A bankrupt’s KiwiSaver account balance is off limits to the Official Assignee. Even if it were not, the Official Assignee could not use the bankruptcy to invoke the hardship-based early withdrawal provisions in the KiwiSaver Act 2006.
This is the effect of a Court of Appeal judgment, delivered on Friday. Although justifiable in policy terms, the decision raises issues about the appropriate balance between promoting retirement savings and protecting creditor rights.
The judgment1 has significant ramifications. In January this year there were 5,559 bankrupts with KiwiSaver accounts totalling over $27.3 million and, as KiwiSaver itself grows, that number can only continue growing.
Two issues were before the Court:
- whether the Insolvency Act 2006 entitles the Official Assignee (OA) to access KiwiSaver balances or is ‘trumped’ by the prohibition on assignments in the KiwiSaver Act 2006 (KSA), and
- whether bankruptcy automatically satisfies the ‘significant financial hardship’ test in the KiwiSaver Scheme Rules, thus allowing an early withdrawal of KiwiSaver funds.
The Court of Appeal’s response to both questions was ‘no’ - overturning earlier findings by the High Court that KiwiSaver balances were automatically assigned to the OA on the bankruptcy of a member.2
The Court of Appeal noted that, although the Insolvency Act and the KSA received the Royal Assent within two months of each other ‘neither refers to the other in any material respect’.
Relevant to its decision on question one was the emphatic wording of section 127 of the KSA. This provides that a member’s interests ‘must not be assigned or charged or passed to any other person whether by way of security, operation of law or any other means’.
This absolute prohibition is tempered where assignment is required by any other enactment. However, the Court drew from the emphatic language of section 127 the following gloss on the interpretation of the assignment provisions:
“divestment of a member’s KiwiSaver interest is not “required by the provisions of any enactment” in terms of s 127(2) unless the enactment expressly provides for the vesting in a third party of the member’s interest in a KiwiSaver scheme” .
As the vesting provisions in the Insolvency Act are stated in general terms, and do not expressly require the vesting in the OA of a member’s interest in a KiwiSaver scheme, the Court took the view that:
- members’ interests are not ‘required’ to pass to the OA in terms of the KSA, and
- therefore the KSA prohibits such assignments.
The Court reached the same conclusion in respect of any KSA funds accumulating for the benefit of a member during bankruptcy, drawing support for this from the example given in the KSA of an exception to the prohibition on assignment - a Court order under the Property (Relationships) Act 1976. That Act expressly enables the Court to make orders in relation to a ‘superannuation scheme entitlement’.
The Court also had regard to the KSA’s purpose statement to encourage a long-term savings habit and the accumulation of funds to provide for security in retirement:
“There is nothing in the KSA to suggest that a purpose of the legislation is to accumulate funds for the benefit of creditors in the event of the member’s bankruptcy. If that were the case, the important social and economic purposes of the KSA would be undermined and the burden of providing for the welfare of individuals would fall back on the state.”
The Court of Appeal confirmed the findings of the High Court that bankruptcy does not automatically result in members suffering financial hardship in terms of the KSA.
So where does this leave creditors – Chapman Tripp comments
We commented on the High Court ruling that it was an unsatisfactory outcome which required a legislative fix. We now have clarity around the legal position, but some of the policy implications are less clear.
If the OA is unable to access KiwiSaver balances on the bankruptcy of members, what - if anything - can creditors do about additional payments made into a KiwiSaver scheme by a debtor who is on the cusp of bankruptcy?
A member’s creditors, or the OA, may be able to seek a Court order under the Property Law Act 2007 requiring the contributions to be repaid. Whether such claims would succeed in practice is unclear, however. KiwiSaver contributions are not a good conceptual fit for the grounds on which a creditor could apply for this kind of order.
The Court’s finding is quite mainstream in international terms – both Australia and the UK for example also generally protect retirement savings funds in bankruptcy. But those jurisdictions do have voidable transactions provisions alongside that protection.
While the law is clear for now, and clarity is helpful for the industry, this is a topic on which a deliberate policy discussion should be had.
There may also be a question mark now over any KiwiSaver balances which the OA was able to access prior to this decision. Is anyone liable to the affected members?