Statement of the Nature and Magnitude of the Problem and the Need for Government Action
Several problems in the Companies Act have been identified: the lack of liquidators' accountability to creditors; the freedom of directors and related entities to vote, possibly inappropriately influencing the outcome of proceedings at creditors' meetings to the detriment of the creditors; and the seldom enforced liquidators' principal duty to promote the collective interest of creditors. The problem is that a small number of Companies Act provisions provide scope for liquidators to act in ways that are inconsistent with that principal duty, for example, not providing the initial report to creditors or foregoing the first creditors meeting. While it is clear that the great majority of liquidations are carried out in a fully professional manner, it is also clear that a small number of liquidators are either debtor-friendly or otherwise fail to properly protect creditors' collective interests. The debtor friendly liquidator tends to be partial to the directors that appointed them, which negatively impacts the return to creditors, especially where the liquidator turns a blind eye to reckless and insolvent transactions entered into by the director of the company.
There are also problems with the process for the Court imposing prohibition orders on liquidators for failing to comply with their duties. The first problem relates to the definition of persistent failure in the Companies Act when imposing prohibition orders on liquidators. The definition of "persistent failure" is based on whether the person has breached their duties as a liquidator on two or more occasions within the preceding five years. The definition of persistent failure restricts the use of evidence of persistent failure to the preceding five years, which means that the court cannot look at evidence of failures beyond the 5-year period. This is a problem especially where the liquidators have been involved in serious breaches of duties, which the courts are not able to take into consideration when making prohibition orders. Another problem in relation to prohibition orders relates to the maximum length of time a prohibition order is in place for. The maximum limit of 5 years currently provided for in the Companies Act 1993 restricts the court in imposing prohibition orders of more than five years where there are serious and continual breaches of liquidator's duties over several assignments taken by the liquidator.
Liquidators perform a vital role in protecting the integrity of the insolvency system. The liquidator is responsible for looking after other people's assets and, without the necessary skills and independence, may defeat the overall objective of the insolvency system. The current state of insolvency law does not provide the necessary framework to promote that objective.
There are about 400 people in the industry who consider themselves liquidators, of whom 100 take regular appointments. It seems likely that there are less than 100 full time liquidators in New Zealand.
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