Insolvency practitioners face new licensing regime

Commerce Minister Paul Goldsmith. Photo / File

New Zealand's insolvency practitioners look likely to face a new licensing regime after a report to Commerce Minister Paul Goldsmith found that gaps in existing rules enable dishonesty and incompetence.

The public has until Oct. 7 to make submissions on a review of insolvency law, which Goldsmith says is primarily to find what the minimum level of entry should be for the specialists tasked with winding down companies.

The Insolvency Working Group, set up in November, recommended improvements to the law, finding "too many providers of insolvency services fall well short of the standards of integrity and skill that the New Zealand public is entitled to expect" by overcharging or failing to protect the interests of creditors.

The group identified two primary causes: it was too easy for people to become an insolvency practitioner; and there was a lack of accountability for poor behaviour.

Goldsmith said there was "evidence of a problem" where practitioners had a history of dishonesty, were too friendly to directors at the expense of creditors, and there was an inability to hold them to account. However, he couldn't say how widespread those issues were.

"The primary question I'm keen to get feedback on is around that trade-off of how high you go in terms of regulating entry and maintaining good competition and efficiency within the industry," Goldsmith told BusinessDesk.

"We've got a good framework here that we can work with, but I do want to test it from that point of view in terms of efficiency and competition. That's why I'm going out publicly."

The working group was tasked with investigating where there are problems with the voluntary liquidation of companies, including the use of phoenix firms where assets are transferred to a near-identical entity to dodge liabilities, and whether that's confined to the building sector or is a broader problem.

The group recommended introducing co-regulation of insolvency practitioners with accredited bodies to license the sector and make sure people meet minimum standards. It also recommended removing some procedural issues around the High Court's powers to enforce a liquidator's duties or remove them from office.

Legislation introduced by former Commerce Minister Simon Power would have installed a negative licensing regime for insolvency practitioners, meaning only those practitioners who fell short of the expected standards would have attracted the regulator's attention.

The 2010 bill's regulatory impact statement preferred the negative licensing regime as the most cost-effective response for a small industry, though said it might not be as effective as the more expensive mandatory licensing option.

The primary question I'm keen to get feedback on is around that trade-off of how high you go in terms of regulating entry and maintaining good competition and efficiency within the industry.

The working group mooted a funding model where professional bodies paid fees to meet the cost of being an accredited firm, which would then be paid fees and levies by practitioners. Firms providing insolvency services would also pay fees for practice reviews, and practitioners would pay levies to meet costs of operating a register.

Goldsmith said once that consultation has been completed he plans to write a "pretty substantial" supplementary order paper for the bill, which is currently at the committee stage.

The working group is chaired by former Deloitte partner Graeme Mitchell and includes Chapman Tripp partner Michael Arthur, lawyer Crispin Vinnell of law firm Anthony Harper, KPMG director Vivian Fatupaito, PwC director John Fisk, Debtworks executive director David Young, and Official Assignee representative Guy Caro.

The group is also looking at whether voidable transactions can be reformed, including whether the law can be changed to aid the recovery of lost funds in Ponzi schemes, with a second report expected later this year, which Goldsmith said would be responded to separately.