Insolvency policy questioned

The right to statutory set-off between legatees of a deceased estate is contained in the Insolvent Debtors Relief Act 1729 and the Debts Relief Amendment Act 1735, known together as the Statutes of Set Off. Until the 18th century there was no right of set-off in an action. A debtor(legatee) who had a mutual debt and was owed money by the creditor (an executor of a mutual estate) risked imprisonment.

The legislation was also enacted to prevent a multiplicity of court proceedings over basic equitable principles and specifically states that; "where there are mutual debts between the plaintiff and defendant, or if either party sue or be sued as Executor or Administrator, where there are mutual debts between the testator or intestate and either party, one debt may be set against the other."

The statute of set-off is still in effect in New Zealand and this has recently been confirmed by the Minister for Commerce the Hon Craig Foss. Last month, Mr Foss answered a written question in Parliament advising that ; " the Set-Off Act 1735 is still in force in New Zealand, by virtue of the Imperial Laws Application Ac't 1988'. The Minister also advised that; "the Official Assignee has no right to over-ride the Set-Off Act 1735 or any other statutory provision. Parliament has made specific provisions for set-off in the Insolvency Act 1967, the Companies Act 1993 and the Insolvency Act 2006 and the Official Assignee is required to comply with these provisions."

However the Official Assignee has taken a different view of its obligations under the legislation and has confirmed that a debt owed by a legatee to the executor of a mutual deceased estate is considered a provable debt in insolvency, effectively overriding the mandatory provisions of the Insolvent Debtors Relief Act 1729.

In contrast to the position taken by the Official Assignee in New Zealand, in the United Kingdom Insolvency set-off is mandatory. This means that:

1. it cannot be restricted, extended or contracted out of by agreement of the parties
2. it takes precedence over any other form of set-off exercised before the liquidation or administration of the debtor
3. a court cannot ignore the rules of insolvency set-off in the exercise of its discretion

The policy reason behind this principle is that insolvency tends to involve matters of public interest and mandatory application of the regime ensures that individuals cannot 'work the system' to suit themselves by taking insolvency proceedings to the disadvantage of one party making an equitable claim.

Concern over the disparity between the regime imposed by the Insolvency Service in New Zealand here compared to the policy adopted in the United Kingdom has resulted in another written question to the Minister asking :  "If the Set-Off Act is still in force in New Zealand, why are debts owed by a legatee to the executor of a mutual deceased estate still considered provable in insolvency by the Official Assignee ?