7. Inspector General of Insolvency
7.1 The Proposals of the Law Commission
48. The Law Commission proposes that to deal with the claimed problems of lack of trust and confidence and lack of effective enforcement there should be established within the Ministry of Economic Development three business units, at least one of which (the Inspector General) would receive direct funding from a Parliamentary appropriation. These three business units would be:
- The current Insolvency and Trustee Service, which would provide operational services through the Official Assignee in matters relating to consumer bankruptcies and under the Proceeds of Crimes Act;
- The Registrar of Companies which would continue to operate the Companies Office, carrying out "functions of an archival nature ... and some quasi-judicial functions"; and
- A new independent office of an Inspector-General in Insolvency, which would take over "all public enforcement functions cast upon both the Official Assignee and the Registrar of companies, as well as the investigative functions currently cast upon the Registrar" (para 193).
7.2 The Quality of the Evidence in Support of the Law Commission Proposal
49. The evidence supporting the Law Commission's view that changes to the structure of the New Zealand Insolvency and Trustee Service are required comes from statements made in the context of informal consultation and judicial criticism of the Official Assignee in respect of two different cases dating from the mid-1990s.
50. In respect of information obtained during informal conversations, the Law Commission report does not include enough information to make it feasible for us to provide an independent assessment of the quantum and significance of the concerns expressed. In particular, the absence of benchmarks (for example, similar evidence in respect of a system that the Law Commission considered to be effective) makes it very difficult to know how to interpret the information. For example, since insolvency processes are about the application of the law and the exercise of judgement in the allocation of losses among those harmed by an insolvency, it is likely to be difficult and acrimonious no matter how professional the insolvency practitioner is. We wonder, for example, how many criticisms of judicial judgement would emerge if we surveyed all unsuccessful plaintiffs or convicted defendants in civil actions!
51. In respect of judicial criticism of the Official Assignee, the Law Commission cites the decisions of two senior members of the judiciary in two different cases dating from the mid-1990s. Since no system managed by human beings is perfect, this evidence would in our opinion only be compelling if it could be argued that it was indicative of systemic failures rather than errors of judgment by individuals associated with those particular cases. In this respect, we note that:
- In 1993/1994 and 1994/1995 the Official Assignee administered 790 and 651 liquidations, and that since that time the number of liquidations administered in each year has been in the range 600 - 790; and
- In 1999 the New Zealand and Insolvency and Trustee Service was restructured to improve administration procedures and increase the effectiveness of its enforcement functions.
- Recent clarification of the respective roles of the Securities Commission and the Insolvency and Trustee Service for disqualification proceedings involving directors of companies has removed past barriers to these proceedings.
We consider that the cases cited by the Law Commission should be set in the context of this information if they are to provide a basis for public consultation on the issues.
52. In the absence of any clear evidence that the operations of the Official Assignee and the Insolvency and Trustee Service have been subject to systemic failure, that a significant number of liquidations result in successful legal action against or judicial criticisms of the Official Assignee, or that any past problems are inherent in the new structure adopted by the Insolvency and Trustee Service, we do not find the evidence for change to be compelling. In particular, it would not in our experience meet the standards of evidence that are normally expected to support proposals for legislative change or new regulatory structures emanating from the civil service.
7.3 Governance and Incentive Issues
53. The proposal for the creation of the Office of the Inspector General gives oversight of the operations of the Official Assignee, and thus oversight of all licensed insolvency practitioners and insolvency actions, to the office that is responsible for all public enforcement functions currently assigned to the Official Assignee and the Registrar of Companies. In our view this raises concerns about the governance arrangements and the incentives established for the insolvency regime.
54. The primary function of the Official Assignee and private insolvency practitioners is to provide for orderly liquidations or reorganizations of companies to maximize returns to creditors. They are in the business of providing a customer service, albeit motivated by statutory obligations. Breaches of the law warranting prosecution arise in only a small number of the approximately 1000 liquidations occurring in New Zealand each year. This focus is currently recognized in the strategy of the Insolvency and Trustee Service, but might be lost with an Inspector focused on enforcement and breaches of insolvency law.
55. Giving the Inspector General oversight of the Official Assignee and private insolvency practitioners is akin to giving the police oversight of the hospital and ambulance service on the grounds that doctors and ambulance staff are obliged to report any injuries which may result from criminal actions (such as child abuse). This example makes the potential problems with this regime readily apparent. Oversight of the Official Assignee by an office responsible for prosecutions will reduce the flow of information to the Assignee because of concerns that it may be used in prosecutions. This will reduce the efficiency with which the Official Assignee functions, while not necessarily increasing the effectiveness of enforcement. In our view, the Official Assignee and the enforcement function should operate within the same organization, but the should but parallel and distinct business units within that organisation, not in a hierarchical relationship. This suggests to us that the current structure of the Trustee and Insolvency Service is superior to the proposal of the Law Commission.
7.4 Cost of the Office of the Inspector General
56. We have been asked to estimate the cost of the proposed office of the Inspector General. The cost of this office would be determined to a large extent by the exact responsibilities and powers that were set out in the legislation, and is therefore very difficult to estimate at this time. Our estimate is that to monitor the activities of the 85 staff engaged by the Insolvency Service and liaise with the Companies Office, Securities Commission and other relevant agencies, would require the Inspector, 5 staff at senior policy analyst level, and 2 assistants. To provide base costs we estimate that the Inspector would receive remuneration of around $200,000 per annum, five senior analysts would average $85,000 and the assistants would average $40,000. Assuming that the total cost of employment (including benefits, the cost of office space and consumables) is two times salary, this would suggest that the office of the Inspector General would cost $1.2 million - $1.3 million per annum. This appears to us to be a large amount given that we cannot discern any tangible benefits that will flow from the creation of the Office. Consequently, we consider it important that this recommendation of the Law Commission be assessed once other changes to the Insolvency Service (including increased funding for enforcement) have been considered and in the light of the emerging evidence on the effectiveness of the structure put in place by the Insolvency Service in 1999.
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