6. Proposed Reform
6.1 Process for New Priorities
Preferences are provided for in numerous pieces of legislation. It has been charged that new priorities may be created without proper consideration being given to the wider insolvency law implications. For example, there appears to be some uncertainty around what debts will take priority in any given situation.
As a solution to this problem, the Commission suggested that the Insolvency Act 1967 and the Companies Act 1993 should be amended to provide that on the introduction of any Bill into the House of Representatives, the House must be notified of any provision which would affect the order of priorities set out in either section 104 of the Insolvency Act or the Seventh Schedule to the Companies Act.
Some submissions argued that legislative amendment was unnecessary. Instead, it was suggested that amendment to the Cabinet Office Manual would be a less intrusive and less costly means of achieving the same objective. Further, the Ministry notes that amendment to the Cabinet Office Manual could ensure officials consider the wider insolvency issues at the time of policy development rather than after the key decisions have been made.
| Recommendation: The Ministry proposes amendments to the Cabinet Office Manual to provide that officials must consult with the Ministry of Economic Development before recommending to Ministers a provision that could affect the order of priorities. The Ministry also recommends that any amendment to legislation that introduces a new priority should simultaneously amend the Companies Act and the Insolvency Act so that all priorities and their rankings are clearly set out. This would provide an additional mechanism for ensuring that the wider objectives of insolvency law are not compromised and aid transparency and compliance with the provisions. |
6.2 Administration Costs
The Commission concluded that administration costs (the fees and expenses of the liquidator/assignee) should receive priority for the following reasons:
- Administration costs are not pre-existing debts of the insolvent entity; they are costs incurred on behalf of the general body of creditors which should be borne by the creditors.
- It would be difficult, if not impossible, to get qualified people to act as insolvency administrators if their costs were not met as a first charge on the estate.
The Ministry agrees with this assessment.
| Recommendation: Administration costs are necessary to ensure the proper co-ordination and management of the bankruptcy or liquidation process. The Ministry recommends that administration costs should be afforded priority. |
The Commission also proposed that a petitioning creditor should be entitled to preferential status for the reasonable solicitor-client costs and disbursements incurred when procuring an order of adjudication or liquidation (including those cases where a creditor is subsequently given leave to withdraw after receiving payment). The amount should be determined by the liquidator or Official Assignee, as appropriate, with a right of appeal for any party in the event of disagreement over costs awarded. The Ministry supports this recommendation.
| Recommendation: A petitioning creditor should be entitled to priority for the reasonable solicitor-client costs incurred when procuring an order of adjudication or liquidation. |
The Commission also proposed that the actual expenses incurred by the Liquidation Committee should receive priority. Such expenses include remuneration where a majority in number and 75 percent of creditors by value have resolved to pay remuneration. Any creditors should have the right to appeal that decision to the courts, but a decision on remuneration should be overturned only if the Court is satisfied that there has been an abuse of process (i.e. the resolution is not bona fide or has been made for an ulterior purpose). Currently, these costs must be borne by those creditors with the resources and expertise to contribute personnel to the creditors' committee. The proposal was argued to be particularly beneficial in large or complex liquidations, especially where expert assistance is needed to realise assets.
Similarly, the Commission also proposed that the Insolvency Act should be amended to ensure consistency with the above proposal (i.e. in relation to the granting of remuneration to those assisting the Official Assignee or liquidator in an official capacity).
The Ministry considers that these proposals have merit and are consistent with the broad objectives of the review in terms of promoting a clear and consistent legal framework that provides incentives for collective involvement in insolvency proceedings. However, the Ministry also acknowledges that these recommendations generated significant interest from submitters. Some suggested that payment could result in abuse, with over-participation in the administration of the insolvent estate, perhaps to the point of interference. It was argued that independent expert advice could be sought and paid for adequately under existing provisions. Finally, it was suggested that the process (in particular, requiring 75 percent majority support) as proposed by the Commission was cumbersome and could cause unnecessary delay. The Ministry therefore welcomes further submissions on this.
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