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What’s the fuss about file notes?

Author: Professional Standards Department

Published: 22 Nov 2021

During a recent ICAEW Restructuring and Insolvency Roadshow, Michelle Butler, partner at The Compliance Alliance, talked about why file notes are so important, how timing is everything, and the need to create a culture of documentation.

For insolvency practitioners (IPs), documenting processes and decisions is crucial. It’s not only about regulatory compliance; it’s also about efficiency and self-protection.

Yet, too many IPs are still failing to recognise why, far from being a compliance burden, good documentation can bring business benefits. “We keep hearing: ‘I know what’s going on in the case; I’ve made sure the case is going to plan, so why do I need to keep file notes?’” says Butler.

The pandemic may also have undermined file note discipline. “Many of us have learned to work in different ways, and office life is probably not going to return to the way it was pre-lockdown for most of us,” suggests Butler.

“People have been working in their own bubbles and maybe some discipline and practice have slipped a little, so they’re no longer making as many notes,” she explains. “Or everything is being done by email, which is fine, but there has to be a disciplined approach to filing these emails or you will have gaping holes in your case files.”

Why we need file notes

On the compliance side, there are several reasons why you need to document your strategies and decisions. “First, we have Statement of Insolvency Practice (SIP) 1, paragraph 7,” explains Butler. “It says that practitioners should evidence their compliance with SIPs and should therefore document their strategies and decision-making processes appropriately.”

Then there are the Insolvency Practitioners Regulations. “These cover a wide range of what we do,” she says. “They mean we have to document the administration of our cases, not just the decisions that materially affect a case.” And since mid-2020, there has been the updated Insolvency Code of Ethics, which requires practitioners to maintain and make file notes about ethical decisions.

There is a clear requirement in the ethical code for IPs to record their ethical considerations. And application material ‘A’ paragraphs in the code provide more context about the nature of that documentation. Referring to the ethics code, Butler says: “You might be thinking this is contained in an ‘A’ paragraph, so it’s not a requirement, but just an expectation. While it’s true the code does state that ‘A’ paragraphs don’t impose requirements, it also states that consideration of ‘A’ paragraphs is necessary to the proper application of the requirements of the code. And this means you may fall foul of the code’s requirements on record keeping if you don’t follow them.”

If it isn’t documented, it didn’t happen

Outside compliance with regulatory requirements, keeping good records can offer business efficiencies and protection. First, there is protection against the ‘run over by a bus scenario’. “If you unexpectedly lose a member of staff, would someone else be able to pick up the file and know what to do next?” asks Butler.

Creating file notes can also help protect you from challenges, litigation, complaints and regulatory action. “Very often, complaints and issues at monitoring visits have an angle to them that could be more damaging because you haven’t got a contemporaneous file note about your thinking or actions,” explains Butler. “And if you keep a record of why you’ve made a particular decision at that time, it makes it a lot more difficult for someone to criticise the decision with the benefit of hindsight.”

“You can also charge the time to create the file note,” she adds, “so why wouldn’t you take that time?”

Timing is everything

File notes need to be not only accurate, but also timely. "There are some areas where producing a file note after the event is unacceptable,” explains Butler. “So for example with ethical considerations, we all know we have to document those before we take the appointment. And anti-money laundering risk assessments and customer due diligence are obviously key hot topics; and we know we have to get that done before agreeing to act as office holder.”

The same is true for SIP 2 assessments and conclusions. “These can be quite meaty documents to complete, but if we submit the DCRS report and complete the CDDA (Company Directors Disqualification Act) checklists afterwards, then we’ve really got a problem,” she says. “We need to ensure the checklist informs the DCRS report, and not the other way around, not least because SIP 2 requires us to document our considerations contemporaneously.”

SIP 3 advice “can be voluminous too”, she adds. “So keeping a contemporaneous record at that time is extremely important: at the very least, it makes sure that you have evidence that you have covered everything that you need to.”

Beyond this, there are areas where you will be protecting yourself from criticism if you can produce contemporaneous records, for example on meetings, telephone calls, decisions to drop the pursuit of assets, and reasons for not paying a dividend.

The chances are that if a monitoring visit identifies a lack of file notes, it will be this type of ad hoc file note that is missing. Butler highlights that file notes are most often missing in areas such as book debt collection (for example, when to abandon collection of specific debts) and paying dividends (for example, adjudication parameters).

“If all else fails and you forget to make a file note, case reviews provide an opportunity to plug any gaps,” she adds. “But you need to make sure you make meaningful comments on case reviews.”

Creating a culture

“I’d recommend promoting a culture that encourages people to take time out to do these file notes,” says Butler. “If you have a meeting with a team member, ask them to set out a note of what was agreed; get them to send you it and check it to see if you think it’s what was agreed.”

“You’ll be in a good place if you can develop a culture internally of creating file notes,” she concludes. “These should be contemporaneous, not only for SIP and ethics code requirements but also to make sure the notes are accurate.” She advises paying particularly careful attention to noting decisions on agreeing settlements, dropping pursuit of assets and not paying dividends, as well as those relating to hot topics such as pre-appointment ethics, instructing a specialist, explaining why you haven’t collected books and records, and investigations (particularly those involving bounce back loans).


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