Insolvency Law Reform

Parliament passed the Insolvency Law Reform Bill on 27 October 2006

It was split into three separate acts:

  • the Insolvency Act 2006 repeals and replaces the Insolvency Act 1967
  • the Companies Amendment Act 2006 amends the insolvency provisions of the Companies Act 1993, and
  • the Insolvency (Cross-border) Act 2006 creates new legislation on cross-border insolvency.

This legislation will come into effect in 2007 (on a date still to be set) once regulations are in place.

Key concepts that you should know...

No asset procedure

The Insolvency Act 2006 streamlines the bankruptcy administration process and introduces a new no asset procedure as an alternative to personal bankruptcy. It provides individuals with a one-off opportunity to be subject to a 12 month procedure, rather than the three years for bankruptcy. A debtor with total debts of between $1,000 and $40,000 with no realisable assets can apply to the Official Assignee for entry into the procedure. The debtor has a moratorium on their debts, and after 12 months, the debts are cancelled (however, student loans will not be discharged through this procedure).

Voluntary administration procedure for companies

The Companies Amendment Act 2006 insets a new Part 15A into the Companies Act 1993 that introduces a voluntary administration procedure for companies with potential for rehabilitation, in line with other OECD countries (including Australia ). The procedure allows an insolvent company, the court, or secured creditors to place a company in voluntary administration and appoint a voluntary administrator to mange the company, organise creditors and draw up a restructuring plan. Creditors then vote on whether the company should be restructured or placed in liquidation.

There is currently some criticism of the fact that the Inland Revenue Department retains priority on liquidation, as this will provide an incentive for the IRD to vote against a voluntary administration in favour of liquidation to better its own recovery.

The amendments attempt to align the voidable transaction provisions in the Companies Act with those in the Insolvency Act, and amend the current ordinary course of business exception to voidability and replaces it with a continuing business relationship test.

Inconsistent priorities

The rules for priority of payments have also been amended, and may now be inconsistent with the treatment of perfected purchase money security interests under the Personal Property Securities Act 1999.

Phoenix companies

The new legislation also attempts to protect creditors of failed companies from directors who act in bad faith to defeat creditors by using phoenix companies. (A phoenix company is where a company's assets have been moved to another company, often with a similar name, and some or all of the directors remain the same.) The phoenix company trades in place of the failed company, but as a new entity, it is not liable for the old company's debts. The new legislation places restrictions on the directors of failed companies, with criminal sanctions and personal liability, and captures sales of company assets at less than market value to the phoenix company.

Insolvency practitioners

Submissions on the Insolvency Law Reform Bill criticised it for not regulating insolvency practitioners. This resulted in a discussion document being released in October seeking feedback from the industry on the regulation of insolvency practitioners. The discussion document closes for submissions on 2 February 2007.


The content of this document is necessarily general and readers should seek specific advice on particular matters and not rely solely on this document.
If you would like further information on any of the topics in this document, please contact the writer or your usual Auld Brewer Mazengarb & McEwen adviser.
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