A Code of Conduct is an innovation for the industry and should help to improve standards.
If it is to succeed it will require careful attention from practitioners as its requirements are many and various.
It will also require leadership from the Restructuring Insolvency and Turnaround Association of New Zealand (RITANZ), in terms of promotion, education and enforcement.
Purpose of the Code
The Code is intended to ensure that insolvency appointments are carried out with integrity. Independence, competence and efficiency are key themes.
The Code will be binding on members of RITANZ and should also become a reference point for any formal assessment of the conduct of non-RITANZ members.
The 13 fundamental principles will need to be studied carefully ahead of the 1 July 2018 start date. They do much more than requiring ethical conduct. They contain a host of practical and procedural requirements which will require active implementation.
Insolvency practitioners are to act with integrity, objectivity and impartiality. Their independence is fundamental. The Code describes independence in detail, and raises the possibility of special purpose liquidators to deal with specific issues on which a liquidator is conflicted.
Practitioners will be permitted to accept only those instructions for which they have adequate resources. They will be required to communicate in a fair manner, to act in a timely way and not personally acquire property under their control. They must develop and maintain policies and programmes relating to quality assurance, risk management and complaints.
Of most immediate practical significance, will be the need to produce accurate and meaningful declarations of independence and to understand and apply the provisions around ensuring that remuneration arrangements are transparent and appropriate. Also, their advertising may need to change and their treatment of fees paid in advance may need to change.
The Code comes into force on 1 July 2018. From that date it applies to all activities, including on appointments that started prior to July 2018. The exceptions are new process requirements under the headings Independence, Competition/Promotion and Remuneration. These will apply only to appointments made after 1 July 2018.
In an innovation borrowed from Australia, practitioners will now be required to provide to creditors, at the earliest practical opportunity, a “Declaration of Independence, Relevant Relationships and Indemnities”. The Code describes it as a “Declaration”. In Australia, the equivalent has become known as the “DIRRI”.
This new requirement goes beyond existing legal requirements and existing New Zealand market practice. Practitioners taking appointments as liquidators, interim liquidators, administrators, deed administrators, compromise trustees or supervisors and certain other appointments (excluding receivers) must complete a declaration, and must update it if new information comes to light later.
A declaration confirms that proper enquiries have been made about the practitioner’s independence and that no real or potential risks to independence exist. Detailed disclosure is required of the person who referred the insolvent entity to the practitioner and the nature of their relationship, including any advice given prior to the appointment, and the fee charged for that advice.
Under the “relevant relationships” section, the declaration must explain all business relationships over the last two years between either the practitioner or the practitioner’s firm and the insolvent entity, known associates, holders of general security interests and any former insolvency practitioner appointed to the insolvent entity. In particular, any advice given to, or services provided to, the insolvent entity must be disclosed.
If the practitioner has received any indemnity or up-front payment for the work under the appointment, that must be disclosed.
Every disclosure must be made in a meaningful way so that creditors can obtain a full and proper understanding of the position.
Competition and promotion
The Code contains a number of rules about how insolvency practitioners may promote and represent their practices and firms. A prohibition on logos in statutory advertisements will be one rule that will require some change of practice.
Perhaps most notable are new requirements that a liquidator seeking to replace another liquidator by a vote of creditors must now give prior notice to the incumbent, and has a right to address the meeting, along with an obligation to provide the meeting with certain information.
The Code, and its associated practice standard, contains substantial detail about remuneration of practitioners aimed at ensuring that charges are reasonable and are easily able to be reviewed by creditors and approving bodies, such as the Court. Disclosure is stipulated even where creditors’ approval is not required by the law.
The key principles include that remuneration can only be claimed in respect of work that was necessary and properly performed. Whether the work was necessary is to be assessed as at the time it was carried out, rather than in hindsight. The fee must be proportionate to the nature of the work. The practitioner must keep proper records.
The Code does not prescribe a particular basis for charging fees. It recognises there will be a range of permitted approaches. Practitioners may charge by hourly rate, fixed fee, percentage of outcomes or some other success or contingency fee. There may be a mixture of approaches on any one matter. Both the basis for charging, and the actual fee, must be reasonable.
Insolvency practitioners are already obliged to charge only reasonable fees, so these principles do not change their obligations as such – but, importantly, they give consumers cheaper and simpler enforcement mechanisms, at least against RITANZ members.
A generic and short form disclosure is sufficient where the overall fee is less than $20,000. For other matters, detailed, meaningful, clear, relevant and concise disclosure is required to the “Approving Body” or the “Body of Creditors”. The intention is to empower creditors to understand and evaluate the reasonableness of the fees and expenses charged.
Whether a liquidator is appointed by the Court or by the shareholder, the Code requires that fees and expenses be disclosed to creditors’ committees, meetings of creditors and in conjunction with statutory six-monthly reports. This goes some way to lessening the impact of the current distinction in the legislation, where only liquidators appointed by the Court need to seek court approval for their fees (above the statutorily approved rate). The Court (on an application by creditors), and now RITANZ, can review fees for any liquidation. The disclosure required by the Code will assist creditors in understanding those fees, and in considering whether there ought to be any review.