It’s important for insolvency practitioners to be aware of the implications of the revised APES 330 Insolvency Services standard, together with the ARITA Code of Professional Practice.
Insolvency is a complex area of practice, says Kim Arnold, policy and education director at the Australian Restructuring and Insolvency and Turnaround Association (ARITA).
“If you’re not an insolvency accountant, there are two things you need to know,” Arnold says.
“If you have a client who is in financial difficulty and you’re looking at making a referral, or having an insolvency practitioner become involved, you need to be aware that insolvency practitioners have to be independent of that company and its directors.”
“The registered liquidator brought in to undertake the administration or liquidation is acting for the creditors, not for the company and not for the directors.”
Importantly, they need to be independent, she emphasises.
New insolvency standard disclosure
The APES 330 standard has been updated by the Accounting Professional and Ethical Standards Board (APESB).
Notably, it updates guidance around independence. For example, if a client had found themselves in financial trouble 12 months earlier and the accountant had introduced them to an insolvency practitioner to advise on restructuring to help turn the business around, that insolvency practitioner could not then take on any subsequent administration or liquidation.
Another important point is that the insolvency practitioner who takes the formal insolvency appointment will have to declare the source of the appointment, or referral, in their Declaration of Independence, Relevant Relationships and Indemnities (DIRRI).
This means the accountant making the referral must be aware that the name of their firm will be disclosed in the declaration. Certain accountants, Arnold says, can be uncomfortable with such disclosure.
“Some accountants don’t necessarily want people to know that one of their clients was in financial difficulty,” she says. “They may think there might be perception issues, but from our perspective, it’s really important that insolvency practitioners are transparent with creditors about where work comes from, so there’s not any feeling by creditors that it’s underhand. This is all about transparency.”
The insolvency practitioner will also need to confirm the identity of the director (or directors) of the company.
“They need to feel comfortable that the person who is recorded as the director in the Australian Securities and Investments Commission’s (ASIC) register exists – that it’s a real person,” Arnold explains. “The accountant can’t intervene between the insolvency practitioner and the director.”
Professional obligations of new insolvency standard
Channa Wijesinghe FCPA, chief executive officer of the Accounting Professional and Ethical Standards Board (APESB) says CPA Australia members who are registered liquidators or trustees need to read and comprehend the revised APES 330 as they will need to comply with it from 1 January 2020.
“The revised APES 330 has been aligned with the restructured APES 110 Code of Ethics and incorporates additional guidance on how to apply the requirements of APES 330 in the critical insolvency practice areas of liquidator independence and professional fees and expenses,” he says.
APES 330 sets the standards for registered liquidators and trustees in the provision of insolvency services to insolvent entities and insolvent debtors and in addition “where practicable, members should apply the provisions in the standard for appointments such as a members’ voluntary liquidation” says Wijesinghe.
What prompted the changes?
Over the past few years, issues have been raised about undesirable business practices, including illegal phoenix activity and the conduct of liquidators in respect to their independence, business relationships, and referral sources, says Wijesinghe.
“Stakeholders raised concerns that reasonable enquiries to identify directors of an insolvent entity or the insolvent debtor were not always made in the insolvency profession”, Wijesinghe says. “A respondent (to the APES 330 Exposure Draft) also noted that reasonable enquiries should include a requirement to meet with the directors, or the insolvent debtor.”
This drove the decision to include a requirement for liquidators to make such reasonable enquiries before an appointment in accordance with APES 320 Quality Control for Firms, and guidance that reasonable enquiries should include meeting with or obtaining appropriate identification of the relevant person(s) where possible.
Similarly, issues associated with the independence of the liquidator have been raised.
“There was a call to include additional guidance from Australian legal cases on the critical importance of a liquidator’s actual and perceived independence. This matter has been addressed by retaining the base definition of independence from the Code of Ethics but incorporating legal precedents in an appendix.”
Additional guidance for APES 330
Additional guidance has been developed in a new appendix to the standard reflecting key principles from recent court decisions in respect of necessary and proper professional fees and expenses charged by liquidators, which also came after requests from stakeholders, Wijesinghe says.
APESB has incorporated into the revised APES 330 a template Declaration of Independence, Relevant Relationships and Indemnities (DIRRI), which complies with the independence requirements of the standard to develop best practice and consistency in the insolvency profession. The DIRRI was developed in consultation with ARITA who provided input to these revisions.
Finally, in 2018 the APESB Code of Ethics incorporated provisions to assist accountants to respond to non-compliance with laws and regulations (NOCLAR) “to address the ethical failures that occurred during the GFC, and these provisions are now incorporated in the revised APES 330”, Wijesinghe says.