The IPRA provides for the licensing and regulation of insolvency practitioners. The IPRAA amends certain parts of the Companies Act 1993 and the Receiverships Act 1993. The provisions that enable the Registrar of Companies to prescribe the requirements for a licence (such as setting minimum standards of competence and experience), grant accreditation to professional bodies, and for regulations to be made, will come into force immediately. The balance of the legislation will come into effect gradually over the next 12 months. Here are the key things you need to know.
Insolvency practitioners are to be licensed and regulated
The aim of the IPRA is to strengthen regulation of insolvency practitioners by introducing a co-regulatory licensing regime. The Registrar of Companies is empowered to grant accreditation to individuals or professional bodies, (such as CAANZ), who will be responsible for licensing practitioners and overseeing their conduct. The majority of practitioners are expected to obtain a licence from an accredited body. Insolvency practitioners will need to be fit and proper people and demonstrate that they meet minimum standards of competence and experience to obtain a licence. The Registrar will also have disciplinary oversight of practitioners as part of the co-regulatory regime.
Anyone who acts as an insolvency practitioner without a licence will commit an offence punishable by a fine of up to $75,000.
Transitional provisions—existing accredited insolvency practitioners and existing insolvent liquidations
Existing accredited insolvency practitioners (CAANZ/RITANZ accredited practitioners) are to be treated as licensed practitioners when the licensing regime comes into force by an Order in Council, which is expected to be in (and cannot be any later than) 12 months’ time — i.e. in June 2020. Practitioners will then have four months to apply for a licence from an accredited body — i.e. by October 2020. If a practitioner does not apply for a licence within this window, then the practitioner’s transitional licence will expire. The transitional provisions allow for a practitioner to continue practicing for a further eight months while an accrediting body determines the practitioner’s application — i.e. until June 2021.
In relation to existing insolvent liquidations, a liquidator who is not a licensed practitioner will have a year to complete the liquidation once the licensing regime is in force.
Qualified accountants and lawyers will still be able to accept appointments as liquidators of solvent companies. Nevertheless, if a liquidator is not a licensed insolvency practitioner and it becomes apparent that the liquidation is an insolvent liquidation, the liquidator will need to resign without delay and appoint a successor who is a licensed insolvency practitioner.
A person who acts as liquidator of a solvent company who is not a licensed insolvency practitioner, a qualified accountant, a lawyer, or a member of any professional body recognised for the purpose of solvent liquidations, will commit an offence and be liable for a fine of up to $75,000.
Directors who provide a declaration that a company is solvent (i.e. its debts will be able to be paid in full within 12 months following appointment of a liquidator) must have reasonable grounds for making that declaration, otherwise they will commit an offence and be liable for fine of up to $10,000.
Australian practitioners—temporary licences for ‘across the ditch’ assignments
Registered Australian insolvency practitioners who accept an engagement in relation to a New Zealand company will be deemed to have a licence for 10 days from the date of their appointment to allow them to apply for a licence. The temporary licence either expires after 10 days if no application is made, or if the licence application is declined. The Registrar may in time expand this privilege to practitioners in other overseas jurisdictions.
Section 280 of the Companies Act 1993—qualification of liquidators
Previously, a practitioner who had, or whose firm had, provided professional services to a company or a secured creditor of the company within the two years immediately before commencement of a liquidation was disqualified from being appointed as liquidator of that company. That disqualification will no longer apply where the professional services were provided because of the appointment of the practitioner or their firm, by or at the instigation of, the company or a creditor, to investigate or to advise on the company’s solvency, or to monitor its affairs.
We welcome this overdue amendment. Given the size of the New Zealand market, many reputable practitioners were disqualified from accepting appointments without court approval as they had accepted an investigating accountant assignment from the company, or were caught by their firm’s continuing business relationship with the major banks. In both circumstances, there was usually no real conflict, or risk that the practitioner’s independence would be compromised.
Duty of insolvency practitioners to report ‘serious problems’
Insolvency practitioners will be required to report ‘serious problems’ to the Registrar and other appropriate authorities. The definition of a ‘serious problem’ is wide and includes:
Practitioners have no obligation to actively take any steps to investigate whether a serious problem has arisen. Nevertheless, given the wide definition of a serious problem, which includes mismanagement contributing to insolvency, practitioners will now be obligated to make reports in relation to many insolvent liquidations. The failure to report a serious problem is an offence itself punishable by a fine of up to $10,000. Practitioners will need to take care to ensure that they comply with this reporting obligation.
Interest statements, company money and records, and providing assistance to incoming liquidators
Liquidators will be required to provide an interest statement on their appointment disclosing any actual or perceived conflict of interest and how they will manage that conflict. RITANZ members are already required to provide a declaration of relevant relationships and independence (DIRRI) under the RITANZ Code of Conduct. We welcome enhanced transparency applying to all practitioners.
While liquidators presently have an obligation to keep company money in a bank account to the credit of the company or in a general or separate trust account, the failure to do so now will constitute a serious offence punishable by a fine of up to $50,000 or a term of imprisonment up to two years.
The obligation to hold company records has been expanded from a minimum of one year after completion of the liquidation to at least six years following completion of the liquidation. In addition, an outgoing liquidator or administrator will now have a positive duty to provide their replacement with information that they have in their possession or under their control, which the replacement reasonably requires to carry out their functions. Failure to comply with either of these obligations is an offence punishable by a fine of up to $10,000.
Restriction on the purchase of company assets by liquidators, administrators or those associated with the assignment
The IPRA prohibits liquidators, administrators, their firms, employees and members of a creditors committee from purchasing company assets unless the purchase is at ‘arm’s length’ or with leave of the Court. Similarly, an insolvency practitioner must not, without leave of the Court, purchase for the company any goods or services from a person if the practitioner would directly or indirectly obtain a benefit out of the transaction, unless the transaction is at arm’s length, or is an integral part of a continuing business relationship between the company and the person. Anyone who fails to comply with these restrictions commits an offence punishable by a fine of up to $75,000.
Creditors’ rights strengthened—prohibition on voluntary appointment of liquidators after service of liquidation proceedings and related party voting
Creditors’ rights have been strengthened under the legislation. A company will no longer be able to appoint its own liquidator following service of liquidation proceedings. Once liquidation proceedings have been served, the creditor’s consent will now be required if the shareholders or the board wish to appoint a liquidator to the company. Until now, a company facing liquidation has had a limited window to choose its own liquidator. In some cases, this has led to the appointment of a so-called ‘friendly’ liquidator, who has not pursued available claims against directors and shareholders.
Related party voting at creditor meetings must now be disregarded unless the Court orders otherwise. Related party voting has often enabled director and shareholder interests to keep a friendly liquidator in office, instead of having that liquidator replaced with an appointee of the creditors’ choice at the first creditors’ meeting.
Voidable dispositions of property following commencement of liquidation proceedings
Any disposition of company property will now be voidable, if it is made by the company following the issue of liquidation proceedings and prior to the appointment of a liquidator, unless the disposition is made:
Creditors must therefore be extremely wary when dealing with a company on the verge of liquidation.