Scheme in the gun over bankruptcies

Proud papa: Then finance minister Dr Michael Cullen at the launch of KiwiSaver.
Proud papa: Then finance minister Dr Michael Cullen at the launch of KiwiSaver.

Confusion over whether creditors have a right to the contents of KiwiSaver accounts when a person goes bankrupt, is to be tested in the courts.

The Government's Insolvency & Trustee Service (ITS) has been successful in persuading trustees of many KiwiSaver schemes, to release the personal and employer contributions from the KiwiSaver accounts of bankrupts to pay their creditors.

Since KiwiSaver began, the Official Assignee (part of the ITS) has clawed $440,000 out of KiwiSaver accounts in the cases of 165 bankruptcies.

But that has been largely a result of bankrupts aged 65 or over.

Most trustees do not believe that the KiwiSaver Act 2006 empowers them to release KiwiSaver funds to pay creditors of bankrupts, when the Official Assignee applies under the scheme's hardship provisions.

Though the Official Assignee takes ownership of a person's assets when they are adjudged bankrupt and can make such applications in the name of the bankrupt, the KiwiSaver Act does not explicitly refer to paying creditors under the hardship provisions, which cover things like illness and the inability to make mortgage payments.

Under the act, trustees must be "reasonably satisfied" that the KiwiSaver member is suffering or is likely to suffer from significant financial hardship, but trustees appear to feel that releasing cash to pay a bankrupt's creditors would make no difference to the member's day-to-day financial hardship, and indeed could actually be said to make it worse by reducing their net wealth.

The definition of financial hardship under the act is not exhaustive, meaning a court could extend the circumstances in which financial hardship would be proved.

A spokesman for the Ministry of Business, Innovation and Employment (MBIE) under which the ITS operates, said: "ITS is seeing an increasing number of bankrupts with KiwiSaver accounts. One of the ITS' responsibilities is to realise a bankrupt's assets to meet the claims of their creditors, and ITS considers KiwiSaver accounts an asset that should be available for creditors."

But he noted that ITS had to use the financial hardship provisions in the KiwiSaver Act, and it was up to each KiwiSaver provider to consider early withdrawal applications on their merits.

"The Official Assignee has recently commenced High Court litigation seeking clarity around its rights in this respect and whether it can access KiwiSaver accounts before the standard date of access, which is when the individual turns 65," the spokesman said.

The case will be heard in the High Court in Wellington. Trustees Executors Ltd finds itself as the other party as trustee for KiwiSaver schemes, in which two bankrupts have KiwiSaver accounts the Official Assignee considers it is entitled to access.

"We are seeking a declaratory judgment in the High Court case, [under the Declaratory Judgements Act 1908] which will clarify the [Official Assignee) rights to access KiwiSaver accounts," the MBIE spokesman said.

"The KiwiSaver Act 2006 does not specifically refer to the status of KiwiSaver accounts in bankruptcy, nor does the Insolvency Act.

"The issue the Official Assignee is seeking to resolve through the court is around the correct interpretation of the KiwiSaver Act and whether the Insolvency Act applies to KiwiSaver accounts, or whether the KiwiSaver Act takes precedence."

Sunday Star Times