9. Miscellaneous Priorities
9.1 Motor Vehicle Dealers Institute
Section 42 of the Motor Vehicle Dealers Act 1975 ("MVDA") provides that where the Institute pays money out of the Motor Vehicle Dealers Fidelity Guarantee Fund to settle a claim against a motor vehicle dealer, the Institute is subrogated to all the rights and remedies of the claimant, as against the motor vehicle dealer claimed against. Section 42(2) MVDA provides that a District Court Judge may declare that a person is personally responsible for repayment of the amount paid from the fund in settlement of the claim.
The Commission received a submission from the Motor Vehicle Dealers Institute supporting the retention of the preference because among other things:
- The pari passu principle should not apply in all instances because some creditors lend money and give credit knowing that the entity is in a perilous state.
- Unlike a commercial insurer, the Motor Vehicle Dealers Fidelity Guarantee Fund has no control over the risk that it undertakes. Licences are issued by the Motor Vehicle Dealers Licensing Board rather than the Fund.
The Commission rejected these arguments because they did not reveal any compelling reasons to depart from the pari passu principle. It also noted that there has never been a similar preference in relation to fidelity funds operated by organisations such as the Institute of Chartered Accountants of New Zealand and the New Zealand Law Society.
| Recommendation: The Ministry endorses the Commission's approach. It notes the Institute's concern that the current Motor Vehicle Dealers Bill may abolish the Fund and will reduce consumer protection, as all claims arising will need to be lodged before a given date. The Bill is currently before the Commerce Select Committee and is due to be reported back on 15 December 2000. The Ministry will re-examine the Institute's concern once that Select Committee's report becomes available. |
9.2 Layby Sales
In its report, the Commission recommended preserving the priority afforded by the Layby Sales Act 1971. The Commission considered that, notwithstanding the significant changes in consumer behaviour (particularly the increased use of credit cards), prudent purchasers continue to use the layby system and should not be disadvantaged. Further, it considered that those using the layby system will generally have modest means and "can least afford to lose the money". The amounts at issue in relation to preferential claims based on layby sales will generally be modest and unlikely to impact unduly on other creditors' dividends.
The Ministry agrees with these comments and also notes that if layby sales encourage consumers to have greater budgetary responsibility (and thereby reduce levels of consumer indebtedness), they should be encouraged. The Ministry also notes that, as of 15 November 2000 the Layby Sales Act applies to transactions of up to $7,500.
| Recommendation: The preference for layby sales should be retained. |
9.3 Costs of Compromise
The costs incurred in organising and conducting a meeting of creditors for the purpose of voting on a proposed compromise under Part XIV of the Companies Act 1993 are given priority (if the costs are incurred by a person other than the company, a receiver or liquidator). The Commission's report states that this provision provides an incentive for a company to face its creditors at the earliest possible time and, if possible, to restructure its affairs without the need for liquidation. The Ministry endorses the Commission's recommendation. The Commission also suggests that there is room to further extend the scope of this priority, particularly if New Zealand adopts a voluntary administration procedure akin to that used in Australia or the United Kingdom. Voluntary administration is one of the Ministry's Tier Two review topics and a paper on this issue will be released for public consultation in 2001. The proposal to extend this priority will therefore be addressed in this context.
| Recommendation: The priority afforded to the costs incurred in organising and conducting a creditor's meeting should be retained. |
9.4 Liens over Book Debts and Papers of a Bankrupt or a Company
A priority is currently given to holders of liens over books and papers of a bankrupt or a company in liquidation. The right to seek preferential payment of a debt to a maximum of $500 operates in lieu of the exercising the right of lien. The Commission's paper explains that the rationale for this preference is that lien holders could disrupt the orderly administration of a bankruptcy or liquidation by refusing to provide the records without, in effect, being given preferential treatment for the whole of the debt to discharge the lien.
The key issue is whether the priority should remain or whether lien holders should have to prove (on an unsecured basis) for the whole of their debt. The Commission's paper contrasts lien holder's position with that of a supplier of essential services which is prohibited from requiring outstanding charges to be paid as condition of supply or from requiring that the liquidator personally guarantee charges which would be incurred for supplying the service. The point of the distinction between the supplier of essential services (which has no preferential claim) and the lien holder (who does) is that the lien holder has a lawful possessory lien which is not allowed to prevail because it would create inefficiencies in the administration of an insolvent estate. In contrast the essential service supplier relies on its "commercial muscle" to achieve a de facto priority.
The Commission also makes the point that someone who has done very little work may recover the whole of the debt back in priority to other creditors because of the limit on the preference. In contrast, someone who has undertaken a significant amount of work is only entitled to a priority to the extent of $500.
| Recommendation: The Ministry agrees that the current provisions have the potential to produce arbitrary results. It endorses the Commission's suggestion that the preferential claim should be made 10 percent of the amount of the total debt up to a maximum of $2,000, as this is likely to result in greater vertical equity as between different classes of creditor. |
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