Dialogue: More regulation won't help creditors

By MIKE ROSS*

A Law Commission proposal for court intervention in the rescue of insolvent companies is leading to demands for a more tightly regulated insolvency profession.

If courts are to be given power to impose a freeze on creditors' claims while a rescue package is debated, then only accredited insolvency practitioners should supervise a debtor company during the moratorium period - so the argument goes.

This is a call for occupational licensing, which fell out of favour with the previous Government. But the Labour coalition just might think the idea will work.

The evidence against occupational licensing is overwhelming: it protects existing practitioners, keeps out competition, drives up prices and does little to protect customers.

All these problems are evident in the medical profession, where occupational licensing is supposedly justified on public interest grounds.

The insolvency profession is unregulated - anyone can set up as a practitioner doing liquidations, receiverships or acting as trustee or manager of a scheme of arrangement.

There are no exams, no certification procedure and no professional body claiming jurisdiction over insolvency specialists.

The statutory qualifications for liquidators and receivers are relatively simple: anyone aged over 18 and sane is eligible for the job. There are some disqualifications: current bankrupts and those disqualified from managing companies cannot undertake insolvency work.

Conflict of interest rules also prohibit those having a current or previous relationship with the insolvent company as director, shareholder or auditor from taking on some insolvency assignments.

While it is virtually open slather over who can claim to be an insolvency specialist, there are probably no more than a couple of hundred insolvency practitioners in New Zealand, nearly all of them chartered accountants.

Insolvency jobs are not given out. Creditors of insolvent companies decide who gets the work.

Chartered accountants dominate the unlicensed profession in New Zealand because their mix of academic training and commercial expertise has found favour with the market.

Creditors of insolvent companies have not relied on the licensing of insolvency practitioners to signal who might be good and who might be bad. Instead, they have relied on branding. Turning to those individuals who have proven expertise and enjoy market respect.

Chartered accountants dominate because their professional body, the Institute of Chartered Accountants, has worked hard to maintain the brand image: setting out professional guidelines for insolvency work, imposing continuing education requirements and operating a disciplinary system for defaulting practitioners.

There is nothing to stop any other professional body setting up with similar aims.

Occupational licensing is sold as the way to solve problems of information asymmetry; dispersed creditors may lack full and complete information about who are the better insolvency practitioners.

Being a licensed practitioner is supposedly a promise of excellence.

The emptiness of that promise is illustrated by problems bedevilling the medical profession.

The major economic criticism of occupational licensing is that it creates barriers to entry and drives up costs.

If licensing is introduced, all existing insolvency practitioners will be grandfathered in. They will be automatically licensed on the basis of their experience and will not have to pass any exams or qualifications.

Once in, they will pull up the drawbridge hampering entry for new entrants. Unnecessarily difficult exams and perverse criteria will be imposed as preconditions for entry.

The rule most favoured by any licensed profession is a requirement that new entrants develop suitable experience before being admitted to the inner sanctum of full registration.

The only way suitable experience can be obtained is by working for existing licensed practitioners.

It is unlikely that a licensing system for insolvency practitioners will benefit the public. In fact, the reverse is possible. A closed shop of insolvency practitioners might drive up prices and fail to seek innovative ways of dealing with dead or struggling businesses. These problems do not arise under the present regime of negative licensing.

Those who do make a mess of the job can be barred by the courts from further work in insolvency.

* Mike Ross teaches at the department of commercial law, University of Auckland Business School.