5. Problem Identification
Some problems with the current priority debts regime are set out in sections 5.1 and 5.2 below.
5.1 Crown's Use of its Position as Dominant Creditor
Most priorities favour the Crown, and in particular the Inland Revenue Department. As the dominant beneficiary from the distribution of assets from an insolvent estate, the way the Crown exercises its rights can have a significant impact on the interests of the debtor, other creditors, and even wider economic interests.
The Crown does have a conflict of interest in establishing priorities. Unlike other creditors, it has been able to determine the situations in which it will take priority over the interests of others in insolvency. It was also argued in submissions that the Crown's position as a dominant creditor has some negative impacts. These include:
- A reduction in the amount of funds available to other creditors, the cost of credit and the risk of "spill-over" business failure is increased.
- It encourages the Crown to be complacent and, as a consequence, it does not monitor debtors closely. This can mean that timely action is not taken to either prevent insolvency, or bring about insolvency while there are still assets available to distribute to creditors. It has been argued in submissions that, in the absence of the Crown's priority, other creditors would have greater incentive to monitor the debtor's actions.
- The Crown is contributing to uncertainty for creditors and accentuating the problems identified above by continuing to approve an ever-increasing list of priorities, often in a piecemeal way, and without assessing the possible implications for wider policy objectives.
There is an argument that priorities favouring the Crown benefit the general community. While this may be at the expense of the individual, the argument is that individuals have the ability to choose who they deal with, which the Inland Revenue Department does not. Further, any change in the Crown's position as a dominant creditor will lead to a loss of Government revenue.
5.2 Those in Like Position Not Treated the Same
Arguments were made in submissions to the effect that certain groups of creditors had different rights afforded to their security even though there were no compelling public reasons warranting it. For example, it was argued that the priority given to employees and consumers (in certain circumstances) was at the expense of small trade creditors who would benefit by at least as much from being granted a priority.
The problems identified above will be assessed in more detail below against the Ministry's proposed solutions.
Back to Top