Nearly 10 years in the making, far-reaching legislation to establish a new regime for insolvency practitioners was passed last week.
The new Act will be phased in, with full implementation by the end of June 2020. It provides for tighter regulation, mandatory standards and stronger protection against abuse.
The Bill was first introduced in 2010 and went through four Ministers of Commerce: Simon Power, Craig Foss, Paul Goldsmith and Kris Faafoi. Initially proposing modest reform, it became a comprehensive package after the industry realised the initial Bill did not go far enough.
Submissions were called for twice: in 2010 and 2018. In 2016, there was also an opportunity to submit on the Insolvency Working Group’s report, covering the same content.
Feedback from these submission rounds found its way into the Bill through two select committee reports (May 2011 and December 2018) and through three Supplementary Order Papers in 2010, 2016 and 2018.
The major change was to shift to compulsory licensing with a public register of licensed practitioners administered by the Registrar of Companies.
The Bill initially provided for a negative licensing model; essentially an ambulance-at-the-bottomof- the-cliff approach. This would have prohibited people from practising, or placed them under supervision, if they failed to meet their obligations.
The Bill, as enacted, creates a co-regulatory system under which the Registrar of Companies will be responsible for accrediting organisations – for example, RITANZ (Restructuring Insolvency & Turnaround Association NZ) or CAANZ (Chartered Accountants Australia & NZ) will issue licences and conduct disciplinary proceedings.
They must issue a licence where the applicant meets the minimum standards (to be prescribed by the registrar). Licensed practitioners must apply for a new licence at least every five years and must satisfy ongoing competence requirements.
A person acting as an insolvency practitioner without a licence may be a fined up to $75,000.
How it will work
The requirement to hold a licence will apply to new appointments after the anniversary of the Royal Assent. There will then be a four-month period when existing accredited practitioners will be treated as licensed but, beyond that, practitioners will need to apply for licences for all new appointments.
The rest of the changes will, similarly, apply only to new appointments, after either the anniversary of the Royal Assent or a date set by Order in Council.
Section 280 of the Companies Act 1993 has been amended so only licensed insolvency practitioners can be appointed to insolvent liquidations or to voluntary administrations.
New additional disqualifications include:
- a director of, or a person with a more than 5% interest in, a creditor of the company (within two years of the liquidation), and
- a relative of certain disqualified persons.
A person will no longer be disqualified under s 280 if, in the two years before the appointment, he/she or their firm had a continuing business relationship with a secured creditor of the company.
The old provision created difficulties as many practitioners’ firms had ongoing relationships with the trading banks and other secured creditors. Further, it was never clear whether suppliers holding ‘Retention of Title’ security interests were secured creditors under the old section.
On the other hand, the categories of persons to whom the “continuing business relationship” rule applies has been expanded to include shareholders with a power to appoint or remove a director of the company (as opposed to just a majority shareholder).
Practitioners who have provided professional services to the company remain unable to act as liquidators or administrators. But a carveout enabling investigating accountants to be appointed as liquidators or administrators has been introduced.
Lawyers, accountants, or members of a recognised body may administer solvent liquidations without an insolvency practitioner’s licence.
At present, shareholders may appoint their own liquidator up to 10 working days after service of an application to liquidate. Under the new law, an appointment after that period will be possible, with consent from the applicant creditor.
Liquidators and administrators will be required to:
- prepare an interest statement disclosing relationships that could reasonably be perceived as creating a conflict of interest, the nature of the conflict and how the conflict will be managed, and
- update these statements every six months to capture any new information.
New disclosure provisions
New rules will apply to directors resolving that the company is solvent upon liquidation. All debts must be able to be paid within 12 months and a fine of up to $10,000 applies to directors who make resolutions without reasonable grounds.
Currently, practitioners’ duty to report offences is limited to specific statutes, and to report to the Registrar of Companies. Only these limited reports are protected by privilege.
The new Act expands protection for practitioners by providing for a broader range of reports to a broader range of regulators. Insolvency practitioners will be required to disclose “serious problems” to the registrar, the Reserve Bank (in respect of a licensed insurer), the police and/or other body responsible for investigating the matter, such as the Financial Markets Authority. All such reports will be protected by privilege.
“Serious problems” include offences by the company, a director, officer or shareholder, misappropriation, negligence, breach of duty, or management of the company that has materially contributed to its insolvency.
The new regime introduces further restrictions on related creditor voting in the context of voluntary administrations and liquidations.
Previously, a creditor, administrator or liquidator had to apply to the court to prevent a related creditor from determining the outcome of voting at a creditors’ meeting. Under the new regime, an administrator or liquidator must disregard a related creditor’s vote at a creditors’ meeting and the related creditor may then apply to the court to have its vote counted.
A disposition of company property made between service of a liquidation application and the High Court ordering the appointment of liquidators will be voidable unless the disposition was made:
- in the ordinary course of business of the company, or
- by an administrator or receiver, or
- under a court order.
It took a long time to get there but the destination is worth the journey. New Zealand now has an insolvency regime reflecting best international practice.
This article was published in LawNews on 21 June 2019.