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ICAS CODE OF ETHICS PART 5 – INSOLVENCY PRACTITIONERS APPLICABLE FROM 1 MAY 2020  INSOLVENCY CODE OF ETHICS LIST OF CONTENTS GENERAL APPLICATION OF THE CODE 2000 Introduction 2100 Fundamental Principles 2110 Conceptual framework 2120 Breaches of the code 2130 Record keeping 2140 Ethical conflict resolution SPECIFIC APPLICATION OF THE CODE 2200 Introduction 2210 Insolvency appointments 2300 Acting with sufficient expertise 2310 Conflicts of interest and professional and personal relationships 2320 Specialist advice and services 2330 Agencies and referrals 2340 Referral fees and commission 2350 Inducements, including gifts and hospitality 2360 Advertising and marketing for insolvency appointments 2370 Dealing with the assets of an entity 2380 The insolvency practitioner as an employee 2390 Responding to non-compliance with laws and regulations 2500 Application of the framework to specific situations 2510 – examples that do not relate to a previous or existing insolvency appointment 2520 – examples relating to previous or existing insolvency appointments 2530 – examples in respect of cases conducted under Scots Law 2540 - application in the Republic of Ireland Definitions and interpretation 1 The Practice of Insolvency Introduction 2000.1 This Code sets out the obligations of insolvency practitioners to meet the ethical requirements expected of them. 2000.2 An authorising body must, so far as is reasonably practicable, act in a way which protects and promotes the public interest. This Code forms part of the framework used to meet this objective. Requirements and Application Material 2000.3 A1 Requirements and application material are to be read and applied with the objective of complying with the fundamental principles and applying the conceptual framework. Requirements 2000.3 A2 Requirements are designated with the letter “R” and, in most cases, include the word “shall.” The word “shall” in the Code imposes an obligation on an insolvency practitioner to comply with the specific provision in which “shall” has been used. 2000.3 A3 In some situations, the Code provides a specific exception to a requirement. In such a situation, the provision is designated with the letter “R” but uses “may” or conditional wording. 2000.3 A4 When the word “may” is used in the Code, it denotes permission to take a particular action in certain circumstances, including as an exception to a requirement. It is not used to denote possibility. 2000.3 A5 When the word “might” is used in the Code, it denotes the possibility of a matter arising, an event occurring or a course of action being taken. The term does not ascribe any particular level of possibility or likelihood when used in conjunction with a threat, as the evaluation of the level of a threat depends on the facts and circumstances of any particular matter, event or course of action. Application Material 2000.4 A1 In addition to requirements, the Code contains application material that provides context relevant to a proper understanding of the Code. In particular, the application material is intended to help an insolvency practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement. While such application material does not of itself impose a requirement, consideration of the material is necessary to the proper application of the requirements of the Code, including application of the conceptual framework. Application material is designated with the letter “A.” 2000.4 A2 Where application material includes lists of examples these lists are not intended to be exhaustive. R2000.5 In order to protect and promote the public interest, an insolvency practitioner shall observe and comply with this Code. If an insolvency practitioner is prohibited from complying with certain parts of this Code by law or regulation, the insolvency practitioner shall comply with all other parts of this Code. 2000.5.A1 The Code establishes the fundamental principles of professional ethics for insolvency practitioners and provides a framework for insolvency practitioners to: a) identify threats to compliance with the fundamental principles; b) evaluate the significance of the threats identified; and c) apply safeguards, where available and capable of being applied, to reduce the threats to a level at which an insolvency practitioner using the reasonable and informed third party test would likely conclude that the insolvency practitioner complies with the fundamental principles. 2 R2000.6 An insolvency practitioner shall use professional judgment in applying this framework. 2000.6 A1 The Code also describes how the ethical framework applies in certain situations. It provides examples of actions that might be appropriate to address threats to compliance with the fundamental principles. It also describes situations where no action can address the threats, and consequently, the circumstance or relationship creating the threats needs to be avoided. Scope R2000.7 Insolvency practitioners shall ensure that the Code is applied at all times in relation to the conduct of an insolvency appointment or circumstances which might lead to an insolvency appointment. 2000.7A1 Arrangements regarding the level of fees for an insolvency appointment is set out in legislation. The requirements of R330.3 A and R330.3 B relating to the provision of fee estimates only applies to an insolvency appointment where legislation requires a fees estimate to be provided by an insolvency practitioner. R2000.8 Insolvency practitioners shall follow the fundamental principles, apply the conceptual framework and specific requirements of the Code in all their professional and business activities whether carried out with or without reward and in other circumstances where to fail to do so would bring discredit to the insolvency profession. R2000.9 Insolvency practitioners shall be guided not merely by the terms but also by the spirit of the Code. 2000.9 A1 The Code provides examples of matters to take into account when insolvency practitioners are considering their position, but ethical considerations are not limited to the examples. It is necessary for insolvency practitioners to take into account how their conduct might be perceived by a reasonable and informed third party. R2000.10 Although, an insolvency appointment will be personal to the insolvency practitioner rather than their firm or employing organisation, insolvency practitioners shall ensure that work for which they are responsible, which is undertaken by members of the insolvency team on their behalf, is carried out in accordance with the requirements of this Code. FUNDAMENTAL PRINCIPLES General 2100.1 A1 There are five fundamental principles of ethics for insolvency practitioners: a) Integrity – to be straightforward and honest in all professional and business relationships. b) Objectivity – not to compromise professional or business judgments because of bias, conflict of interest or undue influence of others. c) Professional Competence and Due Care – to: i. Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation; and ii. Act diligently and in accordance with applicable technical and professional standards. d) Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships. 3  e) Professional Behaviour – to comply with relevant laws and regulations and avoid any conduct that the insolvency practitioner knows or should know might discredit the profession. R2100.2 An insolvency practitioner shall comply with each of the fundamental principles. 2100.2 A1 The fundamental principles of ethics establish the standard of behaviour expected of an insolvency practitioner. The conceptual framework establishes the approach which an insolvency practitioner is required to apply to assist in complying with those fundamental principles. Paragraphs R2101.1 to R2105.1 A2 set out requirements and application material related to each of the fundamental principles. 2100.2 A2 An insolvency practitioner might face a situation in which complying with one fundamental principle conflicts with complying with one or more other fundamental principles. In such a situation, the insolvency practitioner might consider consulting, on an anonymous basis if necessary, with: • others within the firm or employing organisation. • those charged with governance. • another insolvency practitioner from a different firm. • a professional body. • an authorising body. • legal counsel. However, such consultation does not relieve the insolvency practitioner from the responsibility to exercise professional judgment to resolve the conflict or, if necessary, and unless prohibited by law or regulation, disassociate from the matter creating the conflict. INTEGRITY R2101.1 An insolvency practitioner shall comply with the principle of integrity, which requires an insolvency practitioner to be straightforward and honest in all professional and business relationships. 2101.1 A1 Integrity implies fair dealing and truthfulness. R2101.2 An insolvency practitioner shall not knowingly be associated with reports, returns, communications or other information where the insolvency practitioner believes that the information: a) Contains a materially false or misleading statement; b) Contains statements or information provided recklessly; or c) Omits or obscures required information where such omission or obscurity would be misleading. 2101.2 A1 If an insolvency practitioner provides a modified report in respect of such a report, return, communication or other information, the insolvency practitioner is not in breach of paragraph R2101.2. R2101.3 When an insolvency practitioner becomes aware of having been associated with information described in paragraph R2101.2, the insolvency practitioner shall take steps to be disassociated from that information. OBJECTIVITY R2102.1 An insolvency practitioner shall comply with the principle of objectivity, which requires an insolvency practitioner not to compromise professional or business judgment because of bias, conflict of interest or undue influence of others. 4 2102.1 A1 Objectivity is the state of mind which has regard to all considerations relevant to the task in hand but no other. R2102.2 An insolvency practitioner shall not undertake a professional activity if a circumstance or relationship unduly influences the insolvency practitioner’s professional judgment regarding that activity. PROFESSIONAL COMPETENCE AND DUE CARE R2103.1 An insolvency practitioner shall comply with the principle of professional competence and due care, which requires an insolvency practitioner to: a) Attain and maintain professional knowledge and skill at the level required to ensure that a competent professional service is provided, based on current technical and professional standards and relevant legislation; and b) Act diligently and in accordance with applicable technical and professional standards. 2103.1 A1 Professional competence requires the exercise of sound judgment in applying professional knowledge and skill when undertaking professional activities. 2103.1 A2 Maintaining professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. Continuing professional development enables an insolvency practitioner to develop and maintain the capabilities to perform competently within the professional environment 2103.1 A3 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. R2103.2 In complying with the principle of professional competence and due care, an insolvency practitioner shall take reasonable steps to ensure that those working in a professional capacity under the insolvency practitioner’s authority have appropriate training and supervision. R2103.3 Where appropriate, an insolvency practitioner shall make users of the insolvency practitioner’s services or activities or their employing organisation aware of the limitations inherent in the services or activities. CONFIDENTIALITY 2104.1 A1 The principle of confidentiality is not only to keep information confidential, but also to take all reasonable steps to preserve confidentiality. Whether information is confidential or not will depend on its nature. R2104.2 An insolvency practitioner in the role as office holder has a professional duty to report openly to those with an interest in the outcome of the insolvency. An insolvency practitioner shall always report on their acts and dealings as fully as possible given the circumstances of the case, in a way that is transparent and understandable bearing in mind the expectations of others and what a reasonable and informed third party would consider appropriate. R2104.3 An insolvency practitioner shall comply with the principle of confidentiality, which requires an insolvency practitioner to respect the confidentiality of information acquired as a result of professional and business relationships. An insolvency practitioner shall: a) Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member; b) Maintain confidentiality of information within the firm or employing organisation; c) Maintain confidentiality of information disclosed by the employing organisation; 5  d) Not disclose confidential information acquired as a result of professional and business relationships outside the firm or employing organisation without proper and specific authority, unless there is a legal or professional duty or right to disclose; e) Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the insolvency practitioner or for the advantage of a third party; f) Not use or disclose any confidential information, either acquired or received as a result of a professional or business relationship, after that relationship has ended; and g) Take reasonable steps to ensure that personnel under the insolvency practitioner’s control, and individuals from whom advice and assistance are obtained, respect the insolvency practitioner’s duty of confidentiality. 2104.3 A1 There are circumstances where insolvency practitioners are or might be required to disclose confidential information or when such disclosure might be appropriate: a) Disclosure is required by law, for example: i. producing statutory reports for the creditors of the insolvent; ii. submitting reports on the conduct of directors of an insolvent entity; iii. production of documents or other provision of evidence in the course of legal proceedings; or iv. disclosure to the appropriate public authorities of infringements of the law that come to light; b) Disclosure is permitted by law and is authorised by the employing organisation; and c) There is a professional duty or right to disclose, when not prohibited by law: i. To comply with the quality review of an authorising body; ii. To respond to an inquiry or investigation by an authorising body or the oversight body; iii. To protect the professional interests of an insolvency practitioner in legal proceedings; or iv. To comply with technical and professional standards, including ethics requirements. 2104.3 A2 In deciding whether to disclose confidential information, factors to consider, depending on the circumstances, include: • Whether the interests of any parties, including third parties whose interests might be affected, could be harmed if the client or employing organisation consents to the disclosure of information by the insolvency practitioner. • Whether all the relevant information is known and substantiated, to the extent practicable. Factors affecting the decision to disclose include: o Unsubstantiated facts. o Incomplete information. o Unsubstantiated conclusions. • The proposed type of communication, and to whom it is addressed. • Whether the parties to whom the communication is addressed are appropriate recipients. R2104.4 An insolvency practitioner shall continue to comply with the principle of confidentiality even after the end of the relationship between the insolvency practitioner and an 6  employing organisation. When changing employment or accepting an insolvency appointment , the insolvency practitioner is entitled to use prior experience but shall not use or disclose any confidential information acquired or received as a result of a professional or business relationship. PROFESSIONAL BEHAVIOUR R2105.1 An insolvency practitioner shall comply with the principle of professional behaviour, which requires an insolvency practitioner to comply with relevant laws and regulations and avoid any conduct that the insolvency practitioner knows or should know might discredit the profession. An insolvency practitioner shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the insolvency profession, and as a result would be incompatible with the fundamental principles. 2105.1 A1 Conduct that might discredit the insolvency profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession. 2105.1 A2 The concept of professional behaviour implies that it is appropriate for insolvency practitioners to conduct themselves with courtesy and consideration towards all with whom they come into contact when performing their work. 7 THE CONCEPTUAL FRAMEWORK Introduction 2110.1 The circumstances in which insolvency practitioners operate might create threats to compliance with the fundamental principles. This section sets out requirements and application material, including a conceptual framework, to assist insolvency practitioners in complying with the fundamental principles and meeting their responsibility to act in the public interest. Such requirements and application material accommodate the wide range of facts and circumstances, including the various professional activities, interests and relationships, that create threats to compliance with the fundamental principles. In addition, they deter insolvency practitioners from concluding that a situation is permitted solely because that situation is not specifically prohibited by the Code. 2110.2 The conceptual framework specifies an approach for an insolvency practitioner to: a) identify threats to compliance with the fundamental principles; b) evaluate the threats identified; and c) address the threats by eliminating or reducing them to an acceptable level. Requirements and Application Material General R2111.1 The insolvency practitioner shall apply the conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles set out in paragraphs 2100 to 2105. R2111.2 An insolvency practitioner shall take particular care to identify the existence of threats that exist prior to or at the time of taking an insolvency appointment or which at that stage, it might reasonably be expected could arise during the course of the insolvency appointment. R2111.3 In taking steps to identify any threats, an insolvency practitioner shall have regard to relationships whereby the firm is held out as being part of a network. R2111.4 When dealing with an ethics issue, the insolvency practitioner shall consider the context in which the issue has arisen or might arise. Where an insolvency practitioner is performing professional activities pursuant to the insolvency practitioner’s relationship with the firm, whether as a contractor, employee or owner, the individual shall comply with the provisions of this Code. R2111.5 When applying the conceptual framework, the insolvency practitioner shall: a) exercise professional judgment; b) remain alert for new information and to changes in facts and circumstances; and c) use the reasonable and informed third party test described in paragraph 2113.1 A1. Exercise of Professional Judgment 2112.1 A1 Professional judgment involves the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, including the nature and scope of the particular professional activities, and the interests and relationships involved. In relation to undertaking professional activities, the exercise of professional judgment is required when the insolvency practitioner applies the conceptual framework in order to make informed decisions about the courses of actions available, and to determine whether such decisions are appropriate in the circumstances. 2112.1 A2 An understanding of known facts and circumstances is a prerequisite to the proper application of the conceptual framework. Determining the actions necessary to obtain this understanding and coming to a conclusion about whether the fundamental principles have been complied with also require the exercise of professional judgment. 8 2112.1 A3 In exercising professional judgment to obtain this understanding, the insolvency practitioner might consider, among other matters, whether: • There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the insolvency practitioner. • There is an inconsistency between the known facts and circumstances and the insolvency practitioner’s expectations. • The insolvency practitioner’s expertise and experience are sufficient to reach a conclusion. • There is a need to consult with others with relevant expertise or experience. • The information provides a reasonable basis on which to reach a conclusion. • The insolvency practitioner’s own preconception or bias might be affecting the insolvency practitioner’s exercise of professional judgment. • There might be other reasonable conclusions that could be reached from the available information. Reasonable and Informed Third Party 2113.1 A1 The reasonable and informed third party test is a consideration by the insolvency practitioner about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the insolvency practitioner knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an insolvency practitioner, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the insolvency practitioner’s conclusions in an impartial manner. Identifying Threats R2114.1 The insolvency practitioner shall identify threats to compliance with the fundamental principles. 2114.1 A1 An understanding of the facts and circumstances, including any professional activities, interests and relationships that might compromise compliance with the fundamental principles, is a prerequisite to the insolvency practitioner’s identification of threats to such compliance. The existence of certain conditions, policies and procedures established by the profession, legislation, regulation, the firm, or the employing organisation that can enhance the insolvency practitioner acting ethically might also help identify threats to compliance with the fundamental principles. 2114.1 A2 Below there are examples of such conditions, policies and procedures which are also factors that are relevant in evaluating the level of threats (see also Professional and personal relationships): a) leadership of the firm that stresses the importance of compliance with the fundamental principles; b) policies and procedures to implement and monitor quality control of engagements; c) documented policies regarding the need to identify threats to compliance with the fundamental principles, evaluate the significance of those threats, and apply safeguards to eliminate or reduce the threats to an acceptable level; d) documented internal policies and procedures requiring compliance with the fundamental principles; e) policies and procedures to identify the existence of any threats to compliance with the fundamental principles before deciding whether to accept an insolvency appointment; f) policies and procedures to identify interests or relationships between the firm or individuals within the firm and third parties; 9  g) policies and procedures to prohibit individuals who are not members of the insolvency team from inappropriately influencing the outcome of an insolvency appointment; h) timely communication of a firm’s policies and procedures, including any changes to them, to all individuals within the firm, and appropriate training and education on such policies and procedures; i) designating a member of senior management to be responsible for overseeing the adequate functioning of the firm’s quality control system; j) a disciplinary mechanism to promote compliance with policies and procedures; k) published policies and procedures to encourage and empower individuals within the firm to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concerns them. 2114.1 A3 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. It is not possible to define every situation that creates threats. In addition, the nature of engagements and work assignments might differ and, consequently, different types of threats might be created. 2114.1 A4 Threats to compliance with the fundamental principles fall into one or more of the following categories: a) Self-interest threat – the threat that a financial or other interests of the firm, an individual within the firm or a close or immediate family member of an individual within the firm will inappropriately influence the insolvency practitioner’s judgment or behaviour; b) Self-review threat – the threat that the insolvency practitioner will not appropriately evaluate the results of a previous judgment made or service performed by an individual within the firm, on which the insolvency practitioner will rely when forming a judgment as part of providing a current service; c) Advocacy threat – the threat that an individual within the firm will promote a position or opinion to the point that the insolvency practitioner’s objectivity is compromised; d) Familiarity threat –the threat that due to a long or close relationship, an individual within the firm will be too sympathetic or antagonistic to the interests of others or too accepting of their work; and e) Intimidation threat – the threat that an insolvency practitioner will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the insolvency practitioner. 2114.1 A5 The following are examples of facts and circumstances within each category of threats that might create threats for an insolvency practitioner: a) Examples of circumstances that might create self-interest threats for an insolvency practitioner include: i. an individual within the firm having an interest in a creditor or potential creditor with a claim which requires subjective adjudication, or having an interest in a party to a transaction; ii. an individual within the firm having a close business relationship with a creditor, potential creditor or a party to a transaction; iii. the insolvency practitioner discovering a significant error when evaluating the results of a previous service performed by an individual within the firm; iv. concern about the possibility of damaging a business relationship; v. concern about future employment. 10  b) Examples of circumstances that might create self-review threats for an insolvency practitioner include: i. accepting an insolvency appointment in respect of an entity where an individual within the firm has recently been employed by or seconded to that entity; ii. an insolvency practitioner or the firm having previously carried out professional work of any description, including sequential insolvency appointments, for an entity. c) Examples of circumstances that might create advocacy threats for an insolvency practitioner include: i. acting in an advisory capacity for a creditor of the insolvent entity; ii. acting in an advisory capacity to an entity prior to its insolvency; iii. acting as an advocate for a client of the firm in litigation or a dispute with the insolvent entity. d) Examples of circumstances that might create familiarity threats for an insolvency practitioner include: i. an individual within the firm or a close or immediate family member having a close relationship with a director, officer, employee or any individual having a financial interest in the insolvent entity; ii. an individual within the firm or a close or immediate family member having a close relationship with a potential purchaser of the insolvent entity’s assets and/or business or any individual having a financial interest in the potential purchaser. In this regard a close relationship includes both a close professional relationship and a close personal relationship. e) Examples of circumstances that might create intimidation threats for an insolvency practitioner include: i). an individual within the firm being threatened with dismissal or replacement; ii). an individual within the firm being threatened with litigation, complaint or adverse publicity; iii). an individual within the firm being threatened with violence or other reprisal. 2114.1 A6 A circumstance might create more than one threat, and a threat might affect compliance with more than one fundamental principle. Evaluating Threats R2115.1 When the insolvency practitioner identifies a threat to compliance with the fundamental principles, the insolvency practitioner shall evaluate whether such a threat is at an acceptable level. Acceptable Level 2115.1 A1 An acceptable level is a level at which an insolvency practitioner using the reasonable and informed third party test would likely conclude that the insolvency practitioner complies with the fundamental principles. Factors Relevant in Evaluating the Level of Threats 2115.2 A1 The consideration of qualitative as well as quantitative factors is relevant in the insolvency practitioner’s evaluation of threats, as is the combined effect of multiple threats, if applicable. 2115.2 A2 The existence of conditions, policies and procedures described in paragraph 2114.1 A1 might also be factors that are relevant in evaluating the level of threats to compliance with fundamental principles. Examples of such conditions, policies and procedures include: 11  a) corporate governance requirements. b) educational, training and experience requirements for the profession. c) professional standards. d) effective complaint systems which enable the insolvency practitioner and the general public to draw attention to unethical behaviour. e) an explicitly stated duty to report breaches of ethics requirements. f) professional or regulatory monitoring and disciplinary procedures. g) external review by a legally empowered third party of the reports, returns, communications or information produced by the insolvency practitioner. Consideration of New Information or Changes in Facts and Circumstances R2115.3 If the insolvency practitioner becomes aware of new information or changes in facts and circumstances that might impact whether a threat has been eliminated or reduced to an acceptable level, the insolvency practitioner shall re-evaluate and address that threat accordingly. 2115.3 A1 Remaining alert throughout an insolvency appointment assists the insolvency practitioner in determining whether new information has emerged or changes in facts and circumstances have occurred that: a) impact the level of a threat; or b) affect the insolvency practitioner’s conclusions about whether safeguards applied continue to be appropriate to address identified threats. 2115.3 A2 If new information results in the identification of a new threat, the insolvency practitioner is required to evaluate and, as appropriate, address this threat. Addressing Threats R2116.1 If the insolvency practitioner determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the insolvency practitioner shall address the threats by eliminating them or reducing them to an acceptable level. The insolvency practitioner shall do so by: a) eliminating the circumstances, including interests or relationships, that are creating the threats; b) applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or c) declining or ending the insolvency appointment. Actions to Eliminate Threats 2116.1 A1 Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating the threat. However, there are some situations in which threats can only be addressed by declining or ending the insolvency appointment or resigning altogether from the firm or the employing organisation. This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level. Safeguards 2116.1 A2 Safeguards are actions, individually or in combination, that the insolvency practitioner takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level. 2116.1.A3 Safeguards vary depending on the facts and circumstances. Examples of actions that in certain circumstances might be safeguards to address threats include: 12  • Assigning additional time and qualified personnel to required tasks when an insolvency appointment has been accepted might address a self-interest threat. • Having an appropriate reviewer who was not a member of the team review the work performed or advise as necessary might address a self-review threat. • Involving another insolvency practitioner to perform or re-perform part of the engagement might address self-interest, self-review, advocacy, familiarity or intimidation threats. • Disclosing any referral fees or commission arrangements received for recommending services or products might address a self-interest threat. Safeguards specific to an insolvency appointment are considered later in the Code. Consideration of Significant Judgments Made and Overall Conclusions Reached R2116.2 The insolvency practitioner shall form an overall conclusion about whether the actions that the insolvency practitioner takes, or intends to take, to address the threats created will eliminate those threats or reduce them to an acceptable level. In forming the overall conclusion, the insolvency practitioner shall: a) review any significant judgments made or conclusions reached; and b) use the reasonable and informed third party test. 13 Breaches of the Code R2120.1 An insolvency practitioner who identifies a breach of any other provision of the Code shall evaluate the significance of the breach and its impact on the insolvency practitioner’s ability to comply with the fundamental principles. The insolvency practitioner shall also: a) take whatever actions might be available, as soon as possible, to address the consequences of the breach satisfactorily; and b) determine whether to report the breach to the relevant parties. 2120.1 A1 Relevant parties to whom such a breach might be reported include those who might have been affected by it, or an authorising body. 14 Record keeping 2130.1 A1 It will always be for the insolvency practitioner to justify their actions. An insolvency practitioner will be expected to be able to demonstrate the steps that they took and the conclusions that they reached in identifying, evaluating and responding to any threats, both leading up to and during an insolvency appointment, by reference to written contemporaneous records. R2130.2 The insolvency practitioner shall document: a) the facts. b) any communications with, and parties with whom the matters were discussed. c) the courses of action considered, the judgments made and the decisions that were taken. d) the safeguards applied to address the threats when applicable. e) how the matter was addressed. f) where relevant, why it was appropriate to accept or continue the insolvency appointment. 2130.2 A1 The records an insolvency practitioner maintains, in relation to the steps that they took and the conclusions that they reached, are expected to be sufficient to enable a reasonable and informed third party to reach a view on the appropriateness of their actions. 15 Ethical conflict resolution 2140.1 An insolvency practitioner might be required to resolve a conflict in complying with the fundamental principles. 2140.1 A1 When initiating either a formal or informal conflict resolution process, the following factors, either individually or together with other factors, might be relevant to the resolution process: a) relevant facts b) ethical issues involved c) fundamental principles related to the matter in question d) established internal procedures e) alternative courses of action. 2140.1 A2 Having considered the relevant factors, it is necessary for an insolvency practitioner to determine the appropriate course of action, weighing the consequences of each possible course of action. If the matter remains unresolved, the insolvency practitioner might wish to consult with other appropriate persons within the firm for help in obtaining resolution. 2140.1 A3 Where a matter involves a conflict with, or within, an entity, an insolvency practitioner will need to decide whether to consult with those charged with governance of the entity, such as the board of directors or senior management team. R2140.2 The insolvency practitioner shall document the substance of the issue, the details of any discussions held, and the decisions made concerning that issue. 2140.2 A1 Reference should be made to Record Keeping (2130). 2140.2 A2 The insolvency practitioner is expected to be seen to act in such a way that threats to the fundamental principles are adequately addressed. Therefore, it is important that the insolvency practitioner considers disclosure, for example, to the court or to the creditors and other interested parties of the existence of any threat, together with the safeguards identified and applied. 2140.2 A3 If a significant conflict cannot be resolved, an insolvency practitioner might consider obtaining advice from their authorising body or from legal advisors. The insolvency practitioner generally can obtain guidance on ethical issues without breaching the fundamental principle of confidentiality if the matter is discussed with their authorising body on an anonymous basis or with a legal advisor under the protection of legal privilege. R2140.3 If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, an insolvency practitioner shall, where possible, refuse to remain associated with the matter creating the conflict. The insolvency practitioner shall determine whether, in the circumstances, it is appropriate to withdraw from the insolvency appointment, or to resign altogether from the firm or the employing organisation. 16 SPECIFIC APPLICATION OF THE CODE Introduction 2200.1 This part of the Code describes how the framework applies in certain situations to insolvency practitioners. This part does not describe all of the circumstances and relationships that could be encountered by an insolvency practitioner that create or could create threats to compliance with the fundamental principles. Therefore, the insolvency practitioner is encouraged to be alert for such circumstances and relationships. Requirements and application material R2200.2 An insolvency practitioner shall not knowingly engage in any activity that impairs or might impair integrity, objectivity or the good reputation of the profession and as a result would be incompatible with the fundamental principles. R2200.3 An insolvency practitioner shall exercise judgment to determine how best to deal with threats that are not at an acceptable level, whether by applying safeguards to eliminate the threat or reduce it to an acceptable level or, where possible, by refusing to remain associated with the matter creating the conflict. 2200.3 A1 In exercising this judgment, an insolvency practitioner is expected to consider whether a reasonable and informed third party, weighing all the specific facts and circumstances available to the insolvency practitioner at that time, would be likely to conclude that the threats would be eliminated or reduced to an acceptable level by the application of safeguards, such that compliance with the fundamental principles is not compromised. 2200.3 A2 In the work environment, safeguards will vary depending on the facts and circumstances. Work environment safeguards comprise safeguards existing across the firm and safeguards specific to an insolvency appointment. 2200.3 A3 Examples of actions that might be safeguards specific to an insolvency appointment include: a) consulting an independent third party, such as an authorising body or another insolvency practitioner; b) obtaining the views of a committee of creditors; c) disclosing ethical issues to creditors and other interested parties; d) involving another insolvency practitioner to perform or re-perform part of the engagement; e) obtaining legal advice from a solicitor, barrister or advocate with appropriate experience and expertise. General conduct R2200.4 Where circumstances are dealt with by statute or secondary legislation, an insolvency practitioner shall comply with such provisions. 2200.5 The practice of insolvency is principally governed by statute and secondary legislation and in many cases is subject ultimately to the control of the court. R2200.6 An insolvency practitioner shall also comply with any relevant judicial authority relating to their conduct and any directions given by the court. R2200.7 An insolvency practitioner shall act in a manner appropriate to their position (as an officer of the court where applicable) and in accordance with any quasi-judicial, fiduciary or other duties that the insolvency practitioner might be under. R2200.8 An insolvency practitioner shall comply with standards or regulations issued by their authorising body. 17 R2200.9 An insolvency practitioner shall also have regard to guidance relevant to the conduct of an insolvency appointment or work that might lead to an insolvency appointment which is issued by their authorising body, the Insolvency Service and other appropriate organisations. 18 INSOLVENCY APPOINTMENTS Introduction 2210.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2210.2 Acceptance of an insolvency appointment might create a threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and application material R2210.3 Before agreeing to accept any insolvency appointment (including a joint appointment), an insolvency practitioner shall determine whether acceptance would create any threats to compliance with the fundamental principles. 2210.3 A1 Of particular importance are threats to the fundamental principle of objectivity created by conflicts of interest. These are considered in more detail in the section on conflicts of interest (see paragraphs 2310 to 2311.2 A4). 2210.3 A2 When seeking to identify threats to the fundamental principles, an insolvency practitioner will need to identify and evaluate any professional or personal relationships that threaten compliance with the fundamental principles (see Acting with sufficient expertise, 2300 below). The insolvency practitioner will then need to determine the appropriate response to any threats arising from any such relationships, including the identifying and applying appropriate safeguards. R2210.4 If the insolvency practitioner determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the insolvency practitioner shall address the threats by eliminating them or reducing them to an acceptable level. The insolvency practitioner shall do so by: a) Eliminating the circumstances, including interests or relationships, that are creating the threats; or b) Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level. R2210.5 An insolvency practitioner shall not accept an insolvency appointment where a threat to the fundamental principles has been identified unless the threat is eliminated or reduced to an acceptable level. 2210.5 A1 Factors that are relevant in evaluating the level of a threat include measures that prevent unauthorised disclosure of confidential information These measures include: • The existence of separate practice areas for specialty functions within the firm, which might act as a barrier to the passing of confidential client information between practice areas. • Policies and procedures to limit access to client files. • Confidentiality agreements signed by personnel and partners of the firm. • Separation of confidential information physically and electronically. • Specific and dedicated training and communication. 2210.5 A2 Examples of actions that might be safeguards include: a) involving another insolvency practitioner, either from within or outside the firm as appropriate to the circumstances, to review the work done, perform or re-perform part of the work or otherwise advise as necessary. This could include another insolvency practitioner taking a joint appointment; b) changing members of the insolvency team or the use of separate staff; 19  c) terminating the financial or business relationship that gives rise to the threat; d) seeking directions from the court. 2210.5 A3 It is important that, prior to the insolvency appointment, the insolvency practitioner considers disclosure, to the court or to the creditors on whose behalf the insolvency practitioner would be appointed to act, of the existence of any threat, together with the safeguards identified and applied, and that no objection is made to the insolvency practitioner being appointed. 2210.5 A4 Where an insolvency practitioner is specifically precluded by this Code from accepting an insolvency appointment as an individual, a joint appointment is not an appropriate safeguard and would not make accepting the insolvency appointment appropriate. 2210.5 A5 An insolvency practitioner will need to exercise professional judgment to determine the appropriate action when threats have been identified. In exercising their judgment, an insolvency practitioner is expected to take into account whether a reasonable and informed third party, weighing all the specific facts and circumstances available to the insolvency practitioner at the time, would be likely to conclude that the threats would be eliminated or reduced to an acceptable level, such that compliance with the fundamental principles is not compromised. R2210.6 An insolvency practitioner might encounter situations in which the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threats to an acceptable level. Where this is the case, the insolvency practitioner shall not accept the insolvency appointment. R2210.7 Following the acceptance of an insolvency appointment, the insolvency practitioner shall keep under review any identified threats, and the insolvency practitioner shall be mindful that other threats to the fundamental principles could arise. 2210.7 A1 Remaining alert throughout the insolvency appointment will assist the insolvency practitioner in determining whether new information has emerged or changes in facts and circumstances have occurred that: a) impact the level of a threat; or b) affect the insolvency practitioner’s conclusions about whether safeguards applied continue to be appropriate to address identified threats. Mergers 2210.8 A1 If firms merge, after the merger, they are to be treated as one firm for the purposes of assessing threats to the fundamental principles. R2210.9 At the time of the merger, the insolvency practitioner shall review existing insolvency appointments and identify any threats to the fundamental principles. 2210.9 A1 Principals and employees of the merged firm will become subject to common ethical constraints in relation to accepting new insolvency appointments to clients of either of the former firms. However existing insolvency appointments which are rendered in apparent breach of the Code by the merger need not be judged to be so automatically, provided that a considered review of the situation by the firm discloses no obvious and immediate ethical conflict. R2210.10 Where an individual within the firm has, in any former capacity, undertaken work upon the affairs of an entity that is incompatible with an insolvency appointment of the new firm, the individual shall not work or be employed on that assignment. 20 ACTING WITH SUFFICIENT EXPERTISE Introduction 2300.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2300.2 The fundamental principle of professional competence and due care requires that an insolvency practitioner only accepts an insolvency appointment when the insolvency practitioner has or can acquire sufficient expertise. For example, a self-interest threat to the fundamental principle of professional competence and due care is created if the insolvency practitioner or the insolvency team does not possess or cannot acquire the competencies necessary to carry out the insolvency appointment. Acquiring in this context includes obtaining the expertise from elsewhere by employing experts or additional resources. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material General R2300.3 An insolvency practitioner shall not intentionally mislead an employing organisation as to the level of expertise or experience possessed. 2300.3 A1 The principle of professional competence and due care requires that an insolvency practitioner only undertake significant tasks for which the insolvency practitioner has, or can obtain, sufficient training or experience. 2300.3 A2 A self-interest threat to compliance with the principle of professional competence and due care might be created if an insolvency practitioner has: • insufficient time for performing or completing the relevant duties; • incomplete, restricted or otherwise inadequate information for performing the duties; • insufficient experience, training and/or education; • inadequate resources for the performance of the duties. 2300.3 A3 Factors that are relevant in evaluating the level of such a threat include: • the extent to which the insolvency practitioner is working with others; • the relative seniority of the insolvency practitioner in the firm; • the level of supervision and review applied to the work. 2300.3 A4 Factors to be considered in evaluating expertise include: a) an appropriate knowledge and understanding of the entity, its owners, managers and those responsible for its governance and business activities; b) an appropriate understanding of the nature of the entity’s business, the complexity of its operations, the specific requirements of the engagement and the purpose, nature and scope of the work to be performed; c) knowledge of relevant industries and subject matters; d) possessing or obtaining experience of relevant regulatory and reporting requirements; e) availability of sufficient staff with the necessary competencies; f) access to experts where necessary; g) complying with quality control policies and procedures designed to provide reasonable assurance that specific engagements are accepted only when they can be performed competently. 21 2300.3 A5 Maintaining and acquiring professional competence requires a continuing awareness and understanding of relevant technical and professional developments. 2300.3 A6 Examples of actions that might be safeguards to address such threats include: • obtaining assistance or training from someone with the necessary expertise. • ensuring that there is adequate time available for performing the relevant duties. R2300.4 If a threat to compliance with the principle of professional competence and due care cannot be addressed, an insolvency practitioner shall determine whether to decline to perform the duties in question or accept or continue the insolvency appointment. If the insolvency practitioner determines that declining to accept the insolvency appointment is appropriate, the insolvency practitioner shall communicate the reasons. R2300.5 The insolvency practitioner shall keep under review the expertise required throughout the insolvency appointment 22 CONFLICTS OF INTEREST AND PROFESSIONAL AND PERSONAL RELATIONSHIPS Introduction 2310.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2310.2 A conflict of interest creates threats to compliance with the principle of objectivity and might create threats to compliance with the other fundamental principles. 2310.3 Where a conflict of interest arises, the preservation of confidentiality will be of paramount importance. 2310.4 This section sets out specific requirements and application material relevant to applying the conceptual framework to conflicts of interest. Requirements and Application Material General R2311.1 An insolvency practitioner shall not allow a conflict of interest to compromise professional or business judgment. R2311.2 An insolvency practitioner might encounter circumstances where a threat to the principle of objectivity or other fundamental principles cannot be eliminated and safeguards cannot be applied to reduce the threat to an acceptable level. Where this is the case the insolvency practitioner shall not accept the insolvency appointment. 2311.2 A1 Examples of circumstances that might create a conflict of interest include where a significant relationship has existed with the entity or someone connected with the entity, or where an insolvency practitioner: • has to deal with conflicting or competing interests between entitles over whom they, or another insolvency practitioner in their firm, is appointed. • or another insolvency practitioner in their firm has previously acted as an insolvency office holder to a company with a common director, or common directors. Where the insolvency practitioner has been appointed officeholder to a number of insolvent companies with the same director or directors, there will be an increased risk of a conflict of interest arising. • has, or others in their firm have, previously carried out one or more assignments for an entity and / or its wider group and they are appointed as an insolvency office holder to the entity or its connected entities. • has, or others in their firm have, previously carried out one or more assignments for an entity’s charge holders or stakeholders and the insolvency practitioner is appointed as an insolvency office holder to the entity or its connected entities. • is appointed administrator by a floating charge holder, under a recent charge, and the assets are sold to a purchaser and the purchaser is connected to the floating charge holder. • is appointed to act as supervisor of a debtor’s IVA or trustee in a debtor’s bankruptcy or sequestration, and has, or another insolvency practitioner in the same firm, has been appointed as an insolvency officeholder to a company of which the debtor is a director, or was a director in the past three years. • is appointed to deal with an insolvent individual’s affairs, and the insolvency practitioner, or another individual in their firm, was involved in bringing about the individual’s insolvency. There could be an increased risk of a conflict of interest where the insolvency practitioner has a claim for outstanding costs. 2311.2 A2 There will be an increased risk of a conflict arising where an insolvency practitioner or their firm has carried out a number of previous assignments for an entity, its group or its charge holders or stakeholders. There will also be an increased risk if the previous assignments took place over 23  an extended period of time. The level of risk will also depend on the services that were provided and the nature of the work carried out. 2311.2 A3 There will be an increased risk where an insolvency practitioner has, or others in their firm have, carried out one or more pre-appointment engagements for the entity, and the insolvency practitioner is appointed as an insolvency officeholder, and they, or another insolvency practitioner in their firm is subsequently appointed officeholder in a further insolvency process. 2311.2 A4 The fact that an insolvency practitioner, or their firm, might not have been formally engaged to carry out an assignment, or might not have been paid for their work, does not negate the possibility of a conflict of interest arising. Professional and personal relationships Introduction 2312.1 The environment in which insolvency practitioners work and the relationships formed in their professional and personal lives can lead to threats to the fundamental principle of objectivity. Requirements and Application Material R2312.2 The principle of objectivity might be threatened if any individual within the firm, the close or immediate family of an individual within the firm or the firm itself, has or has had a professional or personal relationship which relates to the insolvency appointment being considered. 2312.2 A1 Relationships could include (but are not restricted to) relationships with:- a) the entity; b) senior management or any director or shadow director or former director or shadow director of the entity; c) shareholders or Persons of Significant Control of the entity; d) any principal or employee of the entity; e) business partners of the entity; f) companies or entities controlled by the entity; g) companies which are under common control; h) potential purchasers; i) creditors; j) funders, including shareholders, private equity houses and debenture holders of the entity; k) debtors of the entity; l) close or immediate family of the entity (if an individual) or its officers (if a corporate body); m) others with commercial relationships with the firm or personal relationships with an individual within the firm. 2312.2 A2 The examples above are not exhaustive, and the substance of any relationship should be considered. 24 R2312.3 An insolvency practitioner shall ensure that the firm has policies and procedures to identify relationships between individuals within the firm and third parties in a way that is proportionate and reasonable in relation to the insolvency appointment being considered. R2312.4 Before accepting an insolvency appointment, an insolvency practitioner shall take reasonable steps to identify circumstances (including any relationships) that might create a conflict of interest, and therefore a threat to compliance with one or more of the fundamental principles. Such steps shall include identifying: a) the nature of the relevant interests and relationships between all stakeholders; and b) the nature, extent and timing of any prior work for the entity or connected entities and its implication for all stakeholders . 2312.4 A1 An effective conflict identification process assists an insolvency practitioner when taking reasonable steps to identify interests and relationships that might create an actual or potential conflict of interest, both before determining whether to accept an insolvency appointment and throughout the appointment. Such a process includes considering matters identified by external parties, for example directors of insolvent entities or insolvent individuals. The earlier an actual or potential conflict of interest is identified, the greater the likelihood of the accountant being able to address threats created by the conflict of interest. 2312.4 A2 An effective process to identify actual or potential conflicts of interest will take into account factors such as: • the nature of any previous work carried out for the entity or connected entities • the nature of the insolvency appointment • the size of the firm • the size and nature of the client base • the structure of the firm, for example, the number and geographic location of offices. R2312.5 Where a professional or personal relationship of the type described in paragraph 2312.2 A1 has been identified the insolvency practitioner shall evaluate the impact of the relationship in the context of the insolvency appointment being sought or considered. 2312.5 A1 Issues to consider in evaluating whether a relationship creates a threat to the fundamental principles include the following: a) The nature of the previous duties undertaken by a firm during an earlier relationship with the entity. b) The impact of the work conducted by the firm on the financial state and/or the financial stability of the entity in respect of which the insolvency appointment is being considered. c) Whether the fees for the work or the costs incurred is or was significant to the insolvency practitioner, the insolvency practitioner’s department or the firm itself. d) Whether the fee received for the work or the cost of the work was substantial. e) How recently any professional work was carried out. It is likely that greater threats will arise (or could be seen to arise) where work has been carried out within the previous three years. However, there might still be instances where, in respect of non-audit work, any threat is at an acceptable level. Conversely, there might be situations whereby the nature of the work carried out was such that a considerably longer period will need to have elapsed before any threat can be reduced to an acceptable level. f) Whether the insolvency appointment being considered involves consideration of any work previously undertaken by the firm for that entity. 25  g) The nature of any personal relationship and the proximity of the insolvency practitioner to the individual with whom the relationship exists and, where appropriate, the proximity of that individual to the entity in relation to which the insolvency appointment relates. h) Whether any reporting obligations will arise in respect of the relevant individual with whom the relationship exists (e.g. an obligation to report on the conduct of directors and shadow directors of a company to which the insolvency appointment relates). i) The nature of any previous duties undertaken by an individual within the firm during any earlier relationship with the entity. j) The extent of the insolvency team’s familiarity with the individuals connected with the entity. 2312.5 A2 When evaluating the nature of any previous work done, an insolvency practitioner is expected to take into account any work done, even if it was not subject to a formal engagement and / or did not generate a fee for the firm. R2312.6 Having identified and evaluated a relationship that might create a threat to the fundamental principles, the insolvency practitioner shall consider their response including possible actions to reduce the threat to an acceptable level. 2312.6 A1 Examples of actions which might be safeguards to reduce the level of threat created by a professional or personal relationship to an acceptable level are considered in paragraph 2210.5 A2. Examples of other safeguards include: a) terminating (where possible) the financial or business relationship giving rise to the threat. b) disclosure of the relationship and any financial benefit received by the firm (whether directly or indirectly) to the entity or to those on whose behalf the insolvency practitioner would be appointed to act. 2312.6 A2 While an insolvency practitioner might not be able to withdraw from the team, the threat created by another individual’s professional or personal relationship could be reduced to an acceptable level by that individual withdrawing from the insolvency team. R 2312.7 An insolvency practitioner could encounter situations in which no action can be taken to eliminate a threat arising from a professional or personal relationship, or to reduce it to an acceptable level. In such situations, the relationship in question will constitute a significant professional relationship or a significant personal relationship. Where this is case the insolvency practitioner shall not accept the insolvency appointment. R2312.8 An insolvency practitioner shall always consider the perception of others when deciding whether to accept an insolvency appointment. 2312.8 A1 While an insolvency practitioner might regard a relationship as not being significant to the insolvency appointment, the perception of others could differ and this might in some circumstances be sufficient to make the relationship significant. In considering perception, this needs to be considered on the basis of a reasonable and informed third party, weighing up all the specific facts and circumstances available to the insolvency practitioner at that time. R2312.9 The insolvency practitioner shall document: a) the facts. b) any communications with, and parties with whom the matters were discussed. c) the courses of action considered, the judgments made and the decisions that were taken. d) the safeguards applied to address the threats when applicable. e) how the matter was addressed. f) where relevant, why it was appropriate to accept or continue the insolvency appointment. 26 R2312.10 The records an insolvency practitioner maintains, in relation to the steps that they took and the conclusions that they reached, shall be sufficient to enable a reasonable and informed third party to reach a view on the appropriateness of their actions. Changes in Circumstances R2313.1 An insolvency practitioner shall remain alert to changes over time in the nature of services, interests and relationships that might create a conflict of interest while acting as an insolvency office holder. 2313.1 A1 The nature of interests and relationships might change during the appointment. This is particularly true when an insolvency practitioner is appointed in a situation that might become adversarial, even though the stakeholders might not initially be involved in a dispute. It could also be the case where a debt is sold or transferred during the appointment, where an insolvency practitioner is appointed as a replacement officeholder, where a liquidator in a members’ voluntary liquidation is converting the winding up to a creditors’ voluntary liquidation or where a creditor goes into an insolvency process. Network Firms R2314.1 If the firm is a member of a network, an insolvency practitioner shall consider conflicts of interest that the insolvency practitioner has reason to believe might exist or arise due to interests and relationships of a network firm. 2314.1 A1 Factors to consider when identifying interests and relationships involving a network firm include: • the nature of the professional services provided • the clients served by the network • the geographic locations of all relevant parties Threats Created by Conflicts of Interest 2315.1 In general, the more direct the connection between the professional service and the matter on which the parties’ interests conflict, the more likely the level of the threat is not at an acceptable level. 2315.2 Factors that are relevant in evaluating the level of a threat created by a conflict of interest include measures that prevent unauthorized disclosure of confidential information when dealing with insolvency appointments for two or more insolvent entities whose interests with respect to that matter are in conflict. These measures include: • the existence of separate practice areas for specialty functions within the firm, which might act as a barrier to the passing of confidential client information between practice areas; • policies and procedures to limit access to case files; • confidentiality agreements signed by personnel and partners of the firm; • separation of confidential information physically and electronically; • specific and dedicated training and communication. 2315.3 Examples of actions that might be safeguards to address threats created by a conflict of interest include: • Having separate engagement teams who are provided with clear policies and procedures on maintaining confidentiality. • Having an appropriate reviewer, who is not involved in providing the service or otherwise affected by the conflict, review the work performed to assess whether the key judgments and conclusions are appropriate. R2315.4 An insolvency practitioner shall exercise professional judgment to determine whether the nature and significance of a conflict of interest are such that specific disclosure and 27  explicit consent is necessary when addressing the threat created by the conflict of interest. 2315.4 A1 Factors to consider when determining whether specific disclosure and explicit consent are necessary include: • the circumstances creating the conflict of interest • the parties that might be affected • The nature of the issues that might arise • The potential for the particular matter to develop in an unexpected manner. 2315.4 A2 Disclosure and consent might take different forms, for example: • disclosure to the court on making an application to court for an administration or any other order • obtaining consent from a creditors’ committee • obtaining consent from a secured lender • disclosure to creditors 2315.4 A3 It is generally expected that any disclosure will include the circumstances of the particular conflict and how any threats created were addressed. 2315.4 A4 More information on accepting insolvency appointments is set out in Insolvency appointments (see paragraph 2210). Confidentiality General R2316.1 An insolvency practitioner shall remain alert to the principle of confidentiality, including when making disclosures or sharing information within the firm or network and seeking guidance from third parties. 2316.1 A1 Paragraphs 2104.1 to 2104.4 set out requirements and application material relevant to situations that might create a threat to compliance with the principle of confidentiality. 28 SPECIALIST ADVICE AND SERVICES Introduction 2320.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2320.2 If an insolvency practitioner obtains specialist advice or services from others, this might create a self-interest threat to compliance with one or more of the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material R2320.3 When an insolvency practitioner intends to rely on the advice or work of another, from within the firm or by a third party, the insolvency practitioner shall evaluate whether such advice or work is warranted. R2320.4 Any advice or work contracted shall reflect best value and service for the work undertaken. 2320.4 A Factors that are relevant in evaluating best value and service are: • the cost of the service; • the expertise and experience of the service provider; • that the provider holds appropriate regulatory authorisations; • the professional and ethical standards applicable to the service provider. R2320.5 The Insolvency practitioner shall review arrangements periodically to ensure that best value and service continue to be obtained in relation to each insolvency appointment. R2320.6 The insolvency practitioner shall document the reasons for choosing a particular service provider. 2320.6 A1 Threats to the fundamental principles (for example familiarity threats and self-interest threats) can arise if services are provided by a regular source within the firm or by a party with whom the insolvency practitioner, firm, or an individual within the firm, has a business or personal relationship. 2320.6 A2 Business or personal relationships might include the following: • an immediate family member e.g. spouse, parent, child, sibling etc. • a business partner; • any company or business in which there are common shareholdings with the firm, or which have the same beneficial owner(s); or one of the companies or business controls or owns the other. 2320.6 A3 The examples above are not exhaustive, and the substance of the relationship between the insolvency practitioner, the firm or an individual within the firm and the provider of the service should be considered. 2320.6 A4 When taking steps to assess the nature of any such relationship, the insolvency practitioner should have regard to Conflicts of interest and professional and personal relationships. 2320.6 A5 While the insolvency practitioner might regard a relationship as not being a cause for concern, the perception of others could differ. In considering perception, it is expected that the insolvency practitioner considers this on the basis of a reasonable and informed third party, weighing up all the specific facts and circumstances available to the insolvency practitioner at that time. 2320.6 A6 Examples of actions that might be safeguards to address such threats include: 29  a) applying clear guidelines and policies within the firm on such relationships b) disclosure of the relevant relationships and the process undertaken to evaluate best value and service to the general body of creditors or the creditors’ committee if one exists c) the benefit of negotiated commercial terms such as volume or settlement discounts being received in full by the insolvent estate. 2320.6 A7 Where the insolvency practitioner does not control decisions about the choice of the provider of specialist advice or service, to be able to comply with the requirements in this part the insolvency practitioner will need to obtain sufficient information to establish the nature of the relationship with the provider. Reference should also be made to The insolvency practitioner as an employee (see paragraph 2380). 30 AGENCIES AND REFERRALS Introduction 2330.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2330.2 If an insolvency practitioner receives referred work, refers work to others, or establishes an agency arrangement, this might create a self-interest threat to compliance with one or more of the fundamental principles. A referral could be a formal request made in the course of a professional relationship, for advice on the selection of a potential professional adviser. A referral might also be an informal request, including where there is no existing relationship between the insolvency practitioner and the enquirer. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. 2330.3 Attention is also drawn to the legislative provisions regarding the use of personal data. 2330.4 The requirements in respect of referral fees and commissions are detailed in Referral fees and commission (see paragraph 2340). Requirements and Application Material R2330.5 The insolvency practitioner shall consider the fitness for purpose of the third party to whom a referral is proposed or an agency arrangement is being considered, to address the needs of the recipient of the service. 2330.5 A1 Insolvency practitioners are expected to consider any factors they are aware of that would indicate the proposed third party is not fit for purpose in terms of the potential engagement. The insolvency practitioner needs to take into account what a reasonable person might expect an insolvency practitioner to know. 2330.5 A2 Examples of actions that might be safeguards to address threats created by any referral and agency arrangements include: a) applying clear guidelines and policies within the firm on referrals and agency arrangements b) disclosure of the process undertaken to evaluate best value and service and any relevant relationships to the general body of creditors or the creditors’ committee if one exists. 2330.5 A3 In making that consideration of fitness for purpose, the insolvency practitioner is expected to take account of the professional or regulatory status of the third party. R2330.6 Insolvency practitioners shall not, because of the self-interest threat, enter into any financial arrangements with another supplier either personally or through their firm which would prejudice the objectivity of themselves or their firm. R2330.7 Before accepting or continuing an agency with another supplier, insolvency practitioners shall satisfy themselves that their ability to discharge their professional obligations are not compromised. 2330.7 A1 When referring work or establishing an agency, insolvency practitioners have a responsibility to ascertain that a referral is conducted in accordance with this Code because insolvency practitioners cannot do, or be seen to do, through others what they cannot not do themselves. R2330.8 When insolvency practitioners or their firm are considering the establishment of an agency, the terms of the agency contract (actual or implied) shall not require exclusive referral regardless of suitability. This would make important safeguards inoperable. R2330.9 An insolvency practitioner shall not make a referral to a third party, even with a disclaimer, if they know of a better alternative. R2330.10 The insolvency practitioner shall document the reasons for establishing an agency with another supplier or recommending a particular provider. 31 R2330.11 When permitting the introduction of services or products, an insolvency practitioner shall address the threats to compliance with the fundamental principles. 2330.11 A1 When permitting the introduction of services or products to those who are the subject of an insolvency appointment, factors that are relevant to such introductions include: • The level of knowledge and expertise of those who are subject to, or have a financial interest in, the insolvency appointment or prospective insolvency appointment. • The ability of those who are subject to, or have a financial interest in, the insolvency appointment or prospective insolvency appointment, to question the information provided by or with the consent of the insolvency practitioner. • Information provided to those who are subject to, or have had financial interest in, the insolvency appointment or prospective insolvency appointment to enable an informed decision to be made. • Whether consent has been obtained from the individual subject to the insolvency appointment, or prospective insolvency appointment, for their personal information to be shared with the provider of the service or product. • The cost of the service. • The financial impact on those who are subject to, or have a financial interest in, the insolvency appointment or prospective insolvency appointment. • The regulatory status of the provider of the service or product. • Disclosing the nature of the referral or arrangement to those who are subject to, or have a financial interest in, the insolvency appointment or prospective insolvency appointment. 2330.11 A2 Being transparent about any referral or agency arrangements and setting out in writing to the individuals concerned the nature of the arrangement might be an appropriate safeguard (see paragraph 2330.5 A2 above). 2330.11 A3 When communicating information about any referral or agency arrangements the insolvency practitioner should provide the following information: • the advantages and disadvantages of the service or product being provided; • that similar services or products could be available from other providers at a different cost; • any direct or indirect benefit that the insolvency practitioner or the firm might receive if a service or product is taken up; • that seeking independent advice should be considered. R2330.12 If the insolvency practitioner or the firm has a relationship with the third party, for example a family connection or an automatic referral arrangement, there are clear self- interest or familiarity threats and the connection shall be disclosed. The disclosure shall include any potential benefit, whether direct or indirect, they, or others will receive. 2330.12 A1 In addition to disclosure required by R2330.12, the insolvency practitioner should consider including the additional information listed in 2330.11 A3. 2330.12 A2 This is particularly important where an insolvency practitioner is considering recommending the products of another supplier with which there is an agency agreement or referral arrangement and the insolvency practitioner, firm, or an individual within the firm, has a business or personal relationship with the provider of the service. 32 2330.12 A3 Business or personal relationships might include the following: • an immediate family member e.g. spouse, parent, child, sibling etc. • a business partner; • any company or business in which there are common shareholdings with the firm, or which have the same beneficial owner(s); or one of the companies or business controls or owns the other. 2330.12 A4 The examples above are not exhaustive, and the substance of the relationship between the insolvency practitioner, the firm or an individual within the firm and the provider of the service should be considered. 2330.12 A5 When taking steps to assess the nature of any such relationship, the insolvency practitioner should have regard to Conflicts of interest and professional and personal relationships. 2330.12 A6 While the insolvency practitioner might regard a relationship as not being a cause for concern, the perception of others could differ. It is necessary to consider perception on the basis of a reasonable and informed third party, weighing up all the specific facts and circumstances available to the insolvency practitioner at that time. 2330.12 A7 The requirement to disclose includes situations where in substance there is a one-to-one relationship between the insolvency practitioner and the third party (for example, the insolvency practitioner is the only insolvency practitioner in the area and the third party is the only solicitor), as this implies automatic referral. R2330.13 An insolvency practitioner shall not in any circumstances conduct their firm in such a manner as to give the impression that the insolvency practitioner is a principal rather than an agent. 2330.13 A1 This includes considering signs on premises, websites and any other outward signs or literature used. 2330.13.A2 Where the insolvency practitioner does not control decisions about referrals and agencies within the firm, to comply with the requirements in this part the insolvency practitioner will need to obtain sufficient information about any arrangements. Reference should also be made to – The insolvency practitioner as an employee (see paragraph 2380). 33 REFERRAL FEES AND COMMISSIONS1 Introduction 2340.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2340.2 Paying or receiving referral fees and commissions might create a self-interest threat to compliance with one or more of the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material 2340.3 A self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if an insolvency practitioner, the firm or an associate offers or pays a referral fee or commission. R2340.4 An insolvency practitioner, the firm or an associate shall not make or offer to make any payment or commission for the introduction of an insolvency appointment. 2340.4 A1 Remuneration arising from an employer/employee relationship would not normally be included within the scope of payments referred to in R2340.4 above. 2340.4 A2 A self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if an insolvency practitioner, the firm or an associate receives a referral fee or commission. R2340.5 Where an engagement might lead to an insolvency appointment, insolvency practitioners shall not accept referral fees or commissions unless they take action to reduce the threats created by such fees or commissions to an acceptable level 2. 2340.5 A1 Examples of actions that might be safeguards to address such threats include: a) disclosure in advance of any arrangements to the appointing body, creditors or any other relevant stakeholders, b) obtaining the views of the creditors committee. R2340.6 If after the receipt of any such payments by the insolvency practitioner, the firm or an associate, the insolvency practitioner accepts an insolvency appointment, the amount and any source of any fee or commission received shall be disclosed to creditors. R2340.7 During an insolvency appointment, referral fees or commissions shall not be accepted by the insolvency practitioner, the firm or an associate unless they are paid into the insolvent estate. Any such payments shall be disclosed to creditors. R2340.8 Where the insolvency practitioner or firm obtains preferential contractual terms from suppliers of goods and services obtained for an insolvency appointment, for example volume or settlement discounts, the benefit shall be received in full by the insolvent estate. 1 As per Section 642 Companies Act 2014, referral fees and commission are strictly prohibited in the Republic of Ireland. 2 Insolvency Practitioners operating in the Republic of Ireland or operating in respect of an Irish Company should not accept referral fees or commission under any circumstances (see footnote 1 above). 34 2340.8 A1 The term ‘associate’ of an insolvency practitioner or the firm includes the following: • an immediate family member e.g. spouse, parent, child, sibling etc. • a business partner; • any company or business in which there are common shareholdings with the firm, or which have the same beneficial owner(s); or one of the companies or business controls or owns the other. 2340.8 A2 The examples of associates are not exhaustive, and the substance of the association between the insolvency practitioner and/or the firm and the recipient or payor of any referral fee or commission should be considered. 2340.8 A3 When taking steps to assess the nature of any such association, the insolvency practitioner is expected to have regard to the section on conflicts of interest (paragraphs 2310.1 to 2311.2 A4) of this Code – conflicts of interest and professional and personal relationships. 2340.8 A4 While the insolvency practitioner might regard an association as not being a cause for concern, the perception of others might differ. In considering perception, it is expected that be considered on the basis of a reasonable and informed third party, weighing up all the specific facts and circumstances available to the insolvency practitioner at that time. 2340.8 A5 When referring work, insolvency practitioners have a responsibility to ascertain that a referral is conducted in accordance with this Code because insolvency practitioners cannot do, or be seen to do, through others what they cannot not do themselves. 2340.8 A6 Where the insolvency practitioner does not control decisions about referral and commission arrangements, to comply with the requirements in this section the insolvency practitioner will need to obtain sufficient information to establish the nature and purpose of any payments made or received. Reference should also be made to– The insolvency practitioner as an employee (see paragraph 2380). 35 INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY Introduction 2350.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2350.2 In relation to an insolvency appointment, offering or accepting inducements might create a self- interest, familiarity or intimidation threat to compliance with the fundamental principles, particularly the principles of integrity, objectivity and professional behaviour. 2350.3 This section sets out requirements and application material relevant to applying the conceptual framework in relation to the offering and accepting of inducements when performing services that does not constitute non-compliance with laws and regulations. This section also requires an insolvency practitioner to comply with relevant laws and regulations when offering or accepting inducements. Requirements and Application Material General 2350.4 A1 An inducement is an object, situation, or action that is used as a means to influence another individual’s behaviour, but not necessarily with the intent to improperly influence that individual’s behaviour. Inducements can range from minor acts of hospitality, to acts that result in non- compliance with laws and regulations. An inducement can take many different forms, for example: • gifts. • hospitality. • entertainment. • political or charitable donations. • appeals to friendship and loyalty. • employment or other commercial opportunities. • preferential treatment, rights or privileges. 2350.4 A2 An inducement might be offered to the firm, an individual within the firm or a close or immediate family member, as well as to the insolvency practitioner personally. Inducements offered to others will still give rise to threats to compliance with the fundamental principles. Inducements Prohibited by Laws and Regulations R2350.5 In many jurisdictions, there are laws and regulations, such as those related to bribery and corruption, that prohibit the offering or accepting of inducements in certain circumstances. The insolvency practitioner shall obtain an understanding of relevant laws and regulations and comply with them when the insolvency practitioner encounters such circumstances. Inducements Not Prohibited by Laws and Regulations 2350.5 A1 The offering or accepting of inducements that is not prohibited by laws and regulations might still create threats to compliance with the fundamental principles. Inducements with Intent to Improperly Influence Behaviour R2350.6 An insolvency practitioner shall not offer, or encourage others to offer, any inducement that is made, or which the insolvency practitioner considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another. 36 R2350.7 An insolvency practitioner shall not accept, or encourage others to accept, any inducement that the insolvency practitioner concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another. 2350.7 A1 An inducement is considered as improperly influencing an individual’s behaviour if it causes the individual to act in an unethical manner. Such improper influence can be directed either towards the recipient or towards another individual entity or that has some relationship with the recipient. The fundamental principles are an appropriate frame of reference for an insolvency practitioner in considering what constitutes unethical behaviour on the part of the insolvency practitioner and, if necessary by analogy, others. 2350.7 A2 A breach of the fundamental principle of integrity arises when an insolvency practitioner offers or accepts, or encourages others to offer or accept, an inducement where the intent is to improperly influence the behaviour of the recipient or of another individual. 2350.7 A3 The determination of whether there is actual or perceived intent to improperly influence behaviour requires the exercise of professional judgment. Relevant factors to consider might include: • The nature, frequency, value and cumulative effect of the inducement. • Timing of when the inducement is offered relative to any action or decision that it might influence. • Whether the inducement is a customary or cultural practice in the circumstances, for example, offering a gift on the occasion of a religious holiday or wedding. • Whether the inducement is ancillary to the insolvency appointment, for example, offering or accepting lunch in connection with a business meeting. • Whether the offer of the inducement is limited to an individual recipient or available to a broader group. The broader group might be internal or external to the firm, such as other suppliers to the provider of the inducement. • The roles and positions of the individuals offering or being offered the inducement. • Whether the insolvency practitioner knows, or has reason to believe, that accepting the inducement would breach the policies and procedures of the recipient. • The degree of transparency with which the inducement is offered. • Whether the inducement was required or requested by the recipient. • The known previous behaviour or reputation of the offeror. Consideration of Further Actions 2350.8 A1 If the insolvency practitioner becomes aware of an inducement offered with actual or perceived intent to improperly influence behaviour, threats to compliance with the fundamental principles might still be created even if the requirements in the paragraphs R2350.6 and R2350.7 are met. 2350.8 A2 Examples of actions that might be safeguards to address such threats include: • informing senior management of the firm or those charged with governance of the offeror regarding the offer. • amending or terminating the business relationship with the offeror. Inducements with No Intent to Improperly Influence Behaviour 2350.9 A1 The requirements and application material set out in the conceptual framework apply when an insolvency practitioner has concluded there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another. 37 2350.9 A2 If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level. 2350.9 A3 Examples of circumstances where offering or accepting such an inducement might create threats even if the insolvency practitioner has concluded there is no actual or perceived intent to improperly influence behaviour include: • Self-interest threats o An insolvency practitioner is offered hospitality from the prospective purchaser of an insolvent business. • Familiarity threats o An insolvency practitioner regularly takes someone to an event. • Intimidation threats o An insolvency practitioner accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed. 2350.9 A4 Relevant factors in evaluating the level of such threats created by offering or accepting such an inducement include the same factors set out in paragraph 2350.7 A3 for determining intent. 2350.9 A5 Examples of actions that might eliminate threats created by offering or accepting such an inducement include: • Declining or not offering the inducement. • Transferring responsibility for the provision of professional services to another individual who the insolvency practitioner has no reason to believe would be, or would be perceived to be, improperly influenced when providing the services. 2350.9 A6 Examples of actions that might be safeguards to address such threats created by offering or accepting such an inducement include: • Being transparent with senior management of the firm about offering or accepting an inducement. • Registering the inducement in a log monitored by senior management of the firm or another individual responsible for the firm’s ethics compliance or maintained by the recipient. • Having an appropriate reviewer, who is not otherwise involved in the insolvency appointment, review any work performed or decisions made by the insolvency practitioner with respect to the provider of the inducement to the insolvency practitioner. • Donating the inducement to charity after receipt and appropriately disclosing the donation, for example, to a member of senior management of the firm or of those who offered the inducement. • Reimbursing the cost of the inducement, such as hospitality, received. • As soon as possible, returning the inducement, such as a gift, after it was initially accepted. R2350.10 If an insolvency practitioner encounters a situation in which no or no reasonable action can be taken to reduce a threat arising from offers of gifts or hospitality to an acceptable level the insolvency practitioner shall conclude that it is not appropriate to accept the offer. R2350.11 An insolvency practitioner shall not offer or provide gifts or hospitality where this would give rise to an unacceptable threat to compliance with the fundamental principles. 38 Immediate or Close Family Members R2350.12 An insolvency practitioner shall remain alert to potential threats to the insolvency practitioner’s compliance with the fundamental principles created by the offering of an inducement by or to an immediate or close family member of the insolvency practitioner. R2350.13 Where the insolvency practitioner becomes aware of an inducement being offered to or made by an immediate or close family member and concludes there is intent to improperly influence behaviour, or considers a reasonable and informed third party would be likely to conclude such intent exists, the insolvency practitioner shall advise the immediate or close family member not to offer or accept the inducement. 2350.13 A1 The factors set out in paragraph 2350.7 A3 are relevant in determining whether there is actual or perceived intent to improperly influence behaviour. Another factor that is relevant is the nature or closeness of the relationship, between: a) the insolvency practitioner and the immediate or close family member; b) the immediate or close family member and the other party; and c) the insolvency practitioner and the other party. For example, the offer of employment, outside of the normal recruitment process, to the spouse of the insolvency practitioner by a creditor in an insolvency might indicate such intent. 2350.13 A2 The application material in paragraph 2350.8 A2 is also relevant in addressing threats that might be created when there is actual or perceived intent to improperly influence behaviour even if the immediate or close family member has followed the advice given pursuant to paragraph R2350.13. Application of the Conceptual Framework 2350.14 A1 Where the insolvency practitioner becomes aware of an inducement offered in the circumstances addressed in paragraph R2350.12, threats to compliance with the fundamental principles might be created where: a) The immediate or close family member offers or accepts the inducement contrary to the advice of the insolvency practitioner pursuant to paragraph R2350.13; or b) The insolvency practitioner does not have reason to believe an actual or perceived intent to improperly influence behaviour exists. 2350.14 A2 The application material in paragraphs 2350.9 A1 to 2350.9 A6 is relevant for the purposes of identifying, evaluating and addressing such threats. Factors that are relevant in evaluating the level of threats in these circumstances also include the nature or closeness of the relationships set out in paragraph 2350.13 A1. Financial incentives for team members 2350.15 A1 An insolvency practitioner or members of the insolvency team might be offered an inducement by their employer to achieve certain targets relating to insolvency appointments. Such arrangements might create threats to compliance with the fundamental principles. 2350.15 A2 Examples of circumstances that might create a self-interest threat include situations in which the insolvency practitioner or members of the insolvency team: a) Holds a direct or indirect financial interest in the employing organisation and the value of that financial interest might be directly affected by decisions made by the insolvency practitioner. b) Is eligible for a profit-related bonus and the value of that bonus might be directly affected by decisions made by the insolvency practitioner. c) Participates in arrangements which provide incentives to achieve targets. 39 ADVERTISING, MARKETING AND OTHER PROMOTIONAL ACTIVITIES Introduction 2360.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2360.2 When an insolvency practitioner seeks an insolvency appointment or work that might lead to an insolvency appointment through advertising or other forms of marketing or promotional activity, there might be threats to compliance with the fundamental principles, including integrity and professional behaviour. 2360.3 This section sets out requirements and application material relevant to applying the conceptual framework in relation to advertising and marketing for insolvency appointments and includes the content of the websites and other promotional activities. 2360.4 Reference should also be made to Specialist advice and services (2320) and Referral fees and commissions (2340). Requirements and Application Material R2360.5 When undertaking marketing or promotional activities, an insolvency practitioner shall not bring the profession into disrepute. An insolvency practitioner shall be honest and truthful and shall not make: a) exaggerated claims for the services offered by, or the qualifications or experience of, the insolvency practitioner; or b) disparaging references or unsubstantiated comparisons to the work of others. R2360.6 When considering whether to accept an insolvency appointment an insolvency practitioner shall be satisfied that any advertising, marketing or other form of promotional activity pursuant to which the insolvency appointment might have been obtained: a) has been fair and not misleading b) has avoided unsubstantiated or disparaging statements c) has complied with relevant codes of practice and guidance in relation to advertising d) has been clearly distinguishable as advertising or marketing material, and has been legal, decent, honest and truthful. 2360.6 A1 If reference is made in advertisements or other forms of marketing to fees or to the cost of the services to be provided, the insolvency practitioner needs to be satisfied that the basis of calculation and the range of services that the reference is intended to cover has been provided. The insolvency practitioner needs to take care to ensure that such references are clear as to the precise range of services and the time commitment that the reference is intended to cover. 2360.6 A2 If an insolvency practitioner is in doubt about whether a form of advertising or marketing is appropriate, the insolvency practitioner is encouraged to consult with their authorising body. R 2360.7 Where an insolvency practitioner or the firm obtains work via a third party or a third party conducts marketing activities on behalf of the insolvency practitioner or the firm, the insolvency practitioner shall be responsible for ensuring that the third party follows the application material above. 2360.7 A1 When obtaining work via a third party or using a third party to conduct marketing activities insolvency practitioners have a responsibility to ascertain that a referral manner is in accordance with this Code because insolvency practitioners cannot do, or be seen to do, through others what they cannot not do themselves. 40 R2360.8 Insolvency practitioners shall never promote or seek to promote their services, or the services of other insolvency practitioners, in such a way, or to such an extent, as to amount to harassment. 41 DEALING WITH THE ASSETS OF AN ENTITY Introduction 2370.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2370.2 When an insolvency practitioner realises assets, this might create threats to compliance with one or more of the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material R2370.3 Except in circumstances which clearly do not impair the insolvency practitioner’s objectivity, insolvency practitioners appointed to any insolvency appointment in relation to an entity, shall not themselves acquire, directly or indirectly, any of the assets of an entity, nor knowingly permit any individual within the firm, or any close or immediate family member of an individual within the firm, directly or indirectly, to do so. 2370.3 A1 Where the assets and business of an insolvent company are sold by an insolvency practitioner shortly after appointment on pre-agreed terms, this could lead to an actual or perceived threat to objectivity. The sale could also be seen as a threat to objectivity by creditors or others not involved in the prior agreement. 2370.3 A2 Examples of actions that might be safeguards to address threats to objectivity include: a) obtaining an independent valuation of the assets or business being sold; b) considering other potential purchasers. 2370.3 A3 It is important for an insolvency practitioner to take care to ensure (where to do so does not conflict with any legal or professional obligation) that their decision-making processes are transparent, understandable and readily identifiable to all third parties who could be affected by a sale or proposed sale. 42 THE INSOLVENCY PRACTITIONER AS AN EMPLOYEE Introduction 2380.1 All insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 2380.2 Where an insolvency practitioner is an employee of a firm, the insolvency practitioner might face particular threats to compliance with the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. It does not describe all of the facts and circumstances, including professional activities, interests and relationships, that could be encountered by insolvency practitioner who is an employee, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires insolvency practitioners who are employees to be alert for such facts and circumstances. 2380.3 On occasion, where the insolvency practitioner is an employee or is considering accepting an offer of employment, the insolvency practitioner might be unable to address the threats to compliance with the fundamental principles. In those circumstances the insolvency practitioner will need to consider whether they can accept the offer of employment or resign from their current employment. Requirements and Application Material 2380.4 An insolvency practitioner might be an employee, contractor, partner, or director within the firm. The legal form of the relationship of the insolvency practitioner with their employer has no bearing on the ethical responsibilities placed on the insolvency practitioner. R2380.5 An insolvency practitioner who is an employee shall comply with the fundamental principles. 2380.5 A1 The insolvency practitioner 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. 2380.5 A2 The following are examples of facts and circumstances that might create threats for an insolvency practitioner as an employee: • being eligible for a bonus related to achieving targets or profits; • having inadequate resources for the performance of an insolvency appointment; • a lack of control over processes and internal governance; • being threatened with dismissal or demotion over a disagreement about an insolvency appointment; • an individual attempting to influence the decision-making process of the insolvency practitioner. R2380.6 An insolvency practitioner shall consider whether there are appropriate safeguards available to ensure compliance with the fundamental principles before accepting an offer of employment. 2380.6 A1 Examples of actions that might be safeguards to address such threats prior to accepting an offer of employment include: a) Appropriate provisions within any contract of employment or separate legal agreement with the employer acknowledging that the insolvency practitioner has a duty to comply with the Code of Ethics of their authorising body and that the insolvency practitioner will be able to take all necessary steps they deem necessary to comply with the fundamental principles. b) Ensuring that policies and procedures are in place within the firm to prohibit individuals who are not members of the insolvency team from inappropriately influencing the conduct of an 43  insolvency appointment. c) Ensuring that the firm has published policies and procedures to encourage and empower individuals within the firm to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concern them. d) Obtaining sufficient information to obtain an understanding of the structure and ownership of the firm. 2380.6 A2 If no actions are available to address these threats, it is expected that the insolvency practitioner consider whether it is appropriate to accept the offer of employment. 2380.6 A3 The existence of certain conditions, policies and procedures established by the profession, legislation, regulation, the firm, or the employing organization that can enhance the insolvency practitioner acting ethically might also help identify threats to compliance with the fundamental principles. In this context such factors could include: a) Policies and procedures within the firm to prohibit individuals who are not members of the insolvency team from inappropriately influencing the conduct of an insolvency appointment. b) Published policies and procedures to encourage and empower individuals within the firm to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concern them. 2380.6 A4 Examples of actions that might be safeguards to address threats at a particular time include: a) reporting concerns to senior management within the firm b) seeking legal advice or advice from their authorising body c) reporting the concerns to their authorising body or the Complaints Gateway. 2380.6 A5 The more senior the position of the insolvency practitioner, the greater will be the ability and opportunity to access information, and to influence policies, decisions made and actions taken by others involved with the firm. To the extent that they are able to do so, taking into account their position and seniority in the organisation, insolvency practitioners are expected to encourage and promote an ethics-based culture in the organisation. Examples of actions that might be taken include the introduction, implementation and oversight of: • ethics education and training programs. • ethics and whistle-blowing policies. • policies and procedures designed to prevent non-compliance with laws and regulations. R2380.7 Where threats to compliance with the fundamental principles cannot be eliminated or reduced to an acceptable level then the insolvency practitioner shall not accept the insolvency appointment or refuse to remain associated with the matter creating the conflict. 2380.7 A1 In some circumstances this could mean taking steps to resign from the employment. 2380.7 A2 Reference should also be made to Obtaining specialist advice and services and Referral fees and commissions. 44 RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS Introduction 2390.1 Insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework set to identify, evaluate and address threats. 2390.2 A self-interest or intimidation threat to compliance with the principles of integrity and professional behaviour is created when an insolvency practitioner becomes aware of non- compliance or suspected non-compliance with laws and regulations. 2390.3 An insolvency practitioner might encounter or be made aware of non-compliance or suspected non-compliance in the course of carrying out professional activities. This section guides the insolvency practitioner in assessing the implications of the matter and the possible courses of action when responding to non-compliance or suspected non-compliance with: a) Laws and regulations generally recognised to have a direct effect on the conduct of an appointment. b) Other laws and regulations that do not have a direct effect on the conduct of an appointment, but compliance with which might be fundamental to the outcome of an appointment. c) Other laws and regulations that do not have a direct effect on the conduct of an appointment, but compliance with which might be fundamental to the operating aspects of the employing organisation’s business, to its ability to continue its business, or to avoid material penalties. Objectives of the insolvency practitioner in relation to non-compliance with laws and regulations 2390.4 A distinguishing mark of the insolvency profession is its acceptance of the responsibility to act in the public interest. When responding to non-compliance or suspected non-compliance, the objectives of the insolvency practitioner are: a) To comply with the principles of integrity and professional behaviour; b) By alerting management or, where appropriate, those charged with governance of the entity, to seek to: i. Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or ii. Deter the commission of the non-compliance where it has not yet occurred; and c) By alerting management or, where appropriate, those charged with governance of the employing organisation, to seek to: i. Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or ii. Deter the non-compliance where it has not yet occurred; and d) To take such further action as appropriate in the public interest. Requirements and Application Material General 2390.5 A1 Non-compliance with laws and regulations (“non-compliance”) comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties: a) an entity over which the insolvency practitioner has been appointed; b) those charged with governance of an entity; c) management of an entity; 45  d) other individuals working for or under the direction of an entity; e) the insolvency practitioner’s employing organization; f) those charged with governance of the employing organization; g) management of the employing organization; h) other individuals working for or under the direction of the employing organisation. 2390.5 A2 Examples of laws and regulations which this section addresses include those that deal with: ● insolvency processes and procedures. ● fraud, corruption and bribery. ● money laundering, terrorist financing and proceeds of crime. ● securities markets and trading. ● banking and other financial products and services. ● data protection. ● tax and pension liabilities and payments. ● environmental protection. ● public health and safety. 2390.5 A3 Non-compliance might result in fines, litigation or other consequences for the entity or employing organisation, potentially materially affecting its financial statements. Importantly, such non-compliance might have wider public interest implications in terms of potentially substantial harm to creditors, employees, investors or the general public. For the purposes of this section, an act that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms. Examples include breaches of environmental laws and regulations endangering the health or safety of employees or the public and perpetration of fraud against appointment estates resulting in significant financial loss to creditors. R2390.6 In some jurisdictions, there are legal or regulatory provisions governing how insolvency practitioners should address non-compliance or suspected non-compliance. These legal or regulatory provisions might differ from or go beyond the provisions in this section, for example, anti-money laundering legislation. When encountering such non-compliance or suspected non-compliance, the insolvency practitioner shall obtain an understanding of those legal or regulatory provisions and comply with them, including: a) any requirement to report the matter to an appropriate authority; and b) any prohibition on alerting the relevant party. 2390.6 A1 A prohibition on alerting the relevant party might arise, for example, pursuant to anti-money laundering legislation. 2390.6 A2 An insolvency practitioner who encounters or is made aware of matters that are clearly inconsequential is not required to comply with this section unless other laws or regulations require it. For example, an insolvency practitioner in the UK needs to comply with Anti-Money Laundering legislation which contains no de minimis threshold for reporting. Whether a matter is clearly inconsequential is to be judged with respect to its nature and its impact, financial or otherwise, on the entity or employing organisation, its stakeholders and the general public. 2390.6 A3 This section does not address: a) Personal misconduct unrelated to the business activities of the entity or employing organisation; and 46  b) Unless required by other laws or regulations, non-compliance by parties other than those specified in paragraph 2390.5 A1. This includes, for example, circumstances where an insolvency practitioner has been engaged by a client to perform a due diligence assignment on a third party entity and the identified or suspected non-compliance has been committed by that creditor. The insolvency practitioner might nevertheless find the guidance in this section helpful in considering how to respond in these situations. Responsibilities of Management and Those Charged with Governance 2390.7 A1 Management of an entity or employing organisation, with the oversight of those charged with governance, is responsible for ensuring that the entity’s business activities are conducted in accordance with laws and regulations. Management and those charged with governance are also responsible for identifying and addressing any non-compliance by: a) the entity or employing organisation; b) an individual charged with governance of the entity or employing organisation; c) a member of management; or d) other individuals working for or under the direction of the entity or the employing organisation. Responsibilities of all insolvency practitioners R2390.8 If protocols and procedures exist within the insolvency practitioner’s employing organisation to address non-compliance or suspected non-compliance, the insolvency practitioner shall consider them in determining how to respond to such non-compliance. 2390.8 A1 Many employing organisations have established protocols and procedures regarding how to raise non-compliance or suspected non-compliance internally. These protocols and procedures include, for example, an ethics policy or internal whistle-blowing mechanism. Such protocols and procedures might allow matters to be reported anonymously through designated channels. R2390.9 Where an insolvency practitioner becomes aware of a matter to which this section applies, the steps that the insolvency practitioner takes to comply with this section shall be taken on a timely basis. In taking timely steps, the insolvency practitioner shall have regard to the nature of the matter and the potential harm to the interests of the entity, creditors, employees, investors, or the general public. 2390.9 A1 Insolvency practitioners are reminded especially of the guidance in paragraph R2390.6 above in relation to over-riding laws and regulations. Obtaining an understanding of the matter and addressing It with management and those charged with governance R2390.10 If an insolvency practitioner becomes aware of information concerning non-compliance or suspected non-compliance, the insolvency practitioner shall seek to obtain an understanding of the matter. This understanding shall include the nature of the non- compliance or suspected non-compliance and the circumstances in which it has occurred or might be about to occur. 2390.10 A1 The insolvency practitioner is expected to apply knowledge and expertise, and exercise professional judgment. However, the insolvency practitioner is not expected to have a level of understanding of laws and regulations beyond that which is required for the appointment. Whether an act constitutes actual non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body. 2390.10 A2 Depending on the nature and significance of the matter, the insolvency practitioner might consult on a confidential basis with others within the firm, a network firm or a professional body, or with legal counsel. 47 2390.10 A3 The insolvency practitioner is reminded especially of the guidance in paragraph R2390.6 above in relation to over-riding laws and regulations. R2390.11 If the insolvency practitioner identifies or suspects that non-compliance has occurred or might occur, the insolvency practitioner shall discuss the matter with the appropriate level of management. If the insolvency practitioner has access to those charged with governance, the insolvency practitioner shall also discuss the matter with them where appropriate. 2390.11 A1 The purpose of the discussion is to clarify the insolvency practitioner’s understanding of the facts and circumstances relevant to the matter and its potential consequences. The discussion also might prompt management or those charged with governance to investigate the matter. 2390.11 A2 The appropriate level of management with whom to discuss the matter is a question of professional judgment. Relevant factors to consider include: ● the nature and circumstances of the matter; ● the individuals actually or potentially involved; ● the likelihood of collusion; ● the potential consequences of the matter; ● whether that level of management is able to investigate the matter and take appropriate action. Communicating the matter to the entity’s external auditor R2390.12 If the insolvency practitioner is liquidator in a members voluntary liquidation for: a) an audit client of the firm or a network firm; or b) a component of an audit client of the firm or a network firm, the insolvency practitioner shall consider whether to communicate the non-compliance or suspected non-compliance within the firm or to the network firm, as appropriate. Where the communication is made, it shall be made in accordance with the firm’s or network’s protocols or procedures. In the absence of such protocols and procedures, it shall be made directly to the audit engagement partner. R2390.13 If the insolvency practitioner is supervisor of a Company Voluntary Arrangement the insolvency practitioner shall consider whether to communicate the non-compliance or suspected non-compliance to the firm that is the client’s external auditor, if any. Relevant factors to consider 2390.13 A1 Factors relevant to considering the communication in accordance with paragraphs R2390.12 and R2390.13 include: ● Whether doing so would be contrary to law or regulation. ● Whether there are restrictions about disclosure imposed by a regulatory agency or prosecutor in an ongoing investigation into the non-compliance or suspected non- compliance. ● Whether management or those charged with governance have already informed the entity’s external auditor about the matter. ● The likely materiality of the matter to the audit of the client’s financial statements or, where the matter relates to a component of a group, its likely materiality to the audit of the group financial statements. Purpose of Communication 2390.13 A2 In the circumstances addressed in paragraphs R2390.12 to R2390.13, the purpose of the communication is to enable the audit engagement partner to be informed about the non- 48  compliance or suspected non-compliance and to determine whether and, if so, how to address it in accordance with the provisions of this section. Considering whether further action is needed R2390.14 The insolvency practitioner shall also consider whether further action is needed in the public interest. 2390.14 A1 Whether further action is needed, and the nature and extent of it, will depend on factors such as: ● the legal and regulatory framework; ● the appropriateness and timeliness of the response of management and, where applicable, those charged with governance; ● the urgency of the situation; ● the involvement of management or those charged with governance in the matter; ● the likelihood of substantial harm to the interests of the client, investors, creditors, employees or the general public. 2390.14 A2 Further action by the insolvency practitioner might include: ● Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so. ● Resigning from the appointment where permitted by law or regulation. 2390.14 A3 In considering whether to disclose to an appropriate authority, relevant factors to take into account include: ● Whether doing so would be contrary to law or regulation. ● Whether there are restrictions about disclosure imposed by a regulatory agency or prosecutor in an ongoing investigation into the non-compliance or suspected non- compliance. R2390.15 If the insolvency practitioner determines that disclosure of the non-compliance or suspected non-compliance to an appropriate authority is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to paragraph R2104.3(d) of the Code. When making such disclosure, the insolvency practitioner shall act in good faith and exercise caution when making statements and assertions. The insolvency practitioner shall also consider whether it is appropriate to inform the entity of the insolvency practitioner’s intentions before disclosing the matter. Imminent breach R2390.16 In exceptional circumstances, the insolvency practitioner might become aware of actual or intended conduct that the insolvency practitioner has reason to believe would constitute an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of the entity, the insolvency practitioner shall exercise professional judgment and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach of law or regulation. If disclosure is made, that disclosure is permitted pursuant to paragraph R2104.3(d) of the Code. Seeking advice 2390.16 A1 The insolvency practitioner might consider: ● consulting internally; 49  ● obtaining legal advice to understand the professional or legal implications of taking any particular course of action; ● consulting on a confidential basis with a regulatory body or their authorising body. Documentation 2390.16 A2 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the insolvency practitioner is encouraged to document: ● the matter; ● the results of discussion with management and, where applicable, those charged with governance and other parties; ● how management and, where applicable, those charged with governance have responded to the matter; ● the courses of action the insolvency practitioner considered, the judgments made and the decisions that were taken; ● how the insolvency practitioner is satisfied that the insolvency practitioner has fulfilled the responsibility set out in paragraph R2390.14. 2390.16 A3 The insolvency practitioner is encouraged to consider whether there is a need for any such documentation to be filed separately. Responsibilities of members of the insolvency team R2390.17 If, in the course of carrying out professional activities, a member of the insolvency team becomes aware of information concerning non-compliance or suspected non- compliance, the team member shall seek to obtain an understanding of the matter. This understanding shall include the nature of the non-compliance or suspected non- compliance and the circumstances in which it has occurred or might occur. 2390.17 A1 The team member is expected to apply knowledge and expertise, and exercise professional judgment. However, the team member is not expected to have a level of understanding of laws and regulations greater than that which is required for the team member’s role within the employing organisation. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body. 2390.17 A2 Depending on the nature and significance of the matter, the team member might consult on a confidential basis with others within the employing organisation or an authorising body, or with legal counsel. R2390.18 If the team member identifies or suspects that non-compliance has occurred or might occur, the team shall, subject to paragraph R2390.17, inform an immediate superior to enable the superior to take appropriate action. If the team member’s immediate superior appears to be involved in the matter, the team member shall inform the next higher level of authority within the employing organisation. R2390.19 In exceptional circumstances, the team member may determine that disclosure of the matter to an appropriate authority is an appropriate course of action. If the team member does so pursuant to paragraphs 2390.17 A2 and A3, that disclosure is permitted pursuant to paragraph R2104.3(d) of the Code. When making such disclosure, the team member shall act in good faith and exercise caution when making statements and assertions. Documentation 2390.20 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the team member is encouraged to have the following matters documented: ● the matter; 50  ● the results of discussions with the team member’s superior, management and, where applicable, those charged with governance and other parties; ● how the team member’s superior has responded to the matter; ● the courses of action the team member considered, the judgments made and the decisions that were taken. 2390.20 A2 The team member is encouraged to consider whether there is a need for any such documentation to be filed separately. 51 THE APPLICATION OF THE FRAMEWORK TO SPECIFIC SITUATIONS Introduction to specific situations 2500.1 The following examples describe specific circumstances and relationships that will create threats to compliance with the fundamental principles. The examples are intended to assist an insolvency practitioner and the members of the insolvency team to assess the implications of similar, but different, circumstances and relationships. 2500.2 The examples are included in four sections. Section 2510 contains examples which do not relate to a previous or existing insolvency appointment. Section 2520 contains examples that do relate to a previous or existing insolvency appointment. Section 2530 contains some examples under Scottish law. Section 2540 contains examples relevant to the Republic of Ireland. 2500.3 The examples included in this section are not exhaustive, and the substance of the circumstances and relationships should be considered. 2500.4 When considering specific situations, insolvency practitioners should refer to the section on professional and personal relationships and changes in circumstances. As interests and relationships might change during an appointment, a significant professional relationship can arise as a result of an insolvency practitioner acting as an officeholder in a prior insolvency. An insolvency practitioner is expected to consider both pre-appointment engagements, and / or prior insolvency appointments when assessing whether they have a significant professional relationship. Insolvency practitioners are also expected to document their considerations and conclusions when assessing specific situations. 52 Section 2510 - Examples that do not relate to a previous or existing insolvency appointment 2510.1 Insolvency appointment following audit related work Previous relationship: The firm or an individual within the firm has completed audit related work. Response: A Significant Professional Relationship will normally arise where the audit related work was completed within the previous 3 years. An insolvency practitioner shall not take the insolvency appointment as it is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. Where audit related work was completed more than 3 years before the proposed date of the appointment of the insolvency practitioner a threat to compliance with the fundamental principles could still arise. The insolvency practitioner shall evaluate any such threat and consider whether the threat can be eliminated or reduced to an acceptable level by the use of safeguards. This restriction does not apply where the insolvency appointment is in a members’ voluntary liquidation; an insolvency practitioner may normally take an appointment as liquidator. However, the insolvency practitioner shall consider whether there are any other circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. Further, the insolvency practitioner shall satisfy them self that the directors’ declaration of solvency is likely to be substantiated by events. 2510.2 Appointment as Investigating Accountant at the instigation of a creditor Previous relationship: The firm or an individual within the firm was instructed by, or at the instigation of, a creditor or other party having a financial interest in an entity, to investigate, monitor or advise on its affairs. Response: A Significant Professional Relationship would not normally arise in these circumstances provided that:- a) there has not been a direct involvement by an individual within the firm in the management of the entity; and b) the firm had its principal client relationship with the creditor or other party, rather than with the company or proprietor of the business; and c) the entity was aware of this. An insolvency practitioner shall however consider all the circumstances before accepting an insolvency appointment, including the effect of any discussions or lack of discussions about the financial affairs of the company with its directors, and whether such circumstances give rise to an unacceptable threat to compliance with the fundamental principles. Where such an investigation was conducted at the request of, or at the instigation of, a secured creditor who then requests an insolvency practitioner to accept an insolvency appointment as an administrator or administrative receiver, the insolvency practitioner shall satisfy them self that the company, acting by its board of directors, does not object to them taking such an insolvency appointment. If the secured creditor does not give prior warning of the insolvency appointment to the company or if such warning is given and the company objects but the secured creditor still wishes to appoint the insolvency practitioner, the insolvency practitioner shall consider whether the circumstances give rise to an unacceptable threat to compliance with the fundamental principles. 53 Section 2520 - Examples relating to previous or existing insolvency appointments 2520.1 Insolvency appointment following an appointment as administrative or other receiver Previous appointment: An individual within the firm has been administrative or other receiver. Proposed appointment: Any insolvency appointment. Response: It is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. An insolvency practitioner shall not accept any insolvency appointment. This restriction does not, however, apply where the individual within the firm was appointed a receiver by the court. In such circumstances, the insolvency practitioner shall however consider whether there are any other circumstances which give rise to an unacceptable threat to compliance with the fundamental principles. 2520.2 Administration or Liquidation following appointment as supervisor of a voluntary arrangement Previous appointment: An individual within the firm has been supervisor of a company voluntary arrangement. Proposed appointment: Administrator or liquidator. Response: An insolvency practitioner may normally accept an appointment as administrator or liquidator. However the insolvency practitioner shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 2520.3 Liquidation following appointment as administrator Previous Appointment: An individual within the firm has been administrator. Proposed Appointment: Liquidator. Response: An insolvency practitioner may normally accept an appointment as liquidator provided the insolvency practitioner has complied with the relevant legislative requirements. However, the insolvency practitioner shall also consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 2520.4 Conversion of members’ voluntary liquation into creditors’ voluntary liquidation Previous appointment: An individual within the firm has been the liquidator of a company in a members’ voluntary liquidation. Proposed appointment: Liquidator in a creditors’ voluntary liquidation, where it is necessary to seek a nomination from the company’s creditors. Response: Where there has been a Significant Professional Relationship, an insolvency practitioner may continue or accept an appointment (subject to creditors’ decision or deemed consent) only if the insolvency practitioner concludes that the company will eventually be able to pay its debts in full, together with interest. However, the insolvency practitioner shall consider whether there are any other circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 2520.5 Bankruptcy following appointment as supervisor of an individual voluntary arrangement Previous appointment: An individual within the firm has been supervisor of an individual voluntary arrangement. Proposed Appointment: Trustee in bankruptcy. Response: An insolvency practitioner may normally accept an appointment as trustee in bankruptcy. However, the insolvency practitioner shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental 54 principles. 55 Section 2530 - Examples in respect of cases conducted under Scots Law 2530.1 Sequestration following appointment as trustee under a trust deed for creditors Previous appointment: An individual within the firm has been trustee under a trust deed for creditors. Proposed appointment: Interim trustee or trustee in a sequestration. Response An insolvency practitioner may normally accept an appointment as an interim trustee or trustee in the sequestration. However, the insolvency practitioner shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 2530.2 Sequestration where the Accountant in Bankruptcy is trustee following appointment as trustee under a trust deed for creditors Previous appointment: An individual within the firm has been trustee under a trust deed for creditors. Proposed appointment: Administering the sequestration under a contract for insolvency services with the Accountant in Bankruptcy. Response: The firm may normally accept an appointment under the contract for insolvency services with the Accountant in Bankruptcy. However, an individual within the firm shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 2530.2 Sequestration or trust deed trustee following appointment as continuing money adviser under a Debt Arrangement Scheme Previous appointment: An individual within the firm has been a continuing money advisor under a revoked Debt Arrangement Scheme relating to the debtor. Proposed appointment: Trustee in a sequestration or a trust deed Response: An insolvency practitioner may normally accept an appointment as a trustee under a trust deed or as a trustee in a sequestration. However, the insolvency practitioner shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 56 Section 2540 - Application in the Republic of Ireland 2540.1 In relation to insolvency practice within the Republic of Ireland, the following amended definitions shall apply: Authorising A prescribed accountancy body under any legislation governing the body administration of insolvency in the Republic of Ireland; A Supervisory Authority established under legislation governing insolvency in the Republic of Ireland; or The Insolvency Service of Ireland established pursuant to section 8 of the Personal Insolvency Act 2012. Insolvency A formal appointment under any legislation in the Republic of Ireland which appointment must be undertaken by an insolvency practitioner. Insolvency An individual who is qualified to act as a liquidator under the Companies Act practitioner 2014 in the Republic of Ireland or a person that is appointed as a receiver to a company or the assets of a company in Ireland. 2540.2 Insolvency practitioners shall comply with the requirements of this Code in relation to insolvency practice within the Republic of Ireland. Referral Fees and Commissions notes that the payment of such fees and commissions to any creditor or members is prohibited and gives rise to a Category 2 offence pursuant to Section 642 of the Companies Act 2014. 2540.3 The following examples describe specific circumstances and relationships that will create threats to compliance with the fundamental principles. The examples are intended to assist an insolvency practitioner and the members of the insolvency team to assess the implications of similar, but different, circumstances and relationships. 2540.4 Liquidation following appointment as a receiver Previous appointment: An individual within the firm has been receiver of any assets of a company or any company within a group with which it is associated. Proposed appointment: Liquidator Response: Where the receivership was completed within the previous 3 years, an insolvency practitioner or an individual within the firm shall not accept an appointment as liquidator as it is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. Where the receivership was completed more than 3 years before the proposed date of winding up a threat to compliance with the fundamental principles might still arise. The Insolvency practitioner or individual within the firm shall evaluate any such threat and consider whether the threat can be eliminated or reduced to an acceptable level by the use of safeguards. 2540.5 An appointment following a significant professional relationship Previous appointment: The firm or an individual within the firm has had a significant professional relationship with a company or any company within a group with which it is associated. Proposed appointment: Any insolvency appointment Response: Where the significant professional relationship was present within the previous 3 years, an insolvency practitioner or an individual within the firm shall not accept an insolvency appointment as it is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. Where the significant prior relationship was terminated more than 3 years before the proposed date of the insolvency appointment a threat to compliance with the fundamental principles might still arise. The insolvency practitioner or individual within the firm shall evaluate any such threat 57  and consider whether the threat can be eliminated or reduced to an acceptable level by use of safeguards. 2540.6 Liquidation following examination Previous appointment: An individual within the firm has been examiner and the examiner is unable to formulate proposals for the survival of the company or where the court fails to confirm the examiner's proposals for the survival of the company, and the company subsequently goes into liquidation (either voluntarily or by order of the court). Response: An insolvency practitioner may normally accept an appointment as liquidator provided the insolvency practitioner has complied with the relevant legislative requirements. However, the insolvency practitioner shall also consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 2540.7 Receivership following examinership Previous appointment: The firm or an individual within the firm has been examiner and the examiner is unable to formulate proposals for the survival of the company or the court fails to confirm the examiner's proposals for the survival of the company, and the company subsequently goes into liquidation (either voluntarily or by order of the court) or a secured lender appoints a receiver. Response: An insolvency practitioner may normally accept an appointment as receiver provided the insolvency practitioner has complied with the relevant legislative requirements. However, the insolvency practitioner shall also consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 2540.8 Insolvency appointment following audit related work Previous relationship: The firm or an individual within the firm has completed audit related work. Response: A significant professional relationship will normally arise where the audit related work was completed within the previous 3 years. An individual within a firm shall not take the insolvency appointment as it is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. Where audit related work was completed more than 3 years before the proposed date of the appointment of the insolvency practitioner a threat to compliance with the fundamental principles might still arise. The insolvency practitioner shall evaluate any such threat and consider whether the threat can be eliminated or reduced to an acceptable level by the use of safeguards. Note - Section 635 of the Companies Act 2014 prohibits an auditor from acting as a liquidator when they are or have been in the previous twenty four months prior to the date of commencement of the insolvency appointment, auditor to any client, even a solvent one. 58 Definitions and interpretation Authorising body A body declared to be a recognised professional body under any legislation governing the administration of insolvency in the United Kingdom. Close or immediate A spouse, civil partner (or equivalent), dependant, parent, child or sibling. family Employee A person subject to a contract of employment or a contract for services with an insolvency practitioner or a firm. Entity Any natural or legal person or any group of such persons, including a partnership. Firm The firm (a sole practitioner, partnership, limited liability partnership or corporation) in which the insolvency practitioner practises together with: a) an entity that controls the firm, through ownership, management or other means b) an entity controlled by the firm, through ownership, management or other means c) an entity with which the firm is under common control through ownership, management or other means. Individual within the firm The insolvency practitioner, any principals in the firm and any employees of the firm. Insolvency appointment A formal appointment under the terms of legislation in the United Kingdom, which must be undertaken by an insolvency practitioner. Insolvency practitioner An individual who is authorised or recognised as an insolvency practitioner in the United Kingdom by an authorising body. Insolvency team All persons under the control or direction of an insolvency practitioner. Network A larger structure: a) that is aimed at co-operation; and b) that is clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources. Principal In respect of a firm: a) which is a company: a director b) which is a partnership: a partner c) which is a limited liability partnership: a member d) which is comprised of a sole practitioner: that person. Alternatively any person within the firm who is held out as being a director, partner or member. 59  ETHICS CODE FOR MEMBERS 1. As a professional membership body promoting high standards of practice in relation to work undertaken by its members, the Insolvency Practitioners Association (“IPA”) requires its members to adhere to certain principles in all aspects of their professional work. 2. Furthermore, one of the bases for recognition (by the Secretary of State for Business, Energy and Industrial Strategy) of the IPA as a body entitled to authorise its members to act as insolvency practitioners, is that the IPA: ▪ will arrange for appropriate ethical guidance to be made available to its members; ▪ will ensure through its ethical code or guide that its members, when accepting appointments as office holders, are and are seen to be independent from influences which could affect their objectivity; and ▪ will firmly but fairly apply its relevant professional and ethical codes or guides in relation to the activities of its members. 3. The Code of Ethics set out below (“the Code”) was produced by the Joint Insolvency Committee and has been adopted in substantially similar terms by all of the bodies recognised under the relevant legislation in England and Wales, Scotland and Ireland to grant licences to insolvency practitioners. The Code is stated to apply to all Insolvency Practitioners. However, all members are required to adhere to the Code and in particular the spirit of the Code (with such modifications as are appropriate in all the circumstances) in all their professional and business activities and in other circumstances where to fail to do so might bring discredit upon themselves or the IPA. 4. The Code will replace all previous Codes of Ethics issued by the Council. For the purposes of Article 66 of the Articles of Association of the IPA misconduct shall include any breach by a member of the Code. March 2020  INSOLVENCY CODE OF ETHICS Table of content GENERAL APPLICATION OF THE CODE 1 Introduction 100 Fundamental Principles 110 Conceptual framework 120 Breaches of the code 130 Record keeping 140 Ethical conflict resolution SPECIFIC APPLICATION OF THE CODE 200 Introduction 210 Insolvency appointments 300 Acting with sufficient expertise 310 Conflicts of interest and professional and personal relationships 320 Specialist advice and services 330 Agencies and referrals 340 Referral fees and commission 350 Inducements, including gifts and hospitality 360 Advertising and marketing for insolvency appointments 370 Dealing with the assets of an entity 380 The insolvency practitioner as an employee 390 Responding to non-compliance with laws and regulations 500 The application of the framework to specific situations 510 – examples that do not relate to a previous or existing insolvency appointment 520 – examples relating to previous or existing insolvency appointments 530 – examples in respect of cases conducted under Scots Law 600 Application in the Republic of Ireland Definitions and interpretation Effective from 1 May 2020 THE PRACTICE OF INSOLVENCY INTRODUCTION 1.1 This Code sets out the obligations of insolvency practitioners to meet the ethical requirements expected of them. 1.2 An authorising body must, so far as is reasonably practicable, act in a way which protects and promotes the public interest. This Code forms part of the framework used to meet this objective. Requirements and Application Material 1.3 A1 Requirements and application material are to be read and applied with the objective of complying with the fundamental principles and applying the conceptual framework. Requirements 1.3 A2. Requirements are designated with the letter “R” and, in most cases, include the word “shall.” The word “shall” in the Code imposes an obligation on an insolvency practitioner to comply with the specific provision in which “shall” has been used. 1.3 A3. In some situations, the Code provides a specific exception to a requirement. In such a situation, the provision is designated with the letter “R” but uses “may” or conditional wording. 1.3 A4 When the word “may” is used in the Code, it denotes permission to take a particular action in certain circumstances, including as an exception to a requirement. It is not used to denote possibility. 1.3 A5 When the word “might” is used in the Code, it denotes the possibility of a matter arising, an event occurring or a course of action being taken. The term does not ascribe any particular level of possibility or likelihood when used in conjunction with a threat, as the evaluation of the level of a threat depends on the facts and circumstances of any particular matter, event or course of action. Application Material 1.4 A1 In addition to requirements, the Code contains application material that provides context relevant to a proper understanding of the Code. In particular, the application material is intended to help an insolvency practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement. While such application material does not of itself impose a requirement, consideration of the material is necessary to the proper application of the requirements of the Code, including application of the conceptual framework. Application material is designated with the letter “A.” 1.4 A2 Where application material includes lists of examples these lists are not intended to be exhaustive. R1.5 In order to protect and promote the public interest, an insolvency practitioner shall observe and comply with this Code. If an insolvency practitioner is prohibited from complying with certain parts of this Code by law or regulation, the insolvency practitioner shall comply with all other parts of this Code. 1.5.A1 The Code establishes the fundamental principles of ethics for insolvency practitioners and provides a framework for insolvency practitioners to: a) identify threats to compliance with the fundamental principles; b) evaluate the significance of the threats identified; and c) apply safeguards, where available and capable of being applied, to reduce the threats to a level at which an insolvency practitioner using the reasonable and informed third party test would likely conclude that the insolvency practitioner complies with the fundamental principles. R1.6 An insolvency practitioner shall use professional judgement in applying this framework. 1.6 A1 The Code also describes how the ethical framework applies in certain situations. It provides examples of actions that might be appropriate to address threats to compliance with the fundamental principles. It also describes situations where no action can address the threats, and consequently, the circumstance or relationship creating the threats needs to be avoided. Scope R1.7 insolvency practitioners shall ensure that the Code is applied at all times in relation to the conduct of an insolvency appointment or circumstances which might lead to an insolvency appointment. R1.8 insolvency practitioners shall follow the fundamental principles, apply the conceptual framework and specific requirements of the Code in all their professional and business activities whether carried out with or without reward and in other circumstances where to fail to do so would bring discredit to the insolvency profession. R1.9 insolvency practitioners shall be guided not merely by the terms but also by the spirit of the Code. 1.9 A1 The Code provides examples of matters to take into account when insolvency practitioners are considering their position, but ethical considerations are not limited to the examples. It is necessary for insolvency practitioners to take into account how their conduct might be perceived by a reasonable and informed third party. R1.10 Although, an insolvency appointment will be personal to the insolvency practitioner rather than their firm or employing organisation, insolvency practitioners shall ensure that work for which they are responsible, which is undertaken by members of the insolvency team on their behalf, is carried out in accordance with the requirements of this Code. FUNDAMENTAL PRINCIPLES General 100.1 A1 There are five fundamental principles of ethics for insolvency practitioners: a) Integrity – to be straightforward and honest in all professional and business relationships. b) Objectivity – not to compromise professional or business judgements because of bias, conflict of interest or undue influence of others. c) Professional Competence and Due Care – to: i. Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation; and ii. Act diligently and in accordance with applicable technical and professional standards. d) Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships. e) Professional Behaviour – to comply with relevant laws and regulations and avoid any conduct that the insolvency practitioner knows or should know might discredit the profession. R100.2 An insolvency practitioner shall comply with each of the fundamental principles. 100.2 A1 The fundamental principles of ethics establish the standard of behaviour expected of an insolvency practitioner. The conceptual framework establishes the approach which an insolvency practitioner is required to apply to assist in complying with those fundamental principles. Paragraphs R101.1 to R105.1 A2 set out requirements and application material related to each of the fundamental principles. 100.2 A2 An insolvency practitioner might face a situation in which complying with one fundamental principle conflicts with complying with one or more other fundamental principles. In such a situation, the insolvency practitioner might consider consulting, on an anonymous basis if necessary, with: • others within the firm or employing organisation. • those charged with governance. • another insolvency practitioner from a different firm. • a professional body. • an authorising body. • legal counsel. However, such consultation does not relieve the insolvency practitioner from the responsibility to exercise professional judgment to resolve the conflict or, if necessary, and unless prohibited by law or regulation, disassociate from the matter creating the conflict. INTEGRITY R101.1 An insolvency practitioner shall comply with the principle of integrity, which requires an insolvency practitioner to be straightforward and honest in all professional and business relationships. 101.1 A1 Integrity implies fair dealing and truthfulness. R101.2 An insolvency practitioner shall not knowingly be associated with reports, returns, communications or other information where the insolvency practitioner believes that the information: a) Contains a materially false or misleading statement; b) Contains statements or information provided recklessly; or c) Omits or obscures required information where such omission or obscurity would be misleading. 101.2 A1 If an insolvency practitioner provides a modified report in respect of such a report, return, communication or other information, the insolvency practitioner is not in breach of paragraph R101.2. R101.3 When an insolvency practitioner becomes aware of having been associated with information described in paragraph R101.2, the insolvency practitioner shall take steps to be disassociated from that information. OBJECTIVITY R102.1 An insolvency practitioner shall comply with the principle of objectivity, which requires an insolvency practitioner not to compromise professional or business judgement because of bias, conflict of interest or undue influence of others. 102.1 A1 Objectivity is the state of mind which has regard to all considerations relevant to the task in hand but no other. R102.2 An insolvency practitioner shall not undertake a professional activity if a circumstance or relationship unduly influences the insolvency practitioner’s professional judgement regarding that activity. PROFESSIONAL COMPETENCE AND DUE CARE R103.1 An insolvency practitioner shall comply with the principle of professional competence and due care, which requires an insolvency practitioner to: a) Attain and maintain professional knowledge and skill at the level required to ensure that a competent professional service is provided, based on current technical and professional standards and relevant legislation; and b) Act diligently and in accordance with applicable technical and professional standards. 103.1 A1 Professional competence requires the exercise of sound judgement in applying professional knowledge and skill when undertaking professional activities. 103.1 A2 Maintaining professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. Continuing professional development enables an insolvency practitioner to develop and maintain the capabilities to perform competently within the professional environment 103.1 A3 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. R103.2 In complying with the principle of professional competence and due care, an insolvency practitioner shall take reasonable steps to ensure that those working in a professional capacity under the insolvency practitioner’s authority have appropriate training and supervision. R103.3 Where appropriate, an insolvency practitioner shall make users of the insolvency practitioner’s services or activities or their employing organisation aware of the limitations inherent in the services or activities. CONFIDENTIALITY 104.1 A1 The principle of confidentiality is not only to keep information confidential, but also to take all reasonable steps to preserve confidentiality. Whether information is confidential or not will depend on its nature. R104.2 An insolvency practitioner in the role as office holder has a professional duty to report openly to those with an interest in the outcome of the insolvency. An insolvency practitioner shall always report on their acts and dealings as fully as possible given the circumstances of the case, in a way that is transparent and understandable bearing in mind the expectations of others and what a reasonable and informed third party would consider appropriate. R104.3 An insolvency practitioner shall comply with the principle of confidentiality, which requires an insolvency practitioner to respect the confidentiality of information acquired as a result of professional and business relationships. An insolvency practitioner shall: a) Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member; b) Maintain confidentiality of information within the firm or employing organisation; c) Maintain confidentiality of information disclosed by the employing organisation; d) Not disclose confidential information acquired as a result of professional and business relationships outside the firm or employing organisation without proper and specific authority, unless there is a legal or professional duty or right to disclose; e) Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the insolvency practitioner or for the advantage of a third party; f) Not use or disclose any confidential information, either acquired or received as a result of a professional or business relationship, after that relationship has ended; and g) Take reasonable steps to ensure that personnel under the insolvency practitioner’s control, and individuals from whom advice and assistance are obtained, respect the insolvency practitioner’s duty of confidentiality. 104.3 A1 There are circumstances where insolvency practitioners are or might be required to disclose confidential information or when such disclosure might be appropriate: a) Disclosure is required by law, for example: i. producing statutory reports for the creditors of the insolvent; ii. submitting reports on the conduct of directors of an insolvent entity; iii. production of documents or other provision of evidence in the course of legal proceedings; or iv. disclosure to the appropriate public authorities of infringements of the law that come to light; b) Disclosure is permitted by law and is authorised by the employing organisation; and c) There is a professional duty or right to disclose, when not prohibited by law: i. To comply with the quality review of an authorising body; ii. To respond to an inquiry or investigation by an authorising body or the oversight body; iii. To protect the professional interests of an insolvency practitioner in legal proceedings; or iv. To comply with technical and professional standards, including ethics requirements. 104.3 A2 In deciding whether to disclose confidential information, factors to consider, depending on the circumstances, include: • Whether the interests of any parties, including third parties whose interests might be affected, could be harmed if the client or employing organisation consents to the disclosure of information by the insolvency practitioner. • Whether all the relevant information is known and substantiated, to the extent practicable. Factors affecting the decision to disclose include: o Unsubstantiated facts. o Incomplete information. o Unsubstantiated conclusions. • The proposed type of communication, and to whom it is addressed. • Whether the parties to whom the communication is addressed are appropriate recipients. R104.4 An insolvency practitioner shall continue to comply with the principle of confidentiality even after the end of the relationship between the insolvency practitioner and an employing organisation. When changing employment or accepting an insolvency appointment , the insolvency practitioner is entitled to use prior experience but shall not use or disclose any confidential information acquired or received as a result of a professional or business relationship. PROFESSIONAL BEHAVIOUR R105.1 An insolvency practitioner shall comply with the principle of professional behaviour, which requires an insolvency practitioner to comply with relevant laws and regulations and avoid any conduct that the insolvency practitioner knows or should know might discredit the profession. An insolvency practitioner shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the insolvency profession, and as a result would be incompatible with the fundamental principles. 105.1 A1 Conduct that might discredit the insolvency profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession. 105.1 A2 The concept of professional behaviour implies that it is appropriate for insolvency practitioners to conduct themselves with courtesy and consideration towards all with whom they come into contact when performing their work. THE CONCEPTUAL FRAMEWORK Introduction 110.1 The circumstances in which insolvency practitioners operate might create threats to compliance with the fundamental principles. This section sets out requirements and application material, including a conceptual framework, to assist insolvency practitioners in complying with the fundamental principles and meeting their responsibility to act in the public interest. Such requirements and application material accommodate the wide range of facts and circumstances, including the various professional activities, interests and relationships, that create threats to compliance with the fundamental principles. In addition, they deter insolvency practitioners from concluding that a situation is permitted solely because that situation is not specifically prohibited by the Code. 110.2 The conceptual framework specifies an approach for an insolvency practitioner to: a) identify threats to compliance with the fundamental principles; b) evaluate the threats identified; and c) address the threats by eliminating or reducing them to an acceptable level. Requirements and Application Material General R111.1 The insolvency practitioner shall apply the conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles set out in paragraphs 100 to 105. R111.2 An insolvency practitioner shall take particular care to identify the existence of threats that exist prior to or at the time of taking an insolvency appointment or which at that stage, it might reasonably be expected could arise during the course of the insolvency appointment. R111.3 In taking steps to identify any threats, an insolvency practitioner shall have regard to relationships whereby the firm is held out as being part of a network. R111.4 When dealing with an ethics issue, the insolvency practitioner shall consider the context in which the issue has arisen or might arise. Where an insolvency practitioner is performing professional activities pursuant to the insolvency practitioner’s relationship with the firm, whether as a contractor, employee or owner, the individual shall comply with the provisions of this Code. R111.5 When applying the conceptual framework, the insolvency practitioner shall: a) exercise professional judgement; b) remain alert for new information and to changes in facts and circumstances; and c) use the reasonable and informed third party test described in paragraph 113.1 A1. Exercise of Professional Judgement 112.1 A1 Professional judgement involves the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, including the nature and  scope of the particular professional activities, and the interests and relationships involved. In relation to undertaking professional activities, the exercise of professional judgement is required when the insolvency practitioner applies the conceptual framework in order to make informed decisions about the courses of actions available, and to determine whether such decisions are appropriate in the circumstances. 112.1 A2 An understanding of known facts and circumstances is a prerequisite to the proper application of the conceptual framework. Determining the actions necessary to obtain this understanding and coming to a conclusion about whether the fundamental principles have been complied with also require the exercise of professional judgement. 112.1 A3 In exercising professional judgement to obtain this understanding, the insolvency practitioner might consider, among other matters, whether: • There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the insolvency practitioner. • There is an inconsistency between the known facts and circumstances and the insolvency practitioner’s expectations. • The insolvency practitioner’s expertise and experience are sufficient to reach a conclusion. • There is a need to consult with others with relevant expertise or experience. • The information provides a reasonable basis on which to reach a conclusion. • The insolvency practitioner’s own preconception or bias might be affecting the insolvency practitioner’s exercise of professional judgement. • There might be other reasonable conclusions that could be reached from the available information. Reasonable and Informed Third Party 113.1 A1 The reasonable and informed third party test is a consideration by the insolvency practitioner about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the insolvency practitioner knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an insolvency practitioner, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the insolvency practitioner’s conclusions in an impartial manner. Identifying Threats R114.1 The insolvency practitioner shall identify threats to compliance with the fundamental principles. 114.1 A1 An understanding of the facts and circumstances, including any professional activities, interests and relationships that might compromise compliance with the fundamental principles, is a prerequisite to the insolvency practitioner’s identification of threats to such compliance. The existence of certain conditions, policies and procedures established by the profession, legislation, regulation, the firm, or the employing organisation that can enhance  the insolvency practitioner acting ethically might also help identify threats to compliance with the fundamental principles. 114.1 A2 Below there are examples of such conditions, policies and procedures which are also factors that are relevant in evaluating the level of threats (see also Professional and personal relationships): a) leadership of the firm that stresses the importance of compliance with the fundamental principles; b) policies and procedures to implement and monitor quality control of engagements; c) documented policies regarding the need to identify threats to compliance with the fundamental principles, evaluate the significance of those threats, and apply safeguards to eliminate or reduce the threats to an acceptable level; d) documented internal policies and procedures requiring compliance with the fundamental principles; e) policies and procedures to identify the existence of any threats to compliance with the fundamental principles before deciding whether to accept an insolvency appointment; f) policies and procedures to identify interests or relationships between the firm or individuals within the firm and third parties; g) policies and procedures to prohibit individuals who are not members of the insolvency team from inappropriately influencing the outcome of an insolvency appointment; h) timely communication of a firm’s policies and procedures, including any changes to them, to all individuals within the firm, and appropriate training and education on such policies and procedures; i) designating a member of senior management to be responsible for overseeing the adequate functioning of the firm’s quality control system; j) a disciplinary mechanism to promote compliance with policies and procedures; k) published policies and procedures to encourage and empower individuals within the firm to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concerns them. 114.1 A3 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. It is not possible to define every situation that creates threats. In addition, the nature of engagements and work assignments might differ and, consequently, different types of threats might be created. 114.1 A4 Threats to compliance with the fundamental principles fall into one or more of the following categories: a) Self-interest threat – the threat that financial or other interests of the firm, an individual within the firm or a close or immediate family member of an individual within the firm will inappropriately influence the insolvency practitioner’s judgement or behaviour; b) Self-review threat – the threat that the insolvency practitioner will not appropriately evaluate the results of a previous judgement made or service performed by an individual  within the firm, on which the insolvency practitioner will rely when forming a judgement as part of providing a current service; c) Advocacy threat – the threat that an individual within the firm will promote a position or opinion to the point that the insolvency practitioner’s objectivity is compromised; d) Familiarity threat –the threat that due to a long or close relationship, an individual within the firm will be too sympathetic or antagonistic to the interests of others or too accepting of their work; and e) Intimidation threat – the threat that an insolvency practitioner will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the insolvency practitioner. 114.1 A5 The following are examples of facts and circumstances within each category of threats that might create threats for an insolvency practitioner: a) Examples of circumstances that might create self-interest threats for an insolvency practitioner include: i. an individual within the firm having an interest in a creditor or potential creditor with a claim which requires subjective adjudication, or having an interest in a party to a transaction; ii. an individual within the firm having a close business relationship with a creditor, potential creditor or a party to a transaction; iii. the insolvency practitioner discovering a significant error when evaluating the results of a previous service performed by an individual within the firm; iv. concern about the possibility of damaging a business relationship; v. concern about future employment. b) Examples of circumstances that might create self-review threats for an insolvency practitioner include: i. accepting an insolvency appointment in respect of an entity where an individual within the firm has recently been employed by or seconded to that entity; ii. an insolvency practitioner or the firm having previously carried out professional work of any description, including sequential insolvency appointments, for an entity. c) Examples of circumstances that might create advocacy threats for an insolvency practitioner include: i. acting in an advisory capacity for a creditor of the insolvent entity; ii. acting in an advisory capacity to an entity prior to its insolvency; iii. acting as an advocate for a client of the firm in litigation or a dispute with the insolvent entity. d) Examples of circumstances that might create familiarity threats for an insolvency practitioner include:  i. an individual within the firm or a close or immediate family member having a close relationship with a director, officer, employee or any individual having a financial interest in the insolvent entity; ii. an individual within the firm or a close or immediate family member having a close relationship with a potential purchaser of the insolvent entity’s assets and/or business or any individual having a financial interest in the potential purchaser. In this regard a close relationship includes both a close professional relationship and a close personal relationship. e) Examples of circumstances that might create intimidation threats for an insolvency practitioner include: i). an individual within the firm being threatened with dismissal or replacement; ii). an individual within the firm being threatened with litigation, complaint or adverse publicity; iii). an individual within the firm being threatened with violence or other reprisal. 114.1 A6 and a threat might affect compliance with more than A circumstance might create more than one threat, one fundamental principle. Evaluating Threats R115.1 When the insolvency practitioner identifies a threat to compliance with the fundamental principles, the insolvency practitioner shall evaluate whether such a threat is at an acceptable level. Acceptable Level 115.1 A1 An acceptable level is a level at which an insolvency practitioner using the reasonable and informed third party test would likely conclude that the insolvency practitioner complies with the fundamental principles. Factors Relevant in Evaluating the Level of Threats 115.2 A1 The consideration of qualitative as well as quantitative factors is relevant in the insolvency practitioner’s evaluation of threats, as is the combined effect of multiple threats, if applicable. 115.2 A2 The existence of conditions, policies and procedures described in paragraph 114.1 A1 A2 might also be factors that are relevant in evaluating the level of threats to compliance with fundamental principles. Examples of such conditions, policies and procedures include: a) corporate governance requirements. b) educational, training and experience requirements for the profession. c) professional standards. d) effective complaint systems which enable the insolvency practitioner and the general public to draw attention to unethical behaviour. e) an explicitly stated duty to report breaches of ethics requirements. f) professional or regulatory monitoring and disciplinary procedures.  g) external review by a legally empowered third party of the reports, returns, communications or information produced by the insolvency practitioner. Consideration of New Information or Changes in Facts and Circumstances R115.3 If the insolvency practitioner becomes aware of new information or changes in facts and circumstances that might impact whether a threat has been eliminated or reduced to an acceptable level, the insolvency practitioner shall re-evaluate and address that threat accordingly. 115.3 A1 Remaining alert throughout an insolvency appointment assists the insolvency practitioner in determining whether new information has emerged or changes in facts and circumstances have occurred that: a) impact the level of a threat; or b) affect the insolvency practitioner’s conclusions about whether safeguards applied continue to be appropriate to address identified threats. 115.3 A2 If new information results in the identification of a new threat, the insolvency practitioner is required to evaluate and, as appropriate, address this threat. Addressing Threats R116.1 If the insolvency practitioner determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the insolvency practitioner shall address the threats by eliminating them or reducing them to an acceptable level. The insolvency practitioner shall do so by: a) eliminating the circumstances, including interests or relationships, that are creating the threats; b) applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or c) declining or ending the insolvency appointment. Actions to Eliminate Threats 116.1 A1 Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating the threat. However, there are some situations in which threats can only be addressed by declining or ending the insolvency appointment or resigning altogether from the firm or the employing organisation. This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level. Safeguards 116.1 A2 Safeguards are actions, individually or in combination, that the insolvency practitioner takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level. 116.1 A3 Safeguards vary depending on the facts and circumstances. Examples of actions that in certain circumstances might be safeguards to address threats include:  • Assigning additional time and qualified personnel to required tasks when an insolvency appointment has been accepted might address a self-interest threat. • Having an appropriate reviewer who was not a member of the team review the work performed or advise as necessary might address a self-review threat. • Involving another insolvency practitioner to perform or re-perform part of the engagement might address self-interest, self-review, advocacy, familiarity or intimidation threats. • Disclosing any referral fees or commission arrangements received for recommending services or products might address a self-interest threat. Safeguards specific to an insolvency appointment are considered later in the Code. Consideration of Significant Judgements Made and Overall Conclusions Reached R116.2 The insolvency practitioner shall form an overall conclusion about whether the actions that the insolvency practitioner takes, or intends to take, to address the threats created will eliminate those threats or reduce them to an acceptable level. In forming the overall conclusion, the insolvency practitioner shall: a) review any significant judgements made or conclusions reached; and b) use the reasonable and informed third party test. BREACHES OF THE CODE R120.1 An insolvency practitioner who identifies a breach of any other provision of the Code shall evaluate the significance of the breach and its impact on the insolvency practitioner’s ability to comply with the fundamental principles. The insolvency practitioner shall also: a) take whatever actions might be available, as soon as possible, to address the consequences of the breach satisfactorily; and b) determine whether to report the breach to the relevant parties. 120.1 A1 Relevant parties to whom such a breach might be reported include those who might have been affected by it, or an authorising body. RECORD KEEPING 130.1 A1 It will always be for the insolvency practitioner to justify their actions. An insolvency practitioner will be expected to be able to demonstrate the steps that they took and the conclusions that they reached in identifying, evaluating and responding to any threats, both leading up to and during an insolvency appointment, by reference to written contemporaneous records. R130.2 The insolvency practitioner shall document: a) the facts. b) any communications with, and parties with whom the matters were discussed. c) the courses of action considered, the judgements made and the decisions that were taken. d) the safeguards applied to address the threats when applicable. e) how the matter was addressed. f) where relevant, why it was appropriate to accept or continue the insolvency appointment. 130.2 A1 The records an insolvency practitioner maintains, in relation to the steps that they took and the conclusions that they reached, are expected to be sufficient to enable a reasonable and informed third party to reach a view on the appropriateness of their actions. ETHICAL CONFLICT RESOLUTION 140.1 An insolvency practitioner might be required to resolve a conflict in complying with the fundamental principles. 140.1 A1 When initiating either a formal or informal conflict resolution process, the following factors, either individually or together with other factors, might be relevant to the resolution process: a) relevant facts b) ethical issues involved c) fundamental principles related to the matter in question d) established internal procedures e) alternative courses of action. 140.1 A2 Having considered the relevant factors, it is necessary for an insolvency practitioner to determine the appropriate course of action, weighing the consequences of each possible course of action. If the matter remains unresolved, the insolvency practitioner might wish to consult with other appropriate persons within the firm for help in obtaining resolution. 140.1 A3 Where a matter involves a conflict with, or within, an entity, an insolvency practitioner will need to decide whether to consult with those charged with governance of the entity, such as the board of directors or senior management team. R140.2 The insolvency practitioner shall document the substance of the issue, the details of any discussions held, and the decisions made concerning that issue. 140.2 A1 Reference should be made to Record Keeping (130). 140.2 A2 The insolvency practitioner is expected to be seen to act in such a way that threats to the fundamental principles are adequately addressed. Therefore, it is important that the insolvency practitioner considers disclosure, for example, to the court or to the creditors and other interested parties of the existence of any threat, together with the safeguards identified and applied. 140.2 A3 If a significant conflict cannot be resolved, an insolvency practitioner might consider obtaining advice from their authorising body or from legal advisors. The insolvency practitioner generally can obtain guidance on ethical issues without breaching the fundamental principle of confidentiality if the matter is discussed with their authorising body on an anonymous basis or with a legal advisor under the protection of legal privilege. R140.3 If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, an insolvency practitioner shall, where possible, refuse to remain associated with the matter creating the conflict. The insolvency practitioner shall determine whether, in the circumstances, it is appropriate to withdraw from the insolvency appointment, or to resign altogether from the firm or the employing organisation. SPECIFIC APPLICATION OF THE CODE Introduction 200.1 This part of the Code describes how the framework applies in certain situations to insolvency practitioners. This part does not describe all of the circumstances and relationships that could be encountered by an insolvency practitioner that create or could create threats to compliance with the fundamental principles. Therefore, the insolvency practitioner is encouraged to be alert for such circumstances and relationships. Requirements and application material R200.2 An insolvency practitioner shall not knowingly engage in any activity that impairs or might impair integrity, objectivity or the good reputation of the profession and as a result would be incompatible with the fundamental principles. R200.3 An insolvency practitioner shall exercise judgement to determine how best to deal with threats that are not at an acceptable level, whether by applying safeguards to eliminate the threat or reduce it to an acceptable level or, where possible, by refusing to remain associated with the matter creating the conflict. 200.3 A1 In exercising this judgement, an insolvency practitioner is expected to consider whether a reasonable and informed third party, weighing all the specific facts and circumstances available to the insolvency practitioner at that time, would be likely to conclude that the threats would be eliminated or reduced to an acceptable level by the application of safeguards, such that compliance with the fundamental principles is not compromised. 200.3 A2 In the work environment, safeguards will vary depending on the facts and circumstances. Work environment safeguards comprise safeguards existing across the firm and safeguards specific to an insolvency appointment. 200.3 A3 Examples of actions that might be safeguards specific to an insolvency appointment include: a) consulting an independent third party, such as an authorising body or another insolvency practitioner; b) obtaining the views of a committee of creditors; c) disclosing ethical issues to creditors and other interested parties; d) involving another insolvency practitioner to perform or re-perform part of the engagement; e) obtaining legal advice from a solicitor, barrister or advocate with appropriate experience and expertise. General conduct R200.4 Where circumstances are dealt with by statute or secondary legislation, an insolvency practitioner shall comply with such provisions. 200.5 The practice of insolvency is principally governed by statute and secondary legislation and in many cases is subject ultimately to the control of the court. R200.6 An insolvency practitioner shall also comply with any relevant judicial authority relating to their conduct and any directions given by the court. R200.7 An insolvency practitioner shall act in a manner appropriate to their position (as an officer of the court where applicable) and in accordance with any quasi-judicial, fiduciary or other duties that the insolvency practitioner might be under. R200.8 An insolvency practitioner shall comply with standards or regulations issued by their authorising body. R200.9 An insolvency practitioner shall also have regard to guidance relevant to the conduct of an insolvency appointment or work that might lead to an insolvency appointment which is issued by their authorising body, the Insolvency Service and other appropriate organisations. INSOLVENCY APPOINTMENTS Introduction 210.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 210.2 Acceptance of an insolvency appointment might create a threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and application material R210.3 Before agreeing to accept any insolvency appointment (including a joint appointment), an insolvency practitioner shall determine whether acceptance would create any threats to compliance with the fundamental principles. 210.3 A1 Of particular importance are threats to the fundamental principle of objectivity created by conflicts of interest. These are considered in more detail in the section on conflicts of interest (paragraphs 310 to 311.2 A4). 210.3 A2 When seeking to identify threats to the fundamental principles, an insolvency practitioner will need to identify and evaluate any professional or personal relationships that threaten compliance with the fundamental principles (see Acting with sufficient expertise, 300 below). The insolvency practitioner will then need to determine the appropriate response to any threats arising from any such relationships, including the identifying and applying appropriate safeguards. R210.4 If the insolvency practitioner determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the insolvency practitioner shall address the threats by eliminating them or reducing them to an acceptable level. The insolvency practitioner shall do so by: a) Eliminating the circumstances, including interests or relationships, that are creating the threats; or b) Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level. R210.5 An insolvency practitioner shall not accept an insolvency appointment where a threat to the fundamental principles has been identified unless the threat is eliminated or reduced to an acceptable level. 210.5 A1 Factors that are relevant in evaluating the level of a threat include measures that prevent unauthorised disclosure of confidential information These measures include: • The existence of separate practice areas for specialty functions within the firm, which might act as a barrier to the passing of confidential client information between practice areas. • Policies and procedures to limit access to client files. • Confidentiality agreements signed by personnel and partners of the firm. • Separation of confidential information physically and electronically.  • Specific and dedicated training and communication. 210.5 A2 Examples of actions that might be safeguards include: a) involving another insolvency practitioner, either from within or out with the firm as appropriate to the circumstances, to review the work done, perform or re-perform part of the work or otherwise advise as necessary. This could include another insolvency practitioner taking a joint appointment; b) changing members of the insolvency team or the use of separate staff; c) terminating the financial or business relationship that gives rise to the threat; d) seeking directions from the court. 210.5 A3 It is important that, prior to the insolvency appointment, the insolvency practitioner considers disclosure, to the court or to the creditors on whose behalf the insolvency practitioner would be appointed to act, of the existence of any threat, together with the safeguards identified and applied, and that no objection is made to the insolvency practitioner being appointed. 210.5 A4 Where an insolvency practitioner is specifically precluded by this Code from accepting an insolvency appointment as an individual, a joint appointment is not an appropriate safeguard and would not make accepting the insolvency appointment appropriate. 210.5 A5 An insolvency practitioner will need to exercise professional judgement to determine the appropriate action when threats have been identified. In exercising their judgement, an insolvency practitioner is expected to take into account whether a reasonable and informed third party, weighing all the specific facts and circumstances available to the insolvency practitioner at the time, would be likely to conclude that the threats would be eliminated or reduced to an acceptable level, such that compliance with the fundamental principles is not compromised. R210.6 An insolvency practitioner might encounter situations in which the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threats to an acceptable level. Where this is the case, the insolvency practitioner shall not accept the insolvency appointment. R210.7 Following the acceptance of an insolvency appointment, the insolvency practitioner shall keep under review any identified threats, and the insolvency practitioner shall be mindful that other threats to the fundamental principles could arise. 210.7 A1 Remaining alert throughout the insolvency appointment will assist the insolvency practitioner in determining whether new information has emerged or changes in facts and circumstances have occurred that: a) impact the level of a threat; or b) affect the insolvency practitioner’s conclusions about whether safeguards applied continue to be appropriate to address identified threats. Mergers 210.8 A1 If firms merge, after the merger, they are to be treated as one firm for the purposes of assessing threats to the fundamental principles. R210.9 At the time of the merger, the insolvency practitioner shall review existing insolvency appointments and identify any threats to the fundamental principles. 210.9 A1 Principals and employees of the merged firm will become subject to common ethical constraints in relation to accepting new insolvency appointments to clients of either of the former firms. However existing insolvency appointments which are rendered in apparent breach of the Code by the merger need not be judged to be so automatically, provided that a considered review of the situation by the firm discloses no obvious and immediate ethical conflict. R210.10 Where an individual within the firm has, in any former capacity, undertaken work upon the affairs of an entity that is incompatible with an insolvency appointment of the new firm, the individual shall not work or be employed on that assignment. ACTING WITH SUFFICIENT EXPERTISE Introduction 300.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 300.2 The fundamental principle of professional competence and due care requires that an insolvency practitioner only accepts an insolvency appointment when the insolvency practitioner has or can acquire sufficient expertise. For example, a self-interest threat to the fundamental principle of professional competence and due care is created if the insolvency practitioner or the insolvency team does not possess or cannot acquire the competencies necessary to carry out the insolvency appointment. Acquiring in this context includes obtaining the expertise from elsewhere by employing experts or additional resources. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material General R300.3 An insolvency practitioner shall not intentionally mislead an employing organisation as to the level of expertise or experience possessed. 300.3 A1 The principle of professional competence and due care requires that an insolvency practitioner only undertake significant tasks for which the insolvency practitioner has, or can obtain, sufficient training or experience. 300.3 A2 A self-interest threat to compliance with the principle of professional competence and due care might be created if an insolvency practitioner has: • insufficient time for performing or completing the relevant duties; • incomplete, restricted or otherwise inadequate information for performing the duties; • insufficient experience, training and/or education; • inadequate resources for the performance of the duties. 300.3 A3 Factors that are relevant in evaluating the level of such a threat include: • the extent to which the insolvency practitioner is working with others; • the relative seniority of the insolvency practitioner in the firm; • the level of supervision and review applied to the work. 300.3 A4 Factors to be considered in evaluating expertise include: a) an appropriate knowledge and understanding of the entity, its owners, managers and those responsible for its governance and business activities; b) an appropriate understanding of the nature of the entity’s business, the complexity of its operations, the specific requirements of the engagement and the purpose, nature and scope of the work to be performed; c) knowledge of relevant industries and subject matters;  d) possessing or obtaining experience of relevant regulatory and reporting requirements; e) availability of sufficient staff with the necessary competencies; f) access to experts where necessary; g) complying with quality control policies and procedures designed to provide reasonable assurance that specific engagements are accepted only when they can be performed competently. 300.3 A5 Maintaining and acquiring professional competence requires a continuing awareness and understanding of relevant technical and professional developments. 300.3 A6 Examples of actions that might be safeguards to address such threats include: • obtaining assistance or training from someone with the necessary expertise. • ensuring that there is adequate time available for performing the relevant duties. R300.4 If a threat to compliance with the principle of professional competence and due care cannot be addressed, an insolvency practitioner shall determine whether to decline to perform the duties in question or accept or continue the insolvency appointment. If the insolvency practitioner determines that declining to accept the insolvency appointment is appropriate, the insolvency practitioner shall communicate the reasons. R300.5 The insolvency practitioner shall keep under review the expertise required throughout the insolvency appointment CONFLICTS OF INTEREST AND PROFESSIONAL AND PERSONAL RELATIONSHIPS Introduction 310.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 310.2 A conflict of interest creates threats to compliance with the principle of objectivity and might create threats to compliance with the other fundamental principles. 310.3 Where a conflict of interest arises, the preservation of confidentiality will be of paramount importance. 310.4 This section sets out specific requirements and application material relevant to applying the conceptual framework to conflicts of interest. Requirements and Application Material General R311.1 An insolvency practitioner shall not allow a conflict of interest to compromise professional or business judgement. R311.2 An insolvency practitioner might encounter circumstances where a threat to the principle of objectivity or other fundamental principles cannot be eliminated and safeguards cannot be applied to reduce the threat to an acceptable level. Where this is the case the insolvency practitioner shall not accept the insolvency appointment. 311.2 A1 Examples of circumstances that might create a conflict of interest include where a significant relationship has existed with the entity or someone connected with the entity, or where an insolvency practitioner: • has to deal with conflicting or competing interests between entitles over whom they, or another insolvency practitioner in their firm, is appointed. • or another insolvency practitioner in their firm has previously acted as an insolvency office holder to a company with a common director, or common directors. Where the insolvency practitioner has been appointed officeholder to a number of insolvent companies with the same director or directors, there will be an increased risk of a conflict of interest arising. • has, or others in their firm have, previously carried out one or more assignments for an entity and / or its wider group and they are appointed as an insolvency office holder to the entity or its connected entities. • has, or others in their firm have, previously carried out one or more assignments for an entity’s charge holders or stakeholders and the insolvency practitioner is appointed as an insolvency office holder to the entity or its connected entities. • is appointed administrator by a floating charge holder, under a recent charge, and the assets are sold to a purchaser and the purchaser is connected to the floating charge holder. • is appointed to act as supervisor of a debtor’s IVA or trustee in a debtor’s bankruptcy or sequestration, and has, or another insolvency practitioner in the same firm, has been appointed as an insolvency officeholder to a company of which the debtor is a director, or  was a director in the past three years. • is appointed to deal with an insolvent individual’s affairs, and the insolvency practitioner, or another individual in their firm, was involved in bringing about the individual’s insolvency. There could be an increased risk of a conflict of interest where the insolvency practitioner has a claim for outstanding costs. 311.2 A2 There will be an increased risk of a conflict arising where an insolvency practitioner or their firm has carried out a number of previous assignments for an entity, its group or its charge holders or stakeholders. There will also be an increased risk if the previous assignments took place over an extended period of time. The level of risk will also depend on the services that were provided and the nature of the work carried out. 311.2 A3 There will be an increased risk where an insolvency practitioner has, or others in their firm have, carried out one or more pre-appointment engagements for the entity, and the insolvency practitioner is appointed as an insolvency officeholder, and they, or another insolvency practitioner in their firm is subsequently appointed officeholder in a further insolvency process. 311.2 A4 The fact that an insolvency practitioner, or their firm, might not have been formally engaged to carry out an assignment, or might not have been paid for their work, does not negate the possibility of a conflict of interest arising. Professional and personal relationships Introduction 312.1 The environment in which insolvency practitioners work and the relationships formed in their professional and personal lives can lead to threats to the fundamental principle of objectivity. Requirements and Application Material R312.2 The principle of objectivity might be threatened if any individual within the firm, the close or immediate family of an individual within the firm or the firm itself, has or has had a professional or personal relationship which relates to the insolvency appointment being considered. 312.2 A1 Relationships could include (but are not restricted to) relationships with: a) the entity; b) senior management or any director or shadow director or former director or shadow director of the entity; c) shareholders or Persons of Significant Control of the entity; d) any Principal or employee of the entity; e) business partners of the entity; f) companies or entities controlled by the entity; g) companies which are under common control; h) potential purchasers i) creditors  j) funders, including shareholders, private equity houses and debenture holders of the entity; k) debtors of the entity; l) close or immediate family of the entity (if an individual) or its officers (if a corporate body); m) others with commercial relationships with the firm or personal relationships with an individual within the firm. 312.2 A2 The examples above are not exhaustive, and the substance of any relationship should be considered. R312.3 An insolvency practitioner shall ensure that the firm has policies and procedures to identify relationships between individuals within the firm and third parties in a way that is proportionate and reasonable in relation to the insolvency appointment being considered. R312.4 Before accepting an insolvency appointment, an insolvency practitioner shall take reasonable steps to identify circumstances (including any relationships) that might create a conflict of interest, and therefore a threat to compliance with one or more of the fundamental principles. Such steps shall include identifying: a) the nature of the relevant interests and relationships between all stakeholders; and b) the nature, extent and timing of any prior work for the entity or connected entities and its implication for all stakeholders. 312.4 A1 An effective conflict identification process assists an insolvency practitioner when taking reasonable steps to identify interests and relationships that might create an actual or potential conflict of interest, both before determining whether to accept an insolvency appointment and throughout the appointment. Such a process includes considering matters identified by external parties, for example directors of insolvent entities or insolvent individuals. The earlier an actual or potential conflict of interest is identified, the greater the likelihood of the accountant being able to address threats created by the conflict of interest. 312.4 A2 An effective process to identify actual or potential conflicts of interest will take into account factors such as: • the nature of any previous work carried out for the entity or connected entities • the nature of the insolvency appointment • the size of the firm • the size and nature of the client base • the structure of the firm, for example, the number and geographic location of offices. R312.5 Where a professional or personal relationship of the type described in paragraph 312.2 A1 has been identified the insolvency practitioner shall evaluate the impact of the relationship in the context of the insolvency appointment being sought or considered. 312.5 A1 Issues to consider in evaluating whether a relationship creates a threat to the fundamental principles include the following: a) The nature of the previous duties undertaken by a firm during an earlier relationship with the entity.  b) The impact of the work conducted by the firm on the financial state and/or the financial stability of the entity in respect of which the insolvency appointment is being considered. c) Whether the fees for the work or the costs incurred is or was significant to the insolvency practitioner, the insolvency practitioner’s department or the firm itself. d) Whether the fee received for the work or the cost of the work was substantial. e) How recently any professional work was carried out. It is likely that greater threats will arise (or could be seen to arise) where work has been carried out within the previous three years. However, there might still be instances where, in respect of non-audit work, any threat is at an acceptable level. Conversely, there might be situations whereby the nature of the work carried out was such that a considerably longer period will need to have elapsed before any threat can be reduced to an acceptable level. f) Whether the insolvency appointment being considered involves consideration of any work previously undertaken by the firm for that entity. g) The nature of any personal relationship and the proximity of the insolvency practitioner to the individual with whom the relationship exists and, where appropriate, the proximity of that individual to the entity in relation to which the insolvency appointment relates. h) Whether any reporting obligations will arise in respect of the relevant individual with whom the relationship exists (e.g. an obligation to report on the conduct of directors and shadow directors of a company to which the insolvency appointment relates). i) The nature of any previous duties undertaken by an individual within the firm during any earlier relationship with the entity. j) The extent of the insolvency team’s familiarity with the individuals connected with the entity. 312.5 A2 When evaluating the nature of any previous work done, an insolvency practitioner is expected to take into account any work done, even if it was not subject to a formal engagement and / or did not generate a fee for the firm. R312.6 Having identified and evaluated a relationship that might create a threat to the fundamental principles, the insolvency practitioner shall consider their response including possible actions to reduce the threat to an acceptable level. 312.6 A1 Examples of actions which might be safeguards to reduce the level of threat created by a professional or personal relationship to an acceptable level are considered in paragraph 210.5 A2. Examples of other safeguards include: a) terminating (where possible) the financial or business relationship giving rise to the threat. b) disclosure of the relationship and any financial benefit received by the firm (whether directly or indirectly) to the entity or to those on whose behalf the insolvency practitioner would be appointed to act. 312.6 A2 While an insolvency practitioner might not be able to withdraw from the team, the threat created by another individual’s professional or personal relationship could be reduced to an acceptable level by that individual withdrawing from the insolvency team. R 312.7 An insolvency practitioner could encounter situations in which no action can be taken to  eliminate a threat arising from a professional or personal relationship, or to reduce it to an acceptable level. In such situations, the relationship in question will constitute a significant professional relationship or a significant personal relationship. Where this is case the insolvency practitioner shall not accept the insolvency appointment. R312.8 An insolvency practitioner shall always consider the perception of others when deciding whether to accept an insolvency appointment. 312.8 A1 While an insolvency practitioner might regard a relationship as not being significant to the insolvency appointment, the perception of others could differ and this might in some circumstances be sufficient to make the relationship significant. In considering perception, this needs to be considered on the basis of a reasonable and informed third party, weighing up all the specific facts and circumstances available to the insolvency practitioner at that time. R312.9 The insolvency practitioner shall document: a) the facts. b) any communications with, and parties with whom the matters were discussed. c) the courses of action considered, the judgements made and the decisions that were taken. d) the safeguards applied to address the threats when applicable. e) how the matter was addressed. f) where relevant, why it was appropriate to accept or continue the insolvency appointment. R312.10 The records an insolvency practitioner maintains, in relation to the steps that they took and the conclusions that they reached, shall be sufficient to enable a reasonable and informed third party to reach a view on the appropriateness of their actions. Changes in Circumstances R313.1 An insolvency practitioner shall remain alert to changes over time in the nature of services, interests and relationships that might create a conflict of interest while acting as an insolvency office holder. 313.1 A1 The nature of interests and relationships might change during the appointment. This is particularly true when an insolvency practitioner is appointed in a situation that might become adversarial, even though the stakeholders might not initially be involved in a dispute. It could also be the case where a debt is sold or transferred during the appointment, where an insolvency practitioner is appointed as a replacement officeholder, where a liquidator in a members’ voluntary liquidation is converting the winding up to a creditors’ voluntary liquidation or where a creditor goes into an insolvency process. Network firms R314.1 If the firm is a member of a network, an insolvency practitioner shall consider conflicts of interest that the insolvency practitioner has reason to believe might exist or arise due to interests and relationships of a network firm. 314.1 A1 Factors to consider when identifying interests and relationships involving a network firm include: • the nature of the professional services provided • the clients served by the network • the geographic locations of all relevant parties Threats Created by Conflicts of Interest 315.1 In general, the more direct the connection between the professional service and the matter on which the parties’ interests conflict, the more likely the level of the threat is not at an acceptable level. 315.2 Factors that are relevant in evaluating the level of a threat created by a conflict of interest include measures that prevent unauthorized disclosure of confidential information when dealing with insolvency appointments for two or more insolvent entities whose interests with respect to that matter are in conflict. These measures include: • the existence of separate practice areas for specialty functions within the firm, which might act as a barrier to the passing of confidential client information between practice areas; • policies and procedures to limit access to case files; • confidentiality agreements signed by personnel and partners of the firm; • separation of confidential information physically and electronically; • specific and dedicated training and communication. 315.3 Examples of actions that might be safeguards to address threats created by a conflict of interest include: • Having separate engagement teams who are provided with clear policies and procedures on maintaining confidentiality. • Having an appropriate reviewer, who is not involved in providing the service or otherwise affected by the conflict, review the work performed to assess whether the key judgements and conclusions are appropriate. R315.4 An insolvency practitioner shall exercise professional judgement to determine whether the nature and significance of a conflict of interest are such that specific disclosure and explicit consent is necessary when addressing the threat created by the conflict of interest. 315.4 A1 Factors to consider when determining whether specific disclosure and explicit consent are necessary include: • the circumstances creating the conflict of interest • the parties that might be affected • The nature of the issues that might arise • The potential for the particular matter to develop in an unexpected manner. 315.4 A2 Disclosure and consent might take different forms, for example:  • disclosure to the court on making an application to court for an administration or any other order • obtaining consent from a creditors’ committee • obtaining consent from a secured lender • disclosure to creditors 315.4 A3 It is generally expected that any disclosure will include the circumstances of the particular conflict and how any threats created were addressed. 315.4 A4 More information on accepting insolvency appointments is set out in insolvency appointments (see paragraph 210). Confidentiality General R316.1 An insolvency practitioner shall remain alert to the principle of confidentiality, including when making disclosures or sharing information within the firm or network and seeking guidance from third parties. 316.1 A1 Paragraphs 104.1 to 104.4 set out requirements and application material relevant to situations that might create a threat to compliance with the principle of confidentiality. SPECIALIST ADVICE AND SERVICES Introduction 320.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 320.2 If an insolvency practitioner obtains specialist advice or services from others, this might create a self-interest threat to compliance with one or more of the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material R320.3 When an insolvency practitioner intends to rely on the advice or work of another, from within the firm or by a third party, the insolvency practitioner shall evaluate whether such advice or work is warranted. R320.4 Any advice or work contracted shall reflect best value and service for the work undertaken. 320.4 A Factors that are relevant in evaluating best value and service are: • the cost of the service; • the expertise and experience of the service provider; • that the provider holds appropriate regulatory authorisations; • the professional and ethical standards applicable to the service provider. R320.5 The insolvency practitioner shall review arrangements periodically to ensure that best value and service continue to be obtained in relation to each insolvency appointment. R320.6 The insolvency practitioner shall document the reasons for choosing a particular service provider. 320.6 A1 Threats to the fundamental principles (for example familiarity threats and self-interest threats) can arise if services are provided by a regular source within the firm or by a party with whom the insolvency practitioner, firm, or an individual within the firm, has a business or personal relationship. 320.6 A2 Business or personal relationships might include the following: • an immediate family member e.g. spouse, parent, child, sibling etc. • a business partner; • any company or business in which there are common shareholdings with the firm, or which have the same beneficial owner(s); or one of the companies or business controls or owns the other. 320.6 A3 The examples above are not exhaustive, and the substance of the relationship between the insolvency practitioner, the firm or an individual within the firm and the provider of the service should be considered. 320.6 A4 When taking steps to assess the nature of any such relationship, the insolvency practitioner should have regard to conflicts of interest and professional and personal relationships. 320.6 A5 While the insolvency practitioner might regard a relationship as not being a cause for concern, the perception of others could differ. In considering perception, it is expected that the insolvency practitioner considers this on the basis of a reasonable and informed third party, weighing up all the specific facts and circumstances available to the insolvency practitioner at that time. 320.6 A6 Examples of actions that might be safeguards to address such threats include: a) applying clear guidelines and policies within the firm on such relationships b) disclosure of the relevant relationships and the process undertaken to evaluate best value and service to the general body of creditors or the creditors’ committee if one exists c) the benefit of negotiated commercial terms such as volume or settlement discounts being received in full by the insolvent estate. 320.6 A7 Where the insolvency practitioner does not control decisions about the choice of the provider of specialist advice or service, to be able to comply with the requirements in this part the insolvency practitioner will need to obtain sufficient information to establish the nature of the relationship with the provider. Reference should also be made to – The insolvency practitioner as an employee (see paragraph 380). AGENCIES AND REFERRALS Introduction 330.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 330.2 If an insolvency practitioner receives referred work, refers work to others, or establishes an agency arrangement, this might create a self-interest threat to compliance with one or more of the fundamental principles. A referral could be a formal request made in the course of a professional relationship, for advice on the selection of a potential professional adviser. A referral might also be an informal request, including where there is no existing relationship between the insolvency practitioner and the enquirer. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. 330.3 Attention is also drawn to the legislative provisions regarding the use of personal data. 330.4 The requirements in respect of referral fees and commissions are detailed in Referral fees and commission (see paragraph 340). Requirements and Application Material R330.5 The insolvency practitioner shall consider the fitness for purpose of the third party to whom a referral is proposed or an agency arrangement is being considered, to address the needs of the recipient of the service. 330.5 A1 insolvency practitioners are expected to consider any factors they are aware of that would indicate the proposed third party is not fit for purpose in terms of the potential engagement. The insolvency practitioner needs to take into account what a reasonable person might expect an insolvency practitioner to know. 330.5 A2 Examples of actions that might be safeguards to address threats created by any referral and agency arrangements include: a) applying clear guidelines and policies within the firm on referrals and agency arrangements b) disclosure of the process undertaken to evaluate best value and service and any relevant relationships to the general body of creditors or the creditors’ committee if one exists. 330.5 A3 In making that consideration of fitness for purpose, the insolvency practitioner is expected to take account of the professional or regulatory status of the third party. R330.6 Insolvency practitioners shall not, because of the self-interest threat, enter into any financial arrangements with another supplier either personally or through their firm which would prejudice the objectivity of themselves or their firm. R330.7 Before accepting or continuing an agency with another supplier, insolvency practitioners shall satisfy themselves that their ability to discharge their professional obligations are not compromised. 330.7 A1 When referring work or establishing an agency, insolvency practitioners have a responsibility to ascertain that a referral is conducted in accordance with this Code because insolvency practitioners cannot do, or be seen to do, through others what they cannot not do themselves. R330.8 When insolvency practitioners or their firm are considering the establishment of an agency, the terms of the agency contract (actual or implied) shall not require exclusive referral regardless of suitability. This would make important safeguards inoperable. R330.9 An insolvency practitioner shall not make a referral to a third party, even with a disclaimer, if they know of a better alternative. R330.10 The insolvency practitioner shall document the reasons for establishing an agency with another supplier or recommending a particular provider. R330.11 When permitting the introduction of services or products, an insolvency practitioner shall address the threats to compliance with the fundamental principles. 330.11 A1 When permitting the introduction of services or products to those who are the subject of an insolvency appointment, factors that are relevant to such introductions include: • The level of knowledge and expertise of those who are subject to, or have a financial interest in, the insolvency appointment or prospective insolvency appointment. • The ability of those who are subject to, or have a financial interest in, the insolvency appointment or prospective insolvency appointment, to question the information provided by or with the consent of the insolvency practitioner. • Information provided to those who are subject to, or have had financial interest in, the insolvency appointment or prospective insolvency appointment to enable an informed decision to be made. • Whether consent has been obtained from the individual subject to the insolvency appointment, or prospective insolvency appointment, for their personal information to be shared with the provider of the service or product. • The cost of the service. • The financial impact on those who are subject to, or have a financial interest in, the insolvency appointment or prospective insolvency appointment. • The regulatory status of the provider of the service or product. • Disclosing the nature of the referral or arrangement to those who are subject to, or have a financial interest in, the insolvency appointment or prospective insolvency appointment. 330.11 A2 Being transparent about any referral or agency arrangements and setting out in writing to the individuals concerned the nature of the arrangement might be an appropriate safeguard. (see paragraph 330.5 A2 above) 330.11 A3 When communicating information about any referral or agency arrangements the insolvency practitioner should provide the following information: • the advantages and disadvantages of the service or product being provided; • that similar services or products could be available from other providers at a different cost, • any direct or indirect benefit that the insolvency practitioner or the firm might receive if a service or product is taken up; • that seeking independent advice should be considered. R330.12 If the insolvency practitioner or the firm has a relationship with the third party, for example a family connection or an automatic referral arrangement, there are clear self-interest or familiarity threats and the connection shall be disclosed. The disclosure shall include any potential benefit, whether direct or indirect, they, or others will receive. 330.12 A1 In addition to disclosure required by R330.12, the insolvency practitioner should consider including the additional information listed in 330.11 A3. 330.12 A2 This is particularly important where an insolvency practitioner is considering recommending the products of another supplier with which there is an agency agreement or referral arrangement and the insolvency practitioner, firm, or an individual within the firm, has a business or personal relationship with the provider of the service. 330.12 A3 Business or personal relationships might include the following: • an immediate family member e.g. spouse, parent, child, sibling etc. • a business partner; • any company or business in which there are common shareholdings with the firm, or which have the same beneficial owner(s); or one of the companies or business controls or owns the other. 330.12 A4 The examples above are not exhaustive, and the substance of the relationship between the insolvency practitioner, the firm or an individual within the firm and the provider of the service should be considered. 330.12 A5 When taking steps to assess the nature of any such relationship, the insolvency practitioner should have regard to conflicts of interest and professional and personal relationships. 330.12 A6 While the insolvency practitioner might regard a relationship as not being a cause for concern, the perception of others could differ. It is necessary to consider perception on the basis of a reasonable and informed third party, weighing up all the specific facts and circumstances available to the insolvency practitioner at that time. 330.12 A7 The requirement to disclose includes situations where in substance there is a one-to-one relationship between the insolvency practitioner and the third party (for example, the insolvency practitioner is the only insolvency practitioner in the area and the third party is the only solicitor), as this implies automatic referral. R330.13 An insolvency practitioner shall not in any circumstances conduct their firm in such a manner as to give the impression that the insolvency practitioner is a principal rather than an agent. 330.13 A1 This includes considering signs on premises, websites and any other outward signs or literature used. 330.13 A2 Where the insolvency practitioner does not control decisions about referrals and agencies within the firm, to comply with the requirements in this part the insolvency practitioner will need to obtain sufficient information about any arrangements. Reference should also be made to – the insolvency practitioner as an employee (see paragraph 380). REFERRAL FEES AND COMMISSIONS 1 Introduction 340.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 340.2 Paying or receiving referral fees and commissions might create a self-interest threat to compliance with one or more of the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material 340.3 A self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if an insolvency practitioner, the firm or an associate offers or pays a referral fee or commission. R340.4 An insolvency practitioner, the firm or an associate shall not make or offer to make any payment or commission for the introduction of an insolvency appointment. 340.4 A1 Remuneration arising from an employer/employee relationship would not normally be included within the scope of payments referred to in R340.4 above. 340.4 A2 A self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if an insolvency practitioner, the firm or an associate receives a referral fee or commission. R340.5 Where an engagement might lead to an insolvency appointment, insolvency practitioners shall not accept referral fees or commissions unless they take action to reduce the threats created by such fees or commissions to an acceptable level 2. 340.5 A1 Examples of actions that might be safeguards to address such threats include: a) disclosure in advance of any arrangements to the appointing body, creditors or any other relevant stakeholders, b) obtaining the views of the creditors committee. R340.6 If after the receipt of any such payments by the insolvency practitioner, the firm or an associate, the insolvency practitioner accepts an insolvency appointment, the amount and any source of any fee or commission received shall be disclosed to creditors. R340.7 During an insolvency appointment, referral fees or commissions shall not be accepted by the insolvency practitioner, the firm or an associate unless they are paid into the insolvent estate. Any such payments shall be disclosed to creditors. R340.8 Where the insolvency practitioner or firm obtains preferential contractual terms from suppliers of goods and services obtained for an insolvency appointment, for example volume or settlement discounts, the benefit shall be received in full by the insolvent estate. 1 As per Section 642 Companies Act 2014, referral fees and commission are strictly prohibited in the Republic of Ireland. 2 Insolvency Practitioners operating in the Republic of Ireland or operating in respect of an Irish Company should not accept referral fees or commission under any circumstances (see footnote 1 above). 340.8 A1 The term ‘associate’ of an insolvency practitioner or the firm includes the following: • an immediate family member e.g. spouse, parent, child, sibling etc. • a business partner; • any company or business in which there are common shareholdings with the firm, or which have the same beneficial owner(s); or one of the companies or business controls or owns the other. 340.8 A2 The examples of associates are not exhaustive, and the substance of the association between the insolvency practitioner and/or the firm and the recipient or payor of any referral fee or commission should be considered. 340.8 A3 When taking steps to assess the nature of any such association, the insolvency practitioner is expected to have regard to the section on conflicts of interest (paragraphs 310.1 to 311.2 A4) of this code – conflicts of interest and professional and personal relationships. 340.8 A4 While the insolvency practitioner might regard an association as not being a cause for concern, the perception of others might differ. In considering perception, it is expected that be considered on the basis of a reasonable and informed third party, weighing up all the specific facts and circumstances available to the insolvency practitioner at that time. 340.8 A5 When referring work, insolvency practitioners have a responsibility to ascertain that a referral is conducted in accordance with this Code because insolvency practitioners cannot do, or be seen to do, through others what they cannot not do themselves. 340.8 A6 Where the insolvency practitioner does not control decisions about referral and commission arrangements, to comply with the requirements in this section the insolvency practitioner will need to obtain sufficient information to establish the nature and purpose of any payments made or received. Reference should also be made to– the insolvency practitioner as an employee (see paragraph 380). INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY Introduction 350.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 350.2 In relation to an insolvency appointment, offering or accepting inducements might create a self-interest, familiarity or intimidation threat to compliance with the fundamental principles, particularly the principles of integrity, objectivity and professional behaviour. 350.3 This section sets out requirements and application material relevant to applying the conceptual framework in relation to the offering and accepting of inducements when performing services that does not constitute non-compliance with laws and regulations. This section also requires an insolvency practitioner to comply with relevant laws and regulations when offering or accepting inducements. Requirements and Application Material General 350.4 A1 An inducement is an object, situation, or action that is used as a means to influence another individual’s behaviour, but not necessarily with the intent to improperly influence that individual’s behaviour. Inducements can range from minor acts of hospitality, to acts that result in non-compliance with laws and regulations. An inducement can take many different forms, for example: • gifts. • hospitality. • entertainment. • political or charitable donations. • appeals to friendship and loyalty. • employment or other commercial opportunities. • preferential treatment, rights or privileges. 350.4 A2 An inducement might be offered to the firm, an individual within the firm or a close or immediate family member, as well as to the insolvency practitioner personally. Inducements offered to others will still give rise to threats to compliance with the fundamental principles. Inducements Prohibited by Laws and Regulations R350.5 In many jurisdictions, there are laws and regulations, such as those related to bribery and corruption, that prohibit the offering or accepting of inducements in certain circumstances. The insolvency practitioner shall obtain an understanding of relevant laws and regulations and comply with them when the insolvency practitioner encounters such circumstances. Inducements Not Prohibited by Laws and Regulations 350.5 A1 The offering or accepting of inducements that is not prohibited by laws and regulations might still create threats to compliance with the fundamental principles. Inducements with Intent to Improperly Influence Behaviour R350.6 An insolvency practitioner shall not offer, or encourage others to offer, any inducement that is made, or which the insolvency practitioner considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another. R350.7 An insolvency practitioner shall not accept, or encourage others to accept, any inducement that the insolvency practitioner concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another. 350.7 A1 An inducement is considered as improperly influencing an individual’s behaviour if it causes the individual to act in an unethical manner. Such improper influence can be directed either towards the recipient or towards another individual entity or that has some relationship with the recipient. The fundamental principles are an appropriate frame of reference for an insolvency practitioner in considering what constitutes unethical behaviour on the part of the insolvency practitioner and, if necessary by analogy, others. 350.7 A2 A breach of the fundamental principle of integrity arises when an insolvency practitioner offers or accepts, or encourages others to offer or accept, an inducement where the intent is to improperly influence the behaviour of the recipient or of another individual. 350.7 A3 The determination of whether there is actual or perceived intent to improperly influence behaviour requires the exercise of professional judgement. Relevant factors to consider might include: • The nature, frequency, value and cumulative effect of the inducement. • Timing of when the inducement is offered relative to any action or decision that it might influence. • Whether the inducement is a customary or cultural practice in the circumstances, for example, offering a gift on the occasion of a religious holiday or wedding. • Whether the inducement is ancillary to the insolvency appointment, for example, offering or accepting lunch in connection with a business meeting. • Whether the offer of the inducement is limited to an individual recipient or available to a broader group. The broader group might be internal or external to the firm, such as other suppliers to the provider of the inducement. • The roles and positions of the individuals offering or being offered the inducement. • Whether the insolvency practitioner knows, or has reason to believe, that accepting the inducement would breach the policies and procedures of the recipient. • The degree of transparency with which the inducement is offered. • Whether the inducement was required or requested by the recipient. • The known previous behaviour or reputation of the offeror. Consideration of Further Actions 350.8 A1 If the insolvency practitioner becomes aware of an inducement offered with actual or perceived intent to improperly influence behaviour, threats to compliance with the fundamental principles might still be created even if the requirements in the paragraphs R350.6 and R350.7 are met. 350.8 A2 Examples of actions that might be safeguards to address such threats include: • informing senior management of the firm or those charged with governance of the offeror regarding the offer. • amending or terminating the business relationship with the offeror. Inducements with No Intent to Improperly Influence Behaviour 350.9 A1 The requirements and application material set out in the conceptual framework apply when an insolvency practitioner has concluded there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another. 350.9 A2 If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level. 350.9 A3 Examples of circumstances where offering or accepting such an inducement might create threats even if the insolvency practitioner has concluded there is no actual or perceived intent to improperly influence behaviour include: • Self-interest threats o An insolvency practitioner is offered hospitality from the prospective purchaser of an insolvent business. • Familiarity threats o An insolvency practitioner regularly takes someone to an event. • Intimidation threats o An insolvency practitioner accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed. 350.9 A4 Relevant factors in evaluating the level of such threats created by offering or accepting such an inducement include the same factors set out in paragraph 350.7 A3 for determining intent. 350.9 A5 Examples of actions that might eliminate threats created by offering or accepting such an inducement include: • Declining or not offering the inducement. • Transferring responsibility for the provision of professional services to another individual who the insolvency practitioner has no reason to believe would be, or would be perceived to be, improperly influenced when providing the services. 350.9 A6 Examples of actions that might be safeguards to address such threats created by offering or accepting such an inducement include: • Being transparent with senior management of the firm about offering or accepting an inducement.  • Registering the inducement in a log monitored by senior management of the firm or another individual responsible for the firm’s ethics compliance or maintained by the recipient. • Having an appropriate reviewer, who is not otherwise involved in the insolvency appointment, review any work performed or decisions made by the insolvency practitioner with respect to the provider of the inducement to the insolvency practitioner. • Donating the inducement to charity after receipt and appropriately disclosing the donation, for example, to a member of senior management of the firm or of those who offered the inducement. • Reimbursing the cost of the inducement, such as hospitality, received. • As soon as possible, returning the inducement, such as a gift, after it was initially accepted. R350.10 If an insolvency practitioner encounters a situation in which no or no reasonable action can be taken to reduce a threat arising from offers of gifts or hospitality to an acceptable level the insolvency practitioner shall conclude that it is not appropriate to accept the offer. R350.11 An insolvency practitioner shall not offer or provide gifts or hospitality where this would give rise to an unacceptable threat to compliance with the fundamental principles. Immediate or Close Family Members R350.12 An insolvency practitioner shall remain alert to potential threats to the insolvency practitioner’s compliance with the fundamental principles created by the offering of an inducement by or to an immediate or close family member of the insolvency practitioner. R350.13 Where the insolvency practitioner becomes aware of an inducement being offered to or made by an immediate or close family member and concludes there is intent to improperly influence behaviour, or considers a reasonable and informed third party would be likely to conclude such intent exists, the insolvency practitioner shall advise the immediate or close family member not to offer or accept the inducement. 350.13 A1 The factors set out in paragraph 350.7 A3 are relevant in determining whether there is actual or perceived intent to improperly influence behaviour. Another factor that is relevant is the nature or closeness of the relationship, between: a) the insolvency practitioner and the immediate or close family member; b) the immediate or close family member and the other party; and c) the insolvency practitioner and the other party. For example, the offer of employment, outside of the normal recruitment process, to the spouse of the insolvency practitioner by a creditor in an insolvency might indicate such intent. 350.13 A2 The application material in paragraph 350.8 A2 is also relevant in addressing threats that might be created when there is actual or perceived intent to improperly influence behaviour even if the immediate or close family member has followed the advice given pursuant to paragraph R350.13. Application of the Conceptual Framework 350.14 A1 Where the insolvency practitioner becomes aware of an inducement offered in the circumstances addressed in paragraph R350.12, threats to compliance with the fundamental principles might be created where: a) The immediate or close family member offers or accepts the inducement contrary to the advice of the insolvency practitioner pursuant to paragraph R350.13; or b) The insolvency practitioner does not have reason to believe an actual or perceived intent to improperly influence behaviour exists. 350.14 A2 The application material in paragraphs 350.9 A1 to 350.9 A6 is relevant for the purposes of identifying, evaluating and addressing such threats. Factors that are relevant in evaluating the level of threats in these circumstances also include the nature or closeness of the relationships set out in paragraph 350.13 A1. Financial incentives for team members 350.15 A1 An insolvency practitioner or members of the insolvency team might be offered an inducement by their employer to achieve certain targets relating to insolvency appointments. Such arrangements might create threats to compliance with the fundamental principles. 350.15 A2 Examples of circumstances that might create a self-interest threat include situations in which the insolvency practitioner or members of the insolvency team: a) Holds a direct or indirect financial interest in the employing organisation and the value of that financial interest might be directly affected by decisions made by the insolvency practitioner. b) Is eligible for a profit-related bonus and the value of that bonus might be directly affected by decisions made by the insolvency practitioner. c) Participates in arrangements which provide incentives to achieve targets. ADVERTISING, MARKETING AND OTHER PROMOTIONAL ACTIVITIES Introduction 360.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 360.2 When an insolvency practitioner seeks an insolvency appointment or work that might lead to an insolvency appointment through advertising or other forms of marketing or promotional activity, there might be threats to compliance with the fundamental principles, including integrity and professional behaviour. 360.3 This section sets out requirements and application material relevant to applying the conceptual framework in relation to advertising and marketing for insolvency appointments and includes the content of the websites and other promotional activities. 360.4 Reference should also be made to Specialist advice and services (320) and Referral fees and commissions (340). Requirements and Application Material R360.5 When undertaking marketing or promotional activities, an insolvency practitioner shall not bring the profession into disrepute. An insolvency practitioner shall be honest and truthful and shall not make: a) exaggerated claims for the services offered by, or the qualifications or experience of, the insolvency practitioner; or b) disparaging references or unsubstantiated comparisons to the work of others. R360.6 When considering whether to accept an insolvency appointment an insolvency practitioner shall be satisfied that any advertising, marketing or other form of promotional activity pursuant to which the insolvency appointment might have been obtained: a) has been fair and not misleading b) has avoided unsubstantiated or disparaging statements c) has complied with relevant codes of practice and guidance in relation to advertising d) has been clearly distinguishable as advertising or marketing material, and has been legal, decent, honest and truthful. 360.6 A1 If reference is made in advertisements or other forms of marketing to fees or to the cost of the services to be provided, the insolvency practitioner needs to be satisfied that the basis of calculation and the range of services that the reference is intended to cover has been provided. The insolvency practitioner needs to take care to ensure that such references are clear as to the precise range of services and the time commitment that the reference is intended to cover. 360.6 A2 If an insolvency practitioner is in doubt about whether a form of advertising or marketing is appropriate, the insolvency practitioner is encouraged to consult with their authorising body. R 360.7 Where an insolvency practitioner or the firm obtains work via a third party or a third party conducts marketing activities on behalf of the insolvency practitioner or the firm, the  insolvency practitioner shall be responsible for ensuring that the third party follows the application material above. 360.7 A1 When obtaining work via a third party or using a third party to conduct marketing activities insolvency practitioners have a responsibility to ascertain that a referral manner is in accordance with this Code because insolvency practitioners cannot do, or be seen to do, through others what they cannot not do themselves. R360.8 Insolvency Practitioners shall never promote or seek to promote their services, or the services of other insolvency practitioners, in such a way, or to such an extent, as to amount to harassment. DEALING WITH THE ASSETS OF AN ENTITY Introduction 370.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 370.2 When an insolvency practitioner realises assets, this might create threats to compliance with one or more of the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. Requirements and Application Material R370.3 Except in circumstances which clearly do not impair the insolvency practitioner’s objectivity, insolvency practitioners appointed to any insolvency appointment in relation to an entity, shall not themselves acquire, directly or indirectly, any of the assets of an entity, nor knowingly permit any individual within the firm, or any close or immediate family member of an individual within the firm, directly or indirectly, to do so. 370.3 A1 Where the assets and business of an insolvent company are sold by an insolvency practitioner shortly after appointment on pre-agreed terms, this could lead to an actual or perceived threat to objectivity. The sale could also be seen as a threat to objectivity by creditors or others not involved in the prior agreement. 370.3 A2 Examples of actions that might be safeguards to address threats to objectivity include: a) obtaining an independent valuation of the assets or business being sold; b) considering other potential purchasers. 370.3 A3 It is important for an insolvency practitioner to take care to ensure (where to do so does not conflict with any legal or professional obligation) that their decision-making processes are transparent, understandable and readily identifiable to all third parties who could be affected by a sale or proposed sale. THE INSOLVENCY PRACTITIONER AS AN EMPLOYEE Introduction 380.1 All insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework to identify, evaluate and address threats. 380.2 Where an insolvency practitioner is an employee of a firm, the insolvency practitioner might face particular threats to compliance with the fundamental principles. This section sets out specific application material relevant to applying the conceptual framework in such circumstances. It does not describe all of the facts and circumstances, including professional activities, interests and relationships, that could be encountered by insolvency practitioner who is an employee, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires insolvency practitioners who are employees to be alert for such facts and circumstances. 380.3 On occasion, where the insolvency practitioner is an employee or is considering accepting an offer of employment, the insolvency practitioner might be unable to address the threats to compliance with the fundamental principles. In those circumstances the insolvency practitioner will need to consider whether they can accept the offer of employment or resign from their current employment. Requirements and Application Material 380.4 An insolvency practitioner might be an employee, contractor, partner, or director within the firm. The legal form of the relationship of the insolvency practitioner with their employer has no bearing on the ethical responsibilities placed on the insolvency practitioner. R380.5 An insolvency practitioner who is an employee shall comply with the fundamental principles. 380.5 A1 The insolvency practitioner 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. 380.5 A2 The following are examples of facts and circumstances that might create threats for an insolvency practitioner as an employee: • being eligible for a bonus related to achieving targets or profits; • having inadequate resources for the performance of an insolvency appointment; • a lack of control over processes and internal governance; • being threatened with dismissal or demotion over a disagreement about an insolvency appointment; • an individual attempting to influence the decision-making process of the insolvency practitioner. R380.6 An insolvency practitioner shall consider whether there are appropriate safeguards available to ensure compliance with the fundamental principles before accepting an offer of employment. 380.6 A1 Examples of actions that might be safeguards to address such threats prior to accepting an offer of employment include:  a) Appropriate provisions within any contract of employment or separate legal agreement with the employer acknowledging that the insolvency practitioner has a duty to comply with the Code of Ethics of their authorising body and that the insolvency practitioner will be able to take all necessary steps they deem necessary to comply with the fundamental principles. b) Ensuring that policies and procedures are in place within the firm to prohibit individuals who are not members of the insolvency team from inappropriately influencing the conduct of an insolvency appointment. c) Ensuring that the firm has published policies and procedures to encourage and empower individuals within the firm to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concern them. d) Obtaining sufficient information to obtain an understanding of the structure and ownership of the firm. 380.6 A2 If no actions are available to address these threats, it is expected that the insolvency practitioner consider whether it is appropriate to accept the offer of employment. 380.6 A3 The existence of certain conditions, policies and procedures established by the profession, legislation, regulation, the firm, or the employing organization that can enhance the insolvency practitioner acting ethically might also help identify threats to compliance with the fundamental principles. In this context such factors could include: a) Policies and procedures within the firm to prohibit individuals who are not members of the insolvency team from inappropriately influencing the conduct of an insolvency appointment. b) Published policies and procedures to encourage and empower individuals within the firm to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concern them. 380.6 A4 Examples of actions that might be safeguards to address threats at a particular time include: a) reporting concerns to senior management within the firm b) seeking legal advice or advice from their authorising body c) reporting the concerns to their authorising body or the Complaints Gateway. 380.6 A5 The more senior the position of the insolvency practitioner, the greater will be the ability and opportunity to access information, and to influence policies, decisions made and actions taken by others involved with the firm. To the extent that they are able to do so, taking into account their position and seniority in the organisation, insolvency practitioners are expected to encourage and promote an ethics-based culture in the organisation. Examples of actions that might be taken include the introduction, implementation and oversight of: • ethics education and training programs. • ethics and whistle-blowing policies. • policies and procedures designed to prevent non-compliance with laws and regulations. R380.7 Where threats to compliance with the fundamental principles cannot be eliminated or reduced to an acceptable level then the insolvency practitioner shall not accept the insolvency appointment or refuse to remain associated with the matter creating the conflict. 380.7 A1 In some circumstances this could mean taking steps to resign from the employment. 380.7 A2 Reference should also be made to Obtaining specialist advice and services and Referral fees and commissions. RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS Introduction 390.1 insolvency practitioners are required to comply with the fundamental principles and apply the conceptual framework set to identify, evaluate and address threats. 390.2 A self-interest or intimidation threat to compliance with the principles of integrity and professional behaviour is created when an insolvency practitioner becomes aware of non- compliance or suspected non-compliance with laws and regulations. 390.3 An insolvency practitioner might encounter or be made aware of non-compliance or suspected non-compliance in the course of carrying out professional activities. This section guides the insolvency practitioner in assessing the implications of the matter and the possible courses of action when responding to non-compliance or suspected non-compliance with: a) Laws and regulations generally recognised to have a direct effect on the conduct of an appointment; b) Other laws and regulations that do not have a direct effect on the conduct of an appointment, but compliance with which might be fundamental to the outcome of an appointment. c) Other laws and regulations that do not have a direct effect on the conduct of an appointment, but compliance with which might be fundamental to the operating aspects of the employing organisation’s business, to its ability to continue its business, or to avoid material penalties. Objectives of the insolvency practitioner in relation to non-compliance with laws and regulations 390.4 A distinguishing mark of the insolvency profession is its acceptance of the responsibility to act in the public interest. When responding to non-compliance or suspected non-compliance, the objectives of the insolvency practitioner are: a) To comply with the principles of integrity and professional behaviour; b) By alerting management or, where appropriate, those charged with governance of the entity, to seek to: i. Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or ii. Deter the commission of the non-compliance where it has not yet occurred; and c) By alerting management or, where appropriate, those charged with governance of the employing organisation, to seek to: i. Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or ii. Deter the non-compliance where it has not yet occurred; and d) To take such further action as appropriate in the public interest. Requirements and Application Material General 390.5 A1 Non-compliance with laws and regulations (“non-compliance”) comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties: a) an entity over which the insolvency practitioner has been appointed; b) those charged with governance of an entity; c) management of an entity; d) other individuals working for or under the direction of an entity; e) the insolvency practitioner’s employing organization; f) those charged with governance of the employing organisation; g) management of the employing organisation; h) other individuals working for or under the direction of the employing organisation. 390.5 A2 Examples of laws and regulations which this section addresses include those that deal with: ● insolvency processes and procedures. ● fraud, corruption and bribery. ● money laundering, terrorist financing and proceeds of crime. ● securities markets and trading. ● banking and other financial products and services. ● data protection. ● tax and pension liabilities and payments. ● environmental protection. ● public health and safety. 390.5 A3 Non-compliance might result in fines, litigation or other consequences for the entity or employing organisation, potentially materially affecting its financial statements. Importantly, such non-compliance might have wider public interest implications in terms of potentially substantial harm to creditors, employees, investors or the general public. For the purposes of this section, an act that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms. Examples include breaches of environmental laws and regulations endangering the health or safety of employees or the public and perpetration of fraud against appointment estates resulting in significant financial loss to creditors. R390.6 In some jurisdictions, there are legal or regulatory provisions governing how insolvency practitioners should address non-compliance or suspected non-compliance. These legal or regulatory provisions might differ from or go beyond the provisions in this section, for example, anti-money laundering legislation. When encountering such non-compliance or suspected non-compliance, the insolvency practitioner shall obtain an understanding of those legal or regulatory provisions and comply with them, including:  a) any requirement to report the matter to an appropriate authority; and b) any prohibition on alerting the relevant party. 390.6 A1 A prohibition on alerting the relevant party might arise, for example, pursuant to anti-money laundering legislation. 390.6 A2 An insolvency practitioner who encounters or is made aware of matters that are clearly inconsequential is not required to comply with this section unless other laws or regulations require it. For example, an insolvency practitioner in the UK needs to comply with Anti-Money Laundering legislation which contains no de minimis threshold for reporting. Whether a matter is clearly inconsequential is to be judged with respect to its nature and its impact, financial or otherwise, on the entity or employing organisation, its stakeholders and the general public. 390.6 A3 This section does not address: a) Personal misconduct unrelated to the business activities of the entity or employing organisation; and b) Unless required by other laws or regulations, non-compliance by parties other than those specified in paragraph 390.5 A1. This includes, for example, circumstances where an insolvency practitioner has been engaged by a client to perform a due diligence assignment on a third party entity and the identified or suspected non-compliance has been committed by that creditor. The insolvency practitioner might nevertheless find the guidance in this section helpful in considering how to respond in these situations. Responsibilities of Management and Those Charged with Governance 390.7 A1 Management of an entity or employing organisation, with the oversight of those charged with governance, is responsible for ensuring that the entity’s business activities are conducted in accordance with laws and regulations. Management and those charged with governance are also responsible for identifying and addressing any non-compliance by: a) the entity or employing organisation; b) an individual charged with governance of the entity or employing organisation; c) a member of management; or d) other individuals working for or under the direction of the entity or the employing organisation. Responsibilities of All insolvency practitioners R390.8 If protocols and procedures exist within the insolvency practitioner’s employing organisation to address non-compliance or suspected non-compliance, the insolvency practitioner shall consider them in determining how to respond to such non-compliance. 390.8 A1 Many employing organisations have established protocols and procedures regarding how to raise non-compliance or suspected non-compliance internally. These protocols and procedures include, for example, an ethics policy or internal whistle-blowing mechanism. Such protocols and procedures might allow matters to be reported anonymously through designated channels. R390.9 Where an insolvency practitioner becomes aware of a matter to which this section applies, the steps that the insolvency practitioner takes to comply with this section shall be taken on a timely basis. In taking timely steps, the insolvency practitioner shall have regard to the nature of the matter and the potential harm to the interests of the entity, creditors, employees, investors, or the general public. 390.9 A1 insolvency practitioners are reminded especially of the guidance in paragraph R390.6 above in relation to over-riding laws and regulations. Obtaining an Understanding of the Matter and Addressing It with Management and Those Charged with Governance R390.10 If an insolvency practitioner becomes aware of information concerning non-compliance or suspected non-compliance, the insolvency practitioner shall seek to obtain an understanding of the matter. This understanding shall include the nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might be about to occur. 390.10 A1 The insolvency practitioner is expected to apply knowledge and expertise, and exercise professional judgement. However, the insolvency practitioner is not expected to have a level of understanding of laws and regulations beyond that which is required for the appointment. Whether an act constitutes actual non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body. 390.10 A2 Depending on the nature and significance of the matter, the insolvency practitioner might consult on a confidential basis with others within the firm, a network firm or a professional body, or with legal counsel. 390.10 A3 The insolvency practitioner is reminded especially of the guidance in paragraph R390.6 above in relation to over-riding laws and regulations. R390.11 If the insolvency practitioner identifies or suspects that non-compliance has occurred or might occur, the insolvency practitioner shall discuss the matter with the appropriate level of management. If the insolvency practitioner has access to those charged with governance, the insolvency practitioner shall also discuss the matter with them where appropriate. 390.11 A1 The purpose of the discussion is to clarify the insolvency practitioner’s understanding of the facts and circumstances relevant to the matter and its potential consequences. The discussion also might prompt management or those charged with governance to investigate the matter. 390.11 A2 The appropriate level of management with whom to discuss the matter is a question of professional judgement. Relevant factors to consider include: ● the nature and circumstances of the matter; ● the individuals actually or potentially involved; ● the likelihood of collusion; ● the potential consequences of the matter; ● whether that level of management is able to investigate the matter and take appropriate action. Communicating the Matter to the Entity’s External Auditor R390.12 If the insolvency practitioner is liquidator in a members voluntary liquidation for: a) an audit client of the firm or a network firm; or b) a component of an audit client of the firm or a network firm, the insolvency practitioner shall consider whether to communicate the non-compliance or suspected non-compliance within the firm or to the network firm, as appropriate. Where the communication is made, it shall be made in accordance with the firm’s or network’s protocols or procedures. In the absence of such protocols and procedures, it shall be made directly to the audit engagement partner. R390.13 If the insolvency practitioner is supervisor of a Company Voluntary Arrangement the insolvency practitioner shall consider whether to communicate the non-compliance or suspected non-compliance to the firm that is the client’s external auditor, if any. Relevant Factors to Consider 390.13 A1 Factors relevant to considering the communication in accordance with paragraphs R390.12 and R390.13 include: ● Whether doing so would be contrary to law or regulation. ● Whether there are restrictions about disclosure imposed by a regulatory agency or prosecutor in an ongoing investigation into the non-compliance or suspected non- compliance. ● Whether management or those charged with governance have already informed the entity’s external auditor about the matter. ● The likely materiality of the matter to the audit of the client’s financial statements or, where the matter relates to a component of a group, its likely materiality to the audit of the group financial statements. Purpose of Communication 390.13 A2 In the circumstances addressed in paragraphs R390.12 to R390.13, the purpose of the communication is to enable the audit engagement partner to be informed about the non- compliance or suspected non-compliance and to determine whether and, if so, how to address it in accordance with the provisions of this section. Considering Whether Further Action Is Needed R390.14 The insolvency practitioner shall also consider whether further action is needed in the public interest. 390.14 A1 Whether further action is needed, and the nature and extent of it, will depend on factors such as: ● the legal and regulatory framework; ● the appropriateness and timeliness of the response of management and, where applicable, those charged with governance; ● the urgency of the situation;  ● the involvement of management or those charged with governance in the matter; ● the likelihood of substantial harm to the interests of the client, investors, creditors, employees or the general public. 390.14 A2 Further action by the insolvency practitioner might include: ● Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so. ● Resigning from the appointment where permitted by law or regulation. 390.14 A3 In considering whether to disclose to an appropriate authority, relevant factors to take into account include: ● Whether doing so would be contrary to law or regulation. ● Whether there are restrictions about disclosure imposed by a regulatory agency or prosecutor in an ongoing investigation into the non-compliance or suspected non- compliance. R390.15 If the insolvency practitioner determines that disclosure of the non-compliance or suspected non-compliance to an appropriate authority is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to paragraph R104.3(d) of the Code. When making such disclosure, the insolvency practitioner shall act in good faith and exercise caution when making statements and assertions. The insolvency practitioner shall also consider whether it is appropriate to inform the entity of the insolvency practitioner’s intentions before disclosing the matter. Imminent Breach R390.16 In exceptional circumstances, the insolvency practitioner might become aware of actual or intended conduct that the insolvency practitioner has reason to believe would constitute an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of the entity, the insolvency practitioner shall exercise professional judgement and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach of law or regulation. If disclosure is made, that disclosure is permitted pursuant to paragraph R104.3(d) of the Code. Seeking Advice 390.16 A1 The insolvency practitioner might consider: ● consulting internally; ● obtaining legal advice to understand the professional or legal implications of taking any particular course of action; ● consulting on a confidential basis with a regulatory body or their authorising body. Documentation 390.16 A2 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the insolvency practitioner is encouraged to document:  ● the matter; ● the results of discussion with management and, where applicable, those charged with governance and other parties; ● how management and, where applicable, those charged with governance have responded to the matter; ● the courses of action the insolvency practitioner considered, the judgements made and the decisions that were taken; ● how the insolvency practitioner is satisfied that the insolvency practitioner has fulfilled the responsibility set out in paragraph R390.14. 390.16 A3 The insolvency practitioner is encouraged to consider whether there is a need for any such documentation to be filed separately. Responsibilities of members of the insolvency team R390.17 If, in the course of carrying out professional activities, a member of the insolvency team becomes aware of information concerning non-compliance or suspected non-compliance, the team member shall seek to obtain an understanding of the matter. This understanding shall include the nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might occur. 390.17 A1 The team member is expected to apply knowledge and expertise, and exercise professional judgement. However, the team member is not expected to have a level of understanding of laws and regulations greater than that which is required for the team member’s role within the employing organisation. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body. 390.17 A2 Depending on the nature and significance of the matter, the team member might consult on a confidential basis with others within the employing organisation or an authorising body, or with legal counsel. 390.17 A3 A member of the insolvency team’s attention is drawn to the content of paragraph R390.17. R390.18 If the team member identifies or suspects that non-compliance has occurred or might occur, the team shall, subject to paragraph R390.17, inform an immediate superior to enable the superior to take appropriate action. If the team member’s immediate superior appears to be involved in the matter, the team member shall inform the next higher level of authority within the employing organisation. R390.19 In exceptional circumstances, the team member may determine that disclosure of the matter to an appropriate authority is an appropriate course of action. If the team member does so pursuant to paragraphs 390.17 A2 and A3, that disclosure is permitted pursuant to paragraph R104.3(d) of the Code. When making such disclosure, the team member shall act in good faith and exercise caution when making statements and assertions. Documentation 390.19 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the team member is encouraged to have the following matters documented: ● the matter;  ● the results of discussions with the team member’s superior, management and, where applicable, those charged with governance and other parties; ● how the team member’s superior has responded to the matter; ● the courses of action the team member considered, the judgements made and the decisions that were taken. 390.20 A2 The team member is encouraged to consider whether there is a need for any such documentation to be filed separately. 500 THE APPLICATION OF THE FRAMEWORK TO SPECIFIC SITUATIONS Introduction to specific situations 500.1 The following examples describe specific circumstances and relationships that will create threats to compliance with the fundamental principles. The examples are intended to assist an insolvency practitioner and the members of the insolvency team to assess the implications of similar, but different, circumstances and relationships. 500.2 Section 510 contains examples which do not relate to a previous or existing insolvency appointment. Section 520 contains examples that do relate to a previous or existing insolvency appointment. Section 530 contains some examples under Scottish law. Section 600 contains examples relevant to the Republic of Ireland. 500.3 The examples included in these sections are not exhaustive, and the substance of the circumstances and relationships should be considered. 500.4 When considering specific situations, insolvency practitioners should refer to the section on professional and personal relationships and changes in circumstances. As interests and relationships might change during an appointment, a significant professional relationship can arise as a result of an insolvency practitioner acting as an officeholder in a prior insolvency. An insolvency practitioner is expected to consider both pre-appointment engagements, and / or prior insolvency appointments when assessing whether they have a significant professional relationship. Insolvency practitioners are also expected to document their considerations and conclusions when assessing specific situations. 510 Examples that do not relate to a previous or existing insolvency appointment 510.1 insolvency appointment following audit related work Previous relationship: The firm or an individual within the firm has completed audit related work. Response: A Significant Professional Relationship will normally arise where the audit related work was completed within the previous 3 years. An insolvency practitioner shall not take the insolvency appointment as it is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. Where audit related work was completed more than 3 years before the proposed date of the appointment of the insolvency practitioner a threat to compliance with the fundamental principles could still arise. The insolvency practitioner shall evaluate any such threat and consider whether the threat can be eliminated or reduced to an acceptable level by the use of safeguards. This restriction does not apply where the insolvency appointment is in a members’ voluntary liquidation; an insolvency practitioner may normally take an appointment as liquidator. However, the insolvency practitioner shall consider whether there are any other circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. Further, the insolvency practitioner shall satisfy them self that the directors’ declaration of solvency is likely to be substantiated by events. 510.2 Appointment as Investigating Accountant at the instigation of a creditor Previous relationship: The firm or an individual within the firm was instructed by, or at the instigation of, a creditor or other party having a financial interest in an entity, to investigate, monitor or advise on its affairs. Response: A Significant Professional Relationship would not normally arise in these circumstances provided that: a) there has not been a direct involvement by an individual within the firm in the management of the entity; and b) the firm had its principal client relationship with the creditor or other party, rather than with the company or proprietor of the business; and c) the entity was aware of this. An insolvency practitioner shall however consider all the circumstances before accepting an insolvency appointment, including the effect of any discussions or lack of discussions about the financial affairs of the company with its directors, and whether such circumstances give rise to an unacceptable threat to compliance with the fundamental principles. Where such an investigation was conducted at the request of, or at the instigation of, a secured creditor who then requests an insolvency practitioner to accept an insolvency appointment as an administrator or administrative receiver, the insolvency practitioner shall satisfy them self that the company, acting by its board of directors, does not object to them taking such an insolvency appointment. If the secured creditor does not give prior warning of the insolvency appointment to the company or if such warning is given and the company objects but the secured creditor still wishes to appoint the insolvency practitioner, they shall consider whether the circumstances give rise to an unacceptable threat to compliance with the fundamental principles. 520 Examples relating to previous or existing insolvency appointments 520.1 insolvency appointment following an appointment as administrative or other receiver Previous appointment: An individual within the firm has been administrative or other receiver. Proposed appointment: Any insolvency appointment. Response: It is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. An insolvency practitioner shall not accept any insolvency appointment. This restriction does not, however, apply where the individual within the firm was appointed a receiver by the court. In such circumstances, the insolvency practitioner shall however consider whether there are any other circumstances which give rise to an unacceptable threat to compliance with the fundamental principles. 520.2 Administration or Liquidation following appointment as supervisor of a voluntary arrangement Previous appointment: An individual within the firm has been supervisor of a company voluntary arrangement. Proposed appointment: Administrator or liquidator. Response: An insolvency practitioner may normally accept an appointment as administrator or liquidator. However the insolvency practitioner shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 520.3 Liquidation following appointment as administrator Previous Appointment: An individual within the firm has been administrator. Proposed Appointment: Liquidator.  Response: An insolvency practitioner may normally accept an appointment as liquidator provided they have complied with the relevant legislative requirements. However, the insolvency practitioner shall also consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 520.4 Conversion of members’ voluntary liquation into creditors’ voluntary liquidation Previous appointment: An individual within the firm has been the liquidator of a company in a members’ voluntary liquidation. Proposed appointment: Liquidator in a creditors’ voluntary liquidation, where it is necessary to seek a nomination from the company’s creditors. Response: Where there has been a Significant Professional Relationship, an insolvency practitioner may continue or accept an appointment (subject to creditors’ decision or deemed consent) only if they conclude that the company will eventually be able to pay its debts in full, together with interest. However, the insolvency practitioner shall consider whether there are any other circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 520.5 Bankruptcy following appointment as supervisor of an individual voluntary arrangement Previous appointment: An individual within the firm has been supervisor of an individual voluntary arrangement. Proposed Appointment: Trustee in bankruptcy. Response: An insolvency practitioner may normally accept an appointment as trustee in bankruptcy. However, the insolvency practitioner shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 530 Examples in respect of cases conducted under Scots Law 530.1 Sequestration following appointment as trustee under a trust deed for creditors Previous appointment: An individual within the firm has been trustee under a trust deed for creditors. Proposed appointment: Interim trustee or trustee in a sequestration. Response An insolvency practitioner may normally accept an appointment as an interim trustee or trustee in the sequestration. However, the insolvency practitioner shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 530.2 Sequestration where the Accountant in Bankruptcy is trustee following appointment as trustee under a trust deed for creditors Previous appointment: An individual within the firm has been trustee under a trust deed for creditors. Proposed appointment: Administering the sequestration under a contract for insolvency services with the Accountant in Bankruptcy. Response: The firm may normally accept an appointment under the contract for insolvency services with the Accountant in Bankruptcy. However, an individual within the firm shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 530.3 Sequestration or trust deed trustee following appointment as continuing money adviser under a Debt Arrangement Scheme Previous appointment: An individual within the firm has been a continuing money advisor under a revoked Debt Arrangement Scheme relating to the debtor. Proposed appointment: Trustee in a sequestration or a trust deed Response: An insolvency practitioner may normally accept an appointment as a trustee under a trust deed or as a trustee in a sequestration. However, the insolvency practitioner shall consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 600 APPLICATION IN THE REPUBLIC OF IRELAND Definitions 600.1 In relation to insolvency practice within the Republic of Ireland, the following amended definitions shall apply: authorising body A prescribed accountancy body under any legislation governing the administration of insolvency in the Republic of Ireland; A Supervisory Authority established under legislation governing insolvency in the Republic of Ireland; or The Insolvency Service of Ireland established pursuant to section 8 of the Personal Insolvency Act 2012. insolvency A formal appointment under any legislation in the Republic of Ireland appointment which must be undertaken by an insolvency practitioner. insolvency An individual who is qualified to act as a liquidator under the Companies practitioner Act 2014 in the Republic of Ireland or a person that is appointed as a receiver to a company or the assets of a company in Ireland. 600.2 insolvency practitioners shall comply with the requirements of this Code in relation to insolvency practice within the Republic of Ireland. Referral Fees and Commissions notes that the payment of such fees and commissions to any creditor or members is prohibited and gives rise to a Category 2 offence pursuant to Section 642 of the Companies Act 2014. 600.3 The following examples describe specific circumstances and relationships that will create threats to compliance with the fundamental principles. The examples are intended to assist an insolvency practitioner and the members of the insolvency team to assess the implications of similar, but different, circumstances and relationships. 600.4 Liquidation following appointment as a receiver Previous appointment: An individual within the firm has been receiver of any assets of a company or any company within a group with which it is associated. Proposed appointment: Liquidator Response: Where the receivership was completed within the previous 3 years, an insolvency  practitioner or an individual within the firm shall not accept an appointment as liquidator as it is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. Where the receivership was completed more than 3 years before the proposed date of winding up a threat to compliance with the fundamental principles might still arise. The insolvency practitioner or individual within the firm shall evaluate any such threat and consider whether the threat can be eliminated or reduced to an acceptable level by the use of safeguards. 600.5 An appointment following a significant professional relationship Previous appointment: The firm or an individual within the firm has had a significant professional relationship with a company or any company within a group with which it is associated. Proposed appointment: Any insolvency appointment Response: Where the significant professional relationship was present within the previous 3 years, an insolvency practitioner or an individual within the firm shall not accept an insolvency appointment as it is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. Where the significant prior relationship was terminated more than 3 years before the proposed date of the insolvency appointment a threat to compliance with the fundamental principles might still arise. The insolvency practitioner or individual within the firm shall evaluate any such threat and consider whether the threat can be eliminated or reduced to an acceptable level by use of safeguards. 600.6 Liquidation following examination Previous appointment: An individual within the firm has been examiner and the examiner is unable to formulate proposals for the survival of the company or where the court fails to confirm the examiner's proposals for the survival of the company, and the company subsequently goes into liquidation (either voluntarily or by order of the court). Response: An insolvency practitioner may normally accept an appointment as liquidator provided they have complied with the relevant legislative requirements. However, the insolvency practitioner shall also consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 600.7 Receivership following examinership Previous appointment: The firm or an individual within the firm has been examiner and the examiner is unable to formulate proposals for the survival of the company or the court fails to confirm the examiner's proposals for the survival of the company, and the company subsequently goes into liquidation (either voluntarily or by order of the court) or a secured lender appoints a receiver. Response: An insolvency practitioner may normally accept an appointment as receiver provided they have complied with the relevant legislative requirements. However, the insolvency practitioner shall also consider whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles. 600.8 insolvency appointment following audit related work Previous relationship: The firm or an individual within the firm has completed audit related work. Response: A significant professional relationship will normally arise where the audit related work was completed within the previous 3 years. An individual within a firm shall not take the insolvency appointment as it is unlikely that appropriate action can be taken to reduce the threat to compliance with the fundamental principles to an acceptable level. Where audit related work was completed more than 3 years before the proposed date of the appointment of the insolvency practitioner a threat to compliance with the fundamental principles might still arise. The insolvency practitioner shall evaluate any such threat and consider whether the threat can be eliminated or reduced to an acceptable level by the use of safeguards. Note - Section 635 of the Companies Act 2014 prohibits an auditor from acting as a liquidator when they are or have been in the previous twenty four months prior to the date of commencement of the insolvency appointment, auditor to any client, even a solvent one. Definitions and interpretation authorising body A body declared to be a recognised professional body under any legislation governing the administration of insolvency in the United Kingdom. close or immediate A spouse, civil partner (or equivalent), dependant, parent, child or sibling. family Employee A person subject to a contract of employment or a contract for services with an insolvency practitioner or a firm Entity Any natural or legal person or any group of such persons, including a partnership. firm The firm (a sole practitioner, partnership, limited liability partnership or corporation) in which the insolvency practitioner practises together with: a) an entity that controls the firm, through ownership, management or other means b) an entity controlled by the firm, through ownership, management or other means c) an entity with which the firm is under common control through ownership, management or other means. individual within the The insolvency practitioner, any principals in the firm and any employees of the firm firm. insolvency appointment A formal appointment under the terms of legislation in the United Kingdom, which must be undertaken by an insolvency practitioner. Insolvency practitioner An individual who is authorised or recognised as an insolvency practitioner in the United Kingdom by an authorising body. Insolvency team All persons under the control or direction of an insolvency practitioner. Network A larger structure: a) that is aimed at co-operation; and  b) that is clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources. Principal In respect of a firm: a) which is a company: a director b) which is a partnership: a partner c) which is a limited liability partnership: a member d) which is comprised of a sole practitioner: that person. Alternatively, any person within the firm who is held out as being a director, partner or member.  Code of Professional Conduct for Members of the Swedish Bar Association Adopted and issued by the Board of the Swedish Bar Association on 29 August 2008 with Commentary  About the comments in general ....................................................................................... 4 1 The role and primary responsibilities of an Advocate .................................................. 5 2 Professional Duties in General...................................................................................... 7 2.1 The Execution of a Mandate .................................................................................. 7 2.2 The Duty of Confidentiality and the Duty of Discretion ........................................ 7 2.3 Information to the client......................................................................................... 9 2.4 Information from the client .................................................................................... 9 2.5 Professional competence........................................................................................ 9 2.6 Insurance obligation ............................................................................................ 10 2.7 Economic Transactions with the Client................................................................ 10 This regulation modifies the last paragraph of the guidelines issued on 26 May 2000..... 12 2.8 Client Funds and other Property Belonging to the Client ................................... 12 3 Declining to Act and Discontinuing a Mandate .......................................................... 13 3.1 Offer of a Mandate ............................................................................................... 13 3.2 Conflicts of Interest .............................................................................................. 13 3.3 Duty of Disclosure and Consent .......................................................................... 15 3.4 Duty to Decline a Mandate .................................................................................. 16 3.5 Conflicts of Interest of Colleagues ....................................................................... 17 3.6 Right to Cease Acting when no such Obligation is at Hand................................ 18 3.7 Stating Reasons for Ceasing to Act. ..................................................................... 19 3.8 Assignment as an Arbitrator or a Judge .............................................................. 19 4 Fee and Statements of Accounts, etc........................................................................... 20 4.1 Calculation of the Fee and Invoicing................................................................... 20 4.2 Contingency Fee Agreements............................................................................... 23 4.3 Fee for a Legal Procedure ................................................................................... 24 4.4 Financing of the Mandate .................................................................................... 24 4.5 Advance payment ................................................................................................. 26 4.6 Final Invoicing and Accounting........................................................................... 27 5 Relations to the Opposing Party.................................................................................. 28 5.1 Improper Measures .............................................................................................. 28 5.2 Advance Notice of Legal Action ........................................................................... 29 5.3 Disparaging Information ..................................................................................... 29 5.4 Misleading Information........................................................................................ 30 5.5 If the Opposing Party Lacks Legal Representation or Assistance ....................... 30 5.6 If the Opposing Party Retains an Advocate ......................................................... 31 5.7 Settlement Offers .................................................................................................. 31 6 Relations to Courts and Public Authorities ................................................................. 31 6.1 General................................................................................................................. 31 6.2 Factual Statements and Evidence ........................................................................ 32 6.3 Demeanour towards Witnesses et al..................................................................... 33 6.4 Procedures other than Trial ................................................................................. 34 7 The Organisation of a Law Firm, etc. ......................................................................... 34 7.1 Maintaining Independence................................................................................... 34 7.2 Practise Name ...................................................................................................... 35 7.3 Office Organisation.............................................................................................. 35 7.4 Law Practises Incorporated................................................................................. 36 7.5 Organisation of a Law Firm ................................................................................ 37 2  7.6 Terms of Employment, etc. ................................................................................... 38 7.7 Co-operation ........................................................................................................ 41 7.8 Procurement and Marketing ................................................................................ 42 7.9 Compensation for Acquisition of Mandates......................................................... 43 7.10 Liability for Costs............................................................................................... 43 7.11 Allowing Trade Marks for Use by Others........................................................... 43 7.12 Disclosure and Archiving of Documents............................................................ 44 8 Relations to the Bar Association ................................................................................. 44 3 About the comments in general The initiative to issue Guiding Principles for Good Advocate Conduct was taken by delegates of the Swedish Bar Association in 1967 with the first version being adopted in 1971 by the Board of the Swedish Bar Association. The directives have since undergone a few amendments, the principal wording of which was finalised in 1984. However, 1994 saw two further amendments being added concerning the marketing and running of a legal operation within an existing company. In line with a decision taken by the delegates of the Swedish Bar Association in June 2005, the Board of the Swedish Bar Association decided to appoint a working group, i.e. an Ethics Committee, the purpose of which was to review the current Guiding Principles for Good Advocate Conduct. In November 2007, the Ethics Committee submitted to the Board a proposal for new Guiding Principles for Good Advocate Conduct. On 29 August 2008, the Board of the Swedish Bar Association, following a few amendments and additions, adopted and issued new Guiding Principles for Good Advocate Conduct valid as of 1 January 2009. The commentaries below relate to these principles. The commentaries are not binding and should not be perceived as categorical or exhaustive but merely serve as supplementary guidelines to facilitate the understanding of individual regulations. In the event that the phrasing of a regulation differentiates from that of a previous regulation, the meaning of that regulation will in principal not have changed unless specifically mentioned in the commentary. One or two previous regulations may have been eliminated in line with applicable laws, regulations or other binding legislative acts. Consequently, the need for a regulation is sometimes considered groundless while attention is drawn to the practical importance of other regulations. No commentary has been made in relation to regulations that are deemed fully understandable and unambiguous. These commentaries are regularly updated with declarations from the Board of the Swedish Bar Association, resolutions from the Disciplinary Board, EU directives, etc. Stockholm in September 2008 4 1 The role and primary responsibilities of an Advocate A free and independent legal profession operating in accordance with sound rules developed by the Advocates themselves is an important part of a society governed by the rule of law and a prerequisite for the protection of individual freedoms and rights. Consequently, an Advocate holds a position of significant responsibility in our society. The principal responsibility of an Advocate is to show fidelity and loyalty towards the client. As an independent adviser, the Advocate is obliged to represent and act in the client’s best interests within the established framework of the law and good professional conduct. The Advocate must not be influenced by possible personal gain or inconvenience or by any other irrelevant circumstances. An Advocate must practice with integrity and so as to promote a society governed by the rule of law. An Advocate must act impartially and correctly and so as to uphold confidence in the members of the Advocate’s profession. An Advocate must not promote injustice. Commentary: The role of an advocate A fundamental principle of the entire democratic world and incorporated into the Guiding Principles for Good Advocate Conduct is that an advocate should be emancipated and independent of courts of law and public authorities as well as any other interests which may affect the prospect of fulfilling his/her professional obligations. An emancipated and independent legal bar acting in line with an ethical framework outlined by an independent bar association constitutes an important part of a democratic society governed by law and is a prerequisite for the affirmation of individual constitutional rights. Consequently, an advocate holds a position of significant responsibility in a proper functioning society governed by law. To enable advocates to fulfil the expectations of a society governed by law, the work of the advocates must be subject to specific requirements and performance conditions. In all countries governed by the rule of law, the work of an advocate is subject to specific rules and regulations. There is an abundance of specific rules and regulations on how to act in the best interest of the client, most of which aim to sustain a certain degree of loyalty, trust and confidentiality between the advocate and client whilst other serve to give individuals access to legal advice and representation. These rules and regulations are based on a couple of important and fundamental principles, i.e. core values, such as independence, loyalty towards the client, confidentiality and avoidance of conflicts of interest. Other principles that ought to guide advocates in their work are set out in the charter adopted in 2006 by the European law societies of the Council of Bars and Law Societies of Europe (CCBE), i.e. ‘The Charter of Core Principles of the European Legal Profession’. 5 The role of the advocate has developed and changed over time. Advocates practising general common law involving civil actions and representation in court are these days joined by advocates focusing on all aspects of business law. Today, the bar association includes among its members advocates that practise general law accepting mandates from a broad spectrum of clients as well as highly specialised advocates solely accepting mandates relating to their specialist area. Regardless of whatever dissimilarities, the ethical regulation framework must apply to and function in all aspects of legal work. The responsibilities of the advocate Section 8 of the Code of Judicial Procedure sets forth a number of regulations concerning the responsibilities of an advocate from which it is evident that the principles of good advocate conduct only applies to an advocate’s legal work and not to any other work. However, the nature of such legal work is not defined in law. Instead, there is a margin for interpretation by the Disciplinary Board as to the appropriate meaning of the concept. However, it is further evident from the Code of Judicial Procedure that the disciplinary control of the Bar Association is not just limited to legal work but also take into account every type of misconduct. Such misconduct may lead to exclusion from the bar or in case of mitigating circumstances, a warning. However, the concept of misconduct is not unambiguous and should first and foremost refer to the unacceptable financial conduct of an advocate. According to the Judicial Procedure Preparatory Inquiry, misconduct may also occur externally to the legal work, for example when an advocate is found answerable for a fraudulent behaviour or any other misconduct in a private matter (see NJA II 1943 p. 86; also compare with NJA 1992 C 43 and JK 1984 p. 147 and 1985 p. 36). Advice on the interpretation of the concept of misconduct can also be found in NJA 1994 p. 688. The principal responsibility of an advocate is to make every effort to act in the best interest of the client, i.e. to be truthful and loyal to the client. However, an advocate must not act in violation of valid laws or good advocate conduct and should always act in a righteous and honest manner within the framework of such loyalty. Accordingly, an advocate should adopt an unreserved and independent stance. An advocate should be unbound and independent of the central government so as to act in the best interest of the client in public and civic matters. An advocate must also be unbound and independent in relation to other interests so as to fulfil his/her obligations to the client. Finally, an advocate must assume an unreserved and independent attitude towards the client so as to act in line with the law and good advocate conduct but also to provide the client with an impartial advice and representation and not the advice and representation favoured by the client. It is only possible to sustain a credulous client relationship and endorse the general public’s confidence in the legal bar when personal honour, trustworthiness and integrity are beyond all reasonable doubt. 6 An advocate must not condone injustice The obligation to observe good advocate conduct may result in a restricted freedom to act in the best interest of the client. It is difficult for an advocate to take advantage of all options available once due regard is given to the legal system, opposing party and third party. Naturally, an advocate must not contribute to or in any way be involved in a crime. Nor must an advocate, in good advocate practice, facilitate for someone else’s criminal activities or fraudulently promote a client’s interests. For example, an advocate must not contribute to a dishonest act and shall decline mandates that aim to mislead or in any other way make someone perform a dishonest act. An advocate must not accept a mandate that may result in the unauthorised invasion of someone else’s constitutional rights. Nor must an advocate contribute to the drafting of a written document for the sake of appearances or of a false content or an agreement or any other written document the contents of which may be used for a dishonest purpose. Therefore, to comply with good advocate conduct, it is not enough for an advocate to ensure that the approach recommended or taken by him/her violates the law. The advocate must also act in a manner that promotes honesty and integrity within a society governed by the rule of law. 2 Professional Duties in General 2.1 The Execution of a Mandate 2.1.1 An Advocate must carry out a mandate with care, accuracy and due timeliness. The Advocate must ensure that the client is not burdened with unnecessary cost. Commentary: This directive corresponds in substance with Section 23, second paragraph of the previous regulations. However, the advocate’s obligation to endeavour that neither a public authority nor an insurance company is burdened with unnecessary costs in the event of legal aid or legal protection has been eliminated. The reason for this is that the advocate must always put the best interests of the client in the forefront and not weigh this against a public authority or insurance company that is keen to keep the costs down. Then again, the advocate must not spend undue time on a matter that is not payable by the client. 2.1.2 Legal advice must be based on the necessary examination of the law. 2.2 The Duty of Confidentiality and the Duty of Discretion 2.2.1 An Advocate has a duty of confidentiality in respect of matters disclosed to the Advocate within the framework of the legal practice or which in connection therewith becomes known to the Advocate. Exceptions from the duty of confidentiality apply if the client consents thereto or where a legal obligation to provide the information is at hand. An exception also applies if disclosure is necessary to enable the Advocate to aver complaints by the client or to pursue a justified claim for compensation in respect of the mandate concerned. 7 Commentary: Legal work constitutes the framework of professional confidentiality. However, such legal work provides a broader framework than a mandate. Hence, information given to the advocate by a prospective client without the existence of an actual mandate may also be subject to professional confidentiality. However, the intention of the rule is not for all such information to be subject to professional confidentiality but primarily information that the advocate personally requests, for example to decide on whether or not to accept a mandate. The opposite applies to information provided on the initiative of a prospective client, in which case the advocate may even be compelled to disclose the information received to an existing client. Similar to the previous Section 19, professional confidentiality is exempt when the client consents to or there is a legal obligation to disclose certain information. However, the rule also incorporates an explicit exemption from the obligation to observe professional confidentiality when it is necessary for an advocate to oppose an allegation made by a client, for example in a dispute concerning a client’s claim for indemnity. Exemptions from professional confidentiality against underwriters also apply when specified in relevant policy terms and conditions (see 2.6). In addition, professional confidentiality is subject to exemption to enable the advocate to make an allowable claim for compensation against the client, for example in a judicial proceeding concerning the legal fee charged to the client. However, it should be pointed out that such exemptions only apply to claims arising from the relevant mandates and not claims against a client based on other circumstances. An advocate should generally be able to disclose such information that is deemed necessary for the advocate to defend himself/herself in a judicial proceeding against a client. Even so, it should be mentioned that an advocate is only allowed to disclose information to the extent necessary to assert his/her rights against a client. 2.2.2 An Advocate is obliged to exercise discretion in respect of client matters. An Advocate must not, without cause, enquire about mandates handled by the Advocate’s law firm if the Advocate is not personally charged with such work. Commentary: The duty to exercise discretion as set out in the second sentence of the rule relates to acts of ‘prying’ in matters in which the advocate is not himself/herself involved. However, this regulation is not directed at situations when there is due cause for the advocate in his/her professional capacity to enquire about a client or to attain information in a matter in which the advocate is not involved. This usually takes place in agreement with the colleague handling the relevant client or matter. It may be a question of exchanging know-how or other forms of collegial contacts or attaining the information necessary in order to determine a dispute. However, there are also situations when the advocate has reason to enquire about a matter without first consulting the colleague in charge of that matter. For example, a colleague might be absent due to illness or for any other reason. The regulation generally only applies to obtaining information which is of no use to the advocate in his/her professional capacity. 8 2.2.3 An Advocate is obliged to impose upon his staff the same duty of confidentiality and duty of discretion as that which applies to the Advocate himself. 2.3 Information to the client A client should be kept informed of what transpires in the accomplishment of a mandate. Questions from the client concerning the mandate should be answered without delay. Commentary: Although the wording ‘in an appropriate manner’ has been removed from the preceding Section 24, a change in the actual meaning of Section 24 was never intended. The advocate may at his/her own discretion decide what information the client needs in order to follow the progress and development in a matter. 2.4 Information from the client An Advocate is not, except for special cause, obliged to verify the accuracy of information provided by the client. Commentary: The compulsion to check for accuracy is of course dependent on the type of information provided by a client. The advocate is usually entitled to assume that the factual information provided by his or her principal is correct. However, if the information is of a more sensational nature, the advocate should act responsibly and take such reasonable measures necessary to investigate the correctness of the information received. Information indicating that another person may be accountable for a crime or a dishonourable act should always be handled with extra caution and checked vigilantly in view of the possible consequence of such information. In any event, the use of such sensational information must be of utmost relevance to the mandate in question. 2.5 Professional competence An Advocate is obliged to maintain and develop his professional competence by monitoring the development of the law in the fields in which the Advocate is active and to submit to the necessary continued training. Commentary: This guideline did not exist in the previous regulations. However, Section 36 of the Swedish Bar Association’s Code of Conduct does incorporate a rule on the responsibility of its members to sustain and develop their professional competence. Furthermore, the Board of the Swedish Bar Association requires that its members undergo further training on an annual basis and in line with the guidelines for further training of advocates 9 whereupon details of such further training must be submitted to the Board. Notwithstanding the rules set forth in the Swedish Bar Association’s Code of Conduct, the significant importance of an advocate’s professional competence has lead to a supplementary guideline being added to the Guiding Principles for Good Advocate Conduct. However, it ought to be mentioned that the further training imposed upon members by the Board is not always enough to fully comply with the requirements for further training. 2.6 Insurance obligation An Advocate is obliged to purchase liability insurance cover appropriate to his practice and to maintain such insurance cover by complying with the applicable policy terms and conditions. Commentary: This guideline does not exist in the previous regulations. It is important to note that the insurance cover offered by the Swedish Bar Association within the scope of the membership fee payable to the association is usually not adequate or adapted to the operations of an advocate. Consequently, an additional insurance cover is usually required. Even though the insurance cover held by an advocate is well suited to his or her legal operation, extra attention should be given to the policy terms and conditions so as to maintain an adequate insurance cover. For example, this may entail having to notify the insurer of a claim made against the advocate within a specific period of time. The advocate should also pay attention to any complications that may arise from changing insurer. On account of the above, the obligation to take out an adequate insurance cover is now supplemented with the additional obligation for an advocate to maintain an adequate insurance cover by paying due attention to relevant policy terms and conditions. 2.7 Economic Transactions with the Client 2.7.1 Economic transactions between an Advocate and his clients are prohibited unless resulting from a mandate. However, if a client runs a business, normal transactions within the scope of that business are allowed. Commentary: The fact that any financial transaction with a client is conditional on the existence of a mandate requires a clear and virtually direct connection between the transaction and mandate. The previous regulations of Section 22 that advise against an advocate lending money to, acting as a personal guarantor on behalf of or borrowing money from a client have been eliminated as such transactions are now covered by the proposed principal rule. These types of transactions are only sanctioned if arising directly out of a mandate that has been accepted by an advocate. A symbolic example is when an advocate personally guarantees a client’s application for sequestration. No financial transaction with a client 10 should ever take place if there is a risk of the advocate becoming financially dependent on the client. According to the exemption specified in the second sentence, a financial transaction between an advocate and his/her clients that does not stem from a mandate is also allowed on condition that the transaction falls within the framework of a standard business transaction for the client. Thus, the determining factor is that the transaction is a standard transaction for the client’s business, i.e. it takes place in the same way as any other transaction between the client and associated contractors. If for example the advocate’s client is a bank, the advocate can take out a loan from that bank as long as the loan is agreed on the bank’s normal terms and conditions. If the advocate’s client is a car retailer, the advocate may purchase a car from that client, even if it is a very expensive car, conditional on the transaction being a standard business transaction for the car retailer. A further example is when the advocate’s client is an estate agent. The advocate is then permitted to purchase a house from that client conditional on the purchase taking place in a normal business manner for the estate agent. However, this does not allow the advocate to take advantage of certain discounts, e.g. staff discounts that are usually offered by the client’s business. However, even if a transaction appears to be a standard business transaction for the client, the advocate is recommended not to enter into the transaction if there is any risk at all of the transaction leading to a dispute with the client or a conflict of interest. 2.7.2 It is not permissible for an Advocate to own a share of or have an interest in a client’s enterprise. However, an Advocate may own shares or participations in a client enterprise if the ownership is spread to a wider circle of owners. Such shares or participations may be acquired from the client or someone closely related to the client only if offered to a wider circle and the acquisition takes place on the same terms and conditions as those applicable to others within that circle. An Advocate may also own a share or participation in a business of his own family. Commentary: On 26 May 2000, the Board of the Swedish Bar Association issued the following guidelines on the acquisition and holding of shares in a client’s business. ‘Good advocate conduct means that an advocate should refrain from becoming financially engaged in the business of a client. However, this does not prevent an advocate from directly or indirectly holding shares in a client’s business, the ownership of which is or will become distributed to a wider group of stakeholders following the advocate’s acquisition. The term ‘a wider group of stakeholders’ is further explained in Section 4, Section 18 of the Companies Act. However, regardless of the requirement for dispersion mentioned above, an advocate has the right to own shares in a privately owned family business. An advocate’s acquisition or holding of shares in a client’s business must not lead to other guiding principles for good advocate conduct being ignored. For example, the acquisition or holding of shares must not result in or, at the time of the acquisition, be deemed to result in a conflict of interest with the client. 11 The fact that an advocate may under certain circumstances hold shares in a client’s business does not change the rule that no other financial transactions should take place between an advocate and a client other than those arising out of a mandate and that an advocate generally should not enter into a business relationship with a client. Hence, shares in a client’s business should normally be acquired from someone other than the client. However, shares may be acquired directly from the client on condition that such acquisition will result in a dispersion of the ownership as specified in the first paragraph and is subject to the same terms and conditions offered to other transferees. The abovementioned shall also apply to interests, securities, interim certificates, convertible bonds, bonds with equity warrant, participating securities, share and security options in addition to other share or security derivatives regardless of type’. The aim of this regulation is to codify the guidelines issued by the Board in the Guiding Principles for Good Advocate Conduct. However, it should be pointed out that the regulation which under certain circumstances allows for an advocate to hold shares or interests in a client’s company and acquire such shares or interests directly from a client should be perceived as an exemption from the fundamental rule that any financial transaction taking place between an advocate and a client must have arisen out of the mandate assigned by the client. 2.7.3 An Advocate’s acquisition of, or holding of a share or participation in a client’s business must not cause or be expected to cause a conflict of interest. Commentary: This regulation codifies the second paragraph in the guidelines issued by the Board on 26 May 2000. Even if the conditions for an ownership or acquisition of shares or interests in a client’s company are met, such ownership or acquisition is evidently not permitted if it leads to or is expected to lead to a conflict of interest with the client. 2.7.4 The abovementioned rule concerning shares and participations also applies to other securities or rights that entitle the holder to a participation in the client’s business or where the result is dependent on the business results or another similar circumstance. Commentary: This regulation modifies the last paragraph of the guidelines issued on 26 May 2000. 2.8 Client Funds and other Property Belonging to the Client Monetary funds, valuable documents and other property entrusted to an Advocate by a client or by another on behalf of a client must be linked to the mandate. A mandate must not, except for special cause, entail only the management and brokering of funds or safe- keeping of property. 12 Commentary: It is evident form this regulation that law firms cannot be used as ‘parking zones’ for funds and other property. An advocate can manage or hold funds or any other property for on behalf of a client conditional on having accepted a mandate to which such management or safekeeping of property is linked. For example, if a client asks an advocate to look after a sum of money or a wall painting for a specific period of time or until further notice, the advocate cannot accept the task unless it forms part of a specific mandate assigned to the advocate by the client question. The exemption ‘unless for a specific reason’ refers to a genuine exemption when for example a client is threatened or stalked or there is a legitimate need for a client to have his or her money or any other property safeguarded by an advocate without such service being associated with a mandate assigned to the advocate by the client. An example of the latter instance is when an advocate safeguards property on behalf of a client who owing to old age or for any other reason is unable to safeguard it himself/herself and the client or client’s close relatives do not wish to appoint an administrator or a trustee. 3 Declining to Act and Discontinuing a Mandate 3.1 Offer of a Mandate An Advocate is not obliged to accept a mandate offered but must immediately give notice of his decision to decline a mandate. An Advocate is not required to state reasons for not accepting a mandate. Commentary: If a mandate is offered by a previous client who has every reason to believe that the advocate will accept the mandate, the advocate is obliged to take the necessary measures to give the client time to find another representative without the risk of loosing his or her case as a consequence of the advocate declining the mandate. 3.2 Conflicts of Interest 3.2.1 An Advocate must not accept a mandate if there exists a conflict of interest or a significant risk of a conflict of interest. A conflict of interest exists if: 1. the Advocate assists or has previously assisted the opposing party in the same matter, 2. the Advocate is assisting another client in the same matter and the clients have conflicting interests, 3. the Advocate is assisting another client in a closely related matter and the clients have conflicting interests, 4. there is a risk that knowledge covered by the Advocate’s duty of confidentiality may be of relevance in the matter, 13  5. the Advocate or a close relative has an interest related to the matter which is contrary to that of the client, or 6. the existence of any other circumstance which prevents the Advocate from acting in the client’s best interests in respect of the mandate. Commentary: The ‘mandatory’ conflict of interest situations may, according to the conflictin interests affected, be divided into the client’s mandate interest (items 1, 2 and 3), the client’s confidentiality interest (item 4) and the advocate’s own interest (item5). The expression ‘significant risk’ indicates that the advocate must also consider whether a conflict of interest may arise in the future. Therefore, it is permissible in an exceptional situation for a defence counsel to accept a mandate on behalf of two defendants in the same case if it is not immediately obvious that they have conflicting interests. 3.2.2 A conflict of interest may be at hand if the Advocate is assisting or has previously assisted the opposing party in another matter. Commentary: The expression ‘may’ indicates that there is not necessarily a conflict of interest if the advocate has ongoing mandates for the opposing party. The opposing party’s interest is a general loyalty interest. The fact that the advocate has an ongoing mandate for the opposing party may often be detrimental to trust and if so, there is a conflict of interest. However, sometimes the circumstances may be such that neither client may be expected to consider it disloyal, e.g. if an advocate who has been instructed to represent a party in a tax case is asked to represent another client in reviewing a proposed agreement with the tax client and neither matter is of a greater extent or significance to the advocate or any of the clients. A previous (completed) mandate assigned to an advocate on behalf of the opposing party is generally not considered to be detrimental to trust. However, it should be noted in this context that the expression ’knowledge comprised by the advocate’s professional confidentiality’ under 3.2.1, item 4 is not limited to the knowledge of a factual circumstance. Also knowledge of an individual’s personality and demeanour may be used in a negotiating situation and comprised by the locution. If the advocate can expect a future mandate from a previous opposing party, a conflict of interest is usually considered to exist. By way of example, an advocate who regularly has represented or represents the social welfare board of a municipality in matters concerning the care of young people should not accept a mandate on behalf of an individual in another matter against the municipality unless it is clear that the mandate assigned by the municipality may be considered completed. 3.2.3 When considering whether there is a conflict of interest in relation to clients or opposing parties which are legal entities then ,subject to the specific circumstances, the 14 client or opposing party may be deemed to constitute all or part of the group of companies or interest group of which the legal entity forms a part. The provisions applicable to interest groups may also apply to an individual in his capacity of owner of a legal entity. On the other hand, in such analysis, the client or opposing party may be considered to constitute merely a part of the legal entity, if that legal entity conducts extensive business. Commentary: The first two sentences signify that there may be a conflict of interest if the first mandate has come from an individual or legal entity other than the intended client in the subsequent mandate, where these have a common interest. The last sentence on the other hand means that an advocate may be able to for example represent a local office in Haparanda while simultaneously acting against the local off ice of the same legal entity’s in Ystad. Whether this is acceptable depends on the circumstances in each individual case, i.e. the importance of the mandates for the client and for the advocate and if there is a risk that both mandates are handled by the same persons whereupon a conflict of interest is considered to exist in the latter case. 3.3 Duty of Disclosure and Consent 3.3.1 An Advocate who is considering to accepting a mandate is obliged to consider, as soon as possible, whether there is a conflict of interest which precludes the Advocate from accepting the mandate. If the Advocate finds that no obstacle is at hand but that nevertheless a circumstance exists which may lead the client to a different assessment, the Advocate is obligated immediately to notify the client thereof. If such information cannot be provided without breaching the Advocate’s duty of confidentiality, the Advocate must decline the mandate. Commentary: The rule means that the advocate is obligated not only to consider whether there is an objective conflict of interest, but also how the situation appears from the point of view of the client. Even if the advocate is of the opinion that no conflict of interest exists and the mandate may be accepted, there are perhaps circumstances that could have affected the client’s choice of counsel if the client had know about such circumstances. If that is the case, the client must be granted the opportunity to consider these circumstances before the mandate is assigned. 3.3.2 If express consent can be obtained without setting aside the Advocate’s duty of confidentiality, the Advocate may, exceptionally, and after having obtained such consent, accept a mandate even if a conflict of interest under 3.2.1, subsections 3 or 4 or 3.2.2 above is deemed to exist, provided that the circumstances are not such as to give cause to doubt the Advocate ability fully to safeguard the client’s interests. 15 Commentary: The rule under 3.3.2 considers the exceptional cases where consent from the client may affect the ability to accept a mandate even though a conflict of interest is assumed to exist as well as the requirements for such consent to be relevant. The rule does not emphasise nor is it applicable to mergers and acquisitions by means of controlled auctions so that a waiver could in any case make it possible for one law firm to represent two or more competing bidders in such an auction process. It is clear that a client may waive his/her confidentiality interest and there is also reason to permit affected clients to influence the issue of whether the general duty of loyalty should prevent an advocate from accepting a mandate. In practice, it is fairly common for an advocate to for example request the opinion of a corporate client as to whether the advocate may accept a mandate against the company or another group entity. If in such case the client declares not to have any objections thereto, such declaration must be considered as a material element in the advocate’s analysis as to whether the client’s loyalty interest is impaired by the advocate accepting the mandate. One example where consent may enable the advocate to represent more than one interest is when more than one party jointly asks for assistance by the advocate in drafting a contract between the parties. If in the course of the mandate the interests of the clients are subject to conflict, the advocate will not be able to continue with the mandate, see 3.4.1 below. 3.4 Duty to Decline a Mandate 3.4.1 An Advocate who after having accepted a mandate identifies the existence of a circumstance such as would have obliged the Advocate to decline the mandate had the Advocate been aware of the circumstance when accepting the mandate must resign from the mandate. The duty of disclosure under 3.3 applies also when a circumstance that gives rise to an issue as to the risk of a conflict of interest arises or is discovered after the mandate has been accepted. Commentary: The assessment of the obligation to resign from a mandate is in principle the same in the course of the mandate as when the mandate was first accepted. However, there could be far-reaching consequences for a client if the advocate resigns from an ongoing mandate and the advocate must in such case consider whether the harm caused to the client would justify not resigning from the mandate. Thus, it is a question of weighing up the different interests and it is not certain whether the advocate in the given situation should act in the same way as the circumstances had been known to the advocate at the time of accepting the mandate. If an advocate represents more than one client in the same matter and a conflict of interest arises during the course of the mandate (in case of a criminal defence or a mandate on behalf of parents in a matter concerning the Care of Young Persons Act), the advocate must resign from the mandates assigned to him or her by all the clients. In 16 such a situation, other legal practitioners at the same law firm or sharing office with the advocate in question are also obliged not to accept any of the mandates. 3.4.2 An Advocate is also obliged to resign from a mandate if: 1. the Advocate is prevented from carrying out the mandate because of a statutory bar or similar circumstances, 2. the client demands that the Advocate should act criminally or in breach of Good Advocate’s Practice and despite having been made aware thereof maintains the demand, 3. the client suppresses or distorts evidence or acts deceitfully and cannot be induced to rectify, or 4. the Advocate, in order to avoid violation of the anti-money laundering legislation, reports a client to the police. Commentary: The first three subsections of the rule correspond to the rules in subsections 1 – 3 of the second paragraph of former Section 15. The obligation to resign under the fourth subsection results from anti-money laundering legislation. 3.5 Conflicts of Interest of Colleagues For the purposes of 3.2 and 3.4, a conflict of interest for someone else in the firm or in a shared office where an Advocate practices normally constitutes a conflict of interest also for the Advocate. An exception applies if a conflict of interest occurs due to the entry into the firm of a colleague and the conflict of interest for that colleague arises merely because of a mandate of a former colleague. Another exception arises when the colleague’s conflict of interest is of the nature stated in 3.2.1, subsection 5, and circumstances are not such to make subsection 6 applicable. Commentary: The provision expresses the so-called contagion rule. From a substantail point of view, the new main rule corresponds to the provision in former Section 14. However, it has been deemed appropriate to provide for two particular exceptions. The term ‘someone else’ refers to another colleague from the legal staff but the rule also applies to for example a managing director not practicing law. According to the main rule, a conflict of interest for one advocate will thus ‘infect’ all others at the firm or in the shared office which the advocate is part of. The sharing relationship may arise in different ways. One possibility is that the advocate, without there being a formal company or partnership, collaborates with others in the shared office. The underlying principle is that a conflict of interest contagion will affect all those who collaborate in a manner so that, typically, there is a significant risk of information being compromised by the advocate’s duty of confidentiality or discretion being unduly disclosed to a third party. Examples of cases where such a risk must be deemed to exist 17 are when the advocate shares premises, support personnel, printers, faxes and other similar office equipment. The contagion rule means that a conflict of interest which has arisen in one law office is spread to all other offices of that law firm including those located in other places within or outside of Sweden. It is in principle impossible to avoid a conflict of interest by putting up information barriers. There are two exceptions to the main rule. The first applies to the common situation where an advocate switches law firms while the firm that the advocate is leaving (the old firm) handles a matter where the client’s opposing party is assisted by an advocate at the firm which the advocate is joining (the new firm). According to the main rule, the change could bring about a contagion of the new firm with the consequence that the new firm must resign from its mandate on behalf of the opposing party. Such a rule would mean that clients frequently have to change counsel albeit there being no material reason to do so. The rule would often be too strict and consequently, an exception from the main rule is is called for. An absolute precondition for the applicability of the exception rule is that the transferring advocate when practising law at the old firm has had no dealings with or otherwise received confidential information about the relevant mandate and that the conflict of interest on the part of that advocate has been entirely brought about by conflict contagion from another advocate of the old firm. The second exception refers to an advocate at a firm having an interest of a personal nature in a certain matter. A typical case is that the advocate or a close relative has a financial interest in a company. In those cases, it has been deemed to o strict to let such a circumstance without exception mean that someone else at the firm cannot handle a mandate where a client has an interest opposing that of the company in which the colleague is interested. However, circumstances I the individual case may be such that it may be called into question whether the advocate handling the case can truly represent the client’s interests against the interests of someone else at the law firm. Such a situation may be that the personal finances of a colleague at the firm could be substantially affected by the outcome of the client mandate in which case, the exception is not applicable. 3.6 Right to Cease Acting when no such Obligation is at Hand An Advocate may not without consent of the client resign from a mandate unless the Advocate is obliged to do so or if a valid cause may be invoked. A valid cause for resigning from a mandate may be that: 1. the client, when retaining the Advocate, intentionally withheld information which would have been essential for the Advocate’s decision to accept the mandate, 2. the client unreasonably burdens or troubles the Advocate and cannot be induced to rectification, 3. the client instructs the Advocate to handle the mandate in a manner which is futile or contrary to the best interests of the client, and despite being made aware thereof, maintains the instruction, 4. the client in essential respects acts against the Advocate’s advice or otherwise demonstrates a loss of confidence in the Advocate, or despite reminders, fails to effect an advance payment or compensation to which the advocate is entitled on account of the mandate. 18 Commentary: The rule clearly stipulates the right of an advocate to renounce a mandate when the information given by a client and on the basis of which the advocate has accepted the mandate is false or incorrect. 3.7 Stating Reasons for Ceasing to Act. 3.7.1 An Advocate wishing to resign from a mandate must inform the client of the reason therefore and at the client’s request, give written notice thereof. Before resigning the Advocate must give the client reasonable time to retain another Advocate. Should an Advocate wish to cease acting as legal counsel in Court, it is the duty of the Advocate in accordance with Chapter 12, Section 18 of the Code of Judicial Procedure, on the basis of the power of attorney to safeguard the client’s interests until the client has been able to take measures for legal representation. 3.7.2 The stipulations in 3.7.1 do not apply when, to avoid violation of the Anti-Money Laundering Legislation, the Advocate must report a client to the police. Commentary: The rule has been reviewed and amended to accommodate for the provisions of the Anti- Money Laundering Act. 3.8 Assignment as an Arbitrator or a Judge The rules on conflicts of interest set out above do not apply when an Advocate is subject to conflict of interest rules of an arbitrator or a judge in a Court of Law. Commentary: The appointment of an advocate as an arbitrator has become common place. In such cases, the advocate is generally subject to the particular conflict rules which by law and/or the relevant institutional rules apply to arbitrators. These particular conflict rules are drafted so that a party wishing to challenge on the basis of a conflict of interest must do so within a certain period of time after having become aware of the relevant conflict circumstance. Otherwise, the right to challenge becomes precluded. The purpose of the preclusion rules is to prevent disloyal use of the rule concerning conflicts of interest. Swedish advocates frequently participate in proceedings where the co-arbitrators are lawyers from other countries. It is important that all arbitrators are subject to the same rules on conflicts of interest. It would be undesirable if different bias rules were to apply to different members of the same arbitral tribunal, in that the Swedish advocates are subject not only to the bias rules applicable to the actual arbitration but also to the rule on 19 conflicts of interest that follow from the deontology of the Swedish Bar. In addition, the effect of the arbitral preclusion rule is weakened if a party omitting to observe the time restriction may in fact force an arbitrator to resign by threatening him or her with disciplinary action. The bias rules applicable to arbitral proceedings have been appropriately composed by the legislator. Thus, there is no need for an additional regulation. To some extent, the present rule means a return to the legal state that prevailed under the earlier precedents of the Disciplinary Committee to the effect that an advocate when sitting as an arbitrator is exempt from disciplinary control since such activity is not deemed to constitute good advocate conduct. However, entirely removing the ethical rules applicable to advocates with an arbitration commitment is unwarranted. In a conflict of interest it is sufficient to give precedence to the arbitration rules. In case of a conflict of interest of a colleague and that of an arbitrator in connection with a new assignment, the mandate of an arbitrator shall of course be assessed in the same way as a regular client mandate, i.e. a conflict of interest relating to an arbitration mandate will have an overall effect on a law firm. The same applies to an advocate who acts as an adjunct judge in court on a temporary basis. The conflict rules of the Swedish Code of Judicial Procedure are here sufficient. 4 Fee and Statements of Accounts, etc. 4.1 Calculation of the Fee and Invoicing 4.1.1 The fee charged by an Advocate must be reasonable. Commentary: The client shall enjoy the privilege of being charged a reasonable fee. According to the legislative history of Section 8, subsection 7, second paragraph of the Code of Judicial Procedure, a professional fee is unreasonable when there is cause to take disciplinary action against an advocate. Seeing as the legitimacy of a professional fee is dependent on a multitude of factors, each of which is difficult to assess and hold separate, the assessment of a professional fee must be exercised with discretion. Hence, the assessment may not be based on the advocate failing to comply with good advocate conduct or arriving at the same decision as a court of law. The rule should not be seen as an impediment for the advocate to use his/her own discretion to decide upon a suitable fee. However, the objectives of good advocate conduct are violated when flagrantly ignored by an advocate. (See Wiklund, Good Advocate Practice, p. 360). When the reason for renouncing a mandate can be assignable to the advocate, the professional fee shall allow for any additional expenditure which the client may be encumbered with. 20 4.1.2 In determining what constitutes a reasonable fee for a mandate, regard may be had to what has been agreed with the client, the extent of the mandate, its nature, complexity and importance as well as the Advocate’s expertise, the result of the work and other such circumstances. Commentary: The rule exemplifies what should be taken into account when deciding upon a reasonable fee. The professional fee payable by a client in lieu of a mandate is subject to the provisions of civil law and adjusted by way of an agreement between the client and the advocate. However, the agreed professional fee, whether fixed or hourly, must also be assumed reasonable in line with good advocate conduct. A fixed fee that is agreed in connection with an advocate accepting a mandate is conditional on the advocate having a rough idea of the extent of the mandate. A professional fee agreement is considered to exist when an advocate accepts a mandate subject to statutory compensation or compensation from an insurer or similar entity (such as a non-profit organisation). However, in case of an insurance cover or similar, the advocate may reserve the right to abstain from that type of compensation on condition that this is explained to the client when the mandate is accepted (compare 4.4.2 and 4.4.3). The extent of a mandate usually means the length of a mandate although not the actual time that the advocate spends on a mandate but the expected time needed to complete a mandate. The character of a mandate may refer to the necessity of an expedited handling of a matter and consequently, the constant availability of the advocate or specific demands on the law firm of that advocate. The extent and character of a mandate may also incorporate the constraint of the advocate in the sense that the advocate is prevented from accepting other mandates. The novelty of a problem or solution that an advocate may have to face is usually assigned to the complexity of a mandate and expertise of the advocate. The importance and outcome of a mandate is in every respect for the benefit of the client. The importance of a mandate may also refer to the capital value of a disputed object or a specific responsibility entrusted to the advocate or rising from a mandate. Expertise includes among other the advocate’s specialist knowledge in the area to which the mandate relates. 4.1.3 An Advocate may only receive compensation in the form of customary means of payment. The fee charged does not have to be itemised but, on demand, the Advocate is obliged to provide the client with a written account of the work carried out. If the Advocate charges the client for disbursements, the nature thereof such must be clearly specified. Commentary: Traditional forms of payment include cash, cheques and bank drafts or similar (see the guidelines issued by the Board of the Swedish Bar Association on 26 May 2000). A set-off payment is also considered to be a traditional form of payment when deducted from a client funds account. The client’s right to request a written report on work carried out to date also applies to publicly funded mandates where the client is liable to pay the entire or 21 part of the fee. A written report must be detailed and comprehensible to allow for an assessment of the legitimacy of the fee charged. 4.1.4 In connection with accepting a mandate, the Advocate should state charging principles and inform the client invoicing routines which the Advocate intends to apply. Fees may be invoiced either by way of a partial invoice, an invoice on-account or by invoicing after completion of the mandate. Partial invoicing means charging a final fee for part of the Advocate’s work attributable to a certain period or for a specific part of the work. On-account invoicing means invoicing part of the final fee without specific attribution to a certain part of the work. Invoicing of on-account work must be accounted for in the final invoice. Commentary: The advocate must when accepting a mandate give details of the invoicing principles and routines that the advocate intends to employ. Invoicing principles determine the size of the fee charged (compare 4.1.2 above) whilst invoicing routines determine the type and frequency of the invoice issued. In the event of the cost of the services rendered by the advocate being agreed prior to the start of the mandate, the advocate is liable to notify the client of such cost or when requested by the client. This rule takes into account the so- called Services Directive (the Services Directive 2006/123/EG adopted by the European Parliament and Council). Information about invoicing routines is conditional if an advocate wants to renounce a mandate on the basis of a payment default (compare 3.6, subsection 5). In the event of recurrent mandates from the same client, the advocate is considered to have fulfilled his or her duty to inform the client of relevant invoicing routines as long as this is done once and the relevant information has not been changed. In case of a dispute with a client, the advocate has burden of proof that he or she has complied with the duty to inform the client. Consequently, there are various reasons to document the invoicing principles and routines agreed with a client. See also 4.4.1 and 4.4.3. The second paragraph of the rule refers to different forms of invoicing. The advantage with interim invoicing is that the professional fee charged is settled before each new issue of invoice with no need for a final invoice. The disadvantage with interim invoicing is that it is not possible to review the final outcome of the services rendered in the same way as with a final invoice following an on-account invoice. An on-account invoice only allows for a reasonable estimation of the work carried out plus any so-called wasted time or time set aside by the advocate on behalf of the client. A retainer mandate means that the advocate receives an advance payment of the professional fee agreed with the client for the execution of a specific mandate during a specific period of time. However, if the specific mandate does not go according to plan, the advance amount paid may be deducted as the agreed disposal period passes by. Retainer mandates the prime purpose of which is to prevent an advocate to act on behalf of an opposing party are prohibited. 22 4.2 Contingency Fee Agreements 4.2.1 An Advocate may not, except for special cause, enter into a fee agreement with a client which gives right to a quota of the result of the mandate. Commentary: The rule generally prohibits an advocate to enter into a professional fee agreement that entitles an advocate to a quota of the result of a mandate unless for specific reasons. Specific reasons for allowing such an agreement are for example when an advocate is representing the interests of a collective action or engaged in a cross-border mandate the handling of which is required outside of Sweden. However, in the latter case, the question is whether parts of a mandate concerning a dispute could be handled in Sweden. Another exception is when a client without a quota agreement finds it difficult to get access to justice. The rule conforms with CCBE’s Directives on Good Advocate Conduct within the EU (see item 3.3 therein) on the prohibition of profit quota agreements or pactum de quota litis or contingency fees but it also takes into account such specific circumstances that may motivate the authorisation of a particular profit quota agreement. 4.2.2 An agreement which entails that the Advocate takes a financial risk in the outcome of the mandate must not result in the Advocate’s interest in the matter becoming disproportional or otherwise having an adverse effect on the Advocate’s carrying out of the mandate. Commentary: Risk agreements have never been expressly prohibited in Swedish law. However, risk agreements have traditionally been deemed as incongruous by the Swedish Bar Association. The reason for this is that a risk agreement is considered to intrude on the rule that an advocate’s fee should be reasonable and evade the principle of an advocate refraining from all financial involvements with a client. Whatever the circumstances, the rule prohibits a professional fee agreement where the advocate is taking such a financial risk in the outcome of a matter that the advocate may find it financial benefitting to act or omit to act in the best interest of the client. An example of such a circumstance is when an advocate recommends a client to accept a legal conciliation which results in a worse outcome for the client than what would otherwise have been the case. Nor may an advocate become so financially dependent on the outcome of a case that his or her independence is put in jeopardy. 23 4.3 Fee for a Legal Procedure A fee charged on account of a legal procedure may not, unless for special cause, exceed the fee for which the Advocate, on behalf of the client, claims that the opposing party be ordered to pay. Commentary: In this context, a legal procedure is when a court of law or any other authority examines the claims for costs submitted by the involved parties. The determination of a professional fee in a legal procedure is dependent on various factors. The examination of a claim for costs ultimately determines the amount payable by the opposing party to the client. The same examination will also give the client an idea of what is a reasonable professional fee. A specific reason for charging a client more than the claim for costs submitted in a legal procedure may be that the client for business reasons or to protect consumer or employer interests does not wish the opposing party to pay a higher amount than the claim for costs submitted. Another specific reason may be of a more tactical nature, i.e. when a claim for costs is withdrawn on the basis of an expert opinion is thought not to promote the client’s case or nonparticipation of a witness. In the event of a deviation that does not comply with the client’s instructions, the advocate is obliged to consult the client prior to submitting the claim. Another specific reason is when an advocate acting as private defence counsel or engaged in another type of legal matter (e.g. a fiscal matter) submits a claim for compensation relating to services rendered as a defence counsel or representative on behalf of a client in line with statutory standards for compensation irrespective of whether or not the advocate has reserved the right to charge the client more. 4.4 Financing of the Mandate 4.4.1 An Advocate must inform the client of existing possibilities of having the mandate financed by public means or by insurance and explain the terms and conditions therefore. An Advocate shall assist in safeguarding the rights of the client in this regard. Commentary: The rule does not stop an advocate from declining financing by public means or an insurance cover or similar when accepting a mandate. The duty to inform the client of the terms and conditions for such financing of a mandate is very important and must take place in connection with the mandate being accepted whereupon the client should also be advised that such financing does not cover the costs of the opposing party. It is also important to inform the client of other restrictions that may result in a mandate being insufficiently funded. If a mandate financed by public means, an insurance cover or similar is accepted, the advocate is liable to assist the client with the application, registration and settlement procedures. However, the advocate is usually not permitted to 24 ask the client for an advance payment or that the client pays any excess due in relation to an insurance claim or similar, nor is the advocate permitted to ask the client to personally deal with any insurance claim. Prior to accepting a defence mandate which does not entail the advocate acting as a public defence counsel (private defence counsel), the advocate shall in line with 4.1.4 clarify to the client the invoicing principles and routines which he or she intends to use. The advocate must also clarify to the client whether he or she intends to deviate from the statutory compensation normally applicable to a public defence counsel and whether the compensation paid by public means in case of a successful court ruling may be limited to the compensation usually awarded a public defence counsel. As regards a written clarification, please refer to the commentary to 4.1.4. 4.4.2 An Advocate must not for work as a public defender or as a representative under the Legal Aid Act reserve the right to or receive from the client or another part a fee or any other compensation in addition to the compensation determined by the competent authority. Commentary: This rule relates to the same prohibitions as provided for in the regulations and incorporates every proviso on legal aid. A defence mandate may be accepted without the client initially requesting the appointment of a public defence counsel. For example, this may be the case when a client wishes to avoid the publicity that follows an appointment of a public defence counsel. If this is the case and the case is not subject to secrecy or the initial representative being replaced through the appointment of a public defence counsel, the advocate in question shall be entitled to charge the client for any representation rendered. However, this is subject to such representation being kept separate and verified at the time of the advocate accepting the relevant mandate. 4.4.3 When accepting a mandate covered by legal cost insurance, the Advocate shall inform the client whether he intends to deviate from the standard compensation specified in the terms of the insurance policy. Commentary: The duty to clarify the advocate’s intentions as to standard forms of compensation shall apply alongside the duty to inform about invoicing principles and routines (compare with 4.1.4). 25 4.5 Advance payment An Advocate may ask for advances to cover disbursements on behalf of the client. The Advocate may also, if agreed on acceptance of the mandate or if otherwise reasonable, demand an advance payment on the fee. An advance payment constitutes client funds. When a fee is paid from a client’s account, an invoice showing the payment shall simultaneously be sent to the client. Commentary: An advance payment constitutes a deduction from a client’s funds account. Accounting regulations include specific rules for the management of client funds. When a professional fee is settled by a client’s funds account, the client shall simultaneously be issued with an invoice with details of the payment made and deduction on account regardless of whether it is an interim, on-account or final invoice. The advocate does not need the client’s approval before deducting the client’s account. In the event that the possibility of an advance payment is not agreed prior to accepting a mandate, the advocate shall still be entitled to ask for an advance payment if deemed reasonable. For example, the circumstances that exist when a mandate is assigned may be incorrect or incomplete. This is deemed to apply to all incorrect or incomplete circumstances whether assignable to the mandate or client. If an advocate when receiving a mandate is under the impression that the mandate in question is fairly straightforward and it later transpires that the mandate is of a more complex and demanding nature than initially anticipated, the advocate shall be entitled to ask the client to make an advance payment bearing in mind the changed circumstances. The same shall apply if there is a considerable risk of the advocate not being paid for services rendered. The question is whether the initial intention of the client was to mislead the advocate about his or her financial situation. An advocate shall always have the right to ask for an advance payment to cover for recurring expenditures even if not provisionally agreed at the time of accepting the mandate. Accordingly, an advocate is entitled to request that a client provides him or her with the means necessary to cover for any expenditures arising on behalf of the client. In accordance herewith, the advocate shall also be entitled to ask for compensation from the client for expenditures when a mandate is not yet accomplished. This rule affects the advocate’s right to renounce a mandate owing to a default payment. As with any renouncement of a mandate, the advocate must take into account the situation in which he/she puts a client when renouncing a mandate. Hence, the advocate may not ask for an unreasonable advance payment and should always give the client reasonable time to pay during which the advocate is obliged to take the necessary measures to ensure that the client’s legal rights are unaffected. 26 4.6 Final Invoicing and Accounting 4.6.1 When a mandate has been completed or otherwise terminated a final invoice is to be sent to the client, without delay, except where only partial invoicing is applied. Commentary: The nature of a mandate is indicative of when it will be completed and the liability to issue a final invoice arises. A mandate relating to representation in a legal proceeding is usually not considered to be completed until the court has reached a final decision. Representation that follows a court ruling is generally seen as a new mandate unless otherwise specified. A final invoice is always required when a mandate is subject to on- account invoicing. The final invoice should give details of the total professional fee charged for the entire mandate plus previous on-account charges. An interim invoicing may refer to the consecutive services that an advocate provides on behalf of a client in the course of more than one mandate, e.g. representation in different matters during one quarter of the year or a specific month. Such consecutive services may also be subject to on-account invoicing provided that it is followed up with a final invoice, for instance on an annual basis. 4.6.2 If an Advocate receives funds in the course of the mandate, a final statement of account shall be submitted to the client without delay and any balance in the client’s favour shall be paid to the client unless otherwise agreed, or results from the nature of the mandate. An Advocate must not, as a condition for payment, request that the client approves the fee charged or the final statement of account. Nor may an Advocate by agreement or reservation relieve himself of the accounting duty. Commentary: The principal rule is that any balance due to the client shall immediately be credited the client unless otherwise agreed or because of the nature of the mandate. An agreement is an understanding that gives rise to the question whether an advocate’s right to compensation should also entitle him or her to an advance payment. The nature of a mandate refers for example to administration and liquidation mandates that require continuous funding to enable implementation. The rule also manages to communicate the fact that an advocate’s mandate does not only involve the management of funds. 4.6.3 An Advocate’s statement of account must be clear and unambiguous. The statement of account must specify what the Advocate has received on account of the mandate and the disbursements made by the Advocate as well as the fees invoiced and deducted. Dates 27 of receipt and payment of each partial amount must be specified. The statement of account must be dated. Commentary: If a settlement of account fulfils the basic requirements for clarity and transparency and every other provision of the rule, a computer-based settlement of account may be produced and referred to in connection with invoicing. As regards expenditures, the rule stipulates that it should be clearly specified in writing what each and every expenditure relates to (compare with 4.1.3). Consequently, expenditures cannot be shown as single accounting items. Invoiced expenditures must correspond to an actual cost unless otherwise agreed with the client. For example, an advocate is not usually permitted to charge a standard amount to a client for an individual office expenditure. 4.6.4 The duty, in certain cases, annually to account for management of funds and render a statement of income to the authorities is regulated by law and the Accounting Standards of the Bar Association. Commentary: The rule relates to the special accountability that applies to the management of funds in addition to the final settlement of account. According to Section 5 of the Accounting Standards, an annual account must be submitted no later than 1 April and include details of the management of funds over the past calendar year if the advocate during this year has had an account claim in excess of a basic amount or, if using a slightly more modern term, a price base amount. If a final mandate account has been submitted prior to 1 April, no rendering of accounts for the previous calendar year is required according to the Accounting Standards. With regard to the accounts layout and other rules, please refer to the Accounting Standards. The duty to render a statement of income also applies to the management of funds on behalf of an individual or an estate of a deceased person regulated by the Income Tax Act (2001:1227). 5 Relations to the Opposing Party 5.1 Improper Measures An Advocate must not seek to promote the client’s cause by taking improper measure in relation to the opposing party. Improper measures are, inter alia, 1. reporting to an authority about crime or anything else which lacks foundation or relevance to the mandate or threatening to file such report, 28  2. applying for a summary payment order, filing an application for bankruptcy or payment demand before applying for bankruptcy in circumstances where the Advocate knows that the claim for payment is contested on a basis which is not manifestly unfounded, 3. scandalising the opposing party or threatening to do so , or 4. unwarranted contact with a third party or threatening such conduct. Commentary: The rule is partially identical with Section 38 of the preceding rule. However, the new rule is more transparent and has been adapted to the recommended practice of the Disciplinary Board by way of the second item in the second paragraph. In addition, the third item under the same paragraph has been amended to include all acts or threats of scandalising regardless of where this takes place. An act of scandalising is when an advocate makes unwarranted remarks to an unspecified party. 5.2 Advance Notice of Legal Action 5.2.1 Legal action must not be taken against an opposing party unless the opposing party is given reasonable time to consider the client’s claim and to reach an amicable settlement. 5.2.2 However, legal action may be taken without prior notice if a delay would entail a risk of loss of the legal rights or other damage, or if there are other special reasons for taking such action. 5.3 Disparaging Information An Advocate may not in the course of a legal proceeding submit evidence of circumstances which are disparaging to the opposing party or make offensive or disparaging statements about the opposing party unless, in the circumstances, this appears justifiable in order to act in the best interests of the client. Generally, an Advocate should refrain from actions or statements which are liable unnecessarily to offend or insult the opposing party. Commentary: The rule highlights the responsibility of an advocate to act in the best interest of the client at the same time as showing consideration for the opposing party. A statement made in relation to an opposing party must be justified by the situation of the advocate when making the statement. Hence, a statement will not be subject to criticism with the benefit of hindsight. See also regulation 6.3.2 including commentary. 29 5.4 Misleading Information An Advocate must not mislead the opposing party by making statements about a factual circumstance or the content of legal rule which the Advocate knows are inaccurate. Commentary: The rule merely draws attention to the cognizance of an advocate. It is deemed too categorical for the rule to incorporate what an advocate ought to have known as this may impede the legal and factual analysis. However, an advocate is assumed to have or attain a good knowledge of the contents and meaning of the appropriate rules of law. In the event of an incorrect statement concerning a rule of law, an advocate is likely to be in violation of this or the rule under 2.1.2. 5.5 If the Opposing Party Lacks Legal Representation or Assistance 5.5.1 At a contact with an opposing party who does not have a legal representative or counsel, the Advocate, where appropriate, should inform the opposing party that it is not part of the Advocate’s mandate to safeguard the opposing party’s interests and advise him to retain an Advocate. 5.5.2 A draft prenuptial agreement, or an instrument for distribution of martial property, an agreement on sole custody of a child and other similar documents may normally not be issued without prior contact with both parties. However, an Advocate may provide a party with whom the Advocate has had no previous contact with a proposal for such a document if in a covering letter the Advocate gives the information specified in 5.5.1. 5.5.3 Documents containing beneficial deeds may normally only be prepared in consultation with the party intending to perform the deed. Commentary: These rules express the duty of an advocate to show consideration for the opposing party. This specifically applies when the opposing party is not legally represented by an advocate nor is deemed capable of acting in his or her best interest. However, the duty to show consideration only involves the opposing party confirming that the advocate is only required to represent his or her own client and that the opposing party may need to appoint a legal representative. The term ‘contacting’ under 5.5.1 above has been given a broader connotation than in the preceding rule. The responsibility to inform the opposing party must be assessed on a case-by-case basis and subject to the circumstances and character of the opposing party is. Rule 5.5.2 is an addition to the original rule and partly a codification of the recommended practice of the Disciplinary Board. The rule does not limit the responsibility of an advocate to act in the best interest of a client and is aimed at circumstances relating to family law. If an advocate has not been in contact with the opposing party, certain family 30 law documents cannot be disclosed before the opposing party is informed that it is not the responsibility of the advocate under the relevant mandate to act in the best interest of the opposing party and to recommend the opposing party to appoint an advocate. Rule 5.5.3 refers to all documentation that incorporates a beneficial legal component and is not subject to 5.5.2. No such consultation is normally required in case of a beneficial legal document relating to a legal entity. 5.6 If the Opposing Party Retains an Advocate If the opposing party retains an Advocate, all negotiations in the matter concerned shall be carried out with and all communications sent to that Advocate. It is then not permitted for the Advocate to make direct contact with the opposing party except where the action must be brought directly against the opposing party or otherwise, for special reasons, it is necessary. In such a case the Advocate representing the opposing party must be notified. Commentary: The rule corresponds to the first paragraph of Section 49 in the preceding rule. The same principle ought to apply if the opposing party appoints a legally competent external representative other than an advocate. 5.7 Settlement Offers An Advocate may not, without the consent of the opposing party, disclose an offer of settlement made by the opposing party in legal proceedings. Commentary: The purpose of this rule is to facilitate for negotiations of conciliation. However, the advocate is allowed to make known the details of his/her own offer of conciliation. 6 Relations to Courts and Public Authorities 6.1 General 6.1.1 When acting as counsel at court, an Advocate is obliged to observe the requirements of the Code of Judicial Procedure and what any other procedural statutes require. An Advocate must be properly acquainted with the matter and pursue the matter with such care and in such manner as the proper administration of justice requires. 31 Commentary: The rule corresponds to Section 44, first paragraph of the preceding rule except for the prerequisite of timeliness which has been removed. ‘Timeliness’ is incorporated in the prerequisite of ‘care’ which also includes other important prerequisites. It has not been deemed necessary to emphasise the prerequisite of timeliness in addition to ‘care’ as ‘timeliness’ is sometimes seen to go against what is in the best interest of the client. The Code of Judicial Procedure does not stipulate a prerequisite of care and hence, such prerequisite should be incorporated into these regulations. Care is a fundamental component in all advocate work and client relations but also in relations with the court and administration of justice. The rule aims to counteract situations such as when an advocate attends court unprepared or deliberately waits to call a witness or submit any other evidence in order to gain an advantage by using an element of surprise. Other similar situations are when an advocate decides not to appear in court despite the risk of a judgement by default so the case can be reopened at a later date or gives a long-term excuse for not being able to attend court in order to protract the proceedings, etc. Even if the principal responsibility of an advocate throughout a legal procedure is to act in the best interest of the client, it also important for an advocate to remember that a speedy, efficient and qualitative service will benefit the general public. In addition, a proper administration of justice without any unnecessary reruns is in the best interest of the client community. 6.1.2 An Advocate promote compliance with court orders and that inquiries from the Court are responded to without delay. Commentary: Seeing as orders passed by a court is directed at the relevant party, it is not always the responsibility of the advocate to ensure that a court order is observed or an inquiry responded to without delay. However, an advocate shall always endeavour to promote good conduct by implementing the instructions given by the court. An advocate is also generally liable to endorse that the instructions or orders given by the court are complied with in the best possible way. 6.1.3 The Court must be promptly informed of any impediment to appearance. 6.1.4 If the Advocate’s mandate is terminated the Advocate is obliged to inform the Court thereof without delay. 6.2 Factual Statements and Evidence 6.2.1 An Advocate must not make statements to the Court which the Advocate knows are false nor contest that which the Advocate knows to be true. 32 Commentary: The rule corresponds to Section 45 of the preceding rule, the actual meaning of which has not been changed. The rule is aimed at substantive information, i.e. objective circumstances rather than values and impressions. The rule refers to both verbal and written information and is conditional on the advocate’s knowledge of the matter. The rule on the duty of truthfulness set out in Section 43, subsection 6 of the Code of Judicial Procedure is considered to apply to a defendant in a criminal case whereupon the position of the defence counsel is somewhat different from that of other legal counsels and representatives. An advocate acting as a legal counsel in a civil action or representing the plaintiff in a criminal case while knowing that the client is untruthful in a relevant matter may be requested to withdraw from the matter. This does not apply when an advocate in his or her capacity as a defence counsel becomes aware of the client being untruthful. However, an advocate must never submit such factual information that he or she knows is inaccurate nor must an advocate dispute such information that he or she knows is accurate. If the client submits inaccurate information or disputes information that is accurate, the advocate must never refer to or address the court on behalf of his or her client based on such information or action. An advocate’s duties according to this rule do not on the other hand entail advising the client to certify specific information submitted by the opposing party which the advocate knows is accurate. Examples of actions that are prohibited in this respect are when an advocate knowingly calls a witness who will commit perjury or acts in bad faith and submits or refers to forged written evidence or refers to inaccurate factual particulars or disputes accurate factual particulars regardless of who entered them into the legal procedure. 6.2.2 An Advocate may not be complicit in the suppression or distortion of evidence. However, an Advocate is not obliged to produce or invoke evidence or adduce facts detrimental to the client unless required to do so at law. Commentary: In relation to preceding Section 45, the rule has been extended to incorporate all legal liabilities to disclose information and does not just apply to the duty to witness and present written documentation. The duty to present information may also apply to matters pertaining to the tax authorities and consistent with the Anti-Money Laundering Act. However, the fact that an advocate does not usually have to submit information to the detriment of his/her client remains a key principle. 6.3 Demeanour towards Witnesses et al. 6.3.1 An Advocate must not exercise undue influence upon a witness or someone else testifying at Court. However, the Advocate is free to contact such person to obtain information about the testimony of that person even where the person is called to testify by the prosecutor or another opposing party. 33 Commentary: To actively seek evidence is generally included in an advocate’s duty of care and often involves the advocate hearing witnesses and other examinees of the opposing party. However, the advocate must never put an examinee under undue influence. This applies regardless of whether the same examinee has been referred to in court by the advocate’s own client or the opposing party or whether the examinee is to be examined under oath either as a witness, plaintiff, expert or any other capacity. Naturally, the advocate is not permitted to bypass a plaintiff’s legal representative or the legal counsel of a child, mediator or guardian. A defence counsel is free to contact a plaintiff that is not legally represented in court provided that caution and consideration is observed. 6.3.2 An Advocate must not give demeaning information or make offensive or disparaging statements about a witness or another person unless this appears to be justified in the situation at hand in order to safeguard the interests of the client. Commentary: Any offensive information should be avoided as it does not usually promote what is in the best interest of the client. However, an advocate must be able to present information in support of his/her client’s case even if such information may be offensive to another person and should not give way to the unpleasantness of the situation. The term ‘justified’ refers to the situation at the time of the advocate formulating the expressed or written statement and thus, allows for a certain degree of inexactness. Obviously, a written statement is subject to a greater degree of discretion and moderation than a statement that is express in the heat of the moment when there is less time to give it due consideration. However, the true intent of a statement is the decisive factor. The rule offers a certain alleviation of previous regulations, giving priority to the interests of the client. The demand for moderation must not hamper the advocate’s actions on behalf of the client. 6.4 Procedures other than Trial The provisions set out in 6.1 – 6.3 also apply to proceedings before authorities other than the Courts. Commentary: These rules do not usually apply to arbitration procedures but perhaps ought to in addition to the rules on relations with the court. 7 The Organisation of a Law Firm, etc. 7.1 Maintaining Independence An Advocate must operate his legal practice so as not to jeopardise his independence. 34 Commentary: An advocate’s independence does not just refer to his or her independence in relation to Government authorities and the ownership and management of a law firm. The way in which a law firm is operated may also jeopardize its independence, for example if the advocate becomes insolvent or other than temporary acts on behalf of just one client. 7.2 Practise Name An Advocate should conduct his business under a name which contains the word ‘advokat’ unless an exception is granted by the Board of the Bar Association. The correct and complete name must clearly appear on all written and electronic communications and any other material whereby the legal services of the firm are being presented. Commentary: It must be clearly evident to prospective clients and others who come into contact with the advocate that he or she is a qualified advocate and when operating as a company, under what type of legal entity. The term ‘other material’ refers for example to a homepage or advertisements in which case the entire name of the law firm must be displayed. However, this is not normally required in the case of signposts. Because many law firms collaborate, it is important for the client and others to clearly know which firm they are dealing with. 7.3 Office Organisation 7.3.1 An Advocate is obliged to ensure that the office organisation is in good order and that it has equipment and staffing appropriate for the operation and for satisfactory monitoring of client mandates. 7.3.2 Professional communications addressed to an Advocate should be answered without delay unless it is evident from the circumstances that a response is not needed. If a response cannot be given without delay the receipt of the communication must be confirmed and a response sent as soon as possible. 7.3.3 An Advocate is obliged to ensure that all accounting and management of clients’ funds and valuable instruments complies with all legal requirements and the Accounting Standards of the Bar Association. 7.3.4 An Advocate must carefully follow the financial development of the law practise and ensure that all debt arising from the operations of the practise are timely paid. Commentary: A smooth running office organisation is normally a prerequisite for a satisfactory client management. Hence, it is the responsibility of the advocate to employ the staff and equipment needed to facilitate the advocate’s accessibility during normal office hours and periods of respite while promptly responding to communications. This also applies to 35 when the advocate has time off work or is absent for whatever the reason. In addition, it should not be considered necessary for the advocate to be well versed in the finances of the law firm. It is not a general requirement that a law firm should be profitable though the advocate is expected to promptly take all appropriate and necessary measures if that is not the case. 7.4 Law Practises Incorporated 7.4.1 If an Advocate provides legal services in the form of a company, such company may not engage in activities other than the practice of law. All legal services must be carried out through and be accounted for in that company except in cases where the personal nature of a mandate makes the fee resulting from that mandate attributable to income from services. Commentary: Acompany offering legal services cannot offer any other services to the extent that it may lead to any doubts as to the main business of the company or jeopardize the company’s position or ability to take out an insurance or receive compensation from an insurance in relation to such legal services. All professional fees arising out of the legal services provided must be invoiced by and entered into the accounts of the company to which a mandate was assigned by a client. As regards liability, it is vital that the client knows which firm he or she has appointed and who to contact at that firm. 7.4.2 An Advocate is permitted to provide legal services through more than one company only if an exception is granted by the Board of the Bar Association. The same applies if legal services are simultaneously offered by a sole proprietorship and by a company. Commentary: The Swedish Bar Association may make an exception to the principal rule that legal services cannot be provided under the name of more than one law firm. However, it is not necessary to apply for the approval of the Bar Association if the operation of the law firm is clearly evident and does not render it difficult for a client to understand which firm he or she is dealing with. In case of law firms with operations in both Sweden and overseas, the Board of the Swedish Bar Association may make an exception to the rule subject to such overseas operations being of an acceptable form. There is also a possibility of organising the operations under more than one Swedish company as long as it is clearly evident to the client which company he/she is dealing with. 7.4.3 Notwithstanding the provisions in 7.4.1, a law firm company may manage its own funds as is customary or, to a limited extent, own property which is not directly associated with the law practice. 36 Commentary: The guiding principle on the acquisition and possession of assets issued by the Board of the Swedish Bar Associationon 14 December 2000, expresses among other that a good advocate practice shall not prevent an advocate’s law firm from acquiring or being in possession of such assets which the advocate himself/herself has the right to acquire or possess or managing the assets of the law firm as is customary. Aforementioned investments should not reach such proportions that the operation of the advocate is considered to incorporate other than legal services or involve exceptional risks or contradict the good reputation of the legal bar. It is further stipulated that it is not compatible with good advocate conduct for a public limited law firm to handle marketable instruments or provide any other trust fund management services to the extent that such services fulfil the prerequisites for a business operation according to the Income Tax Act (see Section 13, subsection 1of the Income Tax Act and the revoked Section 3, subsection 21 of the Local Rates Act). According to the abovementioned guiding principles, a law firm may not in its Articles of Association include an exemption clause that allows it to provide any other services than legal services. However, this raises the question of the acqusition of a private residence, apartment block or agricultural dwelling. The basic principle is that such ownership or management must not impose an exceptional risk to or jeopardize the good reputation of the legal bar. The limited ownership of the properties mentioned above would not usually interfere with good advocate conduct. 7.5 Organisation of a Law Firm 7.5.1 Only an Advocate may be appointed to be a member or deputy member of the board or become a shareholder or partner in a law firm company. Commentary: The aim of the principal rule is not to prevent union representatives or others that may with a statutory right or obligation to sit on the board of a law firm. The partnership of a public limited law firm is subject to an exemption clause under 7.5.3 below. 7.5.2 Subject to dispensation by the Board of the Bar Association, the Managing Director of a law firm organised as a limited liability company does not have to be an Advocate provided that the person in question has undertaken to observe the regulations applicable to the law practice including Good Advocacy Standards. In such case, the Managing Director may also be empowered to sign on behalf of the company jointly with an Advocate. However, no one may be authorised to sign on behalf of the company without the participation of one of its active Advocates except in the circumstances set forth in Chapter 8, section 36 of the Companies Act. Commentary: The rule allows for a public limited law firm to employ a person for the position of Managing Director that is not an advocate. However, similar to 7.5.3 relating to the ownership of a law firm by a Managing Director that is not an advocate, the employment of a Managing Director that is not an advocate is conditional on the Board of the Swedish 37 Bar Association granting an exemption. The prerequisite for the Managing Director to observe the regulations imposed by the law firm including good advocate conduct is vital for the Board of the Swedish Bar Association to grant such an exemption. If the possibility to appoint a Managing Director that is not an advocate is utilised, it is important for the law firm to incorporate in its regulations that any legal advice must be provided by an advocate or a junior advocate in the presence of an advocate. Naturally, the same applies to other employees of the law firm that are not advocates or junior advocates. The rule is considered to include the liability for a law firm that is granted an exemption to immediately notify the Swedish Bar Association of any circumstance that may eradicate the prerequisite for an exemption. Failing to comply with the prerequisites for an exemption in one way or another may lead to the Board of the Swedish Bar Assocation withdrawing the exemption granted. 7.5.3 Notwithstanding the provisions in 7.5.1 above, a Managing Director who is not an Advocate may, if granted an exemption by the Board of the Bar Association, become a shareholder or partner in a law firm company subject to the following conditions. Such ownership may only cover less than ten percent of the capital and represent less than ten percent of the voting power. In addition, such ownership requires the Managing Director to undertake immediately to transfer his shares or share to the other owners upon termination of the employment. Commentary: According to Section 38 in the statutes of the Swedish Bar Assocation and Section 8, subsection 4 of the Code of Judicial Procedure, an advocate cannot become a partner of a corporate law firm unless the Board of the Swedish Bar Association grants an exemption. In view of the growing demand from expanding law firms to make it easier for law firms to recruit and sustain key staff members that are not advocates there is reason to facilitate for individuals other than advocates to enter into ownership. In these circumstances, the introduction of the rule aims to clarify the fundamental prerequisites for the Board of the Swedish Bar Association to grant an exemption. The possibility of an external ownership is restricted to the Managing Director. The granting of an exemption is conditional on a restricted ownership or influence in addition to the Managing Director being committed to observe the relevant regulations including good advocate conduct as specified under 7.5.2. These circumstances are of course also vital for the withdrawal of a granted exemption. The duty to notify of prerequisites for the employment of a Managing Director also applies to the Managing Director’s ownership of a law firm (see commentary to 7.5.2). 7.6 Terms of Employment, etc. 7.6.1 An Advocate may not be employed by anyone other than an Advocate or a law firm unless dispensation is granted by the Board of the Bar Association. However, an Advocate may, without the approval of the Board, accept employment at a foreign law firm domiciled in the EU, EEA or in Switzerland. 38 Commentary: The rule complies with Section 3, seventh paragraph of the Regulations of the Swedish Bar Association. The reason for an exemption being required in order to take up employment with a law firm in a non-member state of the EU, EEA or Switzerland is that it is difficult to obtain a general overview of the structure of law firms in other countries. If the regulations applicable to other countries fufil the requirements that the Board of the Swedish Bar Assocation may reasonably make, the granting of an exemption ought to be possible. 7.6.2 An Advocate or partnership of Advocates may employ associates and other staff to assist in the operations of the firm. If more than one Advocate conducts their business in a partnership of Advocates, they shall as between themselves clarify which one of them shall be responsible for the training and supervision of the other staff. The Advocate carrying such responsibility must take all measures reasonable required to ensure that the staff members carry out their duties as required by Good Advocacy Practice. No staff member other than a lawyer may independently render assistance to the public. Commentary: The monitoring of junior advocates and other personnel is central to all types of legal operations. It is difficult to define exactly the measures requied by an advocate in this context though the court ruling described on NJA 1985, p. 856 is an indication of the strict duty placed upon an advocate responsible for supervising the work of a junior advocate. However, when deciding upon the degree of supervision, any previous experience that the the junior advocate may have in addition to the nature of the matter in hand and other relevant circumstances must be taken into consideration. Even when a law firm decides to recruit for example a patent engineer or any other expert that is not an advocate, a conduct which is allowed, the patent engineer or expert in question is required to work with the advocates or junior advocates who assist the clients, i.e. the public. A law firm must not be confused with non-legal consultancy services. 7.6.3 An Advocate or a partnership of Advocates may not employ associates who are not Advocates if they are employed under conditions where the work of the associate cannot be properly supervised. Associates may not be permitted to offer legal services for their own business. Associates may not be employed on terms which in respect of non- competition or otherwise are unreasonable. Commentary: The first sentence is not only aimed at a situation where a junior advocate is carrying out his or her work at the premises of a law firm without such work being continuously and safely monitored but also at a situation where the law firm outsources the services of or a junior advocate to a client company or elsewhere. As regards the first situation, a junior advocate should only be contracted out to an office where advocates from the law firm are already working. According to the guiding principle of 9 December 2004 on the outsourcing of a junior advocate from a law firm, such outsourcing is conditional on the following. 39  1. The junior advocate must remain employed by the law firm during the outsourcing period. 2. It must be evident throughout the outsourcing period that the work is carried out by a junior advocate acting on behalf of the law firm in question. Hence, any external documentation signed by the junior advocate must be drafted on the law firm’s headed stationery and any business card given out by the junior advocate must be the law firm’s own approved business card. 3. The junior advocate shall report directly to a principal at the law firm and not to a Managing Director at the client company. 4. All mandates received must be registered with the law firm whereupon the risk of a conflict of interest shall be checked. 5. The law firm shall draw up routines to guarantee the continuous and safe supervision of the junior advocate. If these conditions cannot be fulfilled then an alternative option is to grant the junior advocate absence of leave while being outsourced to another company. In the event of a shorter assignment or when a junior advocate only works one day a week at a client company, the problems pertaining to the supervision and transparency of employment terms ought to be manageable. The same ought to apply when a junior advocate works at a bank or any other company for the purpose of training or gaining general knowledge and therefore, does other than legal work. The last sentence under 7.6.3 above specifying that the terms of employment of a junior advocate should not lead to an unfair restriction of competition or otherwise means that the salary paid, especially to a new employee, should not based on for example a flexible or commission based salary which may render it difficult for the junior advocate to bring in a reasonable salary. 7.6.4 An Advocate or a partnership of Advocates may not in their practice retain the services of lawyers who are not employed by the law firm. However, such lawyers may be engaged for educational purposes or to perform expert assignments in individual cases. Commentary: The hiring of personnel from a temporary recruitment agency or equivalent may present a problem as regards confidentiality and conflicts of interest, particularly if the personnel in question do temporary work at several law firms or companies. The principal rule is that advocates working at a law firm should also be employed by that law firm. When an advocate from for example a client company works at the law firm for a short period of time so as to gain further knowledge or obtain an expert’s opinion, it is of course possible to manage the situation by way of a contract and obligation to observe professional confidentiality. Should the advocate in question remain an employee of the client company or any other company during such time, it must be made manifest that the person in question is not an employee of the law firm. 40 7.7 Co-operation 7.7.1 An Advocate or a law firm may operate in co-operation with other Advocates or law firms. If such co-operation entails a closer, long-term relationship with respect to mandates or financial connections, the co-operation must be clearly disclosed on the letterhead and any other material of the law firm, for example, through the use of a common firm dominant. If such case, conflicts of interest issues should be determined on the basis of the mandates of all co-operating Advocates and other relevant circumstances. When using a common firm dominant, the insurance obligation set out in 2.6 must be determined having regard to all business performed under such firm dominant. Commentary: An advocate’s right to operate in collaboration with other advocates does not include the right to operate in collaboration with jurisconsults that are not advocates. Item 7.7.5 below includes a rule on sharing office with jurisconsults that are not advocates. When collaborating advocates use a mutual business name dominant, the insurance obligation as detailed in 2.6 must be determined in consideration of all work carried out under that business name dominant. This rule is new and an increase to the insurance obligation. Clients consulting a large organisation, regardless of whether its collaborating advocates run separate operations, should be allowed to assume that the relevant insurance cover applies to the whole organisation. 7.7.2 Close co-operation with foreign lawyers or law firms requires special permission by the Board of the Bar Association. Commentary: Collaborations between advocates and foreign advocates or law firms are an increasing occurrence. This is a natural development bearing in mind the internationalisation of our society. However, international collaborations are often complex in nature and hence, it would not serve any purpose to incorporate in these rules conditions for such collaborations, not least in view of circumstances here in Sweden and overseas being subject to constant change. The Board of the Swedish Bar Association has already on account of numerious exemption cases drawn up standards for good international collaborations conduct. The natural course of things is to let the Board continue with this standardisation. 7.7.3 Other co-operation may not take place under a common firm dominant, or in any other manner which gives the impression that the co-operating parties are part of the same practice. Commentary: The aim of this rule is to prevent non-collaborating operations as specified under 7.7.1 above to be perceived as collaborating operations. 41 7.7.4 Co-operation with respect to premises or equipment which entails a risk that the Advocate’s duty of confidentiality and duty of discretion be set aside. When Advocates or law firms share a joint office, conflicts of interest issues shall be assessed having regard to the mandates and other circumstances of all Advocates and law firms involved regardless of the financial arrangements. The same applies to all co-operations entailing a risk of the setting aside of the Advocate’s duty of confidentiality and duty of discretion. Commentary: The application of this rule is contingent upon the risk of spreading information that is subject to confidentiality or discretion as may be the case when utilising the same personnel, photocopier, facsimile, reception, etc. However, it does not apply to law firms situated on the same floor of a serviced office centre. The objective is not to tighten up the rules or render the practical application more difficult. 7.7.5 The sharing of a joint office with others than Advocates is not permitted. However, office premises may be shared with legal specialists who are not Advocates but have a background in the judiciary or who possess other special legal qualifications. If such specialist lawyers practise under their own firm name, the Advocate or law firm has no obligation to monitor such work. However, such specialist lawyers must be reminded of the regulations applying to law firms in particular the duty of confidentiality and the duty of discretion, and shall be obliged to comply therewith. Commentary: An advocate is liable to monitor its employees, junior advocates and other associates. It is not unusual for a law firm to appoint for example a consultant such as a previous partner, judge, professor or other individuals. In fact, it is often proven difficult for a law firm to adequately monitor the work of consultants. To facilitate for the law firms to appoint competent individuals such as a former Lord Justice, other law lords or professors in law, the rule sanctions advocates sharing office premises with other legally qualified individuals provided that such individuals operate under the name of a private company. When sharing office premises, the law firm must also ensure that appointed consultants by way of contracts pledge to comply with the Guiding Principles of Good Advocate Conduct. 7.8 Procurement and Marketing 7.8.1 An Advocate may not solicit mandates in a way which entails exploitation of someone else’s distress or vulnerable position. Commentary: The previous prohibition against an advocate to contact an individual and offer his or her legal services in order to acquire a mandate has been eliminated though it is still prohibited to exploit the misfortune of another individual, i.e. so-called ‘ambulance chasing’. 42 7.8.2 An Advocate may only state a particular area of specialisation if the Advocate has special knowledge and experience in the given practice area. Commentary: Advocates often claim to be specialists in many different areas, a demeanour which the rule aims to hamper. The previous prohibition against an advocate marketing his or her services in a distasteful or misleading manner has been eliminated seeing as such prohibition is already regulated by the Marketing Act. 7.8.3 An Advocate may not contribute to or permit that someone else solicits legal business or conducts marketing on behalf of the Advocate in a manner which is not permitted for the Advocate himself. 7.9 Compensation for Acquisition of Mandates 7.9.1 An Advocate may not surrender part of the fee to someone else or otherwise compensate another person for referring mandates to the Advocate or for undertaking to act for such purpose. Nor may such compensation be accepted. 7.9.2 The rule in 7.9.1 above does not prevent fee sharing between the Advocate and his partner, associate, or such co-operating partner as is specified in 7.7.1. 7.10 Liability for Costs 7.10.1 If an Advocate retains an expert on behalf of a client for the purpose of carrying out an investigation, rendering an opinion or for any other purpose, the Advocate if he does not intend to assume responsibility for the fee or costs of the expert must make this clear before the start of the assignment. 7.10.2 If an Advocate appoints a colleague on behalf of a client, e.g. as a local counsel, the Advocate is liable for the fees and expenses of that colleague unless a different arrangement has been agreed. Commentary: The purpose of this rule is to clarify what is good advocate conduct from an ethical perspective and not according to civil law. 7.11 Allowing Trade Marks for Use by Others An Advocate may not permit the use by others of his letterhead or trade marks in a manner which incorrectly implies that the Advocate or his law firm is the sender or has created the document or is in any other way responsible for its contents. 43 Commentary: The rule does not prevent the advocate from sending a read-only Word document to a client. However, the advocate must not allow the client to make changes in the document and then present it as if it was sent from the advocate. 7.12 Disclosure and Archiving of Documents 7.12.1 Upon the completion or termination of a mandate, the Advocate shall without delay surrender to the client all documents belonging to the client unless the client explicitly requests the Advocate to store the relevant documents and the Advocate agrees to do so. An Advocate may not as a prerequisite for surrendering such documents to the client require that the client approves of the fee charged or a statement of account rendered by the Advocate. 7.12.2 An Advocate is obliged to archive all relevant documents filed in connection with a mandate either in original or as copies. However, this does not apply to duplicates, printed matter or similar material, which without difficulty can be obtained elsewhere. The archival period shall be ten years or more depending on the nature of the mandate. Documents other than original documents which belong to the client may be archived in either photographic or electronic form. Commentary: These rules make clear an advocate’s responsibility to surrender documents that belongs to a client. A reasonable administration charge for making duplicates is usually payable to the advocate. An advocate’s duty to archive documents for a minimum period of ten years applies even if the client requests a shorter archiving period or the destruction of any of the documents. Please refer also to the guiding principles of the Board dated 17 March 1995 on the obligation of an advocate to surrender documents to a client when a mandate ceases to exist. 8 Relations to the Bar Association An Advocate is obliged, within the prescribed time, to file a submission and a statement of defence if requested by the Board of the Bar Association or by the Disciplinary Committee or the Secretary-General or associates to the Secretary-General. In this respect, the Advocate is not bound by the duty of confidentiality which otherwise applies. All factual information submitted by the Advocate must be truthful. Commentary: Unlike the previous Section 52, the rule does not imply that the advocate is obliged to fully respond to any inquiries or requests put forward by the Swedish Bar Association. The amendment in the ethical regulations has been made to allow for the right to a fair trial as specified in the European Convention (Section 6.1) including the right to remain silent and the right not to contribute to incriminating oneself. The amendment was made 44 despite the predominantly disposition of civil law of the Swedish Bar Association and the absence of obligatory advocates and representatives as well as an advocate monopoly in Sweden and its importance in relation to current convention rights. However, an advocate’s legal responsibility to provide the Bar Association with the information required for supervision still applies (see Section 8, subsection 6, second paragraph of the Code of Judicial Procedure) in addition to Section 43, second paragraph of the Regulations of the Swedish Bar Association expressing a legal responsibility to submit a written opinion when requested, produce documents requested by the Disciplinary Board or Secretary-General or appear before a panel of lay judges in person. Failing to fulfil these responsibilities may still lead to the advocate being subject to a disciplinary action. The duty of disclosure laid down in law does not mean that an advocate is liable to provide information about the actions of another advocate who is in breach of good advocate conduct. The responsibility of an advocate to submit information in a supervision matter also applies to information subject to professional confidentiality. As previously, any information submitted by an advocate must be in accordance with the truth. 45  FOUNDATION CERTIFICATE IN INTERNATIONAL INSOLVENCY LAW Module 9 Guidance Text Ethics and Professional Practice 2023 / 2024 Page 1 CONTENTS 1. Introduction to Ethics and Professional Practice ................................ 1 2. Aims and Outcomes of this Module ..................................................... 1 3. An Introduction to Ethics and Professional Practice .......................... 2 4. Codes of Conduct ................................................................................. 12 5. The Principles ........................................................................................ 13 5.1 Introduction ........................................................................................... 13 5.2 Integrity .................................................................................................. 14 5.3 Objectivity, Independence and Impartiality ..................................... 16 5.4 Professional / Technical Competence ............................................... 29 5.5 Professional Behaviour......................................................................... 32 5.6 Remuneration and Disbursements ..................................................... 36 5.7 Practice Management .......................................................................... 46 6. Conclusion.............................................................................................. 49 Appendix A: Feedback on Self-Assessment Questions .................. 51 Appendix B: Glossary of Terms .......................................................... 58 Page 2  Foundation Certificate: Module 9 This guidance text is part of the study material for the Foundation Certificate in International Insolvency Law and its use is limited to this certificate programme. Unauthorised use or dissemination of this document is prohibited. INSOL International 6-7 Queen Street, London, EC4N 1SP, UK Tel: +44 (0)20 7248 3333 Fax: +44 (0)20 7248 3384 www.insol.org Module Author Dr Lézelle Jacobs Associate Professor Faculty of Law University of Technology Sydney Australia Copyright © No part of this document may be reproduced or transmitted in any form or by any means without the prior permission of INSOL International. The publishers and authors accept no responsibility for any loss occasioned to any person acting or refraining from acting as a result of any view expressed herein. Copyright © INSOL INTERNATIONAL 2023. All Rights Reserved. Registered in England and Wales, No. 0307353. INSOL, INSOL INTERNATIONAL, INSOL Globe are trademarks of INSOL INTERNATIONAL. Published: September 2023 Page i  Foundation Certificate: Module 9 1. INTRODUCTION TO ETHICS AND PROFESSIONAL PRACTICE Welcome to Module 9, dealing with Ethics and Professional Practice. This Module is a standalone elective module choice for the Foundation Certificate. The purpose of this guidance text is to provide: • an overview of the importance of the role played by insolvency professionals (IPs); • an evaluation of the nature of the responsibilities of the IP and the ethical conduct expected from IPs; and • a detailed discussion and commentary on the best practice guidance as contained in INSOL International’s publication, Ethical Principles for Insolvency Professionals. This guidance text is all that is required to be consulted for the completion of the assessment for this module. You are not required to look beyond the guidance text for the answers to the assessment questions, although bonus marks will be awarded if you do refer to materials beyond this guidance text when submitting your assessment. For the purpose of self- assessment, you may be required to conduct research beyond the scope of this guidance text. Please note that the formal assessment for this module must be submitted by 11 pm (23:00) BST (GMT +1) on 31 July 2024. Please consult the web pages for the Foundation Certificate in International Insolvency Law for both the assessment and the instructions for submitting the assessment. Please note that no extensions for the submission of assessments beyond 31 July 2024 will be considered. For general guidance on what is expected of you on the course generally, and more specifically in respect of each module, please consult the course handbook which you will find on the web pages for the Foundation Certificate in International Insolvency Law on the INSOL International website. 2. AIMS AND OUTCOMES OF THIS MODULE After having completed this module you should have a good understanding of the following aspects of ethics and professional practice: • the role of the IP in the insolvency system; • the nature of the duties owed by IPs to their beneficiaries; • the identity of the beneficiaries of the IP’s duties; • the ethical standards to be expected of IPs; • the threats to ethical behaviour by IPs; Page 1  Foundation Certificate: Module 9 • aspects relating to proper practice management. After having completed this module you should be able to: • explain the duties owed by IPs and the nature of such duties; • understand the nexus between the ethical norms expected from IPs and their fiduciary duties; • identify threats to ethical conduct by IPs; • recommend safeguards for ethical conduct; • understand the policies and procedures in relation to practice management as well as to formulate and utilise them. Throughout the guidance text you will find a number of self-assessment questions. These are designed to assist you in ensuring that you understand the work being covered as you progress through the text. In order to assist you further, the suggested answers to the self-assessment questions are provided to you in Appendix A. 3. AN INTRODUCTION TO ETHICS AND PROFESSIONAL PRACTICE 3.1 The importance of ethical behaviour by insolvency professionals The role of the Insolvency Practitioner (IP) is one of great importance. IPs play a “significant role in lubricating the wheels of commerce”.1 The success and outcome of an insolvency procedure will to a large extent depend on the IP’s attributes, qualifications and experience and, of course, his ethics and morals. The trust and confidence that the stakeholders in an insolvency proceeding (and the public at large) place in the IP is equally important. A lack of trust and confidence in the profession erodes its efficacy in bringing about successful rescues and / or ensuring that returns to creditors for failed companies can be maximised. The role of the IP is brought into greater focus in the event of corporate insolvency, where more stakeholders stand to be affected by the demise or threatened demise of the debtor. The Corporate Insolvency Practitioner (CIP) operates in difficult and daunting circumstances, involving distressed parties, competing demands, strict deadlines and complex legal, financial and factual issues. Their tasks are therefore not only overwhelming at times, but also involve a great deal of responsibility. The consequences of financial distress on debtors and all the stakeholders involved make for a chaotic, difficult and volatile situation, often leaving many parties vulnerable and at the “mercy” of the appointed IP. It is therefore not surprising that the parties involved tend to look to the IP to enforce the rules and bring about some much needed clarity and order. IPs are relied upon 1 Re Econ Corp Ltd (No 2) [2004] SGHC 49, 266 [Singapore]. Page 2  Foundation Certificate: Module 9 to do these tasks with the utmost professionalism, being mindful of the fact that he is engaged in activities that will have a real impact on people’s lives and livelihoods. His conduct should therefore reflect the seriousness of the circumstance and reflect the highest standards of ethical behaviour. Evidently the public and stakeholders in insolvency will scrutinise the IP and, based on his conduct, form an opinion not only of him and the insolvency profession but also the entire insolvency system. How would people be able to trust the system if they cannot trust the people who administer it? In this text the abbreviation “IP” will be used in relation to Insolvency Practitioners in general and “CIP” to elaborate on principles of specific importance for Corporate Insolvency Practitioners. 3.2 The nature of an insolvency appointment IPs are regarded as experts in the administration of insolvent estates and restructuring strategies. They are given a large number of extensive powers to utilise their expertise and experience in relation to the objectives of their appointment. However, if an IP has extensive powers and responsibilities, yet lacks integrity, ethics and basic morality, it will not be of much benefit to the debtor, its stakeholders or society at large. To this end, many jurisdictions have imposed fiduciary norms to govern the conduct of IPs. A fiduciary is largely accepted to be a person who: (a) undertakes to act on behalf of another, and (b) has discretion and power over the interests of the other.2 A further element of vulnerability is sometimes added as an indicator for the existence of a fiduciary relationship.3 It is, therefore, not surprising that most IPs are regarded as fiduciaries.4 Although most insolvency appointments are reflective of the elements that prove the existence of a fiduciary relationship, not all IPs are fiduciaries. An example of this type of appointment is 2 R Nimmer and R Feinberg, “Chapter 11 Business Governance: Fiduciary Duties, Business Judgment, Trustees and Exclusivity” (1989) 6 Bankr Dev J 1, 34 – “The idea of treating one person as a fiduciary of another thus rests on the fact that the discretionary judgment of the one controls the destiny of the other.”; R Valsan, “Fiduciary Duties, Conflict of Interest and Proper Exercise of Judgment” [2016] 62 McGill LJ 1, 7. See also J Velasco, “Delimiting fiduciary status” in D Smith and A Gold (eds), Research Handbook on Fiduciary Law (Edward Elgar 2018) at 78 – “It is fair to say that power, trust, and vulnerability are the key terms used to describe fiduciary relationships generally.” J Glover and J Duns, “Insolvency Administrations at General Law: Fiduciary Obligations of Company Receivers, Voluntary Administrators and Liquidators” (2001) 9 Insolv LJ 137 – “Are voluntary administrators fiduciaries? In the scheme of Pt 5.3A, administrators are acting for the benefit of others and the powers and discretions that they possess are held in representative capacities. These are standard indicia of fiduciary status.” 3 R Valsan, “Fiduciary Duties, Conflict of Interest and Proper Exercise of Judgment” (2016) 62 McGill LJ 1, 7. 4 J Glover and J Duns, “Insolvency Administrations at General Law: Fiduciary Obligations of Company Receivers, Voluntary Administrators and Liquidators” (2001) 9 Insolv LJ 137; D Milman, Governance of Distressed Firms (Edward Elgar 2013) – “…can office-holders be classed as fiduciaries? The answer to this in all cases (whether or not ‘officer of the court’ status applies) would appear to be in the affirmative.” Page 3  Foundation Certificate: Module 9 the supervisor in a Company Voluntary Arrangement in England and Wales. IPs in Singapore are generally regarded as fiduciaries.5 However, Private receivers, for example, have less of a fiduciary character to their office. This is due to the fact that certain appointments are more a matter of contract and private negotiations, and such private appointees are better seen as service providers rather than fiduciaries. It was also noted earlier that certain IPs do not displace the management of a corporate debtor, and as such will not be subject to the same fiduciary obligations; managers under the new Singaporean “supercharged” schemes, which is more akin to a debtor-in-possession proceeding, would be a good example here. A scheme manager’s duties in terms of schemes of arrangement (not supercharged) have been said to take on a fiduciary nature upon appointment as scheme manager. The word “fiduciary” is, however, not definitive of a single class of relationships to which a fixed set of rules and principles apply; it is necessary to determine the rules that govern each class of fiduciary relationship.6 Many types of relationships are classed as fiduciary in nature and are frequently described as relationships of trust.7 Lawyers, accountants, agents, trustees, doctors, and directors of companies are but examples of a number of recognised fiduciaries. Evidently, the fiduciary norms applicable to doctors cannot be applied to IPs as their roles and the objectives of their office differ in a number of respects. It is imperative that the fiduciary norms as applicable to IPs are developed and sufficiently nuanced so as to provide better clarity for the insolvency profession and the community in which they operate, including the public at large. Much ambiguity as to their role is created by jurisdictions that have differing approaches in regard to the duties and obligations that IPs owe. Moreover, jurisdictions have divergent ideas as to the exact nature of the IP’s role in different types of insolvency proceedings. This inevitably leads to some confusion as to the role of the profession. IPs, of course, have their own thoughts regarding their role and given the fact that they are appointed from the ranks of several different professions, such as lawyers, accountants, auditors and business managers, the further inevitability of even more confusion is a certainty. This is due to the fact that some of these professions are regarded as fiduciaries in their own right and this will influence their behaviour in accordance with different sets of fiduciary norms, which may be related but not similar. In other words, lawyers and accountants might not have similar approaches to similar situations, purely based on the fact that their frame of reference is different. As an example it could be noted that most lawyers as fiduciaries have a special relationship with the law and the administration of justice which might influence the way in which they deal with a specific situation where elements of dishonesty and fraud have been detected. A much clearer and more definitive approach as to the nature and extent of an IP’s sui generis fiduciary role is needed. 5 Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 31 [21] [Singapore]; Re Econ Corp Ltd (No 2) [2004] SGHC 49, 264 [45] [Singapore]. See also The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal [2012] 2 SLR 213, where the court thought it fitting to refer to fiduciary duties of liquidators when examining the duties of scheme managers [at 76]. 6 M Havenga, Fiduciary Duties of Company Directors with specific regard to Corporate Opportunities (Transactions of the Centre for Business Law, University of the Free State 1998) 10. 7 R Flannigan, “The Fiduciary Obligation” (1989) 9 Oxf J Leg Studies 285,286 – “It is a ‘deferential’ kind of trust in the sense that the trusting person will defer to the judgment of the trusted person. The deference may be total, or it may be only partial or situational. It is accompanied, in some cases, by elements of necessity, dependence or submission.” Page 4  Foundation Certificate: Module 9 This statement is even more accurate in the case of Corporate Insolvency Practitioners (CIPs), due to the number of interested parties. Depending on the type of appointment, whether it is a turnaround / rescue or liquidation, the CIP enters the scene and usually takes control of the affairs and business of the debtor company.8 The extent of an IP’s powers and discretion are often far-reaching and without any personal liability. In many jurisdictions the CIP becomes an “officer” of the company and is also required to adhere to the duties and obligations that are normally attributed to company officers.9 In addition, in many jurisdictions the CIP will be regarded as an officer of the court.10 Understanding these duties are vital, especially for IPs who are not lawyers. Being an officer of the court requires a person to act with integrity and to not mislead the court in acting on behalf of a client. An officer of the court recognises the importance of honesty in the justice system and as such would act in a manner which would further the administration of justice to the best of their ability. These combine to create an intricate net of unique fiduciary responsibilities. 3.2.1 The duties In accepting an appointment as an IP, the IP gives a voluntary undertaking to abide by the rules and responsibilities that defines that type of fiduciary relationship and thereby encourages the trust of the stakeholders involved.11 What these rules and responsibilities are should therefore be clearly identifiable to ensure the IP’s compliance and thereby the trust of the parties. Although the exact fiduciary duties of IPs in various jurisdictions might differ, the following main duties can broadly be agreed upon as being applicable: • the duty to act in good faith – this duty implies honesty and fair dealing; • the duty to act in the best interest of the beneficiary of the fiduciary duties; • the duty to exercise the powers of the office in an independent and impartial manner – this duty includes the duty to avoid a conflict of interest; and • a duty which is usually not regarded as being fiduciary in nature, the duty to act with care, skill and diligence. The duty to act with care, although not fiduciary in nature, is of extreme importance in insolvency situations given the already dire circumstances of the debtor. Furthermore, it is inextricably linked to fiduciary duties for it cannot be said that a fiduciary who acts in a negligent manner has 8 Bearing the distinction between debtor-in-possession and practitioner-in-possession in mind, this statement refers to instances where a form of management displacement does take place. 9 The UK and Australia are good examples here. 10 Examples: South Africa, Scotland, England and Wales (limited instances), Canada, Australia, Singapore and Germany. 11 M Harding, “Fiduciary relationships, fiduciary law and trust” in D Smith and A Gold (eds), Research Handbook on Fiduciary Law (Edward Elgar 2018) 64 – “…fiduciary law’s greatest contribution to facilitating a principal’s trust- based reliance is perhaps seen in its recognition of voluntary undertakings to abide by the norms that, distinctively, characterise fiduciary relationships.” Page 5  Foundation Certificate: Module 9 complied with his duty to act in the best interest of the beneficiaries of his duties. The duty to act with care becomes even more important given the qualifications and skills of IPs, effectively rendering them experts and thereby holding them to a higher degree of care.12 3.2.2 The beneficiaries When it is accepted that an IP is a fiduciary, the next question would be who the beneficiaries of the fiduciary duties are? The task of determining the beneficiaries of fiduciary duties in insolvency proceedings is not straightforward or easy. It has already been mentioned that the debtor’s demise will have a profound impact on a large number of stakeholders. Various factors should be considered, including: (a) the extent of financial difficulty of the corporation; (b) the procedure entered into;13 (c) the rights afforded to stakeholders; and (d) the theories underpinning corporate (in the case of corporate insolvency) and insolvency law. Most jurisdictions follow a creditor-oriented approach to insolvency and as such it has become widely accepted that the main beneficiaries of an IP’s duties are the creditors. However, it is not the only approach to be taken. Several academics have developed insolvency theories in an attempt to answer the question as to whose benefit the insolvency law should be formulated. For purposes of this module, the main theories of insolvency and corporate law will be identified and explained in a condensed form. 3.2.2.1 Contractarian theories The “contractarian theory” is generally based on wealth maximisation and the idea that the law should maximise the collective return to creditors.14 This theory is also in line with the “proceduralist” approach to insolvency which contends that insolvency law should address issues that only arise out of insolvency and believe that non-insolvency claims and entitlements should not be protected by the insolvency law unless this would result in a greater return for 12 L Jacobs and J Neethling, “Die sorgsame ondernemingsreddingspraktisyn: ‘n ondersoek na die gepaste maatstaf” (2016) 13 LitNet Akademies 3, 773 (English title: “The careful business rescue practitioner: a search for the proper yardstick”. Available at https://www.litnet.co.za/careful-business-rescue-practitioner-search-proper-yardstick/. 13 D Milman, Governance of Distressed Firms (Edward Elgar 2013) 92. 14 P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 3-4. Page 6  Foundation Certificate: Module 9 creditors.15 A recognised branch of the contractarian theory is the “creditors’ bargain theory” (CBT), developed by Jackson in the early 1980s.16 CBT is based on the premise that creditors enter into a bargain with the debtor company during negotiations for credit and thereby establish their position and possible remedies upon default by the company, such as insolvency.17 Upon the debtor company’s insolvency, the creditors with an interest will try to recover their debt and will enter into a frenzied race with other creditors to enforce their private contractual agreements with the company. This could cause depreciation in value of the business assets, creating uncertainty of returns for all creditors. The CBT proposes to solve this problem by replacing individual enforcement rights with a collective right to share in the proceeds of the insolvency proceeding, giving rise to the “collectivist approach”.18 “…the Creditors’ Bargain was essentially a bargain that in the event of bankruptcy, the creditors would get everything.”19 The CBT therefore does not support any redistribution of wealth or consequences in insolvency.20 Another contractarian theory can be found in the “team production theory” (TPT) of corporate law.21 This theory is based on social contract and is much more inclusive in nature than the wealth maximisation ideals of the CBT. This theory builds on the ideology that shareholders are not the only party that contribute to the production process of a company. Other parties, such as trade suppliers and the workforce, all contribute towards the end product.22 The TPT, therefore, promotes the inclusivity of all stakeholders during insolvency proceedings and supports the idea of redistribution of some of the interest of one stakeholder (team member) to another.23 The problem with the TPT might be that it is too wide and includes too many stakeholders (team 15 D Baird, “Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren” (1987) 54 U Chi L Rev 54 815; H Nsubuga, “Corporate Insolvency and Employment protection: A Theoretical Perspective” (2016) 4(1) NIBLeJ para 2. 16 P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 4; H Nsubuga, “Corporate Insolvency and Employment protection: A Theoretical Perspective” 4(1) NIBLeJ 4 (2016), para 58. 17 H Nsubuga, “Corporate Insolvency and Employment protection: A Theoretical Perspective” (2016) 4(1) NIBLeJ 4 para 58. Walton is of the opinion that one of the shortcomings of the CBT is the fact that it only considers “hypothetical contract creditors”. P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 5. 18 E Warren, “Bankruptcy Policy” (1987) 54 U Chi L Rev 775, 797-799. The Collectivists believe the single justification for bankruptcy to be the enhancement of the collective return to the creditors. See also H Nsubuga, “Corporate Insolvency and Employment protection: A Theoretical Perspective” (2016) 4(1) NIBLeJ 4 para 61; P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 5. 19 L LoPucki, “A Team Production Theory of Bankruptcy Reorganization” (2004) 57 Vand L Rev 741, 748. 20 Ibid. 21 L LoPucki, “A Team Production Theory of Bankruptcy Reorganization” (2004) 57 Vand L Rev 741, 744; H Nsubuga, “Corporate Insolvency and Employment protection: A Theoretical Perspective” (2016) 4(1) NIBLeJ 4 para 72. 22 L LoPucki, “A Team Production Theory of Bankruptcy Reorganization” (2004) 57 Vand L Rev 741, 749 – “The team members include all who make firm-specific investments but are unable to protect those investments by direct contracting, personal trust or reputation. Team members may include stockholders, creditors, executives, other employees, suppliers, customers, local governments, regulatory agencies, and others.” See also H Nsubuga, “Corporate Insolvency and Employment protection: A Theoretical Perspective” (2016) 4(1) NIBLeJ 4 para 73. 23 H Nsubuga, “Corporate Insolvency and Employment protection: A Theoretical Perspective” (2016) 4(1) NIBLeJ 4 para 77 – “The TPT being an inclusive theory, advocates honouring all team members’ interests on the insolvency of the company, whether in terms of financial gain or losses.” Page 7  Foundation Certificate: Module 9 members) who cannot realistically nor economically always benefit from the insolvency proceeding.24 This theory closely resembles some of the “traditionalist” theories on insolvency. 3.2.2.2 Traditionalist theories Traditionalist theories on insolvency law are against the idea that the law should exist only to serve creditors’ interests and are consequently also inclusive in nature.25 Communitarianism looks to balance a wide range of different stakeholders in the insolvency of the debtor and even to consider the welfare of the community at large.26 It “considers limiting the rights of high ranking creditors to give way to some extent to others including the community at large.”27 It subscribes to the notion of redistribution, that is, to redistribute the consequences of the debtor’s default.28 Communitarian theorists seek to focus on the fact that those involved in and dealing with companies are humans and corporate law should not be de-personalised.29 The Cork Report also seems to validate at least some aspects of the Communitarian Theory. 30 Criticism levelled against this theory relates to the difficulty of defining the community and determining how far it may stretch and is cumbersome.31 Also, articulating the community’s needs in legislative form may prove to be problematic.32 The communitarian theory has a lot in common with Warren’s “multi value approach”, or “eclectic approach”.33 In a corporate insolvency context this approach requires recognition of those who are not directly “creditors”.34 Warren refers to the notion that it was intended that insolvency law address concerns that are broader than just the debtor’s immediate problems and that of its creditors.35 It should involve considering other internal or external stakeholders such as employees, suppliers or tax authorities and in some instances to “protect interests that have no other protection”.36 It is, however, criticised as “too widely expressed to be of much specific assistance in developing 24 LoPucki contends that TPT entitlements are entitlements to “rents and surpluses” and it goes without saying much that there will not be a lot of surplus in the case of insolvency. 25 J Wood, “Corporate Rescue: A Critical Analysis of its Fundamentals and Existence” (PhD thesis, University of Leeds 2013) – “Contrary to proceduralists, traditionalists believe that insolvency law is not a tool solely reserved for the creditors in which they can pursue their own interests.” at 88; H Nsubuga, “Corporate Insolvency and Employment protection: A Theoretical Perspective” (2016) 4(1) NIBLeJ 4 para 3. 26 P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 7. 27 Ibid. 28 E Warren, “Bankruptcy Policy” (1987) 54 U Chi L Rev 775, 777. 29 A Keay, “Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s ‘Enlightened Shareholder Value Approach’” (2007) 29 Sydney L Rev 577, 586. 30 Cork Report on Insolvency Law and Practice, Cmnd 8558 [1982]: p 56 para 204. “The chain reaction consequent upon any given failure can potentially be so disastrous to creditors, employees and the community that it must not be overlooked.” 31 P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 7. 32 Idem, at 9. 33 Idem, at 10. 34 E Warren, “Bankruptcy Policy” 54 (1987) U Chi L Rev 775; P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 10. 35 E Warren, “Bankruptcy Policy” (1987) 54 U Chi L Rev 775, 788. 36 E Warren, “Bankruptcy Policy” (1987) 54 U Chi L Rev 775, 788; P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 10. Page 8  Foundation Certificate: Module 9 policy.”37 It does not provide enough guidance as to the weight that has to be afforded to each of the interests and priorities that come into play in an insolvency context. As Walton states, “[i]t is not clear which principles are to be seen as core and which are of peripheral relevance.”38 Baird criticises Warren’s approach by asking the reasonable question of why stakeholders should be given special rights in insolvency if they don’t have the same rights outside of insolvency?39 3.2.2.3 The “enlightened creditor value” approach As part of a recent research project, I developed my own theory of insolvency law: the “enlightened creditor value” (ECV) approach. Like its solvent brother, the ESV approach,40 the ECV sets out to strike a balance between the competing interests of differing stakeholders in order to benefit creditors in the long run. It can be seen as a compromise between the creditor theories and stakeholder theories. This theory encourages the CIP to achieve the best outcome for creditors by taking into account all the relevant considerations for that purpose; this involves the taking of a proper balanced view of the short and long term – the interests of the shareholders and employees, customers, suppliers, financiers and others – as well as to consider the impact of the company’s possible demise on the community. The basic position is that CIPs are required to treat creditors’ interests as paramount, that is, “creditors first”, not “creditors only”. The interests of employees or other stakeholders should be considered in performing these duties – but only where this would be in the creditors’ interest. A practical example of this theory could be something along the following lines: If a CIP faces the decision of whether or not to lay-off the employees of the company during rescue proceedings, the decision to delay termination of their employment contracts, at least to some extent, would involve a consideration of the employees’ interests but ultimately should hold some benefit for the creditors in that the employees’ continuous employment will contribute to the generation of revenue or the retention of goodwill that will lead to a better outcome for creditors in the long run. This approach can be further qualified by stating that the extent to which a CIP would have to exercise his duties for the benefit of other stakeholders, should depend on the nature of the proceedings and the scope of the financial difficulty the debtor company is facing: (a) During rescue proceedings the CIP, having regard to the financial situation of the debtor, ought to weigh up the competing interests of the stakeholders involved. If the financial difficulty of the debtor has not reached the stage of “doubtful solvency”, as Hawke states,41 37 P Walton, “When is Pre-packaged Administration appropriate? – A Theoretical Consideration” (2011) 20 Nottingham LJ 1, 11. 38 Ibid. 39 D Baird, “Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren” (1987) 54 U Chi L Rev 54 815, 817-818 – “Whenever we must have a legal rule to distribute losses in bankruptcy, we must also have a legal rule that distributes the same loss outside of bankruptcy”, at 822. 40 The enlightened shareholder value approach. 41 N Hawke, “Creditors’ Interest in Solvent and Insolvent Companies” [1989] JBL 54, 59. Page 9  Foundation Certificate: Module 9 then the CIP should take greater care to act in the interests of the company and its shareholders.42 Where the company is, however, beyond that point and where it conversely enters the “twilight zone”, the CIP should keep the interests of the creditors at the fore; (b) Where the CIP is appointed as the liquidator of the company he or she owes fiduciary duties to the creditors of the company but also to the company itself.43 Liquidators, therefore, exercise their duties for the benefit of the creditors in the first instance and then for the benefit of the shareholders. 3.3 INSOL International’s Ethical Principles for Insolvency Professionals In 2016 INSOL International44 took the initiative of drafting “Ethical Principles for Insolvency Professionals” to address the ethical foundation that underpins the insolvency profession. The drafting of the principles was undertaken by Working Group 10 of INSOL’s Task Force 2021. This Working Group considered an extensive range of ethical issues in drafting the principles that are meant to be used as best practice guidance to members as well as to jurisdictions and recognised professional bodies that do not have ethical guidelines that apply to IPs. As trust and confidence are essential to the efficacy of an insolvency regime, the goal in establishing the Principles is to enhance and protect the integrity of the insolvency profession and to create a framework that is fair, effective, practical and readily understood. The members of the Working Group were representative of the diverse community that work in insolvency; from practitioners with a legal or accounting background, members of professional bodies to academics focusing on ethics in insolvency. Several jurisdictions were represented by those involved, contributing to the final product providing a global overview of ethical considerations for the insolvency profession. The Principles are therefore generic in nature in order to set out the most basic ethical standards expected of IPs. It could be viewed as a quasi-“model code” that can be adapted as needed and incorporated into a jurisdiction’s provisions relating to the regulation of IPs. The Principles are therefore not meant to replace the ethical obligations of IPs in terms of a specific jurisdiction’s legislation, regulations or other forms of professional standards and are not mandatory. As stated, they are meant to provide a guide to best practice while allowing for the differing nature of legislation and insolvency practice in different jurisdictions. The Principles provide guidance based on international standards of conduct and consequently some of the principles may impose a higher standard than existing jurisdictional legal requirements. Where the law in a jurisdiction is silent, or ambiguous, the Principles aim to provide clarity and guidance as to what is regarded as best practice. 42 Ibid – “…as long as the company remains on the right side of ‘doubtful solvency,’ any consideration for creditors’ interests need only be minimal.” 43 A Keay and P Walton, Insolvency Law Corporate and Personal (4th ed, LexisNexis, 2017) 299. 44 International Association of Restructuring, Insolvency and Bankruptcy Professionals. Page 10  Foundation Certificate: Module 9 In the event that the Principles in some way conflict with existing local rules or laws, they are not intended to supersede such rules or laws. The majority of the content of this Guidance Text is based on the INSOL Principles. 3.4 Other sources of guidance on ethical behaviour There are also other documents that provide guidance on the qualities and the behaviour that is to be expected of IPs that will be important for this module. 3.4.1 UNCITRAL Legislative Guide on Insolvency Law The purpose of the United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide on Insolvency Law (UNCITRAL Guide or the Guide) is to aid in establishing an efficient and effective legal framework for addressing the financial difficulty of debtors.45 It is intended to act as a point of reference for national authorities and legislative bodies when preparing new insolvency laws and regulations, or for the purpose of reviewing the adequacy of existing insolvency laws and regulations.46 To this end, the UNCITRAL Guide provides guidance on the role of the insolvency representative or IP, his tasks and rights and duties. The Guide states that due to the important role of the CIP and the extensive powers bestowed on him, it is essential that he is appropriately qualified and possesses the knowledge, experience and personal qualities that will ensure not only the effective and efficient conduct of the proceedings, but also that there is confidence in the insolvency regime.47 The most important qualities mentioned by the Guide for purposes of this module are: integrity, impartiality, independence and good management skills.48 Where relevant, mention will also be made of this document in the discussion of the INSOL Principles below. 3.4.2 The World Bank Principles The World Bank’s Principles and Guidelines for Effective Insolvency and Creditor Rights Systems (World Bank Principles),49 much like the UNCITRAL Legislative Guide, are to be used to guide system reform and benchmarking. The principles and guidelines are a distillation of international best practice on the design aspects of insolvency systems. The principles touch on a wide array of important aspects regarding the insolvency process. Relevant to the discussion on ethics and practitioner behaviour are: (1) Principle 33, which refers to the integrity of participants in the insolvency system. It provides that rules should be provided to prevent abuse of the insolvency system and that these rules 45 UNCITRAL Legislative Guide on Insolvency Law, 2004, available online at http://www.uncitral.org/pdf/ english/texts/insolven/05-80722_Ebook.pdf, p 1, para 1. 46 Idem, p 1, para 1. 47 Idem, p 174, para 35. Emphasis added. 48 Idem, p 174-175, para 41. 49 World Bank Group, Principles and Guidelines for Effective Insolvency and Creditor Rights Systems, April 2001. Page 11  Foundation Certificate: Module 9 in turn instil public confidence in the insolvency system.50 Even though the principles do not mention IPs specifically, they are included by implication as one of the main participants in the proceedings. This principle highlights (by implication) the integrity of the IP and touches on the prevention of abuse of the insolvency system; and (2) Principle 35, which refers to the competence and integrity of insolvency administrators and provides that IPs should be competent to exercise the powers given to them and should act with integrity, impartiality and independence.51 This principle states that those who administer insolvencies are given powers over debtors and their assets and have a duty to protect them and their value.52 3.4.3 European Bank for Reconstruction and Development (EBRD) Office Holder Principles The EBRD Insolvency Office Holder Principles53 (EBRD Principles) build on the World Bank Principles and Guidelines and the UNCITRAL Legislative Guide, by providing greater detail and guidance on the application of the standards and practices advanced by those institutions in relation to insolvency professionals. The EBRD Principles provide guidance on several aspects of the role of the IP in an insolvency regime and promote ethical norms such as honesty, integrity, independence and impartiality, as well as the duty to stay abreast of important legal and technical developments in the field and to act with care. Principle 12 recommends that local laws should encourage and facilitate the development of a code of ethics.54 Moreover, it suggests that the law should compel the application of the code by ensuring that it is enforced and binding on IPs. Where applicable, reference will also be made to the EBRD Principles in the text below. 4. CODES OF CONDUCT IPs can often stumble into a breach of their fiduciary duties, not necessarily because they are unethical but because they sometimes fail to understand the extent of what is expected of them in the role of IP. One way in which an attempt can be made to remedy this, is for jurisdictions to draft a code of professional conduct and ethics specifically aimed at IPs. This will not only provide IPs with the opportunity to examine the nature and goals of their work, it also offers information to others (the stakeholders and general public) about what can be expected from members of the insolvency profession. To this end Codes are to describe principles intended to: i) guide present and future behaviour; ii) influence decisions an IP makes so his resulting 50 Idem, p 60, para 220-221. 51 Idem, p 61, para 226. 52 Idem, p 61, para 227. 53 EBRD Principles in Respect of the Qualifications, Appointment, Conduct, Supervision, and Regulation of Office Holders in Insolvency Cases, June 2007, available online at file://prs- tore2.unv.wlv.ac.uk/ home0$/u22982/home/Profile/Downloads/ioh_principles%20(1).pdf 54 Idem, p 11. Page 12  Foundation Certificate: Module 9 behaviour is acceptable; and iii) provide information as to how ethical dilemmas can be dealt with or addressed.55 Not only will this enable IPs to better navigate the ethical conundrums of insolvency appointments, but will also provide a rare opportunity to educate stakeholders and members of the public who are often too keen to believe the worst of the insolvency profession. A code of conduct should incorporate the guidance and best practice principles provided by the standard-setting bodies for insolvency (UNCITRAL and the World Bank Group) as well as other international organisations. Not surprisingly, codes of conduct and ethics are often relied upon by the court, as a breach of a jurisdiction’s code can be a strong indicator of an IP’s breach of duties.56 5. THE PRINCIPLES 5.1 Introduction As stated above, a code of conduct can be seen as a sensible way of educating IPs and the general public as to the ethical standards expected of officeholders in a specific jurisdiction. There are various approaches to drafting a code of conduct. Some codes of conduct are rules-based. A rules-based code usually includes a set of detailed rules to govern professional conduct and to serve as a foundation for resolving grievances.57 It is a type of code that sets out the do’s and don’ts of the profession and are usually binding and enforced throughout the system. Other codes follow a principles-based approach. A principles-based approach usually sets out certain ideals to which practitioners should strive and makes use of lofty language about what “should” be done in regard to certain themes. Instead of focusing on what is right or wrong, it places an emphasis on self-realisation as to what the best approach in a situation might be. As the title suggests, the INSOL Principles follow a principles-based approach. As noted earlier, the INSOL Principles are not mandatory and are meant to set out international best-practice ethical behaviour whilst not being bound to any specific jurisdiction. Moreover, it can be argued that a principles-based approach to ethics further encourages ethical behaviour by compelling IPs to consider whether their conduct meets the ideals set out in the principles, in effect also compelling the IPs to think about what the ethical thing is to do. 55 S Jakubowski et al, “A Cross-Country Comparison of the Codes of Professional Conduct of Certified Chartered Accountants” (2002) 35 JBusEthics at 111, 112. 56 Re 1 Blackfriars Limited (in liquidation) [2021] EWHC 684 (Ch) at para 252 [England and Wales]. In the judgment the court referred to the case of Brewer v Iqbal [2019] EWCH 182 (Ch) at para 80 where CICCJ Briggs stated that behaviour constituting a breach of the Fundamental principles of Integrity or Objectivity as described in the Code of Ethics may well be strong or very strong evidence of a breach of duty of care or a fiduciary duty. 57 M Frankel, “Professional Codes: Why, How, and with What Impact?” (1989) 8 J Bus Ethics 109, 111. Page 13  Foundation Certificate: Module 9 5.2 Integrity Principle 1 – Integrity Integrity In addition to complying with applicable law, Members should endeavour to demonstrate the highest levels of integrity by being straightforward, honest, and truthful; and by adhering to high moral and ethical principles in all aspects of their professional practice. Commentary Integrity implies fair dealing, honesty and truthfulness. 5.2.1 Integrity – honesty, straightforwardness and truthfulness The IP is deemed to act in good faith if he acts with honesty, integrity and confidentiality. On account of his membership of a particular profession,58 the IP is in most instances already required to demonstrate impeccable probity and honesty. The beneficiaries in the insolvency proceedings are at “at the mercy” of the IP’s discretionary powers;59 they have to trust and / or rely on the IP to protect their interests. This reliance and trust in the practitioner demands honesty, truthfulness and transparency on the part of the IP. It is crucial for the IP to be honest and truthful with the beneficiaries and to act with integrity towards them at all times. Honesty implies that the IP should refrain from lying, while truthfulness means that the IP should not conceal any facts from parties with an interest in the outcome of the insolvency. Honesty further implies that the IP should be open and transparent in his decision-making and should not conceal or misrepresent any information. The IP should be honest and truthful when negotiating on behalf of the beneficiaries as well as when reporting on his acts and dealings. The IP must refrain from misleading a creditor, employee or shareholder of the company through any act or omission. Honesty and frankness by the IP may also help neutralise any negative emotions during the insolvency proceeding. An honest and transparent approach to the procedure would instil confidence among beneficiaries and the public and facilitate better co-operation. In restructuring proceedings, this duty will include honesty and truthfulness regarding the prospects of success. 58 Lawyers, accountants, auditors. 59 F Cassim et al, Contemporary Company Law (2nd ed, Juta 2012) 512 – “Typically, in fiduciary relationships, one party is vulnerable to, or is at the mercy of, another party's discretion.” Page 14  Foundation Certificate: Module 9 5.2.2 High moral and ethical standards The Principle requires the IP to adhere to high moral and ethical standards in all aspects of professional practice. Morality and ethics are closely related but are not the same thing. Morals usually refer to a person’s personal beliefs regarding what is right or wrong and is therefore often influenced by upbringing, education, culture and even religious beliefs. Morals, therefore, tend to be subjective. However, morals also tend to provide the foundations for ethics. Ethics refer to the specific rules and actions that are regarded as correct behaviour and often relate to a specific group of people who function in similar circumstances – such as the IP profession. So, although morals form the basis of ethics, ethics does not concern a set of beliefs regarding what is right or wrong, but rather what would be acceptable standards of conduct. This is why the INSOL Principle requires both. The IP should have a personal set of beliefs to guide his actions but should also adhere to the ethical values of the group he belongs to. Where there is a conflict between his personal beliefs and that of the profession, the professional standards should trump his personal opinions. This is because of the fact that a moral action can also be unethical. An example might be where an IP, due his personal beliefs and a moral desire to be open and honest with the stakeholders, divulges information which should be kept confidential in accordance with ethical guidance. 5.2.3 Fair dealing Fair dealing relates to treating people fairly or equitably. In an insolvency scenario, it will not be possible for an IP to treat all the stakeholders equally as usually a system is set up in favour of certain stakeholders (especially creditors). However, bearing this in mind it is possible to treat like stakeholders alike and to ensure the equitable treatment of all involved. Rajah, JA said the following in regards to IPs exercising their duties in a fair manner: “The principle that can also be gleaned from this brief overview is that the duty of the liquidator in assessing a proof of debt is to ensure that while genuine debts are admitted and false claims are rejected, he must act fairly in discharging his duties. He must, at all times, be independent and hold an even hand in dealing with the often competing interests of creditors, contributories and his appointers. A liquidator must never favour the interests of his appointers over that of the other legitimate claimants to the company’s assets.” (emphasis in the original)60 60 Fustar Chemicals Ltd (Hong Kong) v Liquidator of Fustar Chemicals Pte Ltd [2009] SGCA 35, [2009] 4 SLR (R) 458, at [18] [Singapore]. Page 15  Foundation Certificate: Module 9 Self-Assessment Exercise 1 Question 1 What are the most common elements associated with the existence of a fiduciary relationship? Question 2 Identify the key fiduciary duties linked to Insolvency Professionals Question 3 True or False? All Insolvency Professionals owe fiduciary duties. Question 4 Identify the sources of ethical guidance available to jurisdictions when considering frameworks for addressing the behaviour of Insolvency professionals. Question 5 True or False? Being truthful and being honest amounts to the same thing. For commentary and feedback on self-assessment exercise 1, please see APPENDIX A 5.3 Objectivity, independence and impartiality Principle 2 – Objectivity, Independence and Impartiality Objectivity, Independence and Impartiality Members should exhibit the highest levels of objectivity, independence and impartiality in the exercise of their powers and duties. Members should avoid circumstances likely to result in a conflict of interest. Members appointed over an estate should not acquire or remove any assets or cash from the estate except as prescribed or as properly authorised remuneration. Page 16  Foundation Certificate: Module 9 Members should not be unjustly enriched, for example, by receiving secret kick-backs or commissions. Commentary Independence should be considered both as a matter of fact and from the perspective of an informed observer. It should be considered with reference to jurisdictional guidance, whether legislative, professional or code-based, but the key tenet underlying the principle of independence should be ensuring that a Member’s conduct is, and is seen to be, not unfairly or improperly biased towards any party, including Members themselves or their associates. A Member should not accept an appointment in connection with the estate if his (or a related party’s) relationship with the directors of the company or any of the stakeholders would give rise to a possible or perceived lack of independence. Threats to objectivity, independence and impartiality may include any of the following, singly or in combination: • Self - interest; • Self - review; • Advocacy; • Familiarity; and • Intimidation. Lack of independence cannot necessarily be cured by disclosure or by appointment of an independent joint practitioner or officeholder, although both options may be considered and may be appropriate in certain circumstances. Where a Member purchases or removes assets or cash from the estate (excluding appropriately approved remuneration and disbursements payments), it is likely that there will be a perception that independence, objectivity and / or impartiality has been breached, even if it has not in fact been breached. Such action may erode trust in the integrity of such Member and the process. Where a Member appointed over the estate of a commercial retailer is purchasing goods or services from a commercial retailer that sells to the public, it should generally be permissible for such Member to purchase such items from the retailer in the ordinary course of business (for example, buying food in a retailer on the same terms as every other purchaser). However, Members should not take advantage of staff discounts or special payment terms, as doing so may impair, or be perceived to impair, independence. Bribery or payment or receipt of secret commissions in order to receive work or provide work to others should be unacceptable. Page 17  Foundation Certificate: Module 9 Acquisitions by close connections, for example family, connected / related parties, will generally give rise to the same concerns as acquisitions by Members themselves. Therefore, immediate relatives and close business connections should be subject to the same restrictions as Members. Jurisdictions may wish to permit a Member (or relative or connection) to purchase assets where the stakeholders have given explicit permission in advance. The IP will only be able to exercise his discretion and powers in the best interest of the beneficiaries if he is independent and impartial. This is especially true given the balancing act he has to perform in considering and dealing with the competing interests of the stakeholders.61 The call to independence and impartiality of the IP aims to ensure that the IP does not allow bias, a conflicting interest, or the undue influence of others to override his professional and / or business judgements in the execution of his duties and obligations. It is worth noting that many jurisdictions have strict legislative provisions dealing with this aspect.62 IPs should not take appointments where their independence and impartiality will be called into question by the existence of a relationship with a stakeholder. In the event that such a relationship precludes an IP form accepting an insolvency appointment, a joint appointment does not necessarily constitute a proper safeguard. Independence is two-fold. IPs must be independent in fact and also be seen or perceived to be independent. Independence in fact requires that the IP be factually free from any influences that could compromise his judgement. IPs must, therefore, avoid all personal and professional relationships and direct or indirect interests that will adversely influence, impair or threaten their integrity and ability to make decisions. Independence in perception, on the other hand, includes the avoidance of circumstances that would lead a reasonably informed third party to conclude that the IP’s integrity, independence and impartiality have been compromised. Being seen or perceived to be independent and impartial is of extreme importance in the context of insolvency proceedings. If the stakeholders involved in the proceedings perceive the IP to be biased, or to lack independence (even though it might be untrue), it would negate the trust and reliance that they have placed in him. The importance of being perceived to be independent was recently tested in the case of Re Hodlnaut Pte Ltd63 here the court at para 10 61 C Anderson, “Miracle Workers or Ambulance Chasers? The Role of Administrators in the Part 5.3A Process” (2004) 12 Insolv LJ 238, 248. 62 Australia in particular has extensive provisions dealing with the independence and impartiality of CIPs. See eg s 448C of the Corporations Act 50 of 2001 and the Australian Restructuring, Insolvency and Turnaround Association (ARITA) Code of Professional Practice. Australia’s firm approach to independence and impartiality stems from the well-known Harmer Report (Australian Law Reform Commission General Insolvency Inquiry Report No 45 (1988)), which emphasised that impartiality is one of the nine fundamental principles for an efficient insolvency regime – “An insolvency administration should be impartial, efficient and expeditious”. 63 Re Hodlnaut Pte Ltd [2022] SGHC 209; 10 [Singapore]. The court also made some comments about the Malaysian approach to a perceived lack of independence in the case of Jepak Holdings Sdn Bhd v TNB Repair and Maintenance Sdn Bhd & Ors [2021] 11 MLJ 625. Page 18  Foundation Certificate: Module 9 stated that an appointment is “fact-dependent” and Abdullah J noted that he was disinclined to follow a rule which required the court to go “further than a factual determination” in relation to the independence of the IPs in the case. Ultimately, the court upheld the notion of a perceived lack of independence by stating that “…it was to my mind best to have an appointment that would avoid as best as possible any concerns about independence: the process will be likely be complicated enough as it is”. This development is worrying. From an outsider’s perspective Singapore has a robust ethical framework in place for IPs, an approach that would only require factual independence might do great harm to the esteem of insolvency industry in this Jurisdiction. Case law has also established the factors the court might take into account when considering a perception of bias: whether the person held a subjective belief that the IP was biased; that that belief was reasonable; and that as a consequence the person had lost confidence in the ability of the IP to perform his tasks without fear or favour.64 An argument has also been put forward that independence issues should be addressed as a matter of substance rather than form.65 Without trust and reliance, the stakeholders and beneficiaries will no longer believe that the IP is bound to act in their best interest,66 which could lead to a discontinuance of their co-operation with the IP and the insolvency process. This could be particularly cumbersome in rescue proceedings where the co-operation of certain parties is essential to the success of implementing a rescue plan or strategy. In other words, a perceived lack of independence could undermine the success of an entire rescue proceeding. In the pursuit of ensuring the independence of IPs, jurisdictions usually identify certain personal and professional relationships or situations that might give rise to a lack of independence. These might include any professional or personal association with the company or a company director,67 a company shareholder, a company employee, company business partners, other firms or entities controlled by the company, either secured or unsecured company creditors, company debtors, or even the relatives of company officials. As the aforementioned list does not purport to be a numerus clausus of relationships, each instance of alleged lack of independence would have to be assessed against the prevailing circumstances. An attempt to pin all the situations that could give rise to a lack of independence and impartiality down, would 64 Petroships Investment Pte Ltd v Wealthplus Pte Ltd [2018] 3 SLR 687, [109]; Liquidators of Ace Class Precision Engineering Pte Ltd (in members’ voluntary liquidation) v Tan Boon Hwa and others and other matters [2022] 3 SLR 539; [2021] SGHC 134, [104]. [Singapore]. 65 Martin Bruce Jones (joint and several administrators GD Pork Holdings Pty Ltd (administrators appointed) as trustee for the GD Pork Unit Trust [2021] WASC 428. [Australia]. See also Robert Austin AM, ‘The duty of independence’ (20230 35(1) ARITA J, 24 “…and in the present case it was relevant that the payment of fees for the pre- appointment work was a relatively small amount of money which could not sensibly be regarded by a reasonable observer as a possible influence.” 66 Bovis Lend Lease Pty Ltd v Wily [2003] 45 ACSR 612: 139 [Australia]. See also In the matter of MSOLD1 Limited (in administration) [2022] EWHC 3015(Ch) [England and Wales] where the perception of a lack of independence by certain stakeholders were raised in this regard. 67 See, eg, Bovis Lend Lease Pty Ltd v Wily [2003] 45 ACSR 612 – in this case the CIP had previously acted as an advisor to one of the company’s directors; African Banking Corporation of Botswana v Kariba Furniture Manufacturers and others (228/2014) [2015] ZASCA 69; 2015 (5) SA 192 (SCA); [2015] 3 All SA 10 (SCA) – in this case the CIP had previously acted as an attorney for the company. Page 19  Foundation Certificate: Module 9 be unwise. It is far better to provide examples of threats and common issues in practice that could prove cumbersome in adhering to this ethical norm. CASE STUDY The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) & ors v TT International Ltd and another appeal [2012] SGCA 9, [2012] 2 SLR 213 [SINGAPORE] In this case the objectivity and impartiality of the Scheme Manager were in doubt due to his acting as the nominee in the Individual Voluntary Arrangements (IVAs) of two of the shareholders of the respondent TT International (the corporate debtor in question). Both shareholders were also creditors of the company for unpaid dividends. It was a bone of contention in voting to approve the scheme plan where it was argued that the Scheme Manager lacked objectivity in adjudicating proof of debts and that this affected the fairness of the process. The court stated that the conduct of the Scheme Manager goes “too far” when he begins to align his interests with those of the company. The court noted that the temptation to do this is especially critical when his appointers are not the creditors but the company’s management. In this case the success of the shareholders’ IVAs depended heavily on the success of the scheme and created an incentive on the part of the IP to have the plan approved for other reasons than merely an attempt to rescue the company. “In our view, this additional relationship with Mr Sng and Ms Tong, key personnel of the Respondent, was inappropriate because it put the proposed Scheme Manager in an unacceptable position of unavoidable conflict of interest. Therefore, we ordered the proposed Scheme Manager to elect either to continue as such only or as nominee for Mr Sng and Ms Tong in their proposed IVAs only (see Annexure I at [11]). He eventually chose to act for the Respondent alone.”68 This case clearly illustrates the manifestation of a conflict of interest that can arise from having a professional relationship with a stakeholder in the proceedings and how this can influence the behaviour of an IP. In order to address threats to independence and impartiality, some jurisdictions provide for the disclosure of the relationship and a declaration of independence. In this document an IP would be required to truthfully disclose any and all relationships that he might have with any stakeholders in the insolvency proceeding, as well as the nature of said relationship and the 68 The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) & ors v TT International Ltd and another appeal [2012] SGCA 9, [2012] 2 SLR 213, 241 at [78] [Singapore]. Page 20  Foundation Certificate: Module 9 level of interaction with the stakeholder. The IP would also be expected to state that despite the existence of a relationship with a stakeholder he would still be able to perform his duties independently and impartially. However, disclosure of such a relationships does not suddenly render them harmless. If the relationship is not substantial and of a merely superficial nature, disclosing it and declaring independence might remedy the situation. However, it will be a much harder task convincing stakeholders of independence and impartiality when the IP has had a longstanding professional or personal relationship with someone related to the proceedings or one of the stakeholders. The mere disclosure of any relationship as a solution, is flawed. No disclosure serves as a guarantee of impartial and objective conduct. Instead, the declaration by the IP should be seen as a disclosure of those relationships that do not pose any risk to the practitioner’s independence. It is also important that relevant indemnities be declared. In circumstances where the remuneration of IPs is funded by stakeholders the possibility for lack of independence perception issues is increased.69 In the recent case - Liquidators of Ace Class Precision Engineering Pte Ltd (in members’ voluntary liquidation) v Tan Boon Hwa and others and other matters70 - it was stated that the independence and impartiality of IPs are important regardless of whether the liquidation was a solvent or insolvent liquidation. In this case certain creditors sought to have the liquidators of the group of solvent companies removed based on allegations of actual and perceived bias. However, due to the liquidators’ professional behaviour they were able to prove that the application was brought in an attempt to frustrate the liquidation proceedings. The court made valuable comments on the circumstances which might be used to demonstrate bias: bias could be demonstrated by an IP’s failure to investigate the affairs of the company without a rational basis, or in not exercising discretion in good faith.71 The elements of the insolvency proceedings dealt with below are particularly cumbersome and often give rise to threats to the independence and impartiality of the IP and specifically the CIP. 5.3.1 Nature of pre-commencement / appointment involvement In practice, prior consultations often occur between the CIP and the company or stakeholders. These consultations may also create the impression of a lack of independence and impartiality on the part of the CIP. Yet the prior consultations need not result in the disqualification of that person as practitioner and may in fact constitute a crucial part of the insolvency process. Therefore, not all forms of contact between the CIP and stakeholder parties prior to the practitioner’s appointment would necessarily result in a lack of independence. Nevertheless, there should be limits to what would be deemed acceptable engagement during such consultations. Should the consultation involve material engagement by any of the stakeholder parties, the CIP would no longer be independent and should therefore not be appointed as practitioner. The advice provided by the practitioner in the prior consultation should be limited 69 Superpark Oy v Super Park Asia Group Pte Ltd and others [2021] 1 SLR 998; [2021] SGCA 8. [Singapore]. The fact that the IPs in this case received financial support from a relevant stakeholder clearly influenced not only their independence but also their integrity in the manner in which they conducted the issues raised. 70 Liquidators of Ace Class Precision Engineering Pte Ltd (in members’ voluntary liquidation) v Tan Boon Hwa and others and other matters [2022] 3 SLR 539; [2021] SGHC 134 [Singapore]. 71 Idem, at [102]. Page 21  Foundation Certificate: Module 9 to the company’s financial position, the company’s solvency, the effects of potential insolvency and any alternatives to insolvency. Austin AM has provided some useful insights into pre-appointment work by commenting: “…insolvency practitioners’ pre-appointment work must be carried out from ‘outside the tent’; i.e., it should always be clear that the insolvency practitioners are providing advice to the decision-makers rather than making decisions themselves.”72 It would also make sense for the CIP to set out the nature and extent of prior consultations in a disclosure statement. This would facilitate improved transparency and help prevent accusations of a lack of independence. CASE STUDY Re Korda, Ten Network Holdings Ltd (Admn Apptd) (Recs and Mgrs Apptd) [2017] FCA 914 [AUSTRALIA] In this case the administrators’ firm had been involved in reviewing the company’s financial position for several months prior to their appointment. The question before the court was whether they should be allowed to continue to act as administrators given their “long-term, substantial and remunerative involvement” with the company. It is a longstanding practice and especially commonplace for large and complex companies to engage CIPs to undertake a contingency plan in the event that it becomes necessary to appoint a CIP. Such a practitioner is usually referred to as a “potential” or “putative” practitioner. It is assumed that the potential CIP would be able to quickly step into their role and be able to commence it seamlessly, or that they would be able to “hit the ground running”. In the matter of Korda the court elaborated on the nature of modern day corporate restructuring and the importance of early intervention and being prepared to act when and if necessary. In hearing evidence it was generally accepted that the administrators’ firm in this case refrained from providing advice to the board of directors, the creditors or any other stakeholders. The nature of the work done by the firm related to deposing the management in order to form an understanding of the company’s operations, financial position, legal and contractual obligations and cash flow. Based on this information a transformation plan could be developed and, in the event of it being unsuccessful, a draft administration plan. It was noted also that neither of the appointed administrators were involved in any of the work described above. Nor did either of them meet with any of the board members or management of the debtor prior to their appointment. 72 Robert Austin AM, ‘The duty of independence’ (20230 35(1) ARITA J, 24. Page 22  Foundation Certificate: Module 9 The Australian Securities and Investments Commission (ASIC), appearing as amicus curiae, submitted the following statement (with which the court concurred): “Directors contemplating potential insolvency should be encouraged to engage with appropriately-qualified professionals early to develop restructuring plans which will maximise the chance of rescuing a viable business or returning as much value as possible to the relevant stakeholders should a later appointment prove necessary. A reasonable fair-minded observer would appreciate that as a common characteristic of large and complex corporate distress situations. Provided that appropriate safeguards are put in place to avoid the existence or appearance of conflict should an appointment subsequently prove necessary, significant, long-term and consequently remunerative work undertaken for such purposes should not of itself preclude the practitioner from taking a formal appointment (subject of course to consideration of the facts and circumstances of each particular case). The court held that these “safeguards” could include: that the potential administrator makes it clear to the board of directors and executives that she or he is the person who might become the actual administrator if other measures to fix the company’s finances do not succeed as well as proper record keeping of all of the meetings held and tasks performed In this case the court did not find actual or apprehended bias or conflict (despite the substantial pre-appointment work) as the administrators work in this regard was limited to certain aspects and the engagement did not involve any advice to the company or its directors. CASE STUDY Re 1 Blackfriars Limited (in liquidation) [2021] EWHC 684 (Ch) [ENGLAND AND WALES] The English case of Re 1 Blackfriars Limited (in liquidation) also focused on the administrators’ conduct prior to appointment. A big issue in the case was the fact that the administrators informed the appointing creditor that the administration would be a “light touch” administration and that this would mean a less expensive administration as there would be limited or no day-to-day management work for the administrators to perform. This approach to administration is often adopted when an asset realisation is planned rather than a rescue or going concern sale of the business. However, in this case the independence and impartiality of the administrators were drawn into question due to their “agreement” to this approach with the appointing creditor. It also came to light during the proceedings that the creditor in question thought that they would be able to guide the administration, effectively influencing the administration of the estate and the proper functioning of the administrators. Page 23  Foundation Certificate: Module 9 Ultimately the court found no impropriety by the administrators and no evidence of any improper influence but the case does illustrate the scrutiny an IP’s conduct and communication pre-appointment will invite. 5.3.2 Appointment In many jurisdictions the CIP can be appointed by either the board of directors or a stakeholder (usually a shareholder or creditor). This may lead the appointee to expect that the practitioner would prioritise their interests. In some instances, these persons, being the “principal”, even believe that it is within their power to influence the CIP. Thus, it is vitally important for the CIP to be aware of his responsibilities in this regard. The practitioner should not make any promises to those who appointed him and should make it very clear that he is expected to act in the interests of all the beneficiaries. The duty of independence also obliges the CIP to scrutinise each given situation prior to accepting an appointment. Such scrutiny would include reasonable steps to determine any possible association or conflict of interest with any stakeholder. 5.3.3 Subsequent appointments Subsequent appointments refer to a scenario where the same CIP is allowed to act in different insolvency capacities in relation to the same debtor company. In some jurisdictions, such as England and Wales and Singapore, CIPs are allowed to be appointed in this manner.73 Subsequent appointments pose problems in relation to independence and impartiality due to the self-review and self-interest threat it creates. The Insolvency Code of Ethics of the Institute of Chartered Accountants of England and Wales (ICAEW) recognises the potential conflict of interest in this regard and utilised the scenario “sequential insolvency appointments” as an example of circumstances that might lead to a self-review threat being created.74 A self-review threat refers to a situation where a CIP, due to being involved in prior decision-making, will not be able to appropriately evaluate the results of previous judgements made or services rendered.75 The self-interest threat relates to the issue of remuneration of the CIP. The reason subsequent appointments might pose an issue in relation to the remuneration of the CIP, is that the CIP will be remunerated twice for work done in relation to the same company. A self-interest threat refers to a situation where the interests (including financial interests) of the CIP might inappropriately influence his judgement or behaviour.76 An example of a way in which a subsequent appointment and the corresponding subsequent remuneration might influence the behaviour of the CIP, could be that a rescue or turnaround practitioner might not put his best effort into saving the debtor from liquidation due to the fact that he knows he would 73 In South Africa this is prohibited by statute. 74 ICAEW Insolvency Code of Ethics, 2114.1 A5(b)(ii), available at https://www.icaew.com/-/media/corporate/ files/technical/ethics/insolvency-code-of-ethics.ashx?la=en. 75 Idem, 2114.1 A4(b). 76 Idem, 2114.1 A4(a). See also INSOL Principles, p 10 for a definition of “self-interest” – “A situation in which a Member has, or is perceived to have, a direct interest in obtaining a particular outcome: for example, where such Member (or a close associate) is also a creditor or shareholder of the insolvent estate.” Page 24  Foundation Certificate: Module 9 subsequently be appointed as the liquidator and be paid again. CIPs who engage in subsequent appointments often hold the view that the previous appointment does hold some benefits and advantages in the subsequent appointment (such as institutional knowledge) and as professionals have the opinion that they are able to act with independence and impartiality. In jurisdictions where subsequent appointments are allowed, the opinion is held that the benefits outweigh the risks. In certain jurisdictions subsequent appointments in relation to the same debtor company are prohibited due to the threats expressed above. South Africa is a good example of this. The South African Companies Act of 2008 provides that a business rescue practitioner may not be appointed as the liquidator of the debtor in subsequent liquidation proceedings.77 As already mentioned, other jurisdictions such as England and Wales,78 Singapore and New Zealand79 permit subsequent appointments. 5.3.4 Secret monies and personal transactions with the company The CIP should act in the best interests of the beneficiaries of his duties at all times and in all transactions. As a fiduciary, a CIP is not allowed to make a secret profit at the expense of the beneficiaries, or place himself in a position where his personal interests (or that of parties related or connected to him) conflict with his duties. If his judgement was influenced by the fact that he stands to gain personally from a decision, it cannot be said that he was acting in the best interests of the beneficiaries of his duties. This is of particular importance in situations where the CIP (or family / friend of the CIP) would like to purchase assets from the company. This could in effect place the CIP at both ends of the contract, which may cause a strong suspicion that the practitioner, being a fiduciary, is serving his own interests instead of those of the beneficiaries.80 There are also a number of ways in which the CIP would be able to manipulate such a transaction for his own benefit, for example fixing an advantageous price, as the CIP would have knowledge of the bare minimum the company would accept and drafting (or having input into the drafting of) a contract with favourable clauses.81 To this end it is important that a CIP follows the necessary procedural steps (disclosure) and obtains the necessary informed consent where a jurisdiction permits transactions between the CIP and the company. The CIP’s duty to act with independence and impartiality therefore encapsulates the same values as the familiar “no-profit” and “no-conflict” rules in Corporate Law and underpins his duty of undivided loyalty to the beneficiaries. 77 Companies Act 71 of 2008, s 140(4). 78 An example can be found in the Insolvency Act 1986, Sch B1, para 83(7)(b), which allows for an administrator to be a liquidator in a subsequent appointment. 79 Companies Act 2003, s 239ABY provides that the administrator is to be the default liquidator. This section was inserted into the Act by the Companies Amendment Act of 2006. 80 J Shepherd, The Law of Fiduciaries (Carswell 1981), 157 – “Put another way, the rule could be expressed: there is a heavy presumption that a person who has acted on both sides of a transaction, on one side as a fiduciary and on the other side in his individual capacity, has used his fiduciary powers to benefit himself.” 81 Ibid. Page 25  Foundation Certificate: Module 9 The no-profit rule determines that a fiduciary may not profit from his position of trust (his position as CIP) and thereby be unjustly enriched, for example by receiving secret kick-backs or commissions. The no-conflict rule determines that a fiduciary my not allow a conflict to arise between his duty and the interests of the beneficiaries, for example transacting with the debtor company in his personal capacity. CASE STUDIES Commonwealth Bank of Australia v Irving [1996] 65 FCR 291 [AUSTRALIA] This case perfectly illustrates that even without any actual bias shown, personal relationships with stakeholders can result in a lack of independence due to the perception created thereby. The CIP (Mr Irving), a chartered accountant, was appointment as the administrator in terms of the Australian Corporations Act Pt5.3A for the debtor company, NPC. At that time the company had only one director, Mr Roberts. Approximately two weeks prior to the commencement of the proceedings, Mr Townsend and Mr Shergold had resigned as directors of the company. Mr Irving and Mr Townsend had known one another for 16 years. Mr Townsend, a legal practitioner, had at numerous times acted as legal adviser to Mr Irving in his practice as a chartered accountant. The two also partook in the same charity events and sport activities in relation thereto. These charity events were also widely publicised. Moreover, prior to commencement of the insolvency proceedings Mr Irving had provided consultation services to the company regarding its financial position. As part of his services he had also engaged in discussions with one of the company’s major secured creditors (a bank). Two of the company’s creditors sought the removal of Mr Irving as administrator of the company due to his lack of independence. It is important to note the following: (a) Mr Irving had disclosed his relationship with the directors and the company before taking the appointment and stated therein that he believed that he would still be able to act in an independent manner; (b) There was no factual evidence of any impropriety by Mr Irving as administrator and no party suggested anything to the contrary; Page 26  Foundation Certificate: Module 9 (c) the situation was somewhat exacerbated by the fact that the law firm where Mr Townsend was employed acted as solicitors for Mr Irving in this matter. Important comments made by the court: As the administrator of the company, Mr Irving would have had to investigate the affairs of the company and also the conduct of the directors, including that of Mr Townsend, to determine whether or not any action should be taken against them or any of them. His relationship with Mr Townsend created the perception that Mr Irving held Mr Townsend’s judgment in high regard and relied on his professional advice and judgment. In the court’s view a reasonable person would have trouble believing that (despite Mr Irving’s assertions to the contrary) he would be able to conduct said investigation without any bias. The court noted that although nobody had made any allegations against the propriety of Mr Irving’s conduct, the mere fact that he had a longstanding friendly and professional relationship with Mr Townsend would create doubt with a fair-minded person that he would be able to perform his duties in an independent manner and therefore it would not be appropriate for Mr Irving to continue as the administrator of the company. There must not be any bias and there must not be any appearance or perception of bias. This relationship created a familiarity threat for the CIP.82 The involvement of Mr Irving as an advisor in the pre-commencement business of the company was also mentioned. It is fairly common place for companies and their management to meet with advisors who are ultimately appointed in an official capacity as CIPs. The court mentioned that not all prior involvement would lead to a lack of independence but that in this case it was capable of giving rise to questions of a possible lack of independence. Substantial involvement with a company prior to its administration will disqualify a person from appointment as that company's administrator. Such involvement will be seen to detract from the ability of the person to act fairly and impartially during the course of an administration. Substantial involvement prior to commencement of the proceedings could create both advocacy83 and self-review84 threats for the CIP. Comments: Mention was also made of Mr Irving’s disclosure of the relationship, yet it did not influence the outcome of the proceedings. This is indicative of the belief that declaring an interest does not remedy the situation. 82 A situation in which a Member’s relationship to a stakeholder impairs (or is perceived to impair) such Member’s impartiality and objectivity owing to the Member being too sympathetic or antagonistic to the interests of others. See the glossary of terms in Appendix B for a description. 83 A situation in which a Member promotes a position or opinion to the point that subsequent objectivity may be compromised (eg, the Member has acted on behalf of a significant creditor to advance such creditor’s position). In such a case, it is unlikely that other creditors would consider the Member to be impartial. 84 A situation in which actions taken by a Member, such Member’s firm, a close associate, or a close associate’s firm is (or is perceived to be) subject to review only by such Member (eg, where a Member’s firm carried out the disposal of certain assets of the insolvent estate prior to insolvency, and there are suspicions that the disposal is in some way improper). Page 27  Foundation Certificate: Module 9 Ventra Investments Ltd v Bank of Scotland Plc [2019] EWHC 2058 (Comm) [ENGLAND AND WALES] This case brought renewed scrutiny to the practice of accountancy firms that enter into relationships with lenders as part of the lender’s “insolvency panel”. The case is complex in as far as facts and legal issues are concerned and consequently this case study will focus only on the facts and legal issues relevant to the CIPs’ duties of independence and impartiality.85 The relationship giving rise to an issue in this case was based on Ventra Investments’ Administrative Receivers’ firm (BDO) being on the Lloyds “insolvency panel”, which is essentially a preferred status enjoyed by certain firms that then win regular work from the bank. This became a troublesome issue when a subsidiary of Lloyds, the Bank of Scotland, became embroiled in a legal battle with the debtor company, Ventra Investments, in a case concerning among other things certain transactions made at an undervalue. According to the liquidators of Ventra Investments, there were issues relating to the independence and impartiality of the administrative receivers taking an appointment when they were so closely linked to one of the stakeholders. The liquidators also claimed that the administrative receivers were “effectively under the control” of the bank and therefore unduly favoured the lender. They believed the relationship influenced the administrative receivers to exhibit a reluctance to take legal action against the bank. An unwillingness legally to challenge wrongdoing by a creditor is an obstacle to performing their duties as CIPs in the best interest of the creditors as a whole. Although the administrative receivers’ firm denied that their relationship with the bank would cause a lack of independence and impartiality, the perception created by this relationship (and some facts) could lead to an informed observer forming the opinion that the CIPs might not be objective in the performance of their duties. Comments: Great care should be taken to assess appointment opportunities in order to avoid taking an appointment where an actual or perceived conflict of interest might arise. 85 You can investigate the finer details of this case and read some interesting media reports by visiting the following links: https://www.casemine.com/judgement/uk/5d43fad72c94e04a9677bf66; https://www.bmmagazine.co.uk/news/lloyds-banking-group-ordered-to-explain-relationship-with-insolvency- firms/; https://www.thetimes.co.uk/article/lloyds-banking-group-under-scrutiny-for-insolvency-ties-67q0nxrb2?wgu= 270525_73669_1597751206018_d2f08448a2&wgexpiry=1605527205&utm_source=planit&utm_medium=affili ate&utm_content=30828. Page 28  Foundation Certificate: Module 9 Self-Assessment Exercise 2 In order to learn more about your own jurisdiction’s requirements in relation to independence and impartiality and to educate yourself as to what is expected of you in this regard, investigate whether your own jurisdiction provides for this duty or, alternatively, what any regulatory or recognised professional body in your jurisdiction advises in this regard. Be specifically on the lookout for provisions in relation to prohibited or worrying relationships and the test for compliance. For commentary and feedback on self-assessment exercise 2, please see APPENDIX A 5.4 Professional / technical competence Principle 3 – Professional / Technical Competence Professional / Technical Competence Members and their firms should maintain an acceptable level of professional competency. This may be achieved by: • keeping current with legislative / regulatory changes; • undertaking continuing professional education; and • undertaking sufficient case work to remain experienced Commentary Members and their firms should be sufficiently and appropriately experienced and resourced to deal with the engagements and cases they accept or can call upon specialists or further resources as required. Accepting cases where a Member cannot give them the level of attention or technical expertise required to deliver the best result for stakeholders may bring such Member and the profession into disrepute. Even where there may not be continuing education or qualification requirements, Members should endeavour to maintain a high level of competency in their field in order to deliver the services they are engaged to perform and in accordance with any statutory duties. Page 29  Foundation Certificate: Module 9 IPs are often regarded as experts in turnaround, restructuring and liquidation. As such, members of the public and more specifically stakeholders in an insolvency expect that IPs have the requisite experience and technical competence to perform the duties associated with their appointments. This expectation is further emphasised by the fact that IPs are remunerated as skilled professionals. This ethical principle is one that requires an exceptional level of self-realisation and introspection by the IP. It is important that professionals know the limitations of their own knowledge, skills and experience (and diaries). As such, when an area of deficiency is identified it is of paramount importance that the IP, as fiduciary, ensures that he educates himself in order to enable him to act in the best interest of his beneficiaries. The principle of professional and technical competence and the duty of care placed on the IP require that an IP should only accept insolvency appointments when the IP has or can acquire sufficient expertise. Moreover, IPs should not accept appointments when they are already under a heavy case load and would not be able to provide the level of attention required by the appointment. It is also trite that the Law is dynamic and often changes to accommodate changes in practice, politics, culture and the environment. IPs should endeavour to keep abreast of changes to the law or practice in their field. Many jurisdictions provide opportunities for continued professional development and arrange short courses and conferences for IPs to brush up on the latest developments.86 This ethical principle is also closely related to the duty of care, skill and diligence. When a company is in financial distress, it is extremely important that the person who is appointed as CIP does not act recklessly with regard to the affairs and property of the company. It is possible that the objectives of the insolvency proceedings (to protect the interests of stakeholders) can be frustrated through the incompetence and carelessness of the practitioner. It is clear from these statements that a practitioner who undertakes too many case appointments, or one who fails to meticulously perform his duties, might be in breach of the duty to act with care, skill and diligence and may be held personally liable for any loss due to his actions or omissions. In this regard it could be useful to utilise the recognised two-fold test in relation to the duty of care skill and diligence.87 The CIP’s conduct should be measured against that of a reasonable CIP.88 This implies that it should be established whether he acted with the same degree of care, 86 For information regarding educational course offered by INSOL International, see www.insol.org/education. For information regarding the technical content of conferences, seminar and webinars presented by INSOL International, see www.insol.org/events. 87 An objective test is to be applied in order to determine what the reasonable person would have done in the same situation, as well as a subjective test that takes into account the general knowledge, skill and experience of that specific person. 88 Re Charnley Davies Ltd 1990 BCC 605 at 618 – “An administrator must be a professional insolvency practitioner. A complaint that he has failed to take reasonable care in the sale of the company’s assets is, therefore, a complaint of professional negligence and in my judgment the established principles applicable to cases of professional negligence are equally applicable in such a case. It follows that the administrator is to be judged, not by the standards of the most meticulous and conscientious member of his profession but by those of an ordinary, skilled practitioner. In order to succeed the claimant must establish that the administrator has made an error which a reasonably skilled and careful insolvency practitioner would not have made.” They are not to be judged by the standard of the “most meticulous and conscientious member of the profession” – see also Re 1 Blackfriars Limited Page 30  Foundation Certificate: Module 9 skill and diligence that may reasonably be expected of a reasonable practitioner in the same circumstances, having regard also to his personal attributes and qualifications. A CIP can, however, be regarded as an expert in insolvency practice as a result of his experience and training and hence an even higher standard is to be met with regard to the subjective test. As an expert, a CIP should to a certain extent be able to be subjected to the test of a reasonable expert.89 Due to the fact that CIPs will have varying degrees of experience and training, the subjective elements of the test are important and ought to be applied on a case-by-case basis in order to determine whether there was any breach in duty. This approach seems to be aligned with the guidance provided by UNCITRAL:90 “One approach may be to require the insolvency representative to observe a standard no more stringent than would be expected to apply to the debtor in undertaking its normal business activities in a state of solvency, that of a prudent person in that position. Some States, however, may require a higher standard of prudence in such a case because the insolvency representative is not dealing with its own assets, but with assets belonging to another person.” A professionally competent CIP will act with the necessary care, should obtain an adequate degree of understanding of the nature of the company's business in order to understand how the business functions and exactly what is expected of him/her.91 The CIP should also acquire knowledge of the industry in which the company operates. Self-Assessment Exercise 3 Julie is a well-known insolvency practitioner and is often sought out for her knowledge and expertise, especially in relation to retail insolvency. She currently has 10 ongoing insolvency matters (most of them quite complex) relating to retail insolvency and has almost exclusively only dealt with retail insolvencies for the last 5 years. (in liquidation) [2021] EWHC 684 (Ch) at 247 and Re HTL [2021] SGHC 86 where the High Court cited and applied Re Charnley in the context of a challenge of the exercise of discretion on the part of a judicial manager. On appeal, the court affirmed the decision of the High Court. See [2021] SGCA 87. 89 R Bradstreet, “The leak in the Chapter 6 lifeboat: Inadequate regulation of Business Rescue Practitioners may adversely affect lenders’ willingness and growth of the economy” [2010] 22 SAMLJ 195 at 209. 90 UNCITRAL Guide, p 184, para 61. 91 R Mokal and J Armour, “The new UK Corporate Rescue Procedure – The Administrator’s Duty to Act Rationally” [2004] 1 International Corporate Rescue 1, 6 – “So for example, not to take into account reasonably discoverable factors relevant to determining whether the continuation of the company as a going concern (by preserving for its benefit the specific skills and knowledge of the local market of its pre-distress shareholder-managers, say) would result in better expected returns for its creditors than if the company’s business were to be sold off to another company (with little knowledge of and enjoying no goodwill in market), would be to ignore considerations relevant to serving the creditors’ interests, and would thus constitute a breach of duty.” Page 31  Foundation Certificate: Module 9 Due to her impressive curriculum vitae, she is contacted by a very large mining company in distress inquiring whether she would be able to take the appointment as an administrator. Julie does not feel like she has the level of expertise to accept this appointment. Question 1 What would you advise Julie to do in these circumstances? Question 2 If Julie was to accept the appointment and something went wrong, could she be held liable for a breach of her duty of care? Question 3 As an administrator in the retail industry, Julie has from time-to-time had to deal with the online sales component of many retailers. She therefore lists “online sales” on her CV as part of the section titled “additional skills and experience”. Does this change or modify Julie’s duty to exercise her functions to the standard of an ordinary, reasonably skilled and careful practitioner? For commentary and feedback on self-assessment exercise 3, please see APPENDIX A 5.5 Professional behaviour Principle 4 – Professional Behaviour Professional Behaviour Communication with stakeholders should be used to inform and educate them on the progress of a case. Members should strive to be accurate, honest, clear, succinct and timely. It is in the best interests of all parties for Members to co-operate and communicate in a professional manner with other Members and adjudicating bodies. Nonetheless, a Member’s duty is to the estate. When promoting themselves, or their firm, or when competing for work, Members should act with integrity and should avoid bringing the profession into disrepute. Page 32  Foundation Certificate: Module 9 Commentary It is important to provide information about the progress of, and potential recoveries in, the proceedings to those parties with any tangible interest in such proceedings (including but not limited to creditors and shareholders). This does not mean that Members can or should be expected to respond to every query raised. Disseminating information should be balanced with maintaining commercial and other confidentiality obligations, and Members should consider the cost of preparing the response against the benefit of such response. In a high-profile case, many persons without a tangible interest in the case might demand information. Members should weigh the advantages of providing the information against the associated cost and disruption to the company or estate. Decisions should be made in the best interests of the estate and its stakeholders. Duties should be carried out in a timely fashion, respecting legislative time limits. Members should strive to complete cases efficiently, without undue delay. Although Members are naturally in competition for engagements, Members have a common interest in upholding standards for the insolvency profession. Members should not allow their personal relationships with other Members (or the hope of obtaining work) to unduly influence or adversely affect their dealings with the estate. In particular, where different Members are appointed over different estates or divisions of a company group, a Member should act in the interests of their allotted portion of the estate and its stakeholders, which should prevail over the interests of the collective group in the event of a conflict. For example, agreeing to a collective settlement that would leave the individual estate to which a Member is appointed in a worse position than could be obtained by another course of action would be contrary to such duty. As part of a profession that is often the subject of public scrutiny, it is important that an IP always conducts himself in a manner that reflects the standards and customs associated with the profession. Due to the nature of insolvency proceedings and the impact on the immediate community and society, IPs are often asked to comment on ongoing procedures whether informally by colleagues, friends and family or formally by media outlets. In this regard IPs should take care not to divulge any confidential information. Confidentiality forms part of the fiduciary duty to act in good faith. The IP will acquire a vast amount of sensitive information, sometimes even before being formally appointed. Client lists, trade secrets, confidential business discussions and internal financial statements constitute examples of information and sources of information that will be disclosed to the IP. The fact that corporate information can in modern times be regarded as one of a company’s most valuable commodities, makes confidentiality a significant obligation Page 33  Foundation Certificate: Module 9 of the restructuring CIP in the context of a struggling company.92 The IP must, therefore, be careful not to disclose (even inadvertently) any confidential information to third parties. An IP may also not use any information gleaned from his position as fiduciary to facilitate a personal benefit or benefit for a person related to the CIP and should be careful not to be guilty of insider trading or using information to compete with the company. It is also essential that the IP refrains from divulging sensitive information lest it damages the goodwill and reputation of the company. Clearly, therefore, the IP’s duty to good faith has a significant impact on the success of the insolvency proceedings. The principle of confidentiality therefore imposes an obligation on IPs to refrain from: • disclosing confidential information acquired as a result of professional and business relationships without proper and specific authority, unless there is a legal or professional right or duty to disclose; • making improper use of confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties; and • publishing or divulging without just cause to any person any confidential information or details concerning the business, affairs, trade secrets, patents, technical methods or processes of any estate in respect of which they hold an appointment. An IP must maintain confidentiality, including in a social environment, being alert to the possibility of inadvertent disclosure, particularly to a close business associate or a close or immediate family member. In the wake of the Coronavirus Pandemic, many IPs across the globe have had to adapt their practice in order to comply with local government advice and restrictions on work and movement. A great number of IPs and their support staff have been working from their homes and conducting confidential meetings and dealing with confidential correspondence in a less secure environment than that which is provided by their firms’ offices. It is imperative that IPs take steps to ensure that their compliance with the duty in relation to confidentiality remains intact and that their risk management procedures in this regard remain robust. This is important seeing as jurisdictions are still struggling with the pandemic and in many countries there are still measures in place to limit the spread of the disease. Another important aspect of the IP’s duties to the beneficiaries is to communicate with the stakeholders93 in a timely fashion and, as stated earlier, this should be done in an honest and truthful matter. The stakeholders in the insolvency proceedings will have varying degrees of 92 J Shepherd, The Law of Fiduciaries (Carswell 1981) 326-327 – “Like other intellectual property, information must be treated as property because it exhibits so many of the characteristics of property. Money is spent to acquire it, and both the possessors and those who want it consider it very valuable. Like other assets, information is bought, sold, and protected in many of the same ways.” 93 In the matter of Swiss Cottage (38) Properties Lid (in liquidation) and in the matter of Swiss Cottage (40) Properties Limited (in liquidation) [2022] EWHC 1495 (Ch) [England and Wales] This case is a good example of IPs failing to communicate in the correct way with certain creditors. Page 34  Foundation Certificate: Module 9 knowledge and understanding of how the procedure works.94 This sometimes leads to conflicts between parties as not everyone has the same clear understanding of what the process involves. The IP, as fiduciary, should make use of the opportunities presented to him to not only inform the stakeholders of relevant issues but also to educate them. As such, transparency forms an integral part during the IP’s appointment. Transparency and fiduciary duties are inextricably linked. As fiduciaries, IPs have a duty to account.95 Dickfos reflects on the fact that the type of information and comprehensiveness thereof is extremely important. She notes that often “too much” information is provided for the average unsecured creditor; she further questions whether the information provided is meaningful and able to be understood and states that stakeholders tend not to read documents that are too lengthy.96 Communication with the stakeholders provides an excellent opportunity to manage their expectations. They have unrealistic views97 as to what the IP will do and what the outcomes of the procedure will be. If these expectations are not met by the IP, stakeholders might feel that he “failed” and did not do his job properly. The IP should make use of the opportunity to educate stakeholders as to his role and the tasks to be performed in order to minimise any possible disputes. This would, however, only be feasible if the stakeholders have trust and confidence in the IP. Another important aspect in relation to professional behaviour by IPs is advertising and marketing. IPs should refrain from making exaggerating or misleading claims about services offered, qualifications and expertise. In order to not bring the profession into disrepute, IPs ought not to make any unsubstantiated or disparaging comments on the work or qualifications of other IPs. In an age where a great deal of professional networking happens via social media, a word of caution is appropriate. IPs should apply sense and care when posting about their work and their views. A seemingly innocuous social media post can create a great deal of trouble for IPs who wish to maintain the perception that they are competent and independent professionals. 94 J Dickfos, “The Costs and Benefits of Regulating the Market for Corporate Insolvency Practitioner Remuneration” (2016) 25 Int Insolv Rev, 56. Dickfos refers to the lack of practical knowledge, experience and judgement of stakeholders that contribute to “information asymmetry”. 95 Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 31 [24] [Singapore]; Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638, 648 [England]. 96 J Dickfos, “The Costs and Benefits of Regulating the Market for Corporate Insolvency Practitioner Remuneration”, (2016) 25 Int Insolv Rev, 61. 97 Ibid. Page 35  Foundation Certificate: Module 9 Self-Assessment Exercise 4 Question 1 Jason, as the administrator of a large construction company with several government contracts, has been asked to give a television interview on the progress of the proceedings. What are the factors that Jason should consider when deciding to grant the interview? Question 2 It is only risky to provide media interviews and not when you are having a social gathering with family and friends. True or false? For commentary and feedback on self-assessment exercise 4, please see APPENDIX A 5.6 Remuneration and disbursements Principle 5 – Remuneration Remuneration Members are entitled to remuneration for their work (necessary or beneficial, and properly performed). Members should maintain and provide sufficient information to the body approving such remuneration (where applicable) in order to allow an informed decision on whether the remuneration is reasonable. Remuneration should only be drawn in accordance with the approval obtained (if applicable). Commentary Remuneration is a very sensitive subject. Where applicable law does not provide procedures or standards for remuneration, it is important to carefully consider the manner in which Members request and provide justification for remuneration (or pay themselves where no approvals are required by law or professional guidance). Acceptable methods of calculating remuneration may include but are not limited to: • Fixed fee; Page 36  Foundation Certificate: Module 9 • Percentage of the value of the assets realised and / or the value of distributions made; • Hourly, or otherwise based on the time properly spent on attending to the case; • Contingent fee arrangement; and • Combination of the above methods. The terms of any contingent fee arrangement (including remuneration based on realised value) should be transparent, objectively measurable, and if applicable agreed or approved by the proper authority or stakeholders. Members should be able to justify the work performed, for example, by demonstrating that it is required by law (for example, certain jurisdictions may require reports to regulators, which do not benefit stakeholders, but which serve a public interest), or that such work is reasonable in light of the: • complexity of the case; • degree of responsibility falling upon Members; • effectiveness of Members in carrying out their duties; • value and nature of the estate assets and liabilities; and • benefit therefrom accruing to the estate. It is helpful to distinguish between disbursements, remuneration, and third-party costs billed to the estate. Disbursements which are a direct recovery of costs paid by Members or their firms to a third party (e.g., travel costs) should be disclosed. Disbursements that may arise from a recharge or allocation of costs incurred by Members or their firms and contain a profit element (e.g., a charge for use of a meeting room to hold a statutory meeting) should be approved, where applicable, in the same way as remuneration. Third party costs are not considered remuneration or disbursements and, accordingly, should be disclosed separately in accordance with local law and regulation. Page 37  Foundation Certificate: Module 9 5.6.1 Remuneration One of the biggest culprits in reducing the public’s confidence and trust in the insolvency profession, is the issue of remuneration.98 This is exacerbated by the media and others placing an emphasis on seemingly excessive remuneration claims by CIPs. For example, shortly after the collapse of the English construction giant Carillion, the right honourable Frank Field MP, the chair of the UK House of Commons’ Work and Pensions Committee, commented on the GBP 44.2 million to be paid in fees to PwC in relation to one year’s Insolvency work on Carillion as “milking the cash cow”.99 Despite the controversies often related to remuneration, it remains a crucial part of any insolvency regime. CIPs are entitled to receive reasonable remuneration that is commensurate with their qualifications, experience, and the risks involved in the particular case. Due to the fact that the duties of IPs are sometimes daunting and their appointment involves a great degree of risk, it is important that a balance is struck between risk and reward in order to attract appropriately qualified professionals to perform these tasks.100 The various methods for calculating remuneration are dealt with below. 5.6.1.1 Fixed fees As the name suggests, this fee is based on an amount that has been fixed by legislation or the profession. The UNCITRAL Legislative Guide mentions that CIP remuneration may be fixed, but it does not elaborate or provide further guidance on how this could be incorporated into the laws of a specific jurisdiction.101 In most jurisdictions that allow for a fixed fee to be charged it can be, or is, used in combination with other methods of calculation. An issue with a fixed fee element awarded to an IP in relation to work carried out in the performance of his duties, is that it might not be representative of the value of the work done. It is possible for an IP to receive remuneration based on this method of calculation, but it may be that the IP invested more time and resources to complete the work than is reflected in the fee and therefore his remuneration is not commensurate with his efforts and the work performed. On the other hand, an IP might have to do very little work in a particular case and would be paid the same amount. 98 D Brown and C Symes, “Submission to Senate Inquiry into Liquidators and Administrators” [2009] 1-7; J Dickfos, “The Costs and Benefits of Regulating the Market for Corporate Insolvency Practitioner Remuneration” (2016) 25 Int Insolv Rev 56,57. Even in 1998, when the seminal remuneration case of Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638 [England] was decided, Ferris J noted that “[i]n recent years there has been a good deal of concern as the result of a fairly general perception that costs in insolvency cases have reached an unacceptably high level.” 99 The Times, 7 February 2019. Referring to the insolvency practitioners’ fees, he commented: “In this they are ably assisted by a merry little bank of advisors and auditors, conflicted at every turn and with every incentive to milk the cash cow dry.” There are many more examples of global headlines casting CIPs in a very dim light, eg, “Rangers liquidators rack up £5m fees as creditors offered 3p in the pound” – Daily Record, 27 January 2020 – https://www.dailyrecord.co.uk/news/scottish-news/rangers-liquidators-rack-up-5m-21366070. 100 UNCITRAL Guide, p 181, para 53. 101 Ibid – “It may be fixed by reference to an approved scale of fees set by a government agency or professional association”. Page 38  Foundation Certificate: Module 9 A fixed fee cannot be said to represent a fair method of calculating remuneration, unless the remuneration framework allows for the adjustment of the fee in cases where it proves necessary. 5.6.1.2 Percentage-based fees Percentage-based remuneration can be based on either a percentage of realisations of assets or on a percentage of distributions to creditors. The strongest criticism against a percentage-based approach relates to proportionality. The UNCITRAL Guide states that IPs often find this to be an uncertain method to calculate remuneration, as the amount of work involved in the administration will not necessarily be in proportion to the value of the distributable assets.102 This again means that the possibility exists that the IP would do more work than what he will be remunerated for. However, this method of fee calculation does provide some incentive for IPs to ensure that assets will be sold for the highest possible price – the higher the price assets are sold for, the higher the fee. It also provides creditors with some form of certainty as to the fee that will be claimed by the IP, which makes the calculation of risk a lot easier. 5.6.1.3 Time-based fees Perhaps one of the most contentious ethical issues in relation to the remuneration of IPs is the profession’s partiality for charging based on time. Despite the contentiousness of the issue it remains the preferred method for calculating the remuneration of IPs in many jurisdictions, as it is believed to provide for a fair compensation for work done.103 It is accepted that IPs making use of this calculation method are to be remunerated only for “time properly spent on attending to the case”.104 The rate of calculation on which the remuneration is to be based could be the IP’s own hourly or daily rate, or a rate prescribed by legislation or the profession to which the IP belongs. The UNCITRAL Guide submits that this system might operate to incentivise time spent on the administration without necessarily achieving any outcome.105 Moreover, that it is also possible that this method of calculating remuneration might not be reflective of actual work done by the IP.106 Time-based fees were considered in the seminal case of Mirror Group Newspapers plc v Maxwell,107 where Ferris J stated three important principles in relation to time-based costing. He stated that: 102 Idem, p 181, para 55. 103 Idem, p 181, para 54. 104 INSOL Principles, Principle 5, p 7. 105 UNCITRAL Guide, p 181, para 54. 106 This implies that a practitioner might be getting more or less than what he deserves in terms of performance. 107 Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638 [England]. Page 39  Foundation Certificate: Module 9 (a) time spent represents the cost of rendering services, not the value of the service rendered; (b) time spent should be only one of a number of relevant factors to assess value; and (c) it follows from the first two that the real task is to assess value and not cost.108 However, it will only be possible to make an assessment regarding the value of the services ex post facto. The case also addressed the issue of time-based costing not being reflective of work that was performed.109 This is especially true of prescribed fees. It is quite possible for an IP to do more work than what the prescribed hourly / daily rate allows; equally so, it might be the case that an IP is remunerated for more than the actual work performed. IPs often criticise the amount prescribed for hourly rates as they believe it does not clearly represent the full account of the costs of running an insolvency procedure. 5.6.1.4 Contingency fees Contingency fee arrangements have long been a bone of contention in the insolvency world. These arrangements are also known as “success fees” or in some jurisdictions as “conditional fees”. As the name suggests, these are fee arrangements which determine that the IP would be entitled to receive remuneration based on a specific outcome or condition being met. The outcome or condition usually pertains to a favourable outcome for stakeholders, for example the successful implementation of a rescue plan. One reason for the controversy surrounding contingency fee arrangements is that the conditions and outcomes on which the fee is payable are arguably conditions and outcomes that IPs, as fiduciaries, should aspire to anyway and would therefore form part of their remit. Another issue can be found in the diverting of an IP’s focus to a singular task that will benefit his fee arrangement, instead of allowing his approach to be holistic. There would not be an ethical issue in the event of a contingency fee being paid for the achievement of a truly remarkable outcome and these outcomes should always be objectively measurable. It should not merely be an achievement in the eyes of the IP. In Singapore, the Insolvency Practitioner Association’s Code highlights that a firm (and therefore an IP) entering into a contingent fee arrangement is an example of a circumstance that creates a self-interest threat.110 This means that in their estimation, an IP creates a conflict of interest due to his own financial interests being directly linked to certain outcomes, which could impair his judgment and influence his decision-making. 5.6.1.5 Combination fees Many jurisdictions allow for a combination of the abovementioned methods to be utilised in the determination of the quantum of IP remuneration.111 Each of the methods have advantages and 108 Idem, at 652. 109 Ibid. 110 IPAS Code of Professional Conduct and Ethics, p 18 at para 7.4. Note that this is barred in relation to advocates and solicitors in Singapore, and IPs who are lawyers will need to comply with applicable rules in relation to contingent fee arrangements. 111 Australia, England and Wales and Russia, by way of example. Page 40  Foundation Certificate: Module 9 disadvantages. Allowing for a combination of methods provides the opportunity to utilise the best of each whilst the drawbacks, in as far as ethical behaviour is concerned, can be avoided. In most jurisdictions the decision regarding how the fee is constituted rests with the IP. In some cases it might be predetermined.112 It is imperative that the IP is able to justify his remuneration and that the remuneration that he claims is fair, reasonable and proportionate in the circumstances. In order to determine whether the remuneration is reasonable, the following factors are usually considered: the complexity of the case; whether any aspects of the case creates any responsibility of an exceptional kind or degree for the officeholder; the effectiveness with which the officeholder carried out the duties of the office; and the value and nature of the property with which the officeholder had to deal.113 In order to place the IP in the best possible position to justify his remuneration, the IP must be able to account. As fiduciaries, IPs have a duty to account.114 Transparency is a key component to ethical behaviour by the CIP. Moreover, transparency and fiduciary duties are inextricably linked. In the case of Mirror Group Newspapers plc v Maxwell,115 Ferris J emphasised the fiduciary nature of the CIP’s office and related this effectively to remuneration and the duty to account. Ferris J stated that, as fiduciaries, IPs have a duty to protect, get in, realise and pass on to others assets and property that do not belong to themselves but to their beneficiaries.116 What an IP retains for himself out of the property which he controls as an officeholder will no longer be available for those towards whom he is a fiduciary.117 Because an IP is not expected to act gratuitously, he cannot account for the retention by paying it over. The only way in which to account for it is by showing that he ought to be allowed to retain it. This duty to account brings about an obligation to justify expenses incurred, including an obligation to justify and explain the remuneration claimed in exercising the duties of the office.118 It is important that an IP be transparent regarding his fees and the cost of proceedings from the outset. The level of detail required should be proportionate to the complexity of the appointment.119 Understanding the steps to be taken in a case with a complex set of facts or legal issues, would necessarily require a more detailed explanation in order to place parties in the best position to appreciate what steps are required. 112 In Russia, eg, the combination is predetermined. 113 Variations of these factors can be found in several jurisdictions. 114 Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 31 [24] [Singapore]; Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638, 648 [England]. 115 Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638 [England]. 116 Idem, at 648. 117 Ibid. 118 Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638, 648 [England]; Re Peregrine Investments Holdings Ltd [1998] 3 HKC 1 [Hong Kong]; Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 31 [24] [Singapore]; S Steele, M Wee and I Ramsay, “Remunerating Corporate Insolvency Practitioners in the United Kingdom, Australia and Singapore: The Roles of Courts” (2018) 13 AsJCL 141,147. 119 Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 32 [27] [Singapore]. Page 41  Foundation Certificate: Module 9 5.6.2 Disbursements and expenses 5.6.2.1 Generally Both the UNCITRAL Guide and the INSOL Principles elaborate on the fact that an IP will invariably come across the need to incur certain expenses during the course of the administration of the estate (administrative costs).120 Although the remuneration claimed by IPs tends to be a contentious issue, the disbursements and expenses can also have a significant impact on the value of the estate. It would, therefore, be fair to say that in light of the fiduciary nature of his position the IP has a duty to minimise the extent of the impact of these administrative costs. Moreover, incurring these expenses is dependent upon the IP’s commercial judgement, reasonably exercised. The need for record keeping121 and the duty to account122 prevail in the case of administrative costs and the IP’s transparency should continue when disclosing payment of these costs. The INSOL Principles defines disbursements and third-party costs as follows: “Disbursements – Sums paid by a Member or its firm to third parties or a recharge or allocation of costs incurred by Members or their firms which is charged to the estate.”123 Disbursements thus referring to monies paid by the IP for expenses incurred by the IP as part of the discharge of his duties. This serves to reimburse the IP. Costs pertaining to travel are an example of this. Third-party costs are defined by the INSOL Principles as follows:124 “Third-party costs – Sums paid directly from the estate to a third-party supplier. The third-party supplier invoices the estate.” Third-party costs therefore consist of payments made to parties who rendered services to the estate and which were not paid by the IP or his firm. Utility bills and costs pertaining to continued trade are examples of this. 120 UNCITRAL Guide, p 4, a. “…claims that include costs and expenses of the proceedings, such as remuneration of the insolvency representative and any professionals employed by the insolvency representative, expenses for the continued operation of the debtor, debts arising from the exercise of the insolvency representative’s functions and powers, costs arising from continuing contractual and legal obligations and costs of proceedings”. 121 Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638, 649 [England]; INSOL Principles, p 8 – “It is in Members’ (and their agents and service providers) interests to implement policies, procedures and systems to ensure reasonable and proper: record-keeping…” 122 Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638, 648 [England]. 123 INSOL Principles, p 9. 124 Idem, p.10. Page 42  Foundation Certificate: Module 9 5.6.2.2 Disbursements As part of the IP’s duty to account, he should be able to justify payments to third parties and should take responsibility for subjecting the bills of third parties to scrutiny.125 The difficulty in quantifying disbursements made to professionals (other than legal professionals) was highlighted in Mirror Group Newspapers plc v Maxwell,126 where the court was confronted with an unusual expense paid to a firm of public relations consultants. The court stated that it did not have the kind of information it needed in order to form a judgement on the matter and identified the consequential need for a proper explanation by the officeholders.127 In such cases, where insufficient information regarding somewhat obscure disbursements has been given, practitioners should expect the disbursement to be subjected to careful scrutiny.128 As part of his fiduciary duty to account, an IP should still be able to provide transparent and full disclosure as to the nature and need of the expenses incurred. In Singapore, Rajah J stated that “some measure of restraint and discipline”129 is needed in recouping disbursements. The court touched on the seemingly innocuous disbursement of photocopying charges, which could be very substantial in major matters. The court confirmed the principle laid out in Mirror Group Newspapers plc v Maxwell,130 by stating that an IP would still need to provide sufficient particulars in order to establish whether these expenses were reasonably necessary.131 In Australia, Finkelstein J stated that a practitioner should act with the same care as a prudent businessman would act in his own affairs when dealing with disbursements.132 He mentions that a prudent businessman will only litigate as a last resort and, if it is unavoidable, will keep it under close scrutiny. A prudent businessman will shop around to ensure the best legal advice at the best rates by negotiating for the best fees and monitoring the fees incurred.133 “Personal relationships should not obscure the practitioner’s duty. The sole selection criteria should be the benefit to him as litigant. So he will avoid cosy relationships with solicitors and counsel.”134 Here an important ethical issue regarding the use of service providers comes to the fore. The nature of their professional work might lead to familiarity issues being created between IPs and certain service providers. The familiarity issues give rise to a lack of independence, creating a conflict of interest. This is to be avoided in order to enhance the trust and confidence in the IP and the insolvency regime. In the Singaporean Kao case, the court identified two further issues in relation to disbursements: 125 Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638, 639 [England]. 126 Idem, at 662. 127 Ibid. 128 Ibid. 129 Re Econ Corp Ltd (No 2) [2004] SGHC 49, 264, 286 [59] [Singapore]. 130 Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638 [England]. 131 Re Econ Corp Ltd (No 2) [2004] SGHC 49, 264, 287 [59] [Singapore]. 132 Re Korda; in the matter of Stockford Ltd (2004) 140 FCR 424, 443 [51] [Australia]. 133 Ibid. 134 Re Korda; in the matter of Stockford Ltd (2004) 140 FCR 424, 443 [51] [Australia]; Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 44 [58] [Singapore]. Page 43  Foundation Certificate: Module 9 (a) allegations of over-servicing, referring to all instances in which unnecessary work was performed; and (b) allegations that work was duplicative, particularly where other professionals (such as lawyers) were engaged.135 Both of these issues to some extent relate back to the duty of the practitioner to act with care. A careful IP would make sure that no unnecessary tasks are performed and would be careful to not do work that has already been done, or allow service providers to charge for work already performed. As fiduciaries, IPs do not have an automatic right to recover all expenses (not even if they were incurred in good faith) unless the expenses were reasonably incurred in the discharge of their stewardship.136 5.6.2.3 Third-party costs Third-party costs are paid directly from the debtor’s estate and therefore also have an effect on beneficiaries’ interests by diminishing the estate. These administrative expenses, although paid directly from the estate of the debtor, are still executed by the IP or under his supervision. These expenses might relate to the payment of utilities or suppliers in the case of continued trade. 5.6.2.4 Legal professionals One of the most contentious administrative costs is those paid to legal professionals. This is due to the fact that multiple sets of professionals (IPs and legal professionals) translate to multiple sets of professional fees and disbursements. It is possible that the services of legal professionals (lawyers and counsel) can be paid as disbursements or third-party costs. This was carefully illustrated in the Singaporean Kao case by Chong J.137 The court explained that the costs of legal professionals can be claimed i) as part of the IP’s disbursements,138 or ii) the costs can be billed separately and directly to the debtor company.139 When the costs are claimed as disbursements, the onus is on the IP, as the party responsible for the payment, to consider whether the bill is reasonable and appropriate given the 135 Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 23 [Singapore]. 136 Idem, at 35 [32]. 137 Idem, at 44. 138 Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 44 [57] [Singapore]. As was the case in Mirror Group Newspapers plc v Maxwell (No 2) [1998] I BCLC 638, 660 [England] – Ferris J stated that where the solicitors were engaged in providing legal services in connection with the CIP’s appointment there is a contract between the parties and CIPs will be personally bound to pay solicitors for work done in accordance with that contract. 139 Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 44 [59] [Singapore]. Page 44  Foundation Certificate: Module 9 circumstances.140 This reasoning is reminiscent of that expressed in Australia by Finkelstein J in Korda,141 where it was stated that the IP should exercise his commercial judgement when hiring legal professionals and that a prudent IP would monitor the fees claimed by these professionals.142 When the costs of legal professionals are not claimed as disbursements but billed to the company, the issues relating to the monitoring of the fees and scrutiny of the bill prevail. A new issue in relation to this type of administrative costs is the one of duplication of work done by the legal professional.143 In such a situation the burden rests on the CIP to justify claims for work performed when there are other professionals instructed on the same matter.144 In the Dovechem145 case, the court was confronted with a complaint by the majority shareholders of the company that the liquidators had charged four times more than the solicitors that were instructed to institute action on behalf of the company. At first glance it would appear that the liquidators in the case had duplicated the work done by the legal professionals, but the liquidators successfully proved that the work done by them in relation to the case was very different from that of the solicitors.146 In certain jurisdictions, such as South Africa and England and Wales, the CIP appointed to perform a rescue or turnaround of a debtor might not be trained in law or have specialised legal knowledge and as such would at times have to rely on expert advice at a certain cost. That is why it is sensible to include guidance on engaging legal professionals in codes of conduct. The new Insolvency Code of Ethics by the Institute for Chartered Accountants of England and Wales (ICAEW) addresses this issue with remarkable clarity and sensible advice.147 In a section dealing with the specialist advice and services, the ICAEW Code requires that when an IP intends to rely on the advice or work of a third party the IP should evaluate whether such advice or work is warranted.148 The Code also requires an IP to document the reasons for choosing a specific service provider.149 Additionally, where a professional or personal relationship exists between the IP and the service provider, the Code suggests full disclosure of the relevant relationship and the process be undertaken to evaluate whether the service will be the best value for the 140 Idem, 44 [57]. 141 Re Korda; in the matter of Stockford Ltd (2004) 140 FCR 424, 443 [51] [Australia]. 142 Re Korda; in the matter of Stockford Ltd (2004) 140 FCR 424, 443 [51] [Australia]; Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 44 [57] [Singapore]. 143 Kao Chai-Chau Linda v Fong Wai Lyn Carolyn [2015] SGHC 260, [2016] 1 SLR 21, 44 [59] [Singapore]. 144 Ibid. 145 Liquidators of Dovechem Holdings Pte Ltd v Dovechem Holdings Pte Ltd [2015] 4 SLR 955 [Singapore]. 146 Idem, at [46] – “The Liquidators had to establish the facts and find the documents supporting those facts in order to instruct the lawyers and to obtain legal advice on how the statement of claim should be amended. It is not surprising that the work of the Liquidators involved checking many boxes of documents since Suit 833 involved several years of the plaintiff’s operations (it related to the employment of an allegedly phantom employee) and the Liquidators had not run the Company or the plaintiff at the material time. In this case, the time spent by the Liquidators and that spent by the lawyers cannot be compared and the fees of the Liquidators cannot be assessed by reference to the lawyers’ fees.” 147 The ICAEW Insolvency Code of Ethics is based on the International Ethics Standards Board for Accountants Code, effective from 1 May 2020 and is available at https://www.icaew.com/-/media/corporate/files/technical/ ethics/insolvency-code-of-ethics.ashx?la=en. 148 ICAEW Insolvency Code of Ethics, R2320.3. 149 Idem, R2320.4. Page 45  Foundation Certificate: Module 9 creditors.150 In order to establish whether the service provider will be offering best value and service, the IP would have to consider:151 (a) the cost of the service, the expertise and experience of the provider; (b) whether the provider holds appropriate regulatory authorisation; and (c) the professional and ethical standards applicable to the service provider. The requirements and guidance set out in the Code could be applied effectively to the use of legal professionals. Where an IP requires the advice and services of a legal professional he should be able to show that it is indeed necessary and should be able to explain why he chose a specific legal professional. Where he has a relationship that could create the perception that he is not independent from the legal professional, he should disclose the relationship to the stakeholders. He should also be able to provide details of the process he followed to make sure the service provider would offer the best value for the beneficiaries. Self-Assessment Exercise 5 Many jurisdictions allow for contingency fees or conditional fee arrangements. What does this remuneration method entail? What are the main ethical issues associated with the use of this method of remuneration and are there any safeguards for the use thereof? For commentary and feedback on self-assessment exercise 5, please see APPENDIX A 5.7 Practice management Principle 6 – Practice Management Practice Management It is in Members’ (and their agents and service providers) interests to implement policies, procedures and systems to ensure reasonable and proper: • record-keeping; • quality control; 150 Idem, R2320.6 A6(b). 151 Idem, R2320.4 A. Page 46  Foundation Certificate: Module 9 • risk management; • compliance management; • complaints management; and • professional indemnity / fidelity insurance (where available). Commentary Members should endeavour to perform their duties in a timely fashion, respecting legislative time limits. Members should consider and obtain, where required or reasonably available, appropriate professional indemnity and / or fidelity insurance in keeping with the best interests of stakeholders. Professional indemnity insurance provides redress to stakeholders in the event a Member acts negligently. Fidelity insurance protects stakeholders in the event a Member (or a Member’s staff) defrauds the estate. 5.7.1 General The manner in which an IP manages his practice will reflect his commitment to performing his fiduciary duties and his concern for the interests of the beneficiaries of those duties. It is not expected of IPs to perform all the duties and obligations of their appointment personally and as such they often make use of administrative and other forms of assistance in administering the estate. The IP should therefore ensure that there are policies, procedures and systems in place in order to facilitate an efficient service delivery by all involved in the process. The policies and procedures will usually entail guidance on the aspects dealt with below. 5.7.2 Record-keeping Not only is it important to keep proper records for remuneration and disbursement purposes but it is also good practice for IPs to keep records in order to justify their decisions should they be challenged or reviewed at a later stage. An IP might be expected to demonstrate the steps taken and the conclusions reached in identifying, evaluating and responding to any circumstance. The records the practitioner maintains in relation to the steps taken and the conclusions reached should be sufficient to enable the courts and a reasonable and informed Page 47  Foundation Certificate: Module 9 third party to form an opinion on the appropriateness of the IP’s actions. IPs should keep a record of the facts pertaining to the case, who they had interactions with as well as any communications with parties involved in the matter. It would also be sensible for the IP to note his thoughts on the courses of action he considered as well as the reasons why he ultimately chose a particular course of action.152 This type of record-keeping will act as a safety measure should his decisions be questioned. 5.7.3 Quality control The IP should ensure that there are policies and procedures to apply and monitor quality control of engagements. Quality standards are often set by the profession itself as well as recognised professional bodies that aim to regulate the profession. It could also be set by the IP’s firm. These are important measures to ensure that the profession is not brought into disrepute by the negligent and shoddy work of IPs and also to ensure that the remuneration claimed by the IP is for work properly undertaken. It is imperative that the personnel assisting the IP also adhere to these standards and, most importantly, that the IP oversees that work done by people other than himself adhere to the standards. 5.7.4 Risk management The process of risk management entails the identification, assessment and control of threats to the IP’s practice and / or appointment. Threats could be caused by various different sources, including but not limited to: Information Technology threats and data-related breaches (IPs hold a great deal of sensitive information), financial security, legal liabilities and of course accidents and natural disasters. These types of threats can cost the IP or his practice / firm money, or cause it to permanently close. Risk management policies and procedures aim to minimise the risks and costs involved before they transpire by allowing the IP / firm to make plans for unexpected eventualities. It will help to protect the IP, his firm and its assets, as well as the IP’s clients, from potential harm. In being able to identify certain threats it will allow the IP to make sure that his and the firm’s insurance needs are met (see the discussion on indemnity and fidelity insurance below). 5.7.5 Compliance management Many aspects of an insolvency appointment are governed by legislation or secondary legislation, as well as soft law in some places (such as codes of conduct). IPs should take care to comply with the provisions of these sources where a specific aspect is dealt with. Compliance provision could, for example, relate to the performance of certain duties within a specified time. Policies and procedures should be put in place to ensure that the IP complies with the standards and regulations that apply to the profession. The people assisting the IP will thereby also be informed of what is expected of the IP. 152 There is an alternative opinion held that an IP need only keep records that would assist in justifying his actions by making reference to them and that he is not required to set out the chain of reasoning which caused him to take a particular action – see Birdi v Price & Pettit [2018] EWHC 2843 (Ch) at para 77. Page 48  Foundation Certificate: Module 9 5.7.6 Complaints management As circumstances in insolvency can at times be difficult and even volatile for stakeholders, it would be sensible if the IP allowed for complaints to be lodged. This would enable the IP to more effectively deal with the anxieties of parties involved in the process and perhaps even resolve matters before they escalate. A serious complaint could also inform the IP that he would need to consult the body of creditors, the court, or, in some cases, a legal advisor. 5.7.7 Professional indemnity / fidelity insurance In many jurisdictions IPs are required to obtain insurance (professional indemnity or fidelity) in protecting the best interests of the stakeholders. Indemnity insurance covers against the risk of stakeholders instituting action against the IP for acting negligently (without reasonable care). Fidelity insurance protects stakeholders in the event of the IP (or someone working for him) acting dishonestly or defrauding the estate. Fraud in this sense does not necessarily refer to criminal fraud.153 Given the extensive duties owed by IPs, it would be sensible for IPs to obtain professional and fidelity insurance to protect themselves as well as the stakeholders in the estate. Self-Assessment Exercise 6 Explain the difference between professional and fidelity insurance and elaborate on why it is of particular importance for IPs to obtain this type of insurance. For commentary and feedback on self-assessment exercise 6, please see APPENDIX A 6. CONCLUSION From the above discussion it is clear that the IP profession is one that requires the IP to act honestly and in the best interest of the beneficiaries of his duties and with the necessary care and skill at all times; all this while performing the intricate and complex tasks associated with the administration of the insolvent estate. Moreover, IPs have to perform these duties and tasks while undergoing immense public scrutiny. This is of course to be expected as they are the skilled professionals who give themselves out as helpers in times of chaos and they get paid really well to do so. Most IPs perform their duties with the standard of behaviour expected of 153 Fraud in this sense refers to instances of equitable or civil fraud relating to conduct which, having regard to some special relationship between the two parties concerned, is an unconscionable thing for the one to do towards the other. It might also refer to common law fraud which depends on dishonesty. In both cases the action or conduct will fall short of the conduct expected to be prosecuted in criminal proceedings and might not even relate to deceit. Page 49  Foundation Certificate: Module 9 them but, due to the vast collection of duties and the differing backgrounds of IPs, they may quite often fail in this endeavour. Codes of professional conduct could be a helpful tool to remedy this situation. A code has the ability to help the IP to understand what is expected of him and to be properly informed about what can be done when a potential problem arises. INSOL International’s Ethical Principles for Insolvency Professionals does an excellent job of explaining and elaborating on what is commonly accepted as best practice ethical behaviour. One hopes that jurisdictions across the world will make use of this resource and draft their own codes or principles. Having a sound framework to ensure the ethical behaviour of members of the insolvency profession will contribute to the public’s trust and confidence in the profession and in turn strengthen the entire insolvency regime. A final word of advice to bear in mind: A person who accepts the office of a fiduciary undertakes the responsibility of ensuring that he or she understands the nature of the duty a fiduciary is called upon to perform.154 Make sure that you know! 154 Daniels v Anderson [1995] 13 ACLC 614 [Australia]. Page 50  Foundation Certificate: Module 9 APPENDIX A: COMMENTARY AND FEEDBACK ON SELF-ASSESSMENT EXERCISES Self-Assessment Exercise 1 Question 1 What are the most common elements associated with the existence of a fiduciary relationship? Question 2 Identify the key fiduciary duties linked to Insolvency Professionals Question 3 True or False? All Insolvency Professionals owe fiduciary duties. Question 4 Identify the sources of ethical guidance available to jurisdictions when considering frameworks for addressing the behaviour of Insolvency professionals Question 5 True or False? Being truthful and being honest amount to the same thing. Commentary and Feedback on Self-Assessment Exercise 1 Question 1 What are the most common elements associated with the existence of a fiduciary relationship? A fiduciary is largely accepted to be a person i) who undertakes to act on behalf of another, and ii) who has discretion and power over the interests of the other. A further element of vulnerability is sometimes added as an indicator for the existence of a fiduciary relationship. Question 2 Identify the key fiduciary duties linked to Insolvency Professionals. - The duty to act in good faith, this duty implies honesty and fair dealing; - The duty to act in the best interest of the beneficiary of the fiduciary duties, - The duty to exercise the powers of the office in an independent and impartial manner, this duty includes the duty to avoid a conflict of interest Page 51  Foundation Certificate: Module 9 (The duty of care is not fiduciary in nature and should not be mentioned in answer to this question.) Question 3 True or False? All Insolvency Professionals owe fiduciary duties. False, Not all Insolvency Professionals are regarded as fiduciaries as some appointments do not comply with the elements that would normally characterise fiduciary relationships. Question 4 Identify the sources of ethical guidance available to jurisdictions when considering frameworks for addressing the behaviour of Insolvency professionals. The INSOL International Ethical Principles for Insolvency Professionals; UNCITRAL Legislative Guide on Insolvency Law; The World Bank’s Principles and Guidelines for Effective Insolvency and Creditor Rights Systems; European Bank for Reconstruction and Development (EBRD) Office Holder Principles. Question 5 True or False? Being truthful and being honest are the same thing. False, it would be possible for someone to be completely honest but not divulge all the information at his disposal thereby being untruthful. Self-Assessment Exercise 2 In order to learn more about your own jurisdiction’s requirements in relation to independence and impartiality and to educate yourself as to what is expected of you in this regard, investigate whether your own jurisdiction provides for this duty or alternatively what any regulatory or recognised professional body in your jurisdiction advises in this regard. Be specifically on the lookout for provisions in relation to prohibited or worrying relationships and the test for compliance. Page 52  Foundation Certificate: Module 9 Commentary and Feedback on Self-Assessment Exercise 2 This exercise is for enlightenment and to educate yourself on the rules that might apply to you or that would apply to you in relation to performing your insolvency related duties in an independent and impartial matter. You should look for relationships that might be prohibited or even certain actions. Knowing what would get you in trouble is the first step of staying out of it! Self-Assessment Exercise 3 Julie is a well-known Insolvency Practitioner and is often sought out for her knowledge and expertise especially in relation to retail insolvency. She currently has ten ongoing insolvency matters (most of them quite complex) relating to retail insolvency and have almost exclusively only dealt with retail insolvencies for the last 5 years. Due to her impressive curriculum vitae she is contacted by a very large mining company in distress inquiring whether she would be able to take an appointment as an administrator. Julie does not feel like she has the level of expertise to accept this appointment. Question 1 What would you advise Julie to do in these circumstances? Question 2 If Julie was to accept the appointment and something went wrong, could she be held liable for a breach of her duty of care? Question 3 As an administrator in the retail industry, Julie has from time-to-time had to deal with the online sales component of many retailers. She therefore lists “online sales” on her CV as part of the section titled “additional skills and experience”. Does this change or modify Julie’s duty to exercise her functions to the standard of an ordinary, reasonably skilled and careful practitioner? Page 53  Foundation Certificate: Module 9 Commentary and Feedback on Self-Assessment Exercise 3 Question 1 The principle of professional and technical competence is one that requires an exceptional level of self-realisation and introspection by the IP. Well done to Julie for knowing her limits! It is important that professionals know the limitations of their own knowledge, skills and experience (and diaries). As such, when an area of deficiency is identified it is of paramount importance that the IP, as fiduciary, ensures that she educates herself in order to enable her to act in the best interest of her beneficiaries. The principle of professional and technical competence and the duty of care placed on the IP require that an IP should only accept insolvency appointments when the IP has or can acquire sufficient expertise. In Julie’s case it might be possible for her to brush up on some knowledge of the mining industry, given her current case load it might be difficult for her to administer all those estates while taking on a new client in an area she does not know a lot about. She is allowed to make use of the advice and services of other professionals as IPs are not required to be experts on everything. However, the cost of using these professionals should be carefully considered. Julie would have to consider all of these factors before making a decision on whether she would be best placed to serve the interests of her beneficiaries should she decide to accept the appointment. Question 2 The two-fold test for breach of the duty of care would have to be applied in the case (explain the test and apply it). Additionally - Re Charnley Davies Ltd 1990 BCC 605 at 618 – “In order to succeed the claimant must establish that the administrator has made an error which a reasonably skilled and careful insolvency practitioner would not have made.” They are not to be judged by the standard of the “most meticulous and conscientious member of the profession”. Question 3 Depending on her level of experience, the additional experience in online sales would not change her duty to act with care in a way that would make it more onerous. As the facts suggest that she sometimes has cases that involves an online sales element, her mere experience in the matter only means that Julie will owe a duty to act as an ordinary, reasonably skilled and careful insolvency practitioner, albeit one with experience in retail and online sales – see Re 1 Blackfriars Page 54  Foundation Certificate: Module 9 Limited (in liquidation) [2021] EWHC 684 (Ch) at 205 [England and Wales]. Experience does not, however, make the duty more onerous, only more specific. Self-Assessment Exercise 4 Question 1 Jason, as the administrator of a large construction company with several government contracts, has been asked to give a television interview on the progress of the proceedings. What are the factors that Jason should consider when deciding to grant the interview? Question 2 It is only risky to provide media interviews and not when you are having a social gathering with family and friends. True or false? Commentary and Feedback on Self-Assessment Exercise 4 Question 1 Jason should be mindful that giving information should be balanced with maintaining commercial and other confidentiality obligations, and he should also consider the cost of preparing the response against the benefit of such response. In other words what would be gained and lost by divulging certain information. It is normal that in a high-profile case, many persons without a tangible interest in the case might demand information. Again Jason should weigh the advantages of providing the information against the associated cost and disruption to the company or estate. Decisions should be made in the best interests of the estate and its stakeholders. He should be mindful of his duty of confidentiality: not disclosing confidential information acquired as a result of professional and business relationships, without proper and specific authority, unless there is a legal or professional right or duty to disclose; making improper use of confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties; and publishing or divulging without just cause to any person any confidential information or details concerning the business, affairs, trade secrets, patents, technical methods or processes of any estate in respect of which they hold appointment. Page 55  Foundation Certificate: Module 9 Question 2 False. An IP shall maintain confidentiality, including in a social environment, being alert to the possibility of inadvertent disclosure, particularly to a close business associate or a close or immediate family member. Self-Assessment Exercise 5 Many jurisdictions allow for contingency fee or conditional fee arrangements. What does this remuneration method entail? What are the main ethical issues associated with the use of this method of remuneration and are there any safeguards for the use thereof? Commentary and Feedback on Self-Assessment Exercise 5 As the name suggests these are fee arrangements which determine that the IP would be entitled to receive remuneration based on a specific outcome or condition being met. The outcome or condition usually pertains to a favourable outcome for stakeholders. One reason for the controversy surrounding contingency fee arrangements is that the conditions and outcomes on which the fee is payable are arguably conditions and outcomes that IPs, as fiduciaries, should aspire to anyway and would therefore form part of their remit. Another issue can be found in the diverting of an IP’s focus to a singular task that will benefit his fee arrangement instead of allowing his approach to be holistic. There would not be an ethical issue in the event of a contingency fee being paid for the achievement of a truly remarkable outcome and these outcomes should always be objectively measurable. Page 56  Foundation Certificate: Module 9 Self-Assessment Exercise 6 Explain the difference between professional and fidelity insurance and elaborate on why it is of particular importance for IPs to obtain this type of insurance. Commentary and Feedback on Self-Assessment Exercise 6 Indemnity or professional insurance covers against the risk of stakeholders instituting action against the IP for acting negligently (without the reasonable care). Fidelity insurance protects stakeholders in the event of the IP (or someone working for him) acting dishonestly or defrauding the estate. Fraud in this sense does not necessarily refer to criminal fraud. Given the extensive (and sometimes confusing) duties owed by IPs it would be sensible for IPs to obtain professional and fidelity insurance to protect themselves as well as the stakeholders in the estate. Page 57  Foundation Certificate: Module 9 APPENDIX B: GLOSSARY OF TERMS155 Advocacy A situation in which a Member promotes a position or opinion to the point that subsequent objectivity may be compromised (e.g., the Member has acted on behalf of a significant creditor to advance such creditor’s position). In such case, it is unlikely that other creditors would consider the Member to be impartial. Agent A person / firm employed under an engagement letter by the insolvent estate (acting by a Member) to perform a task or provide a service: for example, the employment of legal counsel. Associate Persons connected to the Member in the capacity of (for example) a personal friend or acquaintance, spouse, partner, civil partner, employee, employer, colleague, a relative of the Member or the Member's spouse or civil partner, the spouse or civil partner of a relative of the Member or the Member's spouse or civil partner. Close business Persons connected to the Member through professional means, associate including via employment, partnership, directorships of or shareholding in corporate entities or corporate trust arrangements. Creditor A person who is, or claims to be, owed money by the insolvent estate, whether or not such claim is ascertained, liquidated or contingent. Disbursements Sums paid by a Member or its firm to third parties or a recharge or allocation of costs incurred by Members or their firms which is charged to the estate. Estate The insolvent entity or its assets over which the Member has been appointed insolvency practitioner in accordance with applicable law. Familiarity A situation in which a Member’s relationship to a stakeholder impairs (or is perceived to impair) such Member’s impartiality and objectivity owing to the Member being too sympathetic or antagonistic to the interests of certain others (e.g., where the Member is a close relative of a significant creditor or shareholder, or of a director of the insolvent estate). 155 The glossary of terms included in this appendix has been reproduced from the INSOL International publication Ethical Principles for Insolvency Professionals, published in June 2019. Page 58  Foundation Certificate: Module 9 Family Lineal ancestors / descendants (including step-parents). Dependent relations-by- marriage in lineal relationship. Any other dependents living within the household (adult or children). A Member is related to another individual if they - (i) are married, or live together in a relationship similar to a marriage; or (ii) are separated by no more than two degrees of natural or adopted consanguinity or affinity. A Member is related to a corporation, partnership or other juristic person or entity if the individual directly or indirectly controls such juristic person or entity. Insolvency and Officeholders include formal and informal appointments such as Restructuring Liquidator, Provisional Liquidator, Insolvency Administrator, Insolvency Officeholders Trustee, Receiver, Restructuring Officer, and Insolvency Resolution Professional. Insolvency and IPs include professionals engaged in insolvency administration, Restructuring restructuring and turnaround practice areas, and the advisers to those Professionals engaged in these practice areas. (“IPs”) Intimidation A situation in which a Member is, or may be, threatened or pressured (e.g., with litigation, unfounded complaints, or even physical harm). Member Individual member of INSOL International authorised in accordance with applicable law, practice and regulation to accept an engagement or appointment in respect of an estate. Regulator(s) Any recognised professional body charged with regulating the profession of insolvency practitioners (whether solely or as part of a wider body of professional regulation) in accordance with local law and guidance. Self-interest A situation in which a Member has, or is perceived to have, a direct interest in obtaining a particular outcome: for example, where such Member (or a close associate) is also a creditor or shareholder of the insolvent estate. Self-review A situation in which actions taken by a Member, such Member’s firm, a close associate, or a close associate’s firm is (or is perceived to be) Page 59  Foundation Certificate: Module 9 subject to review only by such Member (e.g., where a Member’s firm carried out the disposal of certain assets of the insolvent estate prior to insolvency, and there are suspicions that the disposal is in some way improper). Shareholder A person having an equity interest in the insolvent estate (ordinary, preferred, restricted) as defined by local law and accounting standards. Stakeholder A person having a tangible interest in the insolvent estate. Tangible interest Financial (monetary or economic) interest, whether direct or indirect (e.g., loss of employment). Third party costs Sums paid directly from the estate to a third party supplier. The third party supplier invoices the estate. Page 60  Foundation Certificate: Module 9 INSOL International 6-7 Queen Street London EC4N 1SP Tel: +44(0) 20 7248 3333 | Fax: +44(0) 20 7248 3384 www.insol.org Page 1  Kohtutäiturite ja Pankrotihaldurite Koda Teie: 08.08.2023 nr 3-9.2/18-1 Tartu mnt 18 Tallinn Meie: 03.12.2023 nr 12-1/2023-007-10 Maksejõuetuse teenistuse pöördumine pankrotihalduri hea kutsetava täiendamise osas Austatud Koja kutsekogu esimees, juhtkond, aukohus ja kutsekogu liikmed Maksejõuetuse teenistus edastas Teile 29. mail 2023.a soovitused pankrotihalduri hea kutsetava täiendamiseks. Kohtutäiturite ja Pankrotihaldurite Koja juhatuse esimees vastas Maksejõuetuse teenistusele 08. augustil 2023.a, et Koja kutsekogu juhatus arutas Maksejõuetuse teenistuse soovitusi 02. augusti 2023.a koosolekul. Ühtlasi teatas Koda oma vastuskirjas, et kutsekogu juhatus ei ole saanud ei kutsekogu liikmetelt ega ka väljastpoolt Koda informatsiooni, et oleks olnud arusaamatusi hea kutsetava sätete tõlgendamisel. Koja aukohus on samuti hea kutsetava tõlgenduste põhjal teinud otsuseid, mida kutsekogu liikmed pole edasi kaevanud argumenteerides hea kutsetava sätete alternatiivsele sisustamisele. Juhatus ei pea vajalikuks kehtestada heas kutsetavas kutsekogu liikmetele ühepoolseid käitumisjuhiseid suhetes järelevalveorganite, pankrotimenetluse organite ega kolmandate isikutega. Olulisemad normid on kehtestatud seaduste ja asjakohastel juhtudel justiitsministri määrustega. Reguleerimata juhtumid lahendatakse kas kaasusepõhiselt või ulatuslikumal juhul kehtiva õiguse täpsustamise teel. Käesolevaga soovib Maksejõuetuse teenistus Teilt teada, kas Kohtutäiturite ja Pankrotihaldurite Koda ja tema liikmeskond jääb 08. augustil 2023.a saadetud kirjas toodud seisukohtade juurde ning ei plaani mitte mingil juhul pankrotihalduri hea kutsetava täiendada. Oleksime Teile siiralt tänulikud, kui Teil oleks aega ja võimalust meile vastata hiljemalt 29. detsembril 2023.a (k.a). Ühtlasi edastame Teile praktika ühtlustamise eesmärgil tutvumiseks teiste riikide ja rahvusvaheliselt väljatöötatud pankrotihalduri hea kutsetava näidised ja koolitusmaterjalid (inglise keeles). Tatari 39 / 10134 Tallinn / 667 2400 / [email protected] / Registrikood 70000303 Lugupidamisega (digiallkirjastatud) Signe Viimsalu juhataja Maksejõuetuse teenistus 2 (2)