The Court of Appeal has recently confirmed what happens to a Kiwisaver account when a person is made bankrupt. The short answer is the bankrupt gets to keep their money.

Since the introduction of the Kiwisaver legislation there has been confusion and uncertainty around what happens to a person’s Kiwisaver account once they are made bankrupt. This uncertainty is caused by two seemingly incompatible provisions contained within two different Acts. On one hand the Insolvency Act says that all the bankrupt’s property belongs to the Official Assignee (the government employee who manages bankruptcies), Kiwisaver funds are property so those funds would belong to the Official Assignee. However, on the other hand the Kiwisaver Act says that unless a law ‘specifically’ requires the withdrawal of Kiwisaver funds then it is not possible to withdraw the funds unless the person is suffering financial hardship.

The Court of Appeal had to weigh up these two competing provisions and decide which prevailed. The Court looked closely at the intention of the two Acts and ultimately found that it was very unlikely that parliament intended a person to lose their Kiwisaver funds if they were made bankrupt. However, the Court did note that in the event a person deliberately put funds into a Kiwisaver funds when they were insolvent that such transfers could be reversed.

The Court also considered some practical difficulties in administering a scheme where a Kiwisaver provider would essentially have to keep two sets of books for a bankrupt person – one being for the benefit of the Official Assignee and the other for the person once they completed their bankruptcy.

Perhaps knowing that the Court of Appeal’s decision could be scrutinised the Court went on to consider what its view of the ‘hardship withdrawal’ is in relation to a bankrupt. This is as the Kiwisaver legislation allows a person to withdraw their Kiwisaver funds in the event they suffer financial hardship. The Act provides for examples of what might be considered hardship. The examples include being diagnosed with a terminal illness, not being able to meet the person’s minimum daily living costs, or a dependent needing surgery etc. The Official Assignee has previously tried to force Kiwisaver providers to release the funds of the bankrupt to the Official Assignee on the basis that as the person has been made bankrupt they are suffering financial hardship. The Official Assignee would then use the funds in the Kiwisaver account to pay the bankrupt’s creditors. The Court said that if it is wrong (on Appeal) and Official Assignee can take a person’s Kiwisaver funds then the financial hardship provisions would usually not permit the withdrawal of funds under the hardship exception. The Court said that the examples given were primarily compassionate ones and meeting debts to trade or other creditors is not the intended purpose of the legislation.

The exception the Court considered could apply would be that if there was sufficient funds in the account to meet all the debts of the person then this could potentially alleviate hardship as the bankruptcy could then be annulled and any remaining funds would belong to the discharged bankrupt.

As a result of this decision, funds invested in Kiwisaver are a unique category of the bankrupt’s property under the insolvency law (excluding funds held by that person on trust for another) and the only attack that can be made on those funds appears to be under the relationship property legislation or potentially under the proceeds of crime legislation (where a future-minded criminal looks to build a nice nest-egg for when their days as a criminal are over).

From a practical perspective if this decision stands (it is unclear whether there will be an appeal to the Supreme Court) then any business person or person that is taking on any activity with financial risk and wishes to invest funds on a long term basis should consider a Kiwisaver scheme as a safer option. Of course the main drawback to the scheme is the funds are locked-in until age 65.