Someone recently bought our

students are currently browsing our notes.


Insolvency Class Notes

Law Notes > Insolvency Law Notes

This is an extract of our Insolvency Class document, which we sell as part of our Insolvency Law Notes collection written by the top tier of University Of Otago students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Insolvency Law Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Insolvency Law

20th July: Personal Insolvency = Bankruptcy
- It is within the umbrella of insolvency law, but is a discrete entity of its own.
- The individual debtor is a human, and accordingly ascribed with legal rights which would never be contemplated in the case of a debtor company or other body corporate. General themes and similarities of terminology have run through the various Acts and align with bankruptcy law in other common law jurisdictions. This is the same with other types of law, such as contract. History: Older bankruptcy statutes concentrated on strict administration, in a more punitive manner. During the 19th and 20th centuries, the process changed, having more of a focus on debtclearing for business. Model of bankruptcy based on consumer protection developed. This aligns with the model of bankruptcy as part of social welfare law. Moving away from punishment - trying to do the best for creditors while protecting the bankrupt - tools of trade and personal belongings may be retained by a bankrupt, as well as a small allowance for family needs.
- Idea of 'wiping the slate clean'. This is completely different to a company. For personal insolvency, you get a new start - companies die. Used to be administered through the Court registries, then placed under the Department of Justice, then the Ministry for Economic Development. Current Policy of Bankruptcy: Not to be seen as a punitive process. The focus is on doing the best collectively for creditors - this is why last minute "selfhelp" transactions are reversed. Court retains overall control:
- Through requiring leave to withdraw application (s15)
- Through substitution of creditors (s44). Why? A greater process for the benefit of society is taking place here.
- Through discretion to adjudicate (s37). Can prove a case beyond reasonable doubt, but the judge still has the discretion to declare bankruptcy or not.
- Through applications back to the court during the bankruptcy. Ronaldson v Dominion Freeholds Ltd [1981]
- Where the court noted the special nature of bankruptcy proceedings they are for the benefit of the community, not the application creditor. The policy is to give bankrupts an opportunity to continue their lives free of debt. Nevertheless, the courts have also indicated that there is an element of public interest. It is not in accordance with bankruptcy law to grant successive opportunities to insolvent debtors to

regulate their affairs and delay the consequences of their actions while the creditors are out of their money. Statements of such principle can be found in In Re Guest, ex parte BNZ Finance Ltd [1991]
Legal Basis of Bankruptcy: The law of bankruptcy is statute based in all jurisdictions. It has never been common law. Nevertheless, a considerable body of interpretive case law spans Acts and jurisdictions. The cases often "read up" or "read down" statutory provisions. E.g. "all property owned by the bankrupt vests in the official assignee" read down to mean not absolutely all property. Insolvency Act 2006: Provides a code for bankruptcy. Covers the following main topics:

1. Entry to bankruptcy (process for an individual getting the status of bankruptcy.)

2. Vesting of property (through a statutory vesting of what the bankrupt owns in the official assignee.)

3. Reversal of certain transactions (what's fairly within the bankruptcy, and what's outside it.)

4. Powers and duties (bankrupt has lots of duties, some offences, official assignee has a number of duties and fairly draconian powers.)

5. Creditor's claims (process for creditors to make their claims in the bankruptcy.)

6. Rules for distributions (Need to read the parts of the Act that relate to these main topics.) Replaced the 1967 Act, after a long process of review and consultation, eventually resulting in an omnibus build (whole package changing a lot of Acts at once.) Also changes made to the insolvency parts of the Companies Act. The new Act modernised what we'd known in the 1967 Act, (boring stuff like name changes), but nothing really radical. However, two new things that it introduced were the "no assets procedure" and crossborder reforms. The no assets procedure provides protection from bankruptcy if your debt is less than $40,000. You don't get the full social stigma of bankruptcy, and your assets don't vest in the official assignee. Crossborder reforms came up to date with the new, international role of New Zealand. High Court Rules: High Court Rules govern civil procedure in the High Court. Within the high court rules there are blocks of rules that are special to particular areas. Part 24 governs bankruptcy proceedings - CM110 Covers creditors' applications, approval of compositions, proposals, appeals from Official Assignee (basically everything!) Insolvency (Personal Insolvency) Regulations 2007: The Act sets out all the important parts, but the mechanics are set out in the regulations. Both read together give you the practicalities of applying the Insolvency provisions to any fact situation.
- Regulate the Official Assignee
- Rules regarding creditors' meeting
- What goes on public registers

- Provide prescribed "out of Court" forms, e.g. statement of affairs Entry to Bankruptcy: Two processes:

1. Debtor's initiative - ss4549. It used to be that the court always pronounced bankruptcy on an application called a petition. Now it is not an application to the court at all.
- A debtor may file an application with the Official Assignee
- Debtor must first file statement of affairs
- Joint applications are possible - if people are jointly burdened with debt, they can have the estates administered together e.g. partnerships.

2. Creditor's move via the court - where the creditor is seeking to bankrupt the debtor.
- Based on "acts of bankruptcy" s13. The one that is most used is 'failure to pay on a bankruptcy notice'.
- A block of High Court rules controls the procedure to be followed, and the forms used.
- An application can only be made in respect of unsecured debts - not a process for secured creditors. A creditor's move via the court is not a creditors' remedy as such, because it's not just for the benefit of the creditor. The creditor is initiating a state of events that is going to apply equally to all creditors involved. The creditor has to decide whether they are better off pursuing bankruptcy, or other creditors' remedies. There may be no property that the debtor has that the creditor can execute against, or there may be transactions that the official assignee can reverse, in which case the creditor should pursue bankruptcy. However, if the debtor has a huge number of creditors that need to be paid, each creditor will get almost nothing. Priorities of distribution also need to be examined.

27th July: Entry to bankruptcy: Two processes

1. First is a debtors initiative
a debtor may file an application with the official assignee
debtor must first file statement of affiars
joint applications are possible

2. Creditor's move via the court
based on "acts of bankruptcy"
High Court Rules control the procedure and forms to be used
an application can only be made in respect of unsecured debt over $1000 Acts of Bankruptcy:
- Bankruptcy notice - requires a court judgement
- Fraud or intent to prefer a creditor by taking certain steps in regards to property
- Admission to creditors of insolvency - no judgement required.
- Avoidance of creditors with intent to defeat or delay creditors

- Notice of suspension of debts - not going to be paying any of debts for the remainder of the year - implies insolvency.
- Removal or concealment of property - e.g. signing over of house to spouse. No judgement required,
- Unsatisfied judgement for nonpayment of trust money - debtor has money on trust for someone, judgement in respect of it. Judgement for trust money has been placed on a higher pedetstal than other sums.
- Writ of sale (sale order) - enforcement or execution order, post judgement.
- Possession under execution process - very similar to writ of sale.
- Departure from NZ with intent to defeat or delay his or her creditors Three Broad Categories:

1. Debtor deliberately sets out to put property beyond reach

2. Creditor allowed to use a procedure (or results of procedure) via the court.

3. Something that evidences inability to pay debts. Creditors with Special Status:
- Non sui juris creditors via guardian ad litem
- Or by manager under the Protection of Personal and Property Rights Act
- Foreigners may apply (using private international law principles)
- Assignee of debt, trustee in estate (but formalities required) Debtors with Special Status:
- Minors can be bankrupted, but special consideration needed of underlying debt. Only in limited situations where you can get judgement against a minor - so for those "acts of bankruptcy" which rely on judgement, have to ask if the judgement has been done correctly. Look at how they have incurred the debts that have made them insolvent.
- People with disabilities can be bankrupted, but Court may require representation, may affect discretion
- People absent from NZ can be bankrupted, but various private international rules apply
- Diplomatic officials enjoy diplomatic immunity
- Members of Parliament are not immune, but particular rules apply to them that affect attendance, service of documents
- Bankruptcy no longer disqualifying to MP Bankruptcy Notice:
- Almost always used. Lawyers tend to continue to use what they have always done. Often really difficult to prove some of the other grounds of bankruptcy.
- Easy and straightforward evidentially.
- Statute and rules based
- Broadly analogous with statutory demand against a company, but with differences
- Depends on preexisting Court monetary judgment.
- Bankruptcy notices have generated a lot of case law
- Generally arguments are of a technical or minor nature
- Debtors who want to avoid bankruptcy generally attack the Bankrupt notice - form, underlying judgement, service, irregularities
- Irregularities that are not substantive can be remedied by the Court
- But anything of substance is going to render the Bankruptcy Notice ineffective.

This will arise in three situations:

1. The debtor applies to set aside

2. The court picks it on adjudication - noticed that there appears to be an error in the bankruptcy notice

3. Annulment - setting aside of a bankruptcy after it has happened. If you find a fault in the bankruptcy notice you apply to the court to annul the bankruptcy and have it set aside. The debtor is severly restricted in what can be set up in opposition. Can bring up things about the substance, underlying judgement, debtor not aware of the proceedings etc. Setoffs are limited, i.e. "but he owes me money as well". No setoff for something that could have been raised in the proceedings in which judgement was obtained, but setoff available otherwise. Examples of difficulties can be seen in Laywood & Rees v Holmes Construction Ltd (CM137). Complication over other unresolved issues between parties. There are a wide range of very technical and complicated attacks that can arise with bankruptcy notices. Take bankruptcy notices very seriously. Time limits are tight Consequences are serious Consider attack on underlying judgement, attack on irregularities, attack on permissable setoff. Are there other things to be brought into account that could not be used in the litigation?
Where on processing the documents, the courts allocate a date where it will be in court. The date they choose will be a date where a whole lot of insolvency cases come to court - an insolvency list. Creditor's Application:
- The court may dismiss the application if it is defective or not proved. The debtor might come forward and say 'I think there's a mistake here. The debtor could persuade the court that there ought not to be an adjudication in bankruptcy.
- The court has a final discretion whether or not to bankrupt, even if the case is proved (CM150)
- The court can "halt" the application ("stay"). The proceedings are put in suspension, usually until something else is done.
- The court may substitute a new creditor. In the overall scheme of things, where insolvency involves more than one creditor, another creditor can come forward and say "that creditor is not taking action fast enough, I want to take things over.". Courts discretion to refuse:
- If there is no worthwhile purpose to the parties or to society, e.g. no assets.
- Where there is only one creditor, particularly if other options available
- Overall fairness and conduct of creditor. If the creditor is wanting to use bankruptcy to embarrass the debtor, to destroy their financial credibility etc, this will completely turn a judge off. Size of the debt taken into account.
- No set rules about discretion. Creditor's application:

1. To High Court

2. Almost always dealth with by Associate Judges

3. "Insolvency Lists"

4. Almost never defended, frequently adjourned

5. Evidence on the papers

6. Must be in open Court, even if video link Miscellaneous Points:
- Filing a creditor's application prevents that creditor from continuing enforcement process ("execution")
- While any creditor's application is pending, the court may stop other enforcement processes taking place
- Appointment of a receiver as an interim step
- There is also provision for second and subsequent bankruptcies. It's not about people going bankrupt a second time, and rather it is about a bankruptcy on top of a bankruptcy. The concept is deceptively important, because only debts at the time of the adjudication are provable, leaving subsequent creditors with the need to pursue creditors' remedies.

3rd August: Immediate Effects of Bankruptcy:
- All property, (whether in or outside New Zealand) belonging to the bankrupt or vested in the bankrupt vests in the Official Assignee. (Vests = giving an immediately secured right of ownership)
- Also, property acquired by the bankrupt after the point of adjudication, but before the discharge from bankruptcy.
- Official Assignee doesn't have to do anything for the property to vest
- Also, the powers that the bankrupt could have exercised in respect of any property (whether inside or outside New Zealand) for the bankrupt's own benefit vest in the Official Assignee. e.g. put (contractual right to offload shares) or call options on shares, option to purchase land.)
- The Official Assignee will often not know what property has vested until investigations have been made. On a court ordered bankruptcy the OA will know nothing, despite owning all this property.
- Property might not be disclosed to the OA
- Property may only come to light after extensive investigation
- Property may be discovered even after the end of the period of bankruptcy
- Property does not revest in the bankrupt on discharge (exception in s123). Assets stay with the OA.
- What "property" vests - defined in s2. "property" means 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.
- "Property" therefore includes beneficial as well as legal interests - trusts and estates, interests in legal proceedings, rights to bring a family protection claim, right to claim, causes of action, options and rights in respect of property e.g. trustees right of indemnity. But there are some exceptions to vesting. Property that does not vest, includes:
- Property held by a bankrupt on trust
- Joint Family Homes Act 1964, and the Kiwi Saver Act 2006, Government pensions - statutory protection for certain assets, outside of the Insolvency Act (Other Acts making exceptions.)
- Rights of personal action for compensation

- Defamation damages and compensation for injury
- Rights to pursue claims under the Property (Relationships) Act OA can bring a claim. Official Assignee v Hooker:
- Said that Parliament would have to say something special for the Official Assignee to bring a claim
- Pennington J had to then answer the question - what do the words actually mean? Said, OA could make applications for determining the status of property, tidying up the boundaries etc, but not bringing a claim.
- Tools of trade, furniture and motor vehicles up to $5000 in value
- Earnings required to maintain bankrupt and family (given the wide vesting of all property after adjudication, earnings vest in the OA - how do you determine the earnings required to maintain bankrupt and family?)
- Deducted PAYE held for IRD
- Accident Compensation payments
- Licences of a personal nature Further Effects of Bankruptcy:
- All court civil proceedings against the bankrupt are halted
- Permission of Official Assignee or Court needed to continue any civil proceedings
- Post judgement enforcements are halted unless Court allows
- Creditors are to file claims on prescribed form for consideration (CM159) Creditor's Claims Unsecured creditors must file a Creditor's claim, to be part of bankruptcy, and the debt will be wiped whether or not the claim is made. The claim can be made on contentious issues, and on halted court proceedings. The official assignee will decide. Official Assignee's Duties:
- General duty to administer the processes under the Act
- To advertise the bankruptcy
- To call or dispense with creditor's meetings
- To examine the creditor's claim form
- Transmission of interest in land subject to a mortgage
- To keep proper accounting records Official Assignee's Powers:
- To do what is necessary to administer under the Act - s217
- To deal with property

* As if owner

* Hold, sell on any terms, lease, give securities

* Carry on business of bankrupt

* To mortgage property

* Compromise debts, claims, and liabilities
- Exercise property powers of bankrupt

* Sign deeds, resolutions, appoint agents

Buy the full version of these notes or essay plans and more in our Insolvency Law Notes.