Insolvency practitioners appointed as liquidator, administrator or trustee in bankruptcy owe fiduciary duties to the company or estate they are appointed over. In an insolvent case they act for the creditors as a whole, and in a solvent liquidation they act for the members. They are not fiduciaries for the directors or for any single creditor. A fiduciary is a person to whom power or property is entrusted for the benefit of another.
What’s a Fiduciary Duty?
Fiduciary duties are imposed by equity, the body of judge-made principles that sits alongside the common law. They are duties of loyalty and good faith owed to the person whose interests the fiduciary serves (referred to as the principal or the beneficiary): act in the beneficiary’s interests, do not profit from the position, and avoid unauthorised conflicts. The separate duty of care requires reasonable care and skill, not the highest possible standard. The no-conflict rule means a fiduciary must not put themselves in a position where their interests conflict with those of the beneficiary, unless the beneficiary gives fully informed consent or the conflict is properly authorised. Fiduciaries are also under a duty of confidentiality to the beneficiary.
What are the Fiduciary Duties Applied to Insolvency Practitioners?
Fiduciary duties come from the general law and are enforced by the court, for example through a misfeasance claim against a liquidator under section 212 of the Insolvency Act 1986. The equivalent routes are paragraph 75 of Schedule B1 to that Act for an administrator and section 304 for a trustee in bankruptcy. Separately, insolvency practitioners must follow the Insolvency Code of Ethics. The Code does not define their fiduciary duties; it requires them to act in line with any fiduciary duties they owe.
The Code is issued by the three recognised professional bodies that license insolvency practitioners: the Insolvency Practitioners Association (IPA), the Institute of Chartered Accountants in England and Wales (ICAEW) and the Institute of Chartered Accountants of Scotland (ICAS). Insolvency practitioners must apply it to all aspects of their insolvency work.
Fundamental Ethical Principles
The Code sets out five fundamental ethical principles. These are professional standards, enforced by the insolvency practitioner’s regulator rather than by the court. They are as follows:
- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional Behaviour
Integrity
The insolvency practitioner should be straightforward and honest in their professional and business relationships. For example, they will need, to be honest about the relative merits of different courses of action for a particular insolvent company once they have reviewed the relevant facts.
Objectivity
Insolvency practitioners must be objective and shouldn’t allow themselves to be biased or unduly influenced by others in their professional decisions. They must identify any conflict of interest and deal with it, either by applying safeguards that remove the threat or reduce it to an acceptable level or, where that is not possible, by declining or ending the work. A conflict must never be allowed to compromise their objectivity.
Professional competence and due care
The insolvency practitioner must ensure that they have sufficient professional knowledge and skill to deal with the cases that they take on. They are under a duty to provide their clients with a competent professional service.
Additionally, they must ensure that they take due care when providing services to beneficiaries and ensure that they are diligent in their advice and actions in accordance with applicable professional standards.
Confidentiality
Insolvency practitioners must ensure that they keep the confidential information of the beneficiary confidential and should not disclose this information to a third party without proper authority from the beneficiary. There are some exceptions to this duty of confidentiality, such as where the insolvency practitioner is legally obliged to disclose the confidential information or where they are under a professional obligation to do so.
The insolvency practitioner must ensure that it does not use any confidential information gained as part of a fiduciary relationship for their own personal benefit or for the benefit of any third party.
Professional behaviour
Insolvency practitioners must behave professionally: this includes compliance with relevant laws and regulations and avoiding any actions that may be seen to discredit the profession. They must also treat others fairly, with respect and dignity, in their professional work.
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