Recovery Rebuttal

30 March 2023

Mark Danby responds to Lezelle Jacobs and Donna McKenzie Skene’s piece in the Autumn 2022 edition of Recovery Magazine about the need for ‘more specific and nuanced’ ethics guidance for IPs…

"You couldn’t be more wrong if you tried.” The quotation is by Jeremy Hanley, when he was a lecturer on company law at Financial Training, in reply to an ill-considered answer from a colleague of mine. I was taken back to those halcyon days by the article headlined ‘Pandemic-driven changes raise ethical concerns’ by Lezelle Jacobs and Donna McKenzie Skene in Recovery Magazine (Autumn 2022). The full article is available online.       

The article starts reasonably enough. Its objective was twofold – to cover issues due to changes from the pandemic, and to identify professional standards issues worthy of note.The authors set out fairly the issues which arose out of the pandemic: the legislation that was introduced, and the profession’s and courts’ practical adaptations, although the article seems to miss any commentary on suspending the offence of wrongful trading on the subsequent recovery of fraudulent claims for loans, grants and furlough payments. 

Remote meetings 

The debateable issues in the article start with the criticism of remote meetings with the statement that ‘creditors need to have access to the relevant technology and a sufficiently strong internet connection’, and the reference to “the lingering sense that some things are better done in person’. However there was no alternative during lockdown, and there was: an ability to have meetings by correspondence; a duty to have regard to convenience; elderly relations adopted to Zoom well; and the 2016 Rules (Part 15 Chapter 2) made this possible – before the lockdown. 

Confidentiality 

The authors refer to the ‘difficulties in maintaining strict confidentiality’ when working from home. In making this comment, they do not give any examples of where this has been an issue. Given the amount of publicity, advertising and reporting which statute and standards oblige the IP to provide, there is little information that is truly confidential. Only a few people will know that which is commercially sensitive on an engagement and IPs take care with this given the effect of its loss on realisations, reputation, etc. IT security around case files generally require specific access to named team members.

Artificial intelligence

The article refers to ‘the increased reliance on technology may have accelerated the use of artificial intelligence … as a potential substitute for [IPs’] own judgement’. What is the evidence for this? And, well, that is a nice trick if you can do it! Banks would pay dearly for such skills and, if you can, insolvency’s gain is financial services loss. AI in no way could possibly replace an IP’s judgement as that is what IPs do the job for and each decision has to be decided on the specific facts and current climate. It is hard enough to train staff in these skills which generally come with experience before you start explaining the requirements to a software engineer. It is not the way AI works as it is good at extrapolating from the past, not applying to new situations. The best technology achieved during lockdown was to allow staff to log on remotely and have Zoom meetings.

Bounce back loans

The authors raise the ethical issues related to ‘advising directors to take advantage of [bounce back loan schemes]’ and ‘the appropriate (and inappropriate) use of any funding obtained and later decisions such as whether to put companies into voluntary liquidation where such support had been accessed but not been repaid’. Again, the authors do not adduce any evidence for this. It is a regulatory breach as well as failing to use the liquidator’s powers to overturn antecedent transactions and the duty to report to the Insolvency Service and HMRC. However that advice, depending on the circumstances, might be correct where the company applied for Covid loans, grants and furlough payments correctly and used them for a valid purpose but became insolvent following the weakening economy with Brexit, the rise in interest rates and input costs following the invasion of Ukraine.

‘Light touch’ administrations

The article states that ‘a protocol was developed to regulate “light touch” administrations … [which] allowed for IPs to fulfil the tasks and duties of an administrator in innovative ways by transferring some of their responsibilities to the company’s management.’ From my discussions with relevant professionals this simply did not happen. Using existing staff happened before Covid and is part of the IP’s judgement in the circumstances of a case.  The IP would need to justify this to their regulator and show that any decision was reasonable under the Insolvency Code of Ethics and in their strategy to return funds to creditors. I have been unable to find such a protocol from discussions with relevant contacts. 

The article states that ‘Parallels can be drawn between ‘light touch’ administrations and the contentious pre-pack administrations … as both can give rise to perceptions of IPs doing deals with directors at the expenses of other stakeholders’. This ignores statute – specifically the Administration (Restriction on Disposal etc to Connected persons) Regulations 2021 and SIP16 which are now in place to address this. 

Dual regulation

The authors say that ethical standards are confused due to dual regulation and the requirements of the FCA handbook. This is simply not the case. Having two regulators assists us because they have slightly different takes on similar issues which expands the debate and avoids groupthink. The proposals for the Insolvency Service to regulate the profession were so poorly developed that the profession would have needed to retain a regulator to provide it with the necessary credibility that users of our services require. The FCA runs sessions so that it can manage our expectations and inform us of its requirements when dealing with companies that it regulates.  The bigger issue for the profession is the rapid development of special insolvency procedures and the confused nature of their structure in agreeing which sections of the main Act and the Rules are in operation and which have been superseded, or do not apply. I would welcome some rationalisation of these to reduce the burden of complying with an ever-increasing range of statute which does little to improve the outcome to creditors which will always be foremost for us.

IVA factories

The authors refer to the problems arising ‘where an IP is an employee, or even a partner or member of a limited liability partnership. In such cases, there is the potential for conflict between the IP’s statutory, common law and ethical duties and the requirements imposed by the employer or partnership.’ I understand that this is a narrow issue where licenced insolvency practitioners do not manage or are in the board majority at the IVA factories. This gap in the legislation could be filled if the FCA regulated such firms. The only aspect of the future of insolvency regulation paper that was useful was to regulate at a firm rather than IP level. When this happens, the IVA factories could face risk to their licences where there was a risk to debtors and their creditors facing real detriment, notwithstanding the benefit that they can provide. 

Moratoriums

The authors discuss the fear of reputational damage in failing to use the new moratorium process (‘Another example of a conflict can be found in discretionary decisions of the IP that may not be in the best interests of creditors, like not suggesting the new company moratorium for an eligible company.’) There are more issues than reputation damage should a moratorium fail.  That the costs become a first charge on the assets means that there is a strong risk that there will be no assets for any subsequent procedure. The result will be the Official Receiver as liquidator with little or no recovery to creditors and as a result no information on how the liquidation is progressing. Also, the moratorium process has a very limited duration. There are other procedures that will generate better outcomes. The number of administrations took time to grow from their introduction in 1986. However, using moratoriums with other processes, which require time for creditors to vote on them, gives the IP a breathing space to put resolutions to the creditors, particularly where the moratorium costs are funded separately – see Lee Manning’s article in Recovery’s Winter 2022 edition (‘Practical uses of moratoriums – from a converted sceptic’). 

Insolvency code of ethics 

The authors recommend that further development of the insolvency code of ethics is needed. No, it needs to be slimmed down considerably to work effectively. Nothing is that new, and there is a vast amount of duplication. It might work from an academic’s perspective but, at 69 pages, it is of limited value to a busy, practising IP, in my view. If it is truly principles-based then it should cover no more than one-and-a-half sides of A4 at a reasonable font size!   A code of ethics needs to call out what are the egregious issues. These might be: selling estate assets to your pension fund or your mates at undervalue; employing a spouse as an advisor for little benefit to creditors; running jobs with cash in for unreasonably long periods; failing to train and recruit able staff; conflicts of interest; and not applying the front page of the Sun / FT and ‘Slicker’ section of Private Eye test to decisions that you take.   More practical principles might be: be interested in your job and pay the going rate; be brave and take the right decisions for the creditors whose interests must be paramount despite difficulty; and recognise that creditors do not occupy the moral high ground when trying to leverage their personal position rather than that of the general body, particularly when they threaten complaints to your licencing body or institute. 

‘Lies, damn lies and unaudited accounts’

The main observation coming out of the pandemic is that the Government arranged for money to be paid away too quickly with inadequate due diligence.   This can be remedied with the statutory audit for all trading and employing companies. The absence of such audits takes away a central lynchpin for establishing these companies’ bona fide. Without an audit, the Government had little alternative than to trust the applicant, when claims for funding during the pandemic might have been countersigned by the company’s audit partner. There are lies, damn lies and unaudited accounts. Should the application then be found to be fraudulent, the audit firm would need to answer certain relevant, pertinent questions.  Statutory audits would also deal with the question of who is the beneficial owner of a company or LLP. If this was subject to audit, the owners would need to pass that firm’s KYC checks which its internal risk processes and the ICAEW will review.

Download the Autumn 2022 edition of RECOVERY Magazine.