New Zealand’s changes to its insolvency laws

Proposed changes to NZ insolvency laws through the Insolvency Practitioners Bill, presently before parliament, are open for submissions until 24 August 2018.  The changes involve conflicts of interest, demand notices, reporting of ‘serious problems’ and more.

Some ideas and drafting look like they have been borrowed from Australian law – some wisely, others not wisely at all.

The insolvency practitioner regulation provisions in the Bill were covered earlier. These will introduce co-regulation of licensed insolvency practitioners by what is likely to be the two professional bodies, RITANZ and CAANZ.  These are based on Report No. 1 of the Insolvency Working Group – Insolvency practitioner regulation and voluntary liquidation – July 2016.

Then there are these substantive changes proposed in relation to the duties and powers of those practitioners, also based on Report No. 1.

Independence – an ‘interests statement’

As to practitioner independence, an interests statement must be prepared disclosing any circumstance that creates or could reasonably be perceived as creating, a conflict of interest in relation to the practitioner’s independence, and explaining the nature of that conflict and ‘how the practitioner intends to manage that conflict’.

While Australian law requires a trustee in bankruptcy to ‘take appropriate steps to avoid the conflict of interest’, this proposed NZ law talks of managing it.

These changes include narrowing the scope of the existing NZ law which

‘in practice capture many situations where no conflict arises. These prohibitions prevent practitioners being appointed in the normal way because

(1) they routinely receive insolvency appointments from banks, or

(2) they have been appointed as investigating accountants or similar.

These provisions cause unnecessary delay and expense because the leave of the High Court is needed to appoint the practitioner’: Report No 1.

Australian law should note this.

Court powers

The courts have powers to make compensatory ordered against practitioners in favour of an ‘aggrieved person’ who has suffered loss or harm and may order the practitioner to pay. This is comparable to the powers of Australian courts but is more simply worded.

Demand notices for voidable transfers

A novel approach to the recovery of property or money applies in relation to dispositions (transfers) of property during the period of time between an application for winding up being filed and the date of appointment of the practitioner as liquidator.

Such a transfer is ‘voidable’ if made during that period of time. Transfers, made, relevantly, ‘in the ordinary course of business’ are protected; as are transfers of ‘non-current assets’ being those defined ‘under generally accepted accounting practice’.

  • The recovery process requires the liquidator to prepare and file a demand notice with the court and serve it on the person against whom the recovery is sought.
  • The notice must specify the transfer and the assets transferred and the money demanded.
  • The recipient of the notice does not respond within 20 working days, the transfer is ‘automatically’ set aside.
  • If they do respond, they must give full details and reasons and evidence in support.
  • In such a case, unless the liquidator considers that the transfer is not voidable, based on the response, the liquidator may apply to the court for orders.

The usual protections are available – subsequent purchasers for valuable consideration “without knowing the circumstances in which the property was acquired form the company”; and good faith with no suspicion of insolvency; and, alterations of position.

Section 139ZQ notices compared

There are elements here of the s 139ZQ notice under the Australian Bankruptcy Act. Major differences are that the notice is issued by a trustee through the Official Receiver, not the court; the notice extends to all voidable transactions; and it is confined to bankruptcy trustees, not liquidators.

Ordinary course of business

NZ’s reliance on this defence is ‘interesting’, for this reason.

A NZ judge in Re Modern Terrazzo once commented on the ordinary course of business defence that

“It was in 1993 that the Australians abandoned the phrase `in the ordinary course of business’ as the key exception to their company voidable preference regime….”.

This was done because of uncertainty and confusion in what it meant. The Judge continued:

“New Zealand chose that moment to introduce into its own companies legislation the very phrase which Australia had just discarded. One of us must have got it wrong. Although in these situations right-thinking New Zealanders would normally assume it to be Australia, Barker J conceded in In re NZ Spraybooth Ltd [1996] 7 NZCLC 261,075 that in this instance `It is perhaps unfortunate that this phrase was included in the new companies legislation’. He may be right.”

A major concession coming from a NZ Judge.

Reports to creditors

The proposed law would require liquidators to send out an initial report to creditors with a brief summary of actions proposed, and by when, the statement of affairs, a list of all the creditors and their addresses “which may be an electronic address”; a summary of the assets and liabilities, estimated realisations, and secured charges. The liquidator may omit information that is commercially sensitive.

A 6 monthly report must be sent in effect updating the original report and the reasons for differences in estimates. It must show the liquidator’s remuneration and disbursements. A ‘final report’ is then required.

These are comparable to the new Australian requirements.

Reporting misconduct

As in Australia, NZ practitioners are required to report any misconduct.

The proposed revision in NZ comes from the view expressed in Report No 1 about the ‘numerous problems’ in what the Report calls the ‘current “whistleblowing regime”‘, including that ‘it is of no importance whether the possible offence is material to the liquidation or the receivership’; that although offences under various laws are listed, the list is incomplete, and should include other serious dishonesty-related offences, such as money laundering and tax evasion; that the list of agencies to receive the reports should be further expanded to include the Police, the Serious Fraud Office and the agency responsible for administering the particular Act (if relevant); and that protection by absolute privilege should be offered to practitioners.

The wording proposed is to

‘report any serious problem’ that the practitioner has reasonable grounds to believe has arisen in relation to the company.

The term serious problem is defined and includes, for example, circumstances in which the company, or a past or present director, officer, or shareholder of the company, has committed an offence in relation to the company. Serious problems must be reported to the Registrar and, if an offence is involved, it must also be reported to the NZ Police or to another body responsible for investigating or prosecuting the offence. The practitioner must provide any further assistance needed to prosecute the offence.

Section 533 of the Australian Corporate Act is far too broad, covering all breaches of any Commonwealth, State and Territory law, in relation to the company, which all must be reported to ASIC. Inconsistently, Australian bankruptcy trustees need only report Bankruptcy Act offences.

Progress

The progress of these NZ reforms is being monitored.

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