Finlayson Christopher: Insolvency Law Reform Bill — First Reading 
Finlayson Christopher: Insolvency Law Reform Bill — First Reading 
[Volume:629;Page:1323] 
CHRISTOPHER FINLAYSON (National) 
: 
 This bill deals with financial bankruptcy not moral bankruptcy so the Labour MPs opposite can generally relax. As my colleague Pansy Wong said National supports the bill’s first reading and its referral to the Commerce Committee although our members will want to raise a number of important issues during the select committee deliberation. As is apparent to anyone who picks up the bill it is a leviathan piece of legislation and it will be impossible to cover the entire bill in the course of a 10-minute address— 
Russell Fairbrother 
: Give it a go; do your best. 
CHRISTOPHER FINLAYSON 
:—so I really want to say something about Part 8 which amends the Companies Act 1993 and also to look at Part 9 which deals with cross-border insolvency. 
First for the benefit of my colleague Mr Fairbrother I want to make a few preliminary points about the slowness of commercial law reform in this country—a point I think he would understand if he were Attorney-General. That really is evidenced by the cetacean-like gestation period of this particular reform. 
Let us go back to May 2001 when the Law Commission published an advisory report to the Ministry of Economic Development in which it outlined the importance of insolvency law. It is worth repeating what the report actually stated: “In a market economy”—and we are still that notwithstanding the endeavours by members on the Government side of the House to turn us into a social democratic paradise—“some businesses will succeed while others will fail. When businesses fail they are unable to pay their debts and creditors suffer a loss. The overriding purpose of insolvency law is to fix rules where the order in which creditors will be paid on insolvency is determined.” So insolvency law is a very important area of the law. Indeed the Law Commission report referred to the comment of a leading commentator that insolvency law was the most crucial indicator of the attitudes of a legal system and was arguably the most important of legal disciplines. Where there is not enough money to go around it is the law that chooses whom to pay. 
As Ms Street mentioned the Insolvency Act was last updated in 1967 and it sets out the insolvency regime for individuals both living and deceased. There have been only minor amendments to that statute since 1967. Company law as she observed is a little more up to date because the Companies Act was passed in 1993 but certain areas relating to company insolvencies were put to one side until that area could be thoroughly reviewed by the Law Commission. 
As I indicated Part 9 of the bill deals with cross-border insolvency. The Law Commission wrote a paper on that subject as far back as 1999 and it was addressed to my colleague the member for Bay of Plenty when he was the Minister of Justice. It recommended that the model law be introduced into New Zealand law. The next piece of work was undertaken by the Law Commission in 1999. At that time it published a report on priority debts and the distribution of insolvent estates. Then in the year 2000 the Law Commission was asked to do some further work and as I said it reported in 2001. It is only fair to acknowledge the huge contribution to that report by Paul Heath then a Queen’s Counsel and now a justice of the High Court in Auckland. 
Between those reports and today there has been a gap of almost 5 years and I believe that that is simply unacceptable. In such a critical area of the law law reform must be able to be undertaken more expeditiously than has been the case there. It is almost incredible that such a critical piece of legislation would take almost 40 years to be overhauled—from the time of the Insolvency Act in 1967 to the introduction of this bill. It is not in the interests of the New Zealand economy for our law to become so outmoded. It is also an insult to the Law Commission which has done some very good work in this area over the years. Something needs to be done with Law Commission reports once they are published to ensure the commission’s recommendations are brought into law quicker than has been the case with regard to this bill. That is why I am pleased that Sir Geoffrey Palmer is now president of the Law Commission because I think he will do something about that. 
Let us look at Part 8 which introduces a very important amendment to the Companies Act 1993. The general purpose of the legislation has been outlined by Ms Street and others so I will not dwell on it here. It highlights the problems associated with the existing business rehabilitation procedures that are currently contained in the Companies Act. It seems that the Government was faced with the option either of moving toward the United States chapter 11 mechanism or opting for the Australian voluntary approach. It has decided to follow the Australian approach based on the Corporations Act 2001 which makes sense given the closer economic relationship between Australia and New Zealand and the general desirability of harmonising business law on both sides of the Tasman—although why it took so long to make that policy decision simply escapes me. 
I imagine that the business community will be very interested in Part 8 and will want to make submissions to the select committee on issues raised by it. The ones I am particularly interested in relate to who can appoint an administrator to the effect of the administrator’s powers—particularly the effect on directors and most important to employees—and to how the administrator will investigate the company’s affairs. My preliminary review of those provisions indicates that the correct balance has been struck and that this bill will become very valuable law. Rather than a chapter 11 procedure which is too protective of the company the provisions try to seek a balance between the interests of the company and the legitimate interests of the creditors. It seems unsatisfactory that a company like United Airlines for example can rely on chapter 11 protection for over 3 years while it tries to sort out its affairs and that is particularly why I like the concept of the watershed meeting which is set out in Subpart 8 of new Part 15A inserted by Part 8 of the bill. Things need to be brought to a head reasonably promptly and watershed meetings can be adjourned only in accordance with the provisions of new clause 239AZ inserted by clause 454. Of particular importance and warranting the attention of the select committee will be new clause 239ABA also inserted by clause 454 which sets out what creditors may decide at a watershed meeting. 
Another important change introduced by the legislation is the new Part 9 which deals with cross-border insolvency. Again it is appropriate to acknowledge the outstanding work done by the Law Commission in that area chaired by Justice Baragwanath. I particularly acknowledge the work of the Rt Hon Justice Blanchard a former law commissioner who is now a Supreme Court judge and of Peter McKenzie QC a barrister in Wellington who is the former chair of the Securities Commission and who has made a huge contribution to insolvency law in his career including his current work in revising the insolvency law of Mauritius. Cross-border insolvency cases have become more common in recent years and they are often linked to international fraud. In fact the Law Commission’s report refers to Lord Millet of the House of Lords saying as far back as 1991 that international fraud is a growth business. As we know from events in recent days over the pledge card domestic fraud is doing quite well as well. 
Cross-border insolvency occurs when an insolvent identity is placed in a form of insolvency administration in one State but has debts or assets in another State. The problem is how the law will be applied so that the assets in that other State can be properly wound up for the benefit of creditors. It is one area of the law where New Zealand cannot act unilaterally and that is why in schedule 5 we are looking to adopt the model law that has been developed by the United Nations Commission on International Trade Law. Schedule 5 follows the original text of that model very closely—perhaps not surprisingly—in order to strive for a satisfactory degree of harmonisation and certainty as between companies. 
 One issue that interests me and I am sure the select committee may want to look at it is that schedule 5 will not apply to a registered bank within the meaning of the Reserve Bank of New Zealand Act that is subject to statutory management under this legislation. I agree that probably it does not make sense to include banks that are in statutory management within the model law but it is certainly an issue that the select committee will want to have a look at. It will arise in this way: the Reserve Bank may decide that because of the insolvency of a bank that has been placed into a formal insolvency regime in for example Australia it needs to be placed in statutory management here. In such a case it will not make sense that the model law will apply to that bank in New Zealand in circumstances where it was placed in insolvency in Australia. 
So those are very important questions. Insolvency law is an area of the law that as I said is overdue for reform and I look forward to seeing submissions on those and other issues.