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Court of Appeal Clarifies Kiwi Saver Status in Bankruptcy

May 2015...In its 17 April 2015 decision, the Court of Appeal has clarified the status of a bankrupt’s interest in Kiwisaver funds.

At issue was whether a bankrupt’s Kiwisaver funds vested in the Official Assignee under s101 or s102 of the Insolvency Act 2006. A consequence of the vesting of such funds would be that the funds are available to the OA to be distributed amongst the creditors of the bankrupt.

In Trustees Executors Limited v Official Assignee [2015] NZCA 118 the Court of Appeal has made it very clear that Kiwisaver interests of a bankrupt do not vest in the Official Assignee.

On the bankruptcy of two persons, the Official Assignee asked Trustees Executors Limited (a Kiwisaver Fund Manager) to release the funds in Kiwisaver accounts of those bankrupts to the Official Assignee under the “significant financial hardship” provisions in the Kiwisaver Act 2006. 

Section 101 and 102 of the Insolvency Act 2006 are the key provisions. They provide that on adjudication all property belonging to the bankrupt vest in the Official Assignee.  The provisions also provide that from the commencement of bankruptcy to the discharge of the bankrupt, any property acquired by the bankrupt vests in the Official Assignee.

The difficulty for the Official Assignee was that section 127 of the Kiwisaver Act provided that the interest of any member of the Kiwisaver Scheme could not be assigned, or charged or passed to any other person by way of security, operation of law or any other means (subject to an exception relating to the division of relationship property).

A critical feature of the Kiwisaver regime is that the members’ interest is “locked in”. Subject to specific exceptions, a member’s Kiwisaver funds are not accessible until the member has reached the “end payment date” which will generally be when the member turns 65.

Kiwisaver payments are “locked in” for the future benefit of individual members, and early withdrawals are only permitted in very constrained circumstances. Those circumstances can include serious financial hardship, which can include circumstances arising from serious illness.

The provisions relating to significant financial hardship or serious illness are prescribed by clauses 10 and 11 of the Schedule to the Kiwisaver Act.

If significant financial hardship is established, the Manager may allow funds to be withdrawn, but only to the extent required to alleviate the particular financial hardship.

That restriction was found by the Court of Appeal to be important.

In determining that persons Kiwisaver entitlements would not vest in the Official Assignee on bankruptcy, the Court had regard to the clear language of section 127 Kiwisaver Act which prevented the vesting of a person’s Kiwisaver entitlement in third party. 

The Court held that section 101 and 102 of the Insolvency Act were stated in general terms and did not therefore require the vesting of a members Kiwisaver scheme in the Official Assignee. Accordingly the insolvency provisions didn’t go as far as would be required by the Kiwisaver Act to transfer the interest to the Official Assignee.

Fundamentally, as the Court held, the objective of the Kiwisaver Act is to encourage a long-term savings habit and the accumulation of funds that will increase the wellbeing and financial independence of individuals, particularly in retirement.  The Court noted that there is nothing in the legislation that a purpose was to accumulate funds for the benefit of creditors in the event of a member’s bankruptcy.  The Court remarked that if that were to be the case, the important social and economic purposes of the Kiwisaver regime would be undermined and the burden of providing for the welfare of individuals would fall back on the state.

The Court also considered a secondary issue as to whether “bankruptcy” amounted to “significant financial hardship” under which the early withdrawal provisions of the Kiwisaver Act could be utilised.

The Court’s view was that the legislature contemplated that early withdrawal would be permitted where significant financial arises through the inability to meet basic necessities of life. The Court held that did not extend to making funds available to pay a bankrupt’s general creditors.

While bankruptcy ordinarily results in some form of hardship, Parliament did not intend that early withdrawal of funds could be permitted to address the hardship resulting from bankruptcy, further, the threshold for early release is to “alleviate the financial hardship experienced by the bankrupt”. The release of funds in the case of a bankruptcy does not meet that goal. Instead it serves the interests of the creditors (and doesn’t alleviate the hardship on the individual bankrupt).

For more information or advice contact David Robinson, Kate Logan or Isabella Broadbent.