The Insolvency Working Group's second and final report, released last week, deals with voidable transactions and Ponzi schemes. It proposes a number of changes to the voidable transaction regime, including returning the “gave value" defence to its earlier, more limited, form.
It makes a range of other recommendations across the law of insolvency. Key among them are that the IRD's preferential debt be subject to a limit, and that gift card and voucher holders be treated as preferential creditors.
The Ministry of Business, Innovation and Employment is seeking public submissions in response to the report. Submissions are due Friday, 23 June. Details of how to make submissions can be found on the Ministry's website.
Insolvency law is based on the premise that creditors of the same class should be treated equally. To achieve this, the Companies Act provides that certain transactions entered into and charges given by a company before it is placed in liquidation can be avoided. This currently applies to payments:
- made when the debtor company was insolvent
- made up to two years prior to the liquidation, and
- resulted in the creditor receiving more than in a liquidation.
But the retrospective nature of the regime is inconsistent with the societal interest in providing certainty to businesses that they can rely on the validity of a payment.
The Supreme Court's Allied Concrete1 decision had the effect of promoting the interests of individual creditors (who will always be able to satisfy the 'gave value' part of the defence). It resulted in a broad defence for any recipient who had no knowledge of the company's potential insolvency. It has disturbed the equal treatment principle which was intended to underpin the voidable transactions regime.
The Group's principal recommendations in this regard are:
- repeal the 'gave value' test and return the defence to one that operates only where a creditor in good faith, and without suspicion of insolvency, relies on the payment itself
- instead create certainty for businesses by reducing the period of vulnerability for insolvent transactions from two years to six months, where the debtor and the preferred creditor are unrelated parties, and
- increase that period to four years where the company and the recipient of the payment are related parties.
Other recommendations include:
- reducing the deadline for liquidators to file in the High Court claims under sections 292 to 299 from six to three years (although with discretion for the Court to grant an extension where "just and equitable")
- standardising the clawback period for insolvent transactions and all other types of voidable transactions (e.g. transactions at undervalue) at four years where the debtor company and the preferred creditor are related parties
- applying the definitions of 'related creditor' and 'related entity' in sections 245A and 239AM in the Companies Act for determining whether a party is a related party in relation to all recoverable transactions, charges and securities
- adding a defence for a creditor with a valid security interest who can demonstrate that there was no preference at the time they received payment
- simplifying the continuing business relationship rule by removing the subjective element relating to the parties' intentions and clarifying that the starting point is either the start of the specified period or the point of the debtor's insolvency – whichever is the later
- the content and form of a liquidator's notice for setting aside a transaction to be prescribed by Order in Council rather than through section 294 of the Act, with the required detail to be expanded
- the clawback period to commence on the date the voluntary administrator is appointed if a decision to appoint a liquidator is made at the watershed meeting
- sections 292, 293 and 297 to 299 be amended to clarify that recoveries be paid out in the order specified under Schedule 7 and not to secured creditors.
Although insolvency law was never designed or intended to prevent or detect fraud, liquidators of a Ponzi scheme can take action against:
- a scheme owner or operator for restitution of funds knowingly received in breach of trust, and
- an investor who received a preferred payment before the scheme's collapse.
The extent to which the regime can be used in relation to the second bullet point will be clarified when the Supreme Court releases its judgment on McIntosh v Fisk.
The Working Group recommends that, once that decision is out, the government assess whether:
- a Ponzi presumption and/or a good faith defence should be added to the recovery of funds provisions under the Property Law Act 2007, and
- a compensation scheme should be created.
Where relevant, the Working Group suggests that equivalent amendments be made to the Insolvency Act 2006. The key policy changes relate to the allocation of funds in an insolvency. They would:
- clarify whether long service leave forms part of the preferential claim for employees
- establish a new preferential claim for gift cards and vouchers
- place a six month limit on preferential claims for unpaid tax and customs duties, and
- provide that recoveries from reckless trading claims be distributed only to unsecured creditors (including preferential creditors).
Other changes are largely technical and include:
- clarifying that the priority for administrators' fees and expenses continues to apply when a company is both in receivership and administration
- amending the definition of secured creditor to include all creditors under the Personal Property Securities Act 1999
- requiring all administrators' reports to be filed with the Registrar of Companies
- empowering liquidators to obtain certain further information from third parties without needing to apply to the courts
- providing that fines and penalties are admissible claims in liquidation, but are subordinate to claims by unsecured creditors
- allowing greater electronic communication between the liquidator and creditors, and
- recommending that the Registrar of Companies should collate and publish information from reports lodged by insolvency practitioners.
New Zealand's corporate restructuring processes – a broader review?
The focus of the report was largely on issues arising from liquidation and improvements to the Receiverships Act 1993. A broader review of voluntary administration and other formal creditor compromise and restructuring processes was not undertaken as the group saw no major issues with them at present.
But the report goes on to note that overseas developments in this area should continue to be monitored – in particular, two proposed changes in Australia relating to safe harbours for directors attempting to restructure a business, and restricting the ability to enforce ipso facto clauses allowing termination of contracts based on an insolvency event.
More details about the Australian proposals, and the exposure draft of the legislation, can be found on the Australian Treasury's website.
The ipso facto reform in particular may be relevant to New Zealand. When a company is in a formal restructuring process, should a supplier be prevented from terminating its supply arrangements on the basis of the company's insolvency? Should, for example, a landlord be permitted to terminate a lease if its tenant is in a formal insolvency process, but is still paying rent during the restructuring process?
While not mentioned in the report, jurisdictions beyond New Zealand and Australia are currently considering insolvency law reforms. It would be sensible to keep an eye on those developments too. In particular:
- the UK Government is conducting a review of its corporate insolvency framework. It wants to reduce the cost of restructuring. It is considering a 'debtor in possession' process including a moratorium on actions against the company, a safe harbour for directors, limits on the ability of suppliers to terminate contracts and a super priority for rescue finance (see more details at the UK Insolvency Service)
- in March this year, the Singapore Government passed a bill making significant changes to Singapore's restructuring and insolvency laws. One of the main changes was the introduction of a number of concepts from the US Chapter 11 process to Singapore's scheme of arrangement procedure to better assist with debt restructuring. The reforms are intended to establish Singapore as the centre for international debt restructuring in Asia. For detail see the Ministry of Law's page for consultation on the Report of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring.
MBIE is seeking submissions on the recommendations made by the Working Group, as well as submissions on whether to introduce director identification numbers (a recommendation from the Working Group’s first report), with a deadline of 5pm, Friday 23 June. Submissions should be emailed to [email protected], with submission templates available under the Insolvency Working Group section of the MBIE website.