If a liquidator is found guilty of stealing money from a company in liquidation, most creditors would assume that he or she could never be a liquidator again. Not in New Zealand. A recent case highlights the need for urgent reform of the regulation of insolvency practitioners.

Readers may recall our earlier article concerning Patrick Norris, a liquidator based in Nelson. The Official Assignee had sought to prohibit Norris from acting as a liquidator, based on complaints made about eight separate liquidations that he had handled. The claim was brought under sections 284 and 286 of the Companies Act. However, the High Court ruled that the claim could not proceed as currently pleaded: Official Assignee v Norris [2012] NZHC 961.

This case illustrated the highly technical and narrow scope of the current law, and the need for reform concerning the regulation of insolvency practitioners.

But there is more. In a decision released last month, Judge Behrens QC convicted Mr Norris of theft under section 220 of the Crimes Act: R v Norris CRI-2011-42-1272. This decision should leave no doubt about the need for urgent reform of the law.

The Astra liquidation

Mr Norris was the liquidator of Astra Enterprises Ltd. In August 2009, he received approximately $80,000 of Astra funds. Regulation 37 of the Companies Act 1993 Liquidation Regulations 1994 requires those funds to be deposited into a bank account to the credit of the company, or to a trust account. However, instead of banking these funds into an Astra account, Norris banked them into the trading account of his company, Norris Management Services Ltd (NML).

By November 2009, NML had used the entire $80,000 to buy items for, or repay the debts of, NML and Norris.

Norris reportedly told an employee that the Astra file "would be my Archilles heel". So it turned out. In March 2011, the Companies Office visited Norris's office to inspect the Astra file. They said they would return in the afternoon. In the meantime, there was a "panic" in the office. Norris claimed that the file had gone missing and everyone was trying to find it.

However, the judge accepted that Norris had "got the Astra file out" and told employees that "he would need invoices for an amount to cover at least $80,000" before handing over the file. Norris and his partner then "went to great lengths" to "engage with the IRD as a creditor" and to "investigate a supposed debt to Astra" in order to generate invoices which "equalled the total of the Astra monies he received".

The judge found reasonable fees would have been $12,000 plus GST, and that Norris "engaged in a blatantly dishonest course of action to try and cover up Mr Norris's failure to deal with or account for the property of Astra to the creditors".

Judge Behrens convicted Norris of theft in a special relationship. He is still to be sentenced.

The need for urgent law reform

Under the current law, a person convicted of any crime involving dishonesty, such as theft, cannot be a liquidator for a period of 5 years after his or her conviction: sections 280(1)(k) and 382(1)(b) of the Companies Act.

Mr Norris has now resigned as liquidator of the companies for which he was liquidator. However, Mr Norris appointed as his replacement Jack Churchill, who says he is an "acquaintance" of Mr Norris. The Nelson Mail reports that Mr Churchill is a former car salesman who runs a bus company, that he is not a qualified accountant, and that he has never worked as a liquidator before. Further, Mr Churchill's contact details are c/- Mr Norris's company, NML.

Mr Norris was not authorised to appoint Mr Churchill, as Mr Norris had already been convicted of fraud. The Official Assignee has since appointed Rhys Cain and Bruce Gemmell of Ernst & Young to act as liquidators.

In our view, a person convicted of a dishonesty offence should not be permitted to act again as a liquidator of a company. That is particularly so where the dishonesty occurred in the course of a liquidation, such as here, where Mr Norris stole funds from the company and its creditors. The Insolvency Practitioners Bill would redress this, by disqualifying any person convicted of a crime involving dishonesty from being a registered insolvency practitioner, unless the Court orders otherwise.

However, the Bill only introduces a negative licensing regime, excluding people from acting as a liquidator if they are disqualified in some way. It does not introduce a positive licensing regime, requiring minimum qualifications for an individual to act as a liquidator. As a result, it would not appear to prohibit someone such as Mr Churchill from acting as a liquidator. Indeed, it would appear to allow Mr Churchill to register and hold himself out as a registered insolvency practitioner.

The label "registered insolvency practitioner" implies that the practitioner meets a minimum standard of proficiency, when he or she may not be qualified at all. For this reason, and as illustrated in this case, we continue to be of the view that the Bill should contain a positive licensing regime, with minimum standards for individuals to be able to hold themselves out as registered insolvency practitioners.