The position of secured and preferential creditors in court ordered winding ups of private companies and its significance for the insolvency law systems in force a comparison between New Zealand and West Germany

Abstract

Using winding up of private companies by the court as an example, the paper examines the position and rights of creditors in an insolvency. The comparing of New Zealand and West German insolvency law shows the different and similar reactions of the law to business practices in each jurisdiction. Because the conceptual bases of the two legal systems are different the comparison provides interesting results. The paper develops the theme that in both jurisdictions the present insolvency laws are outdated and inadequate. The legislation that has its origins in the last century and still embodies the principle of pari passu distribution of a creditor's assets, has been thrown off balance by developments in the use of security devices and the emergence of the state and workforce as major creditors in a winding up. As a result preferential and secured creditors deplete an insolvent estate to an extent that almost invariably little remains to satisfy the claims of unsecured creditors. The former can obtain satisfaction outside insolvency law and are largely unhampered by the court or officials involved in a winding up. In theory unsecured creditors are, in case of an insolvency of a debtor, satisfied by payment of a dividend. Such dividends are on average approximately 5 cent per dollar that a creditor is owed, in both New Zealand and West Germany. Often the dividend is less. The avoidance powers of officials administering an insolvency provide means of challenging satisfaction of debts and securities granted by a debtor prior to a winding up. These powers are too weak in both countries. They depend too heavily on the debtor's motivation in granting preferences and the periods prior to the winding up, if any, are too brief. In short, insolvency law is in a state of crisis. Recent reform proposals in New Zealand, the United Kingdom and West Germany are examined. The proposals made in the United Kingdom are of particular relevance for New Zealand as in this area that laws remain substantially the same. The need for some curtailment of preferences and securities is acknowledged in all three jurisdictions. The writer concludes by making some proposals of his own which, it is argued, would go some way towards resolving the present problems.