KPMG Centre 18 Viaduct Harbour Avenue P.O. Box 1584 Auckland New Zealand Telephone +64 (9) 367 5800 Fax +64 (9) 367 5875 Internet www.kpmg.co.nz To the Commerce Select Committee SUBMISSION IN RESPONSE TO INSOLVENCY PRACTITIONERS BILL ( the Bill ) Introduction This submission is from KPMG of 18 Viaduct Harbour Avenue, Auckland ( the firm or KPMG ). KPMG is a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International), a Swiss entity. The firm provides accounting, auditing, taxation and other advisory services (including restructuring and insolvency). Shaun Neil Adams ( Mr Adams ) is the Head of Restructuring and Insolvency Services for KPMG in New Zealand. Shaun is a Fellow of the Insolvency Practitioners Association and Society of Practitioners of Insolvency (both UK professional organisations), and is a Committee Member of INSOL New Zealand. He trained and practised as an insolvency practitioner in the United Kingdom for 21 years, and moved to New Zealand in 2006, having taken on his current role with KPMG in 2009. Mr Adams as a representative for KPMG prepared to appear before the committee to speak in relation to this submission, if so required. Mr Adams can be contacted at: Phone: 09 373 9053 Mobile: 021 243 4053 E-mail: shaunadams@kpmg.co.nz Summary of Submission On the basis that the proposed negative licensing regime is something better than nothing, then KPMG supports this Bill. We do however propose a number of amendments to enhance the Bill, including the creation and maintenance of a Register of Insolvency Practitioners to be maintained by the Registrar. 2010 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. TM Rugby World Cup Limited 2008.
Our Submission 1) Positive v Negative Licensing KPMG strongly believes that a system of positive licensing is more appropriate for the functions and services performed by insolvency practitioners, when acting as receiver, administrator or liquidator. The primary function of an insolvency practitioner (whether as receiver, liquidator or administrator) is to secure the assets of an underperforming business, and to implement strategies to maximise net returns from those assets for the benefit of creditors, in accordance with the priorities laid down in statute. The role of an insolvency practitioner is that of a fiduciary defined as follows: Someone who has undertaken to act for, and on behalf of another, in a particular matter, in circumstances which give rise to a relationship of trust and confidence. A fiduciary is deemed to have: A duty not to be in a situation where personal interests and fiduciary duty conflict; and A duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty; and A duty not to profit from his fiduciary position without express knowledge and consent. There is significant commentary in the Parliamentary Debates about the quality, competence and professionalism of a number of insolvency practitioners, denoted as rogue or debtor friendly. It is probable that a number of those practitioners act at the fringe of the insolvency industry, dealing with the smaller and less complex cases, thereby minimising the risk of substantial loss (by value) to creditors, as the value of assets or antecedent transactions will in all likelihood be lower. However, it is also probable that the suppliers and creditors of those insolvent companies will be more vulnerable to loss, than suppliers, creditors and financiers of larger organisations. Accordingly, the Bill should recognise the vulnerability of that class of creditor and accordingly the legislation should be structured in such a way as to proactively minimise risk and loss from the bottom up, as opposed to approaching the issue on the basis of after the horse has bolted, which this way in which the negative licensing regime is constructed under this Bill. In most, if not all other jurisdictions of the world, the work of an insolvency practitioner is recognised as a profession in its own right, which requires a regime of tight control, both for the purposes of protecting assets for the benefit of creditors, and just as importantly for preserving going concerns as a means of protecting economic wealth and employment. To achieve those aims, insolvency practitioners need to have appropriate training, experience and professional standards to adhere to, and the rules creating An appropriate framework should be a fundamental part of a Country s robust and integrated Regulatory system. It is our view that this Bill does nothing to improve or assist New Zealand s Regulatory system, and indeed detracts from it by allowing inexperienced, inept or corrupt practitioners from operating.
In addition, the Bill fails to deal with the adequacy requirements of any practitioner dealing with cross border assignments, and detracts from a key policy of the current government, which is the enhancement of Trans-Tasman regulatory, economic and commercial dealings. This is contrary to fact that insolvency practitioners in Australia are currently heavily regulated with considerable debate ongoing about increasing that level of regulation even further. 2) Proposed Amendments to the Bill KPMG recognises that the Bill has overwhelming support in the House, and in the absence of the implementation of a positive licensing regime proposes the following amendments: Section 5: Qualifications of Liquidators (1) The proposed definition of a family member is not sufficiently extensive and fails to deal with a key issue highlighted in the leading case of Fisher International Trustees Limited and Anor v Waterloo Buildings Limited In Liquidation (Auckland Registry CIV-2009-404-006640). Accordingly, we propose that the definition should be widened to that of a relative defined by way of reference to Section 1, CA 1993, as follows: relative, in relation to any person, means: (a) (b) (ba) (c) any parent, child, brother, or sister of that person; or any spouse, civil union partner, or de facto partner of that person; or any parent, child, brother, or sister of a spouse, civil union partner, or defacto partner of that person; or A nominee or trustee for any of those persons. In addition, the prohibition should also be extended in respect of Section 280(1)(c) CA 1993, to read as follows: a person (or a relative of that person) who has, within the 2 years immediately preceding the commencement of the liquidation, been a shareholder, director, auditor, or receiver of the company or of a related company. (2) The proposed amendment to Section 280(1)(cb) CA 1993 is inadequate. The first and leading case on this matter of Re: Icon Digital Entertainment Limited (Auckland Registry CIV-2007-404-007124) of which I was a Joint Administrator was two-fold. Firstly, BDO Spicers was a supplier of insolvency and other advisory services to Westpac. Acting as Investigating or Monitoring Accountant is a common activity of insolvency practitioners from the more established firms, and in most, if not all, circumstances the formal contract is with the debtor entity, not the secured party. The proposed amendment in the Bill adequately covers this first point. Secondly, the firm had also undertaken a long-term review, under a letter of engagement with Icon, whilst reporting to Westpac on those findings. The proposed amendment in the Bill fails to deal with this second issue. The knock on effect of this is that receivership will remain the preferred option to avoid an application for relief under this amended section (as the similar provisions do not
apply under the RA 1993). This is contrary to the situation where Administration or Liquidation could be the more appropriate process to be adopted. The wording (other than through the provision of banking and financial services) is unclear in its meaning and accordingly, we suggest that the salient wording in Section 280(cb) CA 1993 be amended, as follows: a person who has, or whose firm has, within the 2 years immediately before the commencement of the liquidation, had a continuing business relationship (other than through the provision of banking and financial services) (other than where the engagement by the company is one which emanates from the appointment of the person or firm by, or at the instigation of, a secured creditor, having an actual or potential financial interest in the company, to investigate monitor or advise on the affairs of the company) with the company, its majority shareholder, any of its directors, or any of its secured creditor... It is KPMG s view that this amendment would significantly reduce the number of Court applications seeking leave to act, ensure that the most appropriate process is used in dealing with the insolvent company s affairs, and prevent unnecessary costs being incurred. (3) KPMG further proposes that the qualification of Liquidators, Administrators and Receivers be extended to require that all such appointees are domiciled and permanently resident in New Zealand, in accordance with the Immigration Act 2009. The exception to this requirement would be where recognition of an officeholder has been appropriately made in accordance with Insolvency (Cross Border) Act 2006. This recommendation is based on the premise that: a) an overseas practitioner would have little or no familiarity with the statutory insolvency framework of New Zealand, including the Personal Property Securities and Property Law Acts; b) that a creditor, employee or other stakeholder would have limited ability to challenge the decisions of an overseas office holder, and that the costs of any enforcement application and order arising thereon, would be substantially prohibitive; c) the retrospective nature of the negative licensing regime would be ineffective against dealing with an errant overseas office holder. (4) As an extension to the qualification criteria under the current Bill, we propose a simplified positive licensing regime structured around the implementation of a Formal Register of Insolvency Practitioners to be maintained on-line by the Registrar. The logic for the creation of such a Register is to enable both creditors, directors and shareholders the opportunity to inspect that Register prior to an appointment of an office holder, to obtain a requisite degree of comfort that the proposed office holder is someone that has a di minimis level of experience, has fidelity and public liability cover in place, and is of good character. The Register should be based on the following:
a) An annual registration fee of $500 payable by each practitioner to the Registrar for the costs of maintaining the Register (or such other fee as deemed appropriate); b) That all practitioners must provide details and meet the following criteria for inclusion on the Register: 1. Have a permanent place of residence in New Zealand; 2. Provide full contact details including physical and postal addresses, phone, fax and mobile numbers, e-mail and website (where applicable); 3. Inclusion of a profile including work experience, qualifications, professional memberships etc; 4. Has undertaken a minimum of five years insolvency experience (or a defined number of hours) duly proven or certified by an independent third party or organisation (including overseas); 5. Provides annually copies of fidelity and public liability insurance policies for no less than $5 million in any one claim, or confirmation of cover acceptable to insurers; 6. Is of good character, and has obtained and lodged with the Registrar two character references from Chartered Accountants, Solicitors, Barristers, Justices of the Peace, or other parties (as deemed appropriate); 7. Certifies that they have not been debarred from acting as an Insolvency Practitioner in New Zealand, or any other jurisdiction; 8. Provides an annual statement of compliance with all appropriate insolvency legislation in respect of existing appointments, and an undertaking to comply during that current year of registration; 9. Undertakes and maintains a diary evidencing a minimum of 25 hours of structured/formal training and 25 hours of unstructured training per annum, specifically relating to restructuring and insolvency; 10. Undertakes not to accept appointment as a Receiver, Liquidator or Administrator where such appointment would give rise to a conflict of interest, where any circumstance, relationship or other fact relevant to the insolvency practitioner s or his or her firm s own financial, business, property or personal interests which will, or reasonably may, impair the carrying out the statutory role, in either perception or reality. Section 9 New Headings and sections 386G to 386S inserted (1) Period for Prohibition and Supervision The proposed insertion of Section 386G(1)(a) deals with the prohibition or supervision of an insolvency practitioner by a person to be specified by the Registrar, both for a period which must not exceed five years. The cyclical nature of recessions and the resultant increase in insolvencies is generally suggested as being a seven year period. A five year period for debarring an individual from acting is insufficient. The situation could well arise that a practitioner wilfully exploits his appointments in one cycle, to be struck off as a result, and then recommences as a practitioner in the next cycle.
Accordingly, we recommend that the period should be extended to ten years for the most serious offenders. (2) Efficacy of the Supervision Regime The proposed insertion of Section 386G(1)(b) CA 1993 deals with the supervision of an insolvency practitioner, by a person to be specified by the Registrar. The role, responsibilities and liabilities of a Supervisor appointed under this section is not denoted within the legislation, other than by reference to Subsection 386G(2)(b) CA 1993 which includes the terms and conditions of the supervision. For terms and conditions to be constructed to enable a Supervisor to effectively supervise a practitioner, then ideally he should be able to direct that insolvency practitioner in a particular course of action, however that is unworkable as to do so would limit the statutory role of the office holder. The provision of advice alone is likely to be ineffective as many decisions made by an office holder are subjective, based on all of the facts of a particular assignment or matter. To make any appointment of a Supervisor palatable to an experienced insolvency practitioner will be difficult. On current drafting, there are substantial risks in accepting such an appointment, particularly with regard to prospective liability, which can only be redressed by some form of statutory protection being embedded within the legislation. In addition, the acceptance of appointment as a Supervisor could give rise to significant reputational risk, which will inhibit experienced practitioners from accepting such an appointment. Consideration should be given to anonymity for those that agree to accept such an appointment. Section 386J CA 1993 which relates to the costs of supervision is also inadequate, and would inevitably give rise to dispute or friction between the insolvency practitioner and the Supervisor, both in terms of quantum and collection of fees and expenses. As the role of Supervisor is being performed at the behest of the Registrar under statutory powers, surely it is for the Registrar to determine and validate the basis and quantum of those fees and expenses, and that the Registrar should be responsible for collection of those fees in the first instance.