Disclosure requests from insolvency practitioners – not always a rock and a hard place

Disclosure requests from insolvency practitioners – not always a rock and a hard place

Just how much information should an accountant disclose in the event that a company goes insolvent? Lucy Phoenix and Ed Starling, Wedlake Bell LLP clarify some important points

Disclosure requests from insolvency practitioners – not always a rock and a hard place

Requests made by liquidators, administrators and trustees in bankruptcy to professional accountants for information relating to an insolvent company or individual are commonplace.  Yet despite existing ICAEW and ACCA guidance, there remains a lack of understanding around the extent of the accountants’ obligations in this context.

What is the position?

Upon a request by a liquidator, administrator or administrative receiver, professional accountants must hand over any property, books and records in their control or possession to which the insolvent company itself is entitled. A lien cannot be exercised.

Office holders also have a statutory right to call for information which they ‘reasonably require’ concerning the company and its “promotion, formation, business, dealings, affairs or property” from prescribed persons. That includes those who are or have been officers of the company. Case law has indicated that auditors are “most probably” said to be officers for this purpose, although it is not without doubt.

The Insolvency Act

In any event, the Insolvency Act separately gives office holders (including official receivers and trustees in bankruptcy) the power to seek a court order summoning persons within a much broader category to appear before it for the purpose of providing information. In respect of companies, this can be any person known or suspected to hold any property of the company, or capable of giving information concerning its promotion, formation, business, dealings, affairs or property. Similarly, it covers any person believed to hold any property comprised in the bankrupt’s estate or any relevant information relating to the bankrupt’s dealings, affairs or property.

The powers of office holders to compel the disclosure of information relating to the company or bankrupt are therefore broad. While (in relation to a company) an explained ‘reasonable requirement’ to documents not forming part of the company’s own books and records must be shown, there is no requirement to show an absolute need or to explain what is to be done with those documents. An office holder does not need to know the identity of the documents he wishes to see if he can adequately describe them, e.g. by reference to subject matter or categories. On balance, it is safest to work from the backstop of providing the documentation and assume that this duty is not subject to confidentiality.

The importance of proportionality

Proportionality is, however, a factor.  Accountants can sensibly seek to narrow the scope of the request for documentation to make it more manageable. This is an effective approach in response to “fishing expeditions” by office holders where they appear to have no real concept of what they are looking for.

In relation to companies, requests from office holders often come with an opposing demand by the former directors not to disclose documents. Whilst such demands are undoubtedly a commercial consideration, an accountant’s duty is to the company (and its creditors upon insolvency) and there will need to be a detachment of the company (now acting by the office holder) from its controlling directors and shareholders. There may well be legitimate concerns around the disclosure of commercially sensitive, irrelevant and/or certain confidential information, and this can often be managed through an early discussion and drafting appropriate disclosure parameters.

In bankruptcy, any duty of confidentiality owed by an accountant in relation to the property or affairs of the bankrupt transfers to the trustee. Professional accountants should be particularly mindful of their obligations under the General Data Protection Regulation with regard to the disclosure of the bankrupt’s and/or third parties’ personal data, particularly if there are joint retainers (e.g. husband/wife). The contents of files should always be reviewed prior to release.

Cooperation with an office holder is generally seen as a public duty and accountants should not expect to recover their costs of complying. However, there is nothing preventing a request for payment of costs (the court does have discretion on the issue), particularly if they are significant or could impact the accountant’s practice.

The Upshot

It is unlikely that a professional accountant will have justifiable grounds to refuse a reasonable request for information and documentation held in relation to an insolvent company or individual. However, there may need to be a managed process and negotiation of the documents to be disclosed.  If there is doubt about the disclosure or if the former directors, the bankrupt or third parties are discontent with the requests, then it is prudent to insist on having the protection of a court order with which it is essential to comply –  this can be achieved without the need for contested (expensive) court hearings.

It is a balance between complying with recognised duties whilst at the same time minimising the inevitable wasted cost of the process (and avoiding criticism from stakeholders). But, note, if the court considers that the accountant is being deliberately uncooperative or is protecting the rights of former stakeholders or the bankrupt, there is an increased chance of a costs order being made against the accountant. This is a risk that can, and should be, easily avoided.

Resources & Whitepapers

How to optimise your compliance lifecycle

How to optimise your compliance lifecycle

7m
The new rules of accounting

The new rules of accounting

7m
5 ways internal productivity can boost your profitability

5 ways internal productivity can boost your profitability

8m
Crushing the Four Barriers to Growth

Crushing the Four Barriers to Growth

8m