When will liquidators face greater scrutiny under law?

by Jonathan Underhill / 02 October, 2017
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Creditors should be better off when our insolvency laws are eventually reformed, putting liquidators under greater scrutiny.

After beating Inland Revenue in the High Court, insolvency practitioner Imran Kamal says his liquidation and advisory business is booming.

Having won his court case, Kamal doesn’t expect to be singled out again – he did home detention and 150 hours of community work in 2013 for his role in a tax-evasion case. IRD wanted him banned for five years for that conviction and his handling of two 2014 liquidations. But in rejecting the IRD’s suit, the High Court accepted there was nothing in the law that required a liquidator to be broadly fit for the task in the Companies Act 1993. Seemingly, anyone could do the job of liquidator provided they were over 18, weren’t an undischarged bankrupt or certified under mental health legislation and didn’t have ties to the company in focus or its directors, shareholders or associates.

As former Commerce Minister Paul Goldsmith said in a Cabinet paper last November, “There is no statutory occupational regulation system for insolvency practitioners.”

There is certainly no mention of any offences under the Tax Administration Act and in all other regards, Kamal is eminently qualified – an experienced accountant and insolvency specialist with more than 20 years of experience.

“I am handling over 100 liquidations, am well-experienced and resourced and hold legal qualifications in insolvency,” he says. “Practitioners who have demonstrated capability and trustworthiness as liquidators should not be unfairly prohibited from practice.”

But prior convictions may become relevant in insolvency-law reforms. The Insolvency Practitioners Bill, introduced in 2010, has been on hold since its second reading in 2013, and thanks to the work of an Insolvency Working Group, is likely to get more teeth to stop unsatisfactory practitioners entering the market.

There is likely to be a co-regulatory licensing regime operated by the Restructuring Insolvency & Turnaround Association of NZ (Ritanz) and Chartered Accountants Australia & New Zealand (Caanz), overseen by the Registrar of Companies, the Cabinet paper from last November suggests.

John Fisk of PwC.

Greater powers

There would be new grounds for disqualification, including convictions for dishonesty under the Crimes Act and serious offences under the Tax Administration Act. The courts would get greater powers to remove liquidators.

The Government has yet to release details of the bill’s refinements, but remains committed to the reforms – once the hiatus of the election is over and assuming, on the election-night results, a National Party-led administration is back in power.

“In my view, the current regime is too loose,” says Commerce Minister Jacqui Dean. “For example, a person can be convicted of tax evasion or other serious forms of knowledge-based criminal offending, yet still operate as an insolvency practitioner – a position that relies on trust.

“There are insufficient effective sanctions against ‘self-interested’ practitioners who overcharge for their services or do unnecessary work to obtain larger fees, or against ‘debtor-friendly’ liquidators who fail to comply with their statutory duty to protect the interests of creditors,” she says.

The problems are concentrated in the liquidation of small and medium-sized companies and particularly voluntary liquidations.

Typically, when a small or medium-sized enterprise gets into trouble, the shareholders’ investment has been wiped out. Directors may wish to shuffle company assets to a related party to keep them away from creditors and have “incentives to appoint a debtor-friendly liquidator”. Usually, the amounts owed to creditors are too small to bother chasing through the courts.

Directors of troubled companies will sometimes invoke the 10-day rule, under which they can appoint their own liquidator or enter voluntary administration within 10 days of a creditor petitioning to liquidate their company.

The benefit is in installing a liquidator who may be more sympathetic, whereas one installed by IRD or a major lender is likely to take a more aggressive approach to directors’ obligations. That’s a distinction touted by many insolvency firms. Most practitioners discharge their duties satisfactorily.

Kamal supports the intention of the Government’s proposed reforms and “regulation that ensures a high-quality pool of liquidators to administer corporate insolvency. I do not necessarily believe that qualified and experienced liquidators should face any bans or sanctions for unconnected and/or historical issues.”

He says he would like to see a more competitive market, including the ability to win work from the IRD. “I hope regulators take this into consideration when redrafting the new Insolvency Bill, to prevent a growing oligopoly.”

Any rule change must also ensure creditor-appointed liquidations are done in such a way as to look after the best interests of all creditors, Kamal says.

Goldsmith’s paper says that at any one time there may be between 10 and 20 practitioners who are engaging in incompetent, dishonest or debtor-friendly behaviour, “including up to five who are grossly dishonest”.

To put that in perspective, there were about 2500 appointments for insolvency services in the year through August 2016, with a third accepted by just three firms – PwC, KPMG and Deloitte. The volume is more concentrated than that, though – about a quarter were accepted by seven individuals within three firms – four from PwC, two from KPMG and one from Shephard Dunphy.

Elephant in the room

The IRD is the elephant in the room on volume alone. In the past three years, it has filed an annual average 885 applications to liquidate businesses. It uses a panel of three firms for all its work – PwC, KPMG and Deloitte.

“Inland Revenue is a creditor in about 95% of insolvent liquidations and makes the largest number of liquidation applications to the court by far,” Goldsmith’s Cabinet paper says. “Inland Revenue is often among the first creditors not to be paid, because companies with liquidity problems have incentives to keep paying trade creditors and employees so they can continue to trade.”

Insolvency specialist John Fisk, a managing partner at PwC, concurs. “There are some directors, who when they get into financial difficulty, will try to use the IRD as a bank, because they’ve got no source of funding.”

Fisk is Ritanz chairman and also sat on the Insolvency Working Group. His association has 430 members, of whom more than 100 have sought accreditation under its voluntary licensing process, which was developed with the legislative reforms in mind. He says the law change will make it compulsory.

“If there are inadequacies with insolvency practitioners, there needs to be a way for creditors to get answers without having to go to court,” Fisk says.

His association is finalising a code of conduct that will give creditors and the courts the ability to hold a liquidator to account. “It’s in all of our interests as insolvency practitioners to raise the standards.”

This article was first published in the September 30, 2017 issue of the New Zealand Listener.

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