1. Executive Summary
The main purpose of bankruptcy and liquidation systems is to provide for an orderly, compulsory and collective realisation of a debtor's assets. It has long been accepted that to avoid destructive fights between creditors and races among creditors to the courts, insolvency law provides all creditors with some measure of equality.
Individuals and corporations are generally insolvent in a technical sense for some time before formal insolvency. Voidable transactions law reverses some transactions that occurred before formal insolvency. In doing this, these provisions support the system of collective realisation and thereby the underlying pari passu principle.
The Ministry commissioned a paper on voidable transactions law in New Zealand by David Brown, a Senior Lecturer in Law at Victoria University. That paper was circulated with a series of consultation questions written by the Ministry in a round of targeted consultation. Both Mr Brown's paper and the submissions received on it indicated that there are significant problems associated with the current personal and corporate voidable transactions laws in New Zealand. In summary, those problems are that the provisions are resulting in:
- Inconsistency in processes and evidential requirements - this results in different outcomes depending on the provision used and means the provisions are not consistently enhancing the pari passu principle;
- Uncertainty regarding the interpretation of key tests - this results in unnecessary or drawn out litigation and creates difficulties for businesses in determining whether to undertake particular transactions; and
- Unnecessary costs of pursuing and defending potentially voidable transactions - this is due in part to uncertainty of tests and complexity of processes.
The Ministry's proposals are:
- Consideration should be given to whether it is feasible to replace all the current voidable transaction provisions with one provision that would apply regardless of:
- the nature of the transaction;
- the intention, knowledge or motive of the debtor or recipient of the transaction; or
- whether the debtor is an individual or a company.
- As with the current Companies Act provisions, the provision would seek to set aside transactions based on the transaction's effect on creditors in general.
- The "ordinary course of business" exception in section 292 of the Companies Act would be replaced with a test that considers the net effect of a series of transactions, based on the United States "net effect" rule.
- The existing defence in section 296(3) of the Companies Act would be retained.
- Transactions occurring within six months of the application to liquidate/bankrupt could be challenged, except where the recipient is an insider, in which case transactions occurring within two years of the application to liquidate/bankrupt could be challenged.
- The existing procedure in section 294, which enables transactions to be set aside by notice, will be retained as the procedure for seeking to set aside transactions under the new provision.
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