New law slams the door on shonky liquidators

Dishonest or incompetent insolvency practitioners face being banned from the profession when the Insolvency Practitioners Bill is passed later this year.

The Bill provides for mandatory licensing and regulation of insolvency practitioners – something the industry has been demanding for more than 30 years.

And there is good news for lawyers, many of whom work on solvent liquidations. They can continue this work without becoming registered insolvency practitioners.

In reporting back to Parliament, the Economic Development, Science and Innovation Select Committee notes that solvent liquidations are more straightforward than insolvent ones, and present less risk.

“We accept that the aim of this Bill is to curb inappropriate behaviour with insolvencies, not to limit the number of competent people who can undertake liquidations,” the committee says. It recommends amendments to make it clear that “lawyers and qualified statutory accountants are listed as people who can undertake liquidations.”

The Bill is now before the Committee of the Whole House and Parliament is expected to pass it by mid-year.

While the legislation doesn’t specifically ban those with fraud and similar convictions, it will be the job of the new regulator – probably CAANZ (Chartered Accountants Australia & New Zealand) – to determine what will be required for practitioners to pass the “character” test.

LawNews knows of at least two prominent liquidators who are practising in spite of serious dishonesty convictions – one for fraud and the other for tax evasion.

Insolvency has been top-of-mind for New Zealanders in the past week, with the High Court’s long-awaited Mainzeal decision, where four former directors accused of reckless trading have been ordered to pay the liquidator $36 million, and the collapse into voluntary administration of Arrow International, a large Christchurch-based construction company.

All eyes are now on another big insolvency claim, a $20 million reckless trading suit brought by the liquidators, Rhys Cain and Rees Logan of EY, against two former directors of Stonewood Homes Ltd (in receivership and liquidation), Queenstown mayor Jim Boult and Brent Mettrick. Both have filed statements of defence but a trial date has yet to be set.

For the past couple of years, the insolvency industry body RITANZ (Restructuring Insolvency & Turnaround Association of New Zealand) has run a voluntary registration scheme.

But under current law, anyone can be a liquidator, providing he or she is over 18, is not an undischarged bankrupt or certified under the mental health legislation, is not a creditor, director, auditor or receiver of the company and has no continuous business relationships with it, and is not a banned director.

The new legislation, supported by Commerce and Consumer Affairs Minister Kris Faafoi, creates powers to restrict or ban individuals from providing insolvency services and strengthens measures to automatically disqualify them.

In submissions to the select committee, much was made of so-called “debtor-friendly” liquidators who might have conflicts of interest, fail to report director misconduct, or favour particular creditors at the expense of others.

As Faafoi told Fairfax Media (11 May 2018), “There is a certain group of practitioners out there who are falling well short of the mark…. who are not necessarily working in the best interests of creditors and shareholders.”

New insolvency law has been a long time coming. A draft Bill was first drawn up by the National Party in 2008 to create a negative licensing regime, allowing the Registrar of Companies to ban or restrict the activities of certain insolvency practitioners. Its aim was to remove the dishonest and the incompetent from the market.

A draft Bill was introduced to Parliament in April 2010. This eventually found its way to a select committee which, in May 2011, opted for a registration scheme rather than negative licensing.

In introducing the legislation more than two years later, then Commerce Minister Craig Foss referred to a “small number of practitioners who are continually under-performing and imposing significant cost on creditors and failing to discharge their statutory obligations”.

In the Bill’s most recent incarnation, some submitters to the select committee complained about the cost of setting up and maintaining a licensing regime.

But other practitioners, such as mid-tier firm McDonald Vague, point to the costs of having to clean up after non-compliant practitioners who seek their help “once the damage has been done to the insolvent estate”.

That happens, says McDonald Vague, after the non-compliant has outbid the compliant “with promises of lower fees or better results without any effective professional oversight or exposure to disciplinary processes except for recourse to the courts”.

Without licensing, it is difficult for creditors and shareholders to find cost-effective remedies if liquidators fail to discharge their statutory duties or act dishonestly, says EY’s Rees Logan. The only current options are to lay a complaint with the Registrar of Companies (where the threshold is high) or taking costly court action. The complaints process will be an important of the new framework.

The new regime will also put more onus on director certification in solvent liquidations.

Currently, under the Companies Act, directors can simply declare a liquidation to be solvent and appoint an unlicensed liquidator. No proof is required and directors face no consequences, even if they do not reasonably believe the company can pay its debts.

The select committee has recommended that directors must declare the company can meet all its obligations to creditors within 12 months that making such a declaration without reasonable grounds becomes an offence and that solvent liquidations will become insolvent if the 12-month deadline is not met.

Most insolvency practitioners broadly support the new regime though there are some notable exceptions.

Damien Grant, from Waterstone Insolvency, says evidence does not bear out the claim that regulating liquidators will make it harder for incompetents to become liquidators.

“The pool of active liquidator activity is very small and the commercial industry is self-regulating,” Grant told the select committee.

“Liquidators who obtain a poor reputation quickly fail to get repeat work and inexperienced insolvency practitioners never get appointed to the large files…. Dishonest practitioners simply do not gain traction over the medium term.”

On the issue of debtor-friendly liquidators, Grant says: “Most liquidators receive substantial referrals from accountants and legal professionals whose clients have got into trouble. The lawyer or accountant is looking for a ‘friendly’ liquidator who will not pursue their client too aggressively.

“If the liquidator ignores the preference of the referring professional and pursues the director aggressively, the referring professional will select a new liquidator for ongoing assignments.

“Regulation will not resolve this issue…. It is assumed that once the industry becomes regulated, the behaviour will improve but there is no actual evidence for this.”

ADLS will cover this topic in a CPD seminar once the Bill has passed.

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