13 October 2006 Speech Notes
1pm, Friday 13 October 2006
Christchurch Insolvency Special Interest Group
KPMG
Level 5 At Cranmer
34-36 Cranmer Square
Christchurch
12.30pm
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:
"We 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 that."
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:
- Rehabilitation;
- 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.
ENDS