Is There A Case For A More Balanced Approach To Insolvency And Directors/Managers Liability?

Author:Mr Nigel Feetham

It has been said that insolvency practitioners (IPs) tend to be misunderstood and even less appreciated. Partly discharging a public function as an officer of the Court, and partly a private function in the interest of private stakeholders (primarily creditors), admittedly the role of an IP is not easy one.

There is always a balancing act for any IP when seeking to maximise recoveries for the benefit of an insolvent estate and its creditors. Cost is certainly an important one. The high cost of liquidation has been the subject of much media attention in many countries around the world. A criticism often levelled is that insolvencies tend to become 'overlawyered'. Litigation (especially unsuccessful litigation) will add to the cost of any liquidation and unrecoverable cost reduces the amounts available for creditors.

There is no doubt that insolvency litigation is often complex and hard-fought. But an IP is usually able to spend large amounts on litigation, beyond the financial means of the ordinary defendant. This puts the IP in a special position of responsibility. An IP could, however, legitimately argue that they must apply the law as they see it, or rather, as their legal advisers interpret it.   

There is perhaps a dint of irony that most IPs are accountants working in accountancy firms. The reason why I say this is because when some large enterprises are placed into an insolvency process around the world, we sometimes see media reports where questions are asked about the work of the auditors and also see cases of threatened or actual litigation by IP members of one large accountancy firm against rival firms of auditors. Unsurprisingly, the usual public statement of an audit firm threatened with litigation is that they stand by their audit work and will vigorously defend any legal proceedings.

Of course, an IP of an audit practice can view a set of historical circumstances concerning directors and managers of an insolvent company with a different lens to how they might view them if they themselves had been discharging the role of auditor. There is also a risk that IPs might set higher standards for directors and managers than what regulators themselves have expected of the entities they regulate.

The situation could be complicated by the fact that the interpretation of factual questions and matters of evidence can be highly subjective. This is just as true in respect of the opinions that we all hold in most fields. In our daily lives we...

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