Experts talk new insolvency regime and if a surge in liquidations follows wake of Delta lockdown

All practitioners must now hold a licence from the sole accredited frontline regulator, the New Zealand Institute of Chartered Accountants. Photo / 123RF

A new co-regulatory licensing regime for insolvency practitioners comes into full effect today but there are concerns it will increase costs and not address the profession's problems.

All practitioners must now hold a licence from the sole accredited front-line regulator, the New Zealand Institute of Chartered Accountants (NZICA). This finalises the implementation of the Insolvency Practitioners Regulation Act 2019 (Act), following a transitional period from September 1 last year.

During the period, practitioners were required to conclude or resign from any ongoing insolvency appointments prior to today, or obtain a licence to continue work on their appointments after the transitional period. All formal insolvency engagements such as receiverships and insolvent liquidations, both ongoing and new, must now be undertaken by a licensed insolvency practitioner (LIP).

Chartered Accountants Australia and New Zealand (CAANZ) country head Peter Vial FCA said the introduction of the new regime is an important milestone for insolvency appointments in Aotearoa.

"Insolvency practitioners have a responsibility to ensure that the assets of insolvent businesses are realised and distributed in accordance with clear rules and duties to both the insolvent party and their creditors," he said.

"The new licensing regime is integral to lifting standards and promoting quality and integrity in the profession."

As the frontline regulator, Vial said NZICA will be responsible for licensing, monitoring, and providing a complaints process to ensure insolvency practitioners are meeting the required standards.

BDO New Zealand partner Rees Logan said before September last year there were few restrictions to being an insolvency practitioner, the primary criteria simply being over 18, not subject to a mental health order and not banned as a director or bankrupt.

He also said the new regime should assist in lifting standards across the industry.

"Most advanced economies around the world have high regulated standards for insolvency practitioners and up until recently New Zealand has been an outlier in that regard," Logan told the Herald. "Before licensing and the voluntary accreditation regime, if your liquidator was not a chartered accountant and you had an issue with something they had done, you had to go to court to get resolution."

Court action is often a costly and time consuming process — out of reach for most affected creditors.

"Now, if an affected creditor has an issue with any liquidator they can lodge a complaint that can be investigated and that practitioner will be subject to NZICA's disciplinary process without the cost of going through court," Logan said.

But Waterstone Insolvency's Damien Grant told the Herald, practically, the new regime "makes very little difference" and the profession's problems have not been addressed with regulation.

"The vast majority of those who were taking appointments prior to regulation will be those taking appointments now it is fully regulated," he told the Herald.

Waterstone Insolvency's Damien Grant says the industry's issues have not been addressed with regulation. Photo / File

However, Grant said, it now becomes more difficult for those seeking to pursue insolvency as a career. He added the only viable route is to now work for an existing practice.

"This will, over time, have the effect of reducing the number of licensed insolvency practitioners, reducing choice for creditors and increasing the cost of insolvencies," he said.

"With regulation, there are a large number of additional procedures that adds very little to the transparency of insolvency but will inevitably increase the cost."

Grant said the only way to improve the performance of the industry is to make it easier for creditors to replace non-performing insolvency practitioners. He explained this would incentivise liquidators to gain a reputation for achieving positive results for creditors.

"These reforms do not do that, if anything they have made it harder. However, there are a very small number of people who have been excluded from the industry who, in my opinion, were acting unprofessionally, but equally I am aware of some very low quality practitioners have been given licenses and now have a veneer of respectability."

Jeff Meltzer of Auckland firm Meltzer Mason, which specialises in liquidations and receiverships, said insolvency practitioners who are chartered accountants have always been regulated by CAANZ but there was no such mechanism for non-chartered accountants.

"This should bring a greater level of comfort to those who engage a LIP. The insolvency industry can now be seen as a professional body with very high standards," Meltzer, who is a fellow of CAANZ, told the Herald.

"In the past, if a creditor had a concern about the actions of a liquidator, they did not know where to go. Now it is clear that CAANZ is the body who can review the actions of a LIP."

Practitioners must apply to an accredited body to obtain an insolvency practitioner licence, with NZICA currently the only accredited body in NZ.

Solvent liquidations can still be undertaken by qualified statutory accountants and lawyers, as well as by licensed insolvency practitioners.

Licensed insolvency practitioner details can be found on the Companies Office register.

Will the lockdown see a liquidation surge?

Meltzer said he was surprised how few Covid-related liquidations have occurred this year.

But he added it was inevitable more businesses will fail if levels 4 then 3 are prolonged.

"Business may just close up and not go through a formal liquidation," he said. "Creditors are showing a lot of support, and sympathy, for business owners and would prefer to give them more time to turn their business around."

Meltzer said suppliers are looking for a business to continue to trade with them as it helps their own business – it's circle of support that maybe we haven't seen before.

"As we get closer to summer, there may be some optimism from business owners that they can get through another summer trading period."

Logan said it was still too early to tell if the current lockdown would result in a surge in liquidations.

"If we have learnt anything over the last 18 months it is that we are a very resilient country," he said.

"Businesses have been through a few lockdowns now and know how it is going to affect them and what they can do to reduce cost and ride out the period of no or limited trading. As a result, businesses in general are much less anxious than last time."

However, Logan said the current restrictions will hit some businesses much harder than others, especially the hospitality, tourism and the longer level 4 continues in Auckland, construction sectors.

"The government support, wage subsidy, is kicking in for the most effected businesses and we will likely see, the IRD, which drives a significant portion of the liquidations in the country — due to arrears — will take a lighter handed approach as they have with previous lockdowns.

"This will stop any immediate significant surge in liquidations, however, we may see an increase in liquidations of businesses that have just been hanging on financially as a result of the last two lockdowns."

Grant said the enforcement by the IRD of unpaid tax "slowed dramatically" after the countrywide lockdown last year but began to markedly increase in recent months.

"We shall have to wait to see if the IRD continues with its recent trend of debt enforcement or if they elect to take a more liberal approach this time."