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Insolvency law changes – Cabinet approvals

by Stephen on November 14th, 2019

Last week, the efforts of the Insolvency Working Group made further progress – with Cabinet approving a series of recommendations to improve aspects of insolvency law, notably in relation to voidable transactions and other recoveries, and preferential claims.

Whilst the mainstream media chose to headline the issues affecting Ponzi schemes (in a negative tone) this latest development is more notable for the mainstream changes to corporate insolvency.

A summary of the key takeaways from that Cabinet process is set out below.

Voidable transactions and other recoveries

It was agreed that the following, in relation to the periods of vulnerability prior to the commencement of the liquidation for clawbacks:

  • Unrelated parties:  reduce:
  • the clawback period from 2 years to 6 months for voidable transactions with unrelated parties;
  • the clawback period from 2 years to 6 months for voidable charges over property or undertakings of the debtor company;

And retain 2 years for transactions at undervalue with unrelated parties.

  • Related parties:  increase:
  • the clawback period from 2 years to 4 years for voidable transactions with related parties;
    • the clawback period from 2 years to 4 years for voidable charges over property or undertakings of the debtor company;
  • the clawback period from 2 years to 4 years in relation to transactions at undervalue with related parties
  • the clawback period from 3 years to 4 years in relation to transactions for inadequate or excessive consideration.

Section 296(3) unchanged

Cabinet has not accepted the Insolvency Working Group proposal to remove the “gave value” limb of the defence under section 296(3) of the Companies Act against clawbacks. 

The removal of the “gave value” value of that limb was intended to shift the interests of the clawback regime towards the collective interests of creditors.  The amended defence would therefore only apply where the creditor, in good faith and without suspicion of insolvency, relies on the payment itself – effectively returning the defence to an effects-based enquiry (rather than intention).

Reckless trading

It was noted that insolvency practitioners can be deterred from taking reckless trading claims because the costs will be borne by unsecured creditors, but the benefits will accrue to any creditors that have security interests over the assets of the debtor company.  As a result, it was agreed that recoveries from reckless trading claims should be for the benefit of unsecured creditors only.

Preferential claims

The following changes were agreed to the existing preferential claim for employees of the debtor company:

  • clarify that long service leave is included within its scope; and
  • add payments in lieu of notice to its scope.

This means that, if there are sufficient assets, these claims will be paid ahead of some secured creditors and ahead of other unsecured creditors.  However, this still falls short of overseas models (including Australia) where the Government effectively pays amounts owing to employees and then steps into their shoes for a proportion of their preferential claim – so that outstanding wages are paid promptly, thereby providing real help to employees who suffer financial hardship through the failure of their employer.

It was also agree that insolvency practitioners be required to honour at least 50% of the value of gift cards and vouchers, if the company continues to trade after being placed into receivership or liquidation.

Cabinet did not accept a proposal to impose a time limit on the IRD and Customs for preferential claims relating to unpaid taxes and duties.

Amendments to the Insolvency Act 2006

Corresponding changes will be made to bankruptcy law around periods of vulnerability for clawbacks and preferential claims.

Ponzi schemes

The mainstream changes to corporate insolvency, (particularly) reducing the period of vulnerability from 2 years to 6 months under the voidable transactions regime will reduce the amount clawed back from investors who withdrew funds from a ponzi scheme.  This will have the effect of reducing the amount available to be shared amongst other investors and, therefore, increase the differences in the losses between different classes of investors.

However, the RAM ginger group is reported as being unhappy that work on a possible regulation solution for sharing losses among ponzi scheme investors has been put on hold, first, to avoid delaying progress on the above reforms and secondly because most submitters did not consider it to be a high priority issue – although there are issues with applying the voidable transactions regime to ponzi schemes, the detriments associated with retaining the status quo are relatively low.

Concluding comments

The implementation of the recommendations of the Insolvency Working Group will simplify (and improve) the voidable transactions regime.  The reduction of the clawback period to 6 months before liquidation will be welcomed by trade creditors.  Similarly, the increases to the clawback period for related party transactions and charges is likely to meet with approval, particularly in light of concerns about related party transactions and efforts to game when a liquidation is commenced to de-risk the prospect of clawbacks affecting such transactions.

However, the requirement to honour at least 50% of the value of gift cards and vouchers if an insolvency practitioner continues to trade a company appears to put the concerns of retail customers ahead of all other creditors – thereby undermining the fundamental principle that all unsecured creditor claims be placed on an equal footing.


Implementation of these Cabinet decisions will require the usual legislative process.  There is a view about the political impact of (often) obscure bits of commercial law reform.  Nonetheless, I think it likely that the process will be completed this Parliamentary term – possibly for implementation late next year or early 2021.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.

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