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New Zealand Ad Hoc Government Discussion Papers |
Last Updated: 18 July 2021
Ministry of Economic Development
DRAFT
INSOLVENCY LAW REFORM BILL
Discussion Document
April 2004
ISBN 0-478-26372-4
Table of
Contents
CONSULTATION ON INSOLVENCY LAW REFORM BILL 1
Process 1
Official Information and Privacy Act Requirements 1
Disclaimer 1
1.1 Background 3
1.2 Purpose of Consulting on Draft Bill 3
1.3 Regulating Practitioners 4
1.4 Priority of Employees’ Payments in Lieu of Notice 4
2.1 Definition of “Insolvency Practitioners” 5
2.2 Problem 5
2.3 Existing Statutory and Voluntary Measures 7
2.4 Gaps in the Existing Framework 11
2.5 Options for Change 12
3.1 Current Status in Law of Payments in Lieu of Notice 23
3.2 General Principles behind the Introduction of New Priority Debts 23
3.3 Rationale for Prioritising Payments in Lieu of Notice 24
3.4 Consequences of Prioritising Payments in Lieu of Notice but Not Wages and
Salary 24
3.5 Alternative – Changing the Wages and Salary Priority 24
APPENDIX 1 - POLICY DECISIONS 29
Overview of Changes 29
I Personal Insolvency 31
II Corporate Insolvency 39
III Universal Changes 51
APPENDIX 2 - AUSTRALIAN LICENSING REGIME 65
APPENDIX 3 - CONSULTATION QUESTIONS & FORMAT 69
Questions 69
Format for Comments on Draft Bill 71
Consultation on Insolvency Law
Reform Bill Process
The Ministry of Economic Development has prepared the draft Insolvency Law Reform Bill and this discussion document after consultation with the public and other government agencies. Written submissions on the issues raised in this document are invited from all interested parties by Friday, 11 June 2004. After that date, the Ministry will evaluate submissions and seek further comments where necessary, before developing recommendations for the Government to consider.
Appendix three repeats all questions asked in this paper and outlines a standard format for commenting on specific provisions in the Bill.
Submissions should be e-mailed to insolvencyreview@med.govt.nz or sent in hard copy to:
Kristina Ryan
Insolvency Law Review
Ministry of Economic Development
PO Box 1473
Wellington
Any queries may be directed to Kristina Ryan, at the above address or:
Tel: (04) 474 2753 Fax: (04) 471 2658
Official Information and Privacy Act Requirements
The contents of submissions provided to the Ministry in response to the discussion paper and draft Bill will be subject to the Official Information Act 1982 and the Privacy Act 1993. If the Ministry receives a request for information contained in a submission, it will be required to consider release of the submission, in whole or in part, in terms of the criteria set out in these Acts.
Any statements made or views expressed in the discussion paper are the preliminary views of the Ministry of Economic Development and do not reflect official government policy.
Disclaimer
Readers are advised to seek specific advice from a qualified professional
before undertaking any action in reliance on the contents
of this discussion
paper. While every effort has been taken to ensure that the information set out
in this paper is accurate, the
Crown does not accept any responsibility whether
in contract, tort, equity or otherwise for any action taken, or reliance placed
on, any part, or all of the information in this paper or for any error in or
omission from this paper.
1. Introduction 1.1 Background
The draft Insolvency Law Reform Bill is the product of the various streams of work that have formed the insolvency law review. The government initiated the review in 1999, with Law Commission reports on priority debts and cross-border insolvency. The Ministry of Economic Development subsequently published a discussion document covering issues associated with bankruptcy administration, voidable transactions, priority debts, and cross-border insolvency. In early 2001, the Law Commission released another study paper, covering issues associated with the role of the State in insolvency, whether a business rehabilitation regime should be introduced, statutory management and whether there should be a single statute for insolvency law. The Ministry of Economic Development released a final discussion document on business rehabilitation in early 2002.
The focus of the review has been to improve the effectiveness of current insolvency laws, and to modernise them, taking into account changes in both the domestic and international environments within which insolvency laws operate. This has not required fundamental changes to insolvency law. It has, however, required adjustments to the current legislation, particularly the Companies Act 1993, and a re-write of the Insolvency Act 1967. A summary of the policy decisions taken by the government during the review is attached as appendix one.
1.2 Purpose of Consulting on Draft Bill
The purpose of the current consultation exercise is not to repeat or re-open the policy development process. Rather, it is an acknowledgement that the detail of insolvency legislation can have important implications for both insolvency professionals and the insolvent individuals and companies that they work with. We recognise that many people who work in the insolvency industry have a wealth of knowledge and experience that they have developed in the course of applying the current law. We hope to draw on that knowledge and experience so that the practical effects of changes to the legislation can be identified. This consultation exercise is also intended to help ensure that the legislation gives proper effect to the policy decisions that have been made and to minimise the risk of unintended consequences of change.
As a reflection of this purpose, we are seeking comment on the draft Bill that focuses on the following key areas:
1.3 Regulating Practitioners
The draft Bill does not contain specific registration or licensing requirements for company liquidators or administrators (who will conduct voluntary administrations under the new voluntary administration regime). The issue of regulation of liquidators was raised in the Law Commission’s 2001 Study Paper Insolvency Law Reform: Promoting Trust and Confidence. That paper suggested two possible options for reform: occupational regulation; and amending appointment procedures for liquidators. In response to that paper, the government agreed that a person should not be able to act as a liquidator if he or she has, within the two years prior to appointment, been the company’s accountant or tax adviser, or has had a continuing relationship with the company, its majority shareholders or secured creditors. These provisions are included in the draft Bill, and will apply to both liquidators and administrators.
Since this initial proposal was agreed, some members of the industry have questioned whether it will be sufficient to address the problem that some liquidators do not have the requisite skills or experience to undertake that work. It has also been suggested that greater or different skills and experience are required to be a competent administrator than are necessary to be a competent liquidator. This feedback suggests that further regulation may be needed.
These are important questions, but further information is necessary in order to make an assessment of whether additional regulation is required, and what the shape of that regulation could be. We are now seeking further comment and information from stakeholders to inform consideration of how these issues should be addressed. Section 2 of this paper discusses options for regulating company liquidators and administrators.
1.4 Priority of Employees’ Payments in Lieu of Notice
As part of the insolvency law review, the government made a series of decisions to reform the priority debt provisions in both the Insolvency Act and the Companies Act. Several of these decisions related to employee priority debt entitlements.
In early 2003, the Status of Redundancy Payments Bill was introduced into the
House and referred to the Commerce Select Committee.
The Bill sought changes to
the employee priority debt provisions in the Insolvency Act and the Companies
Act (it was enacted on 30
March 2004 as the Insolvency Amendment Act 2004 and
the Companies Amendment Act 2004). In its report, the Committee has recommended
a number of changes to the Bill, to align it with the government decisions
arising out of the insolvency law review. The Select Committee’s
report
also recommended further work on the issue of the priority status of payments
made to employees in lieu of contractual notice
provisions in the event of
insolvency. Because this issue was not specifically considered in the course of
the insolvency law review,
we are now seeking comment on it. Section 3 of
this paper discusses the issue more fully.
2. Regulation of Insolvency
Practitioners 2.1 Definition of “Insolvency
Practitioners”
This paper uses the term “insolvency practitioners” to mean liquidators and administrators. It does not include other professionals that may provide auxiliary services relating to an insolvent company, such as providing legal or forensic accounting advice to an insolvency practitioner.
2.2 Problem
Some stakeholders have suggested that there are people currently acting as liquidators who do not have the requisite skills or experience to undertake that work. An example may be where a company in a regional area appoints a local accountant to liquidate the company. The accountant may have core accountancy skills but these will not necessarily be sufficient to enable the accountant to effectively conduct the liquidation.
There have also been suggestions that a small proportion of liquidators do not have an appropriate standard of ethics in their practice. Anecdotal examples of this are liquidators who do not investigate voidable transactions or possible actions against directors because they have an association with or interest in the company in liquidation.
An additional concern of some stakeholders is that greater or different skills and experience are required to conduct administrations under the new voluntary administration procedure than are required for liquidations. Others suggested that the skills required would be similar to those required by a receiver.
A lack of skills or ethics among insolvency practitioners can adversely affect the rights of creditors and, more generally, confidence in the credit market. If an insolvency practitioner does not effectively identify assets and areas of value in a business, returns to creditors can be adversely affected. In addition, if there is a perception that appropriate action is not taken against directors who breach the law, it can affect the confidence of participants in credit markets in New Zealand.
The risk of harm to the rights of creditors and to confidence in the credit market is difficult to quantify. The level of risk will depend on how many practitioners are not operating effectively and the numbers of liquidations occurring. The degree of harm can be qualified, but again, is difficult to quantify. The key consequence of an ineffective or inefficient insolvency administration is financial harm to the company and creditors. The level of financial harm will be dependent on the nature of the failure by the insolvency practitioner. A flow on effect of financial harm can be personal or business financial failure, and significant levels of stress for individuals affected.
The likelihood or degree of harm to confidence in New Zealand credit markets
will be influenced by domestic and international perceptions
of the level of
risk associated with our regulatory system. Again, these perceptions are
difficult to measure or quantify. However,
there is an identifiable risk that
negative perceptions would act as a barrier to both domestic and cross-border
credit and capital
flows. The extent of this risk in a cross‑
border
setting may be influenced by the degree to which New Zealand law conforms with
international standards and the regulatory regimes
of our major trading
partners. The World Bank Principles and Guidelines for Effective Insolvency and
Creditor Rights Systems1 include Principle 35, which relates to the
competence and integrity of insolvency administrators. This Principle emphasises
the importance
of specific insolvency qualifications and the maintenance of
knowledge through continuing education or experience. Australia and
the United
Kingdom both have licensing systems for insolvency practitioners, while in the
United States, insolvencies are administered
by the United States Trustee, an
officer of the Executive.
The absence of a registration regime for insolvency practitioners also affects the ability for New Zealand practitioners to operate in Australia. The New Zealand and Australian Trans-Tasman Mutual Recognition Acts apply to trade in services between New Zealand and Australia. The Trans-Tasman mutual recognition principle applicable to occupations is that an individual who is registered in a jurisdiction for an occupation is entitled to be registered in the other jurisdiction for the equivalent occupation. Because New Zealand does not have a registration regime for insolvency practitioners, the mutual recognition principle will not apply. This could become a barrier to the effective administration of insolvencies involving companies that operate on both sides of the Tasman.
Questions
1 The World Bank, April 2001
2.3 Existing
Statutory and Voluntary Measures
2.3.1 Composition of the insolvency profession
Currently, insolvency practitioners are lightly regulated by the Companies Act but are not required to have particular qualifications or levels of education, nor do they have to belong to any professional organisation. Consequently, there is no official record of the number of insolvency practitioners or their qualifications.
In practice, there appears to be a relatively small number of specialists undertaking insolvency work. INSOL New Zealand estimates that approximately half of its 210 members are Chartered Accountants and most of its other members have accountancy qualifications and skills. Lawyers do not generally undertake insolvency work, but often act as advisers to insolvency practitioners.
While specialists undertake the majority of insolvency work, some work is done by accountants without specialist insolvency expertise. This appears to be more common in rural areas.
2.3.2 Legislation
The Companies Act 1993 already imposes some restrictions and controls on liquidators. The draft Insolvency Law Reform Bill proposes equivalent provisions for administrators and a new restriction on anyone closely involved in the business being appointed as a liquidator or administrator.
2.3.2.1 Restrictions on appointment of liquidator / administrator
Under section 280 of the Companies Act, there are various restrictions on who can be appointed as a liquidator. In particular, unless the Court orders otherwise, the following people cannot be appointed:
In addition, the draft Bill proposes (clause 433) to amend section 280 by restricting the appointment of any person who, within the previous 2 years:
has or whose firm has provided accounting services to the company; or
has had a continuing relationship with the company, its majority shareholders or secured creditors.
The draft Bill extends these restrictions to the appointment of administrators (clause 424, new CA section 239F).
2.3.2.2 Supervision of liquidators
Section 284 of the Companies Act, gives the Court the power of supervision over liquidators. This power includes the ability to:
In addition, section 286 of the Act gives the Court the power to enforce the various duties of a liquidator under the Companies Act. These duties include the principal duty to:
Particular powers of the Court in relation to these duties include:
The duty of a liquidator to notify the Registrar of suspected offences has an associated offence provision, with the penalty of a fine not exceeding $10,000.
The draft Bill (clause 424, new CA section 239ADO) will introduce broad supervisory powers over administrators’ whose conduct or management of a company is prejudicial to creditors’ interests. The Court will be able to order an administrator to remedy a default such as failing to comply with a requirement to file a document or to give notice (clause 424, new CA section 239ADP). It will also have the power to remove administrators (clause 424, new CA sections 239R & 239ACF).
2.3.3 Self-Regulation
New Zealand does not have a licensing regime for insolvency practitioners. However, it appears that most practitioners are accountants, while a minority may be lawyers. Accountants who are members of the Institute of Chartered Accountants are bound by the Institute’s rules and standards. Lawyers are regulated under the Lawyers and Practitioners Act 1982 and will be regulated under the Lawyers and Conveyancers Bill when it is enacted.
2.3.3.1 Institute of Chartered Accountants of New Zealand
The Institute of Chartered Accountants of New Zealand has almost 27,000 members. Membership is voluntary.
The Institute maintains rules on the ethical considerations to be taken into account by members. Under those rules, except where the liquidation is a solvent liquidation, a member or any person in that member’s firm cannot act as a liquidator of a company where that member or another person in that member’s firm has, or has had during the previous two years, a continuing professional relationship with a company (including an appointment as a receiver). However, a continuing professional relationship does not include the appointment of a member as an investigating accountant at the instigation of a third party.
In addition, ICANZ requires members who propose to accept an insolvency assignment to have undertaken a specified level of education in relation to insolvency law and practice and to have had the requisite practical experience. This involves completion of at least five insolvency assignments with an experienced insolvency practitioner over a 5-year period or the completion of 2 years’ extensive experience in the field where not less than 50 percent of the member’s working time has been spent dealing with insolvency assignments.
Complaints about Chartered Accountants are considered by the
Institute’s Professional Conduct Committee (The PCC). The PCC may
arrange
for mediation of disputes or it may investigate a dispute. If a dispute is
investigated, it may decide to progress the complaint
to a final determination
hearing. The outcome of this can be an admonishment, a consent
order for
penalties such as a fine, a reprimand or severe reprimand, or referral of the
matter to the Institute’s Disciplinary
Tribunal. The Tribunal can impose a
number of penalties, including:
Accountants who are not members of the Institute may still practice as accountants but are not bound by the Institute’s ethical rules and standards, and cannot advertise themselves as a Chartered Accountant.
2.3.3.2 New Zealand Law Society
Lawyers are regulated under the Law Practitioners Act 1982 and have a professional obligation to comply with the Rules of Professional Conduct made by the New Zealand Law Society.
The Rules address matters such as professional independence and conflicts of interest – issues that have been raised by insolvency practitioners. In particular, a lawyer (including a lawyer acting as an insolvency practitioner) must not act:
or continue to act for any person where there is a conflict of interest between the lawyer and an existing or prospective client; or
for more than one party in the same transaction without the prior informed consent of all parties; or
for a client against a former client when, through prior knowledge of the former client or their affairs, to act would or has the potential to be detrimental to the former client, or could be expected to be objectionable to them.
All lawyers with current practising certificates belong to one of the 14 district law societies in New Zealand. District law societies are independent bodies, with their own separate powers that require them to investigate complaints about their members.
Part VII of the Law Practitioners Act deals with the complaints and disciplinary processes at both a national and district level. District law societies can investigate complaints against lawyers. If a matter is sufficiently serious, the society can lay a charge against the lawyer with either the District Disciplinary Tribunal or the New Zealand Law Practitioners Disciplinary Tribunal. These tribunals have various powers, including censure, fines, restriction of practice and the ability to strike a lawyer off the roll of barristers and solicitors. The High Court is also able to strike lawyers off the roll.
If the complainant is not satisfied with a district law society’s
treatment of a complaint, he or she can make a complaint to
the Lay Observer for
the region. The Lay Observer is a government-appointed non-lawyer, whose task is
to examine such allegations.
The Lay
Observer can investigate and report on
complaints, and may make recommendations to the district law society. If the Lay
Observer is
not satisfied with the district law society’s response to its
recommendations, he/she may require the matter to be referred
to the New Zealand
Law Society for review.
Part IX of the Law Practitioners Act also provides for the Solicitors’ Fidelity Guarantee Fund. Clients who have suffered financial loss because of theft by a solicitor or a solicitor’s employee or agent, and who cannot recover the money through other avenues, may claim reimbursement from the fidelity fund.
The Lawyers and Conveyancers Bill will remove compulsory membership of the New Zealand Law Society. However, all lawyers will continue to be regulated by the Bill and by practice rules. The Bill introduces a more effective complaints and disciplinary regime. The Bill also provides for the establishment of a Lawyer’s Fidelity Fund to compensate persons who suffer loss as a result of theft of money entrusted to lawyers. In addition, the New Zealand Law Society may require, via practice rules, on-going legal education in particular areas of practice.
2.3.3.3 INSOL New Zealand
INSOL New Zealand has approximately 210 members. It is essentially an industry organisation, which provides its members with support and ongoing opportunities for professional development. It does not have formalised entry requirements or complaints and disciplinary procedures. However, it does refer any complaints received about practitioners who are members of professional bodies to those bodies.
2.4 Gaps in the Existing Framework
As outlined in section 2.2, the Companies Act places some restrictions on who can act as a liquidator. These will be extended by the Bill to apply to administrators. There is no requirement for insolvency practitioners to obtain particular qualifications or experience or to belong to a professional body. There is no universal ethical code for insolvency practitioners. Nor is it necessary to register or obtain a licence to act as a liquidator or administrator.
The current framework also gives the Courts some powers to supervise liquidators’ conduct and enforce liquidators’ duties. There is, however, no regulator or regulatory body to oversee the profession and investigate possible misconduct. Consequently, cases of misconduct may not be brought to the Courts’ attention. Nor is there an alternative, non-litigious mechanism for dealing with misconduct, unless the liquidator is a member of the Law Society or the Institute of Chartered Accountants.
The Courts can make orders to compel a liquidator to remedy a breach of duty or to remove a liquidator from office. However, there is no power to order a liquidator to compensate a company if it has suffered losses because of the liquidator’s negligence or malfeasance.
It is possible that the problems identified in section 2.2 could be mitigated
if some or all of those gaps in the existing framework
are addressed.
2.5
Options for Change
This section discusses three options for improving the regulation of liquidators and administrators:
Any of these options could be implemented on its own. Option one could be implemented with either option two or option three.
2.5.1 Option One – strengthen existing statutory measures
The existing statutory measures could be enhanced by:
increasing the Registrar of Companies’ powers of oversight and
enforcement; and/or introducing new remedies; and/or
expanding the
liquidator’s duty to report suspected offences).
2.5.1.1 Registrar’s powers of oversight and enforcement
Giving the Registrar of Companies explicit oversight of liquidators and increased enforcement powers could enhance enforcement of the existing restrictions and duties applicable to liquidators.
Some stakeholders have raised concerns about the adequacy of existing powers of enforcement. Under section 286 of the Companies Act, the Official Assignee can seek a court order to enforce a liquidator’s duties, to remove a liquidator, or to prohibit a liquidator from acting as a liquidator or receiver. However, except as a result of a vacancy in the office, the Official Assignee has no investigation powers and no inherent responsibilities relating to liquidators’ conduct.
At the same time, section 365 of the Companies Act gives the Registrar of Companies powers of inspection to determine whether:
Where there is misconduct by a
liquidator, the Registrar will only have grounds to investigate if the
liquidator’s action may
amount to an offence under the Act. The Registrar
has no power to carry out any investigation into the general conduct of
the
liquidator. Nor can the Registrar apply to Court for compliance orders,
the removal or the banning of a liquidator or to prohibit
a liquidator from
acting as a liquidator or receiver.
If the role of the Registrar were expanded to include explicit oversight and enforcement powers, it would allow for more effective enforcement of existing remedies against liquidators. A more visible role for the Registrar could also encourage greater compliance within the industry.
This option could increase costs for the Registrar. However, these costs should be modest because the Registrar already has the necessary infrastructure, through its National Enforcement Unit, to undertake investigations.
2.5.1.2 Strengthen remedies against non-compliance
In conjunction with or instead of expanding the role of the Registrar of Companies, the remedies available to the Court in the event of non-compliance could be strengthened.
Compensatory orders
Under section 286 of the Companies Act, the Court can make various orders to remedy a breach or remove a liquidator from office. However, there is no provision to order compensation to the company, which may be negatively affected by the liquidator’s breach of duty. There may be a case for empowering the Court to make compensatory orders.
The Australian approach might be a useful model for New Zealand. Under the Australian Corporations Act, where the Australian Securities and Investments Commission (ASIC) considers that there has been misfeasance, neglect or omission on the part of a liquidator, ASIC may report that matter to the Court. The Court may order the liquidator to make good any loss that the corporation has sustained because of the conduct and may make such other orders as it thinks fit.
ASIC can also use a general power to apply to the Court where ASIC believes any person (including an external administrator) is guilty of fraud, negligence or breach of trust in relation to a corporation and that corporation has suffered, or is likely to suffer loss or damage as a result. On hearing the application (and giving the person an opportunity to present evidence), the Court may make such orders as it thinks appropriate, including orders that the person concerned pay or transfer money to the corporation, or compensate the corporation.
Offences for breaches of duty
Currently, the Companies Act has only one relevant offence provision, which relates to the liquidator’s duty to notify suspected offences. In that case, a conviction gives rise to a fine not exceeding $10,000. There may be a case for creating further offence provisions linked to specific liquidators’ or administrators’ duties in the Companies Act.
Strengthening the remedies and/or penalties against practitioners would
provide additional incentives for practitioners to undertake
their duties in
accordance with the law. These incentives will be stronger if the penalties are
more severe, for example, if offences
are introduced. However, any liability or
penalty must be proportionate to the potential for harm arising out of the
breach of duty.
Concern about potential liability for compensation
or a
conviction could, otherwise, act as a disincentive to people entering into, or
remaining in the profession.
2.5.1.3 Strengthen reporting requirements
Section 258A of the Companies Act requires liquidators to notify the Registrar where they consider that the company or any of its directors has committed an offence under the Companies Act or any other specified Act.
Under the provisions in the Bill (clause 424, new CA section 239AG), administrators will be required to report to the Registrar if they suspect that:
a past or present officer or shareholder of the company has been guilty of an offence in relation to the company; or
a person who has taken part in the formation, promotion, administration, management or winding up of the company may have misapplied, retained or become liable or accountable for money or property of the company, or may have been guilty of negligence, default, breach of duty or breach of trust in relation to the company.
These provisions are based on requirements for administrators in Australia.
The Companies Act requirements for liquidators could be extended to be consistent with those provisions so that, like administrators, liquidators are required to notify suspected breaches of the law (including, for example, breaches of directors’ duties), as well as suspected offences.
It may also be appropriate to extend the list of legislation in regard to which a liquidator is required to report possible offences. Additions might include the Securities Markets Act 1988 and the Receiverships Act 1993. Alternately, it may be desirable to extend the reporting obligation to any offences in relation to the company, as with administrators.
A benefit of extending liquidators current reporting obligations is that the Registrar will receive more information about potential breaches, making it more likely that breaches can be identified and pursued.
However, in some cases, it may be difficult for practitioners to identify
breaches. Placing additional reporting requirements on practitioners
could add
to their workload and/or potential liability. A significant increase in workload
could increase the cost of the liquidation,
ultimately affecting returns to
creditors.
Questions
2.5.2 Licensing
New Zealand does not have a licensing regime for insolvency practitioners. However, as noted previously, most practitioners appear to be accountants and, if they are chartered accountants, they are regulated under the Institute of Chartered Accountants of New Zealand Act 1996. Some practitioners may be lawyers and therefore be regulated under the Law Practitioners Act 1982. Specialist licensing for insolvency practitioners is another option that could strengthen the current framework either alone or in conjunction with the enhancements to the existing statutory regime proposed in the preceding section.
Licensing regimes typically prohibit all but licensed people from undertaking certain functions. The granting of a licence is usually dependent on a person meeting and maintaining certain prescribed standards. These often include education requirements, standards relating to character or fitness, minimum levels of experience, and mandatory insurance or bonds. A licensing regime would also require an assessment body, and a body to supervise and enforce the requirements.
This section of the paper discusses issues relating to standards, assessment, supervision and enforcement. It then goes on to discuss the benefits and costs that are associated with a licensing regime.
2.5.2.1 Standards of education and experience
Licensing regimes often require minimum levels of education and experience
before a licence will be granted. The purpose of such requirements
is to ensure
that practitioners have the necessary knowledge and skills to carry out their
work effectively, efficiently, and in
compliance with the law and other
applicable standards.
Appendix two outlines the Australian approach to
licensing insolvency practitioners. Australian law requires that an applicant
must be:
A member of the Institute of Chartered Accountants of Australia, the Australian Society of Certified Practising Accountants, or one of a number of comparable bodies in New Zealand, the United Kingdom and the United States; or
Hold tertiary qualifications in accounting and commercial law; or
Have other qualifications and experience that, in the opinion of the Australian Securities and Investments Commission (ASIC), are equivalent to the above qualifications.
ASIC must also be satisfied:
as to the experience of the applicant in connection with the winding up of bodies corporate; and
that the applicant is capable of performing the duties of a liquidator and is otherwise a fit and proper person to be registered as a liquidator.
ASIC Policy Statement 40 sets out ASIC’s requirements for relevant experience. It specifies that an applicant will usually be required to:
have had at least five years in public practice;
have obtained a wide range of experience in external corporate administrations under the direction of an official liquidator for a continuous period of not less than three years, including winding-up companies, receiverships, reconstructions and voluntary administrations; and
have supervised external corporate administrations on a full-time basis for at least two consecutive years during the five years immediately before the date of application.
There has been some discussion in Australia about the appropriateness of the required education and experience standards. The issues are also relevant in the New Zealand context.
In 1997, an Australian government working party reviewed the regulation of corporate insolvency practitioners.2 It concluded that the entry requirements could encompass people from outside the accountancy profession without adversely impacting on standards. The working party considered that, while both accounting and legal skills were important, these skills could be gained through obtaining external advice, as long as the practitioner has the ability to correctly interpret and apply the advice received. It also noted that obtaining tertiary qualifications was a preferable, but not the only, means of obtaining the necessary knowledge and skills in those disciplines – these skills could also be gained through experience in insolvency work.
2 Review of the Regulation of Corporate Insolvency Practitioners
Report of the Working Party, Australian Commonwealth Government, June
1997.
Another relevant issue is whether legal/accounting skills, or even
insolvency skills, are the most appropriate skills for practitioners
undertaking
voluntary administrations. It can be argued that a practitioner who is focussed
on and experienced in the technical aspects
of a liquidation does not
necessarily have the skills to support the rehabilitation of a
company. In
this case, significant business management or turnaround management skills may
be more appropriate.
2.5.2.2 Ethical standards
Some licensing systems require practitioners to adhere to ethical standards. These standards are often backed up by a disciplinary mechanism, which may include the ability to censure and de-license a practitioner.
Explicit ethical standards can help ensure that practitioners act appropriately and professionally. This can mean that administrations are conducted more efficiently and in the interests of all parties, i.e. the company and all creditors. As noted in section 2.3.3, both chartered accountants and lawyers are required to comply with their respective profession’s ethical standards but they apply only to practitioners who are members of those organisations.
It is not clear whether universal standards are needed to address problems within the insolvency profession. In Australia, there are no ethical and professional regulatory standards applicable to insolvency practitioners. The Working Party tasked with reviewing Australia’s regulation of corporate insolvency practitioners did not recommend any change on the basis that it is preferable to leave these matters to the marketplace. The Working Party thought that practitioners who are bound by a code of practice and ethics will be able to use that to their advantage in attracting clients.
2.5.2.3 Ongoing requirements, supervision and enforcement
Some jurisdictions require practitioners to demonstrate ongoing competence in order to retain their licence. This may be in the form of continuing training requirements or a minimum period of time working in the occupation. Such requirements are intended to ensure that a practitioner retains a sufficient level of skill to be able to effectively administer an insolvency proceeding. There are, however, issues around the efficacy of such requirements. Requirements that are too onerous could make compliance time-consuming and expensive, without necessarily raising the industry’s’ skill level.
Australian legislation does not require insolvency practitioners to comply with any ongoing training, education or experience requirements. However, the Working Party tasked with reviewing Australia’s regulation of corporate insolvency practitioners recommended that there should be an ongoing requirement for practitioners to undergo continuing professional education as agreed between the professional bodies and ASIC. It also recommended that ASIC be permitted to require a registered liquidator who does not perform any substantive insolvency work over a period of five years to show cause why his or her registration should not be cancelled.
A related issue is the ongoing supervision of practitioners and the
enforcement of licensing requirements. Supervision could include
regular
reporting by practitioners. It could also
include surveillance and
investigation by a regulator or an organisation established to undertake
regulatory functions. The purpose
of supervision is to monitor whether
practitioners are meeting ongoing requirements. It enables remedial or
enforcement action to
be taken against the insolvency practitioner.
The usefulness of reporting and surveillance needs to be balanced against the potential costs of the system. These will include costs incurred by the regulator or regulatory organisation in analysing reports or undertaking surveillance, and costs incurred by practitioners in preparing reports and liaising with the regulator or regulatory organisation.
Any system of reporting and supervision would need to be backed up by adequate enforcement mechanisms. These may be punitive or remedial. In Australia, the Companies Auditors and Liquidators Disciplinary Board, which is established under legislation, is entitled to suspend or cancel a liquidator’s registration and in certain circumstances reprimand, or require an undertaking that a person will not engage in certain conduct. The Disciplinary Board acts on a referral of a matter from ASIC.
The Disciplinary Board’s role is complemented by ASIC’s role of remedial supervision, which is aimed at providing a remedy for an inappropriate act or omission by a practitioner in a particular matter. ASIC has powers to inquire into the conduct of any insolvency practitioner where it receives complaints from any person regarding the practitioner’s performance of duties. ASIC may also initiate an inquiry where it appears that a practitioner is not faithfully performing his or her duties/functions, or has breached / is not observing a requirement of the law.
If a system of ongoing supervision were introduced in New Zealand, a key
question is who should be conduct that supervision. The Registrar
of Companies
currently undertakes registration and investigation and enforcement activities,
but does not undertake
qualitative assessments based on statutory criteria.
If these sorts of functions were to be undertaken by a government agency, it
would be necessary to decide whether to extend the Registrar’s role or to
establish a new body. This could be either a central
regulator or a specialist
organisation (such as a licensing board) established to carry out those
functions. A specialist board may
be better placed to draw on specialist
expertise to assist its functions, and to maintain a core focus on
insolvency-related issues.
Under either option, the regulator or regulatory organisation would require
sufficient funding to enable it to undertake these activities.
Funding options
could include funding by government or funding either partially or fully through
cost-recovery mechanisms such as
an industry levy or licensing fees. For
chartered accountants and lawyers who act as insolvency practitioners, such
levies or fees
would be in addition to the existing levies and fees they pay via
their respective professional bodies. Given the small size of the
insolvency
profession in New Zealand, cost-recovery mechanisms are unlikely to recover
sufficient funding for these regulatory functions.
In addition, such
cost-recovery mechanisms are not targeted at all of the beneficiaries of the
system – in this case the beneficiaries
are the transacting public (i.e.
potential creditors) as well as insolvency practitioners.
2.5.2.4
Mandatory insurance or security deposit
Some jurisdictions require practitioners to be able to demonstrate an ability to financially recompense parties who suffer loss or damage as a result of a practitioner’s default, through schemes such as mandatory insurance or a security deposit. Lawyers in New Zealand must contribute to the Solicitors’ Fidelity Guarantee Fund, which protects against theft. Most lawyers also have professional indemnity insurance. Under the Lawyers and Conveyancers Bill, the Fund will continue as the “Lawyers’ Fidelity Fund”. The New Zealand Law Society may also, under that Bill, make indemnity rules that could require all lawyers, or any class of lawyers, to hold professional indemnity insurance.
The mandatory insurance or security deposit schemes ensure that there are resources available to meet any claims against a practitioner. However, such schemes have costs for practitioners in the form of either insurance premiums or the costs of obtaining a security deposit. These costs could deter entry into or continuation in the profession. Security deposits could also prevent capital from being used for more productive purposes. The costs of existing professional body requirements for chartered accountants and lawyers who act as insolvency practitioners also needs to be taken into account.
Because of these costs and risks, mandatory insurance or security deposit schemes should only be adopted where there is a clear and overriding benefit in having these requirements. Such a benefit would be evident if, for example, identifiable problems had been raised under the current law with liquidators unable to meet claims against them in their professional capacity. The Ministry is not aware of such problems to date, although more rigorous monitoring of practitioners’ activities could increase the likelihood of claims being brought against them.
2.5.2.5 Overall effects of licensing
In the insolvency context, a licensing regime would be implemented to protect against the harm that could result from allowing ineffective insolvency professionals to practice. In assessing the effects of a licensing regime, an important question is whether the regime will reduce the risk of that harm occurring. To answer this question, it is important to consider the current self-regulatory environment, the gaps in the coverage of that self-regulation, and the nature and degree of any problems that are currently experienced.
An efficient regulatory regime should effectively target identified problems, without imposing unnecessary costs. In assessing costs, the costs of existing professional regimes also need to be taken into account. The costs of regulation arise from a number of factors and include:
2.5.2.6 Transitional arrangements/ recognition of existing regulation
Another key issue with adopting a new licensing or registration regime would be whether, and how, existing practitioners should be transitioned into that regime. There are trade‑offs associated with transitional arrangements. For example, granting existing practitioners automatic entry into the regime may not solve current problems of inadequate skills or competence. Imposing continuing training or experience requirements may mitigate this. If entry to the regime is not automatic, the regime could significantly reduce the number of practitioners who are permitted to undertake insolvency work, particularly in the short term. This could be particularly acute in New Zealand, given the relatively small number of insolvency practitioners here.
Questions
What sort of education and experience requirements do you think would be appropriate for insolvency practitioners? Do you see accounting and/or legal qualifications as necessary? Should significant levels of insolvency practice be an alternative requirement? Should the requirements be different for liquidators and administrators?
Do you consider that specific ethical requirements are necessary? Why or why not?
Do you consider that there should there be ongoing qualifications or experience requirements for practitioners? What are your reasons?
Do you consider that there should be ongoing supervision and surveillance of practitioners? Should there be an enforcement mechanism (in addition to the current professional regimes for chartered accountants and lawyers who act as insolvency practitioners) for when insolvency practitioners fail to observe requirements? What would be the important features of such oversight and enforcement mechanisms?
Do you consider that a government appointed regulator, such as the Registrar of Companies, or an independent specialist regulatory organisation, should undertake any oversight and enforcement functions? What would be the most appropriate method of funding the regulator or regulatory organisation?
2.5.3 Voluntary accreditation
A third option, which could also be implemented alone or in conjunction with
the changes to the Companies Act that are discussed in
section 2.5.1, is a
voluntary accreditation system.
Under such systems, an agency is empowered by
statute to certify to the public that accredited individuals have satisfied
particular
requirements for demonstrating
competence in a particular field. A
certified practitioner is given the exclusive right to use a certain title.
Practitioners who
are not licensed can offer their services in competition with
certified practitioners, but under a different title. The purpose of
certification is to enable the public to have assurance that an accredited
practitioner has met certain standards.
This model applies to chartered accountants. The title “chartered accountant” can only be used by a person who is entitled to use it under the Rules of the Institute of Chartered Accountants of New Zealand (ICANZ). The Rules also provide for:
If an accreditation system for insolvency practitioners were to be adopted in New Zealand, it would be necessary to mandate an organisation to carry out the required self-regulatory functions. This raises the question of whether there are enough insolvency practitioners operating in the New Zealand market to support the infrastructure required by such an organisation. It may also be difficult to establish an accreditation system unless there is sufficient commitment within industry to ensure that the system is both credible and effective.
One possibility may be for an existing organisation, such as INSOL or ICANZ,
to fulfil these functions. Another possibility would
be to establish a New
Zealand arm of an Australian insolvency organisation. The latter option would
have the further benefit of
allowing an alignment between the substantive
features of the regulation on both sides of the Tasman. This could facilitate
both the
trans-Tasman trade in insolvency services and the efficiency of
cross-border insolvency proceedings.
A risk with accreditation regimes is that they may create incentives for self-regulatory organisations to establish unnecessarily high standards. If standards go further than is necessary to ensure the objectives of regulation are met, they may create an unnecessary barrier to entry into the occupation. This could lead to a reduction in the number of people entering the occupation and reduced competition amongst members of the profession. Lack of competition may result in increased prices for consumers who seek services from members of the profession. In the case of insolvency practitioners, any increase in the cost of a being practitioner will also impact on the pool of money available to creditors.
Branding is an important feature of accreditation regimes. The system relies on consumers seeking practitioners who brand themselves in a particular way. There are two features of this system that should be highlighted. First, it does not prevent unbranded people from operating in the market. If there are significant irreparable risks from allowing unaccredited people from operating in the market, accreditation may not be an appropriate mechanism for regulating a profession. Secondly, it relies on the ability of consumers to realise the distinction between a regulated and an unregulated practitioner and to choose the appropriate person to undertake the required task.
In the case of insolvency practitioners, an unregulated practitioner is unlikely to pose a significant irreparable risk. However, it may be argued that insolvency “consumers” are not well placed to be able to choose between a regulated and an unregulated practitioner. This is because the people who are primarily affected by an insolvency practitioner’s actions are the creditors of the insolvent company. While in some circumstances an insolvency practitioner is appointed by the court on the application of a creditor, the company is also able to appoint a practitioner itself. In addition, a practitioner who is appointed on the application of one creditor may not necessarily be the practitioner who is preferred by other creditors.
Questions
Do you consider that, given the size and composition of the New Zealand insolvency profession, it would be feasible to adopt an accreditation regime?
Do you consider that there would be any risks that an accreditation regime would not
be effective in addressing any problems identified because of the limited ability for those affected by a practitioner’s actions to choose the practitioner?
Do you consider that the risk of the bar being raised too high would be a
significant concern if an accreditation system was adopted
for insolvency
practitioners?
3. Payments in Lieu of Notice 3.1 Current Status in
Law of Payments in Lieu of Notice
Payments in lieu of notice are treated in law as payments of wages or salary
for the notice period. Although an employee has a legal
entitlement under the
Wages Protection Act for payment in lieu of notice, these wages will only have a
priority in an insolvency
if they fall within the wages and salary priority debt
provisions of the Companies Act or the
Insolvency Act.
These Acts currently confine the priority to wages and salary to payments for services rendered to the employer during the four months preceding the commencement of the liquidation or bankruptcy. Therefore, any payment for work done after the commencement of the liquidation or bankruptcy will not be subject to a priority. Equally, any payment for a notice period that occurs or continues after the commencement of the liquidation or bankruptcy will not receive a priority.
3.2 General Principles behind the Introduction of New Priority Debts
The insolvency law review proceeded on the key principle that, with limited exceptions, a debtor’s assets should be distributed to all creditors equally in proportion to the size of their admitted claims. This recognises the effect of priority debts on other unsecured creditors, and the concern that unsecured creditors will not participate in the insolvency system if they believe they will not recover anything. This can discourage financing and investment and therefore inhibit business innovation.
The review concluded that new statutory preferences should only be created if they:
These criteria should be considered carefully before changes are made to statutory priority provisions.
3 Payments in lieu of notice are payments that an employee would
receive instead of wages or salary for a contractual period of notice
prior to
termination of employment (note that a reasonable period of notice is implied
into all employment contracts).
3.3 Rationale for Prioritising Payments in
Lieu of Notice
The main rationale presented for prioritising payments in lieu of notice is that these payments are money to be paid out in the event that employment is terminated and should be treated in the same way as redundancy payments (the Status of Redundancy Payments Bill proposes to include redundancy entitlements within the statutory priority given to wages and salary).
3.4 Consequences of Prioritising Payments in Lieu of Notice but Not Wages and Salary
If payments in lieu of notice were prioritised, an employee who worked after the commencement of the liquidation or bankruptcy would not be entitled to a priority for wages or salary for that work, but an employee who received notice and did not work through that period would be entitled to a priority. This could be anomalous in the sense that payments for wages and salary would be given priority status only when an employee does not actually work through the notice period. It could also be seen as unfair to employees who have continued working through a notice period.
3.5 Alternative – Changing the Wages and Salary Priority
An alternative solution would be to extend the priority for wages and salary beyond the commencement of the liquidation or bankruptcy. Payments would be treated in the same way as redundancy payments, with the effect that employees who receive an entitlement for payment in lieu of notice would have that payment prioritised. Equally, an employee who works beyond the commencement of the liquidation or bankruptcy would receive a priority entitlement to wages or salary for that work done.
However, changing the priority in this way could have other significant consequences. As a general principle, creditors’ claims are set at the point of liquidation. Extending the priorities beyond the commencement of a liquidation or bankruptcy would potentially delay distributions to all creditors. This is because a liquidator or the Official Assignee may not have sufficient certainty about whether an obligation for payment of wages will arise, or the extent of that obligation, until some time after the commencement of the liquidation.
Such a change would also have potentially significant flow-on effects for other creditors. While not all employment contracts contain redundancy provisions, every employee is entitled to reasonable notice of termination of his/her employment contract or payment in lieu of notice, irrespective of whether there is a written contract recording such entitlement.4 The practical consequence of extending the wages/salary priority to include an entitlement to payment in lieu of notice would be a potentially greater amount of funds being paid to employees as preferential creditors and less funds available to unsecured creditors.
4 Stuart v Armourguard Security Ltd [1996] 1 NZLR 484
Questions
Do you consider that payments in lieu of notice should be included within the employee priority debt provisions? What are your reasons?
Do you agree that it would be anomalous to extend payments in lieu of notice past he point of liquidation, but not wages and salary?
Do you agree that prioritising payments in lieu of notice could delay payments to all creditors?
Appendix One
Summary of Policy Decisions
Appendix 1 -
Policy Decisions Overview of Changes
During the course of the insolvency law review, the Government decided to introduce changes in the following areas.
Personal Insolvency:
II Corporate Insolvency:
Enforcement of liquidators duties – new options for funding insolvency litigation will be introduced.
Phoenix companies – resulting in a decision to introduce measures aimed at deterring the improper use of phoenix companies to defeat the legitimate interests of creditors. These include a new offence for directors who, with the intent to defraud a creditor, cause the creditor material loss.
III Universal changes to both personal and corporate insolvency:
proceedings. It will apply in New Zealand to proceedings relating to bankruptcy, liquidation, receivership, judicial management, statutory management, and voluntary administration.
The policy decisions relating to those topics are set out in the following sections of this Appendix.
Personal Insolvency
Except as otherwise noted, the following changes will be introduced by the Bill with consequent amendments to the Insolvency Act 1967 (“Insolvency Act” or “IA”), the Insolvency Rules 1970, the Insolvency (Priorities) Order 1988 and the High Court Rules.
Bankruptcy Administration
- there will be a statutory ability for the court to grant a stay of advertising
of bankruptcy pending an appeal or rehearing;
- there will be a minimum specified liability threshold of $1,000 for debtors'
and secured creditors' petitions;
- section 29 will be clarified so that an estate does not need to be assigned
to an individual Official Assignee;
- postal votes will be allowed at creditors' meetings;
- there will be a 25 working day timeframe for the Official Assignee to send
first reports to creditors;
- it will be clarified that debtors may have representation at meetings;
- the Official Assignee will have a discretion to make an allowance of funds
for the support of the bankrupt or their family;
- the current section 54(4) will be repealed (voidable contracts entered into
in consideration of marriage);
- provisions relating to the disclaimer of onerous property and termination
of contracts will be replaced with a provision similar to section 269 of the Companies Act (power to disclaim onerous property);
- it will be clarified that orders for reparation are not provable/dischargeable
debts in bankruptcy;
- the Official Assignee may set a date by which proofs of debt are to be
filed;
- the current provision relating to secured creditors' proofs of debt will be
amended so it is consistent with section 305 of the Companies Act (rights and duties of secured creditors);
- the current section 94 (interest claimable in a proof of debt) is to be
amended so it is consistent with section 311 of the Companies Act (interest on claims);
- the provisions relating to contingent debts (valuation and proof) are to be
amended so that they are consistent with sections 307 and 309 of the Companies Act (claim not of an ascertained amount / claims relating to debts payable after commencement of liquidation);
- the current section 97 (bankrupt's liability as a member of several firms) is
to be repealed;
- the reference to “mining companies” in the current section 101 of the
Insolvency Act is to be repealed
- the current section 105 which relates to the Official Assignee declaring
dividends is to be repealed;
- the current section 129 is to be amended so that the Official Assignee has
a discretion, rather than a duty, to prosecute if they suspect an offence has been committed under the Insolvency Act;
- the provisions relating to “books of account” are to be amended to be
consistent with modern accounting terminology as in section 194 of the Companies Act (accounting records to be kept);
- the current provision relating to the bankruptcy surplus account is to be
amended to be consistent with section 316 of the Companies Act (establishment of liquidation surplus account).
Provision
s126 Crimes by a Bankrupt [indictable]
s127(2) Failure to keep proper books of account [indictable]
|
Current Maximum Penal
3 years imprisonment 3 years imprisonment
|
Proposed Maximum Pena
3 years imprisonment or a fine of $10,000
3 years imprisonment or a fine of $10,000
|
An increase in penalties will deter those considering breaching the law under the new regime. Stakeholders are supportive of the Official Assignee being given adequate resources to carry out investigations and prosecute debtors who commit offences under the new insolvency regime.
Provision Current Maximum Penalty Proposed Maximum Penalty
s127(1) Failure to 3 months imprisonment 12 months imprisonment or a
keep proper books of fine of $5,000
account [summary offence]
s 128 Summary Offences s128A Offences by undischarged bankrupts in
relation to management of companies [summary offence] s151 Offences in
respect of obtaining credit in regard to a Summary Instalment Order debtor
[summary offence]
s 164 False or misleading statements and refusal to answer questions
[summary offence]
|
12 months risonment 12 months imprisonment or a fine of $5,000
3 months imprisonment or a fine of exceeding $200
3 month imprisonment or a fine not exceeding $200
|
12 months imprisonment or a fine of $5,000 12 months imprisonment
or a fine of $5,000
12 months imprisonment or a fine of $5,000
12 months imprisonment or a fine of $5,000
|
5. The Insolvency Act will be updated to ensure consistency with the Privacy Act 1993 and to provide recognition of same sex and de facto relationships in accordance with the New Zealand Bill of Rights Act 1990.
Key amendments proposed are:
6. The Official Assignee in Bankruptcy will retain a monopoly on bankruptcy administration.
The interests of debtors are better served by the State than by the private sector largely because the Official Assignee is not profit driven and is subject to procedural and legislative checks and balances, including court supervision.
In New Zealand, the majority of bankrupts have few or no assets. In these cases, there will be insufficient funds in the estate to meet the costs of effective administration of the bankruptcy.
It was decided that the proposals regime, currently administered by the High Court under Part 15 of the Insolvency Act, should not be transferred from the High Court to the Official Assignee. In comparison, Summary Instalment Orders ("SIOs"), which are currently the responsibility of the District Court, are more administrative in nature. This responsibility will now be transferred to the Official Assignee. In the case of debtor's petitions, at present the petition is filed in the High Court and adjudication is automatic on filing. The rationale behind this decision is that debtor's petitions, collecting fees and Part 16 (SIOs) are administrative processes and the Court does not need to be involved.
This new procedure will also create dialogue between the debtor and the Official Assignee prior to formal bankruptcy, as the debtor will be required to contact the Official Assignee to file a petition in the first instance.
It is expected that the Ministry of Economic Development will adopt the fees schedule currently used by the Department for Courts for these services.
This will avoid the cost of duplication of insolvency procedures.
This will:
10. The cap for SIOs (total unsecured debt) will be raised from $12,000 to $40,000 and will be varied biennially based on the movement of the Consumer Price Index ("CPI").
The $12,000.00 cap was set in 1990 and, since then, there has been increased access to personal credit. The $40,000 cap reflects this change. The ability to vary the cap according to the CPI will ensure that the figure remains realistic. The increased threshold will improve the accessibility of the SIO to debtors, maximising the return to creditors and providing an alternative to bankruptcy.
This will reflect the new responsibilities of Official Assignees in dealing with debtor's petitions and SIOs. A right of appeal will also apply to the No Asset Procedure and the Assignee's power to assign causes of action referred to below.
The increase in the cap for summary instalment orders (from 12,000 to $40,000) means an increase in the amount of money that a private administrator is required to handle. A provision that these funds be held in trust will reduce the risk of fraud in these circumstances.
Currently the threshold of $200 is too easily reached. This change brings the amount required in order to bring a petition for personal bankruptcy into line with the Companies Act threshold.
The doctrine of "relation-back" (“the doctrine”) overlaps with the voidable transaction regime. In the case of a creditor-filed petition, the relation-back period extends back to an act of bankruptcy that occurred within 3 months immediately before the petition was filed. In the case of a debtor-filed petition, the commencement date is usually the date of filing. The general test is that any transaction that took place within the relation-back period may be overturned, unless it was a transaction in good faith committed before the bankruptcy, or it comes under the voidable transaction regime. Because there is an overlap between the voidable transaction regime and the doctrine of relation-back, courts have been reluctant to enforce the doctrine. Accordingly it is proposed that the doctrine be removed and the voidable transaction regime be relied upon instead.
- tools of trade up to a value of $2,500 (previously $500);
- vehicle up to a value of $5,000 (not provided for previously);
money up to a value of $1,000 (previously $400);
household goods to be determined by the Official Assignee (previously $2,000).
The amounts listed above are to be varied every 2 years based on the movement of the CPI.
These figures match those under the Australian personal insolvency regime, and bring the New Zealand caps up to date.
The biennial review of the caps will ensure that they retain their real value and also bring the New Zealand regime into line with Australian personal insolvency legislation.
No Asset Procedure
18. A "no asset procedure" (NAP) for bankrupts will be introduced. It will be targeted at consumer debtors as an alternative to bankruptcy and will be administered by the Official Assignee. There will be a maximum debt threshold of $40,000 to enter the NAP, to be varied every 2 years based on the CPI. The NAP may be terminated either at the Official Assignee’s discretion or at the request of the debtor. Student loan debts will not be dischargeable under the NAP.
Currently there are 3 formal options available to insolvent debtors:
In the case of consumer debtors or small businesses, the restrictions imposed by bankruptcy are often a disproportionate penalty, resulting in social stigma and a general disincentive to contribute positively to the economy. The NAP will provide another option for individuals with minimal debt and few assets, who have no means to repay the debt. This procedure is intended to:
To avoid the risk of abuse, entry into this procedure must be declined by the Official Assignee if he or she believes on reasonable grounds that the debtor does not meet the applicable criteria has engaged in certain misconduct including concealing assess or recklessly incurring debts. In that case, the alternatives will be bankruptcy or an SIO. Also, a debtor may only take advantage of this procedure once.
It is proposed that National Guidelines will be used by the Official Assignee to assess whether an individual has the ability to repay debts while maintaining a reasonable standard of living.
There will be a 12-month discharge from liability, which will give the Official Assignee time to investigate and hear objections and/or appeals. If the debts are paid, the NAP should be annulled according to the Rules on Annulment (Part 11 of the Insolvency Act). On the other hand the Official Assignee will be able to terminate the NAP if a debtor has misrepresented his or her affairs.
Under this proposed regime, funds will not vest in the Official Assignee pursuant to section 42 of the Insolvency Act, but some of the debtor’s general compliance duties under the Insolvency Act will be retained (i.e. the duty to comply with requests for information).
The $40,000 maximum threshold addresses the risk of abuse of the procedure by those who accumulate vast amounts of debt with little or no means to repay it.
At present, student loans are dischargeable in bankruptcy. However, because students will not be adjudged bankrupt because of non-payment of this debt, it has been decided that student debt should not be provable or dischargeable within the NAP, which has a far less punitive effect than bankruptcy. All other debts (apart from debts which are non-dischargeable in bankruptcy, such as child maintenance orders) will be dischargeable through the NAP.
Consistent with the "fresh start" approach of the NAP, this will provide debtors with an opportunity to learn new skills and become productive members of society.
This decision is not reflected in the Bill because it will be implemented through
changes to the Student Loan Scheme administered by the Ministry of Education
II Corporate Insolvency Business Rehabilitation
A business rehabilitation regime enables a debtor company to enter into an agreement with its creditors to allow it to keep trading.
At present, if it is feasible for a business to trade its way out of insolvency, the only option under the Companies Act 1993 (“Companies Act” or “CA”) is a “compromise with creditors”. The compromise provisions in Part 14 of the Companies Act allow directors (amongst others) to apply for a stay on debt proceedings while an arrangement with Creditors is being developed. However, the stay is granted at the Court's discretion and on a case-by-case basis. Furthermore, the stay does not apply to secured creditors. The current New Zealand regime means rehabilitation cannot occur unless all creditors agree. These features make it difficult to rehabilitate a viable business. There is also anecdotal evidence that the procedure is not well understood.
Against this background, the government decided to introduce a new voluntary administration regime, to:
The Bill will introduce a new Part 15A to the Companies Act, to implement the following policy decisions.
In 1992, Australia adopted a procedure for voluntary administration (“VA”), under the Corporations Law 1992. Adoption of a substantively similar regime in New Zealand would make it easier and less costly to conduct business rehabilitation in Australia and New Zealand.
The VA regime will sit along side and reduce the scope of the statutory management scheme under the Corporations Investigations and Management Act 1989. Statutory management will still be an option for serious cases of fraud or where it is the only viable option for cases involving strategic national assets.
Safeguards for creditors during
rehabilitation
A creditor who has a security interest in the whole or
substantially the whole of the company’s property will be able to enforce
their security during a 10 working day period at the beginning of the
administration. This prevents shareholders attempting to defeat
the legitimate
interests of those creditors. Once that period has passed, secured creditors
cannot enforce their security until the
administration ends.
The Court may also make Orders to protect the assets of the business in favour of creditors while the administration is in force.
Initiation of rehabilitation procedure
Administration can be commenced in one of 3 ways:
by the holder of a charge over all or substantially all of the property where the charge is enforceable; or
Length of stay on creditor's action
The length of stay will be 21 days or, in limited circumstances, 28 days. The court also has the power to extend the time period. This timeframe is regarded as being flexible and sufficient for administrators to properly investigate and prepare a viable rehabilitation proposal.
Procedure on failure of rehabilitation
At the end of the stay period, creditors may resolve that:
The administrator has day-to-day control of the company's business, property and affairs. S/he may act in the capacity of an officer of the company. No other person may act in the capacity of an officer of the company without the administrator’s written approval.
Post-filing finance during rehabilitation
For the purpose of administering the deed, the Administrator is able to raise finance for the company (secured or unsecured) during the period of the stay for any period on such terms s/he thinks appropriate. Repayment of this debt takes priority over unsecured creditors.
- Creditor voting on the rehabilitation proposal.
Voting will be decided on the majority of voices by declaration of the chairperson (the administrator or the administrator’s nominee), unless a poll is required by those eligible to call for a poll (at least 2 creditors or by a creditor with more than 10% of the voting rights). A poll will be decided by a:
The chairperson has the casting vote where there is no clear outcome.
The design of the New Zealand VA proposal is based on the Australian model. Good reasons to depart from this model include where the law is not workable or inconsistent with New Zealand law. Some Australian terminology may need to be altered to conform to the Companies Act or Personal Property Securities Act 1999, ie Australian provisions refer to “floating charges”, which no longer exist in the New Zealand context. Key changes are identified in the following paragraphs.
- There will be a specific legislative direction for the Courts to consider
steps that a director has taken to enter voluntary administration when awarding compensation for loss under section 301 of the Companies Act 1993.
This would be taken into account in mitigation under section 301 of the Companies Act (power of Court to require persons to repay money) if a company director has acted early in preventing serious loss by appointing an administrator.
- Directors will not be personally for the company’s unpaid tax debts.
In Australia, directors may be liable for tax debts of a company when they are set aside as a voidable transaction. As GST and PAYE have priority in this country, this mitigates the need for such liability in New Zealand.
- The current priority for liquidators' costs will be extended to include
administrators' costs.
As with the liquidators, administrators should be entitled to charge reasonable remuneration for carrying out their duties.
The Australian definition of "solvency" will apply to the New Zealand VA provisions but not to other parts of the Companies Act 1993.
In Australia, before a liquidator may be appointed they must be satisfied that the company is insolvent or likely to become insolvent at some future time. In New Zealand there is no equivalent test for entry into insolvency proceedings, however there is a 2 prong-test for companies before they enter into a major transaction:
the company must be able to pay its debts as they become due; and
the value of the companies' assets must be greater than the value of its liabilities.
New Zealand liquidators' powers will be used as a model for equivalent administrators' powers.
There are some differences between powers of administrators in Australia and powers of liquidators in New Zealand, particularly in light of the Bill of Rights Act 1990. Sections 260-265 of the Companies Act are to be applied as a model for administrator's powers.
References to the Australian Securities and Investments Commission ("ASIC") will be replaced by references to the Registrar of Companies.
The Registrar of Companies in New Zealand is the equivalent of the ASIC.
Substantive requirements for creditors’ meetings will be followed in the New Zealand VA regime but New Zealand’s administrative requirements will be retained.
Administrative requirements in New Zealand will be amended to conform to current New Zealand liquidation procedures.
Australian offence provisions will not be followed.
The remedy under section 301 of the Companies Act (power of Court to require liquidators and receivers to repay money or return property) will be applied to administrators. No new offence provisions are proposed.
The changes recommended by the Australian Companies and Securities Advisory Committee ("CASAC") will be incorporated into the New Zealand VA provisions, except for:
CASAC (now known as the Corporations and Markets Advisory Committee or CAMAC) reviewed the VA regime in Australia in 1998 and, as a result, recommended a number of technical amendments.
Changes relating to liens, pledges and reservation of title have been excluded because there are differences between security interests recognised by Australian law and those recognised by the Personal Property Securities Act.
Changes to the Corporations Regulations have been excluded because New Zealand regulations will need to be determined once the legislation and enabling legislation has been enacted.
Changes to creditors’ voluntary wind-ups have been excluded because New Zealand does not have creditor voluntary wind-up provisions.
List of CASAC Recommendations
(source: Corporate Voluntary Administration Report, June 1998, Appendix 1)5
The first and major meetings of creditors:
Recommendation 1. The first meeting of creditors should be retained.
Recommendation 2. The time for holding the first meeting should be increased to
8 business days after the beginning of the administration, with 5 business days’ notice of the meeting to creditors.
Recommendation 3. There should be a specific provision stating that creditors may only remove an administrator and appoint a replacement administrator through a single resolution.
The prospective replacement administrator should table at the first meeting, prior to any resolution:
Recommendation 4. The directors’ statement about the company’s business, property, affairs and financial circumstances should be tabled:
Recommendation 5. The reports sent by administrators when convening the major meeting of creditors should be required to include “any other matter material to the creditors’ decision”.
Recommendation 6. The period for holding the major meeting should be extended to
25 business days, with a new convening period of 20 business days. The administrator should be permitted to hold the major meeting before the end of the convening period.
Recommendation 7. The convening period time should be calculated from the day after the administration begins.
5 The full report is available online at http://www.camac.gov.au.
Recommendation 8. The court’s power to extend the convening period should be exercisable on an application made after the convening period has ended only where there would otherwise be substantial injustice to creditors. The court should have regard to the administrator’s conduct when considering the costs of that application.
Recommendation 9. The current 60 day maximum time by which creditors can adjourn meetings should be reduced to 30 business days after the first day on which the meeting is held. However, the court should be given a specific power to permit creditors to adjourn meetings to a date after that period, on application by the administrator.
Recommendation 10. All the directors of a company under administration should be required to attend creditors’ meetings, but should not be obliged to answer questions. A director should only be excused from attendance if:
In addition, creditors at each meeting should have the power to direct attending directors to leave the meeting for all or part of the remainder of that meeting.
Recommendation 11. The administrator and the company should execute a deed that is fully approved at the major meeting within 15 business days of its approval, or such further period as the court allows on application made by the administrator within those 15 business days.
Recommendation 12. Where a deed is not fully approved at the major meeting, the administrator must draft a deed within 10 business days following the creditors’ decision at that meeting. The court should have a power to extend this time on application by the administrator within that 10 business day period. Creditors should thereafter have 3 business days to inspect the draft deed. The administrator and the company should execute the deed within 2 business days following the end of the inspection period. However, the court should have a power to extend that 2 business day period for executing the deed on application by the administrator within that period. Creditors should be informed at the major meeting:
Voting at creditors’ meetings:
Recommendation 13. The current dual majority by value and number voting requirement, with the administrator having a casting vote to resolve any deadlock, should be retained.
Recommendation 14. The current court power to overturn a resolution whose outcome was determined by the votes of related party creditors should remain.
Recommendation 15. Directors and administrators should have a duty to disclose
arrangements of which they are aware and under which persons are required, or may become entitled, to vote a particular way on a proposal. That obligation should remain up to the time of the poll.
Recommendation 16. Secured creditors should be able to vote for the full amount of their debts in meetings while the company is under administration or under a deed of company arrangement.
Recommendation 17. Any person should be permitted to vote for or against any resolution in accordance with a special proxy, whether or not that vote is to the person’s financial advantage.
Recommendation 18. Persons should be prohibited from voting general proxies for or against any resolution in which they are financially interested.
Recommendation 19. Employees should be permitted to vote on a deed of company arrangement as creditors, even if they have priority under that deed.
Recommendation 20. The court should be able to order that creditors who are also the owners of property that is pooled in a single enterprise forming part of the company’s business should be a class of creditors for the purpose of voting on a deed of company arrangement. The deed should bind all those creditors if a majority in number, and three quarters in value, of those present and voting vote to accept the deed.
Effect of appointment of administrator on creditors:
Recommendation 21. There should be no additional restriction on contractual provisions which enable a party dealing with a company to take certain action merely because the company appoints an administrator.
Recommendation 22. Persons who hold property of a company under administration as security under a lien or pledge should be entitled to retain possession of that property. However, they should not be entitled to exercise any rights under the lien or pledge to sell that property during the course of a voluntary administration.
Recommendation 23.
Recommendation 24.
administrator would have no personal liability to the selling creditor, even where the sale price is less than the debt.
Recommendation 25. There should be an exemption from the moratorium under Part 5.3A for:
Recommendation 26. The court’s power to grant an injunction against enforcement action by a chargee over particular property, on application by an administrator, should be extended to cover injunctions against threatened enforcement actions.
Recommendation 27. Chargeholders who are permitted by the Corporations Law to enforce their charges should be able to do so during the administration period through court enforcement, as well as extra-curial, action.
Deeds of company arrangement:
Recommendation 28. The court power to bind secured creditors or owners or lessors of real or personal property to a deed of company arrangement should only be exercisable after the creditors have resolved that a deed of company arrangement be executed.
Recommendation 29. The prescribed provision dealing with making claims should be amended by:
Recommendation 30. The prescribed provision dealing with priority payments under a deed of company arrangement should incorporate all the priority provisions, not just s 556.
Recommendation 31. The prescribed provision dealing with meetings should be deleted.
Recommendation 32. The prescribed provisions should provide for, rather than require, the establishment of a committee of inspection.
Recommendation 33. A company should have an express right to apply to the court for an order that the company need not include the words “subject to deed of company arrangement” on its public documents.
Recommendation 34. It should be made clear that a debt which is extinguished by entry into a deed of company arrangement, and which by its terms would have otherwise survived, is deemed not to have been extinguished for the purpose of enforcing a related guarantee or indemnity.
Recommendation 35. Any deed of company arrangement should only terminate:
Administrators and deed administrators:
Recommendation 36. All administrators (whether appointed under s 436A, 436B or 436C) should be required to table a statement of interest at the first meeting of creditors. The
statement should disclose any professional, personal and business relationships of the administrator and his or her firm with the company or its officers, members or creditors that the administrator knew or should have discovered upon reasonable inquiry, including as an accountant or other professional adviser (other than the relationship arising merely from the company’s request that the person be an administrator).
Recommendation 37. The administrator of a company should be permitted to consent to a transfer of shares in the company or an alteration in the status of the company’s members if such a transaction is, in the administrator’s opinion, in the best interests of the creditors of the company. The court should continue to have the power, on application by the prospective transferor or transferee of the shares, to consent to a transfer of shares or an alteration in the status of a company’s members. An application to the court should only be permissible where the administrator has refused to consent to the transfer.
Recommendation 38. Administrators should be able to obtain approval of their fees:
If a meeting of creditors is convened for this purpose after the administration has concluded, the cost of the meeting should be an expense of the administrator personally, without any right of indemnity out of the company’s property. The administrator’s report to creditors should include a disclosure of the administrator’s past and projected fees and expenses.
Recommendation 39. Administrators should continue to be personally liable for debts incurred in the performance or exercise of any of their functions and powers.
Recommendation 40. An administrator should not be taken to have adopted any employment contract entered into by the company unless the administrator does so expressly in writing. It should be made clear that any adoption of an employment contract only relates to entitlements that accrue during the period of the administration. Any Federal, State or Territory legislation relating to employment contracts that is inconsistent with this recommendation should be overridden. An administrator of a company should be personally liable for the wages of the
company’s employees who continue to provide services with the administrator’s express or implied authority. An administrator should not be taken to have given implied authority for the provision of services by an employee of whom the administrator was unaware, provided that the administrator has taken all reasonable steps to identify all the company’s employees.
Recommendation 41. An administrator’s right of indemnity should cover any personal liabilities incurred by an administrator in the due performance of the administrator’s duties, other than liabilities incurred in bad faith or negligently.
Recommendation 42. Deed administrators should only have a power to sell existing shares in the company either with the prior approval of the holder of those shares or with the leave of the court. Members, creditors and the Commission should have standing to oppose a court application for leave.
Recommendation 43. Administrators and deed administrators should be required to lodge with the Commission accounts of receipts and payments.
Winding up proceedings prior to an administration:
Recommendation 44. The court should have the power, on application by a creditor of a company, to make an order appointing an administrator to that company.
Recommendation 45. The Corporations Law should explicitly provide that the directors of a company to which a liquidator or provisional liquidator has been appointed cannot appoint an administrator.
Recommendation 46. The Corporations Law should explicitly provide that a chargee over all or substantially all the property of a company to which a liquidator or provisional liquidator has been appointed cannot appoint an administrator.
Recommendation 47. A liquidator should be entitled to appoint himself or herself as administrator:
Recommendation 48. The leave of the court or the approval of creditors should be required for a liquidator or provisional liquidator to appoint his or her business partner, employee or employer as administrator of a company.
Recommendation 49. A deed administrator should have the right to apply to the court for an order terminating a winding up. In determining that application, the court should be directed to have regard to:
Recommendation 50. In addition to the Commission, a creditor or a member of a company, a liquidator or provisional liquidator who has put the company into administration should have the right to apply to the court for replacement of an administrator.
Liquidation following an administration:
Recommendation 51. Transactions that take place during the course of a voluntary administration (including during the administration of a deed) that precedes any form of court or voluntary winding up, other than:
Recommendation 52. Where:
Recommendation 53. The officer in control of a company under administration, or under a deed of company arrangement, immediately before the company proceeds into liquidation should be required to lodge with the Commission, at the time the company goes into liquidation, the s 439A report and a further report on:
Recommendation 54. Creditors should have the right to appoint their own nominee as liquidator when a company under administration goes into winding up. If creditors do not appoint their own nominee, the administrator or deed administrator should become the liquidator.
Recommendation 55. Where a liquidation follows a deed of company arrangement, post-deed creditors should have no statutory priority, except where the deed administrator is personally liable for debts covered by s 556(1)(a). Creditors voting at the major meeting should have the
right to include in a deed of company arrangement any other form of priority for post-deed creditors. The current priority rights for debts incurred by administrators should remain.
Recommendation 56. Creditors’ voluntary winding up should be abolished. Implications for takeovers and fundraising:
Recommendation 57. There should be no exemption from the takeover provisions for an acquisition of shares pursuant to a voluntary administration.
Recommendation 58. There should be an exemption from the fundraising provisions for offers or invitations to creditors to exchange debt for equity under a deed of company arrangement.
Other matters:
Recommendation 59. All references to days in Part 5.3A should be to “business days”.
Recommendation 60. Any company that changes its name during the course of, or in the 6 months before, a voluntary administration should be required to disclose its former, as well as its current, name on its public documents for the period of that administration or any subsequent liquidation.
In the absence of statutory clarification, the voluntary administration provisions and the duty of good faith under section 4 could be uncertain.
Compromises will remain an alternative to voluntary administration.
New restrictions on acting as a liquidator
The Bill will introduce the following policy decision as an amendment to section 280(1) of the Companies Act.
There is a perception amongst creditors that
liquidators are not always impartial where they have been appointed by
shareholders (who
are often also the company’s directors). At present
there is also limited scope to replace liquidators and this process can
be
time-consuming and burdensome. Rules governing appointment of liquidators are to
be modified to avoid situations where there is
a continuing relationship to
avoid the appointment of “friendly” (i.e. impartial) liquidators. It
is already a requirement
under the Institute of Chartered Accountants of New
Zealand rule SES-1 Performance of Insolvency Engagements, that a liquidator must
not be a person (an accountant or tax advisor) who has had a continuing
relationship with the company in the previous 2 years.
Phoenix
Companies
The practice of using “phoenix companies” is contrary to the public interest if a business is sold for undervalue because it reduces funds available to creditors. In some cases however, the interests of creditors will be best served by the business being sold as a "going-concern" rather than the assets being sold individually.
To deter the abuse of phoenix company arrangements, the government made the following policy decisions. The Bill will implement these decisions by inserting new sections 386A and 386B of the Companies Act.
This will provide a greater deterrent in addition to the current civil penalties, and will give the government (as opposed to private parties) a primary enforcement role. If both criminal and civil penalties are available, the criminal sanction will only be relied upon in the more serious cases. Forseeably, these sanctions will not deter directors from taking sensible business risks.
The new offence is similar to other section 380 offences, includes the same knowledge requirements, and will have the same penalty as similar Companies Act offences.
In prohibiting directors from re-using the company name, there is less incentive for directors to abuse the "phoenix company" arrangement, and there is less chance that creditors and consumers will be led to believe that they are dealing with the same company. This is a low-cost statutory deterrent that can be easily enforced. This restriction will only apply to directors, and is not a general ban on the re-use of a name of an insolvent company.
III Universal Changes Single Statute
31. The existing statutory framework for insolvency will be used to implement the reforms recommended in the current review.
The Government decided to work within the existing framework because a single statute would be large and complex, with a superficial semblance of order.
Voidable Transactions
There are six types of voidable transactions. Minor amendments will be made to the following five:
More extensive amendments will be made to the sixth category, voidable preferences. These occur when one creditor is paid ahead of the others in the lead-up to insolvency. In theory, creditors are supposed to be treated equally, but on the other hand, businesses require some certainty about the payments that they can expect to receive from debtors.
At present, the Insolvency Act and the Companies Act have different provisions for voidable transactions, the Bill will bring them into consistency.
32. In the context of corporate voidable preferences, the "ordinary course of
business" exception is to be removed and a test similar to the Australian "continuing business relationship" test is to be adopted
Currently the corporate voidable preference regime is "effects-based" with an exception for transactions in the OCB (section 292 of the Companies Act). Because it is unclear what this test actually means, in practice it is difficult to apply, and this ambiguity can lead to litigation. The Australian Corporations Law contains an exception for transactions that take place as an "integral part of a continuing business relationship". If the level of a debtor's indebtedness to a creditor increases and decreases from time to time, during the course of a relationship, then the relationship is to be viewed as one transaction. Therefore, the "net-effect" of the transactions is to be considered in assessing whether or not there has been a preference. As this test is fact-specific, there is still a risk that litigation may ensue, however the advantages are:
33. A new defence will focus more objectively on the knowledge of the party transacting with the debtor, without requiring that the court be satisfied that it is inequitable to order recovery.
At present, corporate creditors seeking to avoid a transaction being set aside can rely on the ordinary course of business exception. If that is not available then reliance will normally be placed on section 296(3) of the Companies Act, which provides a defence if:
This test is subjective and the issue of whether a payment is inequitable involves a value judgement, which could potentially lead to uncertainty and unfairness. Instead it is proposed that section 296(3) of the Companies Act be replaced, and a test be adopted along the lines of section 588FG(2) of the Australian Corporations Law:
Section 588FG(2) Australian Corporations Law
A Court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company and it is proved that:
(a) the person became a party to the transaction in good faith; and
(b) at the time when the person became such a party;
(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.
This test enables the court to take a more objective view of whether the creditor ought to have known of the debtor’s financial position. It also avoids the inclusion of elements requiring a subjective judgement as to what is “inequitable”.
a liquidator will no longer be required to prove the other party's knowledge of the debtor's position; and
the definition of “transaction” will include acts or omissions for the purpose of giving effect to the transaction.
The current test requires proof that the other party to the transaction knew of the debtor’s financial position. However, it was decided that the “Australian defence” is a more appropriate place to consider this issue, rather than considering it under the test of whether a disposition is actually a transaction for undervalue. This removes the requirement for a liquidator to prove the creditor's state of mind. The Australian definition of "insolvent transaction" (which includes acts or omissions for the purpose of giving effect to the transaction) has been adopted under this section.
Under section 294 of the Companies Act, a liquidator may set aside a voidable transaction by filing a notice in court. If there is no opposition, the transaction will be automatically set-aside after 20 days. In relation to voidable preferences, there has been criticism that some liquidators abuse the procedure by applying to set aside every transaction, putting creditors to the task of opposing the notice.
Under the Bill, the transaction will automatically be set aside 20 working days after the liquidator serves a notice on the creditor, unless the creditor sends a written notice of objection to the liquidator. If the creditor objects, the liquidator may apply to the Court to set aside the transaction.
The PPSA is intended to be a code for securities over property (other than land). It is appropriate that key definitions such as “security interest” correspond between the PPSA and the new insolvency legislation.
Voidable preferences are situations where the debtor has repaid one or more of their creditors ahead of other creditors. Section 292 of the Companies Act provides for certain time frames and presumptions where a transaction may be deemed preferential. These transactions are considered improper and are voidable at the
instance of the liquidator. The proposed Insolvency Reform intends to bring sections 292 (transactions having preferential effect), 293 (voidable charges) and 297 (transactions at undervalue) of the Companies Act into line, so there are consistent requirements across the board when testing voidable transactions, and also to harmonise the Companies Act with the Insolvency Act. The Insolvency Act voidable preference provisions focus on the intention of debtor, which is often difficult to prove. The disparity between these tests has not provided a consistent and principled basis for overturning transactions.
Unlike the corporate provision for overturning transactions at an undervalue, the personal insolvency regime (section 54 of the Insolvency Act) involves different time frames and requires proof that the intention was the debtor’s dominant intention, which in practical terms is very difficult to prove. In comparison, the equivalent section 297 of the Companies Act provides a presumption for a specified period when transactions are deemed to be recoverable by a liquidator, making it easier for liquidators to overturn questionable transactions.
It is almost impossible to prove the debtors state of mind in situations covered by section 56 of the Insolvency Act (voidable preferences) - ie. whether the debtor intended to prefer a particular creditor. Any new test and the time frames for personal insolvency should mirror the Companies Act provisions, which are "effects-based".
The current test under section 57 of the Insolvency Act enables charges and other security interests granted over the debtor’s property to be overturned if granted within a certain period. The equivalent provision for corporate debtors includes presumptions within certain periods, which make it easier for liquidators to challenge charges and securities. The timeframes and presumptions should mirror the Companies Act.
Priority Debts
The government has agreed the following policy for the treatment of priority debts under both the Companies Act and the Insolvency Act. The Bill will insert a new Schedule 7 to the Companies Act.
The Cabinet Office Manual will be amended to reflect this
This preference remains for the following reasons:
the costs are incurred on behalf of creditors (ie. they are not a pre-existing debt), accordingly the cost should be borne by creditors.
This overcomes the situation where a creditor incurs costs in procuring an order for liquidation or adjudication on behalf of the general body of creditors. The amount is to be determined by the Official Assignee or liquidator, with a right of appeal to the High Court if there is any objection.
The rationale is that the Liquidation Committee is performing a function for the benefit of all creditors.
47. Independent contractors will not be afforded the same priority as employees.
The suggestion that independent contractors be given the same priority as employees did not receive general support from submitters.
48. The Companies Act will be expressly amended to clarify that:
Employment Relations Authority or Employment Court awards as they relate to lost wages/arrears accrued over the 4 months prior to bankruptcy or liquidation, be afforded the same priority as the current priority for employees for arrears of salary and wages provided the award is in respect of a default and/or contravention occurring before the commencement of the bankruptcy or liquidation;
The preference legislation will be expressly amended to state that awards made by the Employment Relations Authority or Employment Court for lost wages or arrears of salary and wages are included in the employee priority.
The priority will be restricted to situations where the award for payment was
made or given before the commencement of liquidation or bankruptcy.
Holiday pay will be afforded the same priority as the current priority for employees for arrears of salary and wages.
The employee priority is not to include damages under section 123 Employment Relations Act 2000.
This expressly excludes damages for compensation for humiliation, loss of dignity and injury to feelings, and loss of any benefit.
The priorities for apprentices and for persons whose employment terminates due to involvement in protected training under the Volunteers Employment Protection Act 1973 will be removed.
The apprentice priority is now redundant because apprentices are defined as "employees" under the Modern Apprenticeship Training Act 2000 and are, therefore, covered by the Employment Relations Act 2000. The volunteers priority is now an anomaly. The award will now come under the employee priority for unpaid wages and salaries.
The priority for Motor Vehicle Dealers Institute under MVDA 1975 will be abolished.
The Motor Vehicle Dealers Institute currently has a priority against motor vehicle dealers for settlement sums paid out of the Motor Vehicle Dealers
Fidelity Guarantee Fund. This preference was not retained, because:
it is not consistent with the pari passu rule, according to which all equally ranking claims are to be paid in full unless there are insufficient funds, in which case the amount paid for each claim is reduced proportionately so that the relationship between claims remains the same;
there is no similar preference afforded to the Institute of Chartered Accountants of New Zealand or the New Zealand Law Society; and
the proposal to remove the priority received widespread support from submitters.
The priority for lay-by sales will be retained.
This preference encourages prudent purchasers and gives them incentive to make commercially sensible decisions. The decision received general support from submitters.
The costs of organising/conducting creditors’ meetings will be retained.
Priority is to be retained for the costs of organising a creditors' meeting for the purpose of voting on a proposed compromise under Part 15 of the Companies Act. This gives incentive for companies to face creditors sooner rather than later, and encourages attempts to rehabilitate the business without having to resort to liquidation.
The priority given to holders of liens over book debts will be retained but modified so that a preference will be given for up to 10% of the amount of the total debt, up to a maximum of $2,000.
Lien holders could disrupt the administration of a bankruptcy or liquidation without this preference. Currently the lien holder can seek a preferential payment of a debt up to a maximum figure of $500, in lieu of exercising the right of lien. This amount appears to be arbitrary. The modified priority gives lien holders an incentive not to exercise the right of lien during the administration of the estate.
This new priority provides creditors with a strong incentive to finance proceedings and to assist a liquidator in recovering or preserving a company’s assets. The proposal, based on section 564 of the Corporations Law (Australia) and section 109(10) of the Bankruptcy Act 1966 (Cth), received strong support from practitioners.
The situation will arise where one party is substituted for another as creditor, transferring all rights and duties. There are currently no statutory provisions to clarify which debts may be subrogated. These subrogation rights should be expressed clearly in the Insolvency Act and the Companies Act.
There appears to be insufficient public policy or legal reasoning to support the introduction of gift vouchers as a new priority. As the goods are not ascertained, there are no proprietary rights or remedies available to gift voucher holders, and it is arguable whether a new priority should introduce a new remedy. However, submissions are welcome on this issue.
This is intended to give Directors an incentive to make commercially viable decisions (i.e. without the protection of the employee preference).
PAYE and GST are regarded as a special case as the funds have already been deducted, but not paid, and arguably they are seen as “quasi-trust” monies.
These payments are made on behalf of a third party, and it is considered that removing the priority would cause injustice in the following ways:
57. The current priorities given to child support and student loan deductions are to be consolidated and replaced with a general provision in terms of the current clause 2(d) of the Seventh Schedule of the Companies Act.
Clause 2 (d) of the Seventh Schedule of the Companies Act provides:
After paying the claims referred to in clause 1 of this Schedule, the Liquidator must next pay the following claims:
(d) Subject to clause 6 of this Schedule, amounts deducted by the company from the wages or salary of an employee in order to satisfy obligations of the employee:
The reason for this change is that:
The government considered explicitly including ACC levies in this general priority but ultimately concluded that ACC deductions should continue to be collected as part of PAYE.
This decision was made on the basis there is little to differentiate those duties from general tax.
There was an insufficient case made out for the introduction of a statutory preference for the environmental costs associated with contaminated land, also known as "orphan sites", where the culprit is either unknown or insolvent.
Cross Border Insolvency
Procedural difficulties arise when an entity is placed under some form of insolvency administration in one state, but it has assets or debts in another. An increase in overseas commercial transactions has meant that businesses must consider whether they are able to access foreign insolvency regimes. If intervention is necessary, the foreign insolvency procedure is not always clear or certain. Specific problems include the cost, delay and difficulty in obtaining recognition of New Zealand judgements in foreign courts and in
obtaining assistance from overseas courts. The objective for cross-border insolvency is to provide a fair and co-ordinated framework to deal with cases of cross-border insolvency. This should enable individuals and companies to act with certainty within a predictable, cost-effective regime.
In May 1997, the General Assembly of the United Nations approved a framework established by the United Nations Commission on International Trade Law (“UNCITRAL”) to deal with administration of cross-border insolvencies (the “Model Law”). The key points of the Model Law are as follows:
The Model Law does not alter the substantive law of the countries that adopt it.
In February 1999, the Law Commission of New Zealand recommended adoption of the Model Law. The Ministry of Economic Development consulted with stakeholders at the end of 1999. As a result of full public support, the following public policy was approved. It will be introduced by the Bill with consequential amendments to the Companies Act and the Judicature Act.
The benefit of the Model Law will not accrue to New Zealand creditors until major trading partners adopt it. Australia is also working towards adoption of the Model Law.
This exclusion is to protect against systemic financial failure.
Section 135 of the Insolvency Act provides that the High Court must assist a Commonwealth country wishing to access assets in New Zealand. The section also gives the Court a discretion to assist a non-Commonwealth country (these provisions will now only be relevant where the Model Law does not apply).
the other country or state has a specified level of regulation; and
the level of regulation in the other country and the terms of the recognition agreement provide appropriate protection for the needs of New Zealand creditors.
This will enable New Zealand to enter into bilateral agreements, under the framework of the UNCITRAL law, to further co-ordinate cross-border insolvencies. Close co‑ordination could provide for automatic recognition of a proceeding as a specified insolvency proceeding ("SIP"). This status would:
It is expected that the insolvency regulations will state the order of priority that the assets be distributed according to domestic priority creditor provisions, and the foreign representative will be given powers to distribute assets subject to conditions in the regulations.
67. Section 342 of the Companies Act 1993 will be retained and apply regardless of the application of the Model Law, but that section will be amended to refer to the “liquidation of a company” rather than “liquidation of the assets in New Zealand of an overseas company”.
The existing section 342 of the Companies Act is necessary for the effective implementation of the Model Law. However it is too narrowly focussed and is inconsistent with international case law because it only permits the liquidation of the assets an overseas company has in New Zealand, not the liquidation of the company itself. Recent case law suggests that the presence of assets in the jurisdiction is not a necessary requirement for liquidating a foreign company. A reasonable possibility of a benefit accruing to the petitioning creditors is a sufficient reason for a liquidation order to be made.
Enforcement
The National Enforcement Unit ("NEU") within the Ministry of Economic Development was created in 1999. It conducts prosecutions under the Companies Act, the Insolvency Act and the Securities Act 1978. The NEU pursues mainly high-profile cases.
Funding Insolvency Litigation
The common law does not allow the assignment of the exercise of a statutory right (for example, to claim against a director for reckless trading or to apply to set aside a voidable transaction). However, given the appropriate safeguards (ie. application must be made to the High Court, and defendant may object to an assignment) this change will provide an option for much-needed finance for insolvency litigation.
Appendix Two
Australian Licensing Regime
Appendix 2 -
Australian Licensing Regime
The Australian regulation of insolvency practitioners is an example of a licensing a regime. There are two classes of practitioners: liquidators and official liquidators. Applications for registration as a liquidator are considered by the Australian Securities and Investments Commission. The applicant must be:
A member of the Institute of Chartered Accountants in Australia, the Australian Society of Certified Practising Accountants, or one of a number of comparable bodies in New Zealand, the United Kingdom and the United States;
Hold tertiary qualifications in accounting and commercial law; or
Have other qualifications and experience that in the opinion of ASIC are equivalent to the above qualifications; and
ASIC must also be satisfied:
ASIC is required to give an applicant an opportunity to be heard in relation to their application. Where ASIC refuses registration, written reasons must be provided within 14 days. ASIC’s decision is reviewable by the Administrative Appeals Tribunal.
Liquidators are required to lodge and maintain a security deposit with ASIC to obtain registration. The deposit can be used by ASIC to pay compensation to any person who suffers loss or damage as a result of the failure of a registered practitioner to carry out their duties adequately. As an alternative to lodging a bond, a registered liquidator may hold a public practice certificate from either the Institute of Chartered Accountants in Australia (ICAA) or CPA Australia and provide to ASIC, and comply with, an undertaking that they will maintain professional indemnity insurance in accordance with ASIC policy statements and maintain a public practice certificate.
There are no specific provisions which deal with the criteria for registration as an official liquidator, however ASIC has the power to register a person who is a registered liquidator as an official liquidator.
ASIC is required to maintain a register of all people who are registered liquidators and official liquidators. Once registered, liquidators remain on the register until they die or their registration is cancelled by the ASIC or the Companies Auditors and Liquidators Disciplinary Board. A person may request ASIC to have their registration as a registered or official liquidator cancelled voluntarily.
ASIC has issued Policy Statements to explain the criteria it will apply in exercising its discretions in this area. The general effect of these statements is that:
Under the Corporations Law, registered liquidators are required to lodge triennial statements with ASIC. Where it appears to ASIC that a liquidator is not faithfully performing their duties, or where a complaint is made to ASIC about the conduct of a liquidator, ASIC may inquire into the matter and take such action as it thinks fit. ASIC may also apply to the CALD to have the registration of a liquidator suspended or cancelled where the person has:
In 1997 an Australian government working party released a report of the review of the regulation of corporate insolvency practitioners. The report recommended various changes to the regulatory regime, principally:
ASIC should be permitted to require a registered liquidator who does not perform any substantive insolvency work over a period of five years [or an official liquidator who does not perform any substantive insolvency work over a period of two years], to show cause why their registration (or official status) should not be cancelled.
Appendix Three
Questions
&
Format for Comments on Bill
Appendix 3 - Consultation Questions & Format Questions
Draft Insolvency Law Reform Bill
Regulating insolvency practitioners – problem definition
Regulating practitioners – strengthening existing powers
obligations in that all offences and breaches of duty or trust, default or negligence must be reported?
Regulating Practitioners - Licensing
Regulating practitioners – voluntary accreditation
Priority of payments in lieu of notice
Format for Comments on Draft Bill
To ensure that relevant cross-references can be identified, please use the following format for commenting on the draft bill:
Clause Topic Comment Cross reference to
number existing
provisions, if relevant
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