May 2014... The High Court has declared that a bankrupt’s KiwiSaver account can be made available for distribution to creditors, but only after the bankrupt qualifies for withdrawal under the KiwiSaver rules. This decision is a mixed result for both bankrupts and creditors alike.
The KiwiSaver scheme is now in its seventh year, and with members accounting for more than half the eligible population, and managed funds totalling over $16 billion it represents a significant and growing asset. At May 2013, there were 1,971 bankrupt persons with KiwiSaver accounts cumulatively valued at $7,613,943.
This was a test case brought by the Official Assignee (the public sector body that administers bankruptcies), in respect of two bankrupts, Mr T and Mr H. The Official Assignee sought a number of declarations from the Court, requiring the Court to consider three key questions. Firstly, is a member’s KiwiSaver account their “property” for the purposes of the Insolvency Act? Secondly, on insolvency, does a bankrupt’s interest in their KiwiSaver account vest in the Official Assignee, and if yes then thirdly, can the Official Assignee access the bankrupt’s KiwiSaver interests to pay the bankrupt’s creditors?
Creditors of Mr T and Mr H had filed claims against them for $26,254 and $9,583 respectively. Their KiwiSaver interests at the time they were adjudicated bankrupt totalled $11,860.46 and $10,805.98 respectively.
The Trustee for Mr T’s and Mr H’s KiwiSaver accounts opposed the Official Assignee’s application. The Trustee asserted that a member’s interest in their KiwiSaver account was not “property” and therefore did not vest in the Official Assignee on bankruptcy. Instead, the Trustee submitted that a KiwiSaver interest is a mere “expectancy”. This distinction is relevant because the Insolvency Act (which governs the bankruptcy process) provides that all the property of a bankrupt person vests automatically in the Official Assignee whereas a mere expectancy would not.
The Trustee referred to an Australian case where it was held that a member’s interest in their occupation-based pension scheme was an “expectancy” only and would not become the member’s property until they were entitled to gain access to the funds, usually upon retirement. The Court considered this analysis and distinguished between personal pension schemes and occupation-based pension schemes, which might be tied to employment or other hooks. The Court preferred the view that the KiwiSaver scheme had many similar features to personal pension schemes, including that the size of the pension fund is determined by contributions made by the employer and the employee rather than a member’s salary at retirement. The Court concluded that a bankrupt’s interest in KiwiSaver is property for the purposes of the Insolvency Act. In addition, the Court held that any KiwiSaver interest acquired during bankruptcy is also “property” for the purposes of the Insolvency Act.
The Court then turned to consider whether such “property” would vest in the Official Assignee upon the KiwiSaver member being declared bankrupt. The Court held that the provisions in the Insolvency Act which provide that property of the bankrupt and property obtained by a bankrupt during their bankruptcy vests in the Official Assignee without the Official Assignee needing to take further steps, to be conclusive on the matter.
The third question before the Court was the stumbling block for the Official Assignee. The KiwiSaver Act dictates the circumstances where funds can be withdrawn from a member’s KiwiSaver account. The most common reasons are retirement, the purchase of a member’s first home, and significant financial hardship.
The Official Assignee asserted that bankruptcy will always constitute significant financial hardship, and that such hardship will remain until all the bankrupts’ creditors are repaid. However, the Court considered the examples of qualifying financial hardship which are set out in the KiwiSaver rules, and concluded that those examples “illustrate that serious financial hardship is focused on an inability to meet the “basics” of life including food, shelter and medical care.”
The difficulty for the Official Assignee and creditors is that bankruptcy does not necessarily mean that a bankrupt will be unable to meet the “basics” of life. In fact, Mr T (whose proven debts significantly exceeded his KiwiSaver account balance) gave evidence that bankruptcy had alleviated his financial hardship. He was better off having been declared bankrupt because he no longer had to meet his own debts. Therefore, on bankruptcy, he suffered no serious financial hardship and even if he did, partial payment of his creditors would not have alleviated his hardship.
In contrast, Mr H’s KiwiSaver account exceeded his proven debts. If the Official Assignee was able to access those funds, Mr H’s creditors could have been repaid and his bankruptcy may have been annulled. Such annulment would alleviate Mr H’s financial hardship.
The contrasting cases of Mr T and Mr H illustrate the point that a one size fits all approach will not work in this situation. The application of the financial hardship rules will need to be applied on a case by case basis. The Court did not make a final decision on whether the Official Assignee could withdraw funds from Mr T’s or Mr H’s KiwiSaver accounts, instead leaving this for the Trustee to determine in accordance with the KiwiSaver rules.
If the Official Assignee cannot withdraw funds based on the bankrupt’s financial hardship, the funds will still become available when the account matures, typically when the bankrupt reaches retirement age. However, it is likely that the administrative costs of the Official Assignee maintaining separate KiwiSaver accounts until the bankrupt reaches retirement age might outweigh the benefit to creditors.
The Judge described his decision as an “unattractive result for all concerned” concluding that legislative reform was called for.
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