Wilkinson Kate: Insolvency Law Reform Bill — In Committee 
Wilkinson Kate: Insolvency Law Reform Bill — In Committee 
[Volume:634;Page:5735] 
KATE WILKINSON (National) 
: 
 In speaking to the Insolvency Law Reform Bill I would like to make some comments in rebuttal of the previous speaker’s concentration on the Inland Revenue Department’s status and in particular the priority in relation to wages. The Inland Revenue Department’s four-pronged priority status remains—it is not just in relation to wages but also to GST and withholding taxes. It is interesting to note that the Law Commission report itself recommended abolition of this priority yet for some reason the bill retains it. If we look at some of the criticisms made in commentary relating to the Inland Revenue Department’s priority status we see that they include such comments as: “New Zealand’s decision to retain the Inland Revenue priority is out of step with Australia and the United Kingdom offends the pari-passu principle and could be seen to incentivise inefficient tax collection. For these reasons alone the decision to retain the Inland Revenue priority is a poor policy decision and should be revisited.” Yet that seems to have been ignored in this bill. 
It has been commented that the policy decision in relation to the Inland Revenue Department requires consideration because it conflicts with the goals of introducing a business rehabilitation regime and harmonising trans-Tasman business laws. Unless reconsidered the Inland Revenue Department voluntary administrators and general unsecured creditors will have great difficulty in effectively implementing the new voluntary administration procedure. Some have said that while the Inland Revenue Department still has preference the voluntary administration will be a waste of time. One of the questions that has been raised is why an administrator would bust a gut to trade a company out of trouble just so that it can pay the Inland Revenue Department. In fact one of the final verdicts on voluntary administration is that it will create a new dimension for the insolvency industry but it will not be a panacea. 
The main problem with insolvency as we all know is that there is rarely enough money to pay all the creditors everything they are owed. Insolvency law provides a system that kicks into place in the event of financial failure and if we look at why businesses or people become bankrupt or insolvent or go into liquidation we see that it is not all because of reckless or irresponsible trading. According to 2004-05 figures about 3000 people filed for bankruptcy that year. Of those 15 percent attributed their bankruptcy to the excessive use of credit facilities extravagance gambling or speculation; 35 percent to unemployment or loss of income; 10 percent to relationship breakdowns; another 10 percent to ill health or absence of health insurance; and the final 10 percent to adverse legal action or the incurring of liabilities due to giving personal guarantees as collateral for bank loans or failed businesses. Personal guarantees as we well know are often secured by way of collateral mortgages and therefore such guarantors do not rank as unsecured creditors and do not have to line up in the queue. 
With any financial failure there is only so much money to go around and not all creditors will get their money back. Some are secured and are the lucky ones; others need to line up and get a proportion. Under this bill the new voluntary administration procedure is introduced and this is one of the most significant reforms in the bill. It is not unlike the receivership provisions we have in existence at the moment. Some of the problems that often surround receiverships are the cost of those receiverships and the stigma attached to them. It is not unlikely that a stigma will also be attached to voluntary administration under this new regime. 
Under the bill when a company enters into voluntary administration an administrator is appointed to operate the company. Again that is similar to a receiver under the existing receivership rules. The administrator reports to creditors and at the end holds a meeting of creditors to determine whether the company shall be liquidated returned to the directors or be entered into a restructuring plan. There are similarities with the receivership regime but under this new bill the deed of company arrangement requires approval from 50 percent of creditors receiving 75 percent of the value of a company’s debt. Effectively this means that a creditor holding 26 percent of that debt can quite easily defeat that deed of company arrangement which in effect defeats the liquidation. If the Inland Revenue Department for example were that creditor then it would be able to defeat any plan for voluntary administration. As a preferred creditor it is also able to receive the proceeds of liquidation before unsecured creditors. 
The Australian experience which has been used as a comparison in many cases indicates that most companies entering into the voluntary administration arrangement are in fact subsequently liquidated. However the argument in favour of it is that it may provide a more orderly liquidation and the opportunity to negotiate with creditors. In theory it allows the directors to refocus from if you like the firefighting to active business improvement so that the company may then be able to trade out of its difficulties. But it is certainly not the panacea that the bill purports it to be. The Inland Revenue Department’s four-pronged priority is certainly an issue we take issue with and on that basis National is opposing this bill. 
I would like to speak later in relation to the no-asset procedure scheme but I am aware of the time restraints and I will let my colleagues take further calls on this part of the bill.