A new version of the Insolvency Code of Ethics will apply from 1 May 2020 to all insolvency practitioners in the UK.
In its reliance on ‘disclosure and consent’ as a way of managing a conflict, it may differ from code guidance in Australia.
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It follows a 2017 consultation saying that the Code had arguably not kept pace with changing business structures and services being offered – for example, in relation to referrals of work and commissions. As well, guidance on insolvency appointments gave
‘little recognition 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’
and with more services are being offered by firms of IPs.
Focus was given in the consultation, and now in the new Code, to specific matters, including practitioners’ remuneration and insolvency appointments, and to IPs as employees of a firm.
Changes to the Code
The new Code of Ethics acknowledges that paying or receiving referral fees and commissions might create a self-interest threat but firms can safeguard against this by having and applying clear guidelines and policies, for example by disclosure of the process undertaken to evaluate the best value and service offered despite the relationships.
Likewise, in dealing with conflicting insolvency appointments, a firm can set up separate practice areas to isolate and protect confidential information and to limit access to files, all supported by specific and dedicated training and communication. An independent reviewer could assess whether the firm’s judgments and conclusions are appropriate.
Necessarily, the Code requires an insolvency practitioner to exercise professional judgment in determining whether a conflict of interest calls for ‘specific disclosure and explicit consent’, or whether the appointment should be declined.
‘Disclosure and consent’ can take different forms, for example, to the court at the time of appointment, or by obtaining consent from a creditors committee or from a secured lender, or by disclosing to creditors. Any disclosure must include the circumstances of the particular conflict and how any threats created are to be addressed.
The new Code also gives extensive guidance on the NOCLAR[1] obligations, where an insolvency practitioner might encounter and report breaches of the law in the course of carrying out their professional duties.
Whether an IP is engaged in a firm as an employee, contractor, partner, or director, the legal form of the engagement has no bearing on their ethical responsibilities. But the Code notes that an IP who is an employee
‘might have a reduced ability to control or influence matters within the firm which might affect the actions available as safeguards to address threats to compliance with the fundamental principles’.
It says that IPs in such cases may need to decide whether or not to accept an offer as an employee of a firm, or, as an employee, to resign if independence is not assured.
The Code is based on the International Ethics Standards Board for Accountants (IESBA) Code and has been rewritten in the rather quaint style and dense content often adopted by accountants.
It would be difficult to read and understand for creditors and other insolvency stakeholders.
Comment
While insolvency accountants are ultimately regulated through an international hierarchy down through the APESB[2] in Australia, with all accountants bound by APES 110,[3] there is some inconsistency in relation to certain insolvency ethical principles compared with those set out in APES 330 – Insolvency and in the ARITA Code, and that of RITANZ.
Apart from that inconsistency, some of the UK Code principles have judicial recognition in Australia, for example:
- as to separation of practice areas in matters where there is a potential conflict,[4]
- in lack of opposition from creditors to an apparent conflict,[5]
- in issues relevant to disclosure of a conflict to creditors[6] and
- in the views of reasonable third parties.[7]
Likewise, the ultimate test prevails in Australia that, despite an apparent conflict, a
‘court will remove and replace an administrator only if satisfied that to do so would be “for the better conduct of the administration”’.[8]
ARITA Code
Some unique features of the new ARITA Code – for example the proscriptions against cartel conduct, and gender and race discrimination – are not found in the new UK Code. On the other hand, the ARITA Code does not deal with NOCLAR nor refer to its members’ APES 110 obligations, or to IPs as employees.
RITANZ may need to revise its 2018 Code in light of the co-regulatory changes in New Zealand commencing in July 2020, and recent insolvency law changes.
The UK and NZ Codes are of greater significance in those jurisdictions given that breach of code requirements can lead to termination of the IP’s right to practise. Breach of the ARITA Code of itself goes only to an IP’s membership of ARITA, not the IP’s right to practise.
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[1] Non-compliance with laws and regulations.
[2] Accounting Professional & Ethical Standards Board.
[3] APES 110 Code of Ethics for Professional Accountants which is based on international standards of the International Ethics Standards Board for Accountants (IESBA), which comes under the International Federation of Accountants (IFAC).
[4] BC39 Pty Ltd v Rambaldi, in the matter of Wharington [2014] FCA 1076
[5] Walley, in the matter of Poles & Underground Pty Ltd (Adm Apptd) [2017] FCA 486
[6] Korda, in the matter of Ten Network Holdings Ltd (Adm Apptd) (R&M Apptd) [2017] FCA 914
[7] Ziziphus v Pluton Resources [2017] WASCA 19
[8] in Re Recycling Holdings Pty Ltd [2015] NSWSC 1016 at [94].
