Proposed changes to the Insolvency Act 2006

On 28 May, the Commerce Committee recommended that the Insolvency Amendment Bill 2009 (the Bill) be passed with a few minor amendments. If enacted, the Bill will amend the Insolvency Act 2006 (the 2006 Act) for the first time since it came into force on 3 December 2007.

The principal changes proposed by the Bill concern:

• the cancellation of insolvent gifts by the Official Assignee;

• the status of fraudulent debts on discharge from the No Asset Procedure (the NAP); and

• the retention of information on the public register.

Cancellation of insolvent gifts

The Bill makes a number of changes to the insolvent gift provisions in the 2006 Act, largely returning to the position under the Insolvency Act 1967 (the 1967 Act).

Gifts within two years of adjudication

Under the 1967 Act, the Official Assignee could cancel a gift made by the bankrupt within two years prior to adjudication without needing to prove that the bankrupt was insolvent at the time of the gift.

The 2006 Act changed this by allowing the Official Assignee to cancel a gift only if the bankrupt was unable to pay his or her debts immediately after the gift was made. The Act does create a presumption that the bankrupt was unable to pay his or her debts during the two years prior to adjudication. However, if the recipient of the gift is able to rebut this presumption, the Official Assignee cannot cancel the gift.

Under the Bill the position will revert to that under the 1967 Act by allowing the Official Assignee to cancel any gift made by the bankrupt within two years prior to adjudication, irrespective of whether the bankrupt was insolvent at the time of the gift.

Gifts within two to five years of adjudication

Under the Bill the position relating to gifts made within two to five years of adjudication also moves back to the 1967 Act.

Currently, the burden of proof lies on the Official Assignee to establish that the bankrupt was insolvent. The Bill shifts the burden of proof back to the recipient of the gift, where it had stood under the 1967 Act, so that the recipient will need to prove the bankrupt satisfied the solvency test to avoid the Official Assignee cancelling the debt.

In addition, the Bill makes a change to the time at which the bankrupt must be proven to have satisfied the solvency test. Under the current law, the test will be satisfied only if the bankrupt was able to pay his or her debts immediately after the gift was made. The Bill changes this so that the bankrupt will satisfy the solvency test if, at any time after the gift but before adjudication, the bankrupt was able to pay his or her debts. This is also a return to the pre-2006 Act position.

Solvency test for insolvent gifts and transactions at undervalue

The Bill also modifies the solvency test for insolvent gifts so that it takes into account all debts owed by the bankrupt, not just those that were due. Contingent liabilities will consequently need to be taken into account in applying the test.

The same change applies where the Official Assignee seeks to make a recovery in respect of a transaction at undervalue. For all other irregular transactions (insolvent transactions and insolvent charges), the test takes into account only due debts.

Commencement of changes

The changes to the insolvent gifts rules will not be retrospective. They will apply only where adjudication has occurred after the amendments have come into force. If adjudication has occurred prior to this, the current provisions in the 2006 Act will continue to apply.

Status of fraudulent debts on discharge from NAP

Currently, when a debtor is discharged from the NAP, all of his or her debts that were unenforceable upon entry into the scheme are cancelled. The Bill amends this blanket cancellation to exclude two types of fraudulent debt:

• any debt or liability incurred by fraud or fraudulent breach of trust to which the debtor was a party; and

• any debt or liability for which the debtor has obtained forbearance through fraud to which the debtor was a party.

While these types of debt will be unenforceable during the debtor's participation in the NAP, they will become enforceable again once the debtor is discharged. This change brings the position of fraudulent debts under the NAP into line with the position of such debts in bankruptcy.

This change will have some retroactive effect: this part of the Bill is deemed to have come into force on 10 March 2009. Therefore all fraudulent debts cancelled on discharge from 10 March 2009 will be revived when the Bill receives the Royal Assent.

Retention of information on the public register

The public register contains information on people who are or have been bankrupt and who are in the NAP. Information must currently be removed four years after discharge for bankrupts and on discharge for those admitted to the NAP.

The Bill will change this so that information on persons admitted to the NAP will be retained for four years after discharge and information on bankrupts will be kept permanently if they have multiple insolvency events. A person is defined as having multiple insolvency events if they have been bankrupted more than once or have been bankrupted once and also discharged from the NAP.

While these changes will not be retroactive for persons admitted to the NAP, they will be for those who have multiple insolvency events. The Bill introduced into Parliament made it clear that this included bankruptcies under the Insolvency Act 1967 or the Bankruptcy Act 1908. The Commerce Committee recommended that this be changed not to include bankruptcies under the 1908 Act as records prior to the 1967 Act can be unreliable.

The public register provisions were the one feature of the Bill in which members of the Commerce Committee differed. The Labour members of the Committee considered that there had been insufficient consultation with stakeholders, such as the Privacy Commissioner, on this part of the Bill. The Committee consequently recommended that this part of the Bill be separated from the rest.

For more information, please contact:

Murray Tingey
Partner