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2019-11-doc5 Insolvency and ethics

In June 2019, INSOL International released under the banner “Towards 2021” its Ethical Principles for Insolvency Professionals. These principles are the result of work carried out by a working group of a forward-looking task force chaired and they are intended to serve as general guidance on a set of common issues affecting insolvency professionals. Members of INSOL International are actively involved in nearly all initiatives of other organisations in the industry and have issued several technical studies on all sorts of topics. With the INSOL Ethical Principles, the federation, I think for the first time, touches on the core of the profession: a laudable initative.

Six INSOL Ethical Principles have been put forward, covering (i) integrity, (ii) objectivity, independence and impartiality, (iii) professional/technical competence, (iv) professional behaviour, (v) remuneration and (vi) practice management (involving six specified policies). Each Principle is accompanied by a commentary explaining its intention and providing certain examples of the principles, as well as the meaning of several terms used, for which a glossary is added. The commentary and glossary are helpful sources putting more flesh on the bones of the principles. The stated purpose of the principles is ‘to suggest best practices for members, inform and educate INSOL Int’l members about such best practices, assist them in implementing best practices by providing professional and ethical guidance and, finally, provide an instructive reference for stakeholders and disciplinary bodies.’ An INSOL Int’l member is understood to be an individual member that, according to applicable law, practice and regulation, is authorised to accept an engagement or appointment in respect of an estate. So, the principles will have over 10,000 addressees!

Given its ‘global’ aim, the working group is conscious about the nature of the principles, providing guidance based on international standards of conduct. Here I am struggling with the methodology followed to ascertain these international standards, at least as far as this is very briefly explained in the Ethical Principles. Has there been a survey sent along to (a selection of) all of the members? Have there been regional groupings of members – and others involved, such as judges or regulators – discussing certain elements in a regulatory regime, such as integrity, (lack of) independence, conflict of interests or, when a member is appointed, purchasing goods with a discount from a retailer in financial distress, or the threat of malafide financiers or power-loving politicians? And/or has a study been done in the rather over-populated world of existing principles and guidelines in this area, with the aim of looking for coherence, or for that matter contrasts, between the principles and the recommendations of other standard-setting organisations?

To mention a non-exhaustive list of existing sets of alternative principles, there are, for example: a set of 10 recommendations by the United Nations Commission on International Trade Law’s (UNCITRAL) Legislative Guide on Insolvency Law (2004); several principles from the World Bank’s Principles for Effective Insolvency and Creditor/Debtor Regimes (last revised in 2015); the European Bank for Reconstruction and Development (EBRD) Insovency Office Holders Principles (2007); the INSOL Europe Draft Statement of Principles and Best Practices for Insolvency Office Holders (2014); and the recent 2018 IAIR Principles, developed by the International Association of Insolvency Regulators. Given the high standards INSOL Int’l sets, it is presumed that such sources will have been consulted in the making of the Ethical Principles, but it’s unfortunate that it was not elaborated on either in the Principles, their commentary, or in their introduction.

The goal in establishing the principles is to enhance and protect the integrity of the insolvency profession and create a framework that is fair, effective, practical and readily understood. Some principles may impose a higher standard than existing jurisdictional legal requirements in certain countries, the related document says. It is for the individual to find out what ‘higher’ means, since it lacks an explanation. Where the law is silent, or ambiguous, the principles provide guidelines to clarify best practices. Evidently, the principles contain ‘soft law’ and they make that clear by saying that to the extent the principles conflict with local rules or laws, they are not intended to supersede such rules or laws. The clue is hidden under the heading ‘principles-based’. The INSOL Ethical Principles are in line with the trend of not presenting an overly detailed legal rule-based text, rather a principle-based text for guidance. They demonstrate an awareness that a rule-based set of best practices cannot solve all governance problems. At the same time, this design may relate well with the great diversity of members and practices within INSOL’s global network.

For a principle-based code to be a vivid document one may expect a review within three or five years. Practitioners (and regulators) are not waiting for more rules and extensive legal documentation. They need clear and accessible guidance. The motto is not to introduce more rules trimmed down to checklists. Instead of more rules, practice wants better rules that are or can be complied with properly. This all sounds ‘soft’ but it is also ‘hard’: ethics is human work and therefore a part of the organisational culture in which someone works. It is necessary to be able to enter into a dialogue about these principles and to work from values ​​and norms in practice that are reflected in these principles. Soft law codes can contribute to a behavioural compass and can help IPs and those involved in their conduct, such as regulators and judges, to determine their course. The working group stresses that the INSOL Ethical Principles themselves are there to assist in guiding members’ decisions and actions.

The group also has a message for the insolvency industry’s bystanders: in addition to assisting members, this guidance may also assist stakeholders in setting reasonable expectations by better understanding certain limitations affecting insolvency advisers and/or office holders in carrying out their duties. Naturally, the working group recognises that the regulation of the insolvency profession varies in different jurisdictions, and the conduct of insolvency practitioners may be subject to review by disciplinary tribunals and courts in accordance with local requirements. The intention, however, is that the principles may be used by regulators, tribunals and courts to assist with the identification and enforcement of acceptable insolvency practices and professional standards.

It seems to me an omission not to specifically address national legislators. In the Ethical Principles ‘regulators’ are defined as professional bodies. In non-common law countries, that’s only half-way, especially in code-adoring jurisdictions where ‘law’ is the basis of all ‘good’ things. For this reason, in 2017, based on a comparison of 13 European jurisdictions, the European Law Institute (ELI) recommended that EU Member States should lay down expressively in their laws that any professional performing restructuring and insolvency tasks must be impartial, independent and competent. Anticipating arguments that would be used for instance in Germany and the Netherlands, the ELI added that being recognised as a lawyer or an accountant does not in itself sufficiently guarantee the standards of performance necessary for the proper exercise of restructuring and insolvency tasks. It recommended that European and national legislators should set professional and ethical standards for insolvency practitioners and ensure that the relevant professional bodies are consulted and involved in the creation of such standards.

The ELI also said EU member states should take into account best practices for appropriately regulated professional parties as set out in principles and guidelines on regulation of the restructuring and insolvency profession developed or adopted by European and international non-governmental organisations active in the area of restructuring and insolvency. According to the ELI, those standards should at least contain rules on licensing and registration, supervision and discipline, qualification and training, an appointment system, work standards during administration, legal powers and duties, remuneration, reporting and communication and ethical working standards – including rules on conflict of interests and a complaint procedure.

The INSOL Ethical Principles do not cover all these subjects. Guidance will be needed too when dealing with the role of an IP acting on legislative duties, e.g. relating to privacy, anti-fraud and anti money laundering; and on his role regarding innovative technologies (crypto and EU Payments Services Directive payments); and when a ’debtor-in-possession’ (DIP) acts in an IP rule and the vague relation with its rights and duties under national corporate law.

The last two decades, professional and ethical principles and recommendations have been greatly developed. They now make an important contribution to the highly desirable professionalisation of IPs, judges, regulators and, for that matter, legislators. This was emphasised in the recently adopted EU Directive on restructuring and insolvency, which recommended the adoption of codes of conduct by practitioners. INSOL International’s Principles may be a relevant source. However, the evolutionary process is never complete. Professional and ethical governance is a living structure: it is never finished, constantly requires maintenance and is inherently in need of development. It must be clear that the various principles and codes influence each other and this influence must be made visible. Legislation cannot do everything, but unfortunately, sets of soft law principles and codes are not a panacea for unpleasant events and disgracing incidents. New rules do not automatically lead to better behaviour.

It is not uncommon for soft law drafters, when the job is done, to pick up their day-to-day routine again. Their work is finished and the file closes: the drawer clicks, the lap-top is switched-off. That is unwise. Soft law constantly needs improvement. Continuing improvement also serves as a workable tool demonstrating that the profession takes its professional responsibility seriously and learns from inevitable mistakes. In this way, the INSOL Ethical Principles can continue to make a dynamic and positive contribution, reflecting on the intrinsic values ​​and behaviour of IPs and contributing to enhanced confidence and respect in the profession, not only from courts and from creditors and debtors, but also from the general public. As a provisional conclusion, the INSOL Ethical Principles are a good start, however, they can gain a better reputation by explaining the methodology followed. INSOL International, as the originator, should embark on a route of robust communication to inform and educate its members regarding the expectations that others may have. It could also put as a priority on its agenda, rounds of national and regional discussions on the use and practice, benefits, limitations, and disadvantages of its principles. It should also report at regional and global conferences its actions considered and steps taken; develop a system for seeing where any gaps are and how to provide guidance for them; and discuss and introduce a system of monitoring and enforcement for the creation of an ethical culture and the shifts it introduces to the profession. Ethics should not become a checklist. To guide the conduct of practitioners, the Principles require a process for their continuous improvement and refinement. This should not come as a surprise, as you know, ethics is a verb.

This is a slightly adapted version of a regular column I am writing for Global Restructuring Review (GRR) on a topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication, but below is a link to the full journal. My colomn, written  with the input of Gert-Jan Boon, PhD-researcher from Leiden University, appeared in September 2019 on GRR’s website at globalrestructuringreview.com