New Zealand: Court clarifies personal bankruptcy issues

BRIEF COUNSEL
Last Updated: 20 June 2017
Article by Michael Arthur, Michael Harper, Daniel Kalderimis and Hamish Foote
Most Read Contributor in New Zealand, September 2017

Three recent decisions clarify issues around personal bankruptcy proceedings.

These include:

  • compromise proposals
  • procedures for substitution of creditors, and
  • vesting of property disclaimed by the Official Assignee.

DEBTORS' COMPROMISES IN BANKRUPTCY PROCEEDINGS

A bankruptcy notice under the Insolvency Act requires the debtor to pay the debt or compromise the amount owing on terms that satisfy the Court or the creditor.

But if the creditor rejects a proposed compromise, can the Court override that rejection? This was the question in Commissioner of Inland Revenue v Wilson [2017] NZCA 100.

The context

The Commissioner of Inland Revenue served a bankruptcy notice on the debtor and rejected the debtor's proposal to satisfy the debt. The debtor applied to the High Court for orders approving his proposed compromise and setting aside the bankruptcy notice.

The High Court obliged, citing its inherent jurisdiction to do so (as opposed to approving the compromise under the proposal scheme in the Insolvency Act). The Commissioner appealed.

The decision

The Court of Appeal held that:

  • the Court does not have inherent jurisdiction to approve a compromise rejected by the creditor or creditors, and
  • the Court cannot approve a compromise outside the proposal scheme in the Insolvency Act but a debtor can without needing the Court's approval. Such a compromise would satisfy the bankruptcy notice and would prevent adjudication of bankruptcy, and
  • debtors seeking a compromise with the Commissioner of Inland Revenue should first seek financial relief under the Tax Administration Act which imposes policy considerations not directly addressed by the proposal scheme in the Insolvency Act.

Chapman Tripp comments

Creditors or debtors considering compromise should keep in mind that:

  • the issuer of the bankruptcy notice and the debtor may, by agreement, compromise the debt without seeking the Court's approval. The compromise will be binding on the creditor but, importantly, will not bind any other creditors
  • a debtor may propose a compromise to creditors pursuant to the proposal scheme in the Insolvency Act. The proposal, if approved by the creditors and the Court, will bind all creditors who are affected by the proposal. The Court has no jurisdiction outside this scheme to approve compromises of personal debts.

CREDITORS MUST BE OWED PROVABLE DEBT TO BE SUBSTITUTED

The High Court decision in Muollo v Garnham [2017] NZHC 622 confirms when substitution may be used in bankruptcy proceedings.

Generally, a creditor may apply for a debtor to be adjudicated bankrupt if:

  • the debtor owes more than $1,000, and
  • has committed an act of bankruptcy, and
  • the debt is for a certain or liquidated amount, and
  • is payable immediately or at a particular point in the future.

If the original creditor fails to progress an application, another qualifying creditor (i.e. owed $1,000 or more by the debtor) may be substituted. The benefit of substitution is that the substituted creditor can rely on the existing act of bankruptcy.

The context

In this case, a second creditor was successfully substituted for the original creditor despite the debtor's objection. The debtor sought a review of that decision.

The decision

The High Court found that the second creditor did not have standing to be substituted because the alleged debt owed to her was not a qualifying debt under the Insolvency Act:

  • there was no creditor/debtor relationship between the parties to the proceeding
  • the alleged debt was not immediately payable or payable at a certain date in the future
  • was not a liquidated sum, but a security interest in property, enforceable against another individual and unenforceable against the judgment debtor, and
  • was not for a certain amount as there was conflicting evidence about the value of the property in which the security interest was held.

Take outs

To commence bankruptcy proceedings, the debt providing the foundation for the application or the grounds for substitution must comply with the requirements of section 13 of the Insolvency Act. Particularly, the debt must be a liquidated sum.

The Court can and will inquire into the factual basis for substitution.

The fact that notice or evidence is not always required in support of substitution applications in the bankruptcy regime does not mean that it is never required.

Chapman Tripp comments

The decision is another step away from the New Zealand practice of not requiring evidence of the debt on substitution. Now, it seems that it will be required in all but the clearest of cases.

Creditors should also notify the debtor of the substitution application and the evidential foundation for it.

VESTING OF PROPERTY DISCLAIMED BY THE OFFICIAL ASSIGNEE

In Re Hanara ex parte the Official Assignee [2017] NZHC 902, the Court had to consider whether property disclaimed by the Official Assignee (OA) could be subsequently vested in the OA.

A party who has suffered loss or damage as a result of a disclaimer may apply to the Court for an order that the disclaimed property be vested in that party.

The context

A husband and wife each owned a half share in a property. The wife was adjudicated bankrupt and the OA decided to disclaim her half share because there was no equity in the property. By the time the husband was adjudicated bankrupt two years later, the OA considered that there was now equity in the property and that it could be sold for the benefit of the creditors if both half-shares were vested in the OA.

The decision

The OA made the application in her capacity as Assignee of both the husband's and the wife's estate. The Court decided that the OA had standing to make the application in respect of both estates.

The Court did not accept that the wife's estate had suffered a loss by the disclaimer as, at the time it was made, there was no value in the property. The fact that it grew in value later was irrelevant. The Court also considered that Parliament could not have intended to give the OA a "second bite at the cherry" in these circumstances.

However, the Court accepted that the husband's estate had suffered a loss. The husband's half share in the property would be hard to sell on its own. Had the wife's interest not been disclaimed, the OA could have sold both half-shares at the same time.

The Court found it was fair to make an order vesting the wife's half-share in the OA for the benefit of the husband's creditors. The new equity in the property was largely due to the husband making mortgage payments following the wife's bankruptcy. The Court therefore concluded it was not unfair to the wife's creditors that the order be made.

Chapman Tripp comments

The Court's reasoning is likely to apply to liquidators as well as to the OA. Liquidators should therefore carefully consider the potential consequences before disclaiming any perceived onerous property. However, where it is clear that circumstances have changed and there are practical benefits to doing so, the Court will consider making orders vesting the property with the OA or with the company, as the case may be.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Michael Arthur
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.