Corporate Insolvency Update February 2011



The time allocated today is relatively short, so I thought that I would address four key

    1.   Impacts of the present insolvency qualifications regime
    2.   Effectiveness of remedies currently available to creditors
    3.   The Australian insolvency regime
    4.   The Insolvency Practitioners Bill 2010


As any of you who have browsed the Companies Act and the Receiverships Act
1993 will be well aware, the qualifications required of a liquidator or receiver in this
country are rather light weight. In fact the acts set out disqualifications rather than
qualifications for the role.

Disqualifications for appointment as Liquidator can be summarised as:

        Under 18 years of age
        A creditor of the company
        A shareholder, director, auditor, or receiver of the company or related
         company (during the previous 2 yrs)
        Member of a firm which has provided professional services to the company
         (during the previous 2 yrs)
        Member of a firm which has had a business relationship with the company,
         majority shareholder, directors or secured creditor (during the previous 2 yrs)
        Undischarged bankrupt
        Person subject to treatment under the Mental Health Act 1992
        Person subject to an order under the Protection of Personal and Property
         Rights Act 1988
        Person who has been subject to an enforcement order as liquidator under the
         Companies Act 1993
        Person prohibited from acting under the Receiverships Act 1993
        Person prohibited from being a director, officer, manager, or promoter of
         companies under the Companies Acts 1955 and 1993
        Person prohibited from acting as a director under the Insolvency Act 2006
        Person prohibited from being an administrator or deed administrator

Disqualifications for Receivers are less restrictive but add;

        Mortgagee of the property in receivership
        Director of the grantor or mortgagee
        Investor in shares of the grantor or the mortgagee

While I suspect nobody would argue that persons falling within the criteria set out
above should be allowed to hold the role of liquidator or receiver, in our role we come

Qualifications for Insolvency Practitioners              Paul Sargison TW Gerry Rea Partners

across many instances where persons undertaking liquidation and receivership roles
should not be doing so. Let me list some examples.

    1. Incompetence

    The structure of liquidation and receivership legislation as set down in the
    Companies Act and the Receiverships Act assumes that:

    A liquidator will act impartially for the benefit of all creditors, but recognise the
    special interests of preferential and secured creditors.

    A receiver will act for the benefit of the appointing secured creditor, but recognise
    the special interests of preferential and other secured creditors as well as
    unsecured creditors.

    Prior to the introduction of the Personal Property Securities Act, the demands of a
    liquidator or receiver were relatively straight forward. Now, with the introduction
    of GSA and PMSI secured creditors, and special protection for the factoring
    industry, determining the relative rights of the creditors claiming in an insolvency
    can be extremely complex.

    It is no longer simply a matter of turning to the 7th Schedule of the Companies Act
    to determine the order of preferential creditors. Yet every year brings a crop of
    new liquidators and receivers, who hope to learn on the job. A recent survey by
    the Ministry of Economic Development has revealed that the number of once only
    liquidator appointments has doubled in the last three years, with 104 persons
    appointed only once in 2010.

    As an example of incompetence, consider the receivers of a company we came
    across a year or so ago. They had been appointed, traded the company, sold the
    assets and then politely advised the creditors arising during the period of the
    receivers trading, that funds available were insufficient and that there would be a
    partial payment only of trading debts incurred by the receivers.

    2. Invalid Appointment

    While the appointment of a liquidator is subject to some creditor overview,
    discussed later, the appointment of a receiver is less so.

    There is ample scope for the registration of a financing statement under the
    Personal Property Securities Act without a supporting valid General Security
    Agreement. Even where such an agreement exists, there is no simple procedure
    whereby other creditors can verify the validity of the receivers appointment or
    even the amount actually owing to the appointing creditor.

    In order to challenge the appointment of a receiver, a creditor must either apply to
    the Court for supervision of the receiver in question, or petition it for the
    appointment of a liquidator. These actions are not inexpensive!

    3. Dishonesty

    Yes there are dishonest practitioners. One receiver we have encountered
    determined that his time should be charged simply on a daily basis. Naturally this
    was agreeable from his point of view, but from the perspective of the secured
    creditor, and ultimately the unsecured creditors, charging in this manner cannot

Qualifications for Insolvency Practitioners                Paul Sargison TW Gerry Rea Partners

    be justified.

    In this particular instance there was an element of overview from the grantor. But
    in the case of the average shareholder appointed liquidator, there is no provision
    for reviewing fees charged.

    In another more recent case we have come across, the receiver, a former builder,
    basically cleared out the company’s trust account to his own bank account. He
    then proceeded to advise the creditors concerned that they would be receiving no
    payment from the receivership.

    There have been and will continue to be cases where liquidators or receivers
    dispose of assets of the company in distress, at prices which are below market
    value. In some cases, the assets are sold to parties associated with the
    company, who are then enabled to set up again without the encumbrance of the
    former company’s creditors.

    As you will be aware, section 386 of the Companies Act sets out to discourage
    the practice of establishing Phoenix Companies. But in reality this succeeds only
    in stopping subsequent trading under the same or similar name as the failed

    There have been instances where insolvency practitioners themselves, or
    associates, have been the parties acquiring the assets of failed companies,
    without any stringent market testing of the prices paid for them.

    However, probably the worst case we have come across is a current file. The
    liquidator, had become known to the director of the failed company through his
    advertising in the Bartercard directory. The insolvent company had, in common
    with many such companies an unused Bartercard credit balance, and its director
    was led to believe that the liquidator appointed on his recommendation, would
    merely take the Bartercard credit as his fee for the assignment.

    On appointment, the liquidator proceeded to run the failing company for a month
    until the sale of the business and its property, which had been negotiated by the
    director, were settled. The liquidator was financed for his trading by a special
    bank overdraft guaranteed by the director, but still took the deposit and sale
    proceeds for the business into his trust account and proceeded to charge fees
    against same. It was not until the business property had been settled that the
    liquidator’s solicitor paid off the company’s bank

    When the business sale proceeds were not used to pay down the company’s
    bank borrowings, the director realised that something was not quite right. Despite
    his calling for a creditors meeting, the director was forced to go to the Court to
    obtain one. At the creditors meeting the liquidator was finally replaced by

    Our efforts since appointment, again through the Courts, have been directed at
    recovering the more than $73,000 which the liquidator has failed to account for,
    despite his charging over $84,000 in liquidation fees.

    4. Review

Qualifications for Insolvency Practitioners           Paul Sargison TW Gerry Rea Partners

    As members of the New Zealand Institute of Chartered Accountants, we are
    required to hold sufficient professional indemnity insurance cover. Our practice is
    also subject to periodic peer review by an Institute appointed inspector. As part
    of the review, a random selection of insolvency files is appraised by the reviewer,
    and the operation of our trust account checked.

    Given the powers and the absolute authority granted to liquidators by the
    Companies Act and to a lesser extent to Receivers by the Receiverships Act, it is
    not unreasonable to check that the insolvency practitioners appointed are
    exercising their powers in a manner which is in compliance with the underlying
    law, and is transparent.

    While in years gone by most liquidators and receivers were members of the New
    Zealand Institute of Chartered Accountants, this is no longer a given. One of the
    players on the local insolvency scene was an executive of a failed plumbing
    services company. He currently controls a debt recovery business which one
    would suspect might naturally refer insolvency assignment work to his own

    We have heard that some other local practitioners are reputed to have resigned
    from the Zealand Institute of Chartered Accountants, rather than face review or
    possible censure.


As will be seen from the foregoing, not very.

Creditors are permitted to call for a meeting of creditors, at which the appointment of
liquidator by shareholders can be confirmed, or a replacement liquidator installed.
But many creditors are not aware that pursuant to section 245 of the Companies Act,
this right must be exercised within 10 working days of receiving the liquidators first
report where the liquidator has determined that no creditors meeting need be called.

The threshold for replacement of a liquidator is quite high, requiring in excess of 50%
of those voting and 50% of voting creditors by value. It can be a simple matter for
the liquidator to allow exaggerated claims by creditors who will support him, or to
locate and seek votes from other creditors, who would not have claimed in the
liquidation or voted.

Creditors are of course able to apply to the Court for directions on any matter arising
in connection with a liquidation. The powers of the Court under section 284 of the
Companies Act are quite extensive, including an ability to give directions, modify the
liquidator’s decisions, audit his accounts, fix the liquidator’s remuneration, and
determine whether the liquidator was validly appointed or validly assumed control of

The issue here though is cost. The major preferential creditor in most liquidations,
Inland Revenue, is in our experience not normally prepared to fund litigation in
liquidations. In fact in several instances where we have sought its assistance as the
principal creditor, funding has ultimately not been forthcoming. I can’t comment on
the approach of the Department where it has had either of its preferred local
insolvency firms appointed by the Court, as I have no knowledge of its arrangements
with them.

Qualifications for Insolvency Practitioners            Paul Sargison TW Gerry Rea Partners

Unsecured creditors are handicapped on two counts. Firstly, the outcome of any
application to the Court which they may make, is likely to benefit Inland Revenue
most. In fact, the outcome of most liquidations today, is a distribution to Preferential
Creditors, after settling any secured creditors claims, with no funds being available
for unsecured creditors.

Secondly, these creditors are typically small businesses, which have often lost a
significant sum of money. They tend to view throwing more money in legal fees at
the problem as a high risk investment.


By way of comparison, I will make some comments on the Australian insolvency

Liquidators and Administrators in Australia must be registered. In order to become
registered, a liquidator must satisfy the administering body ASIC, that he or she has:

        Several years experience at a senior level
        Completed 2 university level papers, with 4 local work shops for each unit
        A recognised accountancy qualification
        Good references
        Insurance cover, failing which a bond must be put up.

Once a liquidator has been registered for several years, he may apply to ASIC for
approval as being qualified to take on Court appointed roles.

This is a far cry from our wild west approach. But some high profile cases in
Australia have led to calls for an even tougher regime. In one recent Australian
liquidation, Golden Chef, the asset sale proceeds of $3.5 million had been totally
absorbed by liquidators fees and costs.

The Senate Report on Regulation of Insolvency Practitioners was released in
September 2010. In brief this has recommended:

        Transfer of regulation of practitioners from ASIC to Insolvency and Trustee
         Services Australia
        Establishment of a flying squad to undertake random and targeted
        Australian Insolvency Practitioners Authority (AIPA) to establish a licensing
         system for practitioners
        AIPA to have right to suspend and penalise practitioners


As most of you will be aware, this April 2010 New Zealand bill proposed a negative
licensing system, whereby the Registrar of Companies would have the power to
restrict or prohibit individuals from providing corporate insolvency services. The bill
also aimed to strengthen the existing Companies Act provisions relating to automatic
disqualification of insolvency practitioners.

I believe the reason for this approach is largely because no body is prepared to pick
up the cost of managing the registration and supervision of insolvency practitioners.

Qualifications for Insolvency Practitioners             Paul Sargison TW Gerry Rea Partners

This seems to me to be short sighted, particularly when a registration regime could
be largely funded from fees levied on registered practitioners.

Under the bill the following are proposed to be prohibited from accepting liquidator,
administrator or receiver appointments:

        Family members of former shareholders, directors, auditors or receivers of a
         company or related company.
        Debtors under the No Asset procedure
        Persons subject to summary instalment order
        Lawyers who have been struck off the roll of barristers and solicitors
        Accountants whose membership of the Institute of Chartered Accountants of
         New Zealand has been revoked or suspended
        Persons convicted of a crime involving dishonesty

There is no provision for the banning of persons who have been struck off rolls other
than the Institute of Chartered Accountants or Law Society. There are other
accounting bodies now active in New Zealand which escape mention. And what
about those practitioners who belong to no professional body?

Interestingly, persons who have had a continuing business relationship with the
company will now become eligible to be liquidators.

The Registrar of Companies would be able to prohibit a person from acting as an
insolvency practitioner for up to 5 years, and a public register of prohibited persons
would be established.

Attendees may have noticed a report in the NBR on 28 January, that the Insolvency
Practitioners Bill was returned to the Ministry of Economic Development in December
for a re-write, after serious concerns were expressed by submitters to the Select
Committee concerning the proposed negative licensing regime.

These included the processes over creditors meetings, voting, remuneration of
practitioners and the often scant reporting, which is currently accepted from some
liquidators and receivers.

I understand that a new paper has been prepared by the Ministry, setting out
proposals for strengthening the negative licensing regime, but more importantly,
suggesting a closer alignment with the Australian regime outlined above.

As a liquidator, administrator and receiver, I believe that our statutorily designated
role demands integrity and transparency. The light handed regime under which the
profession has operated over the years, has now come under assault from persons
whose interests are not those of creditors, but rather self enrichment.

Policing of the actions of insolvency practitioners, should not depend on the ability of
a company’s creditors to fund Court actions.

Paul Sargison
Partner TW Gerry Rea Partners
18 February 2011

Qualifications for Insolvency Practitioners             Paul Sargison TW Gerry Rea Partners

To top