Dalziel: Christchurch Insolvency Interest Group
13 October 2006 Speech Notes
1pm, Friday 13 October 2006
Christchurch Insolvency Special Interest
Level 5 At Cranmer
34-36 Cranmer Square
Thank you for the opportunity to be here today to talk to you about the Insolvency Law Reform Bill, and in particular, the voluntary administration regime.
I intend to take some time to provide you with an update on where the Bill is at in the legislative process, and also to make an announcement about the next step in the process of discussing insolvency practitioner regulation.
As a profession, you carry out a skilled task that is crucial to protecting and promoting the integrity of the corporate insolvency system. I know that the new voluntary administration regime is widely anticipated by practitioners as a new option that has great potential in saving companies from falling over.
The Bill yesterday commenced the Committee of the Whole House stage.
I have been describing insolvency law reform as part of the government's economic transformation agenda. This may seem surprising – given that corporate insolvency and personal bankruptcy are about financial failure – but in my view enhancing the regulatory environment in this area, especially the provision of voluntary administration, should increase confidence in this important aspect of commerce.
Over the last decade, we have undertaken substantive reform of just about every area of commercial law in New Zealand. Some of this is still ongoing, while others have largely been completed. Right now, a few areas of focus include:
- Financial reporting – where we are considering overseas company reporting and auditor regulation along with the institutional arrangements for approving financial reporting and other related standards in New Zealand;
- The review of financial products and providers on which 9 discussion documents were launched last month. This is a substantive review of insurance, superannuation and non-deposit taking institutions such as credit unions and building societies;
- We are also reviewing the ‘special partnerships’ section within the Partnerships Act to replace it with a ‘limited partnership’ concept that is designed to facilitate venture capital investment into New Zealand.
A key driver for a lot of the reform we have undertaken over the last few years is to improve the confidence of investors and market participants in our commercial law. If we can improve the confidence that both New Zealand and overseas-based institutional investors have in our regulatory framework, this should strengthen our capital markets and economy as a whole. This means that, in a number of areas, we have been looking to international standard-setting bodies and countries such as Australia and Canada to see how they regulate in particular areas.
If we adopt laws similar to those that are considered best practice and that are in place in other OECD countries, and that overseas investors are familiar with, this will, in turn, increase their confidence in dealing in New Zealand.
In February this year, the Prime Minister presented her opening Statement to Parliament. In it she confirmed that economic transformation is central to the government’s economic policy and noted that much has been achieved, but there is more to be done.
In that context she also said:
will also be taking a fresh look at regulatory frameworks.
Feedback from business suggests that higher quality
regulation would lead to more growth and investment – and
we want to engage with business on how to achieve
As part of the Quality Regulation Review that emerged from these words, the government has committed to getting its own house in order in terms of the Regulatory Impact Analysis that we have undertaken to perform. Naturally as I am leading this Review I am very mindful that I am meeting the standard myself when new regulatory frameworks are proposed. I think we have got that right in terms of Insolvency Law Reform, largely because of the quality of the involvement of practitioners such as yourselves in a consultation process, which was not a once-over-lightly, but in-depth and meaningful engagement – so thank you for that.
The focus on economic transformation becomes evident when you look at the objectives we have set for the insolvency law reform.
First, the reform aims to establish a predictable and simple regime that can be administered quickly and efficiently in the event of financial failure, which does not impose unnecessary compliance costs or stifle innovation and responsible risk taking.
Second, to establish a regime that distributes proceeds to creditors in accordance with their pre-insolvency entitlements and maximises returns to creditors, through flexible and effective methods of administration and enforcement.
Third, to encourage early intervention when financial distress becomes apparent by providing alternative avenues of administration and opportunities for individual bankrupts to participate fully again in the economic life of the community.
And finally, to promote international co-operation in cross-border insolvency cases where assets are being held in different jurisdictions.
As business interests grow between countries and ease of travel increases population flow, a framework to deal with cross-border insolvency issues has become a necessity.
Reforming our insolvency regime based on these objectives has meant designing changes to enhance its workability and bring it into line with international best practice. In completing this exercise, the government has been aware of the need to support and acknowledge:
- Innovation; and
- The economic significance of creating the right environment for growth and entrepreneurship.
The rehabilitation and innovation objectives have been common goals for the government under both corporate and individual insolvency. It is vital for the efficient functioning of the economy that while insolvency laws provide mechanisms to deal with financial failure, they further provide companies and individuals with a chance to rehabilitate and become productive and contributing participants in the economy again.
The voluntary administration proposals in the Bill give some level of comfort to directors that taking calculated risks will not necessarily mean that the entity will be liquidated if it becomes insolvent. Liquidation will not always be the final outcome. Voluntary administration is a significant development to New Zealand’s regime. Its introduction in Australia in 1993 saw an immediate take-up and it has since become the dominant formal proceeding in that country.
Voluntary administration will provide a much-needed boost to New Zealand’s formal rehabilitation processes and will provide opportunities to restructure and rehabilitate companies in distress.
Co-ordinating the New Zealand regime with that of Australia will also mean it will be easier and less costly to conduct rehabilitations for the growing number of businesses that operate on both sides of the Tasman.
In terms of how it will operate, the administrator will essentially take control of the business and property for the duration of the stay on proceedings being issued, which will apply to secured and unsecured creditors for a period of up to 28 days. The objective of the stay is to preserve the assets of the company and effect a more orderly distribution of assets, or for the company to re-organise with a view to returning to profitability.
In either case the outcome should be better than is currently possible.
As you might recall, submitters on the original discussion paper that led to the Bill raised concerns about the lack of a regulatory framework for insolvency practitioners. With the select committee process of the Bill, it is apparent that a number of submitters used the opportunity to raise this again, particularly in relation to voluntary administration.
The concern that has been raised relates to the value of introducing the voluntary administration regime without a complementary regulatory regime for practitioners. Comparisons were made with the Australia, where such a regime was introduced. The point that was made was that administrators who take on the “turnaround” role in the voluntary administration regime will require a broader skill base than liquidators. Assessment of the efficacy of continuing with part or all of the business and the business acumen required to trade through the period of uncertainty will be key to the success of the administration.
I am not convinced that we need a high level regulatory framework, however I do believe that it is important that we put this matter on the table for consideration. I am therefore using today's address as an opportunity to formally release a discussion document "Insolvency Practitioner Regulation: options for change".
The discussion paper was approved by Cabinet this week and follows the Regulatory Impact Analysis process that I believe meets the high standard that we have set through the Quality Regulation Review.
These options paper puts the issue in context – namely there are very few insolvency practitioners in New Zealand; most of them meet a very high standard of professional competence and integrity; only a few would be regarded as not meeting that standard; and not all insolvency practitioners come from the same discipline, some being lawyers and others accountants, for example.
The options in the document therefore set out a possible direction for change, based on feedback and submissions on the previous discussion document and submissions to the Commerce Select Committee on the Insolvency Law Reform Bill.
This discussion document further explores the options raised in the 2004 paper and seeks comment on a preferred option involving the introduction of a competitive licensing scheme. In essence, this approach would require all persons carrying out corporate insolvency processes to be members of a professional organisation approved by the Registrar of Companies. An example would be the New Zealand Institute of Chartered Accountants, which has competency requirements and a code of ethical behaviour.
The benefits of this approach, from the point of view of the shareholders and creditors, are that all practitioners will have their skills and competencies tested and be subject to investigation and disciplinary processes.
From a practitioner point of view, it will serve to enhance the industry’s reputation and compared with full government licensing this approach will minimise costs, because the rules of existing professional bodies’, including investigation, disciplinary and appeals processes, would already be in place.
I do hasten to remind you that this is a discussion document. The government has not yet made decisions and we are genuinely keen to have your feedback on this.
An important consideration with this proposal is that there would need to be well-developed and carefully managed transitional arrangements. Along with the key question, the discussion document asks for your views on how such a transition could best be managed.
So in conclusion can I thank you again for your valuable contribution to this process so far and thank you for providing me with the perfect opportunity to release this discussion document. I strongly encourage you to make submissions and look forward to further input from you on where the government’s policy proposals should be heading as the review progresses.
As I said before, the introduction of the voluntary administration regime is widely anticipated and you, as practitioners, will be key to its effective implementation. As well as protecting and promoting the integrity of the corporate insolvency system, you encourage confidence in the system by undertaking this work. The government values your skills and your contribution to the law reform and we should all look forward to the successful implementation of this new legislation.