Insolvency law changes announced

The key changes, arising from the second stage of the government's insolvency law review, cover business rehabilitation, phoenix companies, bankruptcy administration and cross-border insolvency.

"The government is committed to insolvency rules that are both certain and fair. We want an environment which encourages business innovation and entrepreneurial activity, while also having rules that provide comfort to creditors.

Lianne Dalziel said she was very pleased to announce the decision to introduce a company rehabilitation system similar to that operating in Australia.

"Currently most insolvent companies go into liquidation, which means their assets are sold and jobs are lost. A rehabilitation regime will offer an opportunity for these companies to trade out of difficulties.

"In Australia, under their similar arrangements, the total company insolvencies administered in this way has grown from around 20% ten years ago to around 64% of total company insolvencies by 2000.

"Changes are also planned in the personal bankruptcy area, where the government intends to offer a 'no asset' procedure as an alternative to bankruptcy for low-income debtors with few or no realisable assets.

"This procedure reflects a concern that some of the more punitive restrictions of bankruptcy are not appropriate for these debtors. The streamlined 'no asset' procedure will provide them with a better opportunity for a fresh start."

"Another focus is the problem arising out of what have been termed 'phoenix companies', where a business is sold as a going concern to another company or to its directors and/or managers, usually soon after its failure.

"We want to ensure that there are effective penalties available to the courts when directors deliberately abuse phoenix company arrangements. This will be achieved by providing for criminal penalties when directors have acted in bad faith to defeat creditors' legitimate interests.

"We will also restrict the re-use of a company name by any director of the company after it has gone into insolvent liquidation. This will prevent directors from continuing to trade off the goodwill of an insolvent company by selling it to another company they control."

"The government has already decided that cross-border insolvency issues will be addressed through the adoption of the UNICITRAL Model Law. A new legislative framework will allow for the development of single insolvency proceedings in the case of cross-border insolvency. Such a move has the potential to substantially reduce the costs of inter-country insolvency proceedings, and to ensure greater co-ordination in realising assets to satisfy creditors."

The changes will be incorporated into legislation to be introduced later this year.

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