Call for single, tougher law on insolvency

By JIM EAGLES

New Zealand's insolvency laws are heading for a major overhaul in a bid to boost flagging confidence in the system.

A Government review of the existing laws has yet to be completed, but at this stage the likely outcome looks like being:

* Much tougher enforcement in cases of commercial irresponsibility, including the creation of a new office of Inspector-General of Insolvency to oversee investigations and prosecutions.

* A new company rehabilitation regime aimed at enabling basically sound companies to trade their way back to solvency.

* Stricter checks on the qualifications and impartiality of the private practitioners appointed as receivers and liquidators.

* A bringing-together of the myriad laws affecting insolvency into a single statute.

The exercise, being carried out under the auspices of the Ministry for Economic Development, has been thrown into sharp focus by the controversial collapses of Tasman Pacific (alias Qantas NZ) and Hartner Group.

But it began in February, as a result of a general concern at New Zealand's insolvency regime, and is expected to reach finality towards the end of the year when recommendations for change are due to go to the Government.

The focal point of the review is a Law Commission advisory report which has just been made public. It was discussed at an Insolvency Conference in Auckland last week and is now open for comment.

The commission, which carried out extensive consultation in the commercial community, identified several areas of concern within the present insolvency regime.

It found:

* Lack of faith within the commercial community about whether responsible officials can be relied on to carry out "timely enforcement of duties affecting commercial morality."

* Fears of inadequate rules to ensure receivers and liquidators are "properly qualified and impartial."

* Concern that the standards required by a liquidator are different depending on whether the job is being done by a private insolvency practitioner or the Official Assignee.

* Dissatisfaction with the lack of clarity in the legislation governing insolvency.

* Lack of judicial expertise in insolvency matters.

* Opposition to the legal monopoly granted to the Official Assignee to administer a bankruptcy under the Insolvency Act.

Summing up its findings, the commission says there is "sufficient anecdotal evidence to justify a conclusion that there is a lack of business confidence in the state's performance of public enforcement duties designed to prevent irresponsible commercial behaviour.

"Our provisional view is that a new regulatory regime is necessary so that a fresh start can be made."

The commission says the most consistent criticism levelled against the state's role in the insolvency process is "the perceived lack of enforcement action ... as a deterrent to irresponsible or undesirable commercial behaviour" involved in either personal bankruptcies or corporate failure.

These concerns, it says, have been supported by its own investigations.

For instance, in 1998 the Insolvency and Trustee Service reported laying 261 charges and getting 111 convictions; in 1999 it obtained 75 convictions; but no criminal prosecutions or disqualification actions were taken in 2000 and the service's report for 2001 also contained no reference to any prosecutions or convictions.

The commission also notes that from time to time judges have taken the unusual step of criticising the Official Assignee, the police and the system generally for failure to make proper investigations.

In one case Sir Ian Barker, then the senior puisne judge, said an insolvency case before him demonstrated "a lowering of standards" on the part of officials and suggested the difficulties "may be more the fault of the system than of any individual."

The commission's key proposal for dealing with this lack of enforcement action is to create a new office of Inspector-General of Insolvency.

The inspector-general would have overall responsibility for investigations and prosecutions including director disqualifications.

The office would supervise other office-holders working in the insolvency area, including the Official Assignee.

It would be empowered to set enforceable standards required of insolvency practitioners appointed as receivers or liquidators.

It could also have a role in public education, particularly in regard to small creditors and debtors, on insolvency matters.

The commission says it envisages the position would be akin to that of the Chief Review Officer of the Education Review Office.

"We believe it is important that the Inspector-General of Insolvency be a person of standing who has the trust and confidence of the commercial community and established credentials in insolvency administration; perhaps a person appointed from outside the public sector."

Other recommendations for dealing with the enforcement problem include:

* Monitoring the recently established National Enforcement Unit of the Insolvency and Trustee Service to see "if enforcement action improves to an acceptable level."

* Designing a new regulatory framework.

* Combining the investigative resources of agencies such as the Serious Fraud Office, Securities Commission, Commerce Commission and Registrar of Companies into "an independent enforcement unit."

* Establishing a panel of suitably experienced senior barristers to hear applications for disqualification of directors.

* Providing for directors to be examined publicly before a Master "where there are concerns about irresponsible commercial behaviour."

The commission also looks closely at the role of the private practitioners who take on duties as liquidators and receivers. As well as placing them under the authority of the inspector-general it proposes:

* Creating some form of accreditation - possibly self-regulatory - for those acting as office-holders in a collective insolvency regime.

* Requiring any private practitioner appointed as an office-holder to certify to the court as to their qualifications and record.

Provided there are satisfactory rules governing private practitioners, the commission feels their role could be expanded to some areas currently the monopoly of the Official Assignee.

The commission report also examines the need for a specific business rehabilitation regime in cases where a business would be worth more as a going concern than if it was liquidated.

It concludes that the existing legal provisions which would allow business rehabilitation are rarely used, partly because they are considered too costly and time-consuming, but also due to them being little-known.

There is, it says, also a disincentive for debtors to agree to compromises which result in part of their debt being written off because the written-off debt could still be assessed for tax purposes.

Accordingly, the commission recommends that consideration be given to removing the tax liability under such circumstances.

It also feels there should be clearer provision for a rehabilitation regime targeted primarily at larger businesses and aimed at "maximising the value of the enterprise for the benefit of the general body of creditors."

Access to the regime would require a court order.

To give approval the court would have to be satisfied that the business record will enable a prompt assessment of its future viability; there is a real prospect creditors will accept the proposal; and that if it goes ahead, the business will be able to satisfy the solvency test.

Once an order is made, there will be a 14-day stay on all creditors' claims with provision for a further 14 days where necessary.

An impartial administrator will be appointed to carry out an investigation, negotiate with creditors, protect the assets of the business and oversee the existing management.



The commission recommends that the existing provision for statutory management of a business should remain, but as a last resort.

After examining the present legal framework the commission suggests the existing laws on insolvency - notably the Companies Act, Receiverships Act, Corporations (Investigation and Management) Act, Personal Property Securities Act and Insolvency Act - should be merged to provide a clearer framework and remove inconsistencies.

"In our view," it concludes, "the reasons in favour of a generic act are compelling.

"It is not a case of favouring one statute to make the legislation more aesthetically pleasing. Rather there are good reasons to enact a generic statute to improve the insolvency process."

* In Forum tomorrow: three views on insolvency reform.