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.
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.
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  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.
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.
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).
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).
Bankruptcy is a way to relieve a person of debts they owe to creditors, and where possible, repay those debts from the bankrupt’s estate. It also acts as a security measure as the Official Assignee is granted powers to oversee and control the financial affairs of the bankrupt.
Once adjudicated bankrupt, there are many duties that the bankrupt must comply with so that these purposes are fulfilled. There are also severe consequences for the bankrupt who breaches these duties.
Duties to provide information
Upon adjudication, the bankrupt must file a statement of affairs with the Official Assignee.
This document should reveal all information regarding the bankrupt’s assets, liabilities, income and expenses. In case of Court ordered adjudication, this must be done within 10 working days after receiving the Official Assignee’s notice that the statement must be filed. If the bankruptcy was commenced on the bankrupt’s own application, then the statement of affairs will already have been filed as a prerequisite.
It is important that the bankrupt completes the statement of affairs as soon as possible, as until this is done, the period of 3 years, on expiry of which bankruptcy usually ends, will not begin.
Further, the bankrupt must, as soon as practicable upon adjudication, deliver to the Official Assignee all accounting records, papers, deeds, instruments and any other documentation relating to the bankrupt’s estate in the bankrupt’s possession or control.
Throughout the whole period of bankruptcy, the bankrupt must notify the Official Assignee of any change in address, employment, name or income.
Lastly, where the Official Assignee believes that the bankrupt does not comply with its duties for provision of information, the bankrupt may be summoned to a formal examination under oath before the Official Assignee or the District Court. In addition, the Official Assignee has powers to summon the bankrupt’s spouse and any other person known or suspected to be associated with the bankrupt or his property.
Duties in relation to property
Upon bankruptcy, all property of the bankrupt vests in the Official Assignee. The exceptions are the necessary tools of trade, furniture and effects, to a maximum value set at the Official Assignee’s discretion, and a motor vehicle of a maximum value of $5,000.
There is a general overarching duty for the bankrupt to assist the Official Assignee with realisation of the bankrupt’s property and the distribution of proceeds amongst the creditors. The specific duties can be summarised as:
- On demand by the Official Assignee, the bankrupt must deliver all or any of the bankrupt’s property that is under the bankrupt’s possession or control.
- The bankrupt must take all steps in relation to the distribution of proceeds to creditors that is required by the Official Assignee.
- If the bankrupt acquires property during the bankruptcy, he/she must as soon as practicable, notify the Official Assignee.
- The bankrupt is under a duty to supply the Official Assignee whatever information the Official Assignee required regarding the bankrupt’s expenditure and sources of income after adjudication.
As well as above duties, there are several restrictions applying to adjudicated bankrupts.
One common example is the restriction to leave, or attempt to leave, New Zealand without the Official Assignee’s prior authorisation.
Another example is the restriction to undertake any business or being involved in the management of a business without the Official Assignee’s prior authorisation. The restriction extends to any business carried, owned, managed or controlled by a relative of the bankrupt. Further, the bankrupt must not be employed by a relative of the bankrupt or by any company, trust, trustee, or incorporated society that is managed, or controlled by a relative of the bankrupt. Similarly, a bankrupt must not act as a director of a company.
The other important restriction is that the bankrupt cannot obtain credits of more than $1,000 without informing the creditor about the bankruptcy.
If the bankrupt fails, without reasonable excuse, to comply with their duties, or breaches the restrictions, the bankrupt will commit an offence under the Insolvency Act 2006. The penalty for committing such offences can be a conviction for imprisonment or a fine, or both.
Further, the Official Assignee can seek to extend the three-year bankruptcy period.
Bankrupts should be informed of their duties and restrictions imposed on their actions to avoid penalties and the bankruptcy period being extended.
It is also important to consider these duties and restrictions prior to considering whether to enter bankruptcy. While entering bankruptcy might seem as a quick fix to be relieved of debts, the consequences might have long reaching effect.
A Summary Instalment Order (“SIO”) provides another alternative to a debtor who does not have the means to immediately repay debts, but that can show they have enough in their budget to make regular repayments.
The debtors application is made to the Official Assignee. If successful in the application, the debtor is permitted to repay debts over a period of time and to the extent that the Assignee considers practicable in the circumstances. This can be very beneficial to a debtor as it is a relatively quick and easy process to obtain an order which relieves pressure and does not incur the level of costs that are typical in other processes.
An application for a SIO can be made either by a debtor or by a creditor (with consent of the debtor). The criteria for entry requires that the debtor’s total unsecured debts do not exceed $47,000.00 and the debtor is unable to immediately pay those debts. This is read alongside part 5(4) of the No Asset Procedure (“NAP”) which requires that the debtor “does not have the means of paying any amount towards those debts”.
The Assignee has the responsibility to direct a debtor as to which procedure is more appropriate after reviewing their current circumstances.
A requirement to obtain a SIO is that the debtor will be able to make repayments in full or part over the course of the SIO. If a debtor proposes to pay a sum less than the full amount owing, they must specify the exact amount. The Assignee’s cost of the application is $100.00.
A SIO must appoint a suitable and willing person to supervise compliance by the debtor. This role is not taken lightly and failure to supervise adequately can result in termination of the supervisor’s appointment under s 348. Upon application, a debtor must inform the creditors that the application has been made to allow them 10 days to make representations to the Assignee. The decision whether to grant an order is at the discretion of the Assignee.
A successful order can remain in place for up to 3 years or 5 years if there are special circumstances surrounding the application. After a SIO is made a person cannot begin or continue proceedings relating to a debt shown in the debtors application, included in the order or notified to the supervisor.
However, if a debtor defaults on any payments, any proceedings that had been halted may continue.
The Assignee will not take control over assets, expenditure and spending when under a SIO. There is the option however to include the selling of assets in a SIO application. An example of this includes selling a vehicle that is owned that is not subject to finance and using the proceeds from the sale to pay some debts.
With a SIO certain limits are imposed on a debtor. For example, it is an offence to obtain credit of $1000.00 or more. However, a defence can be made to this if the debtor advised the person giving the credit of the order. The Assignee must maintain a public register of persons who are subject to a SIO.
The SIO can be a good option for those who are eligible before resorting to a formal (and more onerous) bankruptcy.
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If a debtor is unable to repay its debts and believes there is no prospect of this changing, the No Asset Procedure (“NAP”) provides an alternative to bankruptcy as a one-off opportunity to sort out the debtor’s financial affairs without a formal bankruptcy.
Requirements to entering the NAP
A successful application will give a debtor protection from creditors, similar but not identical, to that provided by bankruptcy. To be successful in the application, the debtor must satisfy the Official Assignee on reasonable grounds that:
the debtor has no realizable assets;
the debtor has not previously been admitted to the NAP;
the debtor has not previously been adjudicated bankrupt;
the debtor has total debts not less than $1000 but no more than $40,000 (this does not include student loan); and
under the prescribed means test (which assesses whether the debtor has surplus income after household usual and reasonable living expenses are paid) the debtor does not have the means of repaying any amount towards those debts.
Barriers to entering the NAP
However, a debtor must not be admitted to the NAP the Official Assignee is satisfied on reasonable grounds that:
the debtor has concealed assets with the intention of defrauding his creditors;
the debtor has engaged in conduct that would, if the bankrupt adjudicated, constitute an specified offence;
the debtor has incurred a debt or debts knowing that the debtor does not have the means to repay them; or
a creditor intends on applying for the debtor’s adjudication as a bankrupt as it is likely that the outcome will be materially better than if the debtor is admitted to the NAP.
Consequences of entering the NAP
Once a debtor is admitted to the NAP, creditors are prevented from beginning or continuing any steps to recover a debt owed by the debtor.
However, there are three debts that remain payable despite being under the NAP scheme. These include:
amounts payable under a maintenance order under the Family Proceedings Act 1980;
amount payable under the Child Support Act 1991; and
student loan balance.
The debtor must also comply with the Official Assignee’s requests and notify the Official Assignee as soon as practicable, if there is a change in their financial circumstances allowing them to repay any amounts toward the debts that would otherwise be discharged.
Further, the debtor must not obtain credit (either alone or jointly) of more than $1,000.00 without advising the prospective creditor they are currently under the NAP scheme.
Normally, a debtor is discharged under the NAP scheme 12 months after the date of admission.
Upon discharge from the scheme, the debts that existed on entry into the NAP are cancelled, the debtor is no longer liable to repay any part of those debts including any penalties or interest that may have accrued. However, debts incurred by fraud are not discharged nor is any debt for which the debtor has obtained forbearance through fraud.
The NAP is a great consideration prior to the consideration of bankruptcy as the effects are not as long lasting or as onerous. NAP provides relief from financial pressures for a maximum term of a 12 months, allowing the debtor to get on top of their financial situation.
NAP is but one of the alternatives to bankruptcy. All options ought to be considered as against the facts of the debtor before any large decisions are made.
Part 5 of the Insolvency Act 2006 enables a debtor to enter into an arrangement with creditors. Part 5 may be a good alternative for insolvent individuals who are facing bankruptcy proceedings and would like to avoid the formal restrictions that are associated with a bankruptcy.
In the event that a debtor can put in place a composition, the arrangement will be binding on all creditors. Including dissenting creditors. The composition must be accepted by the prescribed majority (currently three quarters) of creditors and approved by the court, then a debtor is entitled to have their bankruptcy annulled. This process requires the debtor to formulate a scheme that offers creditors more than what they would receive in a formal bankruptcy.
The process for compositions can be complex, it involves the following:
- Two meetings of creditors
- The first meeting will settle the terms of the composition and hold a vote, a special resolution is required (currently three quarter majority)
- The second meeting will confirm the preliminary resolution and as with the first meeting a special resolution is again required; and
- An application must be made to the court for approval:
- There are four prescribed grounds in section 315(3) which if any are made out the application can be refused.
- If it is approved, all creditors are bound.
- If accepted the bankrupt and Assignee must prepare a deed of composition; and
- Apply to the court for approval of the deed.
This procedure is not commonly used, as it seems to offer little advantage over obtaining a discharge. However, a debtor may be persuaded to enter a composition if there is an ability to trade again immediately upon approval.
Proposals have a similar process as to compositions. However a proposal occurs prior to adjudication and essentially provides that if a proposal is brought about and approved, unsecured creditors cannot pursue a formal bankruptcy process against the debtor. The difference between proposals and compositions is that under a proposal the debtor is able to avoid bankruptcy completely and the procedure is much less complex.
The proposal procedure has two basic requirements:
That the debtor has an interest in “being saved” from the consequences of the bankruptcy; and
That the creditors receive (the potential of) something more than they would receive in either a bankruptcy, or through normal execution methods.
In terms of the latter, a debtor can provide more to a creditor than would be received in a formal bankruptcy if they fund the scheme through earning income, through assets that cannot be taken by the Assignee or through a third party.
The process for a proposal involves the following steps:
The insolvent must formulate and make a proposal to their creditors which is filed at the nearest court to where the insolvent lives; and
A meeting of creditors is then held, creditors must submit a claim form and then it is up to the trustee to decide whether the claim is accepted or not. In order for the proposal to be accepted it must obtain support of the majority (three quarters majority) and;
If accepted the trustee must as soon as possible:
Apply to the court for approval of the proposal; and
Send notice of hearing to insolvent and each creditor
The court may reject the proposal under section 33 if one of the three prescribed grounds is made out.
Once approved the proposal is binding upon all creditors whose debts were provable. During the proposal the insolvent must do everything that is necessary to put the proposal into effect.
These procedures enable a debtor to either avoid bankruptcy or to be removed from the process by formal compromise with creditors. There may be advantages to creditors as in some cases they may receive more than they otherwise would in a bankruptcy.
The creditors are not in any way required to accept either procedure so it is at the wider pool of creditors’ discretion as to whether or not either process will be successful.
Bankruptcy can occur when an individual is unable to pay their debts as they become due. A debtor can make a voluntary application for bankruptcy or can wait until a creditor adjudicates them bankrupt via the prescribed process at the High Court.
However, bankruptcy should not be viewed as an easy way out of paying debts as it can have significant and potentially long lasting consequences for the bankrupt.
To enter bankruptcy a debtor must have debts greater than $1,000.00.
If a debtor voluntarily submits themselves to bankruptcy, they must first file with the Official Assignee (“OA”) a statement of the debtor’s affairs in the prescribed form. It is up to the OA to decide whether the proposed bankrupt is accepted to bankruptcy.
A creditor may also make an application to the High Court seeking that the debtor be adjudicated bankrupt.
The debtor must have committed an act of bankruptcy within the last 3 months before the filing of the application and the debt must be a liquidated sum of more than $1000.00.
An act of bankruptcy is central to the creditor’s application, it must show an act of personal default by the debtor. There are 12 separate acts of bankruptcy but the most common act alleged by a creditor is failure to comply with a bankruptcy notice.
Responsibilities and restrictions under bankruptcy
Once bankrupt, the property of the bankrupt vests in the OA. The definition of property is very wide. It might include any interests in trusts that can be defined as property. It may also include any interests in property (such as a 50% claim against the property of a spouse/de facto partner). Income earnt between the time of commencement of bankruptcy and discharge is also included as acquired property so any income earnt by the bankrupt vests in the OA.
However, in most bankruptcies if the income is modest the OA will not take any steps as bankrupts have a right to retain earnings that are necessary to maintain themselves, their spouse and family to a reasonable standard. This includes necessary tools for trade, necessary household furniture and effects, motor vehicle worth up to $6,000.00 and in most cases, Kiwisaver funds.
If a sole business owner is made bankrupt, there are serious consequences. The OA may shut down the business and any assets will be sold to pay creditors.
Other restrictions on the bankrupt include:
- A bankrupt is unable to be a director of a limited liability company; and
- A bankrupt cannot incur credit of more than $1000 without making the creditor aware that the bankrupt is bankrupt;
- A bankrupt must not prevent, attempt to prevent or hamper the OA dealing with any property or assets;
- A bankrupt must notify the OA whenever they change their name, address, employment or income/expenditure;
- A bankrupt must not leave the country without consent of the OA;
- A bankrupt cannot be employed by a relative or take part in the management or control of any business without consent of the OA; and
- A bankrupt is prevented from employment in numerous professions such as auctioneers, officer of a charitable entity, motor vehicle trader and so on.
In some communities, professions or circles, bankruptcy has a negative stigma attached to it. However, many individuals are adjudicated or volunteer themselves to bankruptcy and it does not necessarily have the same stigma attached as it once did. Life can continue beyond bankruptcy!
Being chased by creditors can be a substantial burden. Bankruptcy can be a good way to end that stress. However, the implications of bankruptcy can be long lasting in some cases. A debtor is considered bankrupt for a term of 3 years upon admission to this scheme and details of this are on the Insolvency Register for the entire term plus 4 years after discharge. In some cases, this term can be extended if the circumstances warrant an extension.
In many cases, there are alternatives to bankruptcy for debtors in financial turmoil. In articles to follow we will detail some of these alternatives.
Sound, strategic advice is necessary to navigate the process or to navigate the alternatives to the process.
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