Insolvency Practitioners Bill

Hon JUDITH COLLINS (Minister of Police) Link to this

I move, That the Insolvency Practitioners Bill be now read a first time. At the appropriate time I intend to move that the Insolvency Practitioners Bill be referred to the Commerce Committee for consideration. The law currently provides for minimal restrictions as to who can be appointed as a liquidator, administrator, or receiver, collectively referred to as insolvency practitioners. Insolvency practitioners in New Zealand are not required to obtain any particular qualification or experience to register, or obtain a licence, or to belong to a professional body. Almost anybody, as long as they are not disqualified by limited criteria set out in the Companies Act or the Receiverships Act, can—and do—set themselves up as an insolvency practitioner. This has resulted in the situation where there is a small minority of individuals practising as insolvency practitioners who simply should not be.

The Insolvency Practitioners Bill provides for regulation of insolvency practitioners through a negative licensing regime. Put simply, this means that rather than registering all practitioners, only those who fall short of expected standards of practice will attract the attention of regulators. The Registrar of Companies will have the statutory power to stop individuals from providing corporate insolvency services if they fail to carry out the duties outlined in legislation in a competent and honest manner. Insolvency practitioners are required to carry out skilled tasks and manage a number of competing tensions. These include striking a balance between investigating and seeking to void a business transaction, or to realise an asset at a good price, and completing insolvency processes as quickly and efficiently as possible. Winding up an insolvent business effectively requires practitioners to demonstrate sound judgment and good negotiation skills on a range of matters. It also requires knowledge of commercial law, investigative skills to quickly assess the financial position of a company often in the presence of inadequate financial management systems, and an understanding of the statutory obligations of company directors and practitioners’ own obligations under insolvency law. There are currently a small number of practitioners who are continuously demonstrating incompetence, imposing significant costs upon creditors. However, beyond competency issues some practitioners are also debtor-friendly, failing to discharge their statutory obligations so as to favour the interests of the insolvent company, its director, shareholders, or themselves at the expense of the very creditors practitioners are supposed to protect. For example, practitioners may short-change creditors by selling a business or its assets to the directors or shareholders of the insolvent company, or a third party related to themselves, at less than market value. The asset could then be onsold at a later date at market value, putting money in the pocket of practitioners or insolvent parties.

Such practices could be remedied by introducing a positive licensing regime whereby all practitioners would need to meet a minimum set of standards to be licensed to practise. However, the cost of such a system would be disproportionate to the size of the insolvency practitioner industry in New Zealand, estimated to have fewer than 200 practitioners. This cost would effectively be passed down to creditors, as under insolvency the practitioner becomes the priority creditor and is among the first to be paid for services. This would reduce the money available to disburse to the general pool of creditors. The courts currently have, and will continue to have, the ability to remove individuals from providing corporate insolvency services. However, in an insolvency situation there is rarely enough money to be disbursed to all creditors, limiting their ability to challenge—in the courts—poor or dishonest decisions made by these practitioners.

This bill primarily aims to improve enforcement of practitioners’ duties by providing a lower-cost way for parties to seek prohibition orders. The bill will expand the disqualification criteria outlined in section 280 of the Companies Act and section 5 of the Receiverships Act. These sections list the persons who cannot be appointed as practitioners from the outset, such as individuals who are under the age of 18, creditors of the insolvent business, and undischarged bankrupts. The bill will also disqualify practitioners who have been banned from taking similar appointments in other specified jurisdictions—for example, Australia. It disqualifies individuals who are undischarged no-asset procedure debtors or subject to a summary instalment order under the Insolvency Act, accountants and lawyers who have been struck off from their respective professional registers, individuals who have been convicted of a crime involving dishonesty under the Crimes Act, and close relatives of the major shareholders, directors, auditors, or receivers of the company or of a related company.

Finally, the bill amends the Receiverships Act to allow the court to make a prohibition order against a receiver for an indefinite period, rather than the 5-year limit in the current Act. This brings the court’s powers to place sanctions under the Receiverships Act in line with its powers to sanction liquidators and administrators under the Companies Act. The Insolvency Practitioners Bill will therefore not only strengthen measures to remove incompetent, dishonest, or conflicted practitioners but also make it easier to avoid the appointment of such persons from the outset. I commend this bill to the House.

Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this

I am happy to follow on from the Minister and to say that the Labour Party will be supporting the Insolvency Practitioners Bill. In fact, I welcome the first reading of the bill. I was involved in the Insolvency Law Review at various stages of its progress. I think it began in 1999 and there were a number of different aspects to it, as it traversed its way through the different processes, involving a number of discussion documents. The initial discussion document was produced in 2004 and there was a subsequent one in 2006. On both of those we actually sought to address the issue of insolvency practitioners, and it was something that I personally wanted to have addressed. I cannot say that I found particular support for the proposition from certain officials within the Ministry of Economic Development, but I did think that it was important. What was really pushing back from the officials was the fact that there were such a small number of people involved in this profession that it did seem to be potentially a sledgehammer to crack a nut. I had some sympathy with that point of view but I felt that it was important that we try to consult those who were interested in insolvency law reform generally, around this issue of whether we should have some sort of regulatory regime on quality control, as it were, for insolvency practitioners.

The two discussion documents that actually raised this as an issue failed to produce a consensus, and that left me somewhat red-faced because, of course, the officials said: “There you go; we were right and you were wrong.”, which happened from time to time, as it happens to any Minister, I guess. I still was very keen to see something tried, and we have the same issue around auditors, and again it is the numbers, the coverage, and our relationship with other jurisdictions. It is also about our best practice and where we stand internationally and where we might look with the principles of the International Organisation of Securities Commissions, for example, in respect of insolvency practitioners.

The negative licensing option, which had not been promoted in either of the discussion documents, was my last-ditch attempt to get some traction on the issue and this was the one that we went out and did a targeted consultation on. This did not go out for another discussion document; the consultation paper was sent to the specialist insolvency practitioner stakeholder bodies, and they were INSOL New Zealand and the joint insolvency committee, which involved representatives from the New Zealand Law Society and the New Zealand Institute of Chartered Accountants. That was back in June 2008, and of course we were coming up against a general election at that stage, so it was a relatively tough order to put to people in the lead-up to a general election. But agreement was reached, and I think that what really sold the particular model the Government is now adopting, by way of the legislation, was that it was a cost-effective form of regulation. It was not going to break the bank, as it were; it was not going to impose unnecessary compliance costs on a very, very small sector, but it recognised that there were a small number of people out there who essentially were causing a major problem. The well-respected insolvency practitioners whom we have in this country were the first ones to tell us that they existed and that there was sufficient concern to do something. It was not sufficient to go that step further and bring in a positive licensing regime, but the negative licensing regime enabled action to be taken where it was needed to be taken.

As I say, I think the number of insolvency practitioners drove what I saw as a pragmatic response to the issue. They say there are around 50 involved in full-time insolvency practice and around 50 others who take referrals from time to time; so we are not talking about a huge amount of people. I also want to give some public reassurance that this is not an indication of any great crisis in the sector, or that we think that the vast majority of insolvency practitioners have issues; it is an absolute minority. But because we are dealing with people who have great responsibility, at a time that is very distressing for shareholders, for creditors, for company management often, and for all of those different individuals who have concerns around the insolvency of a company in voluntary administration, in liquidation, or in receivership, I believe we have an absolute obligation to make sure that we have the power to take action, should it be required.

I took the opportunity of the bill’s introduction to grab a copy of the original Cabinet paper that I took through, which of course the Ministry of Economic Development helpfully put on its website on a regular basis. This enabled me to look at the regulatory impact statement and refresh my memory around that. I know that I have said this all this year, but I will not miss any opportunity to repeat it: it is a huge mistake to take the regulatory impact statement out of bills. It really is much better to have the regulatory impact statement printed with the bills. If that is not done, then one has to print them out separately as they contain the information we need to debate these issues in the House.

I have made the point to the Minister for Regulatory Reform, and I know that he has an issue with this. The issue is that the regulatory impact statement is part of the Cabinet paper, and by including it in the bill it may not reflect the changes that have been made in Cabinet. Well, I think we could have some tweaking here. There is probably a germ of an idea where we could get that resolved. But, anyway, this regulatory impact statement, which I can take some credit for because I was the Minister who signed it off, is excellent. I think that everyone would be proud to have a regulatory impact statement of this nature. The reason is that it states the problem. It talks about the status quo and the problem. It talks about the size of the industry. It talks about the objectives. It also talks about the alternative options, which were completely missing from the bill that we dealt with before. There were no other options included in that paper, because the Government had gone straight to the decision without setting out the options. This paper sets out the first option of voluntary accreditation, the second option of mandatory licensing, the third option of competitive licensing, and then finally the option of negative licensing.

I think that is absolutely the way that all regulatory impact statements should proceed. We have to state the problem and then set out the different options for addressing that problem, while also addressing the status quo. We have to ask ourselves what the cost-benefit analysis is, and what the risks and opportunities are in respect of the different options that exist. We then come up with a recommended option, and we justify it in the regulatory impact statement. That is why this particular bill is one that I fully support. It will make a difference.

I make the point that it occurs not just in the instance of a shareholder-friendly appointee. The Minister used that example, and it is a very good example of what can go wrong. But I also put it to the House that money has to be left in the company in order to pay the liquidator’s fees. If the liquidator thinks that chasing some money, which does not have a certain outcome, may not leave enough for the fees to be paid, then that may drive a totally inappropriate outcome for the individuals who are relying on the receiver or the liquidator to do the best for the interests of the creditors and the shareholders. I think this is something that we will enjoy looking at in the select committee. I am very confident that in relatively short order we will be able to report back a bill that will gain the full support of the House.

KATRINA SHANKS (National) Link to this

It is my pleasure to stand and talk to the Insolvency Practitioners Bill tonight. In fact, it is not very often that we get a bill before us that is exactly what the title says it is. This bill is literally about insolvency practitioners, and it is good to see the title of the bill reflects what the bill is about.

This bill is part of the National-led Government’s focus on improving the integrity of our financial systems, which is really important. It is important that we boost investor confidence, and that investors have confidence in our markets. It is especially important after the collapse of some finance companies that there is integrity, and that investors know that if an insolvency practitioner is going to look at a firm, they can have confidence that it will be done with integrity.

I would like to respond to the comments of the previous speaker, Lianne Dalziel. She made a couple of really interesting comments, and I am really interested to see what will happen in the select committee when we tease out some of the issues that she raised tonight. It was really interesting to listen to the previous Minister speak. She had the commerce portfolio and tried to implement the initiative. She tried to turn it into a bill, but she never managed to get to that stage, because of advice that she received previously. Now National has this legislation, which is in the same form that it was when the previous Minister looked at it, and the same issues still sit around it. I am really interested to tease out some of the issues that the previous Minister, Lianne Dalziel, spoke about.

Lianne Dalziel talked about why we need legislation for such a small number of people. In effect, from my understanding, there are only about 100 insolvency practitioners in New Zealand, like Lianne said, and of those a very small percentage are not particularly good. So if this bill addresses only 5 percent, then that works out to be five practitioners, which is really interesting. I ask whether the bill is a sledgehammer for a walnut, or whether there is more to it. I cannot wait to see the debate within our own select committee when we address those issues and get advice on them. If we are serious about boosting confidence in our companies and in our finance sector, we need those types of frameworks in place.

When I looked through this bill, I thought we should just put it through as a regulation instead of creating a bill for such a small number of people. But then we have to ask where the framework would be in order to have that regulation. It would most probably have to be in the Companies Act, but it is not in there. So there is a real purpose for having this bill in place—to ensure that we have a type of register in place.

When we talk about a register, it is really a reverse register. It is a register for those practitioners who are barred or are not allowed to practise as insolvency practitioners, as opposed to a register to show who is a practitioner, which is quite unique. When we look at it, we see that it is quite creative. It keeps down the costs for all those practitioners, because they do not have to register. It is also very easy to find someone who cannot practise, because there will be such a small number of them on the register.

I am looking forward to the debate we will have at the select committee. I am looking forward to hearing the submitters who will come forward and talk to some of the issues that have already been raised tonight. I commend this bill to the House.

CLARE CURRAN (Labour—Dunedin South) Link to this

I stand to speak in the first reading of the Insolvency Practitioners Bill. As members have heard, Labour supports this bill. I thank the Minister Simon Power for carrying out the work of the fifth Labour Government in strengthening the rights of creditors, and I support his assertion that insolvent companies must be handled with integrity. I also commend tonight the work done by my colleague the Hon Lianne Dalziel and her involvement in this issue.

The bill brings insolvency practitioners up to standard by introducing a negative licensing system that gives the Registrar of Companies the statutory authority to place individuals under supervision in, or to prohibit individuals from, providing corporate insolvency services for up to 5 years. Insolvency practitioners carry out liquidations, voluntary administrations, and receiverships. A minority of those practitioners are underperforming; they lack the necessary skills and competence, and repeatedly favour debtors at the expense of creditors.

I think we heard tonight that there are about 100 insolvency practitioners in New Zealand, and that a mandatory licensing system would not be cost-effective. This bill aims to make it easier to prohibit or place under supervision practitioners who are unfit to practise, rather than to force a creditor or another party to have to go through the rigmarole of applying to the High Court to get a practitioner prohibited from practising. The bill will also give protection against self-interested practitioners, who in some cases have put their own interests, or the interests of the insolvent company, ahead of creditors who may be owed money.

Labour supports any measure that strengthens and upholds corporate integrity in New Zealand. That is why the previous Labour Government recommended in August 2008 that a negative licensing system be adopted for insolvency practitioners. We are glad to see that the current Minister is carrying on that work. Labour’s concern is that in cases where companies are made insolvent, creditors are left wanting; it is the protection of those creditors that is important. The purpose of insolvency law is largely to protect against resource-intensive court proceedings where creditors are forced to compete to recover their debt. We need to ensure that financial failure is dealt with, with certainty, clarity, and a clear set of rules for who gets what and in what order. We believe that this bill goes some way to addressing that.

As I previously mentioned—and I know that it has been mentioned by my colleague Lianne Dalziel—there are about 100 insolvency practitioners in New Zealand, and a lot of trust is put into those few, who are charged with carrying out liquidations, voluntary administrations, and receiverships. Those processes require a practitioner to carry out skilled tasks with sound judgment and integrity, and it is important to note that that expectation is mostly upheld. But there are always exceptions, and it is the underperformers whom this bill targets. The current law provides minimal restrictions as to who can be appointed as a liquidator, administrator, or receiver, which means that practitioners with very little knowledge of commercial law and of procedures set out in relevant legislation can be appointed to manage or wind up insolvent companies.

That can lead, among other things, to the failure of practitioners to discharge their statutory obligations to creditors, so this bill establishes a system that targets practitioners who fail to comply with their duties, then places them under supervision and/or prohibits them from acting as practitioners for up to 5 years. This negative licensing system is being adopted as a more cost-effective option, rather than having it made compulsory for all insolvency practitioners to be registered—a system that if implemented would cost several thousands a year and deplete the funds available to creditors.

This bill will give the Registrar of Companies the power to take into account failures that have occurred up to 5 years previously, and practitioners will be able to appeal to the High Court against a decision of the registrar. This bill amends the Receiverships Act 1993 so that the High Court may make a prohibition order in relation to a receiver, for an indefinite period. The registrar is able to fine, up to $10,000, those practitioners who do not adhere to their terms and conditions under the Companies Act 1993.

The bill will also require the registrar to maintain a public register of people who are subject to prohibition or supervision, which is information about practitioners that will be easily accessible to the public. Last week in the New Zealand Herald there was the story of Ram Rai, a former restaurant owner, who got into a dispute with liquidator Gilbert Chapman over the amount he was being charged. Through action in the High Court Mr Rai was successful in reducing the charges from Gilbert Chapman from about $63,000 to $25,000. In his summary, Judge Roger Bell noted the difficulty of the process of challenging a liquidator’s charges, saying that most times it is not worthwhile for a creditor to do so, which to a certain extent leaves the liquidator in a position of some immunity. So this bill would go some way to resolving that problem, by allowing the Registrar of Companies to suspend incompetent or delinquent practitioners from operating in the insolvency industry, based on their prior actions or current performance. These reforms will enhance transparency and accountability in the insolvency profession, which is important, by ensuring that only skilled and competent practitioners are appointed and that returns to creditors are maximised.

It is important to note that the current lack of regulation means that although the profession plays a crucial role, there is no official record of the number of practitioners, or of their qualifications. We need to make the financial sector more open and transparent, which is what my colleague the Hon Lianne Dalziel strived to do as Minister of Commerce in the last Labour Government, and it is good to see that the current Minister is putting partisan politics aside and following in her footsteps. Labour wholeheartedly supports a licensing system that lets creditors know that insolvency practitioners are competent in their specialised areas of work, and that they are capable of maximising returns from financially distressed businesses. That is why we are supporting this bill.

DAVID CLENDON (Green) Link to this

I am pleased to speak on behalf of the Greens on the Insolvency Practitioners Bill. It has been useful to hear some of the contributions so far, and in particular to hear some of the background and the history to this. Clearly, there has been a problem here for some time, and this is the latest attempt to address that problem. The bill clearly sets out to create a negative licensing system giving the Registrar of Companies the authority to restrict certain individuals from providing or continuing to provide corporate insolvency services. The registrar would be able to take into account failures to comply for the previous 5 years and would be able to move to prohibit receivers from practising for up to 5 years, or require them to practise under the supervision of somebody who is acceptable to the registrar. There is also a provision in the bill for receivers to have the right to appeal any move to put them on a negative register, which is only appropriate, given that it could be a matter of livelihood for some of these practitioners.

The nature of the problem being addressed is spelt out in the explanatory note of the bill, and that is that the process involved in liquidating companies—that is, dealing with voluntary administrations or receiverships—requires that practitioners possess a high level of knowledge, a high level of skills, and an equally high level of integrity to ensure the best outcomes for all the parties affected in these cases.

Reference is also made to a general consensus among practitioners and observers that a small number of their peers cannot be relied upon to perform, or to provide, or to exercise adequate care, and that the small number of practitioners is constantly and continually underperforming. The law as it currently stands offered only very limited restrictions on who can be appointed as a liquidator, as a receiver, and it seemed possible, and perhaps even inevitable, that, on occasion, practitioners with very limited knowledge of commercial law or the procedures set out in relevant legislation can be appointed to manage or wind up an insolvent company. That general view has clearly been reflected in some of the comments we have already heard.

Finally, it is clearly noted that some practitioners currently appointed repeatedly fail to discharge their statutory obligations to creditors and in ways, as expressed by the Minister of Commerce, that are certainly unethical and must border on the illegal in terms of the practices that were described.

The solution proposed in this bill is that practitioners whose work is deemed to be inadequate or who fail to comply with their duties to their clients can be prohibited from acting in this capacity, or be obliged to work under supervision. The argument is made that the sector is too small, having only a hundred or so—or somewhere between 100 and 200 practitioners—for it to warrant the establishment of a positive, upfront accreditation or licensing system, and that such an approach would not be cost-effective. The point is made in the bill that setting up registration or some sort of an accreditation system would cost something to the tune of several hundred thousand dollars a year per practitioner to operate, and that given that the practitioners are priority creditors in the winding up of a company this cost could further deplete the limited funds available to creditors. I question that view, although I would appreciate clarification on it. That would suggest that each practitioner would indeed take funding of several thousand dollars in each insolvency case, and surely the practitioner would be registered. There would be cost to maintaining a register, so in fact it would not be the case that in each event there would be a cost imposed on the funds available from a dissolution or a receivership. It is also observed that there will be some cost in establishing a register of people who have been banned or suspended from practice. Indeed, that cost would be borne by the registrar.

An appeal to short-term cost savings cannot disguise the key point in our key objection to this bill, which is that the remedy proposed is a classic “bottom of the cliff” approach. It waits for a person to demonstrate his or her inadequacy, rather than establishing in advance that a person has the necessary qualifications, skill, ability, confidence of his or her peers, and integrity to practise and to deal with issues at this level. It is our view that short-term cost savings are seldom appropriate drivers for good policy. Clearly, there would be costs involved in the supervision of those who had failed to perform adequately and are deemed to be in suspension, or operating only under the supervision of the registrar or somebody appointed by him. So the dollar figure that has been suggested, of a few thousand dollars a year, to manage a positive accreditation programme is clearly a gross figure and not a net figure.

The reactive measure of waiting for trouble to occur before responding will simply see costs transferred from the upfront creation, management, and maintenance of a positive accreditation system, and could quite conceivably lead to costly and after-the-fact court proceedings. This would seem to be opening a door, creating a possibility that only those creditors wealthy enough to afford to go to the courts will have the opportunity to protect their interests from bad receivers, from practitioners who lack integrity in their work. A positive accreditation system, upfront licensing, and some sort of regime to accredit individuals or companies is commonplace across a range of professions and trades.

Hon Dr NICK SMITH (Minister for the Environment) Link to this

First, I commend the Minister of Commerce for the work that has gone into introducing the Insolvency Practitioners Bill to the House. I also acknowledge the work that the previous Government did in this area, and its recognition of the real need for a more robust framework for regulating insolvency practitioners. I particularly wanted to make a contribution to the debate in the context of my own Nelson constituency, where there has been considerable angst about insolvency practice, and where the need for this reform is well illustrated. Insolvency work is not top of the popularity charts. Just as there are not many doctors lining up to be undertakers, most chartered accountants would much rather have the work of building successful businesses than being involved in the winding up of unsuccessful companies. There are all sorts of tensions that fly around insolvency. Success has many fathers, but failure is often an orphan. There are often issues over who specifically owns what, relative to directors of a company, and what they own personally. There are arguments over valuations and what is fair value, and debate over which creditors are owed how much.

Those problems are compounded by the practical reality that the companies that are in liquidation will commonly have real problems over the accuracy of their records and in their management. The issue of insolvency practices has caused a considerable amount of press attention in Nelson, and I have received a considerable number of concerns about a number of insolvencies involving a new practitioner trading as Norris Management Services, or NMS. I want to illustrate the examples to the House so that as the bill goes to the select committee we can be sure that we get the detail of this bill right. The first part that causes me concern is that when this practitioner started up in Nelson, he advertised himself as being a “highly experienced insolvency practitioner”, but it has worked out that he had no previous experience. He had no professional qualifications; he was trained as an auto-electrician. Prior to coming to Nelson, his only experience in liquidations was his own spray-painting business in Hamilton, which went into liquidation and left over $150,000 of debts to unpaid creditors.

I am further concerned that this particular practitioner was convicted of fraud in Hamilton in May 1999, and was more recently convicted this year in the courts for illegal filming in a private residence. There has been some quite inappropriate goings-on. In the most recent liquidation, of Murchison Buses, the liquidator effectively sold a bus to his own company for nil value. There are also accusations that his partner is now the owner of one of the other vehicles that was owned by that company. When I met the insolvency practitioner and raised those issues with him on behalf of some of the creditors, the practitioner admitted that his company had acquired the bus for nothing, and, most worryingly, could not see that there was anything particularly wrong with that. That is not the only liquidation involving Norris Management Services where there are real concerns over the conduct of the insolvency.

In responding to constituency concerns about those goings-on I have been quite perturbed about how little protection or checks and balances there are where there are problems over an insolvency. I raise these issues quite deliberately in the House because a number of the parties have come to me, incredibly fearful that any attempt to raise issues would simply involve them in more litigation or threats. My greatest frustration with these issues is how little can be done. There are no checks or balances under the current law, and an insolvency practitioner is in a very powerful position. We need to be realistic that the directors of companies or businesses concerned will often be broke, and they will be in no position either emotionally or financially to be able to legally challenge a decision of an insolvency practitioner. Most creditors take the attitude that they are unlikely to get much; they cut their losses and simply move on. My worry is that disreputable operators are able to burn up most of a company’s assets in their own fees, effectively transferring the creditor’s assets to themselves.

In the case I have looked at in Nelson, the insolvency practitioner—and I remind the House that this is a person with no qualifications—is charging himself out at $200 per hour, which is $8,000 per week, and the largest share of the company’s assets end up in the hands of that insolvency practitioner. I also believe there are real issues over the reporting timetables. I have had numerous complaints of creditors and debtors waiting for 6 months, 9 months, and 12 months to get any idea on the totalling up of the final position in a company. Although I respect the fact that we all want to ensure we do not over-regulate, we all have an interest in ensuring integrity in the way business creditors are treated, and to ensure the affairs of companies are wound up fairly.

This bill provides sensible improvements. I particularly welcome clause 5, which disqualifies a person from being an insolvency practitioner where they have a conviction for a dishonesty offence. People convicted of dishonesty should not be allowed to work in this area. I also welcome the provisions that enable the Registrar of Companies to prohibit individuals from providing corporate insolvency services. Those are welcome measures that, alongside many of the other changes being made in the area of financial and investment affairs by the Minister, provide an increased level of integrity, from which all New Zealanders will benefit. This bill will be welcome news to those in Nelson who feel powerless to deal with problems over inappropriate practitioners. I support its first reading and I encourage the Commerce Committee to debate its provisions vigorously so that we can have a fairer and better system of solvency practitioners in New Zealand.

Hon SHANE JONES (Labour) Link to this

Kia ora anō tātou. Firstly, I stand to support—bizarre though this may sound to be—many of the sentiments expressed by the previous speaker, Dr Nick Smith. Indeed, as he was on his feet I shared with a colleague of mine the thought that the colleague should observe Dr Smith outlining a case apparently about egregious wrongdoing—of potential criminal liability. One of the virtues of being in Parliament is the ability to outline before colleagues of the House and, indeed, to the public via the media, those cases that warrant the attention of this House. Of course, what we should bear in mind upon making those statements is that facts have to be of a high order and that a remedy should follow closely behind them. But the case that Dr Nick Smith has outlined gives a great deal of impetus as to why we should support the Insolvency Practitioners Bill.

I was reading several days ago about the appointment of receivers to Allied Nationwide Finance, the finance company associated with the organisation that—in my view unwisely—sought to assimilate the assets of the two discredited businessmen Eric Watson and Mark Hotchin. They, however, can wait for another day. This bill is important if we look at a case like that of Allied Nationwide Finance, where the actual investors are highly likely to recover most of their money by dint of a Treasury guarantee. It raises a question as to the quality of stewardship that will be shown by the receivers in such a case, because there is a balance to be drawn between how much time and energy they exhaust in the pursuit of monies in order to satisfy creditors, and ensuring that they do not exhaust time and energy to such an extent that they actually melt down the residue that might be available for the parties injured by the enterprise. Many of us have watched in our small provincial towns as insolvency practitioners and receivers were appointed by virtual associates and virtual friends. They conducted their affairs in such a way that we could see that although they were hiding behind the patina of the reputation of their profession, in fact they were also aiding the agenda of the people who had appointed them.

I remember that several years ago the Inland Revenue Department—if I am not mistaken it was the Inland Revenue Department—and members of the accountancy profession brought forward a proposal that in matters of receivership there should be an unqualified ability for the statutory creditors to zoom in and take everything. I think that this bill lifts up the professionalism required of a receiver. We need to ensure that the people who have this role draw the right balance between the time and money available to pursue monies that are outstanding and also the ability to listen to and treat different categories of creditors with a degree of fairness. Receivership takes place at a time when there is an enormous amount of stress, marital discord, and—dare I say it—as we learnt in the 1990s, even death. We must bring to an end the damage done by dodgy secondhand-car salespeople, or by people like the friends of Eric Watson and other discredited members of the business community who have rorted over $6 billion worth of pensioners’ monies through the imbroglio of the finance companies. This bill seeks to do that, and it is good that there is a shared level of concern between our former Minister and the current Minister about that.

Earlier today we were debating the wisdom of expanding savings vehicles and improving the taxation treatment of those vehicles. It is all very well for us to talk about expanding savings, but in order for that to occur we need to have professionals whom members of either the business community or the ordinary New Zealand community can trust. Our desire to expand the scope for business to create new trajectories of wealth will not come to pass if the people in society whom we charge to carry out these responsibilities are not accountable, cannot be held to be accountable, or are unfit for the task. Receivers and liquidators are only one part of that; there are a host of other characters who have not distinguished themselves with a great deal of success or high-quality conduct in the funds industry—the finance industry. I salute the architects of this bill and the people bringing forward the concerns of individual constituents, firms, and creditors, but this is really just a small part of a broader challenge that we have in New Zealand. If we are to ensure that the conduct in our commercial sectors improves, then those who have special responsibilities of an administrative nature need to be held to a high level of accountability.

I have often wondered about the American model, which really moves very quickly into criminality. In the way that we have tended to deal with cases of egregious failure of a commercial—a white-collar—nature, unless there is a criminal issue, then we do not ordinarily think that these people should go to jail. That is a distinction that I have often drawn, as I have spoken and thought about these things. In the United States of America people tend not to dither. The wrongdoers, the culprits, are very quickly arrested, and in a remarkably short period of time they are sharing, figuratively, a cell with O J Simpson. I wonder, as we move to improve the quality of administrators, whether we ought to think about injecting penalties of that burden, of that nature, into our law. I have no doubt that had that situation applied, many of the people who have acted wrongly, or who were dodgy, in the period of time of the finance company breakdowns would be facing a wider range of penalties than they face now—although a few of them are going to court, and then it is up to our District Court and High Court judges.

We have heard from various speakers as to why this legislation is very important. I would say that although it is important in terms of the breakdown of a company, we should see its importance also in actually buttressing and strengthening the pillars of the commercial community, the commercial sector, for the benefit of the generations coming through—unsophisticated investors, and creditors like a constituent who came to see me recently. A building company went broke, and he had not registered, or possibly did not know that he had to register, his claim to $200,000 worth of tiles prior to the appointment of a receiver. Of course the receivers arrived, and his ability to—legally—secure the tiles now that the premises are under the control of the receiver is somewhere near zero. That tells me that in a time of economic buoyancy, when everyone had a lot of money and there was a lot of cash going around, we probably were sloppy—and that constituent certainly was. But he is learning a very valuable—and indeed highly costly—lesson that once a receiver is appointed, if the provider of either a service or material has goods that have not been registered, then the prospect of that party recovering them is very, very slight.

Not only does this legislation represent a very sensible advance but it is a reminder that we have to lift the quality and the standard of administration right across the commercial sector—certainly in the event of a greater savings development, and of a greater level of interest in our economy, when money may be put into certain areas where there may be risk in order to grow the economy. I support this bill.

JONATHAN YOUNG (National—New Plymouth) Link to this

I am very pleased to stand in support of the Insolvency Practitioners Bill. Tonight we have heard some very interesting comments, and it will be good to see this bill progress through the select committee and to discuss it.

The bill is part of a well-rounded framework of regulation that this Government wants to put in place in the financial and business sectors. When the credit crisis struck, $190 million in $100 notes was taken out of circulation, out of the banking sector, and was simply stored in private deposit boxes or under mattresses. That is all to do with confidence. The previous speaker, the Hon Shane Jones, commented that our drive for savings depends upon people’s willingness to trust the administrators of those savings schemes. I believe that the Insolvency Practitioners Bill goes well toward shoring up the lack of confidence that has existed through company failures.

When creditors suffer loss through a company failure, the last thing they want is a shonky insolvency practitioner trying to recover their interests. They do not want to go from one injury to another. This bill, in its many aspects, ensures that the quality and the stewardship of those practitioners are maintained at an incredibly high level. Stewardship is a good word to use in regard to this profession, because people are looking after the interests of other people’s assets with skill, integrity, fairness, and timeliness. All of those aspects are incredibly important. It is my pleasure to support this bill as it goes through the House. Thank you.

RAYMOND HUO (Labour) Link to this

I rise to take a call to support the Insolvency Practitioners Bill. The bill follows concern that up to 40 percent of the New Zealand insolvency profession might not be up to scratch. Submissions received on a 2004 Ministry of Economic Development discussion paper entitled Draft Insolvency Law Reform Bill suggested there might be as few as 50 insolvency specialists in New Zealand, and that up to 20 might not meet adequate standards. There are two apparent problems at the moment. Firstly, unlike the situation in many comparable countries, insolvency practitioners in New Zealand do not need to have any particular qualifications or licences to be appointed as liquidators and receivers. Secondly, the lack of regulation means that although the profession plays a crucial role, there is no official record of the number of practitioners or their qualifications. Therefore, reform in this area is long overdue. The bill results from work done by the previous Minister of Commerce, the Hon Lianne Dalziel. My congratulations go firstly to the Hon Lianne Dalziel for such a great initiative, and also to the current Minister, the Hon Simon Power, for implementing those proposals.

The bill introduces a negative licensing regime for insolvency practitioners—namely, liquidators, receivers, and voluntary administrators. Insolvency practitioners who do not meet the required standards of competence will be banned or placed under supervision. It also empowers the Registrar of Companies to maintain a publicly accessible electoral register of people who have been banned or placed under supervision. The new system is expected to assure creditors that insolvency practitioners are competent to undertake specialist work and capable of maximising returns from financially troubled businesses. A negative licensing system is designed to achieve that goal while avoiding high compliance costs for businesses. Under the existing criteria, any person over 18 years with sound mental health can be appointed as an insolvency practitioner; there are no requirements that insolvency practitioners have any particular qualifications or level of education. There is no way for creditors and others appointing liquidators to assess whether the person has the appropriate skills, knowledge, or competencies. To avoid delaying the bulk of the insolvency law reform process, the previous Labour Government’s work on the regulation of practitioners was split off from the main reform process.

Aside from negative licensing, two other options were considered for the regulation of practitioners. The first one was voluntary accreditation, which was rejected because it would not deal with the issue of preventing people with insufficient skill and experience from carrying out insolvency work. The second option was mandatory or competitive licensing linked with New Zealand Institute of Chartered Accountants membership. It was rejected due to its high compliance costs, and due to the fact that insolvency practitioners do not all come from the field of accounting. The bill also extends the automatic disqualification criteria in the Companies Act 1993 and the Receiverships Act 1993. The following people are prevented from being appointed from the outset: certain family members of a person who has, within the 2 years immediately preceding the commencement of liquidation, been a shareholder, director, auditor, or receiver of the company or of a related company; a person who has been banned from taking similar appointments in other specified jurisdictions, such as Australia; a person who is a debtor participating in a no-asset procedure, or who is subject to a summary instalment order under the Insolvency Act 2006; a lawyer who has been struck off; an accountant whose membership of the New Zealand Institute of Chartered Accountants has been revoked or suspended; and, lastly, a person who has been convicted of a crime involving dishonesty as defined in the Crimes Act.

Under the bill the new regime will apply retrospectively, in that the Registrar of Companies will be able to take into account failures to comply with the duties of a practitioner that have taken place before the negative licensing regime came into effect, but only up to 5 years before the date of notice. These reforms will enhance transparency and accountability in the insolvency profession by ensuring that only skilled and competent practitioners are appointed, and that the returns to creditors are maximised. The new system will apply to liquidators, administrators, and receivers, and will target those practitioners who lack the requisite skill and knowledge to undertake insolvency work competently, or who perform poorly in this field of work. Supporting this new system will be tighter statutory disqualification criteria and wider court powers to replace a practitioner who has a conflict of interest and lacks independence in a particular insolvency case.

The reform in this area is long overdue, although this is by no means a major reform. Many interested parties, including practitioners, had hoped that a form of licensing would be introduced, which could have been grandfathered in. I note that the Government aims to have this bill passed into law and coming in to force in July 2011. I look forward to more debate on this bill in the near future. Thank you.

MELISSA LEE (National) Link to this

It is a pleasure to rise to take a short call on the Insolvency Practitioners Bill. Having listened to all of the speakers who spoke before me, there seems to be a consensus across the House. I particularly liked the turn of phrase that the Hon Shane Jones used—he congratulated the architects of the legislation. I take this opportunity to acknowledge the previous Minister of Commerce, Lianne Dalziel, as well as the current Minister of Commerce, Simon Power. He has done a lot of work, and I look forward to the tremendous amount of work that will be coming to the Commerce Committee.

The overriding focus in the commerce portfolio is to restore confidence in our capital markets after the huge global financial crisis we have had and the collapse of many finance companies in New Zealand, so that mum and dad investors in New Zealand can have that confidence back. Insolvency practitioners play a crucial role in mitigating losses to investors when a company hits difficult times. In spite of their important role, insolvency practitioners are not required to be licensed or registered. That is hugely surprising to me, especially when an insolvent business is wound up. Insolvency practitioners are required to demonstrate sound judgment and good negotiation skills. They need to have a knowledge of commercial law and investigative skills to quickly assess whether the financial position of a company has resulted from the company’s not having had adequate financial management systems. An understanding of the statutory obligations of company directors and of their own obligations under insolvency law is also required, and when these people do not have a clue, we are in big trouble.

This bill is part of the National-led Government’s focus on improving the integrity of our financial system. The aim of the bill is to establish a negative licensing system for insolvency practitioners. Earlier speakers have also mentioned this. It gives the Registrar of Companies the power to prohibit or restrict individuals from providing corporate insolvency services. The number of bad seeds in the scheme of things is only small, and to set up a licensing system whereby all practitioners have to be registered, or licensed, and accredited would cost practitioners thousands to operate. This cost would be passed on to people who often do not have the money to pay it. Often the insolvency practitioners take out the money first, so that at the end of the day, the people who are in financial trouble do not end up getting anything.

The main change to the Companies Act 1993 applies specifically to the kinds of people who are disqualified to act as the liquidator of a company, or as the administrator of a company. Apart from those who are currently disqualified, I particularly like it that anyone who is a family member, shareholder, director, auditor, or receiver of the company or a related company in the 2 years immediately preceding the insolvency is disqualified. However, one class of person who would normally be disqualified has been removed from this legislation—that is, a person who has a continuing business relationship with a secured creditor of a company becomes eligible to be appointed as a liquidator of that company.

The Registrar of Companies gets more powers in this bill. For anyone who in the past 5 years has failed to comply with the Act, the registrar has the power either to prohibit that person from practising as an insolvency practitioner for 5 years, or to make that person practise under supervision for 5 years. Anyone acting in contravention of such a decision is liable to the maximum fine of $10,000. What is really good for the public is that they are able to see a list created by the companies register of the people who are struck off—people who are either restricted or prohibited from acting as insolvency practitioners.

As I said, this is a very short call as I am the last speaker. I look forward to the submissions in the Commerce Committee. I commend this bill to the House.