Negative licensing regime for insolvency practitioners

Liquidators, administrators and receivers who are delinquent in their duties will be liable to be stood down or placed under supervision by the Registrar of Companies under the Insolvency Practitioners Bill tabled in Parliament yesterday.

Click here to view the Bill.

Why a negative licensing regime?

The Government considers that, given the small numbers of insolvency practitioners in New Zealand, the costs of setting up a full licensing system would not be justified, particularly as those costs would ultimately be passed on to creditors in the form of higher fees. 

How the proposed regime will work

The Registrar of Companies will have the power to issue a prohibition or restriction notice to insolvency practitioners who fail to comply with their duties.  The Registrar will be able to take into account behaviours before the new regime comes into effect, but only up to five years before the date of the notice.

The practitioner must be notified at least 20 working days’ ahead that the Registrar intends to issue a notice to him or her, including the nature and terms of the proposed notice and the reasons why it is going to be issued. 

The practitioner will be entitled to make representations to the Registrar about the proposed notice, which the Registrar will be obliged to consider. 

The notice must state the period of prohibition or supervision (and, in the case of supervision, the name of the supervisor and the terms of the supervision).  Once a notice has been issued, it must be published in the Gazette. 

Failure to comply with the terms and conditions of a notice will constitute an offence that, upon conviction, could lead to a fine of up to $10,000. 

Practitioners will be able to appeal decisions of the Registrar to the High Court.

The Registrar will be required to establish and maintain a public register of people who are subject to a prohibition or supervision notice, or subject to a prohibition order made by the High Court under the Court’s existing powers. 

Other provisions

The Bill repeals the ban in section 280(1)(cb) of the Companies Act on the appointment of a practitioner who (or whose firm) has a continuing business relationship with the insolvent company, its major shareholders, or any of its directors or secured creditors.  This is a sensible move which recognises that the business relationship may be unrelated to the issue at hand. 

The Bill extends the automatic disqualification criteria listed in section 280(1) and also in section 5(1) of the Receiverships Act to prevent the appointment of the following people as insolvency practitioners:

  • certain family members of a person who has, within the two years immediately preceding the commencement of a liquidation, been a shareholder, director, auditor or receiver of the company or of a related company

  • a person who has been banned from taking a similar appointment in other specified jurisdictions, such as Australia

  • a person who is an undischarged “no asset procedure” debtor, or who is subject to a summary instalment order, under the Insolvency Act 2006

  • a lawyer who has been struck off

  • an accountant whose membership of the Institute of Chartered Accountants has been revoked or suspended by the Institute, or

  • a person who has been convicted of a dishonesty offence.

The Bill strengthens the ability of the Registrar to remove inadequate liquidators by giving the Registrar the power to apply to the High Court for a prohibition order to stop a liquidator from taking an appointment, as the Registrar can currently do for administrators and receivers. 

The Bill brings the Receiverships Act into line with the Companies Act and puts receivers on the same footing as administrators and liquidators in relation to the grounds for disqualification and by allowing the High Court to make a prohibition order against a receiver for an indefinite period (as opposed to a maximum of five years currently). 

Next steps

At the time of writing, the Bill is yet to receive its first reading.  We will advise you of the deadline for submissions when the date is announced.  Expectations are that the new law will come into force in about July 2011. 

For further information please contact the lawyers featured.

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Related topics: Restructuring & insolvency; Voluntary administration; Receiverships; Liquidation

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