5. The Bankruptcy Administration Procedure
The bankruptcy administration procedure is managed by the Official Assignee ("the Assignee"). The Assignee is a role established under the Insolvency Act 1967 ("the Act"). The Assignee, as an officer of the High Court, is required to implement the law impartially. The office of the Assignee is part of the New Zealand Insolvency and Trustee Service, under the Business and Registries Branch of the Ministry of Economic Development.
Bankruptcy is designed to be the "last resort" in personal insolvency. Before this, the debtor has alternatives, both formal and informal. Under the Act, there are two formal alternatives available to the debtor.
5.1 Alternatives to Bankruptcy
The existing pre-bankruptcy alternatives are summary instalment orders and proposals under Part XV of the Act.
Debtors may apply for a summary instalment order. This is an order made by a District Court Judge which allows a person whose total debts are less than $12,000 to pay back those debts in regular instalments, without the threat of further legal action in relation to those debts while the order is in force.
Part XV of the Act allows a debtor to make a proposal to their creditors. A proposal may include all or any of the following:
- An offer to assign all or any of their property to a trustee for the benefit of their creditors;
- An offer to pay their debts by instalments;
- An offer to compromise their debts at less than 100 cents in the dollar;
- An offer to pay their debts at some time in the future; and
- Any other offer for an arrangement for the satisfaction of their debts.
A proposal may include any other conditions for the benefit of the creditors and may be accompanied by a security or guarantee. The proposal must: be:
- Accompanied by a statement of affairs in the form prescribed, verified by affidavit showing particulars of the insolvent's assets, debts, and liabilities, the name, address, and occupation of every creditor of the insolvent, and the securities (if any) held by each creditor;
- Signed by the debtor and have the name of the person willing to act as trustee for the creditors endorsed on it; and
- Filed in the office of the court nearest to where the insolvent resides, and neither the proposal nor any security or guarantee tendered with it may, without the leave of the court, be withdrawn pending the decision of the creditors and the court.
The time a proposal is filed in the court constitutes the time for the determination of creditors' claims and for all other purposes of the Act.
After the proposal has been accepted, a meeting of creditors is convened. At this meeting the creditors decide whether to accept the proposal. If the proposal is accepted, the trustee must immediately apply to the court for its approval, and must, at least 10 days before the hearing date, send notice (of the hearing of the application, in the prescribed form) to the insolvent and to every known creditor. However, if the creditors at a meeting held under section 142 of the Act do not accept the proposal, then the chairman of the meeting will return the proposal to the court with the words "not accepted by creditors" endorsed over his signature and the Registrar will cancel the proposal.
If the creditors accept the proposal and the court approves it, Part XV provides that, in respect of that debt and while the proposal remains in force, a creditor cannot:
- File or proceed with a creditor's petition against the insolvent (except with the leave of the court given on such terms as the court thinks fit); or
- Enforce any civil remedy against the insolvent's property; or
- Commence any legal proceeding in respect of the debt.
At any time after the court has approved the proposal the court may vary or cancel the proposal on application of a creditor or the trustee.
5.2 Bankruptcy
5.2.1 Debtor Petitions
When a debtor files a petition, they immediately become bankrupt and there is no need for a court hearing. As the filing of a debtor's petition is equivalent to an order of adjudication, a debtor's petition cannot be withdrawn, so instead the debtor must move for an annulment of adjudication.
5.2.2 Creditor Petitions
Creditors are entitled to file a petition in the High Court if they are $200 or more, the debtor has committed an act of bankruptcy within three months before the filing of the petition, and the debt is a liquidated sum payable either immediately or at some certain future time.3 The creditor and debtor4 appear at a court hearing which determines whether to adjudge the debtor bankrupt. If the court is satisfied as to the facts alleged in the petition and that the debtor has been duly served, the debtor may be adjudged bankrupt.
On adjudication, all the debtor's property is vested in the Assignee. The potential outcomes of the court hearing are:
- The debtor may be adjudged bankrupt;
- The petition may be dismissed;
- Proceedings may be stayed; or
- The Assignee may be appointed as receiver and manager of the debtor's property.
- If the debtor is not adjudged bankrupt creditors can seek recovery of debts by agreement with the debtor or through the courts.
5.2.3 Effects of Adjudication
At the point where the debtor is adjudged bankrupt, the distinction between a debtor-filed petition and a creditor-filed petition is not relevant to the effects of bankruptcy on the bankrupt.
Commencement of bankruptcy relates to the time of the act of bankruptcy on which the petition is founded or the time of the first of the acts of bankruptcy which the bankrupt is proved to have committed within the three months immediately before the petition was filed. Section 42(1) of the Act states that all the bankrupt's property and powers vest in the Official Assignee. Section 42(2) of the Act states that the property that vests in the Assignee is that belonging to or vested in the bankrupt at the commencement of the bankruptcy. The Official Assignee becomes entitled to all5 real and personal property, vested in the bankrupt at the commencement of bankruptcy or acquired by him or her before discharge.
Once the debtor is adjudged bankrupt, the Assignee under section 33 of the Act, either sends the bankrupt certain forms relating their assets and liabilities and a list of questions relating to his or her affairs, or the bankrupt is requested to attend an interview at an office of the New Zealand Insolvency and Trustee Service to complete the same forms.
Once adjudged bankrupt, the bankrupt receives a notice that can be shown to their creditors as evidence of their bankruptcy. A notice advertising the bankruptcy is published in the regional newspapers where the bankrupt lives and has incurred the majority of their debts.
Immediately after adjudication, the bankrupt may select and retain, with the Assignee's agreement, tools of trade to the value of $500, furniture and personal effects not exceeding $2,000 in value and money to the value of $400. With this exception, the Official Assignee becomes entitled to all6 real and personal property vested in the bankrupt at the commencement of bankruptcy or acquired by him or her before discharge.
The Assignee may call meetings of creditors and compel the bankrupt to attend them. The Assignee has discretion to call a meeting of creditors within 14 days of compliance with section 33 of the Act. The Assignee may from time to time summon a further meeting of creditors and must call one if required to do so by one-quarter (in value) of the creditors who have proved their debts. The Assignee and at least one creditor must attend meetings.
The Assignee can require the bankrupt to undergo a private examination in respect of their property either before or after their discharge. The usual purpose of a private examination is to discover whether the debtor has documents that have not been disclosed to date and, if so, to have the property or information delivered up to the Assignee. The private examination provides a mechanism for dealing with a bankrupt whose conduct is unsatisfactory or who is suspected of concealing his or her property.7
Public examinations can also be held, but these are rare due to the expense involved and sometimes serve more of a scandalous than a public interest. Public examinations usually take place immediately before the hearing of an application for discharge. Creditors may by resolution appoint an expert or a committee of persons to help the Assignee administer the estate.
During bankruptcy, the bankrupt is restricted from entering into business alone or in a partnership and from being a director of, or taking any part in the management of, a company without the Assignee's. The bankrupt is also prevented from obtaining credit for $100 or more without disclosing that he or she is an undischarged bankrupt and from leaving the country within three years of adjudication without the Assignee's.
5.2.4 Discharge
A bankrupt may apply for discharge at any time after the adjudication is made. This is determined in a court hearing, and the bankrupt has to show good cause for an early discharge. If an order of discharge is not granted, the bankrupt can make further applications from time to time unless the court in refusing the discharge, stipulates the earliest date on which he or she can apply again.8 At the hearing of an application for discharge, or any hearing where the automatic discharge of the bankrupt is opposed, the court may:
- Grant an immediate order of discharge; or
- Grant an order of discharge subject to such conditions (including consenting to any judgment or order for the payment of any sum of money) as it thinks fit, or suspend any order for discharge as it thinks fit; or
- Grant an order of discharge with or without such conditions as it thinks fit to take effect at a specified future date; or
- Refuse an order of discharge, in which case the court may specify the earliest date on which the bankrupt may apply again to the court for an order of discharge.
A bankrupt is normally discharged three years after adjudication unless this is objected to by a creditor with leave of the court, or the Assignee, or the bankrupt is required to pass a public examination and has not done so.9
The court, before or while granting an order of discharge, may make an order prohibiting the bankrupt, following discharge, from engaging in business without leave of the court. The restriction period need not be limited, but the court may at any time cancel or vary the order.10
5.3 The Typical Attributes of a Debtor
Bankruptcy administration is available only to individuals. This includes a wide variety of people, such as consumers, employees, sole traders and partnerships, and it is quite common for a bankrupt to be a mixture of these. The statistics available on bankruptcy are often incomplete, but the available statistics for the years 1997-2000 provide some information on bankrupts in New Zealand, in conjunction with anecdotal evidence from the New Zealand Insolvency and Trustee Service.
For the year ended June 2000,11 where dividends were not paid in 79 percent of estates (2,235 out of 2,817). Some money was recovered but not paid in dividends to creditors 4.6 percent of estates (132 out of 2,817) and 0.9 percent of estates (28 out of 2,817) paid 50-99 cents in the dollar.
Statistics show a seven percent decrease in the number of bankruptcies for 1999. There were 3,003 people adjudicated bankrupt during 1999, as against 3,224 in 1998. For the year ended 31 December 1999, 59 percent of bankruptcies resulted from debtor's petitions.
Consumer bankrupts continue to represent the majority of bankrupts, contributing to 63 percent of all bankrupt estates for the year ended 31 December 1999. This is an increase from 1998 in which 55 percent of all bankrupts were consumer related.
For the period 1 July 1997 until 30 June 1998, the statistics available cover a wider range of topics but are still incomplete. They do, however, provide some insight into bankruptcy.
Table One: Sample of Responses Received for the Period 1 July 1997 until 30 June 1998
| Filed by creditors | 263 | |
| | Male 81 % | Female 19% |
| Filed by debtors | 805 | |
| | Male 55% | Female 45% |
| Aged between 25 and 40 years | 50% of total bankruptcies | |
| Aged between 41 and 55 years | 28% of total bankruptcies | |
| Married / de facto | 557 | 48% of total bankruptcies |
| In business during the two years before bankruptcy | 20% of total bankruptcies | |
| Employed | 30% of total bankruptcies | |
| Receiving Income Support | 50% of total bankruptcies | |
| Bankrupts owning credit cards | Males 30% of total bankruptcies | Females 31% of total bankruptcies |
| | Of this figure, 48% of males owned two or more credit cards | Of this figure, 62% of females owned two or more credit cards |
| Second time bankrupts | 6% of total bankruptcies | |
Based on the empirical evidence and anecdotal information provided by the New Zealand Insolvency and Trustee Service, the make-up of the "typical" New Zealand bankrupt can be drawn out. Almost 80 percent of bankrupt estates do not return a dividend to creditors. The majority of bankruptcies began with a debtor-filed petition and the debtor is usually aged between 25 and 40 years. A large number of bankrupts are married or in a de facto relationship, and many own more than one credit card. Half the bankrupts are receiving income support, so have no income with which to pay creditors once they are bankrupt.
Since the last review of personal insolvency legislation in the 1960s, the number of consumer bankrupts has increased and has surpassed the number of business-related bankrupts.
5.4 Factors Contributing to Personal Insolvency
Personal insolvency, and therefore bankruptcy, can arise for many reasons, including credit and overindebtedness, the unavoidable cost of sensible risk-taking, lack of business efficacy, and dishonesty or criminal conduct. The factors that contribute to insolvency are generally similar for debtors, whether they are consumers, sole traders or partnerships. Where they differ is in the impact that each factor has on the different types of debtors. For example, access to credit and overindebtedness is an issue for all debtors, but impacts greatly as a factor leading to personal insolvency for consumers.
The historical view of the causes of personal insolvency centre on the individuals' failure in terms of their conduct. The current view of the causes of personal insolvency is that, for individuals involved in trade, the cause is generally poor management. The most common factor that leads to "consumer" insolvency is the increasing availability of credit and overindebtedness. This factor also affects sole traders and partnerships, but in those cases it is not the main cause.
5.4.1 Credit and Overindebtedness12
Overindebtedness occurs when borrowers find themselves with a higher level of debt than they can service. There are indications that levels of consumer debt are increasing and that this is resulting in overindebtedness:
- Reserve Bank of New Zealand surveys have demonstrated trends toward rising personal indebtedness. For instance, from 1978 to 1987 household debt remained below 50 percent of personal disposable income but climbed steadily to exceed the 100 percent level by 1997.13 The survey shows that most forms of consumer borrowing, particularly from the major trading banks, have significantly increased in that time.
- New Zealand's network of Budget Advisory Services reports that more people are requiring its services. In the 12 months to June 1999, it reported that the number of people applying for budgeting help rose from 70,500 to 91,700, and the total amount the services clients owed rose from $43.7 million to $56.4 million. (In part, however, this may be due to increased consumer awareness of the Budget Advisory Service.)
- In the first six months of 1999, the credit check agency Baycorp reported that 22.8 percent of a sample of people on its credit file had an "adverse credit record". The figure for the same survey for the first six months of 1998 was 19.7 percent.
- More consumers are filing for bankruptcy. In the year to the end of June 1998, consumer bankruptcies rose by 42 percent to 1,844. In the year ended June 1999, they rose again slightly, to 1,945.14 The number of consumer bankruptcies in comparable countries has also steadily increased. For example, in Australia, the consumer insolvency rate more than doubled between 1986/1987 and 1996/1997 and in Canada, it also rose considerably in the 1990s.15
5.4.2 The Nature of Consumer Debt
Individual overindebtedness has three causes namely where a consumer:
- Has received credit which they were always unlikely to be able to repay;
- May become unable to meet repayments because of changing circumstances - for example job loss, separation, or illness;
- Agrees to act as a guarantor16 without understanding the full extent of the obligations incurred and later discover they are responsible for repaying the debt.
5.4.3 Credit Which Consumers Cannot Repay
For a variety of reasons such as desperate need, or not understanding the full extent of what they are committing themselves to17 some consumers obtain credit when, objectively, there is no likelihood they can repay it.
This raises the question of whether lenders are making commercially responsible lending decisions. The argument is often made that lenders may "overlend" if, in the event of default, they have sufficient security, or a guarantor, to cover the debt. Lenders dispute this: they say it is irrational to over lend, there are significant transaction costs in realising security, and (apart from loans secured against real property) the value of security is rarely enough to cover the debt and the lender's enforcement expenses.
5.4.4 Changing Circumstances
Consumers can find themselves in circumstances, not anticipate when they obtained credit. This can occur, for example, through illness, job loss, or the breakdown of a relationship.
Circumstances such as job loss and illness can be insured against but even if insurance has been taken out, the terms of the policy may not sufficiently cover the debt. For example, the circumstances of a consumer's job loss may not meet the requirements of the policy, or an exclusion in the policy may mean a consumer's claim is rejected.
5.4.5 Guarantors
There is also the risk that a guarantor a consumer who guarantees repayment of the debt could end up suffering the consequences of overindebtedness. This will occur if the borrower defaults and the guarantor is called on to honour repayments. Some guarantors have no idea of the obligation that they have undertaken by agreeing to guarantee a loan, or never expect to have to fulfil the guarantee.18
5.4.6 The Unavoidable Cost of Sensible Risk-Taking
The unavoidable cost of sensible risk-taking can lead to personal insolvency for both consumers and sole traders or partnerships.
This category recognises that decisions are made without full information, markets are unpredictable, and unforeseeable externally caused change occurs (e.g. new Government regulations). Any of these characteristics can mean business decisions that were sensible at the time they were made can subsequently lead to insolvency.
5.4.7 Lack of Business Efficacy
There are people who do not make sensible decisions in relation to risk-taking. This behaviour creates a substantial risk of serious loss of assets by the debtor. It can easily lead to personal insolvency, bankruptcy, and to repeat bankruptcies.
5.4.8 Dishonesty or Criminal Conduct
The most common forms of criminal conduct by a debtor, in terms of insolvency legislation, are concealing or removing property, destroying or falsifying documentation relating to their affairs, failing to keep proper business accounts, absconding and obtaining credit when a Court has ordered them not to.
Although the behaviour in itself may not be the sole cause of insolvency, it will certainly lead to the bankruptcy, as creditors will be unlikely to participate in informal or formal arrangements with a dishonest debtor.
Back to Top