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Focus: New code of professional practice takes effect

21 January 2011

In brief: The second edition of the IPA Code of Professional Practice for Insolvency Practitioners took effect from 1 January 2011. Partner Michael Quinlan (view CV) and Lawyer Leesa Vanmali report on some of the significant changes.

How does it affect you?

  • The second edition of the Insolvency Practitioners Association of Australia (the IPA) Code of Professional Practice (the Code)1 sets out the new standards of conduct expected of insolvency practitioners and provides additional guidance in a number of areas in order to assist insolvency practitioners discharge their professional responsibilities.
  • Although it is not the law, the courts are likely to look to the Code in assessing negligence and impropriety in the course of external administrations. The standards set out in the Code are therefore pertinent to all stakeholder groups in insolvencies, including creditors.

Background

The amendments to the Code resulted from a review that the IPA commenced in mid 2009. The amendments have also been influenced by the Australian Securities and Investment Commission's 2009 independence review of liquidator activities and the Senate Economics Reference Committee's Report on Liquidators and Administrators.

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The changes

The significant changes to the Code include the following:

New principles

Three new principles have been added to Part B of the Code (which sets out the overarching principles for the practice of insolvency). They concern:

  • the need for co-operation and assistance between practitioners, for example, in joint or successive appointments;
  • professional competency; and
  • the resources and capacity of an insolvency practitioner, and their firm, to take on an appointment.
Independence

There are a number of changes in Chapter 6 (Independence), including the following:

  • broadening of the definition of a firm to include associated practices and practices operating under the same, or substantially the same business name, whatever the financial arrangement;
  • rewording of the exceptions to the two-year rule, particularly in relation to pre-appointment communications and meetings. The two-year rule provides that practitioners must not take an appointment if they have had a professional relationship with the insolvent during the previous two years;
  • added sections on professional relationships longer than two years and relationships with associates; and
  • additional guidance on taking concurrent appointments to related parties, particularly in relation to taking both personal insolvency and related company appointments and joint personal insolvency appointments.
DIRRI

The Code now provides significant guidance on the drafting of disclosures and explanations by practitioners in a Declaration of Independence, Relevant Relationship and Indemnities (DIRRI) and in relation to the signing of a DIRRI. In addition, various examples of DIRRI disclosure are provided throughout Chapter 6 of the Code.

There are also revised DIRRI disclosure requirements for the 'circumstances leading up to the appointment'. The revision requires disclosure of the usual initial contact between a practitioner and the insolvent (for example, where the practitioner initially meets with the insolvent to provide a consent to act) as explaining the circumstances of the appointment. This revision is aimed at resolving the difference of opinion that previously existed as to whether this type of initial contact was required to be disclosed in the DIRRI as a 'relevant relationship' for the purposes of section 60 of the Corporations Act 2001 (Cth) (the Act). The additional disclosure requirement in the Code also applies in relation to pre-appointment contact by a trustee with a debtor.

Remuneration

A section on the setting of hourly rates by practitioners has been added, requiring practitioners to ensure the appropriateness of their standard hourly rates is specifically considered for each administration to which they are appointed.

In addition, the template remuneration report contained in the Code has been revised to clarify various issues, including what information must be provided to creditors if the practitioner is intending to request approval of prospective remuneration.

Section 439A reports

The Code now requires reports under s439A of the Act to include a section on the effect on employees of any deed of company arrangement.

Expert opinions

The Code now provides guidance to practitioners regarding giving expert opinions to a court in relation to the administrations to which they have been appointed. In particular, the Code reiterates:

  • the practitioner's paramount duty to the court to assist it in an objective and unbiased manner on matters relevant to the practitioner's area of expertise; and
  • that the practitioner must provide full disclosure to the court about the extent to which they may obtain a financial benefit from the outcome of the case, for example, by way of payment of remuneration.

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Conclusion

There have been several significant amendments to the Code, particularly in relation to the independence of insolvency practitioners and the level of disclosure required in a DIRRI. The Code's new standards of conduct are likely to be referred to by the courts when assessing negligence and impropriety in the context of external administrations or personal insolvencies.

Footnotes
  1. A copy of the second edition of the IPA Code of Professional Practice is available from the IPA's website.

For further information, please contact:

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