SIP 9 avoidance schemes
An example of a SIP 9 avoidance scheme is where there is a rebate or repayment to the firm, a holding company or another group or associated company or associated individual from a supplier, which is not passed onto the estate.
The use of such schemes is not consistent with the principles of SIP 9 or with the Insolvency Code of Ethics. ICAEW wishes to alert insolvency practitioners to the possibility of being inadvertently involved in such a scheme.
SIP 9 and the Insolvency Code of Ethics
Insolvency practitioners are reminded in particular of the following requirements:
- to consider the likely perception of any association between the insolvency practitioner, their firm, or an individual within their firm, and the recipient of a payment (SIP 9, April 2021 version paragraph 2),
- of transparency and fairness in all of an office holder’s dealings, and that payments to an office holder, or to the associates (widely defined) of an office holder, from an estate should be fair and reasonable reflections of the work necessarily and properly undertaken (SIP 9 paragraphs 5, 6 & 7),
- to disclose all payments arising from an insolvency appointment to the office holder or to their associates (widely defined) (SIP 9 paragraph 14),
- that payments that could reasonably be perceived as presenting a threat to the office holder’s objectivity or independence by virtue of a professional or personal relationship, including to an associate (widely defined), should not be made from the estate unless disclosed and approved in the same manner as an office holder’s remuneration or category 2 expenses (SIP 9 paragraph 9).
Insolvency practitioners who are employees
There may be a greater risk of an insolvency practitioner being unaware of the existence of a SIP 9 avoidance scheme at firms where the insolvency practitioner is an employee.
The Insolvency Code of Ethics confirms that an insolvency practitioner who is an employee shall comply with the fundamental principles (paragraph 2380.5) and recognises that they 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.
The code also suggests that 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 code, they will need to obtain sufficient information to establish the nature of the relationship with the provider. (paragraph 2320.6 A7).
There is also a requirement that any advice or work contracted shall reflect best value and service for the work undertaken (paragraph 2320.4).
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 need to resign from their current employment (paragraph 2380.3 of the code).
Preliminary protective steps for IPs
An insolvency practitioner may be in office without knowing or suspecting that a SIP 9 avoidance scheme exists and unwittingly playing a part in it. To protect against such a possibility, ICAEW recommends that, in addition to complying with their duties under SIP 9 and the Insolvency Code of Ethics, insolvency practitioners should take the following preliminary steps:
(1) Seek written confirmation from the board of directors of the insolvency practitioner’s firm (or equivalent), persons with significant control and beneficial owners;
(a) that neither they nor the firm is involved (directly or indirectly) in any fee-sharing agreement or other arrangement with the service providers used in relation to insolvency appointments; and
(b) of any financial, business or personal relationship (directly or indirectly) with the service providers used in relation to insolvency appointments.
(2) Seek written confirmation from the service providers used by the insolvency practitioner or their firm in relation to insolvency appointments;
(a) that they are not involved (directly or indirectly) in any fee-sharing agreement or other arrangement with the insolvency practitioner’s firm, its directors, its persons with significant control and/or beneficial owners; and
(b) of any direct or indirect financial, business or personal relationship with the insolvency practitioner’s firm, its directors, its persons with significant control and/or beneficial owners and / or group or connected companies.
The insolvency practitioner may need to make further enquiries depending on the responses received, and the absence of a satisfactory response may cause suspicion.
Where any relationships are disclosed, the insolvency practitioner will need to ensure that any associated payments are treated in line with SIP 9.
Insolvency practitioners are reminded that SIP 1 (October 2015) paragraph 4 requires insolvency practitioners who become aware of any insolvency practitioner who they consider is not complying or who has not complied with the relevant laws and regulations and whose actions discredit the profession to report that insolvency practitioner to the complaints gateway operated by the Insolvency Service, or to that insolvency practitioner’s recognised professional body.
Whistleblowing reports may be made to ICAEW at email@example.com
Insolvency practitioners are also reminded of their anti-money laundering duties.
Investigation and disciplinary action
ICAEW will work in conjunction with insolvency practitioners and other regulatory bodies to investigate schemes which involve mis-categorisation of expenses, undisclosed fee sharing or secret commissions or which are otherwise contrary to the public interest. Where appropriate ICAEW may commence disciplinary proceedings against insolvency practitioners involved in such schemes.