Paul Muscutt, London restructuring partner at law firm Squire Patton Boggs, talks to Andrew Tate, former R3 President, Chair of R3’s Policy Group and Partner at accountancy firm Kreston Reeves LLP, about conflicts of interest in the restructuring and insolvency profession*.
- To what extent does your (or your organisation’s) involvement with a company prevent you from taking a formal appointment in relation to that company?
My firm takes a view that an engagement with a client, even where the matter is relatively minor with a small fee, can lead to a potential self-review threat and a perception by others that there could be a conflict. We therefore tend to suggest other practitioners in the circumstances and to ensure that the client is introduced to an appropriate practitioner and is provided with support through the process.
- Does this include reviews / IBR’s?
At Kreston Reeves, we try to help our clients where they encounter difficulties and, where this leads to difficulties with their banking relationship, we will try to assist with information flow and advice but, always recognising that the bank may wish for an independent review to take place.
Where we are requested to undertake a review on behalf of the lender, we would treat it in the same way as mentioned above. We would take the view that a lender requiring an independent review would wish to avoid a situation where a potential conflict could interfere with the review process.
I think that, in the majority of situations, most IPs could undertake a genuinely independent review of a business and, if it was appropriate, undertake the insolvency of it for the benefit of all creditors. I think that the perception of all IPs recommending insolvency just to generate fees is a gross exaggeration. We are accountable to creditors and the majority of creditors in the commercial world want a business to survive, turn around and preserve value.
However, the public perception of this practice is something the profession has not been able to address satisfactorily and, therefore, I think that the practice of having different firms undertake a review and a subsequent insolvency has to be the right policy at this time.
- What measures should firms have in place to reduce the risks of serious conflicts of interests arising?
Clearly, having an integrated and comprehensive conflict check system in place is a given. This can be a complex requirement given the range of relationships which could potentially cause a threat to independence. At smaller firms, it is still feasible for to supplement searches of client databases with email circulars providing details of the potential client opportunity. Partners should be diligent in reviewing these emails and reporting any potential issues.
In larger international firms this becomes substantially more difficult to manage and complex conflict checking systems are in place to ensure that potential conflicts are identified and then risk assessed.
Firms also need to ensure that adequate training is given to staff across the board on the ethical framework and the dangers of potential conflicts. This enables all of the staff in the business to raise alarm bells if they see or hear any matters which lead them to be concerned.
- Do “Chinese Walls” really work?
The ethical code for insolvency practitioners highlights “procedures to prevent access to information by the use of information barriers” as a potential safeguard to deal with ethical threats. It is possible for Chinese walls to be put in place physically and through the use of IT security measures (including reporting of any breaches or attempted breaches).
My own view is that Chinese walls can work but should only be used in circumstances where there is no other choice or a significant benefit to both clients from inherent specialist expertise within the firm. There must always be a danger that the perception of the professional advice given could be belittled simply because advice is being given by the same firm to two or more parties to a transaction or dispute.
- Do you see issues in representing more than one stakeholder in any restructuring?
Restructuring work which preserves investor value, whilst hugely beneficial for businesses and the UK economy remains a controversial area of practice where tensions quickly mount as negotiations progress.
Representation of more than one stakeholder requires careful management and transparent open dialogue with each party to anticipate how tension between the parties is dealt with. There can be advantages to both parties being represented by a firm which is trusted as issues whether is common ground can quickly be identified and eliminated in a secure environment where tension between professional advisers is minimised. This can allow an efficient exposure of the key decisions and early resolution.
However, if the resolution methods employed to deal with conflict between the parties is not openly and transparently discussed and agreed before the procedure commences, the professional firm involved can quickly get into an irretrievable mess.
- Do you think some financial institutions are increasing the costs of restructurings by implementing unnecessary measures designed to reduce perceived conflict?
Personally, I would lay the increased measures designed to reduce perceived conflict at the door of politicians rather than financial institutions. We increasingly live in a world which is dominated by social media and the political world has reacted to this by adapting the select committee to undertake investigations and, unfortunately rash comments resulting from select committee appearances by professionals and financial institutions have driven those concerned in restructuring to protect themselves from potential reputational damage.
It is right that scandals should be exposed but I don’t believe that the select committee process which has evolved in recent years is benefiting the UK economy as it distorts decision-making and the efficiency of our market system when distress occurs.
- How should the insolvency profession improve the external perception of conflicts of interests in larger restructurings?
Our habitual response to criticism in terms of self-interest or conflict is to promote more transparency. Unfortunately, I think that our ability to improve the external perception of conflicts is hampered by the ongoing suspicion by politicians of professionals. The professions generally are an easy target for blame and I personally believe that the only way to combat this is to engage with politicians as widely as possible to help them to understand how our work benefits our clients and the economy. There are thousands of businesses saved through the work of insolvency and restructuring professionals and we should be shouting about this work to MPs in our local markets and at Westminster. We should also be educating the media on these issues but recognising that good news does not sell.
- What do you see as the main risks to creditors of a conflict of interest arising during an insolvency process?
Clearly, a conflict of interest arising is a serious matter if it is not managed and dealt with professionally. The failure to pursue a claim because the target party is connected to the officeholder in some way is clearly detrimental to creditors and the failure to negotiate the highest price for assets being sold to a party where a conflict exists, is also detrimental.
There are some well-documented legal and disciplinary cases where conflicts have arisen and we have to accept that any measures put in place will not completely eliminate errors or errors of judgment by professionals. I personally believe that the rules around conflict of interest should be strengthened so that they provide clearer guidance on the distinction between threats being reduced to an acceptable level and where a threat cannot be managed through safeguards.