters need to be addressed. I can see that the first provision needs to be addressed as a matter of urgency which is why the Government has taken the position that it will apply from the day that the bill was introduced to the House which was as I understand it on Monday or Tuesday of this week. In that way it will stop fraudulent debts from being discharged from this day forward. 
But what I am concerned about though is the fourth provision. It is described in the Cabinet paper in a positive way without highlighting the negative potential of it and that is what disturbs me. The fourth provision is to provide improved access to the public register on the no-asset procedure and bankruptcy in order to enable informed lending decisions to be made. That provision cannot have been generated off the concern that the ministry had in relation to the implementation of the legislation because this issue was debated at some length when we introduced the Insolvency Act. The no-asset procedure was probably the most debated part of the legislation being a very new procedure. The issue was whether we should have a strong separation between the bankruptcy provisions and the no-asset procedure to make it very clear that the no-asset procedure was a one-off once-in-a-lifetime opportunity for somebody who had otherwise acted in good faith had come across a very poor set of circumstances and hardship in his or her life and was able to get a fresh start. That fresh start included the ability to carry on a business and the ability to travel overseas which are prohibited under the bankruptcy provisions. 
The third amendment was not to have this on the record as it were for any longer than the no-asset procedure. The public register’s relation to bankruptcy has been 7 years for many years now and that was not adjusted when we looked at the Insolvency Law Reform Bill. So the 7 years remains for bankruptcy. But the suggestion that we now increase the time for having the no-asset procedure on the record not for the 1 year that the no-asset procedure is in place but for 5 years creates a real concern. I am deeply concerned about the way that it has been publicly released by the Government. It is almost as if this has been added as an extra measure to a technical bill that Labour would have supported completely—100 percent. For the first three items alone we would have said there was no problem. We could whisk the legislation through the committee—it is a very good committee—and get the legislation back to the House well within the time frame as proposed by the Minister. But this inclusion of another item that is clearly coming from the credit agencies not from the Ministry of Economic Development worries me. Nowhere in the entire Cabinet paper could I find out where anyone in the credit industry had been consulted yet the suggestion has obviously come from there. The fact that the credit industry had been consulted was not mentioned. 
The other people who had not been consulted were those in the budget advisory services. I have seen Raewyn Fox’s comments in the media in response to this bill saying there are concerns about people coming into budget advice services and asking for assistance to fill out the forms for a no-asset procedure. That is not what budget advisers do. Budget advisers do not help people just to fill out forms for a no-asset procedure. On the ground they have been using the fact that there is a no-asset procedure to approach the creditors of people in dire straits and working through arrangements that are outside the summary instalment order regime and outside the no-asset procedure so some commitment is made to repaying what is owed under the circumstances. I think the no-asset procedure has ended up being quite a useful tool. It is one that did not exist before in terms of providing a realistic bargaining tool with a number of creditors in order for them to accept less than the full 100 percent return. 
When we change the provisions around the no-asset procedure it will change the number of people who want to contemplate that as an option. Will that change then weaken its ability to be used by budget advisers as a negotiating tool? I think it could and that is the sort of thing I want to spend some time on at the select committee. Quite frankly if we do not get the opportunity to seriously consider this issue then I think the bill itself will become an abuse of process. I would much rather carve out this provision if we are not able to deal with it within the time frame. As a responsible chair I will do what I can but I also want very much to have on the record our concern about the way this has been included in the bill which will mean that we have to take some serious consideration over it. In many respects it is a bit unfortunate because if this provision had not been included in the bill we could have made an absolute assurance about getting the bill back to the House in the time frame concerned. 
The regulatory impact analysis is perfectly legitimate under the circumstances because secrecy had to be afforded to one of the provisions in the legislation and that is preventing the discharge of fraudulent debts under the no-asset procedure. I quote from the Cabinet paper where it says: “Any publicity at this stage would unnecessarily draw attention to the loophole that allows fraudulent debts to be cancelled under the NAP process which has the possibility to reward individuals for their dishonesty. This may encourage such dishonesty therefore I am proposing that no publicity be given to this matter until a bill is introduced to Parliament.” That is perfectly appropriate for that provision but not for the fourth one. The fourth one needs to be properly consulted. The Privacy Commissioner has raised serious concerns about the inclusion of this provision in the bill. I think we are going to have to talk to the commissioner and get a very clear steer on a matter that I know she is currently undertaking a review of. I have a real concern about that fourth element being included but I am confident that we are able to address all of the other matters that are contained within the bill. 
I will close by expressing my disappointment at the inclusion of that element which clearly was not driven by a Ministry of Economic Development expectation but by the interests of those in the credit lending business. 
PESETA SAM LOTU-IIGA (National—Maungakiekie) 
: 
 I rise to speak in favour of the Insolvency Amendment Bill. This bill amends the Insolvency Act 2006 as has been said earlier to address a small number of significant issues that have arisen since that legislation was passed. The bill as has been stated preserves the integrity of the no-asset procedure by preventing the discharge of fraudulent debts and of bankruptcy by restoring the official assignee’s ability to recover those gifts made by a person prior to bankruptcy. The bill also amends public register provisions to better enable creditors to make informed lending decisions by ensuring a public record of people who have been discharged from the no-asset procedure is available for an appropriate period of time. 
That period is yet to be finalised. It also provides for permanent public records where the offender has had multiple insolvency events. 
The bill makes two amendments to the existing no-asset procedure and one amendment to the current bankruptcy process. The fourth amendment is the one that may be contentious. 
The no-asset procedure has been described as the soft bankruptcy procedure. It applies to debtors who have not previously gone through the no-asset procedure or been declared bankrupt and it remains in place for only 12 months. After 12 months the debtor is discharged from the debts that were owed at the start of the period. We know that the debts are between $1 and $40000 and that entry into the no-asset procedure can be refused only by the official assignee. The procedure provides a one-off opportunity for financially distressed individuals to avoid the stigma of bankruptcy and to rebuild their financial lives as well as their personal lives. 
The changes to the no-asset procedure are significant in that they close a current loophole around fraudulent debt. We seem to have cross-party support for closing that loophole. The changes also allow for further investigation of a person who is undergoing the no-asset procedure. 
I will turn to the four amendments to the Act. The current Act does not explicitly exclude fraudulent debt under the no-asset procedure as it does for bankruptcy. An example is where someone racks up a fraudulent debt where maybe a benefit has been obtained under false pretences from a Government department. The changes stated will prevent fraudulent debtors from avoiding their legal obligations to repay a debt. That is a good thing. It is about personal responsibility accounting for one’s mistakes and putting right what has been done wrong. 
The second change I refer to is a reversion to the provisions in the Insolvency Act 1967 around gifts made in the 5 years prior to someone becoming a bankrupt. Those provisions put the onus of proving that the debtor was solvent at the time of the gift on the recipient rather than on the official assignee. This is in line with the longstanding presumption that debtors are technically insolvent for a period of time before they file for formal insolvency and that gifts during that time are given for the purpose of avoiding payments to creditors. For example if a husband is insolvent and gifts a number of items to his spouse or children then that is deemed to be captured by the legislation. In my view this not only reduces the workload of the official assignee but also clearly puts the onus on the debtor to discharge that duty before he or she is absolved of that debt. 
The third amendment allows the official assignee to extend the period of time a debtor is under the no-asset procedure by a maximum of 25 working days. This allows for the investigation of any late objections or information received about the termination of a debtor’s entry to the no-asset procedure. In my view it is a common-sense provision. It allows the official assignee the requisite time and eases the workload so that the right decision is made in the right circumstances. 
The fourth amendment—probably the most contentious point that the former Minister of Commerce and the current chair of the Commerce Committee Lianne Dalziel pointed out in her representations before me—is around extending the period of time a debtor’s name remains on the no-asset procedure and bankruptcy public registers. Currently a debtor’s name remains on the no-asset procedure register only until the debtor is discharged from the no-asset procedure process which is up to 12 months. This prevents future investors lenders and credit-rating agencies from accessing that information once the debtor has been discharged. That information once that time period has expired cannot be accessed by lenders credit agencies and future investors. That is a very important and crucial point. 
Hon Lianne Dalziel 
: It’s a decision we made 2 years ago. 
PESETA SAM LOTU-IIGA 
: It is a decision that the former Minister made 2 years ago but that we are about to— 
Hon Lianne Dalziel 
: No Parliament. 
PESETA SAM LOTU-IIGA 
: It is a decision that we are about to debate at future select committee meetings. 
A bankrupt debtor remains on the public register for a minimum of 7 years. After a bankrupt debtor is discharged investors lenders and credit agencies cannot access that bankruptcy information. So there is a discrepancy there. 
There is a difference between bankruptcy and the no-asset procedure which we will investigate. Under the current legislation an accurate credit history cannot be compiled. As the Minister of Commerce alluded to earlier that presents in itself an increased business risk. Although I accept the argument made by the Hon Lianne Dalziel that we may have a person who acts in good faith and who becomes bankrupt during the normal course of his or her business career we also have to balance that consideration with the needs and desires of investors lenders and credit agencies. They require up-to-date and accurate information as to a person’s financial risk. 
This is a critical point and it is one we will get into serious discussions over. As the deputy chairperson of the Commerce Committee I would be happy to hear representations and to listen to the submissions of the Privacy Commissioner and other parties from the business area and from across the board even from those who may have been made bankrupt under the no-asset procedure and have experienced a revival in their fortunes. I think it is important to hear submissions from across the board. 
This bill is about delivering for businesses. It is about delivering for individuals who have made errors but it is also about delivering on the rule of law. The rule of law states that one should not profit from one’s own dishonesty fraudulent behaviour or other lack of probity in one’s business transactions. 
The amendments are required to maintain the integrity of the personal insolvency processes. They also promote confidence in the official assignee’s ability to administer these processes effectively. As I said earlier these changes will prevent fraudulent debtors from avoiding their legal obligations to repay debt. The bill also removes the potential for a dishonest person to be rewarded. In my view it is consistent with the overriding policy objectives of the personal insolvency legislation. I reiterate that I support this bill. I look forward to the vibrant discussions during the select committee process. That is my submission. 
CHARLES CHAUVEL (Labour) 
: 
 I would like to make a brief contribution to the debate in the time that remains this evening. As has been said the legislation makes a number of changes to insolvency law. 
First in relation to insolvent gifts the rules have changed. There are four sets of rules that entitle the official assignee to cancel certain things done by a debtor before bankruptcy that reduce the assets available to creditors—for example giving money to a spouse or a family trust. This is what we might refer to these days as the Madoff exception. 
The Insolvency Act 1967 stated that gifts given within 2 years before the adjudication of bankruptcy were voidable—as was said in those days—against the official assignee. This meant that the assignee could cancel the debts if the assignee wished to do so without having to prove whether the debtor could pay them at the time. And gifts within 2 to 5 years before the adjudication were voidable unless the party claiming under the gift proved that the donor was able to pay all his or her debts without the aid of the property comprised in the gift. This meant that the onus of proving that the debtor was solvent when he or she made the gift fell on the recipient of the gift. 
Now the law in section 204 of the Insolvency Act passed in 2006 is that the gift by a bankrupt to another person may be cancelled by the assignee if the bankrupt made the gift within 5 years immediately before adjudication and the bankrupt was unable to pay his or her due debts immediately after making the gift. But the effect of section 205 is that the onus of proving that the debtor was solvent when the gift was made falls on the recipient of the gift if the gift was made within 2 years of the adjudication and on the assignee if the gift was made between 2 and 5 years before it. 
This Insolvency Amendment Bill provides a new set of rules so that gifts made within 2 years of the adjudication may again be cancelled entirely at the assignee’s discretion. For gifts made between 2 and 5 years before adjudication the onus of proof will no longer lie with the assignee; it will shift to the recipient of the gift. The time at which the debtor must be proven to be able to satisfy the solvency test will shift. Instead of being immediately after making the gift it becomes either then or at any time up to the adjudication. For example if the debtor wins Lotto between making an insolvent gift and becoming bankrupt the debtor may be able to avoid the gift being cancelled—and that is obviously a sensible provision. 
When proving solvency account is to be taken again of debts that have not yet fallen due—for example contingent liabilities. The 2006 Act would have provided on that point that the solvency test would look only at due debts. So as Lianne Dalziel said the first part of the legislation—as far as changing the insolvent gifting regime—makes a lot of sense as do most of the changes mooted to the no-asset procedure which speakers including the previous speaker have detailed and which I will not repeat. 
Clearly we are in a position in our history where insolvencies are on the rise. I refer to an article that appeared in the  
New Zealand Herald  
in November last year in which comparison was made between the 3938 insolvencies in the 10 months to October that year and the 2963 insolvencies in the same period the year before. So we saw a 33 percent rise in insolvencies and in the 4 months prior to that article there had been a 46 percent rise. 
Clearly as we head into more difficult times we will be facing further insolvencies. Anything this Parliament does to strengthen the alternatives—like the no-asset procedure so that it is a proper avenue for people who really need that relief—is a good thing. As Lianne Dalziel said we will support that. 
We have a real concern however about the provisions relating to the retention of information on the register. We need to take proper account of what the Privacy Commissioner said about this area. In fact the whole area of information around insolvencies needs a proper look. Veda Advantage wrote to me some time ago and made the point that at the moment it is very easy to obtain someone’s negative credit-rating in New Zealand but it is an expensive and cumbersome process to get information on whether that person has a positive credit-rating. 
I urge the Commerce Committee when it looks at the information provisions in this legislation to take a proper look in the round at those requirements to look at the Privacy Commissioner’s concerns about the 4-year requirement in this particular case and to also look at the wider issues about whether for example it would be a good thing to be able to get positive credit-ratings on people rather than just the negative ones that exist at the moment. 
So with those words I repeat that Labour supports the bill’s going to a select committee but in respect of the information provisions we have serious reservations and would like to see a proper consideration of them. 
JOHN BOSCAWEN (ACT) 
: 
 It is 1 minute to 6pm but let me very briefly say that the Minister of Commerce Hon Simon Power gave a very detailed summary of the Insolvency Amendment Bill’s provisions. He was followed by the Hon Lianne Dalziel giving her very detailed knowledge of the circumstances that gave rise to the original Insolvency Bill being passed just 2 years ago. 
This is a bill that the ACT Party will be supporting for referral to the Commerce Committee. I do not propose to go into the details of the bill. But I would like to talk about the issues of insolvency and saving because insolvency is an issue that I personally know something about. 
Debate interrupted.