Expertise

When the Cork Committee considered the qualifications of IPs, it noted that the absence of some ‘minimal qualification’ was much criticised.70 The Committee then stressed that ‘a certain degree of knowledge and experience’ was essential for the IPs to discharge their functions adequately. They needed to be familiar with the relevant law on debtor–creditor relations; the organisation and proceedings of courts dealing with insolvency; the investigation of business dealings and transactions of insolvent debtors; the pursuit and recovery of assets fraudulently disposed of; voidable preferences; and the distribution of assets to creditors. The IP, moreover, had to be capable of taking complete control of a business of some size and complexity and of carrying it on to sell as a going concern or to make other proposals for its continuance as an economic unit.71

The Cork Report, as noted, served as a foundation for the systems of entry screening, qualification and monitoring that have been described above. It can be argued that the current regime’s reliance on professional control through different ‘home’ RPBs encourages a breadth of expertise in IPs.72 Thus, accountancy and lawyer-based IPs are required to display qualities of general professional expertise in a manner that would, perhaps, not be the case if IPs were regulated as a discrete, more narrowly defined, profession.

Questions have, nevertheless, been raised about the scope of IPs’ skills. A 1995 analysis of CVAs asked whether IPs are the right people to carry out these arrangements since, by training, they know best ‘how to kill companies’.73 IPs have, in the past, been found to possess a limited knowledge of CVAs,74 and it was suggested that the ‘going concern’ departments of the major accountancy firms might be better equipped to engage in corporate rescues than the IPs who are actually involved with insolvencies.75 The statistics historically revealed that receiverships and liquidations were

70Cork Report, para. 735.

71On IPs’ ‘vital’ use of due diligence to find the value of a company and any aspects enhancing its worth see C. Parr, ‘Due Diligence: Seek and You Shall Find’ (2008) Recovery (Spring) 42.

72See IRWP Review, pp. 35–6. IPs may also receive expert assistance from specialists. Thus, it is said that members of the Non-Administrative Receivers Association (NARA) can provide IPs with advice in relation to fixed-charge receiverships: see D. Smith, ‘Partners in Insolvency’ (2007) Recovery (Autumn) 7.

73See Flood et al., Professional Restructuring, p. 17.

74See L. Gee, How Effective are Voluntary Arrangements? (Levy Gee, London, 1994).

75Flood et al., Professional Restructuring, p. 17.

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popular in comparison with administrations and CVAs, and Flood et al. argued that a senior accountant captured the essence of the IP vision of insolvency work in saying ‘We are debt collectors.’76 As will be argued below,77 however, in the last decade there has been a revision of insolvency roles so that participants in corporate and insolvency processes are encouraged to see corporate decline as a matter to be anticipated and prevented rather than responded to after the event and, in this development, turnaround professionals have gained a new prominence.78 Furthermore, the reforms of the Enterprise Act 2002 attempted to foster a ‘rescue culture’ by replacing the regime of administrative receivership with provisions that give pride of place to the new administration process. The control of this reformed rescue procedure lies principally in the hands of IPs.79 Thus the training, expertise and approach of IPs may now increasingly be orientated towards including managerial skills so as to encourage them to give proper weight to rescue in reviewing options for troubled companies. As one IP described it: ‘the emphasis has shifted from “pathology” to “preventative medicine”… “managing change” has become a critical new discipline’.80 The law may set up a variety of insolvency procedures but here we see that the machineries of implementation can have a very considerable role in shaping insolvency processes on the ground.

A concern voiced in recent years is not so much that IPs lack skills but that, within the insolvency process, there is often an imbalance of skills in favour of IPs. This topic, however, will be considered in dealing with fairness.

Fairness

Does the present regime of implementing insolvency processes ensure fairness to affected parties?81 If IPs are allowed to act where conflicts of

76 Ibid. 77 See pp. 221 ff. and chs. 6–9 below.

78See further V. Finch, ‘The Recasting of Insolvency Law’ (2005) 68 MLR 713. In 2001 R3 established a Society of Turnaround Professionals and this organisation has contributed to the development of a rescue culture: see ‘Turnaround Talk’ (2001) Recovery (September). See further V. Finch, ‘Doctoring in the Shadows of Insolvency’ [2005] JBL 690; pp. 221 ff. below.

79See further V. Finch, ‘Control and Co-ordination in Corporate Rescue’.

80See L. Hornan, ‘The Changing Face of Insolvency Practice’ (2005) (March) International Accountant 24 at 24. See further ch. 6, pp. 221 ff. below.

81This section of the chapter builds on V. Finch, ‘Controlling the Insolvency Professionals’ [1999] Ins. Law. 228. As for fairness to regulated IPs, the R3 survey of 2004 suggested that 62 per cent of responding members thought that the regime did not operate fairly: see Verrill, ‘R3 Regulation Survey’.

interest arise, there is a potential for unfairness or bias, and insolvency processes have the capacity to throw up a plethora of conflicts of interests for IPs. The latter, and their firms, for instance, may have ongoing links with different companies or creditors who are involved in various ways in an insolvency; relationships with the directors of individual companies may create conflicts; personal interests and other appointments held may be relevant; the IP’s firm may have financial interests present or future that are potentially affected by advice or decisions relating to a troubled company; and the quantity of work or remuneration that an IP receives may be affected by actions or recommendations made.

It is, accordingly, necessary to consider how the present system controls such conflicts. The Insolvency Act 1986 does not expressly prevent an IP from acting where there is a conflict, but in considering whether a person is fit and proper to act as an IP, the Secretary of State82 must take into account whether, in any case, the applicant has acted as an IP but has failed fully to disclose to persons who might reasonably be expected to be affected circumstances where there is, or appears to be, a conflict of interest between his so acting and any interest of his own (personal, financial or otherwise) without having received appropriate consent.83 The Secretary of State must also consider whether the insolvency practice of the applicant is, has been, or will be carried on with the independence, integrity and professional skills appropriate.84

These provisions do not apply to the RPBs who also authorise persons to act as IPs, but the RPBs and the BERR do issue guidance on conflicts of interest.85 The Secretary of State’s ‘Code of Conduct’86 warns practitioners to be vigilant about potential conflicts of interest between their IP work and any personal, professional or financial commitments which might impair their objectivity or appear to do so. Specifically prohibited in the Code is acting as a liquidator after having acted as an administrative

82 The Insolvency Practitioner Regulations 2005 specify the matters to be taken into account by the Secretary of State in determining whether a person is fit and proper to hold an IP licence (Regulation 4). Section 419 of the Insolvency Act 1986 empowers the Secretary of State to make regulations prohibiting persons from acting as IPs where conflicts of interest may arise.

83Insolvency Practitioner Regulations 2005 Regulation 4(f).

84See Insolvency Practitioner Regulations 2005 Regulation 4(e).

85See generally H. Anderson, ‘Insolvency Practitioners: Professional Independence and Conflict of Interest’ in A. Clarke (ed.), Current Issues in Insolvency Law (Stevens, London, 1991) pp. 1–25.

86See IS, Guidance to Professional Conduct and Ethics for Persons Authorized by the Secretary of State as IPs, www.insolvency.gov.uk/guidanceleaflets/conductethics/conductethics.htm (visited 11 January 2008).

194 the context of corporate insolvency law

receiver, and the appointment of auditors as liquidators or administrative receivers, except in the case of a members’ voluntary liquidation, where it is beyond reasonable doubt that the company is solvent and that all debts can be satisfied within a twelve-month period. Similar rules are issued by the accountancy bodies in a combined approach through the ICAEW, and the ICAEW’s Statement on Insolvency Practice87 expresses rules on accepting appointments along similar lines to the Secretary of State’s Code of Conduct. A key notion is that of the ‘material professional relationship’. This arises where ‘material’88 work is being carried out, or has been carried out, during the previous three years, and means that an IP who is a member of a recognised accountancy body should not act as an IP in relation to a company if they, or their partners, have been auditors to that company or if they have carried out one or more ‘significant’89 assignments within three years of the onset of the company’s insolvency. (Such requirements do not, however, rule out an IP acting in a members’ voluntary liquidation as long as he has given ‘careful consideration’ to all the implications of acceptance in the particular case and is satisfied that the directors’ declaration of solvency is likely to be substantiated by events.)90

The courts, for their part, have stressed that IPs must consider not only their own personal or professional interests and connections but also whether persons with whom they are associated have held appointments that would lead to a lack of independence. Harman J has stated that it would be most unlikely (but not totally impossible) that a director could ever be a proper liquidator of a company.91 In Re Lowestoft Traffic Services

87See ICAEW, Guide to Professional Ethics 2006, sec. 220 (Conflict of Interest); Statement on Insolvency Practice 1.202 (revised September 1998 and reformatted August 2001). For solicitors see Solicitors’ Code of Conduct Rules 2007, Rule 3 (Conflict of Interest) and The Guide to the Professional Conduct of Solicitors (Insolvency Practice) (8th edn, Law Society, 1999 as amended): see Guide Online, SRA, www.lawsociety.org.uk/professional/conduct/guideonline (visited January 2008). The IPA’s Guide to Professional Conduct and Ethics will be replaced with a new Ethics Code with effect from 1 January 2009. The new code aims to encourage its members to balance the need to preserve client confidentiality with a need to be transparent in dealing with all parties involved in an insolvency: see J. Grant, ‘Balanced Code’, Financial Times, 4 November 2008.

88As defined in ICAEW, Insolvency Practice, paras. 7.0 and 7.1. See also IS, Guidance to Professional Conduct and Ethics, Annex of Particular Circumstances, Group A(i).

89See ICAEW, Insolvency Practice, para. 7.0(ii): ‘where a practice or person has carried out one or more assignments, whether of a continuing nature or not, of such overall significance or in such circumstances that a member’s objectivity in carrying out a subsequent insolvency appointment might or reasonably could be seen to be prejudiced’.

90See ICAEW, Insolvency Practice, para. 10.0.

91See Re Corbenstoke Ltd (No. 2) [1989] 5 BCC 767.

Co. Ltd 92 Hoffmann J stated that the public interest required that a liquidator should not only be independent, but also be seen to be independent, and he displaced a liquidator from office following considerable creditor disquiet at the appointment.93 Conflicts of interest, moreover, arise where an IP holds a number of appointments and acts for more than one company involved in an insolvency: where, for example, a group is liquidated and the IP acts as liquidator for the parent company and the subsidiary companies. The courts have, however, tended to adopt an accepting attitude to such conflicts, seeing them as inevitable and routinely handled by experienced IPs.94 The ICAEW Statement on Insolvency Practice acknowledges the possibility of conflicts but states that it would be ‘impracticable’ for a series of different IPs to act.95 Where a direct conflict may arise, the courts may work around this by allowing IPs to secure the appointment of independent persons to deal with specific issues of conflict. Thus, in Re Maxwell Communications Corp.96 Hoffmann J declined to appoint an additional administrator where the existing administrators had acted for Robert Maxwell personally. He considered the conflicts to be only distant possibilities and able to be dealt with by allowing the existing administrators an area of discretion.

As for powers of control, the courts may remove liquidators,97 administrative receivers,98 administrators,99 supervisors of CVAs100 and voluntary liquidators.101 Parties aggrieved by the acts of liquidators may apply to the courts to reverse or modify these,102 although the courts are generally reluctant to interfere in the administration of insolvency.103

92[1986] BCLC 81; [1986] 2 BCC 98.

93The liquidator had been appointed at a creditors’ meeting where the chairman (a director) had used proxy voting to outvote the creditors, who favoured another IP. See also Re Rhine Film Corporation (UK) Ltd [1986] 2 BCC 98.

94See Dillon LJ in the Court of Appeal in Re Esal (Commodities) Ltd [1988] 4 BCC 475.

95See ICAEW, Insolvency Practice, para. 22.0; Anderson, ‘Insolvency Practitioners’, p. 14.

101Ibid., s. 108. See Re Keypack Homecare Ltd [1987] BCLC 409. Liquidators may still be removed in some cases without the court being involved: see Insolvency Act 1986 ss. 171–2.

102Insolvency Act 1986 ss. 168(5), 112(1).

103See Re Hans Place Ltd [1993] BCLC 768; Re Edennote Ltd [1996] 2 BCLC 389. The

Commercial Law and Practice’ (2001) 3 Finance and Credit Law 1; R. Tateossian,

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Creditors, or members of the company, who are aggrieved by the actions

of an administrator may similarly apply to the court under the 1986 Act.104 IPs also owe common law duties of care and good faith to the

company,105 and liquidators in compulsory windings up and administrators are considered to be officers of the court and obliged to act honourably.106 It should not be forgotten, furthermore, that under the Human Rights Act 1998 and Article 6 of the European Convention on Human Rights, 1950, there is a right, inter alia, to an independent and impartial tribunal. Where, accordingly, IPs act as office holders and determine rights, conflicts of interests may be pointed to and human rights issues raised.107

The Enterprise Act 2002 restricted the right of the floating charge holder to appoint an administrative receiver but, before that Act was passed, there were fears that harmful conflicts of interest were involved when investigating accountants were appointed as receivers.108 A common business occurrence was that a bank, with concerns about the viability of a debtor company, would appoint accountants, often IPs, to investigate and report on the company’s financial situation and prospects.109 If these investigators reported that it was possible to save the company, and devise an action plan for the bank accordingly, they would

‘ Brie fi ng’ ( 20 00) 2 Finance a nd Credi t Law 5 ; N . P i ke , ‘ The H uman Ri its Impact on Insolvency Practitioners’ [2001] Ins. Law. 25. See also J. Ulph and T. Allen, ‘Transactions at an Undervalue, Purchasers and the Impact of the Human Rights Act

19 98’ [20 04] JBL 1 and ch. 13 below.

104See Insolvency Act 1986 Sch. B1, para. 74 – arguing that the administrator is acting, has acted, or is proposing to act in a way which (would) unfairly harm(s) their interests: see ch. 9 below. On liquidation, liquidators and administrative receivers can be found liable for breaches of duty (or ‘misfeasance’) under the Insolvency Act 1986 s. 212 and administrators can be similarly liable for misfeasance/breach of duty under para. 75 of Sch. B1 of the Insolvency Act 1986 (it is not now necessary regarding administrators for the company to be in liquidation): see chs. 8, 9 and 12 below.

105Re AMF International Ltd (No. 2) [1996] 2 BCLC 9; Re Home and Colonial Insurance Co. Ltd [1930] 1 Ch 102; Re Windsor Steam Coal Co. (1901) Ltd [1929] 1 Ch 151; Pulsford v. Devenish [1903] 2 Ch 625.

106See Insolvency Act 1986 Sch. B1, para. 5. Administrators are subject to the rule in Ex parte James, Re Condon (1874) 9 Ch App 609. See further I. Dawson, ‘The Administrator, Morality and the Court’ [1996] JBL 437.

107See W. Trower, ‘Human Rights: Article 6 – The Reality and the Myth’ [2001] Ins. Law. 48.

108See Flood and Skordaki, Insolvency Practitioners, pp. 16–17. Note, of course, that only administrative receivers have to be IPs: Insolvency Act 1986 s. 388(1).

109Such investigating accountants may also be called in by directors of the company who seek reassurance that it is proper to continue trading. The directors may be concerned about future liability under the Insolvency Act 1986 s. 214, ‘wrongful’ trading: see ch. 16 below.

receive fees for the investigation and planning tasks. If, on the other hand, the investigators advised the bank that the safest way to secure repayment of funds was to appoint a receiver, there was a high probability that the investigating firm of accountants would pick up the lucrative receivership work that ensued.110 This was because they could argue that the investigating accountants were already familiar with the company’s books, figures and position and because the bank was usually the largest secured creditor and was likely to be well placed to insist on the appointment of the receiver of its choice. The investigators were subject to real conflicts of interests: they were in a position to report on the company’s viability but had a chance of privileged access to work and to assets. They were likely to ensure that the bank (which was effectively the investigating firm’s real client) obtained as much of the insolvency assets as possible. The real danger was that such conflicts could produce biased advice to creditors and might exacerbate the existing propensity of large secured creditors to look to their own, not the company’s or body of creditors’, interests and to end the lives of companies before they had been given a reasonable opportunity of recovery. No independent ombudsman reviewed complaints on these matters and there was no compensation scheme. The regime was characterised as ‘the Chaps regulating the Chaps’111 but concerns on this front are, in the wake of the Enterprise Act 2002 reforms, of more historical than practical interest.112

Conflicts of interest may not, however, be the only sources of unfairness within the administration of insolvency regimes. Unfairness may arise where the parties involved in transactions are ill-matched in terms of information, expertise or power. Such inequalities may mean that the interests of certain parties are not fairly represented in the procedures or in the outcomes of insolvency processes. Socio-legal commentators on insolvency have thus emphasised the extent to which the rules on insolvency, which may speak loudly of fairness, are manipulated by

110Conflicts of interest appear stark where the investigation has been carried out for no fee and the only way the accountant can recover costs is by appointment as receiver: see J. Wilding, ‘Instructing Investigating Accountants’ (1994) 7 Insolvency Intelligence 3 (who states that ‘in nearly all cases if the bank decides to appoint a receiver subsequent to an investigation, then it is the investigating accountant who will be appointed’).

111See G. McCormack, ‘Receiverships and the Rescue Culture’ [2000] 2 CFILR 229, 245; P. Sikka, ‘Turkeys Don’t Vote for Christmas, Do They?’ (1999) Insolvency Bulletin 5 (June); J. Cousins, A. Mitchell, P. Sikka, C. Cooper and P. Arnold, Insolvency Abuse: Regulating the Insolvency Service (Association for Accounting and Business Affairs, 2000).

112On Enterprise Act 2002 reforms see chs. 8 and 9 below.

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experts to the advantage of their clients, or even themselves.113 Wheeler’s examination of the enforcement of retention of title clauses revealed that small trade creditors, who sought the protection of such clauses, were confronted in the enforcement process by the IPs who tended to act for large, secured creditors (in receiverships) or for the body of creditors (in liquidations) and who constituted the ‘dominant actors’ in the process. This domination flowed from their de facto positions as the possessors of the assets at issue; their superior knowledge concerning the assets and their utility to the company; their superior financial capacity and legal competence; and the familiarity with insolvency processes that flowed from their status as repeat players in the insolvency game. On this account, IPs used this superiority to protect the source of their fee income – the insolvency estate – from diminution by, amongst others, the holders of retention of title clauses. The procedures that were

encountered were not properly ‘negotiations’: they were ‘defence strategies’ put up by the IPs.114 What the IPs did was erect barrier upon barrier

so as to defeat claims on the estate. They would thus ‘fob-off’ claimants; insert delays into processes; demand answers to never-ending lists of questions; employ bluffing; and confront the claimant with a mass of legal and administrative technicalities.115 The overall picture, therefore, is neither of negotiations between matched parties, nor of independent fair-minded officials holding the ring between different interests. It is of highly trained practitioners acting for the economically powerful and gaining the advantage over less well-resourced parties.

What can be done to reduce such unfairness? In relation to conflicts of interest it has been suggested that concerned parties should be able to have recourse to a professional tribunal or an arbitration body.116 There might, accordingly, be an appeal body established by the licensing bodies of IPs, and directors, creditors, employees or others aggrieved at the appointment of, say, a receiver, might put their case to such a body without recourse to the courts. The basis for complaint would be that the relevant provision of the professional code of conduct had not been followed and the arbitrator would be able to rule on compliance with the code. An ombudsman could also be established117 by the profession and investigatory as well as

113See Wheeler, ‘Capital Fractionalised’; Wheeler, Reservation of Title Clauses; Carruthers and Halliday, Rescuing Business.

114Wheeler, Reservation of Title Clauses, p. 96.

115Only 24 per cent of suppliers used lawyers in the study discussed in ibid., p. 101.

116See Lord Montague of Oxford in HL Debates, vol. 596, col. 940, 26 January 1999.

117See Justice, Insolvency Law, para. 5.19.