Introduction

Generally, bankruptcy lasts for a period of three years. During this time, a bankrupt is subject to onerous conditions imposed by the Insolvency Act 2006. These conditions include, but are not limited to:

  • The bankrupt’s property vesting in the Official Assignee;

  • The continued monitoring of the bankrupt’s financial affairs;

  • Prohibition from being involved in the management of a company or being self-employed without the consent of the Official Assignee; and

  • Prohibition from travelling overseas without the consent of the Official Assignee.

To learn more about the conditions imposed by the Insolvency Act 2006 on the bankrupt, go to: https://www.norlinglaw.co.nz/duties-of-a-bankrupt-and-consequences-of-failure-to-comply.

The Courts have frequently acknowledged that the three-year term allows the Official Assignee to properly administer the estate of the bankrupt and it also allows for the protection of the community from the bankrupt.

Parliament, however, has also recognised that a bankruptcy term of three years may in certain instances not be necessary and there is a provision in the Insolvency Act 2006 which allows a bankrupt to end their bankruptcy earlier.

There is also a provision under the Insolvency Act 2006 which allows the bankrupt to annul their bankruptcy in limited circumstances.

Early Discharge

Under s 294 of the Insolvency Act 2006, a bankrupt may apply for early discharge at any time. In making the application, a bankrupt should carefully consider the timing of the application. This is because if the bankrupt is unsuccessful, the Court will usually specify the earliest date the bankrupt may apply again, and the bankrupt may not be able to apply for a considerable period.

The Court, in making an order for early discharge, may immediately discharge the bankrupt or may discharge the bankrupt with conditions such as the order to pay a sum of money or report to a financial advisor.

Parliament has given the Court a broad discretion to discharge the bankrupt and the Courts have been careful to ensure that the discretion remains unfettered. Each application will be determined on the facts of each case.

Despite the broad discretion, a bankrupt will usually need to show some form of special circumstances which justify early discharge. This is because there is a public interest in a bankruptcy lasting three years.

For instance, in Re Kaye HC Auckland B2182/93, 9 May 1997, the court allowed an application for early discharge when the bankrupt was unable to find meaningful work without being discharged and there was no advantage to the bankrupt’s only creditor serving the full three-year term.

It is important that a bankrupt who wishes to apply for early discharge ensures that they are compliant with their obligations and prohibitions under the Insolvency Act 2006.

The Courts have been clear that punishment of a bankrupt is not a consideration for early discharge, rather, the Courts tend to look at whether the bankrupt poses a further risk to the commercial community.

Annulment

Section 309 of the Insolvency Act 2006 allows a bankrupt to apply for annulment of their bankruptcy under three grounds:

  • The court considers that the bankrupt should not have been adjudicated in the first place;

  • The court is satisfied that the bankrupt’s debts have been fully paid or settled;

  • The court considers that the bankrupt’s debts should be revived because of a change in financial circumstances; or

  • The court has approved a composition with creditors.

The court considers that the bankrupt should not have been adjudicated

An application under this ground usually relates to some form of defect in procedure, abuse of process or where a material fact was not drawn to the Court’s attention at the adjudication hearing due to human error. The essence of any application for discharge under this ground is that the bankrupt, because of a defect in procedure or abuse of process, should not have been adjudicated in the first instance.

The threshold for annulment under this provision is high and the Courts will not entertain an effective rehearing of a bankruptcy proceeding.

In Re Willis, ex parte Willis [2017] NZHC 2586, an interesting argument was raised regarding abuse of process. In that case, a wife was bankrupted by her husband for $12,000. At the time of the bankruptcy proceeding, the wife and husband were involved in an acrimonious relationship property dispute where the wife was due to receive $600,000 from her husband. The Court considered that the bankruptcy was couched in the context of the relationship property dispute. Associate Judge Sargisson held that the husband’s successful application to bankrupt his wife amounted to an abuse of bankruptcy proceedings and allowed the wife’s application for annulment.

A bankruptcy application that was not served validly will also render the proceedings a nullity.

In Fredrickson Centurion Finance Ltd HC, Auckland B 259-01, 11 February 2005, a debtor who arrived late at Court and was adjudicated bankrupt in his absence had the adjudication annulled.

A successful application under this ground has the effect of annulling a bankruptcy from the date of adjudication. This means that the bankrupt is never considered to have been bankrupt. In relation to the other grounds, the bankruptcy is annulled from the date of the court order.

The court is satisfied that the bankrupt’s debts have been fully paid or satisfied

In order for an application to be successful, the bankrupt will need to have paid or satisfied all of their debts. The ground does not necessarily require that all debts be paid in full, rather, that the debts are satisfied. This provision allows the bankrupt to negotiate settlement of their debt with individual creditors.

The Courts have taken a broad approach in relation to the definition of debts and the definition extends to all known debts of the bankrupt and not simply the debts of creditors who have lodged a claim in the bankrupt’s estate. It is important that the bankrupt is able to provide sufficient evidence to the Court which shows that all known debts have been paid in full or satisfied.

The bankrupt will also need to show that the Official Assignee’s fees in relation to the administration of their bankruptcy have been paid.

The court considers that the liability of the bankrupt should be revived

This ground is related to the one above, however, it does not require the payment of debts prior to the application for annulment. Rather, it simply requires a change in a bankrupt’s finances which allows the creditors to be paid (e.g. inheritance, gift and etc.).

It is important that, when an application is made under this ground, that the bankrupt can provide cogent evidence that the bankrupt has the ability to repay their debts.

Similarities and Differences

Applications for annulment and early discharge are similar proceedings in that they generally release an individual from obligations under the Insolvency Act 1993. However, the two different processes import fundamentally different consequences for an individual. These consequences can be summarised below.

Annulment:

  • If application is made under the first ground, the individual is considered never to have been adjudicated bankrupt.

  • All property that vested in the Official Assignee at the time of adjudication re-vests in the individual.

  • The individual is not released from their debts.

Early Discharge:

  • The individual is still considered to have been bankrupt. The procedure simply ended prior to the general three-year term.

  • All property that vested in the Official Assignee at the time of adjudication does not re-vest in the individual.

  • The individual is released from their debts prior to adjudication (subject to limited exceptions).

Conclusion

A bankrupt who wishes to end their bankruptcy should carefully consider the best way to terminate their bankruptcy. Our professionals will be able to assist with choosing the right option and also making an application to Court (if necessary).