KiwiSaver Accounts and Bankruptcy : Round Two

David Smillie

May 2015 as seen in the Otago Daily Times ...Last year we wrote about a High Court decision regarding the status of KiwiSaver accounts of people who have been declared bankrupt and whether or not their KiwiSaver accounts can be claimed by the Official Assignee (OA) as one of the bankrupt person’s assets. 

In Official Assignee v Trustees Executors Limited last year the Judge in the High Court decided that KiwiSaver accounts are “property” that vests in the OA under the provisions in the Insolvency Act. The Judge also found that the OA could not automatically access the KiwiSaver accounts under the early withdrawal provisions under the KiwiSaver Act (which include an allowance for early withdrawal in the case of a bankrupt’s significant financial hardship) and that would have to be considered on a case-by-case basis.  If early withdrawal of the funds was not possible then the OA would have to wait until the Kiwisaver accounts matured which would usually be when the bankrupt person turned 65.  The Judge in the High Court acknowledged that his decision was “an unattractive result for all concerned” and concluded that legislative reform was required to address the issue.

Trustees Executors Limited appealed the High Court decision to the Court of Appeal. The two questions the Court of Appeal had to consider were:

The first question involved a matter of statutory interpretation between the Kiwisaver Act and the Insolvency Act.  That is because under the Insolvency Act all property belonging to a bankrupt person vests in the OA, however there is a specific section in the Insolvency Act which states that it does not affect the operation of any other law that prevents any property from vesting in the OA  The KiwiSaver Act includes section 127 which states essentially that KiwiSaver accounts must not be assigned to any other person unless “it is required by the provisions of any enactment, including a requirement by order of the Court under any enactment (including an order made under section 31 of the Property (Relationships) Act 1976).”  It was the interrelationship between these sections in the two Acts which would determine this issue.

The Court of Appeal concluded that the interest of a bankrupt member of a KiwiSaver scheme does not pass to the OA. The Court decided that the language of section 127 in the KiwiSaver Act meant that the Insolvency Act provisions had to specifically refer to a KiwiSaver scheme as being included in property that vests in the OA.  The relevant sections of the Insolvency Act are stated in general terms only and therefore the Court’s interpretation was that the general wording of the Insolvency Act was not effective to vest the KiwiSaver accounts in the OA.

The Court also noted that the objective of the KiwiSaver Act is to encourage long term savings habits and the accumulation of funds to assist members particularly in retirement.  They noted that there is nothing in the KiwiSaver Act to suggest that a purpose is to accumulate funds for the benefit of creditors in the event of a member’s bankruptcy and they considered that such an interpretation would undermine the KiwiSaver Act.

The Court then went on to consider the second question. They decided that even if they were wrong on the first point and a bankrupt member’s KiwiSaver interest did pass to the OA, then the early withdrawal provisions (based on “significant financial hardship”) would not apply and the OA would not be able to access any of those funds until the member turned 65.  In considering the various arguments the Court noted that allowing early withdrawal of a bankrupt’s funds to pay creditors would only alleviate the “financial hardship” suffered by his or her creditors since the bankrupt had already been protected from his or her debts by virtue of being made bankrupt in the first place. The Court considered that the clear intention of the KiwiSaver Act was to restrict a member’s right to early withdrawal of funds to carefully prescribed circumstances focusing on the personal circumstances of each member and their dependents and that did not extend to repaying creditors. The Court also noted that having a Kiwisaver account vest in the OA but the funds not being accessible until the member turns 65 would result in an impractical and ineffective remedy for the OA and it is unlikely that Parliament would have intended that outcome.

Trustees Executors Limited’s appeal was therefore allowed with the result being that (for now) KiwiSaver accounts do not vest in the OA on bankruptcy.  We will need to wait and see whether the OA appeals the decision to the Supreme Court for a possible round three determination.