Tremain Chris: Insolvency Law Reform Bill — In Committee 
Tremain Chris: Insolvency Law Reform Bill — In Committee 
[Volume:634;Page:6061] 
CHRIS TREMAIN (National—Napier) 
: 
 I wish to round out my arguments earlier on this evening on Part 8 of the Insolvency Law Reform Bill. I spoke at length about voluntary administration and how it does appear to have merit—in fact we have seen that it does have merit overseas. I spoke in depth again about the level of priority status and I think it would be inept of me not to discuss the full consideration that the Commerce Committee had—particularly given that Maryan Street who was at those meetings is here in the Chamber with us tonight. In terms of the points that Shane Jones made regarding why priority status was left where it was I will cover those off in some detail. 
As I have said on the face of it the idea of voluntary administration appears 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 the significant creditor. Why? Well a person can run a small business by putting off paying the PAYE by putting off paying the GST and by putting off paying the fringe benefit tax but a person cannot keep his or her business going by putting off paying the power the telephone and all those items for which if he or she stopped paying the bills it would unfortunately mean he or she would not have a business. So what tends to happen is that the department ends up being a significant creditor in many of the situations we are talking about. 
If the department’s priority is retained as it has been in the bill the department will be compelled to evaluate its recovery from entering voluntary administration versus entering liquidation. As I have said previously section 6A of the Tax Administration Act ensures that the commissioner is required to collect tax over anything else—that is his or her priority. By retaining the department’s priority there is a statutory incentive to vote against voluntary administration in favour of liquidation to ensure the department gets better recovery. If the department is compelled to vote against voluntary administration I cannot see how it will have the success it has been able to achieve overseas. 
How did voluntary administration have success overseas? In Australia the Australian Taxation Office priority was amended but at the same time director responsibility was increased. We did discuss that point in the select committee but we have not rounded it out tonight. Here is how it works. If a company has failed to pay tax that it is required to collect then the Australian Taxation Office can issue the directors with a notice requiring the directors to firstly comply with its remittance obligations; secondly make an agreement with the Australian Taxation Office; thirdly appoint an administrator; or lastly appoint a liquidator. The key point is that if the company does not take one of those steps within a 14-day period each director can be personally liable for the unpaid amount of tax the company is required to collect. 
Shane Jones argued vociferously in defence of the corporate veil. He argued—and I understood his point on this—that if we actually increased the directors’ liability then we would discourage more directors and more entrepreneurs from getting into business. He made the point that if we are to have economic transformation in this country we do not want to increase the barriers to and risks of directorship. Shane Jones did not want to increase director liability so he voted in favour of retaining the department’s priority status. I argued that we did not need to follow the Australian model and that we could have removed the department’s priority status and kept director responsibility unchanged. The select committee seemed unable to cover that—why we could lower the department’s responsibility and not increase director responsibility. One can bet that in this instance the department would be far more vigilant with regard to late PAYE and GST remittances and that as a result companies would not be allowed to get to the point where liquidation was the only option. 
Other alternatives that were not fully debated included firstly reducing the department’s priority to a limited period only—say a specific period of 3 to 6 months prior to liquidation or receivership—and secondly the English approach which eliminated the Crown priority completely in 2002 on the basis that the fiscal cost to Treasury was insignificant. This is a key quote that I think we will end this part of the debate on: “The state could not maintain the priority because the government could not get any sympathy from the private sector over its long delay in collecting back taxes … such rank inefficiency merely confirmed to private creditors that government needed stronger incentives to keep abreast of creditor delinquency…”. That was the point. 
So in summary National believes that for voluntary administration to work effectively the department’s priority needs to be removed or limited. We believe that the retention of the department’s priority will lead to difficulties in implementing the key component of the bill. We believe that we did not explore other alternatives enough. Thank you. 
The question was put that the following amendment in the name of Katherine Rich to clause 471(1) be agreed to: 
to omit from paragraph (cb) of section 280(1) the words “or any of its secured creditors”.