Statement of Feasible Options to Achieve the Desired Objectives
Option One
The first option involves introducing a licensing system for liquidators in which individuals would not be able to practice unless they met certain educational and experience qualifications and continued to comply with a set of rules and a code of ethics. Licensing liquidators could lead to increased confidence in the profession as a result of well known standards and enforcement mechanisms.
Currently the regulatory options are preferred over the full licensing model because the regulation properly targets the identified problems. A licensing system is expensive to implement but could be a useful compliment to the regulatory changes if found to be warranted at a later date. Further work is required before conclusions can be reached on this matter. However, there is currently a need to impose greater controls than just the status quo.
Option Two (Preferred Option): Amend the Companies Act 1993
The preferred option is to carry out some simple changes to the Companies Act.
The Companies Act would be amended in the following areas:
Liquidator Reporting Duties
Status Quo
Companies Act obligations:
- Liquidator to prepare list of creditors.
- Liquidator to send statement of affairs to creditors, shareholders and the Registrar of Companies.
- When dividend to unsecured creditors is likely to be under 20 cents in the dollar, liquidator can dispense with reporting duties to creditors.
Preferred Option
- Liquidator to send list of creditors to each creditor.
- Liquidator to send statement of affairs to the Registrar of companies only for publishing on the Companies Office website.
- Repeal the 20 cent rule to make liquidators report to creditors in all instances.
Net Benefit
Government
- The efficiency of the corporate insolvency system is enhanced by the removal of the loophole in the liquidation process, e.g., the liquidator would not be able to use the 20 cent rule to dispense with reporting duties.
Liquidators
- There is a cost saving in sending one report to the Registrar instead of to all creditors and shareholders.
- Making the insolvency process transparent by requiring the liquidator to comply with its reporting obligation would lead to increased confidence in the insolvency system.
- Liquidators will have increased clarity of role in relation to their reporting obligations.
Creditors
- Accountability of liquidators to creditors is enhanced by liquidators providing reports to the creditors on the financial affairs of the company.
- The creditors will be able to collectively organise themselves with new information about other creditors once the list of creditors is circulated by the liquidator to all the creditors.
Society
- The changes promote greater public confidence in the insolvency profession as a whole as they provide more clarity on liquidators reporting obligations.
Director and Related-Party Voting Rights
Status Quo
Directors
- Directors of a failed company who are also creditors are entitled to vote at creditors' meetings.
Related-Parties
- Related entities of the failed company are entitled to vote at creditors' meetings.
Preferred Option
- Directors and related entities will be allowed to vote but this right can be challenged by creditors in the court.
- Provide Court with a range of corrective powers, such as setting aside the resolution or calling a new meeting, where director or related entity voting has been determinative and has gone against creditors interests.
Net Benefit
Creditors
- General promotion of the collective interests of creditors is achieved by giving the creditors the ability to challenge resolution that the director and related entities voted on if the outcome is contrary to the interest of creditors or a class of creditors as a whole.
- The creditors will incur court fees when challenging the director's or related entities voting rights. The court costs would be shared by the creditors.
Directors
- The directors and related entity voting rights in a creditors meeting are open to challenge by the creditors in Court if the resolution results in an outcome that is favourable to the director at the expense of creditors collective interests.
Society
- The changes promote greater public confidence in the insolvency profession as a whole as the outcome of a creditors meeting would not be subverted by self-serving interests of directors or related entities voting on the resolution at the creditors meeting.
Appointment of a Liquidator
Status Quo
- A company in voluntary liquidation can appoint a liquidator without the approval of the creditors or the Court when creditors have already begun the liquidation process.
Preferred Option
- Requiring that where a debtor company enters into voluntary liquidation when there is a pending creditor's petition in the Court, the liquidator appointed by the debtor company be approved by the petitioning creditor, or alternatively, if a consensus is not reached between the petitioning creditor and the debtor company, the Court decides on the appointment at the time of hearing of the creditor's petition.
Net Benefit
Government
- IRD is one of the groups of creditors which will benefit from this change as it would result in the appointment of an impartial liquidator.
Liquidators
- Credibility of the profession is enhanced by the appointment of impartial liquidators.
Creditors
- Returns to creditors are maximised with the appointment of impartial liquidators to carry out the liquidation process.
Debtors
- The debtor company would still be able to place themselves into voluntary liquidation but there is a cost for the debtor companies in not being able to appoint a preferred liquidator without the approval of the petitioning creditor.
Society
- The changes promote greater public confidence in the insolvency profession as a whole.
Prohibition Orders on Liquidators and Administrators
Status Quo
- The High Court must make a prohibition order against a liquidator if satisfied that the person has seriously or persistently failed to comply with their duties as a liquidator.
- There are no prohibition orders for administrators.
- Liquidators will work as administrators and vice versa.
- A fixed five year upper limit exists on prohibition orders for serious and persistent failures to comply with liquidators' duties; and
- The definition of "persistent failures" relates to a prohibition order for serious and persistent breaches of liquidators' duties in the preceding five years.
Preferred Option
- It is proposed that the prohibition orders on administrators be legislated for in the Bill along the same lines as that currently exists for liquidators.
- When considering persistent misbehaviour, to require the Court to take into consideration the practitioners combined record as a liquidator and an administrator when imposing prohibition orders.
- Removing the fixed five year upper limit on a prohibition order for serious and persistent failures to comply with liquidators' duties.
- It is proposed that the "five years" limb from the definition of persistent failure be removed.
Net Benefit
Liquidators
- Credibility of the insolvency profession is enhanced by prohibiting imprudent liquidators and administrators from taking up appointments.
Creditors
- The potential for imprudent liquidators to be prohibited from taking appointment would increase the chances of maximising returns to the creditors by the appointment of prudent liquidators.
Society
- The changes promote greater public confidence in the insolvency profession as a whole by the appointment of prudent liquidators and prohibiting imprudent ones from taking appointments for a period of time as the court sees fit.
Court
- The Court may prohibit practitioners from practicing for longer than five years if it is considered necessary.
- Removing the "five year" limb from the definition of persistent failure as it relates to a prohibition order for serious and persistent breaches of liquidators' duties means that each case will be dealt with relative to the serious nature of the failures and the Court will have more discretion to decide a prohibition on a case by case basis.
- The Court will be able to ban a liquidator for serious breaches of liquidator's duties for any term considered appropriate to the circumstances.
- The court will have discretion to decide the gravity of offending by a liquidator on a case by case basis.
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