Do all Liquidators act professionally?

Do all Liquidators act professionally?


Our current law in New Zealand is very relaxed on the issue of malpractice by liquidators.  There is draft legislation awaiting passage through Parliament, which will provide for the potential banning of an individual from accepting appointment as a liquidator.  But the proposed legislation will require proof of bad faith in a previous insolvency assignment.


As to qualifications, at present the Companies Act 1993 simply requires that a liquidator be over the age of 18, mentally fit, and not an undischarged bankrupt.  There are some restrictions, such as on having acted as a receiver of the company or an associated one, having rendered professional services to the company or had a continuing business relationship it or a majority shareholder in the previous two years.  There are even prohibitions against prohibited directors or promoters.


But generally, the law assumes that one does not need to be a professional in order to be a liquidator.  This is quite surprising, given the sometime large sums of money owing to creditors of failed companies, which are under the sole custody of a liquidator.


Insolvency practitioners who are members of the Chartered Accountants of Australia and New Zealand, are subject to a 5 yearly practice review which will include some level of overview of their professionalism and trust account procedures.  Other practitioners have no such constraints, unless a liquidation committee is appointed.  Liquidation Committees may call for reports from the liquidator.  They may, like creditors and shareholders, apply to the Court to have the liquidator’s actions opened up to the light of day.


Unfortunately, most liquidations do not have a Liquidation Committee appointed.  Even where one is in place, there may be a certain reluctance by the creditors, to incur the costs of applying to the Court for a review.


In a liquidation where I was appointed the replacement liquidator a few years back after application by the shareholder to the Courts, the lack of professionalism by the original liquidator was very clear.


The liquidator of the small manufacturing business had, through his ineptness, caused a sale of the business to be re-negotiated resulting in a significant loss to the shareholder and creditors.  Further, although the liquidator had initially proposed to undertake the job in return for the credits sitting in the company’s Bartercard account, he later claimed in Court that his fees amounted to over $84,000.  At the time of my appointment, I calculated that there was in addition over $73,000 of sales proceeds unaccounted for by him.


When action for recovery of this shortfall was commenced, it became clear that the liquidator had an interesting side line activity.  A credit recovery operation run by him from the same office had substantial sums owing to it by another liquidator.  These were commissions for work referred to the second liquidator.


While not suggesting that these practices are wide spread in New Zealand, I believe that there are strong grounds for better regulation of insolvency practitioners.  The costs to creditors of dishonest and unprofessional practice by some liquidators appointed under our Companies Act, are not insubstantial.


Paul Sargison