News Flaws in Coalition's insolvency law reform

08 November 2019

Following the recommendations in the Insolvency Working Group’s (IWG) second paper in 2017, the government this week released details of further insolvency law reform being proposed for gift voucher... Following the recommendations in the Insolvency Working Group’s (IWG) second paper in 2017, the government this week released details of further insolvency law reform being proposed for gift vouchers, voidable transactions, preferential employee claims and other changes to existing rules. Additional discussion on new legislation dealing with ponzi schemes has been deferred for the time being. The government has accepted many of the recommendations made by the IWG; the professional body for insolvency practitioners, RITANZ, believes most of these are both sensible and prudent. Our view on the key aspects of the changes are: • Changes to the existing voidable transaction regime are absolutely needed and we like the concept of having a longer clawback period for related parties. The impact of not dropping the ‘gave value’ defence for creditors will need careful consideration. • Giving super-priority for gift vouchers will not make good insolvency law, and the devil will be in the detail of the legislation to make it work practically. • Employees will benefit from the ability to claim pay instead of notice and long service leave but we believe the government has missed an opportunity to replicate overseas models that provide real help to employees who suffer financial hardship through the failure of their employer. Without question, RITANZ supports changes that will result in greater certainty for creditors of insolvent companies while maintaining fairness to all creditors when there is not enough money to meet all their claims. While the proposed changes provide added protection for consumers and to employees, it goes against the fundamental principle of insolvency that creditors should share losses proportionately. Voidable transactions The existing law on voidable transactions doesn’t meet the primary purpose of that regime, which is to put creditors back onto an equal footing with other creditors who may not have received more than they would get in the liquidation from transactions in the two years before liquidation. The proposed six-month clawback period will provide greater certainty for those creditors dealing with a company that goes into liquidation. The government has not accepted the IWG’s recommendation to remove the ‘gave value’ test in voidable transactions. This means creditors trading with an insolvent entity who believe they have done nothing wrong can rely on this defence if challenged for transactions occurring within the six-month clawback period. We hope the final revised voidable transaction rules will be easier to apply, resulting in less litigation and lower costs of recovery, which will ultimately mean there will be more available (when appropriate) to all creditors from voidable recoveries. RITANZ supports the time extension for clawback claims against related parties to the four years before liquidation. Related parties have a substantial advantage over third-party creditors and should know the exact financial position of the company. There should be a higher level of accountability for transactions with related parties that result in a financial advantage being obtained by them at the expense of other creditors. Gift vouchers Holders of gift vouchers from retailers that have been placed into receivership or liquidation join the pool of unsecured creditors and are often left unpaid. Currently, when a retail business continues to trade after an insolvency appointment, practitioners will offer to redeem a proportion of the value of gift vouchers to preserve goodwill, which could result in a better price being paid for the business as a going concern. RITANZ believes giving insolvency practitioners the flexibility to assess when to redeem gift vouchers is better than legislating for it across the board. There will always be risks for consumers buying gift vouchers, but the position of those holding gift vouchers will be improved by the proposed legislative changes when a business trades on after an appointment is made. Care will need to be taken in the drafting of law in this area given the often complex security/ownership arrangements that might exist with inventory in retail situations and the costs of dealing with potentially numerous claims, often of relatively low value. RITANZ believes a time period where claims can be made should also be imposed to ensure the administration of the insolvency can be completed within a reasonable time. Employee claims Employees currently have a preferential claim to a prescribed amount for unpaid wages, holiday pay and redundancy. If there are sufficient assets in the insolvent entity, these claims are paid ahead of some secured creditors and ahead of other unsecured creditors. The problem we often see for employees is where there are insufficient assets to pay the claims or when it might take weeks or even months before the assets are realised to pay the claims. This is where significant financial hardship for employees can occur. In other developed countries, including Australia, the UK and Canada, the government has established a safety net for employees. The fund effectively pays amounts owing to employees and the government then steps into their shoes for a proportion of their preferential claim, thus ensuring outstanding wages, and some other employee claims, are paid promptly and the risk of missing out is partially transferred to the government. The position is summarised below: We believe further consideration is needed on adopting a safety net, together with addressing situations where employees may transfer immediately to the employment of a buyer of the business or where they walk into another job within a very short time. Another factor is that employees have had a preferential claim leading up to the insolvency based on what they have earned (wages, holiday pay and redundancy). No services have been provided to the insolvent company for the claim for payment in lieu of notice, which creates a different type of preferential claim from existing ones. None of the countries referred to above include pay instead of notice as a preferential claim. Ultimately, it comes down to the government creating a policy on what employees should be entitled to claim in priority to other creditors (and the amounts that may be available to meet those claims). In other jurisdictions, governments have set up employee funds to ensure timely payment of preferential employee claims when a business fails. New Zealand will be out of step with Australia, the UK and Canada in promoting pay in lieu of notice to a preferential status. These countries all have a government fund to ensure employees receive some immediate relief when a business fails. Perhaps this should also be considered in New Zealand. This is supplied content and not commissioned or paid for by NBR. John Fisk is a PWC partner and also chair of the industry organisation RITANZ.


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