The Ministry of Business, Innovation and Employment (MBIE) is seeking submissions by 7 October on recommendations from the Insolvency Working Group.
We canvass the issues. Michael Arthur of Chapman Tripp is a member of the Working Group.
The current system has been tested by relatively high levels of insolvency activity in the past few years and has not always performed to standard so it makes sense to take stock of whether our rules and processes are as efficient and effective as possible.
Making a submission is simple. MBIE has provided a guide “how to have your say”, which asks specific questions but submissions need not be limited to those questions.
Licensing of insolvency practitioners
The Insolvency Practitioners Bill currently provides for registration without specifying any criteria. This might give creditors false assurance, in that many would assume that a registered practitioner was qualified and had satisfied a “fit and proper person” test.
Instead, the working group recommends an occupational licensing system with a professional body acting as front-line regulator, overseen by a government agency. The UK has a similar co-regulation model and it is used in other New Zealand professions.
This recommendation will likely receive most comment and discussion. Important issues include whether there is a need for licensing or regulation. If so:
- should it be a government or professional body that is responsible for the licensing and oversight, and
- what processes should be covered by the regime? Will practitioners need to be licensed in order to carry out solvent liquidations, or assist in formal creditor compromises, for example?
Conduct prior to liquidation
The terms of reference asked about the efficacy of existing protections against “the use of phoenix companies and companies being liquidated to avoid liability for latent defects, paying arrears of wages to employees, other employee entitlements and employment related penalties”.
Licensing of insolvency practitioners would go some way to addressing concerns around the lack of robust investigation into the events giving rise to phoenix arrangements and the transfer of assets from Oldco to Newco at undervalued prices.
Latent defect problems could best be addressed through building sector rather than insolvency law. The working group report notes:
“A company should be liquidated if the most efficient use of its assets is different from the current use. We consider important objectives of insolvency law would be undermined if directors were unable to make a ‘fresh start,’ or if liquidations were to be delayed for several years because there was potential for latent defects to become apparent at some point in the future.”
The group has made three recommendations in this area1.
- Remove the ability to appoint a liquidator or administrator after service of a liquidation application. And instead of allowing a creditor to ask the court to review the appointment of a voluntary liquidator, give the creditor the ability to approve the appointment of a particular liquidator.
- Void the transfer of assets outside the ordinary course of business after service of a liquidation application. This would follow UK law and practice, but would be a significant shift for New Zealand. So, for example, a company could not sell its whole undertaking (whether to a related party by way of a hive-down or otherwise) after it had been served with a liquidation application.
- Introduce a director identification number. This would assist prospective creditors undertake better due diligence on the risk posed by the company and its director(s).
Regulating formal insolvencies
The working group recommends that most of the provisions in the current Bill dealing with matters outside the question of licensing or regulation be pursued, with further enhancements2.
Practitioners should not be disqualified from appointment on the basis that the practitioner or the practitioner’s firm:
- has a continuing business relationship with a secured creditor of the company (e.g., a bank), or
- has acted as investigating accountant in relation to the company.
In relation to practitioner’ responsibilities, particularly around reporting and provision of information, the recommendations would require; the filing of regular interests statements, better hand-over of materials to replacement practitioners, a more coherent regime for reporting offences and greater transparency on when and how practitioners were appointed.
In particular, the report suggests that there are “significant information asymmetries between insolvency practitioners and creditors” and recommends:
- a requirement to report cumulative fees and expenses of the liquidator and cumulative amounts received and paid (in summary form), and
- that liquidators be required, on completion of the liquidation, to report on the extent to which unsecured creditors in each class (preferential and ordinary) were paid, and whether there were any recoveries from creditors, directors or shareholders.
These changes would clearly enable outcomes from multiple liquidations to be gathered and compared, and would make data about the effectiveness of the liquidation process more available to consumers of insolvency services. We encourage you to send a written submission.