The question of insolvency practitioner independence is important given the role of a company liquidator and bankruptcy trustee. Independence rules are being reviewed in England, and the rules associated with remuneration arrangements, in light of changes in commercial and professional practice. The Joint Insolvency Committee refers to “non-traditional routes to market, advertising, websites, lead generators and purchasing of data” as being part of the new landscape, and pre-packs. Australia has undergone similar changes, and the independence rules here, already the subject of subtle changes in court decisions, may also need re-examination.
Insolvency practitioners (IPs) are given significant powers and responsibilities, and their decisions can go to determine a person’s rights. Confidence in the profession and its practitioners is essential. It is often tested in relation to how the IP came to be appointed to the particular insolvent company or person and whether there is any perceived lack of independence arising from that process.
That perception has to be based on a reasonable perception. The fact that an IP is appointed by a director or a debtor does not per se lead to any reasonable view that the IP will act in that director’s or debtor’s favour. IPs are not like lawyers or accountants who are chosen by clients for whom they then act. Nevertheless, the perception is pervasive and should, in my and others’ views, somehow be addressed.
A revision of the UK insolvency Code of Ethics
The reasonableness of that perception is among several issues being re-assessed in England based on what is seen as a changed landscape since the various rules of conduct were first laid down. The Joint Insolvency Committee (JIC) in England and Wales is consulting on a revised version of the insolvency Code of Ethics and is seeking the views of insolvency practitioners and other stakeholders, with the consultation having closed on 25 July 2017.
The review is being conducted in deference to the overriding Code of Ethics for Professional Accountants of IESBA (the International Ethics Standards Board for Accountants). In Australia, this is APES 110. The JIC says that the insolvency Code has to reflect changes being made to the IESBA Code this year, similar to those being made in Australia under APES 110.
As the JIC explains, commercial practice has moved substantially since the Code was first introduced.
“Business structures and non-traditional routes to market have developed. Activities leading to insolvency appointments, particularly in the personal/consumer debt insolvency arena, bear little (resemblance) to the landscape when the Code was introduced. In particular, the use of advertising, websites, lead generators or purchasing of data has brought a new complexity to this area. Similarly, the services offered by firms or groups in which IPs operate are far greater than the accountancy or legal practice in which IPs have been traditionally associated”.
Questions are raised by the JIC whether revised rules are required for fees and other types of remuneration and obtaining insolvency appointments, being two areas where there have been changes in commercial practice.
For example, the Code currently provides that accepting referral fees or commissions is a significant threat to the fundamental principles; notwithstanding the threat, they can be accepted if they are to the benefit of the insolvent estate; where accepted, they should be disclosed; but they should not be accepted if they are only for the benefit of the IP or their practice.
The JIC says this has arguably not kept pace with changing business structures and services now being offered. The Code does not specifically deal with, for example, the referral of work to other companies within a group which may not generate a referral fee or commission but may improve turnover and profit in that company and which ultimately may provide a benefit to the IP or the beneficial owners of the practice.
Appointment as an IP
As to independence, the JIC properly notes is that activities leading to insolvency appointments bear little resemblance to the landscape when the Code was first introduced. For one thing, services offered by firms or groups in which IPs operate are far greater than the accountancy or legal practice with which IPs have been traditionally associated in the UK. Also,
“the number of IPs who are employees rather than principals in firms has increased. Such IPs have less influence over the operation and strategy of the firm”.
One of the founding principles is that because of the “special nature” of insolvency appointments, the payment for the introduction of insolvency appointments is inappropriate. However, the JIC says that
“views have been expressed that due to the commoditisation of certain insolvency processes (particularly those used to address consumer debt) that the ‘special nature’ is diminished or indeed that it is not at all clear what the special nature is”.
Questions asked by the JIC include whether payment may be appropriate for insolvency introductions given that the UK Financial Conduct Authority does not prohibit payment to lead generators by those providing debt advice or debt adjusting services? Should they be permitted but with new requirements surrounding disclosure of the source and arrangements with that source? Does the prohibition influence other adverse behaviour, for example, by way of disguised referral fees? While the Code permits payments to employees as part of a remuneration package, does employment status in fact mitigate the risk and hence justify the exception?
The work being done in the UK has obvious parallels with Australia, which has similar changes in landscape with which its rules need to keep pace. Codes are a very useful mechanism in applying soft law but, more so than law itself, codes need to keep close to commercial and professional practice, otherwise they risk a diminution in their compliance and influence. The difficulties with codes in insolvency practice is usefully discussed in Corporate Insolvency Law, 2nd ed, Finch, 472ff.
Codes also and obviously need to have regard to the law. Recent court decisions suggest a more commercial approach being taken by judges, with emphasis on the reasonableness of perception in the context of a legal structure whereby debtors and creditors can choose their IP, and where prior knowledge of the insolvent’s financial affairs can be seen as a benefit to the administration rather than a hindrance to objectivity.
Independence is one area where settled standards may need to change, including as to the more difficult core issue of how IPs are selected and appointed. A starting point is the useful thoughts offered by Ray Finkelstein in Re Fernandez  FCA 1487 when he was a Judge.