We understand that the ICAEW have recently taken a more robust view about the circumstances in which the liquidator of an MVL can take the appointment as liquidator of a subsequent CVL. Initially it seemed that their view was that the flipped appointment could only be taken if the MVL liquidator was able to conclude that the company will eventually be able to pay its debts in full, together with interest. Allison Broad has however helpfully clarified this point in her blog of 16 May 2019 which can be found here.
The difficulty all boils down to ICAEW’s interpretation of paragraph 85 of the Insolvency Code of ethics (the code) (ICAEW inserts the code in its regulations so that the paragraphs all start 400.x, such as 400.85 here, but we will use the original code paragraphs throughout this article) and, in particular, their interpretation of “a Significant Professional Relationship”(SPR). The code states that when an MVL liquidator wants to be liquidator of a successor CVL;
“Where there has been a Significant Professional Relationship, an Insolvency Practitioner may continue or accept an appointment (subject to creditors’ approval) only if he concludes that the company will eventually be able to pay its debts in full, together with interest.
However, the Insolvency Practitioner should consider whether there are any other circumstances that give rise to an unacceptable threat to compliance with the fundamental principles.”
Historically, SPR was interpreted as relating to the office holder’s relationship with the MVL stakeholders before the MVL appointment. So, if a practice had previously worked for the company doing, say, annual accounts or audit, the MVL office holder would not be able to take any subsequent CVL. However, if the MVL was the first contact with the practice, there would normally be no such difficulty and the MVL liquidator could normally stay in office for the CVL. We say, “normally”, because there may be other ethical threats that could prevent the successor appointment.
We all know that prior to accepting an appointment an IP must identify and consider any threats to the fundamental principles. The code identifies the fact that professional and personal relationships can lead to threats to the fundamental principle of objectivity and identifies at paragraphs 40 to 42 the types of relationship which the IP may encounter. Paragraph 44 provides details of the issues to consider when evaluating those relationships and whether or not the relationship can be considered significant to the conduct of the insolvency appointment.
There is, however, a carve out for MVLs and this is set out in Section H of the Code which applies its frameworks to specific situations. Part 1 deals with situations which do not relate to a previous or existing insolvency appointment and, citing the example of audit related work, states that: where the practice or an individual within the practice has carried out audit work for the company within the previous 3 years, a significant professional relationship will arise and the IP should therefore conclude that it is not appropriate to take the appointment. It then goes onto say that the restriction does not apply in MVLs provided that the insolvency practitioner can “satisfy himself that the directors’ declaration of solvency is likely to be substantiated by events”.
As stated above the profession has historically interpreted the reference in paragraph 85 to SPRs to be to only those which arose prior to the initial MVL appointment. The ICAEW is now of the opinion that simply the appointment as MVL liquidator may create a SPR which makes it much more difficult to accept the appointment in the CVL.
We are not convinced that ICAEW’s interpretation is correct. If it is, then the supervisor of an IVA could never become a trustee in bankruptcy, nor could an administrator become a liquidator. Furthermore, with the exception of an administrative or other receiver who has not been appointed by the court, the code specifically permits it (see paragraphs 83 and 84 of the code) on the proviso that the IP has considered “whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles”.
Allison has already pointed out that the legislation clearly envisages the MVL liquidator becoming the CVL liquidator. In her blog, Allison makes a very valid point that much of the difficulty comes down to the documentation of the ethical considerations which have been undertaken prior to the appointment being flipped and states that many of the ethical reviews she has seen have concentrated solely on whether or not the company was previously an audit client. She states that whilst the legislation does allow the MVL liquidator to become the CVL liquidator it does not negate the necessity to consider the ethical issues. We agree with that and support her view that a full review should be carried out of the IP’s actions as MVL liquidator, and earlier when accepting the MVL appointment, to see if there was anything in the initial advice around the Declaration of Solvency, or subsequently in the administration of the MVL, that might preclude the MVL liquidator continuing in office in the CVL.
In conclusion then, we do not consider that an insolvency appointment in itself creates a significant professional relationship, as it will be governed by the act and the rules. In particular we do not believe that an MVL appointment creates a significant professional relationship so that taking an appointment as the liquidator of a subsequent CVL is automatically barred unless all creditors are paid in full.
A flipped appointment does however give rise to ethical threats both in the view of the IP’s pre-appointment advice to the directors (or the debtor in a personal insolvency appointment) and, in respect of matters that have transpired during the appointment. IPs should consider and document their consideration of any ethical risks to the fundamental principles, irrespective of the appointment type and whether or not the creditors will be paid in full. Where any threats are identified and the IP considers that they can still accept the appointment, then the IP’s should provide a full explanation as to why they are considered to be at an acceptable level and why the appointment can be taken. All threats should of course be disclosed to the creditors prior to the acceptance of the flipped appointment.
We note that Allison says that the ICAEW licensing committee is “taking an interest” in the issue. We hope that the licensing committee will take a pragmatic approach and allow past cases to be treated under the interpretation that applied when the flip decision was made, so that only new flips after, say, 1 June 2019 are expected to have been reviewed in that way. Existing cases could then be reviewed at the next annual review, if there is one, and creditors’ approval to the IP continuing as CVL liquidator can be sought if necessary.
