4. Overall Assessment of Approach and Analysis of the Law Commission Report
6. The recommendations of the Law Commission follow from their claim that the business community lacks trust and confidence in the current insolvency regime in New Zealand.
7. Very limited data are available on insolvency practice in New Zealand, and there are no systematic studies of the quality of the work undertaken by insolvency practitioners. Even given these restrictions, we found it difficult to assess the extent and quality of the data on which the Law Commission have developed their views and based their recommendations. Most of the problems that the Law Commission claims give rise to a lack of trust and confidence are sourced to anecdotal evidence gleaned from conversations with market participants. As a minimum it would have been helpful to have some information about the number and cumulative experience of the practitioners on whose observations the Law Commission is relying.
8. Anecdotal evidence of the type used by the Law Commission is usually not relied upon because it suffers from two problems. First, it may rest on the views of a market participant with a private interest in seeing particular regulatory changes (for example, changes that introduce a barrier to entry would in the future increase the profits of that particular participant). Second, anecdotal evidence does not provide the systematic empirical basis required to assess whether the problems identified are quantitatively large by comparison with the number of insolvencies that are dealt with each year. This is important because regulations impose compliance and other costs on the market. These costs must be assessed against the benefits to be derived from the regulations. Unless the problems identified are quantitatively large in the context of the market as a whole, the costs imposed by the introduction of new regulations may outweigh the benefits provided by the regulations.
9. In our view, the evidence provided by the Law Commission is in some cases insufficient to demonstrate that a problem has been clearly identified or that it is of sufficient importance to warrant the costs and risk associated with a change to the insolvency regime. In these cases, it is our view that further conceptual and empirical research should be undertaken before any policy recommendations or legislative changes are considered.
10. In some cases it is apparent that the Law Commission has been unable to identify particular problems with the current insolvency regime, but have recommended changes based on the idea that "Good insolvency laws should be developed in good economic times for the purpose of dealing with bad economic times"; and "Experiences with the operation of insolvency laws in good economic times do not necessarily reflect how the laws will work in bad economic times;" (para 38). The Law Commission suggests that for New Zealand the relevant benchmark for bad economic times is the period between 1989 and 1992, when there were a large number of insolvencies. However, the Law Commission does not present any systematic analysis of the record of insolvencies, or any measures of the efficiency with which the insolvency regime functioned, in that period. Neither do they provide any substantive analysis of the effectiveness of the revisions to the operation of the New Zealand Insolvency and Trustee Service that have been put in place since 1999. In both cases, we suggest that more detailed analysis of the data on insolvencies and the operation of the current operations of the Insolvency and Trustee Service are required before any legislative changes should be considered.
11. The Law Commission also bases some of its concerns about the operation of the insolvency regime on assumptions about human behaviour that are at least open to question. For example, some of their recommendations are based on the claim that creditors and debtors may not act rationally as the point of insolvency approaches and during insolvency proceedings. These claims are not supported by evidence demonstrating that in individual insolvency proceedings the irrational actions of debtors or creditors produced an outcome that was inefficient. Moreover, the view of the Law Commission is in direct contrast to the economics and business literature on gambling for resurrection which has demonstrated that this behaviour represents a rational response to the inventives facing owners of insolvent firms. It also raises questions about the focus of the Law Commission's recommendation for a moratorium regime aimed at honest and competent but unlucky (and possibly also irrational) debtors. The Law Commission offers no evidence that will allow us to assess the proportion of entrepreneurs in New Zealand who conform to this psychological profile. Further work on the rationale for the interventions and law changes proposed would assist us in understanding exactly what gaps in the market the Law Commission is proposing to fill. In this Review we provide some suggestions for alternative ways of thinking about the problems that may motivate changes to New Zealand's insolvency regime.
12. The Law Commission provides a review of the business environment and the structure of business enterprise in New Zealand focusing on the importance of small business for the economy and identifying the particular problems that arise when a business with a large share of the market (such as the Bank of New Zealand in 1990) become insolvent. However, neither of these features of the New Zealand economy provide any uniqueness. As the Commission itself demonstrates, the proportion of small businesses in the New Zealand economy is the same as that in the UK, while the collapse of firms with large market shares is not unknown in much larger economies (HIH in Australia provides a recent example, despite the fact that the relevant regulator, the Australian Prudential Regulation Authority, has 850 staff). Large firms with substantial customer bases and investment in brand awareness (such as the BNZ) or large infrastructure businesses are readily sold as a going concern to investors with a superior management technology. Increases in the regulation of insolvency practice and the licensing of insolvency practitioners may reduce the choice available to small businesses and drive up the cost of insolvency proceedings.
13. The views of the Law Commission appear to have been shaped by World Bank, Asian Development Bank and International Monetary Fund reports on insolvency procedures. There is enough diversity in the insolvency regimes of the US, Europe, Canada and Japan to suggest that we should develop a regime suited to commercial practice and institutional structures in New Zealand rather than seeking to adopt "best practice" from other countries. Further, some of the recommendations in these reports may have greater relevance to developing countries with well-established commercial law frameworks and substantial private sector capability to provide insolvency services. For example the impact of an economic downturn and an increase in insolvencies may not have economy-wide effects in New Zealand even though such "contagion" may be a problem in developing countries. In contrast to most developing economies, New Zealand's economy is characterised by the absence of widespread political patronage for business enterprises, the existence of well-developed capital markets for the efficient management of risk, and stable macroeconomic policies focused on low inflation and a freely floating exchange rate.
Back to Top