There is no doubt that bankruptcy is never a position you expect to find yourself in. However, declaring bankruptcy is more common than one may think. In the wake of COVID -19, rising living costs, inflation and the devastation from natural events the prevalence of bankruptcy is more visible in the community, even though rates of bankruptcy are not as high as they once were.
The number of individuals who declared bankruptcy for the period of July 2021 to June 2022 was 528 in comparison with the figures from July 2016 to June 2017 where 1873 individuals were declared bankrupt.
Besides the clear decrease in number of bankruptcies occurring, the main difference between declaring yourself bankrupt in is the prevalence of conversations about insolvency and bankruptcy in general. New Zealanders are having to declare bankruptcy at no fault of their own, but rather as a victim of the circumstances of our current economic climate.
This article aims to inform you on what bankruptcy is, and what you need to be aware of if you are faced with debts which you are not able to manage.
The basics
Bankruptcy can occur when an individual is unable to pay their debts as they become due. If you are unable to pay your debts as they fall due you are insolvent. The typical length of a bankruptcy is three years from the date upon which you file your statement of affairs with the Official Assignee (OA) but can be extended in certain circumstances.
A person who owes debts can make a voluntary application for bankruptcy. This process is relatively easy and does not require legal representation. An ordinary layperson can make themselves bankrupt 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. It is also important to note that bankruptcy does not wipe all of your debts, court ordered fines, orders of compensation for creditors and child support fees will be still viewed as due and owing by you.
Bankruptcy removes the control over your assets. You will no longer be able to live your life as your normally would, and are bound by a number of duties and restrictions which we will discuss in this article.
Voluntary Application
To enter bankruptcy a debtor must have debts greater than $1,000.00.
An application can be made on the insolvency.govt.nz website, a response by the OA should be received within 10 working days of making the application. It is up to the OA to decide whether the proposed bankrupt is accepted to bankruptcy.
It is also important to consider whether bankruptcy is the best option for a voluntary insolvency procedure. If you have not been made bankrupt before, have no assets of value and have debts of under $50,000.00 no assets procedure may be a more favourable option.
Creditor application
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 $1,000.00.
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.
Once the creditor makes an application there will be a hearing. the debtor does not have to attend the hearing. If they do not attend it is very likely the Judge will adjudicate the debtor bankrupt.
Responsibilities and restrictions under bankruptcy
When a debtor is made bankrupt they must first file a statement of the debtor’s affairs in the prescribed form. It is important this form is returned to the OA as the period of 3 years for bankruptcy does not begin until the statement of affairs is returned to the OA.
Once bankrupt, the property of the bankrupt vests in the OA. The definition of property is very wide in the Insolvency Act 2006. 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.
The OA is entitled to look at transactions you have made in the years before your bankruptcy. These transactions can be deemed a voidable transaction, which is payment or transaction made whilst you were about to be made insolvent. The OA can reverse these transactions, therefore if you are considering going bankrupt disposing of assets is not recommended.
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;
A bankrupt cannot incur credit of more than $1,000 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.
Bankruptcy considerations
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, and it does for many individuals in New Zealand
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 and is not always a suitable solution. 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. We have published a number of these articles on our website and encourage you to read these or book in for a consultation with us if you would like to discuss your options.
Sound, strategic advice is necessary to navigate the process or to navigate the alternatives to the process.
Before applying for bankruptcy, it is important to ensure you are fully informed of the process and the effect it will have on you and your day-to-day life.
If you would like a confidential no obligation discussion with one of our solicitors please book in here:
Creditors’ limited ability to pursue directors for breach of duties
The facts of Banks v Farmer [2021] NZHC 1922 will sound familiar to many. A gap in the market is identified and a business is set up to fill that gap. The issue many of these start-up businesses face is trying to convince investors to support them. Upon securing an investor there is subsequent pressure placed on the directors to make good on that investment. But sometimes everything might turn sour, with investors left trying to recover the money they put into these ventures.
The background of this case centres around a company named Mako Networks Holdings Limited (Mako), the company operated within the technology security market and the development of technological solutions for this area. Adam Banks (Mr Banks) was an investor in Mako, between 2011 and 2014 he had invested over $3.2 million in unsecured loans. Unfortunately, Mako was placed into liquidation and receivership when it owed creditors $34.5 million. Mr Banks brought these proceedings against the four directors of Mako (the Directors) on the basis they did not act in accordance with their obligations as directors.
Section 301 of the Companies Act 1993
Section 301 of the Companies Act 1993 (the Act) provides the High Court with the power to require a director (amongst other persons) to repay the money or return property of the company, or to make a contribution to the assets of the company by way of compensation. Under this section, liquidators, creditors, and shareholders are given the opportunity to make an application to the Court which is only triggered when the company in question is in liquidation.
An order made under this section will qualify as a judgment debt, therefore enabling liquidators, creditors, and shareholders to hold directors personally liable, resulting in the commencement of bankruptcy proceedings, if necessary, to enforce payment.
Application in Banks v Farmer
In the High Court decision, the third cause of action against the defendants was for a breach of their directors’ duties. Specifically, their failure to act in good faith and the best interests of the company, for carrying on business in a manner that was likely to create a substantial risk of serious loss to creditors, and for letting the company incur obligations that it was not able to perform and for their failure to exercise the care, diligence, and skill that a reasonable director would exercise in those circumstances.
Mr Banks relied on s 301(1)(c) of the Act to claim relief in the sum he advanced to Mako. In the alternative, Mr Banks sought the defendants restore or contribute $29,897,000.00 to Mako. He specifically referred to s 135 (reckless trading), s 136 (improperly incurring obligations), and s 137 (failing to exercise reasonable skill and care) as the directors’ duties that were breached.
In his discussion of the case, Moore J referred to the purpose of the Act regarding directors’ duties stating “Directors’ duties are not intended to prevent the taking of legitimate business risks or constrain genuine business judgment, but rather to protect shareholders and creditors against illegitimate abuses of directors’ power.” Moore J referenced that directors’ duties under ss 135 and 136 aim to protect shareholders and creditors from the directors taking big risks. These sections are intended to discourage directors from increasing their company indebtedness. Moore J also referenced that s 135 should only penalise illegitimate risk-taking. It was decided that there was no breach of s 135 before April 2014, and therefore this section failed.
Under s 136 it has to be established that when obligations were entered into a director of a company did not believe a company would be able to perform these obligations. Or that if there was a belief, it was an unreasonable one. Moore J also decided this section would fail as the defendants subjectively believed on reasonable grounds that Mako would be able to meet its obligation to Mr Banks as those obligations were due.
Section 137 relates to a duty of care. Moore J considered that by mid-2014, the Directors of Mako should have been aware of its looming cash flow issues. He considered that without a multi-million dollar contract coming into play, the company would not be able to meet its obligations. As such “at that point, a reasonable director, exercising due care, diligence, and skill, would have caused Mako to cease trading and go into liquidation” and it was concluded that a breach of s 137 was found.
Section 301 as a remedy for creditors
As s 137 was found to have been breached by the Directors, Moore J considered whether s 301(1)(c) could be used as a remedy with Mako no longer being at liquidation at the time of the trial.
Moore J held that s 301(1)(c) was unavailable as a remedy to Mr Banks as Mako was no longer in liquidation. At the time the proceedings were initiated, Mako was in liquidation, however, before the trial had begun, Mako was removed from the register. Moore J referred to the practical issues regarding the varying lengths of trials and securing a court date after an application has been filed. However, the law is clear, and the company must be in liquidation, otherwise, there will be no directors of a company to be held liable. It was noted that Mr Banks could have made an application under s 239 of the Act to restore Mako as a company. Yet, no applications were made.
The second consideration under this section was whether creditors could be personally compensated for a breach of directors’ duties. Moore J concluded that directors’ duties are owed to the company, not to specific creditors. As such, only a company is entitled to receive a remedy for a breach of directors’ duties. Moore J reviewed two conflicting decisions of the High Court on this issue. In Mitchell v Hesketh [1998] 8 NZLC 261,559 (HC), Master Venning was of the view there is a limit on the approach for creditors to obtain personal compensation. Where the claim was for “negligence, default, or breach of duty or trust about the company, the Court may only award relief by ordering that the director pay compensation to the company under s 301(1)(b)(ii).”
In the alternative decision, in Marshall Futures Ltd (in Liq) v Marshall [1992] 1 NZLR 316 (HC), Tipping J was of the view s 301(1)(c) permits creditors to be personally compensated in limited circumstances. Tipping considered whether “moneys which are the subject of the declaration of personal responsibility are payable to the company…for the benefit of the creditors of the company as a whole or whether they are payable directly to the creditor.” His conclusion was that monies would be payable if the claim was payable to the creditor directly, without needing the liquidator to be involved. However, this authority was not helpful to Mr Banks, as the liquidator would have had to be notified of the claim, which did not occur.
Conclusion of Moore J – what it means for creditors
In the decision Moore J decided in favour of the defendants, holding that Mr Banks was unable to recover directly under s 301(1)(c). Section 301(1)(c) allows the Court to order directors to pay or transfer money or property directly to applicant creditors. However, a relief under this section can only be ordered where a director has misappropriated specific funds or property. This was not the case in this case so there could be no relief ordered to Mr Banks. In this case, the directors were found in breach of directors’ duties, but not misappropriation.
Section 301(1)(b) allows for relief where there has been a breach of director duties (as was the case here), however, this section provides for such relief to be paid to the company (as opposed to directly to the creditor) and then liquidators could make distributions to creditors. Section 301(1)(b) allows for the pool of assets in a liquidation to increase as the Court can order a person to repay or restore money or property with interest, or to contribute a sum to the assets of the company by way of compensation. However, at the time of the trial, Mako was no longer in liquidation and had been struck off the companies register. As such, Mr Banks was not able to utilise s 301 as a creditor as there was no company in existence that could receive the payment.
This decision highlights the importance of having security over your investments in a company. In this case, Mr Banks was left without any proper avenue for recourse under s 301.
A statutory demand is a mechanism created by legislation, the Companies Act 1993 (“the Act”). It enables creditors to enforce overdue payment from indebted companies. The debtor company’s failure to comply with the issued statutory demand could result in the liquidation of the debtor company.
The Court of Appeal in Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14 stated that there are two main purposes of a statutory demand:
The main purpose is to obtain payment of the debt.
The secondary purpose is to prove that the debtor company cannot pay their debts for the purposes of liquidation proceedings.
A statutory demand is a common way pursuant to which liquidation proceedings are started and brought to the High Court; a failure to pay or set aside a validly issued statutory demand creates a presumption of the company’s insolvency (s 287(a) of the Act).
Due to severe consequences that it can cause, a statutory demand should not be used carelessly or vexatiously.
Requirements for issuance of statutory demand
For the creditor to be able to issue a statutory demand, the statutory demand must (s 289(2) of the Act):
Be in respect of a debt that is due and is not less than $1,000.00; and
Be in writing; and
Be served on the debtor company; and
Require the debtor company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the court may order.
The service of the statutory demand on the defendant company must also comply with the rules of service contained under the Act.
Abuse of Process
The Courts have made it clear that creditors should not be criticised for utilising a statutory demand as a method of debt collection, however, the process should not be abused. The Court of Appeal in Link Electrosystems v GPC Electronics (New Zealand) Ltd (2007) has explicitly stated that a statutory demand should not be used “oppressively as a debt collection device”. A statutory demand should not be used to threaten a company with liquidation if the requirements have not been met for issuing the statutory demand in the first place.
A statutory demand should not be used where there is a genuine and substantial dispute as to the debt. Doing so will likely be seen as an abuse process.
It is a good practice that a statutory demand is issued by the creditor’s lawyer, rather than the creditor personally or their debt collection agency. This is because it is generally expected of lawyers to ensure that the required pre-requisitions for the issuance of the statutory demand are satisfied.
Subsequently, it is recommended to consult a lawyer before considering your options and whether or not to issue a statutory demand is the right process for your company, as there can be risks associated with improperly using the process. For example, a Court may penalise a creditor by awarding increased costs in relation to setting aside the statutory demand if it deems that the statutory demand was improperly issued.
Setting aside a statutory demand
If your company has been served with a statutory demand, then you should consult a specialist lawyer immediately; time is of the essence in determining your options. The Act has strict timelines for companies that have been issued with a statutory demand.
If the debt is not disputed by the debtor company, most commonly recommended option is to either pay the debt or enter into a payment arrangement with the creditor.
If obligation to pay the debt is disputed by the debtor company, there is an option to make an application to Court to seek that the statutory demand is set aside. There are three primary grounds under s 290(4) of the Act that allow the court to set a statutory demand aside:
There is a substantial dispute whether or not the debt is owing or is due; or
The debtor company appears to have a counterclaim, set-off, or cross-demand, and the amount specified in the demand (less the amount of the counterclaim, set-off, or cross-demand) is less than $1,000.00; or
The demand ought to be set aside on other grounds.
The grounds for seeking the setting aside of the statutory demand in High Court will be addressed in more details below.
It should be noted that any application to set aside a statutory demand must be made within 10 working days of the date of service of the statutory demand, and also served on the creditor within 10 working days of the date of service of the statutory demand. This is a strict requirement, and no extension of time may be given. However, at the hearing of the application, a court may extend the time for compliance with the statutory demand (e.g. payment of amount owing).
Otherwise, if the statutory demand has procedural defects (these procedural requirements are located in s 289(2) of the Act and above), it could be considered invalid and/or can be set aside.
If the statutory demand is neither satisfied, nor an application to Court is made for the setting aside of the statutory demand within the prescribed timeframe, by operation of the Act, the debtor company would be presumed to be insolvent, and the creditor would be entitled to make an application to Court to seek liquidation of the debtor company.
Disputed Debt
In the event that the debt is genuinely disputed, a statutory demand should not be issued in the first place.
If a statutory demand has been issued on a disputed debt, the Court will have to decide whether there is a credible or fairly arguable basis that the debt is not owing. The assessment is conducted on the basis of the material presented to Court. Where there is a genuine dispute, the dispute should be addressed in an ordinary proceeding, and not in the liquidation Court.
It is worth noting that if the debt had been genuinely disputed prior to the issue of the statutory demand, and the statutory demand was made despite the dispute, there may be an increased award of costs in favour of the party setting aside the statutory demand.
Set off, counter claim, or cross demand
If the debtor company can show that there is a set-off or a counter claim that appears to exist against the creditor that would reduce the amount owing to be under $1,000.00, then a Court may set aside the demand. If the claim against the creditor is a liquidated or undisputed amount, then it is likely the demand will be set aside with minimal issues. If the claim against the issuer is for an unliquidated amount or disputed, the debtor company must demonstrate sufficient evidence showing that it has a real basis for the claimed set-off or counter claim.
Other grounds
If the Court is satisfied that the creditor’s prima facie entitlement to liquidate the company is outweighed by some factor making it plainly unjust for the liquidation to occur, then the Court has the discretion to set aside the statutory demand (Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA)). Generally, this would include grounds such as preventing the abuse of the statutory demand process and/or preventing substantial injustice. It is less common to see this section invoked.
Conclusion
If you have received a statutory demand, the time to act is now. Due to the strict timelines of the Act, it is imperative to consult a lawyer as soon as possible. Failure to serve an application to set aside the statutory demand when faced with a validly issued statutory demand can lead to a company’s liquidation extremely quickly.
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Importance of updating company address details on the Companies Register
It is important to keep the company’s address details on the Companies Register updated at all times. Yet, we often come across situations where this does not happen, and what seems like a small omission may lead to serious consequences. For example, important legal documents can be missed, and consequently, judgment can be entered into against the company without the company’s knowledge. Further, there can be personal consequences for company directors under the Companies Act 1993 (“the Act”) if the registered address is unmanaged.
Requirement under the Act
A company must always have:
A physical registered office in New Zealand. This is the address where the company’s records (described under s 189 of the Act) are stored.
A physical address for service in New Zealand, which can be the same as the registered office or another place. This is the address where legal documents are served.
The registered office and address for service of a company at any particular time are the places that are described as those on the Companies Register at that time. This information is publicly available on the Companies Register website.
Subject to the company’s constitution, the Board of the Company can change the registered office or addresses for service at any time. If the registered office or address for service change, then notice of that change (in the prescribed form) must be given to the Registrar of Companies. Otherwise, the registered office or address for service will remain in the previous place specified on the Companies Register.
Also, s 188 of the Act allows the Registrar of Companies to require a company to change its registered office by notice in writing. In such a case, a company will have two options: change its registered office by the date stated in the notice; or appeal to the Court. Failure to comply with s 188 is an offense and renders every director of the company liable on conviction to a fine not exceeding $5,000.
If the company’s records are moved to a location other than the registered office, a notice of this must be given to the Registrar of Companies within 10 working days. If the company fails to comply with this requirement, the company and every director personally commit an offense and are liable on conviction to a penalty not exceeding $10,000.
Risks of not updating address details
Section 387 of the Act prescribes how documents in legal proceedings are to be served on New Zealand registered companies. There are several options to serve, however, service by leaving the documents at the company’s registered office or address for service are the most commonly used options. If the office is closed, the documents in question can simply be affixed to the front door.
As a result, if the company’s office or address for service is not updated, the company may risk missing essential legal documents, notices, and deadlines and be subjected to a judgment entered against them or, worse, liquidation proceedings. In our experience, unfortunately, this is common. While in certain circumstances it could be possible to reverse judgment or order that was entered into without the company knowing it, this process is expensive and procedurally complicated as an application to Court would be required.
If any of the addresses are in a building with other businesses, it is equally important to provide full details of the address, such as the level of the building, office number, and/or name. If no details are provided, the service of documents could be conducted anywhere in the building. This could again result in the essential documents being unnoticed by the company.
If the company suffers a detriment as a result of the addresses not being properly maintained on the Companies Register, the director could be personally liable for breach of his director duties.
It is also important to ensure that the address that is stated as the company’s office or the address for service is checked regularly. Some documents, such as statutory demands, when served, have a very strict and short timeframe for compliance, or making an application to set it aside. If that time lapses, the consequences could be serious as there is a risk that the company will be liquidated. If the address is not checked regularly (for example, staff usually work offsite), it is recommended that the registered office and/or address for service are at another location, such as the accountant’s or solicitor’s office.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
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Bankruptcy is an incredibly onerous process; upon adjudication, all property belonging to the bankrupt or vested in the bankrupt automatically vests in the Official Assignee (OA) (s 101 Insolvency Act 2006 (the Act)). The definition of property under the Act is wide and includes “property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise” (s 3(1)). As a result, shares in a company are included in this definition.
Context
We have recently been engaged to act for the spouse of a discharged bankrupt. Our client and their spouse both held 50% shareholding in a company that was essentially their retirement fund. Upon bankruptcy, 50% of the shareholding vested in the OA pursuant to s 101 of the Act. As there was no shareholders’ agreement for the company, there were very few restrictions on what could be done with the shares.
What happened
The OA wanted to realize the value of the shares that the bankrupt held in the company for the benefit of the creditors of the bankrupt. The OA offered to sell the shares to the remaining shareholder (our client) for circa $110,000.00 and warned that the OA would take steps to either liquidate the company or sell the shares on the open market, if this offer was not accepted. The basis of the OA’s valuation of the company’s shares was to simply ascertain the value of the net assets of the company. After calculating the value of the net assets, the OA then halved this to represent the 50% shareholding it held and then adjusted this figure for the shareholders’ current accounts.
The previous advisors of our client recommended accepting the value prescribed to the shares by the OA.
Upon being engaged by the client, we ascertained that:
The company had only been able to retain a level of value in the assets it owned due to the efforts, including unpaid work, of our client and the spouse.
They had not received any remuneration for work carried out for the company since its incorporation, over 20 years ago.
Taking a simple net asset position divorced from all other factors is not a reliable method of assessing the value of shares in a company in these circumstances.
As our client’s spouse had been adjudicated bankrupt and no longer eligible to be a director, this left our client as the sole director of the Company, and subsequently, our client had the power to set the director’s remuneration pursuant to s 161 of the Companies Act 1993. In such circumstances, any excess in the company could simply be remunerated to our client, making the shares worthless even with the net asset valuation method. The company was not simply profitable without our client’s unpaid services as a going concern.
We explained these concerns to the OA. After negotiations, our client was able to purchase the shares at a fraction of the amounts that the OA had been offering, which was also in full and final settlement of any claims that the OA may have had against our client and the company.
Key takeaways
This case demonstrates the importance of having a comprehensive shareholders’ agreement in the event a situation as this occurs, and also to obtain a valuation before purchasing items like shares, the value of which is not always obvious.
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.
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).
