Deficiencies exposed in regulation of insolvency practitioners

A recent case alleging serious misconduct by a liquidator highlights the need for New Zealand to reform the regulation of insolvency practitioners.

The case, Official Assignee v Norris [2012] NZHC 961, illustrates the inadequacies of our current regime.

Patrick Norris is a liquidator based in Nelson.

Complaints were made to the Official Assignee about the way Mr Norris handled eight separate liquidations.

The Official Assignee launched proceedings against Mr Norris under the Companies Act, seeking to review Mr Norris's fees, remove him as a liquidator of the companies, and prohibit him from acting as a liquidator for an indefinite period.

Mr Norris sought to strike out the claim against him.

The Official Assignee's allegations against Mr Norris were wide ranging, including that he:

# Banked all the liquidation monies in the one account.

# Disposed of assets at below value to parties associated with him.

# Benefited as a purchaser of assets.

# Combined liquidation funds with the funds of his own business.

# Charged unreasonable and excessive fees.

In addition, Mr Norris was appointed as liquidator of Just Tees Ltd by shareholder resolution.

In his liquidators' report, Mr Norris said that he was "independent" of the director and shareholders.

The Official Assignee alleged that, in fact, the company director and majority shareholder was the former partner of Mr Norris's daughter.

The Official Assignee brought claims under sections 284 and 286 of the Companies Act, which is currently the primary way to enforce a liquidator's duties and to obtain orders prohibiting a liquidator from acting.

Review of Mr Norris's fees

Section 284 allows the court to give directions in relation to any matter arising in the liquidation, including an order that a liquidator refund any unreasonable fees charged. The Official Assignee sought a review of Mr Norris's fees under section 284.

However, the problem with this claim is that section 284 only allows specified people to apply for relief.

The court found that the Official Assignee was not in the list of specified people, and so could not bring a claim under section 284. This precluded the Official Assignee from reviewing Mr Norris's fees under this section.

In response, the Official Assignee sought to rely on the court's inherent jurisdiction to review Mr Norris's fees.

The court was sceptical of this argument, saying that section 284 acted as a "filtering mechanism", and that there were difficulties in this case in seeking to avoid section 284 by relying on the Court's inherent jurisdiction.

The court therefore struck out the Official Assignee's claim in relation to Mr Norris's remuneration, to the extent that it relied on section 284.

However, it allowed the Official Assignee to consider whether it could replead the claims concerning Mr Norris's fees on other grounds.

Prohibition order

The Official Assignee also brought a claim under section 286.

This section allows the Official Assignee to make an application for an order to enforce a liquidator's duties where there have been persistent or serious failures by a liquidator to comply with his or her duties. In such a case, the court can prohibit a liquidator from acting for an indefinite period.

Unlike section 284, section 286 does allow the Official Assignee to bring a claim.

However, section 286 contains a number of procedural requirements, including that an applicant serve a notice of a failure to comply by a liquidator before issuing proceedings under the section.

The Official Assignee served a draft copy of the statement of claim on Mr Norris, but did not serve a notice as required. The court therefore stayed the Official Assignee's claim until proper notice was given under section 286.

In addition, it ruled that the Official Assignee had failed to properly particularise its claim.

Section 286 only allows the court to prohibit a liquidator from acting if there has been a persistent or serious failure to comply with his or her duties.

The court held that the Official Assignee had failed to say whether it was claiming that Mr Norris's breaches of duty were persistent, or whether they were serious. As a result, it considered that Mr Norris was not properly informed of the claim against him.

The court ruled that the Official Assignee needed to replead its claim before it could proceed.

The need for reform

Sections 284 and 286 of the Companies Act are the primary way in which liquidators can be held to account.

As the Norris case illustrates, the sections are highly technical.

In addition, they are narrowly drafted – for example, they do not allow the court to prohibit a liquidator from acting if he or she is convicted of an offence involving dishonesty.

As many readers will know, the Insolvency Practitioners Bill is before Parliament.

Although the bill as introduced proposed a negative licensing regime, the select committee considering it has proposed a positive licensing regime.

The Ministry of Economic Development is currently considering its response to the select committee report.

In our view, the Norris case is a good example of the need to reform the law concerning the regulation of insolvency practitioners.

We look forward to the ministry's response to the select committee report with interest.

This article was contributed by Murray Tingey, partner, David Friar, senior associate, and Anita Smith, solicitor, of Bell Gully.