Chapman Tripp | Companies Act Refresh - Insolvency Law Updates

Included in the reform package the Government is proposing to the Companies Act 1993 are amendments to insolvency law designed to “help make sure creditors get their fair share when a company fails”.

The changes will progress some of the unfinished business from the Insolvency Working Group’s 2017 report not picked up by the previous Government in 2020, although at this stage it isn’t entirely clear which of the various outstanding recommendations are to be adopted.

We will follow the policy development and will be making submissions in due course.

Voidable transactions

The April 2020 Companies Act amendments adopted the Working Group’s recommendation to reduce the voidable transaction claw-back period from two years to six months, where the parties are not related.¹

The new proposals seek to implement the remaining recommendations, including:

Standardising the claw-back period under sections 292 to 299 at four years, where the debtor company and the preferred creditor are related parties. This proposal has been specifically identified in the Minister’s Cabinet Paper released as part of the announcement;
Reducing the limitation period from six to three years for actions under sections 292 to 299, but giving the High Court the discretion to extend that where it would be just and equitable to do so;
Simplifying the “continuing business relationship” test by removing the subjective elements relating to the parties’ intentions;
Adding a specific defence for a creditor with a valid security interest who can demonstrate that there was no preference at the time they received payment.

While the 2020 reduction to the clawback period has significantly reduced the number of voidable transaction claims being made, adopting the remainder of the Working Group’s recommendations on this point would be welcome.

Ponzi schemes

In light of the Ross Asset Management liquidation and consequent litigation, Ponzi schemes were front and centre of the Working Group’s thinking in 2017 and have continued to be a problem (for example, Barry Kloogh in 2019), making the changes recommended by the Working Group to aid recovery of funds still relevant. These would:

Confirm that the ‘giving value’ element of the s 296(3) defence to a voidable transaction claim is not satisfied by receiving fictitious profits, and
Amend the provisions for setting aside prejudicial dispositions (Part 6 Subpart 6 of the Property Law Act 2007) to:
- introduce a Ponzi presumption that establishes that investors are creditors and avoids the need to prove an intent to defraud, or of the debtor’s insolvency; and
- impose an objective standard for the good faith and change of position defence where a Ponzi scheme is established.

Preferential claims

The Working Group recommended a limit on the Crown's preferential status for certain tax debts.

Specifically, they recommend limiting existing preferential claims for taxes and customs and excise duties to six months from the date the debt falls due, with prior debts being ordinary unsecured debts. The lack of time or value limits means that many years of unpaid GST and PAYE can be (and often are) claimed and paid in priority to ordinary creditors. Employees, on the other hand, have their preferential status limited to a sum set by legislation. It is currently $25,480². The Working Group said that the law should similarly limit the preference for taxes, but by time period rather than by an absolute sum.

Inland Revenue in particular is uniquely well placed to assess creditors’ financial position compared to ordinary creditors. Ordinary trade creditors are not usually in a position to know whether a company is using non-payment of GST and other taxes as a source of working capital. Inland Revenue also has powers other creditors do not possess, such as the ability to order third parties that it be paid instead of paying a debt to the taxpayer debtor. The proposed change should incentivise Inland Revenue to intervene earlier where it is evident that a company is in difficulty.

In its submissions on the proposal, the industry body, RITANZ, supported this proposal.³

Distributions

The Working Group recommended that recoveries from reckless trading claims not be distributed to secured creditors.

This would better protect unsecured creditors in situations where a related party to the director holds a general security agreement and a claim against directors is the main or only available asset. It would also recognise that secured creditors often have greater access to information and to remedies in the event of insolvency.

Since then, the Supreme Court’s decision in Mainzeal has given a strong indication that security would not attach to any compensation award in any event under s 301. The statutory change will put this beyond doubt.⁴

We also understand there is strong disquiet among legal practitioners post-Mainzeal that, as a process matter, creditors may be able to bring director duty claims directly rather than through a liquidator, significantly undermining the pari passu (equal treatment) foundation of insolvency law.

We hope the Government will consider this as part of the Companies Act modernisation work, ahead of the Law Commission’s review on the content of the director’s duties.

Additional changes

The Government’s intention is not express in relation to the Working Group recommendation that preferential status (ranking equally with lay-by sales) be given to gift cards and vouchers, in order to reduce the chances of holders being left out of pocket.

We note that this proposal received some criticism at the time on the basis that it may create practical difficulties, including creating the need for costly processes, relative to the size of the individual gift cards.⁵ We have some sympathy for that view.

The Cabinet Paper also refers to stamping out phoenix company behaviour by:

Introducing director identification numbers to increase transparency of directors’ identities and corporate histories and make tracking of such behaviour easier for law enforcement, customers and creditors. Directors’ home addresses would however be suppressed, to be replaced with an address for service, reflecting privacy concerns, and
Improving the framework for insolvency practitioners to report such behaviour to regulators. To the extent these changes contemplate greater cooperation and information sharing between insolvency practitioners and regulators (and between regulators), we see this as a positive change.

One somewhat technical but important change we encourage the Minister to consider is to correct the anomaly in relation to fines and penalties. The Working Group’s recommendation, supported by RITANZ, would remove the risk that fines and penalties, caused by the actions of the owners and directors, would be visited on the creditors rather than the wrongdoer.

Finally, the Cabinet Paper also seeks to expand the levying powers in the Companies Act to help fund the Insolvency and Trustee Service (ITS), which performs the statutory functions of the Official Assignee. This makes sense.

The ITS can recover its staff time cost and expenses from the realisable assets of a company in liquidation. But as the Official Assignee is typically appointed over companies with limited or no assets, recoveries often fall short of the cost, leaving the Crown to pick up the tab. The proposed change would increase the funding capability of the ITS and reduce the need for Crown funding.