2. Background to Bankruptcy
This paper focuses on the role and administration of bankruptcy in New Zealand. It is part of a wider review, traversing legislation that applies to both corporate and individual insolvency. In New Zealand, the legal framework for insolvency is administered in two parts: personal and corporate insolvency. The law dealing with personal insolvency is the Insolvency Act 1967 and refers to the process of individual insolvency as "bankruptcy". The term "bankrupt" refers to the status of a natural person (not a corporation) who, on filing a petition, or one of their creditors filing a petition, is then adjudged bankrupt by the High Court.
A "natural person" is basically any individual, whether involved in trade or consumer. Traditionally, the typical debtor that was adjudicated bankrupt was a sole trader. The changing make-up of a typical bankrupt means the majority of bankrupts are now increasingly consumers.
Personal insolvency, or solvency, is a person's financial state, while bankruptcy is the legal status of a person that has been adjudicated bankrupt by the courts. While a bankruptcy adjudication may be obtained without proving the debtor's true insolvency, it is held generally that the debtor's insolvency is reasonably to be inferred under the circumstances. Regardless of the uncoordinated appearance of insolvency and bankruptcy, the underlying links between the two are important as they determine who can become bankrupt and at what point the bankruptcy procedure begins.
Bankruptcy is a procedure for distributing a bankrupt's estate to their creditors and discharging the bankrupt from any outstanding debt once the procedure has been completed. It is designed to be the last available option for the debtor and the creditors when insolvency occurs. During the procedure, issues generally arise in relation to the fact that there are never enough assets to meet all the liabilities.
Bankruptcy law in New Zealand is based on the British historical notions of bankruptcy. Before the enactment of legislation in 1861, there was no bankruptcy administration procedure at common law. Until legislation in 1705-06 the legal concept of discharge did not exist. After this legislation, discharge was possible for traders but there was no similar discharge provision for individuals, and no bankruptcy administration procedure at common law, until the enactment of further legislation in 1861. The modern system of Official Assignees to administer the bankruptcy procedure did not begin until the nineteenth century. Before this, the procedure was open to abuse.
Before the legal concept of discharge from debt, the history of bankruptcy law tilted the balance between debtors, creditors and public interests in favour of the creditors. With the introduction of the concept of discharge, and the focus on administration without corruption, the law gradually reflected the need for balance between debtors rehabilitation, the public interest in processing insolvencies, and maximising returns to creditors.
This balance was last reviewed in the 1960s with the introduction of the Insolvency Act 1967. This paper will provide a much-needed review of the bankruptcy administration procedure in light of the changes to the market place's make up and behaviour of the market-place since the last review.
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