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INPRACTICE     NZ determined to stamp out rogue insolvency practitioners  

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NZ determined to stamp out rogue insolvency practitioners

Fed up with so-called “debtor-friendly” liquidators failing to protect the interests of creditors and undermining public trust, New Zealand has taken considered but far-reaching legislative action to eradicate the problem.

Dr John Purcell FCPA | March 2020

In June 2019, the New Zealand Parliament passed into law the Insolvency Practitioners Act 2019, heralding a co-regulatory scheme for insolvency practitioners to commence in June 2020. Prior to these reforms, insolvency practitioners were not regulated as a specialist profession. The legal rules and technical processes by which corporate insolvency is addressed are contained in the New Zealand Companies Act 1993.

The New Zealand insolvency law – typical of most jurisdictions – has balanced objectives of efficient reallocation of residual assets to economic purposes and the protection of creditor rights by way of optimised distribution, where a business rescue is no longer an option.

Over and above these practical matters is the universally acknowledged role of insolvency law as critical to promoting and protecting the integrity of corporate law as an essential aspect of market governance and transparency.

Background

The practitioner reforms have their origin in a Ministry of Business, Innovation and Employment (MBIE) 2016 review of corporate insolvency law, the background to which was a deepening awareness of the extent to which providers of insolvency services were falling short in standards of integrity and skills to the point where public confidence in the insolvency system was being eroded.

Specific instances came to light of “debtor-friendly” liquidators failing in their duties to protect the interests of creditors because of inaction – both wilful and through passive incompetence. These particularly related to transactions and arrangements in the “twilight” period leading to corporate collapse, with the vulnerabilities most evident among small-to-medium enterprises (SMEs).

Two key areas of systemic failure were identified by MBIE. First, the absence of anything but modest, rudimentary requirements regarding legal and mental capacity, and the personal solvency necessary for an individual to effectively perform as an insolvency practitioner. There was, therefore, no reference to fundamentals such as integrity, knowledge, skills, and experience.

Second, the MBIE review cited the absence of an efficient and accessible regulatory mechanism to both drive accountability for professional misconduct or negligence, and to rid the system of those who were dishonest and incompetent.

The Insolvency Practitioners Bill, which was the subject of MBIE’s Insolvency Working Group 2016 review, contained a number of reforms aimed at easing inefficiencies associated with prima facie disqualifications stemming from appointments from banks and prior roles as investigating accountants and introduced a scheme of occupational regulation for insolvency practitioners. However, it opposed the latter licensing proposals on the grounds that there was no requirement or reference relating to qualifications, experience or good character.

Hence, the Insolvency Working Group’s July 2016 Report No. 1 canvassed three occupational regulation options in addition to the Bill’s proposal, which was silent on matters of honesty, competence and quality of service. These were:

  • no statutory occupational regulation allowing current voluntary accreditation by the accounting bodies (at that time CAANZ [Chartered Accountants Australia and New Zealand] and RITANZ [Restructuring Insolvency & Turnaround Association of New Zealand]) to persist as the cornerstone of occupational/professional oversight
  • co-regulation with defined and demarcated roles for a government regulator and an accredited professional body
  • a government licensing regime.

Solutions

The Working Group’s recommendation, which is now embodied in the Insolvency Practitioner Act 2019, was for co-regulation of insolvency practitioners. The division of responsibilities is as follows, noting that the scheme differs from Australia’s co-regulation of insolvency practitioners, which has substantially greater power residing with the Australian Securities and Investments Commission (ASIC), particularly since 2017, with the passage of Schedule 2 of the Corporations Act – Insolvency Practice Schedule (Corporations):

  • A government regulator (MBIE/New Zealand Companies Office) will:
    • consider applications from professional bodies to be accredited to regulate members who offer insolvency services
    • set the criteria for accreditation
    • monitor and report on the adequacy and effectiveness of each accredited professional body’s regulatory systems and processes
    • set minimum requirements to be applied by accredited bodies for licensing insolvency practitioners
    • licence overseas-qualified practitioners who are not members of an accredited professional body.

  • An accredited professional body will issue licences to practice and carry out other aspects of frontline regulation including:
    • regulating entry
    • regulating ongoing requirements to retain a licence, including such matters as continuing professional development and the carrying of adequate insurance cover
    • promulgating and monitoring compliance with codes of conduct and professional ethical standards
    • receiving and investigation of complaints and taking disciplinary action where appropriate
    • carrying out practice reviews.   

‘Fit and proper’

Practitioners will be familiar with the critical notion of “fit and proper” in the occupational regulation of accounting professionals. Given the character of the New Zealand co-regulator regime, “fit and proper” has a dual application; first, as it applies to the individual applicant’s good standing in the business and wider community, and secondly, as it may affect the accredited professional body’s capacity to carry out its regulatory work to an appropriately high standard.   

Since the passing of the Insolvency Practitioners Act 2019, two highly significant initiatives and associated consultations have been undertaken by MBIE. These are the “Proposed minimum standards and conditions for the licensing of insolvency practitioners” (November 2019) and “Proposed standards, conditions and policies for accredited bodies” (December 2019). Of special note in the latter is the modelling of the co-regulation of insolvency practitioners on the co-regulatory scheme operating under the Auditor Regulation Act 2011 administered by the Financial Markets Authority (FMA), of which CPA Australia is an accredited body.

At the time of writing, it is expected that the final version of minimum standards, conditions, and policies for accredited bodies will be released in mid-March 2020, ahead of an April-to-May application period, for which CPA Australia is currently preparing.


Dr John Purcell FCPA is Policy Adviser Corporate Regulation at CPA Australia.