The Compliance Alliance issued a bulletin to its subscribers yesterday, saying that the ICAEW has decided that the appointment of an MVL liquidator is considered to be a significant professional relationship (whether or not the IP or their firm had a relationship with the company before taking the appointment as MVL liquidator). And that the ICAEW further concludes that, if the MVL needs to move to CVL, the only way that the MVL liquidator can be the CVL liquidator is if the creditors are going to be paid in full in the liquidation.
We’d like to confirm the ICAEW’s position.
The Code of Ethics at paragraph 400.85 says:
Previous appointment: An individual within the practice has been the liquidator of a company in a members’ voluntary liquidation.
Proposed appointment: Liquidator in a creditors’ voluntary liquidation, where it has been necessary to convene a creditors’ meeting.
Response: 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.
Consideration as to a Significant Professional Relationship
Paragraph 400.44 of the Code of Ethics requires IPs to consider their relationships with the entity subject to the proposed insolvency proceeding.
We believe that acting as liquidator in a previous MVL may give rise to a significant professional relationship. Where an IP decides that they are able to take the CVL appointment, we’d expect to see a documented argument in the context of the Code of Ethics as to why there was no significant professional relationship created by their previous appointment as MVL liquidator, contemporaneous to the decision to accept the appointment in the successor proceeding. The position will need to be considered on a case by case basis and should consider, among other things, the duration of the IP’s tenure as MVL liquidator and the work they have done in that role.
There is the carve out (subject to other ethical considerations) should the IP conclude that the company will eventually be able to pay its debts in full, together with interest.
However even in those circumstances we’d expect the IP to consider the nature of the prior relationship as part of any risk assessment before accepting the appointment as the move from MVL to CVL is already an obvious marker that the company’s finances are not straightforward and a payment in full scenario may not be a 100% certain.
Although section 96(3) of the Insolvency Act allows the MVL liquidator to become the CVL liquidator, we don’t believe that this negates the need to consider the ethical issues.
ICAEW’s Quality Assurance Department (QAD) has over recent months seen a number of cases where the documented ethical considerations in moving from MVL to CVL purely commented on whether there had been a prior audit relationship with the company. Where the MVL liquidator has been in office for a period of time (and in some of the examples we have seen this was over two years before the MVL was converted to CVL), the IP should also consider the MVL liquidator’s work within that period.
It would also be appropriate to consider why circumstances have changed to require a solvent liquidation to be converted to an insolvent liquidation. Some of the cases that QAD has seen have resulted from significant claims from HMRC in relation to employee benefit trust schemes. Where that is the case, before deciding whether they should act in the CVL, the MVL liquidator should consider the extent to which they made appropriate enquiries into the existence of such schemes when assisting the directors in preparing their declaration of solvency. Some firms have very detailed questionnaires, asking directors about a whole host of potential liabilities. But if the firm doesn’t have such a comprehensive approach and hasn’t made appropriate enquiries, there could be a self-review or self-interest threat, if the directors weren’t prompted to consider the possibility of such claims, as the appropriateness of the MVL will be in question. While any declaration of solvency is clearly the responsibility of the director(s), where an IP has been engaged to assist with its preparation, we would expect an IP to review, and challenge, the information provided both in terms of their engagement but also to satisfy themselves that an MVL is appropriate.
The position will clearly be complicated if the MVL liquidator has made distributions to creditors in the MVL before the conversion.
Our underlying position is that when converting an MVL to a CVL, the proposed CVL liquidator should fully document their ethical considerations, and (if applicable) why they believe they are able to act. These considerations should not be limited to considering whether the company was previously an audit client.
At the present time our licensing committee is taking an interest in this issue