Commerce and Consumer Affairs Minister Paul Goldsmith, who is introducing a new licensing regime for insolvency practitioners, said between 10 and 20 percent of them fall short of reasonable expectations.
Goldsmith is introducing a co-regulatory licensing system where professional bodies, such as the Recovery, Insolvency and Turnaround Association of NZ and Chartered Accountants Australia and New Zealand, will carry out the frontline regulation.
The Registrar of Companies will monitor and report on the effectiveness of their systems and processes. The Registrar would also be empowered to guard against the frontline regulators imposing excessive barriers to entry.
Provisions in the Companies Act and Receiverships Act will also be strengthened, including creditors' powers relating to appointing and replacing insolvency practitioners and providing the High Court with workable powers to remove and ban incompetent, dishonest and unprofessional insolvency practitioners.
Currently there is little financial incentive for creditors to seek to enforce the duties, particularly when practitioners liquidate small to medium sized companies (SMEs).
Hundreds of New Zealand companies go into liquidation, receivership or administration each year with outstanding debts running into many millions of dollars and Goldsmith said it was essential there is a high level of trust and transparency around the process.
In a Cabinet paper on the proposed changes, Goldsmith said most of the hundred or so practitioners who regularly take appointments administer insolvencies in a professional manner but "it appears that there are 10 to 20 practitioners at any one time who consistency fall below reasonable expectations".
Of the 2500 appointments in the year to August 2016, a significant number of liquidations were administered by practitioners with convictions under the Crimes Act and/or the Tax Administration Act, which is permissible under the current rules. Two of them accepted 98 appointments between them, the paper said.
Goldsmith said problems with "dishonesty, debtor-friendliness, and incompetence" were concentrated in SME company liquidations where typically the shareholders' investments in the company are gone so they have no incentive to appoint a good liquidator and individual creditors owed relatively small amounts don't want to incur the expense of seeking court remedies.
The new measures follow the recommendations of an Insolvency Working Group set up last year to investigate the industry, particularly problems with voluntary company liquidations and the use of phoenix companies where assets are transferred to a near-identical entity to dodge liabilities. It recommended law changes after finding too many insolvency practitioners fell well short of expected standards by overcharging or failing to protect creditors' interests.
The group identified two primary causes - that it was too easy for people to become an insolvency practitioner and a lack of accountability for poor behaviour.
Goldsmith said a small number of insolvency practitioners use their statutory powers to misappropriate money that should go to creditors. For example, in a High Court case earlier this year a liquidator was found to have forged a document and not accounted for $540,000 worth of receipts.
More commonly, self-interested practitioners overcharge for their services or carry out unnecessary work in order to get higher fees while debtor-friendly liquidators fail to comply with their statutory duty to protect creditors' interests, the minister said. There is also a wider issue with the quality of insolvency practice and a need to raise professional standards.
The changes will be made through a supplementary order paper to the Insolvency Practitioner's Bill which is currently before the House.
Licensed practitioners and professional bodies will meet the cost of the new frontline regulation, including licensing, managing complaints, disciplinary action and continuing professional development. Independent oversight and maintaining a register of licensed practitioners by the Companies Office will cost between $750,000 and $1 million per annum which will be initially met by a surplus in the office's memorandum account and then by adding the cost to the annual company return fee.
The working group also considered whether voidable transactions should be reformed, including legal changes to aid the recovery of lost funds in Ponzi schemes. A second report on that is due out early next year. The Cabinet paper suggests one solution would be voiding the transfer of a company's assets once a liquidation application has been filed, subject to certain exceptions, to make it more difficult for company directors to effect these transactions at undervalue.