December 2007

55.21 Solicitation

It is an offence, punishable by a fine, for a person to give to any member or creditor of a company any valuable consideration with a view to securing his/her own appointment or nomination, or to securing or preventing the appointment or nomination of some person other than himself/herself, as the company’s liquidator [note 1].

Where the court is satisfied that that any improper solicitation has been used by, or on behalf of, the liquidator or trustee in obtaining proxies or procuring his/her appointment it may order that no remuneration out of the estate be paid to any person who, or on whose behalf, the solicitation was exercised and an order of the court under the relevant rule overrides any resolution of the liquidation or creditor’s committee or the creditors, or any provision of the rules relating to the liquidator’s or trustee’s remuneration  [note 2].

In addition to the statutory consequences, solicitation for insolvency work which a reasonable person would regard as harassment, or which would be inconsistent with the image of a professional person, is inappropriate.  IP Unit (see paragraph 55.50) are responsible for investigating matters of suspected impropriety including, as appropriate, liaison with the insolvency practitioner’s authorising body.

55.22 Professional independence

For those insolvency practitioners authorised by the Secretary of State (see paragraph 55.10), the Insolvency Service produces a document entitled Guidance to Professional Conduct and Ethics for persons authorised by the Secretary of State as insolvency practitioners (http://www.insolvency.gov.uk/guidanceleaflets/conductethics/conductethics.htm).  Much of the information in the following eight paragraphs (55.23 to 55.30) is based on the contents of that document, though it is equally applicable to those insolvency practitioners authorised by a RPB as the guide produced by the Insolvency Service has been adopted by all of those bodies.

The Joint Insolvency Committee (see paragraph 55.32) is currently working on revising the guidance in the form of a code of ethics.  It is hoped that this code will also be adopted by all of the authorising bodies (the draft code is available at this website http://www.accaglobal.com/members/professionalstandards/monitoring/insolvency/code_ethics/).

55.23 Threats to objectivity

It has been identified that there are two types of threat to an insolvency practitioner’s objectivity.  These are known as “self-review” threats (see paragraph 55.25) and “self-interest” threats (see paragraph 55.27). Threats may be general in nature or peculiar to the particular circumstances of the case.  Sometimes, the mere perception of risk or conflict will tend to undermine confidence in the practitioner’s objectivity, and so make acceptance of an appointment, or continuation of an appointment, unwise.

55.24 Self-review threats to objectivity

If the practitioner’s exercise of professional judgement may be influenced by an earlier such exercise in relation to the same entity, then a question of self-review may arise (i.e. the practitioner would effectively be reviewing his/her own actions in relation to, for example, an earlier audit of the entity).  Self-review threats relate to situations where the practitioner has or had a “material professional relationship” with the company or individual (see paragraph 55.25). 

55.25 Self review threats - material professional relationship

A material professional relationship arises where a principal or employee of the practitioner’s practice is carrying out, or has during the previous three years carried out, material professional work for that client.  Material professional work would include the following:

• Where a practice or person has carried out, or has been appointed to carry out, audit work.
• Where a practice or person has carried out one or more assignments of such significance or in such circumstances that an insolvency practitioner’s objectivity in carrying out a subsequent insolvency appointment could be, or could reasonably seen to be, prejudiced.

Where there has been a material professional relationship, no principal or employee of the practice should accept an appointment as, supervisor of a voluntary arrangement, administrator, administrative receiver, other receiver, liquidator if the company is insolvent (in the case of a liquidation where the company is solvent, the appointment should only be accepted after careful consideration of all the implications of the case and in particular whether the directors’ declaration of solvency is likely to be substantiated – see paragraph 55.26) trustee in bankruptcy, or trustee under a deed of arrangement.

A material professional relationship could arise where a practice or person has carried out professional work for any director or shadow director of a company in their personal capacity.

Where accountants are appointed to investigate a company’s affairs on the terms that they would not undertake any responsibility for the management of the company’s affairs either in the present or in the future, the partners in the firm could not subsequently be appointed as receivers for that company [note 3].

55.26 Self-review threats - sequential insolvency appointments

Whilst there is nothing in the legislation to preclude an insolvency practitioner accepting an appointment having held a previous appointment, he/she should only accept office in any insolvency role sequential to one in which the insolvency practitioner or his/her practice, or a current employee of the practice, has previously acted after giving careful consideration to the implications of acceptance and being satisfied that objectivity is unlikely to be compromised by a prospective conflict of interest.  Some of the relevant guidelines are outlined below:

• Conversion of member’s voluntary winding up into creditors’ voluntary winding up – where an insolvency practitioner has been appointed liquidator in a members voluntary liquidation and is obliged to summon a meeting because it appears that the company will be unable to pay its debts in full within the period stated in the directors’ declaration of solvency, the practitioner’s continuance as liquidator will depend on whether or not he/she believes that the company will eventually be able to pay its debts in full.  If the company will not be able to pay its debts in full and the practitioner had a material professional relationship with the company (see paragraph 55.25), the practitioner should not accept nomination under the creditors’ winding up.  If the practitioner has had no such material relationship, he/she may accept nomination and continue as liquidator with creditors’ approval subject to giving careful consideration to the implications.  If the practitioner believes that the company will eventually be able to pay its debts in full he/she may accept nomination by creditors and continue as liquidator.  If, however, it should subsequently appear that this belief was mistaken, the practitioner should resign if he or she previously had a material professional relationship with the company.
• Insolvent liquidation following an appointment as an administrative or other receiver – where a principal or employee of a practice is, or in the previous three years has been, receiver or administrative receiver of any of a company’s assets, no principal or employee of the practice should accept appointment as liquidator of the company in an insolvent liquidation.  This restriction does not apply where the court made the previous appointment.  Before a court-appointed receiver accepts subsequent appointment as liquidator the practitioner should give careful consideration as to whether his/her objectivity might be, or appear to be, impaired and, if so, the appointment should be refused.
• Liquidation following appointment as supervisor of a voluntary arrangement or administrator – where a practitioner, or any principal or employee of his practice, has been supervisor of a voluntary arrangement or administrator of a company the practitioner may, if he/she gives careful consideration to the implications and these are satisfied, accept appointment as liquidator if so nominated by creditors or appointed by the Secretary of State.  However, where the relevant previous role is that of administrator, the practitioner should not accept nomination or appointment as liquidator unless either the practitioner has support of the creditors’ committee or the practitioner has the support of a meeting of creditors, of which all known creditors have been given notice.
• Bankruptcy following appointment as supervisor of an individual voluntary arrangement – where a practitioner, or any principal of his/her practice, has been supervisor of a voluntary arrangement in relation to a debtor, the practitioner may, provided he/she has given careful consideration to the implications and these have been satisfied, accept appointment as trustee in bankruptcy of that debtor provided that it is effected by a general meeting of creditors, by appointment by court or by appointment by the Secretary of State. 

55.27 Self-interest threats to objectivity

Self-interest threats are those which can affect the reasoning the practitioner applies because he/she is, or might be, affected by considerations that either favour, or are prejudicial or disadvantageous to the him/her.

It is improper for a practitioner to be influenced by a significant financial or other benefit accruing, or which might accrue, to the practitioner or to anyone with whom the practitioner is associated or connected, or by the avoidance of disadvantage to all or some of these.  Self-interest threats can include the following:

• Personal relationships
• Relationship with a debenture holder
• Purchase of assets of an insolvent company or debtor

55.28 Other potential conflicts of interest

In addition to the self-review and self-interest threats to objectivity, insolvency practitioners may encounter conflicts of interest and, therefore, threats to objectivity in the following areas:

• Group, associated and family connected companies
• Relationships between insolvent individuals and insolvent companies

55.29 Transfer of employees and principals, including practice mergers

When two or more practices merge, principals and employees of the merged practice become subject to common ethical constraints in relation to accepting new insolvency appointments to clients of either of the former practices.  However, existing appointments which are rendered in apparent breach of guidance by such merger need not be determined automatically, provided that a considered review of the situation by the practice discloses no obvious and immediate conflict, such as a potential need to sue a colleague.

Where a principal or an employee of a practice has, in any former practice, undertaken work upon the affairs of a company or debtor in a capacity which is incompatible with an insolvency assignment of his/her new practice, the practitioner should not personally work or be employed on that assignment, save in the case of an employee of such junior status that his or her duties in the former practice did not involve the exercise of any material judgement or discretion.

55.30 Joint appointments

A practitioner who is invited to accept an insolvency appointment jointly with another practitioner should be guided by similar principles to those set out in relation to sole appointments.  Where a practitioner is specifically precluded by the guidance from accepting an insolvency appointment as an individual, a joint appointment will not render the appointment acceptable.

55.31 Insolvency Practices Council

55.32 The Joint Insolvency Committee

The Insolvency Regulation Working Party (see paragraph 55.31) made a recommendation that the RPBs (see paragraph 55.9) should consider the potential for taking further initiatives for co-operative activities in regulatory areas. 

Joint committees existing at that time such as the Insolvency Licensing Forum, the Best Practice Liaison Committee and the Joint Ethics Committee have, over the years, developed into the Joint Insolvency Committee, which was formed in 1999.  The committee is the insolvency profession’s principal source of contact with the Insolvency Practices Council (see paragraph 55.31).

The committee is made up of representatives from each of the RPBs and, also, the Insolvency Service.  The Insolvency Service’s current representative on the committee is the head of Insolvency Practitioners Policy Section (see paragraph 55.51).  The committee also has “observers”, who assist with updating the committee on issues from within their respective areas of interest or expertise.  Observers are drawn from organisations such as the Insolvency Service (Northern Ireland), The Association of Business Recovery Professionals (see paragraph 55.33) and the Law Society.

The committee meets four times a year and considers and takes appropriate action on the recommendations of the Insolvency Practices Council.  It is also responsible for commissioning the creation or revision of Statements of Insolvency Practice (see paragraph 55.34).

55.33 Association of Business Recovery Professionals

The Association of Business Recovery Professionals is better known by its brand name “R3” (which stands for Rescue, Recovery and Renewal).  R3 is a professional association for insolvency, business recovery and turnaround specialists and promotes best practice for those involved in the insolvency profession.  It operates as a not-for-profit organisation and provides an avenue for debate on issues facing the profession.  Membership of the association is not limited to qualified insolvency practitioners and includes those working towards full insolvency practitioner qualification and others involved in the rescue of struggling businesses.

The association has a president, a vice-president, a deputy vice-president and a chief operating officer, and is operated by a council of members.  The association operates committees covering areas such as membership, technical, education, small practices and regions.

The association is responsible for drafting Statements of Insolvency Practice (see paragraph 55.34) following commission of the Joint Insolvency Committee (see paragraph 55.32) and runs training courses and seminars to which insolvency practitioners can subscribe to further their on-going professional development.   Membership is available in the following categories:

• Fellow - those who have been full members for at least five years
• Member – those who are licensed insolvency practitioners, successful students of the Joint Insolvency Board examination, members of the Society of Turnaround Professionals, full members of the Insolvency Lawyers Association and chartered surveyors who are members of a RPB in their field and are full members of the Non-Administrative Receivers Association.
• Students – those who are members of one of the RPBs and are studying to take the Joint Insolvency Board examination and students of the Insolvency Practitioners Association who are preparing to take, or have passed, the Certificate of Proficiency of Insolvency (see paragraph 55.16).
• Subscribers – Anyone with an interest in insolvency administration may apply for subscriber status, with entry at the discretion of the council.
• Retired – Those members who are no longer active in the insolvency profession.

More information on the Association of Business Recovery Specialists can be found on their website (www.r3.org.uk).

55.34 Statements of Insolvency Practice

Statements of Insolvency Practice (commonly referred to by the initials SIP) are issued to insolvency practitioners to give guidance as to best practice in respect to aspects of insolvency practice, particularly those areas which are not covered by specific legislation.

The Statements of Insolvency Practice are commissioned by the Joint Insolvency Committee (see paragraph 55.32) and are written by the Association for Business Recovery Professionals (see paragraph 55.33).  The statements are then issued to the RPBs (see paragraph 55.8) and the Secretary of State for onward transmission to the insolvency practitioners regulated by those bodies.   Details of the statements currently in force are available at the website of the Association of Business Recovery Professionals (http://www.r3.org.uk/publications/default.htm?dir=professional&pag=SIPS&i=402). 

Adherence to the Statements of Insolvency Practice is not compulsory, but departure from the standards outlined in the statements is a matter for consideration in disciplinary or regulatory decisions by the authorising body. 

[Back to Part 1 – Professional conduct and ethics] [On to Part 3 Maintaining records and reporting requirements for liquidators and trustees (including the official receiver)]