Applied Knowledge Course

Transcription

1 Applied Knowledge Course Updated July 2013

2 Table of Contents Introduction Introduction Course Objectives The Applied Knowledge Course and the CQP Competency Profile How to Approach the Course Materials Insolvency and Business Practice Insolvency and Business Practices Conflicts of Interest Rules Directives and Rules CAIRP Standards of Professional Practice CAIRP Rules of Professional Conduct Ethical Conflicts and Objectivity Ethical and Moral Issues Breach of Code of Ethics / Professional Conduct Procedures Handling of Trust Funds Public Trust and Policy Advertising Relations with Other Professionals Communications with the Legal Community Consumer Associations Professional Practice Location Strategy CQP Applied Knowledge Course July

3 2.16. Satellite Offices Marketing Strategies Communications Banking Arrangements Trust Accounts Financing Practices Planning and Control of Practice Engagement Acceptance Policy Planning the Engagement Personnel Practices Quality Review Information Technology Office Technology Electronic Research E-Filing System General Business Knowledge Risk Management Risk Management Introduction Client / Engagement Acceptance Professionalism Supervision File Administration Practice Administration CQP Applied Knowledge Course July

4 Critical Thinking for Insolvency and Restructuring Professionals Critical Thinking for Insolvency and Restructuring Professionals Introduction Critical Thinking Model: Steps for Better Thinking Foundation: Knowing Step 1: Identifying the Problem, Relevant Information, and Uncertainties Step 2: Exploring Interpretations and Connections Step 3: Prioritizing Alternatives and Communicating Conclusions Step 4: Envisioning and Re-Visioning the Problem General Decision-Making Process Patterns of Thinking and Self-Assessment Suggested Use of Chapter Materials Exhibit 6: Critical Thinking Rubric End of Chapter Problems Case Analysis Case Analysis Introduction What is a Case Analysis? Key Factors for a Successful Case Analysis How to Write a Convincing Case Suggested Approach Analysis of a Case in a Consumer Debtor Situation Analysis of a Case Combining a Company and a Consumer Debtor Situation References CQP Applied Knowledge Course July

5 Appendices Appendices CQP Applied Knowledge Course July

6 Introduction Introduction 1. Introduction Course Objectives The Applied Knowledge Course and the CQP Competency Profile The Competency Profile and the Body of Knowledge How to Approach the Course Materials CQP Applied Knowledge Course May

7 Introduction 1. Introduction Welcome to the CIRP Qualification Program (CQP) Applied Knowledge course the new advanced course of the CQP. As the third in the three-course CIRP Qualification Program, it builds on the information in the Introductory and the Core Knowledge courses. As the name implies, this course focuses on the practical application of the technical topics that candidates must thoroughly understand to pass the CIRP National Insolvency Examination (CNIE) and to be a successful practitioner. At the end of the Applied Knowledge course candidates should be ready (subject to confirmation by their sponsor) to challenge the CQP National Insolvency Examination (CNIE), prior to applying for membership of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). As with the previous course offerings (under the NIQP), our overall goal with the CQP is to train professionals who have high ethical standards and the necessary knowledge and skills to maintain the integrity and proper functioning of Canada s insolvency system in providing high quality professional services. In this regard we have created courses to aid in developing well rounded insolvency and restructuring professionals who are able to: look at situations objectively, devise practical solutions that enhance value for stakeholders; and implement optimal outcomes. Rules of the Road 1. While we are committed to gender equality, to keep the text grammatically simple we have sacrificed the goal of using gender neutral language in this course material. So, for example, references to insolvency professionals that are in the singular are generally third person masculine (in other words, he rather than he, she or it ). 2. The material in the CQP program can be time sensitive. Notwithstanding all of the efforts of the professionals involved in the preparation and review of these notes, some errors may be present. The candidates should review the material carefully with their sponsors with a critical thinking approach and bring to the attention of the sponsors and the Course Material Review Committee any material that is not clear. 3. The OSB directives are described in the text in generic terms. It is up to candidates to research and become familiar with the latest versions of these directives. For example, the directive on Estate Funds and Banking is referred to in the text as directive 5R and not as directive 5R4. 4. A deliberate decision has been made in the preparation of the course materials to only refer to sections of the BIA and the CCAA and not to subsections. The intent is to encourage candidates to read all parts of the acts, and not just specific sections so that the relevant provisions can be looked at in context. CQP Applied Knowledge Course May

8 Introduction 1.1. Course Objectives Part 1 of the Applied Knowledge Course Insolvency Business Practices 1. To understand ethical requirements demanded of an insolvency professional and the standards against which they will be measured by CAIRP, by the Office of the Superintendent of Bankruptcy, by the courts, by other professional bodies, by creditors and other stakeholders including the public, in general. 2. To recognize and appreciate the components required to manage an insolvency practice, including compliance with legal and professional obligations. 3. To gain an understanding of general business principles and issues that are important in analysing operations, both pre- engagement and throughout the engagement. Business Risk Management 1. To identify and assess the risks associated with the operation of a professional practice. 2. To apply the appropriate procedures to control the risks that have been identified. Critical Thinking Skills 1. To learn and practice a process designed to help in the development of critical thinking skills. 2. To apply the process to problems encountered in insolvency and restructuring engagements. Case Analysis 1. To learn how to apply a structured approach for working through an insolvency or restructuring engagement. Part 2 of the Applied Knowledge Course This part of the course focuses on candidates practicing synthesis and integration of the knowledge and skills they have acquired in the Introductory and Core Knowledge Courses by working through case-based teaching simulations of insolvency proceedings and situations in order: 1. To exercise sound judgement in drawing conclusions and developing workable plans based on the information presented in a case-based scenario and the knowledge acquired and training received throughout the program. 2. To learn how to apply the knowledge acquired in the previous courses to a practical situation. CQP Applied Knowledge Course May

9 Introduction The cases include suggested solutions on a step by step basis. To facilitate working through the case questions independently, the answers to each of the questions posed have been blacked out. After you have prepared your answer, compare to the suggested solutions and comments. To do this, simply highlight the text and replace the black highlighting with no colour fill. The text will then appear for you to review. The next step will then be to proceed to the next part of the case. These cases are teaching tools not testable assignments. However, you will benefit much more from working through the cases rather than skipping to the suggested solution in developing an approach to answering competency based questions in the CNIE and to issues you will face in your future professional practice. Part 3 of the Applied Knowledge Course 1. To demonstrate an ability to manage information and assess its significance. 2. To apply sound judgement in drawing conclusions and developing workable plans based on the information presented in a case-based scenario and the knowledge acquired and training received throughout the program. 3. To communicate effectively, in writing and verbally (as required). The assignments in Part 3 are to be marked by your sponsor who will be provided with suggested solutions and a marking key. These assignments are an essential tool to allow you and your sponsor to assess your readiness to challenge the CNIE The Applied Knowledge Course and the CQP Competency Profile All of the courses in the CQP have been designed with the goal of helping you develop the competencies outlined in the CQP Competency Profile. The Competency Profile outlines the specific professional competencies and proficiency levels you will need to demonstrate when you take the CIRP National Insolvency Exam (CNIE) and that you will need along with personal and professional attributes related to ethical behaviour in your career as an insolvency professional. We suggest you refamiliarize yourself with Competency Profile because it focuses on skills and proficiencies you will need throughout your career as an insolvency professional. As in so many professional fields, insolvency and restructuring professionals are dynamic because legislation and case law are always evolving and because every situation has its own unique facts and problems. As such, practitioners must constantly draw on all their knowledge and skills in other words, the different competencies that are highlighted in the Competency Profile to tailor a solution that fits the unique circumstances. The Competency Profile outlines 10 different areas, and specific competencies within each area, that insolvency professionals must demonstrate proficiency in. As well, levels of proficiency that candidates should possess for each competency are set out for each of these 10 areas. CQP Applied Knowledge Course May

10 Introduction The CQP Core Knowledge course you have recently completed focused on Level 2 proficiency, which is where the candidate has a functional as well as a strong theoretical appreciation of the concepts or subject matter and a technical ability to perform a task adequately, but not without supervision or support. In addition, with Level 2 proficiency, candidates recognize when involvement of personnel with specialized expertise is required. The CQP Applied Knowledge course aims to provide a Level 1 ability level proficiency where the candidate can clearly identify the problem and analyze it thoroughly, can make useful recommendations and can define a path towards implementation. It is important to remember, however, that the competencies and attributes necessary to be a successful insolvency professional cannot be learned through coursework and study alone. We expect that you will develop and hone many of the necessary skills and competencies through work-related activities The Competency Profile and the Body of Knowledge A competency-based program is based on the premise that knowledge alone is not sufficient to define a successful professional. That said, knowledge, though not sufficient, is necessary and so we believe it is useful for professionals to have a reference base to turn to for information and research. With this in mind, we have developed a Body of Knowledge, which is basically a reference base you should become familiar with and should use to supplement your learning as you make your way through the CQP courses, as you prepare for the CNIE, and as you carry on your professional practice. The Body of Knowledge we have developed is, at a minimum, a reference base for all testable subjects in the CQP. Again, we remind you that since the practice is dynamic, so too is the Body of Knowledge. Any time you refer to a source listed in the Body of Knowledge you should ensure that you have the most up-to-date version of the reference and keep in mind that it is your responsibility to keep abreast of proposed or actual changes that may come into play as a particular matter unfolds. As well, as you develop your own practice, we encourage you to build your own library of resources, as well as your personal network of professionals, such as lawyers and business valuators, to whom you may turn for advice and opinions How to Approach the Course Materials And finally, although every person approaches learning in their own way, given the volume of material presented in the Applied Knowledge course and the supplementary information candidates are responsible for in the Body of Knowledge, we thought it would be useful to offer suggestions on how to approach the course materials. To a large extent, the study approach we recommend is non-linear. In other words, you will not assimilate all that you need to know to be a qualified insolvency professional merely by going straight through the written course materials. Instead, as you read the course materials you will CQP Applied Knowledge Course May

11 Introduction also have to look at other sources, including the relevant statutes, case law and other references included in the Body of Knowledge. Given that we expect you to synthesize information from a number of different sources, it is impossible to outline an exact order of information synthesis that will be right for you. There are certain steps that you should take in order to gain a full understanding of the information covered in the Applied Knowledge course and to develop the ability to apply this information in your professional career We offer the following outline of steps that you should complete in whatever order works for you as you make your way through this course: Review the course s learning objectives. Review the Competency Profile to determine the ultimate goal of learning. Read the course materials on a given topic (a module, for example), including the relevant appendices. Read the relevant statute(s). Refer to the Body of Knowledge for materials related to the module, reading whatever reference material you need to gain an understanding of a given topic or concept. Read relevant cases to understand their holding, as well as to gain an appreciation for the possible limits of their applicability. Review your learning against the Competency Profile and learning objectives. Go back through whatever material you need to in order to feel confident that you have gained the level of knowledge and competency required. When you feel you have mastered the material covered in Part 1, download the assignment and work through it to confirm your mastery or to learn about areas you need to review or study more. Similarly, once you have worked your way through all of the case studies in Part 2, download the comprehensive case studies and complete. As well, throughout your course of study you should also consult with other insolvency professionals, in particular, your sponsor, as they are tremendous sources of knowledge, expertise, inspiration, and guidance. Their experience will be an invaluable aid to you in this course which focuses on the conduct of an insolvency practice. CQP Applied Knowledge Course May

12 Insolvency and Business Practices Insolvency and Business Practice 2. Insolvency and Business Practices Conflicts of Interest Rules Introduction Where a Trustee is Not Qualified to Act Trustee Acting for a Secured Creditor Directives and Rules Introduction Code of Ethics Superintendent s Programs Professional Conduct and Publicity of Decisions Directives and Offences Conclusion CAIRP Standards of Professional Practice Minimum Standards Engagements CAIRP Rules of Professional Conduct Mandatory Compliance Basic Principles Ethical Conflicts and Objectivity Introduction Specific Prohibitions CQP Applied Knowledge Course July

13 Insolvency and Business Practices Practical Examples Practitioner s Safety Net Plan of Action Dual Appointments Legal Opinions Additional Concerns Remaining Independent Credibility Ethical and Moral Issues Introduction Specific Prohibitions Practical Examples Actions by Insolvency Professional Breach of Code of Ethics / Professional Conduct Procedures Introduction BIA Suspension of Licence OSB Professional Conduct Process Offences under the BIA CAIRP Disciplinary Process Handling of Trust Funds Introduction Trust Accounts Banking and Accounting Records CQP Applied Knowledge Course July

14 Insolvency and Business Practices Monitoring Program Internal Controls Public Trust and Policy Dealing with the Public Trading in Claims Advertising Regulations Guidelines Restrictions Fees Complaints Relations with Other Professionals Communications Between Practitioners Consultation Ethics Documentation Communications with the Legal Community Overview Need for Independent Counsel Relationship with Counsel Communications with Opposing Counsel Communications to the Court Consumer Associations Definition CQP Applied Knowledge Course July

15 Insolvency and Business Practices Role of Consumer Associations Government Associations or Statutes Credit Counselling Credit Bureaus Self-Help Other Professional Practice Preparing Business Plans Components of the Business Plan Format Location Strategy Location Strategy Prerequisites and Qualifications Approvals Feasibility Study and Business Plan Support Systems Guaranty Bonds or Guaranty Suretyships Systems Banking Arrangements Internal Control Satellite Offices Planning Prerequisites and Qualifications Non-Resident Office CQP Applied Knowledge Course July

16 Insolvency and Business Practices Advertising by Trustees Approvals Feasibility Study and Business Plan Support Systems Delegation of Tasks Marketing Strategies Marketing Plan Presentation of Image Practical Considerations Other Promotion Infringement Communications Internal Communication External Communication Banking Arrangements Requirements Trust Accounts Regulations Financing Practices Cash Flow Work in Progress and Accounts Receivable Controls Billing Practices Planning and Control of Practice Appropriate Accounting Internal Controls CQP Applied Knowledge Course July

17 Insolvency and Business Practices File Documentation and Retention Note Taking Policies and Procedures Proceeds of Crime (Money Laundering) and Terrorist Financing Act Personal Information Protection and Electronic Documents Act (PIPEDA) Sarbanes-Oxley Act of 2002 (SOX) SEC Independence Rules Engagement Acceptance Policy Considerations Conflict of Interest Damage to Existing Client Relationship Engagement Letters Level of Risk Risk Assessment Model Orders Fee Arrangements Costs and Payment of Fees Environmental Liabilities Employee and Pension Related Liabilities Staffing Requirements Industry Expertise Unfavourable Media Exposure Documentation Planning the Engagement CQP Applied Knowledge Course July

18 Insolvency and Business Practices Administration and Coordination Delegation of Duties Planning Memorandum Minimum Documentation Requirements Documentation Review Duty of Care OSB Directive Personnel Practices Staff Reviews and Training Professional Development Mandatory Professional Development Quality Review Superintendent s Monitoring In House Quality Reviews Review of General Risk Management Procedures Conduct of Engagement Reviews Conduct of Fidelity Audit Information Technology Insolvency Programs In-House Development Office Technology Data Integrity Internet Video Conferencing CQP Applied Knowledge Course July

19 Insolvency and Business Practices Remote Access Electronic Research Services Available E-Filing System Methods of Filing Documents Time of Transmission Electronic Filing What You Will Need E-Filing Registration User Agreement Benefits General Business Knowledge General Business Knowledge Business Aspects Quality of Management Vulnerability to Changes Capital Replacement Subsidiaries Financial Information Strategy for Survival Alternative Solutions Dealing with Debt and Equity Holders The Security Review Estimating Future Values CQP Applied Knowledge Course July

20 Insolvency and Business Practices Assessing Realizable Value Specific Considerations CQP Applied Knowledge Course July

21 Insolvency and Business Practices 2. Insolvency and Business Practices 2.1. Conflicts of Interest Rules Introduction BIA Rule 44 CAIRP Rule of Professional Conduct 4 An insolvency professional must be aware of any potential conflict of interest when accepting an engagement. A conflict of interest can be defined as the circumstance of a person who finds that one of his activities, interests, etc. may have an interest contrary to another of his interests or activities. Conflicts can be grouped into two categories: personal conflicts and conflicts arising from wearing two or more hats or exercising two or more insolvency roles. Trustees are to avoid any influence, interest, or relationship that impairs, or appears in the opinion of an informed person to impair, their professional judgment Where a Trustee is Not Qualified to Act BIA s The BIA states that no trustee shall act as trustee in relation to the estate of a debtor in the following situations: where the trustee is, or at any time during the two preceding years was; a director or officer of the debtor, an employer or employee of the debtor or of a director or officer of the debtor, related to the debtor or any director or officer of the debtor, or, the auditor, accountant or legal counsel, or a partner or employee of the auditor, accountant or legal counsel, of the debtor; or where the trustee is: the trustee under a trust indenture issued by the debtor or any person related to the debtor; or the holder of a power of attorney under an act constituting a hypothec within the meaning of the Civil Code of Québec that is granted by the debtor or any person related to the debtor, or related to the trustee under a trust indenture or the holder of a power of attorney under an act constituting a hypothec within the meaning of the Civil Code of Québec that is granted by the debtor or any person related to the debtor. CQP Applied Knowledge Course July

22 Insolvency and Business Practices These provisions apply in all cases unless permission to act is obtained from the court and on such conditions as the court may impose. In addition to the above restrictions, the BIA provides that no trustee shall act as a trustee in relation to the estate of a debtor where the trustee is already: a trustee in bankruptcy of, or in a proposal concerning, any person related to the debtor; or the receiver or liquidator of the property of any person related to the debtor, unless, at the time of being appointed as trustee and at the first meeting of creditors, makes full disclosure of any fact above and the potential conflict of interest,. The purpose of the requirements above is to: prevent a conflict of interest; protect the debtor from a person who may have information that could be used to the prejudice of the debtor; and ensure that the trustee who may have a close relationship with the debtor does not work to the prejudice of the creditors Trustee Acting for a Secured Creditor BIA s The BIA requires a trustee to obtain a written opinion from independent legal counsel that the security is valid and enforceable against the estate, prior to acting or assisting a secured creditor of a bankruptcy estate. This applies to any situation where the trustee is already acting for the estate. Immediately on commencing to act for a secured creditor of the estate, the trustee must notify the Superintendent of Bankruptcy and the creditors or the inspectors of the following: that the trustee is acting for the secured creditor; the basis of any remuneration from the secured creditor; and, the conclusion of the independent legal opinion obtained. In summary, a trustee in bankruptcy cannot act for or assist a secured creditor, even before the first meeting of creditors, unless the trustee obtains an independent legal opinion that the security is valid and enforceable Directives and Rules Introduction BIA s CQP Applied Knowledge Course July

23 Insolvency and Business Practices CCAA s. 25 The BIA provides guidelines regarding conduct that trustees must adhere to in relation to their operations. These guidelines include a BIA Code of Ethics for Trustees. Trustees must also comply with the Directives and the Superintendent s Programs which are designed to regulate ethics and professionalism. The Code of Ethics for Trustees that is found in the Bankruptcy and Insolvency General Rules also applies to engagements as monitor under the Companies Creditors Arrangement Act, insofar as the individual rules are applicable, as the code of ethics was incorporated by reference in the CCAA Code of Ethics BIA s. 13.5; BIA Directives 5R3, 17, 21, 27 and 29; BIA Rules The code of ethics establishes a standard for services to be provided by licensed trustees. It addresses information that trustees must provide to creditors, the treatment of trust funds, conflicts of interest, the sale and purchase of property, and advertising. It contains standards for maintaining the good reputation of the trustee community. In developing the code of ethics, the Superintendant sought a uniform, complete and compulsory code. The code s development reinforces the confidence of creditors, debtors and the general public in the bankruptcy and insolvency system. The code establishes a minimum standard in the quality of services provided and is designed to strengthen and enhance standards of professional practice. The code enables trustees to better understand the scope of the rights and duties that govern their professional conduct and can be used as a reference in providing services. It enhances the predictability of the rules of administration of bankruptcies and gives interested parties, particularly creditors, a means of control over the quality of service. Trustees must familiarize themselves with and abide by the code of ethics. The provisions of the code include the following requirements: performing duties in a timely manner with competence, honesty, integrity, and due care; a prohibition against assisting, advising, or encouraging any person to engage in any conduct that is illegal or dishonest; being honest and impartial and providing full and accurate information to interested parties; not disclosing confidential information without authorization, unless required by law and not using confidential information for personal gain or to benefit a third party; not purchasing property of any debtor for whom they are acting in respect of, or selling the property to an employee or related party; CQP Applied Knowledge Course July

24 Insolvency and Business Practices avoiding any influence, interest or relationship that impairs their professional judgment; not engage in any business or occupation that would compromise their ability to perform a professional engagement or would jeopardize their integrity, independence, or competence; holding and administering money and property with due care and subject to laws applicable to the trust; not paying any commission, compensation, or other benefit in order to obtain a professional engagement; and, not advertising in a manner that is false, misleading, incomplete or that reflects unfavourably on the reputation or competence of another trustee or on the integrity of the bankruptcy and insolvency process. In enforcing the code, the Superintendent of Bankruptcy can rely on several means to ensure compliance including licensing and disciplining of trustees, supervising and auditing of estate administration, and conducting investigations Superintendent s Programs The Office of the Superintendent of Bankruptcy introduced two programs to assist in the regulation of the bankruptcy and insolvency process: the intervention program and the monitoring program. In addition, the Superintendent has issued a policy statement regarding professional conduct and the publicity of decisions. Intervention program The objective of the intervention program is to identify those situations in which the Superintendent should intervene in the administration of certain cases by applying to the courts to ensure the integrity of the insolvency process. Trustees should be familiar with this program because it addresses the following issues: taxation of trustee s accounts in ordinary administration; taxation of trustee s fees in summary administration; opposition to the automatic discharge of a first-time individual bankrupt; opposition to the bankrupt s application for discharge; report to the court after three years; objection to the discharge of a trustee; and intervention in receiverships. CQP Applied Knowledge Course July

25 Insolvency and Business Practices Monitoring program The purpose of the monitoring program is to ensure uniform assessment of estate administration and to maintain high standards of administration. The program includes monitoring of: trustees estate bank accounts; asset realization; propriety of costs; and timeliness in the administration of estates. More detailed information on the OSB s monitoring program is found in the module titled: Professional Practice Professional Conduct and Publicity of Decisions Trustees should review the Policy on Publicizing Professional Conduct Matters issued July 12, 2001 by the Superintendent. This policy is premised upon a need for transparency in all decisions affecting trustees licenses, and outlines the Superintendent s process for investigation and taking disciplinary action relating to the professional conduct of trustees. Paragraphs 12 and 13 state that the Superintendent s decisions are public and lists those parties to whom the decision is immediately communicated, including posting on the OSB web site at osb.nsf/eng/h_br01189.html and providing notice to the media Directives and Offences BIA s. 202, 203.1, 205 and 206 Trustees must also familiarize themselves with the Directives governing ethics and professionalism. Trustees should have an understanding of all the Directives. The BIA outlines offences that are punishable by fine or imprisonment. Many of these offences are specific to the actions of a trustee. Trustees are also required to report any offences under the BIA or other legislation. Trustees should have an understanding of all of the provisions and consequences Conclusion The rules and regulations governing ethics and professionalism are at times both lengthy and difficult to apply. They have been developed and continue to be developed to ensure consistency and fairness, and to maintain the integrity of the bankruptcy and insolvency process. They are essential for maintaining the good reputation of the trustee community. CQP Applied Knowledge Course July

26 Insolvency and Business Practices 2.3. CAIRP Standards of Professional Practice Minimum Standards 1 CAIRP is committed to quality and professionalism in the practice of insolvency. CAIRP has developed Standards of Professional Practice that are intended to develop consistency within the profession. The standards prescribe the minimum standards to be followed by members. The Standards of Professional Practice are intended to allow the practitioner to exercise professional judgment. The exercise of professional judgment is fundamental to the quality of work performed. The standards are meant to complement any statutory requirements to which members may be subject. Each Standard is introduced by its Scope and Purpose and definitions. They establish policy for members in regard to assessing and accepting engagements, roles the practitioner plays, documentation, reporting, planning, safeguarding of assets, record keeping, presentation, disclosure and responsibilities. They include samples of letters including direction on mandatory reporting requirements and mandatory content. Where required, there are explanatory notes published for certain of the Standards. The Standards of Professional Practice can be found in the members only section of the CAIRP website at: The standards are intended to provide guidance to members of CAIRP, as well as give an indication of matters that are discretionary (things that the member may do) and matters that are expected as a minimum standard (things that the member should or shall do) Engagements BIA Rules 44 and 52 CAIRP members have become increasingly exposed to critical scrutiny by a range of interested parties whose positions are directly affected by the actions of members, but whose interest may differ. CAIRP members undertake a variety of engagements, including the following: trustee in bankruptcy (BIA); trustee in a proposal (BIA); interim receiver (BIA); monitor (CCAA); 1 Consumer Standards were approved, ratified and confirmed on April 5, 2011 and are in force as of that date. CQP Applied Knowledge Course July

27 Insolvency and Business Practices liquidator or inspector (Canada Business Corporations Act, Winding-up and Restructuring Act); trustee or receiver (other federal or provincial statutes); receiver, receiver and manager, or agent (Bank Act); receiver or receiver and manager (court-appointed under provincial statutes or under the BIA); and consultant (creditor/creditor group/debtor). The CAIRP Standards of Professional Practice apply to all formal and advisory appointments including those to which the BIA does not apply. While the BIA sets minimum standards for appointments as trustee and receiver, there are no specific standards for other appointments. Nevertheless, the Code of Ethics for Trustees extends to trustees acting in any professional engagement CAIRP Rules of Professional Conduct Mandatory Compliance CAIRP enacted the Rules of Professional Conduct in The rules of professional conduct contain similar content to the BIA Code of Ethics for Trustees. The insolvency professional should ensure that they have a complete understanding of the rules, as compliance with them is mandatory for all members. The rules can be found in the Members Only section of the CAIRP website at: To establish their competence as insolvency professionals in the eyes of the public and other professional and governmental bodies, CAIRP members must set high standards of conduct for themselves. The rules that set these high standards are established to protect the public, and to ensure that members conduct themselves with integrity and treat other parties with courtesy and respect. The rules allow the profession to monitor its members and provide sanctions when necessary Basic Principles The rules flow from a reliance on trustees and insolvency professionals to provide sound, fair and uncompromised advice and service in insolvency matters. The rules are based on the following principles: a member s conduct shall at all times maintain the good reputation of the profession; a member shall perform his professional services with integrity and care; CQP Applied Knowledge Course July

28 Insolvency and Business Practices a member shall maintain his professional competence by keeping informed of developments in professional standards and legislation; a member, when engaged in an assignment, shall be free from any influence, interest or relationship that impairs his professional judgment or objectivity or where in the view of a reasonable and informed person, has that effect; a member has a duty of confidentiality to a client and shall not disclose, without proper cause, any information obtained in the course of an engagement. Nor should such information be exploited, directly or indirectly by a member; and, a member shall accord to any other member the courtesy and consideration expected between professional colleagues. The rules that flow from the principles establish a minimum level of acceptable conduct. It is a strength of our profession that trustees and insolvency professionals strive for the highest level of ethical behaviour. In addition to the BIA Code of Ethics and the CAIRP Standards of Professional Practice and Rules of Professional Conduct all CAIRP members are bound by the bylaws, rulings, interpretations, standards and other pronouncements of the CICA (Canadian Institute of Chartered Accountants) and the various institutes or orders of chartered accountants of the province in which they reside or in which they carry out a mandate, to the extent that they are applicable to the work of trustees, receivers, receiver-managers, agents, liquidators and others involved in the practice of insolvency administration. These bylaws, rulings, interpretations, standards and other pronouncements are incorporated by reference in the CAIRP Rules of Professional Conduct. Many trustees and insolvency professionals are members of other professional bodies and are, therefore, also bound by the code of ethics established and governed by these other professional bodies. Members of such organizations and professional bodies should familiarize themselves with all the requirements that bind them. Being in breach of any code could jeopardize an individual s professional standing Ethical Conflicts and Objectivity Introduction BIA s. 13.3; BIA Rule 44 CAIRP Rule 4 and interpretation Insolvency professionals often find themselves in situations of conflict when they end up pursuing economic avenues without recognizing that individual rights of stakeholders may diverge. CQP Applied Knowledge Course July

29 Insolvency and Business Practices The most efficient way to address an insolvency problem is often for a single insolvency professional to attempt to solve the problem for the benefit of all stakeholders. If the problem can be overcome, everyone is happy. While having one person perform this role may be efficient and cost-effective, when things do not work out, as is often the case, stakeholders interests will diverge and an insolvency professional who has not properly anticipated this at the onset may find that he must now withdraw from the situation. This may be embarrassing and may also compromise client interests and relationships. In an effort to avoid all ambiguous situations in light of the competing interests of the various interested parties, the insolvency professional must take care to clearly indicate his role and for whom he acts. The actions of the insolvency professional will, in certain cases, be reviewed by the court. Therefore, insolvency professionals must understand their obligation to avoid conflicts, recognize and protect themselves against the likelihood that the positions of individual stakeholders will diverge and understand their obligations with respect to confidential information Specific Prohibitions BIA s. 13.3; BIA Rule 44 CCAA s. 11.7; CAIRP Rule of Professional Conduct 4 The BIA provides that trustees; "shall avoid any influence, interest or relationship that impairs, or appears in the opinion of an informed person to impair, their professional judgment. Rule 4 of the CAIRP Rules of Professional Conduct provides a similar obligation on the part of an insolvency professional. The BIA outlines certain situations where a trustee is not qualified to act because of a potential conflict of interest. Specifically, trustees are prohibited from acting as a trustee in bankruptcy without prior court approval where the trustee or an affiliate has been an accountant or auditor of the debtor within the prior two years. Most audit engagements are not complete until between 90 days and six months following the company's year-end and the two-year prohibition does not begin to run until the engagement is complete. With respect to a trustee who applies to the court for permission for the purposes of s. 13.3, the trustee shall, without delay, send a copy of the application to the Superintendent. Where the trustee is the trustee or receiver of a related entity there is no absolute prohibition but merely an obligation to disclose this fact. This does not mean, however, that the trustee is always free to act. Actual conflicts of interest must always be considered. The interpretation to CAIRP Rule of Professional Conduct 4 should be reviewed for additional guidelines in this regard. CQP Applied Knowledge Course July

30 Insolvency and Business Practices The CCAA contains rules that are essentially the same as those contained in the BIA regarding the auditor or accountant s ability to act as monitor, and that specify that the person so appointed must be a trustee within the meaning of subsection 2 of the BIA Practical Examples Conflicts of interest may arise in many situations. In fact, in certain cases conflict may arise from the very structure of the BIA itself, as the BIA sets up the trustee in such a way as to be perceived by the debtors as an advisor, though, he ends up acting on behalf of the debtor's creditors. An insolvency professional s role and duties will often require him to give advice, make decisions, or take action in situations where the financial interests of competing parties diverge. Advice given to one stakeholder can have a negative result on others and vice versa. In certain situations, the advice given and decisions made could also directly affect the insolvency professional s personal interests. For example, a recommendation for a particular course of action may result in his appointment to a new engagement, which an aggrieved party may perceive as a self-serving situation. Two examples are provided that illustrate potential conflicts. Thought should be given as to how the insolvency professional could have prevented these situations from arising and what should be done now that they have arisen. Example 1 During an initial interview with a trustee a debtor admits that he has known he would have to file for bankruptcy for some time. Consequentially, he sold his house 11 months ago and remitted the proceeds to his relatives to repay money they had advanced to him to finance the start up of a now failed business. Clearly, a person whose sole interest is to help the debtor would realize that if he advises the debtor to wait one more month before filing, the payment would not be subject to challenge under the BIA as a preferential payment. A person whose sole interest was that of the debtor s creditors would realize that the most favourable outcome for them would be that an immediate assignment be made. Example 2 A debtor brings her spouse to a meeting with the trustee. It turns out that the debtor has made a fraudulent transfer to her spouse. During the course of the meeting the spouse, who believed that the trustee was representing him as well, provides information to the trustee as to what he did with the assets after they were conveyed to him. This information would not have otherwise been conveyed had the spouse thought that the trustee was a potential adversary. Clearly, both of these are difficult situations. There are no easy answers as to how to deal with the conflicts once they arise. The best course of action in both instances would have been to take steps to prevent such conflicts from arising in the first place. In example two, the insolvency professional should have clearly defined at the very outset to the debtor that the trustee was not CQP Applied Knowledge Course July

31 Insolvency and Business Practices acting as her advisor or that of the spouse and that information obtained could not be held in confidence Practitioner s Safety Net Many conflicts and ethical dilemmas do not have clear answers or solutions. In these types of situations the answer often is the one that emerges from the process of consultation. In both of these situations the trustee would be wise to seek advice as to the correct course of action from others familiar with insolvency practice such as other insolvency professional, particularly those with seniority, insolvency lawyers, OSB, CAIRP, or the registrar. Sometimes an application to court is also available. This support mechanism is sometimes referred to as the practitioner s Safety Net. In seeking advice, views may diverge, however, the right answer will be the consensus that emerges from this consultation process, with extra weight being put on the views of the court, OSB and the CAIRP. In November 2008 CAIRP initiated a Practice Advisor Program. The program is designed to provide support to members who require advice or direction. Each province has a designated practice advisor who has volunteered to provide advice on consumer issues. The designated persons can be found in the members only section of the CAIRP website Plan of Action BIA s. 13.3; BIA Rule 44 CAIRP Rule of Professional Conduct 4 A clear plan is needed to address conflicts at all stages. Insolvency professional need to: consider the appropriateness of the appointment: take into account BIA s and BIA Rule 44 as well as CAIRP s Rule of Professional Conduct 4 (and its interpretation) to determine if they should accept the appointment at all or if disclosure and/or written consent of all parties is required; identify the issues: think through in advance how the positions of various parties may later diverge; make it clear from the outset who their client is. When being asked to accept an independent role such as a trustee or a court appointment, make it clear that there is no client relationship at all. Address this issue in writing and make sure it is clear up front before information is exchanged; be sensitive to confidential information: make it clear from the outset whether communications will or will not be confidential; consider what will happen if a conflict arises: in appropriate cases make sure that all parties are independently advised before agreeing as to what will happen if a conflict emerges. Obtain agreement regarding the course of action in writing; CQP Applied Knowledge Course July

32 Insolvency and Business Practices disclose all potential conflicts as soon as they arise. If a conflict arises, stand aside and get independent advisors involved. Do not allow economic convenience to persuade you otherwise. Where the correct path of action is not clear, seek input from the "Safety Net"; respond immediately: ensure that parties, independently advised, sign off on the conflict and how it will be dealt with. Apply to the court for directions if the problem cannot be resolved; and if in doubt, offer to resign from both sides: although this may be difficult, it will be much less difficult than dealing with the effects of staying on when to do so would be improper. Often a total resignation can be avoided by, for instance, bringing in another insolvency professional to deal with a particular aspect of a case where a conflict has arisen Dual Appointments BIA s One of the main areas where conflicts are known is where a trustee undertakes to act on behalf of a secured creditor. The BIA provides that a trustee may not take on such an engagement unless he has obtained a written opinion from a legal counsel who is independent of the secured creditor and the opinion states that the party s security is valid and enforceable against the bankruptcy estate. BIA s goes on to outline the notice requirements to which the trustee is subject Legal Opinions Upon receiving an independent legal opinion that the security is valid and enforceable, the trustee should review the assumptions on which the opinion is based. For instance, the common assumption that signatures are genuine and the persons who sign the documents are properly authorized may be important where the secured party is related to the debtor. If, however, the security was taken by a third party, a full minute book review may not be warranted from a cost perspective. Opinions also typically contain an assumption regarding preferences and other reviewable transactions. The opinion is generally stated to be subject to the laws of general application related to bankruptcy and creditor and debtor rights. Generally, the issue of fraudulent transfers, preference or transfers at undervalue should be considered by the trustee prior to taking the dual engagement. Accordingly, where necessary, the trustee should give the lawyer sufficient facts upon which the lawyer may provide an opinion on any issue related to whether the transaction may be voidable. Finally, the trustee must consider whether there are other conflicts that could arise that will not be answered by the opinion. For instance, disputes can arise with respect to the state of the account or whether certain bonus or penalty amounts may be payable. CQP Applied Knowledge Course July

33 Insolvency and Business Practices Additional Concerns Having a legal opinion that the security is valid and enforceable is only one aspect of a conflict under a dual appointment. Remaining independent during a dual appointment can also become a challenge. Potential conflicts may arise in many situations. For example: Does the secured creditor or the trustee get the benefit of the reversal of a transaction that is void or voidable? What happens when the secured creditor refuses to let any surplus from the net realization of the assets be paid into the bankruptcy, because the creditor has concerns about potential warranty or environmental claims? When the trustee is occupying leased premises where the rent is below market can, or should, the trustee ask the secured creditor for a premium over existing rent? What happens when the secured party feels that it is well secured and advocates a quick sale in order to minimize costs, when perhaps a slower more thorough canvas of the marketplace would produce a surplus for the unsecured creditors? Who is to monitor the secured creditor's costs when the fees of the trustee are paid by the secured creditor? What happens if the inspectors want to contest the approval of a sale that the secured creditor wants to make? Remaining Independent These numerous potential conflicts serve to highlight the fact that the independent legal opinion is merely the starting point when a trustee considers whether or not to accept a dual appointment. The trustee must be vigilant to identify any potential conflicts not only at the onset but throughout the engagement and the trustee must set in place an effective mechanism to make sure than an independent view is available whenever necessary. Usually, this can be accomplished by retaining the services of an independent legal advisor who may take the lead on issues where conflicts are identified. Care must be taken to ensure that the independent legal advisor does not exist in name only. If independent legal advice is not enough, the insolvency professional may have to resign one or both engagements. Another effective technique to deal with a conflict that can arise with respect to a discrete part of an engagement is to seek a joint appointment of another insolvency professional as trustee or receiver with the role of the additional appointee being limited to dealing with the area of conflict. CQP Applied Knowledge Course July

34 Insolvency and Business Practices Credibility The independence and objectivity of insolvency professionals is critical to the credibility of the insolvency system. Trustees, receivers, monitors, etc., are all officers of the court with a duty of care owed to all creditors and interested parties. They must act impartially and independently, ensuring that conflicting interests are resolved equitably. Even the appearance of a conflict of interest will discredit individual representations and the insolvency system as a whole. Consideration should be given not only to real conflicts of interest, but also to those that may be perceived. Although it is commonly stated by the court that a trustee is in a fiduciary relationship with all of the creditors, this statement needs to be viewed with more flexibility given that there are a multitude of stakeholders. For instance, trustees have the ability and the duty where appropriate to attack individual stakeholder's claims in terms of priority, quantum or validity, with the object of maximizing the estate for the balance of stakeholders. Such litigation would clearly not be proper given the role of a traditional fiduciary, if one was to view in a narrow bilateral framework the relationship between the trustee and the party with which the trustee is in conflict. While the court has given no guidance in this regard, the better view is that the role of the trustee is to represent the mass of creditors against the individual and that the fiduciary duty is not due so much on an individual basis but rather to the stakeholders as a whole. In fact, the trustee s prime responsibility is to the BIA itself, namely to try to fulfill the objectives of the BIA, and not to the debtor/insolvent person/bankrupt, the creditors or the other stakeholders Ethical and Moral Issues Introduction It is important to realize that avoiding conflicts of interest is only one aspect of maintaining a high standard of professionalism. An insolvency professional will also face the difficult task of making choices in situations with competing ethical and moral issues. This is analogous to the dilemma faced in the case of whistle-blowing in which a duty of confidentiality to a client or employer conflicts with a duty to warn the public of a serious harm or injustice, or to warn regulators of a breach of rules or duty. These situations may create a personal conflict of interest or dilemma for the insolvency professional that has a direct impact on his professional reputation and livelihood. In such areas, the rules are usually very clear. The problem is knowing how to apply the rules to the facts at hand. An old, but wise, saying is well remembered here: "It takes a lifetime to establish a reputation and only a moment to lose it." Specific Prohibitions BIA Rules 38 and 47 CQP Applied Knowledge Course July

35 Insolvency and Business Practices Directive 13R The BIA provides that a trustee "shall not assist, advise or encourage any person to engage in any conduct that the trustee knows, or ought to know, is illegal or dishonest, in respect of the bankruptcy and insolvency process. As well, BIA Rule 47 provides that trustees "shall not engage in any business or occupation that would compromise their ability to perform any professional engagement or that would jeopardize their integrity, independence or competence". According to Directive 13R2, incompatible occupations include: collection agent; bailiff; trade association representative; employee of the Office of the Superintendent of Bankruptcy (OSB); lawyer; notary in the province of Québec; or any other occupation, business or profession that may be in conflict with the duties and responsibilities of a trustee Practical Examples Although the rules are clear, in practice, competing ethical and moral issues may become quite complex. There are many situations where an ethical or moral issue will be clear and others where it may not be as apparent. In either case, it is important to recognize the concerns and deal with them appropriately. Clearly, an insolvency professional cannot advise a client to engage in illegal behaviour, such as concealing assets or evading taxes. An insolvency professional should also be on guard against being used as a tool or dupe of a client. But what is the obligation of an insolvency professional when he discovers that his client has engaged in illegal or immoral behaviour, or refuses to follow his advice to cease the activities? Consider the following issues and dilemmas related to a situation where an insolvency professional discovers fraudulent conduct on the part of the debtor who has engaged him for workout advice: Is the information that the insolvency professional gained confidential, and if so does this affect his obligations to protect the public? What should an insolvency professional do if a client refuses to follow his advice and continues to engage in the illegal behaviour? CQP Applied Knowledge Course July

36 Insolvency and Business Practices If the answer is resignation, would resignation be appropriate if the effect of the resignation would be tantamount to disclosure of impropriety or would have a seriously detrimental impact on the debtor by, for instance, triggering a demand by a secured creditor? Would the insolvency professional have any obligation to work through the likely scenarios with the debtor? Is independent advice called for? What explanation should the insolvency professional give if asked by stakeholders? Could silence be misleading? Not all of these questions have clear answers and opinions among practitioners could vary. We will discuss what to do where there is no clear "right" answer Actions by Insolvency Professional When confronted with an ethical or moral dilemma, especially one where action or inaction may raise concerns, an insolvency professional must take the issue very seriously. If not handled properly, irreparable damage may result to the reputation of the individual in question, as well as to the profession in general. There is also a possibility that the insolvency professional s actions may give rise to an action for damages against him personally. To prevent ethical or moral dilemmas from arising the insolvency professional should make his role, and the obligations that flow from it, clear to all involved. If in doubt about the correct course of action, advice should be sought from what has been previously described (see Ethical Conflicts and Objectivity) as the insolvency professional s "Safety Net", who might include: other insolvency professionals both inside and outside of his organization (especially those with seniority and a good reputation within the profession); senior insolvency lawyers; and, the OSB, CAIRP, the registrar or, where applicable, the court. In certain situations, consultation with the interested parties may be possible and appropriate. As noted, often the answers to particular issues in this area of morality and ethics are not clear. In such cases, the "right" answer is the consensus that emerges from the consultation process one engages in to arrive at the decision. In this process it is important to consult multiple sources and to put different weight upon advice given from different sources. For instance, input from professional bodies and regulators should be given more weight than the views of practitioners. Where there is a divergence of views as to how to proceed, the insolvency professional should make each party with whom he consults aware of conflicting views expressed by others (where CQP Applied Knowledge Course July

37 Insolvency and Business Practices appropriate, on a no-names basis) so that the views of each person consulted can be given based on the views of others. The ability to show that a broad ranging consultation, even if on a "no-names" basis, was taken as part of an informed and thoroughly considered decision that reflected the consensus that flowed from the consultation process will be more likely to protect the insolvency professional than a choice made by himself, no matter how considered Breach of Code of Ethics / Professional Conduct Procedures Introduction The behaviour of insolvency professionals is regulated by the Superintendent of Bankruptcy and CAIRP. Each is discussed separately below BIA BIA s. 13.5, 202 and 203; BIA Rules The BIA states that trustees "shall comply with such a code of ethics respecting the conduct of trustees as may be prescribed." Trustees who breach the code of ethics are subject to disciplinary procedures by the Superintendent of Bankruptcy. A trustee's licence can be suspended, cancelled or become subject to various conditions. If a trustee continues to act as a trustee while his licence is suspended or cancelled, or if he acts contrary to any conditions on his licence, he also commits an offence under the BIA. The applicable sections of the BIA are discussed below. Policy Statement 5: Memorandum of July 12, 2001, Issued by the Office of the Superintendent of Bankruptcy Re Professional Conduct and Publicity of Decisions should also be reviewed, as it provides a more detailed discussion of the professional conduct process Suspension of Licence BIA s Directive 13R The Superintendent of Bankruptcy may suspend or cancel a trustee's licence if the trustee is convicted of an indictable offence or has failed to comply with a condition of the trustee s licence. Directive 13 provides that any breach of the directive gives rise to the Superintendent having the power under BIA s to cancel or suspend the licence of the trustee. The Superintendent must give notice, in writing, to the trustee of the Superintendent's intention to exercise his power under BIA s at least 10 days before the decision takes effect. It CQP Applied Knowledge Course July

38 Insolvency and Business Practices should be noted that the requirement for the trustee to be given an opportunity to be heard on the matter, as discussed below related to BIA s , do not apply to an order under s OSB Professional Conduct Process BIA s and The Superintendent of Bankruptcy is given the power to ensure compliance with the code of ethics. The procedure for such professional conduct process is provided in BIA s The Superintendent must first investigate, or cause to be investigated, the conduct of the trustee. If it appears to the Superintendent that the trustee: has not properly performed his duties, has been guilty of improper management of the estate, or has not fully complied with the BIA, the Rules, any Directives, or any other law related to the proper administration of the estate then the Superintendent has certain powers. These powers include: cancelling or suspending the licence of the trustee, placing conditions or limitations on the licence of the trustee or ordering the trustee to make restitution. The Superintendent may also make such orders if it is in the public interest to do so. If the Superintendent intends to exercise his power under BIA s , the Superintendent must give notice to the trustee; the trustee has a reasonable opportunity to be heard. Section governs the procedure at an oral hearing. The hearing record is public, unless the Superintendent orders otherwise. The decision of the Superintendent must be provided, with reasons, to the trustee. The decision is subject to review under the Federal Court Act, R.S.C. 1985, c. F Offences under the BIA BIA s.13.2, 14.02, and It is an offence for a trustee to act as a trustee after the trustee's licence has been cancelled or suspended under BIA s or where the trustee has been informed of the Superintendent s decision to do so, pursuant to s It is also an offence for a trustee to act contrary to conditions or limitations placed on his licence. These offences are punishable on summary conviction to a fine not exceeding $5,000, or to imprisonment for a term not exceeding two years, or to both CAIRP Disciplinary Process CAIRP Bylaw CAIRP Bylaw outlines the process that the CAIRP follows regarding complaints, determinations and disciplinary proceedings. This bylaw outlines the powers of the Professional Conduct Committee, the Discipline Committee, the process of a discipline action, and the rights CQP Applied Knowledge Course July

39 Insolvency and Business Practices of a member when being investigated by the CAIRP. The text below outlines some highlights of the bylaw, but the entire bylaw should be reviewed. Obligation to report a breach CAIRP Bylaw In order to protect the reputation of the insolvency system, every member who becomes aware of an apparent breach of the rules must report such breach to the President or the Professional Conduct Committee of the CAIRP. An issue may arise as to the degree of certainty that a member is required to have regarding the impropriety before he has the obligation to report. Under a similar rule pertaining to lawyers in Ontario, a discipline panel held that the obligation to report was triggered by the mere suspicion of impropriety and that it was improper for a member to defer reporting for several months while he investigated the situation to be certain of his facts out of concern about casting aspersions against a fellow practitioner. The view was that there is no harm done to reputations by reporting since discipline procedures are confidential and that the professional body is the proper person to investigate. In that case, certain lawyers were disciplined for late reporting. It is also of note that in the subject case the lawyers were disciplined even though they followed the advice of an acknowledged expert on the rules of conduct. If they had also consulted with the Law Society, a different outcome likely would have resulted. In essence, the lawyers used part, but not all, of their "Safety Net". Once a breach has been reported, the Professional Conduct Committee may investigate the situation. The Professional Conduct Committee, if the member consents, ultimately has the power to order the member to: accept a reprimand; complete one or more courses of instruction prescribed by the committee; pay a fine not exceeding $5,000; pay all or any part of the costs of the investigation or review; take such corrective or remedial action as the committee considers appropriate; or carry out any combination of the foregoing actions. If the member does not consent, the Professional Conduct Committee may refer the member to the Discipline Committee. The Discipline Committee is given the power to, among other things, admonish, suspend, expel and order costs against the member. The bylaw also outlines the procedure for a proceeding before the Discipline Committee and for any appeals. CQP Applied Knowledge Course July

40 Insolvency and Business Practices 2.8. Handling of Trust Funds Introduction BIA Rule 48 CAIRP Rule of Professional Conduct 7 During the administration of an engagement, an insolvency professional will hold money and property of the debtor in trust for the benefit of the creditors Trust Accounts BIA s. 25 Directive 5R CAIRP Standard of Professional Practice 99-3 The BIA requires that the trustee deposit all monies received, without delay, into a separate trust account for each estate in a bank or other insured deposit-taking institution. In a summary administration estate or consumer proposal the monies may be held in a consolidated bank account, provided that the prior approval of the Superintendent is obtained and Directive 5R4, Estate Funds and Banking, is complied with. The BIA provides that the trustee "shall not withdraw any funds from the trust account of an estate without the permission, in writing, of the inspectors or, on application, the court, except for payment of dividends and charges incidental to the administration of the estate. The payments from the trust account must be made by cheque and must be reviewed and signed by the trustee. In certain cases, where the controls are considered sufficient, electronic transfers of funds may also be permissible. It is an offence for a trustee to deposit any funds the trustee receives in an official capacity into any banking account kept by the trustee for the trustee s personal use. Any income earned on the estate funds forms part of the estate and the trustee is required to make a reasonable effort to obtain a competitive rate of interest. According to Directive 5R4, the trustee must reconcile all trust accounts monthly, within 45 days after the end of the month. Any errors discovered in the reconciliation shall be corrected within 30 days of discovery. Any surplus in the account should be distributed to the beneficiary in a timely manner. CQP Applied Knowledge Course July

41 Insolvency and Business Practices Banking and Accounting Records BIA s. 26 Directive 5R The BIA outlines the proper books to be kept by the trustee for each administration of an estate. Such books are property of the estate and may be inspected by the Superintendent of Bankruptcy, the bankrupt, a creditor or their representative at any time. The trustee must maintain, in good order, specific banking and accounting records Monitoring Program BIA Rule 128 Under the Superintendent of Bankruptcy's Monitoring Program Trust Bank Accounts bankruptcy officials will conduct an examination of the trust bank accounts of a trustee for whom they have responsibility at 12-month intervals. The examination will seek to determine if: individual accounts have been reconciled monthly; the consolidated bank account has been reconciled monthly; accrued interest in the consolidated bank account has been allocated to individual accounts monthly or quarterly; individual accounts having appreciable balances are earning interest; advances in files administered under summary administration and for consumer proposals have been withdrawn based on the prescribed periods; and, no withdrawals have been made without proper authorization Internal Controls Directive 5R The trustee is required to maintain an internal control system for the recording of receipts and disbursements of trust funds. Periodically, the trustee is required to review and evaluate the system to ensure it functions properly and that adequate safeguards are in place. CAIRP Standard of Professional Practice No Explanatory Notes lists a number of considerations that an insolvency professional should take into account in evaluating such internal controls. CQP Applied Knowledge Course July

42 Insolvency and Business Practices 2.9. Public Trust and Policy Dealing with the Public Overview BIA Rules 39, 40, 48 and 51 The trust and confidence of the general public is a necessary condition to ensure the orderly administration of the bankruptcy and insolvency system. To this end, compulsory uniform standards of ethics and professional practice are essential. The BIA Rules discussed in more detail in other sections of this module that relate directly to an insolvency professional s dealings with the public include: Rule 39 (see Ethical Conflicts and Objectivity); Rule 40 (see Confidentiality); Rule 48 (see Handling of Trust Funds); and, Rule 51 (see Advertising). At all times, insolvency professionals should strive to maintain a professional and respectful demeanour when dealing with the public. Courtesy and civility are essential when dealing with the public to ensure confidence in the bankruptcy and insolvency system is maintained Trading in Claims Dealings with the public become particularly challenging when it is apparent that there will be trading in claims against a debtor. The insolvency professional administering the debtor's affairs should guard against differential dissemination of information that could give rise to a trading advantage to certain parties. This is similar to the obligations of a public corporation concerning trading in its shares. An insolvency professional should adopt a clear communication strategy to ensure the even dissemination of information. The strategy should balance the creditor's right to know with the concerns of differential dissemination of information. Websites, distribution lists, press releases, and possibly press conferences should be considered to ensure equal distribution of information. Consideration should be carefully given to exactly how much to say and how complete and accurate the information is and whether qualifications should be made as appropriate. Non-public information should only be given within the context of confidentiality agreements or court order confidentiality requirements and only undertakings are made by the relevant parties not to trade in claims at least for some material amount of time. The same considerations would apply if the shares of the debtor continue to trade after the commencement of insolvency proceedings. CQP Applied Knowledge Course July

43 Insolvency and Business Practices It is important to guard against one-off comments to creditors or stakeholders and proper administration will call for all questions to be funneled through a single person or special team controlled by the insolvency professional Advertising Regulations BIA Rule 51 Directive 29 CAIRP Rule of Professional Conduct 9; CAIRP Bulletin: Compliance in Advertising October 2000 The Superintendent of Bankruptcy has established guidelines to ensure that advertising by trustees is consistent, professional and meets the high standards of the Code of Ethics for Trustees and the various provisions of the BIA and CAIRP Rules of Professional Conduct. These guidelines are important and necessary, given liberties taken by some trustees in their advertising practices. Advertising by the insolvency professional must be carefully considered so that it does not conflict with the restrictions imposed by the BIA and is in compliance with the high standards imposed by the BIA Code of Ethics for Trustees and the CAIRP Rules of Professional Conduct to maintain the professionalism which trustees must project at all times. In the event that a trustee does not adhere to the advertising standards as set out in BIA Directive 29 and in the CAIRP Bulletin: Compliance in Advertising October 2000, a complaint may be registered against that trustee and all complaints will be sent to CAIRP for investigation. After the investigation by CAIRP, a report on the nature of the problem is provided to the trustee. with a copy to the Superintendent of Bankruptcy If the trustee fails to respond within 30 days regarding how the trustee intends on correcting the situation, the Superintendent of Bankruptcy may take measures against the trustee and impose penalties against the trustee which will be published in the appropriate media (for example, the Office of the Superintendent of Bankruptcy Canada Newsletter) Guidelines BIA s. 202 Trustees are allowed to advertise their services, provided they meet the established guidelines. They must also bear in mind that the BIA makes it an offence to solicit anyone to make a proposal or file a bankruptcy. The following guidelines apply to all advertising by trustees: CQP Applied Knowledge Course July

44 Insolvency and Business Practices trustees may advertise their services anywhere in Canada provided their advertising indicates in which province and/or territory they are licensed, if the advertisement is outside the province and/or territory in which they are licensed; the advertising of a resident trustee office must always include the address of the principal place of business from which an individual trustee normally practices and this address must be predominant in the advertisement; the advertising of a non-resident trustee office must be done in a manner that will not convey to the public the impression that there is a resident individual trustee in that office; the name of trustees and full-time employees may appear in advertising but their status must be identified appropriately, such as trustee, estate administrator; and trustees may use a logo to identify their firm Restrictions Directive 29 When advertising their services, trustees shall always identify themselves as Trustee in Bankruptcy. A trustee shall not advertise, directly or indirectly, in a manner that: he knows, or should know, is false or misleading; contravenes professional good taste or fails to uphold professional courtesy; reflects unfavourably on the competence or integrity of any trustee; refers to him or her as a specialist in a particular industry or area of insolvency; or involves a statement he cannot substantiate Fees Given that there are so many factors that affect the fees allowed on a file, advertising fees would be difficult at best. To avoid misleading the public, it is not advisable to advertise fees, although fees for an initial consultation prior to bankruptcy can be advertised Complaints Directive 29 All complaints about advertisements will be referred to the CAIRP, which will investigate the complaint. After the investigation, the trustee will be put on notice, in writing, of the nature of the problem and the trustee will be asked to respond as to how he intends to correct the situation. Failure to comply with the Code of Ethics for Trustees, the Superintendent s Directive on Advertising, the CAIRP Rules of Professional Conduct or other regulations, may result in the CQP Applied Knowledge Course July

45 Insolvency and Business Practices Superintendent taking disciplinary measures. Any penalties imposed by the Superintendent will be published in the appropriate media Relations with Other Professionals Communications Between Practitioners Overview At all times, insolvency professionals should strive to maintain a professional and respectful demeanour when dealing with other practitioners. Courtesy and civility are essential to ensure productive working relationships and thus an efficient bankruptcy and insolvency system. Because public confidence in the bankruptcy and insolvency system is paramount, it is especially important that practitioners refrain from dealing with each other in a public forum in a rude or discourteous manner Consultation In many circumstances, turning to other insolvency professionals for advice may be an appropriate and wise course of action. This is especially true when deciding how to deal with an ethical dilemma where consultation with a more experienced practitioner may be prudent. Members of the profession should support each other in these matters for the greater good. In communications, members must at all times be aware of the need to protect confidentiality. It is easy to let down one's guard when having casual conversations with fellow practitioners who are friends and colleagues Ethics BIA Rules 39 and 40 CAIRP Bylaws; CAIRP Standards of Professional Practice; CAIRP Rules of Professional Conduct The BIA Rules discussed in more detail in other sections that relate directly to an insolvency professional s dealings with the other practitioners include: Rule 39 (see Ethical Conflicts and Objectivity) and Rule 40 (see Confidentiality). As well, members have a responsibility to report another member who is engaged in an apparent breach of the CAIRP Bylaws, Rules of Professional Conduct or Standards of Professional Practice to the CAIRP Professional Conduct Committee (see Breach of Code of Ethics) Documentation It is a good idea to document all communications in writing. The pressure of fast moving files and the fact that practitioners may have developed strong and trusting relationships over the years sometimes leads to a tendency not to do this. Putting things in writing not only CQP Applied Knowledge Course July

46 Insolvency and Business Practices memorializes understandings, but also helps identify any areas of miscommunication. Just as "good fences make good neighbours", clear written communication makes for fewer misunderstandings and reduces the risk of faulty recollection. If written communications are not exchanged in certain situations, it is important to record oral discussions in files by memos to file and adequate notes. Given the uncertainty and fluidity of insolvency practice, matters that may seem insignificant when they occur may subsequently be critical Communications with the Legal Community Overview Insolvency professionals spend a great deal of time working with the legal community, dealing with their own lawyers, the lawyers of creditors and other stakeholders, as well as with the courts. As such, it is critical that insolvency professionals handle this interaction both properly and effectively Need for Independent Counsel A key issue for an insolvency professional is to recognize when independent legal advice is needed and when it is acceptable to have a joint retainer with counsel for a creditor or the debtor company. The pressure is often to save costs by minimizing the involvement of independent counsel. This can become a false economy. As mentioned in the section entitled Ethical Conflicts and Objectivity, one instance where an independent legal opinion on the validity of security is required is where the insolvency professional will be acting in a dual capacity. An insolvency professional will always appear more impartial in court and in the eyes of the various stakeholders if he has separate representation. Case law clearly states that an insolvency professional who is fulfilling a court-appointed mandate should have separate counsel, but this is not always reflected in practice. It is common for an insolvency professional to use multiple lawyers. It is also common for lawyers to act for both a receiver and the bank that appointed him, or for a monitor and the debtor under the CCAA, in situations where it is both practical to do so and clear that there is no conflict between the party the lawyer primarily represents and the insolvency professional. The insolvency professional should have independent representation on all other matters. It is important to recall that there must not only be independence in fact, but also that independence should be seen by the stakeholders who are entitled to expect it. Clearly, any independent counsel engaged by an insolvency professional should be qualified in insolvency law. Usually, when a lawyer is the source of a file referral, the temptation is to employ his services even though he may not have experience in insolvency matters. While ultimately the responsibility for competence in taking on a matter falls upon the lawyer, the insolvency professional should be candid in discussing this issue with the lawyer. CQP Applied Knowledge Course July

47 Insolvency and Business Practices Often a major creditor, such as a bank, may put forward a short list of specific lawyers or law firms that it wishes the insolvency professional to use for "independent" advice. Usually the listed firms or individuals will have an ongoing business relationship with the creditor but will not have dealt with the specific matter in issue. While this is a not uncommon practice, the courts have not ruled on whether or not and to what degree it is acceptable. In such circumstances insolvency professional should raise the issue with the subject law firm and consider obtaining, in writing, a statement that the firm's other involvements with the creditor do not, in their view, impinge upon their independence. Where appropriate, it may be wise to disclose this relationship to inspectors, other stakeholders, or the court, preferably prior to retention Relationship with Counsel Arrangements concerning retainers, billing, reporting, conflicts and the like should be set out in a written retainer agreement. Purchasing legal services should not be treated any differently than any other expenditure that an insolvency professional may make with respect to fulfilling his role. A continuing dialogue with counsel is necessary to ensure that the insolvency professional is effectively represented. Clear, full and candid communication is essential for a lawyer to provide sound advice. The legal advice obtained is only as good as the facts conveyed to the lawyer giving the advice. It is essential to clarify roles between the insolvency professional and the lawyer. The lawyer must have the final word on legal issues. In practice, insolvency professionals gain a great deal of knowledge of the law and, indeed, need to understand these issues to identify relevant facts and to properly fulfil their role. Despite this, practitioners must leave the final decisions on legal issues to the lawyers and remember the old adage: "a little bit of knowledge is a dangerous thing". Insolvency professionals are often asked for their views on legal questions. It is always best, even if confident in the answer, for an insolvency professional to either refer the question to a lawyer or to clearly qualify the answer with a statement such as from my experience I think the answer would be X, but I am not a lawyer and cannot give you a legal opinion and you should consult counsel to get the definitive answer. As well, the insolvency professional should be aware that all communications with his lawyer for the purpose of giving or receiving legal advice are subject to solicitor client privilege and cannot be disclosed by the lawyer unless the client waives privilege. In bankruptcy matters, approval of the inspectors should be obtained prior to retaining counsel. Fees of counsel are subject to taxation both in bankruptcy and in other court-appointed situations Communications with Opposing Counsel The Rules of Professional Conduct that govern lawyers provide that a lawyer cannot have contact with a person who is represented in a matter by another lawyer. As such, where both CQP Applied Knowledge Course July

48 Insolvency and Business Practices parties are represented, all communications between an insolvency professional and counsel representing other stakeholders should be through lawyers. In the insolvency community, however, this rule is not as strictly observed as perhaps it should be. Because of the small number of practitioners active in the insolvency community, the common need to deal with matters on an accelerated time line, the familiarity between insolvency professionals and members of the bar and the fact that insolvency professionals are sophisticated parties, it is not unusual for there to be direct contact between insolvency professionals and counsel for various stakeholders. One should be aware that there are risks in this and that such communications should not include matters of controversy unless there has first been an agreement reached between counsel as to the terms governing the communications. In the absence of such an agreement, anything said to an opposing counsel may show up in an affidavit later in the proceedings Communications to the Court Insolvency professionals routinely act as officers of the court. On most motions, and particularly where the evidence before the court is in the form of a report from the insolvency professional, the author of the report, or someone knowledgeable from his firm should be present in court when the report is being used. The lead insolvency professional should be present on any motion of substance. While, on occasion, an insolvency professional will have to testify in court, the court may on other occasions request that he address open court directly during a hearing with respect to matters raised in his reports or with respect to submissions made by opposing stakeholders. Often court proceedings are adjourned to allow parties to negotiate and the insolvency professional should be present to be part of this process. It is usually the case that the evidence given by a court-appointed insolvency professional is the most critical and persuasive in any particular motion brought in an insolvency proceeding. Because of this, in many cases the parties to the proceeding will attempt to lobby or advocate their position with the court officer prior to a hearing seeking to win the officer s support. An insolvency professional should be aware of this possibility and, while inviting input, deal with submissions critically. As well, an insolvency professional should ensure that, before making any recommendation to the court, the insolvency professional has considered all sides of the issue. Subject to time constraints, circulating a report in draft to the affected stakeholders for comment prior to finalization is good practice. Putting a preliminary position before the affected stakeholder parties as soon as possible to seek feedback prior to a final decision is also strongly recommended for insolvency professionals who are fulfilling a court-appointed mandate, but doing so may not always be possible, especially where confidential information is involved. Timeliness is vital in dealings with the court. Reports should be submitted to the court in accordance with applicable rules. Although the inclination of some insolvency professionals is to wait until the last minute to submit reports to the court so that the most up-to-date information is included, such a delay is not generally appropriate. The proper practice is to file reports sufficiently in advance to ensure that all parties have an adequate opportunity to review them CQP Applied Knowledge Course July

49 Insolvency and Business Practices and file response material. If there are last minute additions or changes, a short supplement to the report can be circulated and filed just before the court hearing but, even in this case, maximum effort should be made to serve this material as much in advance of court attendance as possible. The court will look much more favourably on a few numbers changing the day before the proceeding than on receiving an entirely new report for the first time on the day of the proceeding. Trustees must have the utmost respect for the rules of the court. The Introductory Course has a module dedicated to dealing with courts and should be reviewed by candidates in conjunction with the information above Consumer Associations Definition A consumer association is any organization, for profit or not-for-profit, that provides information and/or services to consumer debtors relating to their rights and remedies. These associations deal with a broad range of matters relating to purchasing, renting, debt collection, privacy, health and financial management Role of Consumer Associations There are numerous consumer associations in the marketplace that are available to assist the insolvent debtor and that can be classified under one of the following categories: government associations; credit counselling associations; credit bureaus; self-help associations; and others, including banking or credit grantor associations. Consumer associations are a great resource for troubled debtors. The trustee should be aware of the types of associations available to refer debtors to for counselling and as a referral source for insolvency engagements. A list of some of the more established associations is provided in Appendix A Government Associations or Statutes The government associations, for the most part, focus on providing information and resources relating to the statutory rights and remedies of the consumer. There are a number of statutes both federal and provincial that provide protection to the consumer debtor with which the trustee should be familiar. A general listing is provided in Appendix B. The trustee should be familiar with the provincial statutes so as to determine whether a particular type of legislation is CQP Applied Knowledge Course July

50 Insolvency and Business Practices applicable in the province of practice and the impact on an insolvent debtor. For example, the Personal Property Security Act is not relevant in all provinces Credit Counselling There are numerous credit-counselling services in the market place today, both for profit and not-for profit, which provide a varying range of services. This is an unregulated field so the experience of the individual counsellors can vary significantly. In practice, a trustee may refer to the counselling prescribed in Directive 1R3 issued by the Superintendent of Bankruptcy to outside counsellors; however, the counsellors must meet the prescribed qualification standards and be registered with the Superintendent of Bankruptcy, and in case of a referral the trustee remains the prime person responsible for the counselling given Credit Bureaus There are three main credit bureaus in operation in Canada: Equifax Canada, Trans Union Canada and NCB Inc. The credit bureaus share information through a system known as the National Equifax Network. All debtors have the right to review the information listed on their personal credit report at a credit bureau and to place a statement on file. It is not uncommon for a trustee to be contacted by a frustrated debtor more than seven years after discharge regarding a denied credit application due to a bankruptcy notation that has not been removed from his credit rating Self-Help There are self-help organizations on almost all aspects of life. However, the primary areas that have a significant impact on the causes of insolvency are money management and addiction, be it compulsive spending, gambling, alcohol or other substance abuse. Counselling was legislated into the BIA with the 1992 amendments. When the trustee suspects any problem related to health or addiction as a cause of the debtor s bankruptcy, he should refer the debtor to an outside counsellor or association specializing in the appropriate area of need Other The Canadian Bankers Association and the various credit grantor associations are among the many other associations that provide information and/or education to consumer debtors Professional Practice Preparing Business Plans Background In this section preparation of a business plan specifically for an insolvency practice is discussed. The process would be essentially the same for the preparation or the review of a business plan for a debtor company or an individual. CQP Applied Knowledge Course July

51 Insolvency and Business Practices As for any commercial entity, a business plan is an essential element in the planning and monitoring processes of an insolvency practice. The business plan summarizes the nature of the practice, its historical activities, if any, and its goals and objectives for the future. It also provides a documented tool for periodic future reference, to compare actual achievements with planned performance. A key part of any business plan is laying out a clear understanding of a vision and/or mission statement for the business. Business plans should be prepared on a regular basis, at least annually, and should include a discussion of current and anticipated operations combined with operational and financial data. The relevant coverage period for the business plan normally coincides with the financial reporting period. The plan should indicate the projected financial and operational information for a period varying from one to five years. If the practice is financed with external capital, such as from a financial institution, the plan likely will have to be submitted to the financing party on a regular basis. If the practice is financed with partners or proprietor s capital, the financial stakeholder(s) likely will wish to review, and contribute to, the business plan. While the services offered by an insolvency firm can vary depending on the maturity of the firm and areas of concentration, the essential elements of the business plan are common to all types of practices. Ideally, business plans should be compiled by areas of concentration that eventually are combined into an office plan. (Compilation of some financial data, such as cash flow and balance sheets, may be difficult by areas of concentration in which case such information would be prepared at the office or firm level.) If the professional practice has multiple locations, individual office plans should be prepared and eventually incorporated into an overall firm master business plan Components of the Business Plan Components of the business plan should include: a historical description and analysis of the practice indicating its past financial performance, if applicable; a description of its goals or objectives; a narrative description of the firm, its marketing procedures, competition, location, facilities, management and personnel; an operating plan or budget that projects operating results, cash flow, and financial position; and CQP Applied Knowledge Course July

52 Insolvency and Business Practices an indication of the amount and source of financing required to achieve the goals Format The format of the business plan, generally, incorporates the following: Executive summary Statement of purpose Goals and objectives Action plan Operations Description of business Marketing Competition Operating procedures Personnel Financial information Annual budgets Financing sources Review of Results Key elements Any additional information judged necessary All supporting information relating to the Business Plan should be in appendices. The business plan should not be voluminous. It should present only highlights of various important aspects related to the practice. However, all the information should be supportable by detailed information. Where appropriate, detailed information can be included as supporting information. The plan should be specific to the type of practice, such as: start up; established; single office; CQP Applied Knowledge Course July

53 Insolvency and Business Practices multi office; consumer; corporate; combination consumer and corporate; single specialty (concentrating on insolvency services); and association with other type of services, such as accounting, valuations, dispute analysis, or other specialty practices. Executive summary The executive summary includes highlights of the various areas covered in the business plan summarizing important aspects of operational and financial data. Statement of purpose The statement of purpose includes the vision and/or mission statement(s), a summary of goals and objectives, and a plan of action to implement the goals and objectives. The insolvency practice should have an overall purpose summarized in a few sentences. For example: To provide high quality service to the business community and/or individuals while maintaining the integrity of the insolvency system. All members of the practice should have input in formulating, and agreeing with, the vision statement. A vision statement remains constant and will change only if the core purpose of the insolvency practice changes. The mission statement describes which issues, including resources, are most critical to supporting the strategy of the practice. Three factors considered in terms of the mission are: quality, value and service. An example of a mission statement, specific to an insolvency practice, is: Our goal is to provide insolvency services to businesses and individuals and to demonstrate our commitment to timely client service and client satisfaction, and to ensure that knowledge and experience are shared throughout our practice and with our clients. The mission statement is modified when factors, such as competition or the elimination of a key engagement referral source, change. CQP Applied Knowledge Course July

54 Insolvency and Business Practices While some entities combine the vision statement within a mission statement, some segregate the two statements. The following describes a common process applied when moving from vision to action: creation of a vision statement; formulating a mission statement; analysis of strengths, weaknesses, opportunities and threats (SWOT analysis); defining practice goals and objectives; preparation of actions plans; and executing or implementing. Goals and objectives The discussion in this section includes a summary of the underlying principles that include goal setting. Two common methodologies are often used in the process of setting goals and objectives for incorporation in action plans. Some practices will use the top down approach, which is a process initiated by the managers (represented by the proprietor, partners or senior personnel) after discussion with, and input from, key employees. The managers formulate the vision and mission statements, list the goals and objectives of the insolvency practice, and incorporate the feedback from key employees. An alternative is the bottom up approach, which is initiated by the employees after their agreement to the vision and mission statements of the practice. The goals and objectives of the employees are incorporated with those of the managers in determining the goals and objectives of the practice. Both methods are acceptable. The key is that a structured approach is taken whereby nominated or elected team leaders coordinate the process. The goals and objectives, with the action plans, are compiled by designated individuals, or a committee, for submission to the senior personnel or management, of the practice. Goals are an integral part of any business plan. The goals are formulated recognizing the purpose of the practice after matching the strengths found in the practice s internal environment with opportunities in the external environment in a way that makes the business core competencies self-evident. These steps are future-oriented and should be part of the vision of the insolvency practice. The objectives, which also can be referred to as short-term goals, for an insolvency practice turn vision and mission into specific items to be accomplished. The anticipated accomplishments should be attainable, or realistic. The objectives should be written to include specific CQP Applied Knowledge Course July

55 Insolvency and Business Practices measurements to eventually identify whether success has been achieved. Objectives must be updated regularly, that is, at least once a year. Goals can be set for many years in advance. Examples of goals and objectives for an insolvency practice could include items such as the following: the practice will attract five corporate engagements during the next year from new referral sources; the practice will increase its consumer business by five new engagements each month; one new location will open during the next year; the professional staff of the practice will increase by three individuals during the next year. The goals and objectives also can be expressed as financial data, such as: corporate engagements will generate $250,000 during the next year, with $75,000 generated from new referral sources; consumer engagements will generate $320,000 during the next year, with $120,000 generated from new referral sources; the new location will involve $150,000 in start-up costs represented by additional staff requirements, leasehold improvements, equipment, and various supplies with incremental revenue of $195,000 in the first year; three additional professional staff, primarily for the new location, will be hired during the course of the next year at a cost of $100,000 in the first year. Follow up There should be regular review of the compiled goals of the insolvency practice to ascertain whether actual performance has met expectations or to determine whether or not remedial action is required. There also should be regular review of individual staff goals (at a meeting of the mentor and staff person) to monitor staff performance, provide advice and direction and recommend any required corrective measures. Action plan When the decision has been made to accept the goals and objectives, the next step is to develop the action plan. The work is broken down by department (that is, corporate and consumer, if appropriate), team and individual. Each individual is informed of his role in the overall plan, the timing of a given task and how success will be measured. An action plan should address various aspects of the business plan. For example, if growth is planned in corporate engagements, commentary would be made regarding the specific target, anticipated date of contacting of the referral source, anticipated dates of follow up with the CQP Applied Knowledge Course July

56 Insolvency and Business Practices contact, and the individuals within the practice responsible for attracting that business. If additional staff is required for a growing practice, commentary would be made regarding the types of individuals required, the means of contacting individuals such as hiring the services of a human resources consultant, the intended date of contacting the consultant, and the responsible practice individual. Implementation may be combined in the comments on an action plan but may be presented separately if the action plan is comprised of several components. For example, if an additional office is contemplated, the implementation plan will include a number of individual action plans laid out in a logical sequence (by use of planning tools such as critical path, a GANS chart or relevant software). The financial aspects of the action plan form the input for the budget process which is discussed in the next section of this module. The implementation is incorporated in the timing of revenue generation or required expenditure. In addition to overall practice goals and objectives, each individual associated with the practice should document his or her goals and objectives, at least once a year. The goals should be reviewed with an individual at an equal or more senior level commonly known as a mentor or counsellor as part of the regular staff review procedure. While there are different methodologies used for documenting an individual s goals, there is common agreement that goals should be specific, measurable, appropriate, and have realistic targets. The individual goals should be compiled into the overall goals of the professional practice. Examples of some individual goals and objectives could include the following: a newly hired individual wishes to obtain his or her trustee s licence in the next four years; a person with three years experience wishes to expand his or her experience levels to supervise the administration of corporate engagements; and a senior person wishes to increase his or her contact base for referral of engagements. Operations Operations consist of the following: description of the business; marketing; competition; operating procedures; and personnel. CQP Applied Knowledge Course July

57 Insolvency and Business Practices Description of the business The description of the business includes commentary on: the ownership stakeholder(s) represented by partners, proprietors, or, if the practice is operated as a corporation, its shareholder(s); the history of the practice, if applicable, including a summary of past financial performance; the types of services provided (these should be consistent with the stated purpose of the overall insolvency practice); the sources of referrals such as financial institutions, lawyers, and/or consumer debtors; location(s) of the practice; whether locations are leased or owned; any anticipated expansion including location, additional type of services, staffing and other requirements including the related financial impact; and financing of the practice. The history of the practice, if applicable, will include commentary on the growth of the practice from its start relative to its location(s) and staff complement. Details of summary financial information presented in this section of the plan can be included as supplementary information. The types of services should be specific to those offered by the practice, such as consumer debtor and/or corporate with some indication of the relative number and size of engagements. For example, 200 summary administration and consumer proposal engagements represented by individual debtors are serviced annually with average individual revenue of $1,600; and 10 ordinary administration and Division I proposal engagements represented primarily by owner/operator businesses are serviced annually with average revenue of $15,000 per engagement. The commentary on plans for expansion should be realistic and should address areas of growth and possible change while taking into account the abilities of the personnel providing the services. If the present practice services consumer debtors and small corporations experiencing financial difficulties, for example, the plan should not be aggressive or optimistic by incorporating growth from reorganizations of public corporations. (An exception, particular to this example, may be that the plan incorporates attracting individuals with experience in the administration and promotion of such engagements.) If downsizing is planned, a description of the related impact on operations, with related financial information, should be included. CQP Applied Knowledge Course July

58 Insolvency and Business Practices Marketing The discussion on marketing includes existing publicity methods such as Yellow Pages, media advertising and brochures, and proposed promotional means to attract sources of additional and existing referrals. Commentary on the relative success of marketing methods can be incorporated in this section of the plan. In addition, any revisions to specific marketing areas also should be covered. For example, certain marketing initiatives may give the practitioner little return for dollars expended on promotional efforts. Competition The commentary on competition should relate the insolvency practice to its relative position in the market place compared with other firms in the pertinent geographical areas. There are consulting firms that specialize in performing market surveys that can assist in compilation of the relevant data and information. SWOT analysis is utilized by many business entities to make certain that the vision and mission are attainable and that the organization is always focused on competitiveness. Examples of some of the areas that should be considered in SWOT analysis with respect to strengths and weaknesses would include: quality of service; quality of professional staff; planning process; quality of staff evaluation; profitability; availability of capital for growth; quality of marketing and sales efforts; compliance with statutory requirements; facilities; operations; and staff morale. With respect to opportunities and threats, examples of factors that can be considered would include: market limitations; lack of available capital; location challenges; and CQP Applied Knowledge Course July

59 Insolvency and Business Practices quality of professional staff. The philosophy of the practice, reflected in the business plan, should be to build on the strengths, limit the weaknesses, capitalize on the opportunities, and survive the threats to the practice. For more details on SWOT analysis, refer to the Case Analysis module. All employees should be involved in the process of documenting, and eventually recognizing, overall strengths, weaknesses, opportunities and threats. Comparison of documented SWOTs should be made to ensure that they are consistent with the purpose statement, that is, the vision and mission statements. Operating procedures The discussion on operating procedures includes a summary of the type of systems utilized to service engagements, compile time and disbursement charges, and document accounting information. Commentary should also include the reasons for anticipated success, such as, for example, a competitive advantage due to expertise of personnel with industry knowledge in certain types of businesses or specific consumer engagements, such as business professionals. The discussion also has to reflect criteria permitted by the Superintendent of Bankruptcy for licences restricted to certain types of consumer or corporate engagements, and suitable locations. In addition, any pertinent rules of professional conduct of related professional organizations have to be followed. These issues are discussed in the sections entitled: Location Strategy and Satellite Offices. Personnel Commentary on personnel includes background on management structure, persons in charge of the practice, trustees, estate administrators and other support staff. Efforts to complement the present knowledge base through educational programs and insolvencyrelated seminars can be discussed in this section. While the supervisors of the practice bear responsibility for the prepared business plan, the input of relevant personnel should be reflected in various aspects of the business plan. As an example, if an estate administrator in a consumer practice handles most aspects of the administration of an engagement (subject to areas where the trustee s involvement is required), that person should provide input with respect to the number of engagements with which he or she can be involved during a specific time period. The business plan should be shared with employees. Details surrounding potentially sensitive information, such as remuneration and/or staff terminations, obviously would be excluded. Sharing of information will encourage a team approach to the practice and encourage individuals to be accountable for their areas of responsibility. The business plan process should be started sufficiently early to enable sufficient input from employees and stakeholders well in advance to the beginning of its relevant time frame. CQP Applied Knowledge Course July

60 Insolvency and Business Practices Financial information The discussion on start-up, or shutdown, costs should include an analysis of their impact on each relevant area in the financial projections. The comments on capital expenditures relate to intended use and related financing sources. An explanation should be provided for required financing of working capital such as to, what is required to sustain existing and new business, with reference to specific areas of the practice requiring the funding. These areas could include increased accounts receivable and work in process due to additional business. In addition, in the event specific financing is not intended, investment in additional hardware or other capital expenditures would be included. Annual budgets Budgets should be prepared, at a minimum, on an annual basis. The budget should incorporate projected operating results, cash flow and a balance sheet. Prior to preparation of the projected financial items, assumptions specific to individual revenue and expense categories have to be derived. The assumptions should be realistic and include commentary on fluctuations based on historical experience. As mentioned earlier, a number of items included in the action plan will form the basis of determining the assumptions associated with financial projections. There are a number of software applications that can help with the budget process and facilitate its preparation. The budget should indicate projections, at a minimum, by month for the first year and quarterly for subsequent years (although some practitioners will prepare projections on a weekly basis for the first year and monthly for subsequent years). While preparation of budgets can be delegated to an individual or individuals responsible for financial and office administration, professional staff should have input, or at least agree with, items specific to their involvement with the practice. For example, the staff should be aware of the expectations of time involvement with professional engagements and nonchargeable activities. Staff also should be aware of specific planned expenditures, related to their activities, for items such as business promotion and education. Segregation of cash flow and balance sheets may not be possible by revenue centre, or even by individual office, if financing activities are centralized. In these instances, income projections should be prepared by revenue centre, or individual office, for inclusion with cash flow and balance sheets at the appropriate level. Key elements As mentioned above, assumptions should be documented at the beginning of the budget process. Examples of some assumptions, with reference to the next fiscal year, are: CQP Applied Knowledge Course July

61 Insolvency and Business Practices revenue has been projected as the number of hours estimated per on-going and new engagements, multiplied by the hourly rates of each professional staff; projected revenue incorporates: $125,000 from on-going corporate engagements; $75,000 from five new corporate engagements; $200,000 from on-going consumer engagements; and $120,000 from 60 new consumer engagements. a provision equivalent to at least 10% of projected revenue for possible unbillable hours, the whole being consistent with historical practice of the firm; salaries for professional and administrative personnel incorporate anticipated increases in June; salaries include additional staff that will be hired at different times during the next year; staff benefits include group insurance and statutory benefits with provision for anticipated increases due to salary adjustments and additional personnel; continuing education includes course fees for seven individuals enrolled in the CAIRP program and attendance by all professional staff at two educational seminars; licences and professional fees include fees for three trustees associated with the practice and professional organization fees for 10 individuals; staff activities include a monthly meeting with all staff to discuss firm activities, a baseball tournament in September, a Christmas event for staff children, and a Christmas party for staff and spouses/significant others; occupancy includes rent for (describe locations and monthly or annual rent), utilities comprised of hydro, water and heat with a provision for anticipated increases of 10% for all utilities, and communications not chargeable to engagements comprised of telephone, fax, courier and postage at historic amounts with an increase corresponding to projected increases in revenue; advertising costs have been increased to reflect additional costs related to the new location; business promotional activities include regular meetings with existing and prospective referral sources and two promotional events with referral sources in March and November; travel between offices reflects increased costs related to the new location that are not chargeable to engagements; CQP Applied Knowledge Course July

62 Insolvency and Business Practices office and other supplies, and office cleaning have been related to historic amounts with projected increases attributable to the new location; interest costs have been related to month-end balances of work in process and accounts receivable at an average rate equivalent to the Bank lending prime rate with a provision for an increase of ½% six months after the beginning of the next fiscal year; capital expenditures will be leased at a cost of $12,000 annually for hardware and software, and $50,000 for leasehold improvements and office furniture, primarily for the new location; hardware and software purchased in the next year relates entirely to the new location; a summary of start up costs for the new location is as follows: Staff Requirements (included with salaries) $100,000 Capital Expenditures Leasehold Improvements $35,000 Office Furniture $15,000 Annual Lease Cost $12,000 $ 62,000 Total $162,000 incremental revenue of $195,000 to be generated by the new location has been included with projected revenue; work in process related to corporate engagements will be billed in 30-day intervals after the commencement of the engagement; accounts receivable related to corporate engagements will be collected 45 days after the date of billing; work in process related to consumer engagements will be billed in accordance with criteria permitted by the Rules of the BIA; final billings for consumer engagements have been related to historical trends for completion of such engagements that are 20 months for bankruptcies and 36 months for proposals; accounts receivable related to consumer engagements will be collected 30 days after the date of billing; capital assets include assets subject to leases where ownership likely will be assumed by the insolvency practice; CQP Applied Knowledge Course July

63 Insolvency and Business Practices capital assets are mainly comprised of equipment; associated with the insolvency practice and are being amortized in equal amounts over a five year period commencing with the year of acquisition; and a provision for contingencies representing unforeseen expenses or fluctuation in estimated amounts, equivalent to 5% of total expenses, excluding amortization, has been included in projected expenses. With respect to projected income, operational information, in some cases, will form the base for financial projected results. As an example, information regarding the number of engagements by type can be translated into projected revenue. Similarly, readily available statistics on employees can be translated to projected salaries. Other expenses will have to be related to historical performance with incorporation of known fluctuations in the future. A provision for unknown fluctuations in expenses, including contingencies not considered in the projection of income, should be made. Underlying assumptions in the preparation of projected income for an insolvency practice may include, depending on the areas of concentration of types of services, commentary on items such as: estimated staff hours to service on-going and new engagements; staff charge-out rates; the number of on-going engagements at the beginning of the (business plan) reporting period; anticipated number of new engagements by type, that is, consumer and/or corporate engagements; staffing requirements; staff benefits; staff enrolment in educational courses and/or seminars; licences and professional fees; planned staff activities; occupancy, such as rent or mortgage payments, utilities (hydro, water, heat), communications (telephone, fax, courier, postage); advertising media, such as Yellow Pages, newspaper, brochures, television and/or radio; business promotional activities; travel between offices; other office items, such as supplies and cleaning; CQP Applied Knowledge Course July

64 Insolvency and Business Practices interest on borrowings; capital expenditures and equipment leases; and software and hardware requirements. The above will form the base for projecting revenue and expenditure for each revenue centre. Individual revenue centres should be identified and can be related to senior personnel, such as an individual licensed trustee or a senior person, for gathering related identifiable information specific to that person s practice area. Insolvency statistics, particularly with respect to receiverships, bankruptcies and proposals, are available from Industry Canada and credit rating agencies particular to the locality, or anticipated locality, of an insolvency practice. This information will assist with an assessment of revenue potential based on historical experience combined with present economic conditions. Revenue targets should be related to attainable and on-going engagements. The information will include revenue generated by staff combined with identifiable direct expenses such as employee wages. Revenue should be related to time involvement with anticipated new and on-going engagements, combined with a meaningful and realistic hourly rate specific to individual personnel. Staff time should be allocated to specific on-going and new engagements. In addition, provision has to be made for time required for vacations, education, promotion, practice administration and other non-chargeable categories. Estimates of time involvement may be difficult, due to unforeseen circumstances and complexity of particular engagements combined with the unknown nature of future engagements. Best efforts to predict utilization, on a reasonable basis, allocated to specific engagements are a necessity. As payroll is the most significant outlay for an insolvency service s practice, indicators have to be present, even on a best estimate basis, to help with planned staff requirements to service on-going and new engagements. A realistic provision for time that may not be billable should be incorporated against projected revenue related to time charges. Time budgets should be pre-determined for all engagements with subsequent follow up by comparison to actual incidence by related responsible staff. Additional discussion on time records is presented in the section entitled: Financing Practices. Expenses that cannot be readily attributable to specific individuals, such as premises rent, utilities, communications, advertising, supplies, and interest should be allocated against each revenue centre on a meaningful basis, such as revenue or head count. While capital expenditures, including hardware, do not form part of projected income, such information is used for calculating amortization (depreciation). CQP Applied Knowledge Course July

65 Insolvency and Business Practices The total revenue and expenses, compiled by revenue centre, obviously will form the income projection for a particular office. If multiple locations are operated, the individual office results will form the total projected income for the firm. A discussion of projected cash flow is summarized in the following comments. Realistic assumptions will have to be made for the collection of revenue in both summary and ordinary administrations, as well as all other corporate engagements. Realistic assumptions also will have to be made with respect to the payment of expenditures. A number of items are readily predictable due to their regular incidence such as salaries, utilities, and occupancy costs. Other expenditures will require estimates of payment terms particular to related suppliers. Projected capital expenditures, and any related financing, will be incorporated in projected cash flow. The source of capital to finance the activities of the practice also will be incorporated. The sum of cash flow from operations, adjustments for capital expenditures, financing of capital expenditures and capital will provide projected overall cash generated or required. Combined with a balance sheet at the beginning of the projection period, if applicable, the assumptions regarding changes in accounts receivable, capital expenditures, changes in accounts payable, financing of capital expenditures and capital contributions will support the necessary compilation of a balance sheet at the end of a projection period. Obviously, if the projection relates to the first period of operations, the items will represent the balance sheet at the end of the projection period. Supporting information Supporting information should be specific to the stakeholder receiving the business plan. For example, a financial institution that will be approached for financing may want personal financial information on the partners in the insolvency practice in addition to historical financial statements. Review of results This section discusses the information required by relevant parties to conduct a review of the results of an insolvency practice. Operating and financial information should be compiled on a regular and timely basis to facilitate comparison with the relevant areas of the business plan (goals, objectives and action plan) and, if required, remedial action. Some items will be reviewed on a daily basis while other items will be reviewed on a less frequent basis. Information should be distributed to parties responsible for its input. Remedial action, if any is needed, should be delegated to an appointed individual, or committee. CQP Applied Knowledge Course July

66 Insolvency and Business Practices Key information The main sources of information related to the review and monitoring of results include: collections from accounts receivable; unbilled work in process; accounts receivable; cash position; time statistics; new engagements; promotional activities; financial operations; comparison with business plan; and remedial action required. Depending on the size of the practice, some information will be compiled by the revenue centre; other information will be compiled by the individual office, while overall information for a multiple-office practice will be compiled at the firm level. Some of the information will be generated by the systems in place. The types of systems are discussed in other sections of this module, particularly with respect to the planning phase of a practice. Some information will require feedback from responsible individuals. For example, various procedures to assist with cash flow primarily generated from appropriate billing and collection practices are discussed in the section entitled: Financing Practices. Information that should be available on a daily basis includes billings and collections for the leader of a revenue centre and the person in charge of financial administration for the office. Cumulative totals for the prior month at least, compared with the budget, and results to date for the current month also can be made available. If the office is part of a multiple-office firm, and accounting functions are not centralized, the information should also be forwarded to the person in charge of financial administration for the firm. The daily information on collections can be incorporated in a daily cash report indicating the status of cash on hand and any bank indebtedness. Prudent cash planning would utilize an overdraft facility, if external borrowings are required, to apply cash against borrowings immediately on deposits. For multiple-office locations, cash concentration accounts can be used so that all cash deposited at any location is immediately transferred to a central banking facility. If cash is available, consideration can be given to its investment in interestbearing facilities. Items that should be available for review on a weekly, or bi-weekly, basis should include unbilled work in process for possible billings and aged accounts receivable for the status of CQP Applied Knowledge Course July

67 Insolvency and Business Practices older accounts. A comparison with historic information should be made to determine whether or not there has been any deterioration in billing and collection practices. On the other hand, increases in both items may be attributable to recent additional engagements. As time is the commodity that an insolvency practice sells to its clients, the control of time should be an essential component of regular review procedures. Time management is discussed further in the section entitled: Financing Practices. With respect to regular review and monitoring of time utilization, summary statistics should be available by staff person, and in total, on chargeable and non-chargeable time for current periods (weekly, bi-weekly, bi-monthly or monthly). While there may be periodic fluctuations in chargeable time, depending on the work load related to on-going and new engagements, revenue leaders responsible for revenue centres should review time statistics to ensure that productivity attains levels previously projected. Follow up may be required to assist staff who have unusually high levels of productivity. Discussion may also have to be held with staff who have low or unaccounted for hours. Information on the status of on-going engagements should be compiled by team leaders and shared with all staff. As everyone associated with a professional practice contributes to the engagements serviced by the practice, staff should be made aware of the results of their contribution. Similarly, information on new engagements should be compiled and shared with all staff. The referral source and practice individual responsible for attracting the engagement should be included in the compilation and information provided. There are different procedures related to encouragement and reporting of promotional activities. Some practices encourage all staff to promote the activities of the firm through activities such as charity work with prime responsibility for contact with direct referral sources falling on the revenue leaders. Other practices will encourage fewer senior professional staff to partake in promotional activities as early as possible. In any event, the activities should be tied to the individual, and practice, goals and objectives. Promotional activities and events should be carefully planned to ensure that prime existing and potential referral sources are included on a regular basis. The results of promotional efforts should be monitored by comparison with the goals and objectives and related referral of engagements. Financial results should be compiled on a monthly basis to measure performance and to provide a comparison with budget. Areas where actual results differ from projection should be analyzed and reviewed, and particularly with items reflecting an unfavourable variance between actual and budget, to determine any required corrective action. If revenue has increased beyond expectations, additional staff resources may be required, or consideration may be given to additional locations. However, such decisions should include reference to the goals, objectives and action plan documented in the business plan, to ensure the variance is not temporary. Otherwise, an improper decision may be made that could have consequences on the financial resources of the practice. CQP Applied Knowledge Course July

68 Insolvency and Business Practices If there are significant unfavourable variances in controllable expenses, such as business promotion, follow up should be performed, including comparison with the documentation in the business plan. Discussion may be required with certain individuals where spending may not be yielding rewards exhibited by increased revenue as expected. Segments of financial information can be distributed to leaders of revenue centers as feedback on their individual and specific group, goals and objectives Location Strategy Location Strategy This section discusses resident office insolvency operations. A number of the issues discussed also pertain to satellite offices, which are discussed in the section entitled: Satellite Offices. Traditionally, insolvency professionals represented themselves, for the most part, as a specialty area of a public accounting practice using the same name, although they were usually a separately incorporated entity. In recent years, an increasing number of firms have surfaced providing solely insolvency services. Overall administration of an insolvency practice is provided by a resident office with any branch operations supplied by satellite offices, or non-resident offices, as permitted by the Superintendent of Bankruptcy. While the operation of an insolvency practice will involve varied engagements, subject to any limitations on the licence issued by the Superintendent of Bankruptcy, practicality dictates that such services will include bankruptcy, proposal, receivership, and other types of engagements. Accordingly, the BIA and Directives issued by the Superintendent of Bankruptcy and the CAIRP Rules of Professional Conduct, Interpretations and Standards of Professional Practice, document the requirements of operating a practice that provides bankruptcy, proposal and receivership appointments. While some insolvency firms may supplement operational requirements set out in the BIA and in the Directives in internal memoranda or manuals, the primary sources of mandatory procedures are outlined in the documents Prerequisites and Qualifications Directive 13R When determining where to locate an insolvency practice, the individual or firm must ensure that they are able to provide the contemplated services. A licensed trustee in good standing has to be designated to be situated full-time and responsible for overall coordination and supervision of the operating activities of the office. The licensed trustee must have the necessary prerequisite qualifications regarding: financial status, including not being insolvent during the last five years; educational background or relevant work experience; CQP Applied Knowledge Course July

69 Insolvency and Business Practices successful completion of the CIRP Qualification Program, including the CQP National Insolvency Examination and the Insolvency Counsellor s Qualification Course; and being a member in good standing of all professional organizations of which they are members (without any outstanding disciplinary matters against them Other qualifications regarding reputation and suitability of the individual include: good character; and suitability, as evaluated by a Board of Examination coincident with the Oral Trustee Examination process. The insolvency services to be offered have to be adapted to the type of licence issued to the individual trustee responsible for the activities of the office. If a licence has been issued by the Superintendent of Bankruptcy, such as the ability to accept only summary administration and Division II proposal engagements, the individual can only administer engagements allowed by the issued licence. The name of the practice has to be suitable to the Superintendent of Bankruptcy and, if applicable, to any professional organization of which the individual is a member. The individual trustee cannot carry on an incompatible occupation including, among other things, operating as a collection agent, bailiff, trade association representative, employee of the Office of the Superintendent of Bankruptcy, lawyer, notary in the Province of Québec, or any other occupation, business, or profession that may be incompatible with the duties and responsibilities of a Trustee. If the practice is to operate under a corporate name, in addition to pre-approval of the name by the Superintendent of Bankruptcy, approval is required from the appropriate federal or provincial regulatory body. Operation of an insolvency practice as a corporation requires the charter and by-laws to be specific to such a practice, and that an individual trustee be designated as the chief officer. Subject to the exceptions set out in the BIA, operating an insolvency practice as a corporation does not protect the individual officers from any liability with regard to actions by a third party. Accordingly, evidence of adequate financial stability of the individual or individuals must be provided to the Superintendent of Bankruptcy Approvals The initial set up of an office to provide insolvency services requires the approval of the Superintendent of Bankruptcy. To avoid the risk of being liable for obligations related to opening an office, such as occupancy rent and related services, care should be taken not to enter into such arrangements prior to approval of the Superintendent to provide insolvency services. With regard to setting up an insolvency practice, the Superintendent of Bankruptcy has shown particular concern about: file storage and proximity of files for daily use, the availability of a CQP Applied Knowledge Course July

70 Insolvency and Business Practices boardroom large enough to hold interviews and conduct meetings of creditors and the proximity of the office to other trustees in the area. Approval from the Superintendent of Bankruptcy is also required if the practitioner wants to either move office locations or open a satellite office. Factors considered by the Superintendent of Bankruptcy, and by an individual or firm contemplating a resident office, are discussed in the section entitled: Satellite Offices. If insolvency services are to be provided in conjunction with other professional services, such as an accounting practice, approval may be required of the related professional organization of which the individual/firm is a member. If an insolvency professional is providing other professional services, then he or she will be required to provide those services under a different corporate name than that of the firm providing insolvency services. In addition, approval may be required from the municipality where contemplated insolvency services are to be offered Feasibility Study and Business Plan Directive 20 A feasibility study, including a business plan, should be prepared when considering a location providing insolvency services. The business plan should incorporate the goals, annual budgets and reviews as discussed in the section entitled: Preparing Business Plans. With respect to feasibility regarding potential business, the feasibility study can incorporate: general economic conditions particular to the geographical area of the contemplated location; discussion with the Superintendent of Bankruptcy including any available statistics by postal code; whether or not engagements will be accepted pursuant to the Bankruptcy Assistance Program; 2 information compiled by local credit agencies; and any input regarding historical experience and sources of referrals from discussions with local lawyers, bankers, accounting firms, ethnic organizations and other trustees. 2 The Bankruptcy Assistance Program was established to assist those debtors who do not have sufficient funds or whose estate will not have sufficient funds to secure the services of a trustee. CQP Applied Knowledge Course July

71 Insolvency and Business Practices Other factors should include the availability of required support staff, adequate office space, and other essential support systems Support Systems When assessing a location from which to run an insolvency practice, consideration must be given to having adequate support systems, including access to the location, available space, insurance, staffing, information systems, system support, and marketing. Also of concern should be ease of access to the location by prospects, including public transportation services within the vicinity, and services specific to the location such as adequacy of parking, related snow removal services, and access by handicapped individuals. Telephone, facsimile and services should take into account ease of contacting the proposed location, including communication from rural areas. Accordingly, consideration should be given to arranging for toll free telephone and facsimile services, and services. Sufficient space will be required for practice needs including: reception areas, private interview rooms, separate private accommodation for holding meetings of creditors, private work areas for staff, including receptionist and administrators, related required office furniture equipment and supplies, and restricted access to areas housing information systems, engagement files and stored items, including smaller assets seized from debtors and completed engagement files. Adequate support staff will be required to assist with reception, office administration, including accounting, and the administration of engagements Guaranty Bonds or Guaranty Suretyships BIA s. 5 Directive 21 Arrangements will have to be made for required insurance coverage: related to bonding, if required by the Superintendent of Bankruptcy, for example, fidelity bonding of employees; errors and omissions insurance; business interruption insurance; and insurance coverage for furniture and fixtures and the premises, if required by the lease, or if owned Systems Adequate information and accounting systems will be required to administer individual engagements and to administer the contemplated practice. There are insolvency software packages available to assist with the on-going administration of engagements. CQP Applied Knowledge Course July

72 Insolvency and Business Practices Banking Arrangements Directive 5R CAIRP Standard of Professional Practice No Banking arrangements will have to be made for the operation of trust and professional practice bank accounts. Provision will have to be made for backing up electronic data information on a regular basis, with storage of duplicate records off site. In addition, consideration should be given to the availability of an alternate source of power in the event of electrical power disruption Internal Control Directive 4R Adequate internal control procedures will have to be implemented and documented particular to the administration of engagements. In addition, certain tasks cannot be delegated by the trustee to support staff. These are discussed in the section entitled: Satellite Offices. Service providers will require access to install required practice and administrative software, and to maintain, update, repair, etc. information systems, such as telephone and facsimile, other utilities, and electronic data systems. In the case of a contemplated stand-alone practice not affiliated with an accounting firm, application will have to be made with various government authorities for reporting and remittance of employee-related items such as source deductions, health tax if applicable, workers compensation, Goods and Services Tax and any provincial and/or municipal levies. If the contemplated premises will be leased, the lease document should include an exclusivity clause if possible. Other matters, including items such as responsibility for maintenance including common areas, premises insurance and municipal taxes, will be the subject of negotiation with the prospective lessor. Essential reference material will have to be purchased in electronic and/or hard copy form, including regular electronic and/or hard copy publications such as Canadian Bankruptcy Reports. Continued education of all staff will have to be considered and enrolment in courses and seminars offered by various professional bodies, such as CAIRP Satellite Offices Planning During the last few years, a number of insolvency professionals have opened satellite or nonresident offices in areas surrounding their resident office. The need for such offices was dictated CQP Applied Knowledge Course July

73 Insolvency and Business Practices by the availability to the general public of insolvency services closer to their locality. Such offices primarily provide services to consumer debtors. A satellite office cannot operate as a stand-alone practice and is required to be supervised by a trustee situated in a resident office. The responsible trustee has to provide supervision by attendance at the satellite office on a periodic basis. Any advertising of the satellite office location has to include reference to the location of the resident office Prerequisites and Qualifications Directive 13R As with a resident office, operation of a satellite, or non-resident, office is subject to the provisions in the corporation s charter and by-laws, if operated as a corporation, and is subject to any restrictions placed on the trustee licence for the individual responsible for the resident office. The prerequisites and qualifications of the trustee responsible are the same as for a resident office Non-Resident Office Directive 28 A resident office refers to the principal place of business from which an individual trustee normally practices. A non-resident or satellite office is an office that is in operation and where there is no individual trustee on the premises on a full-time basis. Prior to opening a non-resident or satellite office, the practitioner must apply for the registration of the non-resident office and obtain permission from the Superintendent of Bankruptcy to extend the licence to another district. The bankruptcy administrator of the local office of the Superintendent of Bankruptcy (nominated by the Superintendent of Bankruptcy) will satisfy himself that the trustee is familiar with legislation pertinent to the additional district, the performance of the trustee in the administration of its past appointments, and that operation of the extended practice will not adversely affect the performance of professional engagements. The trustee may be required to appear before the Board of Examiners prior to the bankruptcy administrator being satisfied that the trustee is familiar with the pertinent legislation in the additional district. Where there is more than one trustee in a resident office, an individual trustee has to be designated as responsible for the satellite office Advertising by Trustees The name of the practice has to be the same as for the resident office. The advertising of the non-resident office must always include the address of the resident office where the trustee CQP Applied Knowledge Course July

74 Insolvency and Business Practices normally practices, and this address must be predominant in the advertisement. However, the name of individuals assisting with the administration of individual engagements, commonly known as estate administrators, can be used in advertisements for the satellite office as long as they are identified accordingly. If the trustee s overall performance is not deemed satisfactory, the bankruptcy administrator may refuse or cancel the registration of a non-resident office, refuse new appointments or may make reports to the court or to the Superintendent of Bankruptcy Approvals Directive As mentioned previously, the set up of a non-resident or satellite office to provide insolvency services requires the approval of the Superintendent of Bankruptcy. The satellite office can be open during pre-determined times with the trustee providing services on a periodic basis without any support staff. The bankruptcy administrator has to be satisfied that: there is an acceptable location for holding interviews and meetings of creditors; and all files are kept in the resident trustee s office. Where support staff is maintained in the non-resident office, the Bankruptcy Administrator has to be satisfied that: there are adequate facilities for holding interviews and meetings of creditors; there are adequate internal controls over the operation of the non-resident office; where there is more than one trustee in the resident office, one specific trustee is assigned responsibility for the non-resident office; there is proper supervision of appointments by the trustee in charge of the non-resident office; the maintenance (storage) of files in the non-resident office will not adversely affect the administration of engagements; and the administration of engagements from the non-resident office does not cause additional costs for an estate. Other approval measures to be considered prior to opening a satellite office are similar to those for a resident office as discussed in the section entitled: Location Strategy Feasibility Study and Business Plan BIA Rule 51 Directive 29 CQP Applied Knowledge Course July

75 Insolvency and Business Practices CAIRP Rule of Professional Conduct 9 A feasibility study, including a business plan, should be prepared prior to considering an additional location providing insolvency services. Factors to be considered are similar to those of a resident office. Additional factors to be considered are discussed in the sections entitled Preparing Business Plans and Location Strategy Support Systems As for a resident office, a satellite office providing insolvency services will require provision for adequate support systems, including access to the location, available space, insurance, staffing, information systems, system support and marketing. Additional considerations for the satellite office include assurance that information compiled on site pertaining to engagements and other administrative matters is forwarded to the resident office on a regular basis. Adequate controls will also have to be instituted to ensure that adequate back up is maintained of all information that is forwarded from the satellite office to the resident office Delegation of Tasks Directive 4R As with a resident office, certain tasks cannot be delegated by the trustee to support staff of such satellite office. Such tasks include: acceptance of an appointment; chairing meetings of creditors for ordinary administration bankruptcies and Division I proposals; chairing meetings of creditors for summary administration bankruptcies and Division II proposals where a proven creditor or the Official Receiver requests the trustee to chair the meeting; chairing a meeting of Inspectors at the request of an Inspector; reviewing and signing of cheques drawn on estate accounts; ensuring that internal control systems are adequate and operational; reviewing and signing the forms and documents listed in Schedule A; and other tasks specified in the BIA, Rules and Directives issued by the Superintendent of Bankruptcy. CQP Applied Knowledge Course July

76 Insolvency and Business Practices Marketing Strategies Marketing Plan As discussed in the sections entitled: Preparing Business Plans and Location Strategy, a business plan for an insolvency practice should include marketing strategies. Considerations for a start-up practice can include an announcement of the insolvency practice in selected media and written letters or announcement cards sent to prospective referral sources such as bankers, lawyers and accountants, and credit counselling agencies. Established practices often use select on-going advertising in different types of media, as well as personal contact with prospective referral sources. Promotion of services also can be provided by membership in selected professional business organizations including Boards of Trade and Chambers of Commerce, and registering and meeting with local economic development organizations. Indirect advertising and personal satisfaction can be achieved by joining service clubs and assisting charitable organizations, including sponsorship of fundraising events. A number of avenues are available for advertising insolvency services including: telephone directories, particularly Yellow Pages; local newspapers; radio stations, including ethnic stations; television, particularly cable facilities advertising upcoming events; written news, and upcoming programs; local television guides; brochures displayed at selected locations such as local grocery stores; and web sites. Trustees have been innovative in their use of different media to advertise the availability of insolvency services. Advertisements of all forms should be in good taste, should avoid use of terms stating best or least expensive services and should avoid solicitation or canvassing to make an insolvency filing. Advertising should not include any relationship of the cost of the insolvency services to realization from assets or contributions to the estate by the debtor. For obvious reasons, such amounts are dictated by individual circumstances particular to each engagement and are governed by the BIA, Regulations and orders of the court. Any advertising of a satellite office location has to include reference to the location of the resident office Presentation of Image CAIRP Bulletin: Compliance in Advertising. October 2000 In September 1999 the Superintendent of Bankruptcy issued a letter to all trustees regarding the conduct of trustees in their advertising practices. In October 2000, a Bulletin was issued by the CIPA, now known as CAIRP, to enforce compliance with advertising standards to improve the image of Trustees in Bankruptcy. Highlights of the Bulletin are discussed below: CQP Applied Knowledge Course July

77 Insolvency and Business Practices False names Placement of an extra A in front of a firm name (to gain an advantage in positioning of the name in a directory, for example) is false advertising. Similarly, a stand-alone alphabetical listing under a name different from the firm s licensed name is not acceptable, for example, Bankruptcy Boutique. Principal office As discussed previously, where a firm lists several addresses but does not have a resident trustee at each of the locations listed in the advertisement, the principal place of business has to be indicated. The public should not be given the impression that there is a resident individual trustee in a non-resident office. Use of by appointment only is acceptable for a satellite or nonresident office. Exclusive headings Trustees have to identify themselves as Trustee in Bankruptcy in their advertising. Estate administrators Individual listings are not permitted for estate administrators and services should only be listed in a section for Bankruptcies-Trustees. Photographs Photographs of office staff or models without using names are acceptable. When names are used, the status and full name of the employee must be included. When the photograph and name is featured in a display advertisement, the name of the firm must be included. Internet listings Internet listings constitute advertising and the content must comply with advertising standards. Practical experience When advertisements refer to years of experience, the number of years should refer to the number of years the trustee has held his or her license Practical Considerations If the practitioner has a brand, then the practitioner should ensure that all advertising adheres to its brand image. The advertising image should be similar regardless of the type of media used. Consideration should be given to the images used, the firm logo (if any), fonts and colours. A brochure for a consumer insolvency practice may include the following headings with explanations under each heading to gain the attention of the target market: CQP Applied Knowledge Course July

78 Insolvency and Business Practices Financial Problems; Debt Consolidation Loan; Informal Arrangements with Creditors; Consumer Proposals; Division I Proposals; Personal Bankruptcy; Your Duties and Responsibilities Include; Contributions from Your Future Income; Credit Collection Proceedings; Debts Not Affected by Bankruptcy; The Length of Your Bankruptcy; Co-Signed Loans; Your Credit Rating; Trustee s Fees; Your Assets; and The Next Step. The brochure would also include the address of the office location, main phone number and a list of the names of resident trustees and their direct telephone numbers Other Promotion Infringement BIA Rule 49 Directive 29R An example of an infringement that is not permitted is the use of discount coupons or gifts, such as cars and trips, to attract potential engagements. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement. CQP Applied Knowledge Course July

79 Insolvency and Business Practices Communications Internal Communication Members of an engagement team will communicate with each other in a number of ways, including internal memoranda, meetings, telephone discussions and s. Appropriate records of these communications should be kept. It should be remembered that they could be discoverable in the event of litigation External Communication BIA Rules 39, 40, 45, and 46 Most insolvency engagements entail the practitioner, and the practitioner s firm, being responsible for the property of others, often involving sizeable amounts. To properly discharge such responsibility, all documents and reports relating to such property must be reviewed and signed by responsible persons on behalf of the firm. In addition, the impressions of licensing bodies, creditors and others as to the quality of a firm s work can be influenced greatly by the general standards of reports and correspondence. Partners and others, in exercising the signing authorities granted to them, should ensure that documents, reports and correspondence that they sign properly discharge the firm s responsibilities and enhance the firm s professional image. Generally, it is expected that only a partner, or a senior practitioner specifically authorized by the engagement partner, would be authorized to sign documents or communications that commit the practitioner s firm in some respect. Such documents or communications normally include: communications accepting or rejecting new work; reports, government returns, and other documents involving the assumption of responsibility by the firm; and correspondence concerning important points of principle or practice that commits the firm in some respect. Correspondence relating to an engagement that does not involve any important principle or special or unusual circumstance would normally be delegated to the engagement manager, while more junior staff, properly supervised, could deal with routine correspondence. Legal documents should be executed by one or more authorized signing officers on behalf of the practitioner s firm showing, where appropriate, the basis of the firm s authority. For example: A Trustee and Associates Inc., as Receiver and Manager of ABC Limited Per: George E. Jones, Senior Vice-President CQP Applied Knowledge Course July

80 Insolvency and Business Practices Formal reports and formal letters can be signed with the firm s manual signature showing, where appropriate, the basis of the firm s authority. In this case, the name of the individual signing the letter should be typed below to identify the signer. For example: Yours very truly A Trustee and Associates Inc., Receiver and Manager of ABC Limited George E. Jones, Senior Vice-President Informal correspondence can be addressed and signed more informally. However, the firm s letterhead should be used in all correspondence related to an engagement. Where a final report is prepared and issued by a practitioner, it is recommended that it: contain a clear reference to the terms of engagement under which the report was produced; be dated and refer to the timeframe over which the work was conducted. This is especially important if the field analysis is completed some time prior to the issue of the final report; contain no potentially embarrassing comments; contain clear statements referring to the source of all material data in it; and be supported by a final draft maintained in the Engagement File that is cross-referenced to supporting analyses and source documentation. Every effort should be made to ensure that reports are logical, with clear conclusions drawn from the facts and free of typographical errors. The approach of requiring a cold read by someone independent of the engagement team is strongly encouraged. In the case of business review engagements, unless specifically prohibited in the engagement letter, it is recommended that a draft of the report be discussed with the company being reported on before the final report is issued. The purpose of this discussion is to confirm the accuracy of the facts included in the report and to ensure that no material facts have been omitted. Detailed notes of this discussion should be prepared. Consideration should be given to obtaining a letter of representation confirming these matters. The conclusions to the report may, or may not, be discussed depending on the particular circumstances. The practitioner should remember that documentation is discoverable including correspondence. The practitioner should be aware of the following sections in the BIA Rules regarding the Code of Ethics for Trustees: trustees shall be honest and impartial and shall provide to interested parties full and accurate information as required by the Act with respect to the professional engagements of the trustees; trustees shall not disclose confidential information to the public concerning any professional engagement, unless the disclosure is: CQP Applied Knowledge Course July

81 Insolvency and Business Practices required by law; or authorized by the person to whom the confidential information relates; trustees shall not sign any document, including a letter, report, statement, representation or financial statement, or associate themselves with any such document, that they know, or reasonably ought to know, is false or misleading, and shall not associate themselves with such a document in any way, including by adding a disclaimer of responsibility after their signature ( Note: a member is allowed to forward information that is not verified with an appropriate disclaimer, only if he or she does not know that it is false or misleading, that is, he or she has no reason to question its reasonableness); and trustees may transmit information that they have not verified respecting the financial affairs of a bankrupt or debtor, if: the information is subject to a disclaimer of responsibility or an explanation of the origin of the information; and the transmission of the information is not contrary to the Act, these Rules or any directive. The CAIRP Rules of Professional Conduct set similar standards Banking Arrangements Requirements BIA s. 2 and 25 Directive 5R CAIRP Standard of Professional Practice No The CAIRP Standard of Professional Practice No sets out the requirements for opening and operating bank accounts. A Trust Account is defined as a bank account maintained by a member on behalf of a party other than the member. Generally, trust accounts are held at a Canadian chartered bank, although other deposit-taking institutions are permitted. The requirement of BIA s. 25 states that the trustee may deposit in a bank all monies received for an estate in a separate account for each estate. Trustees may deposit funds in other financial institutions other than a bank as defined in BIA s. 2, only if the deposits are insured or guaranteed under a provincial or federal program that provides the depositors with protection against the loss of the money on deposit. Trustees invest monies that are not immediately required in term deposits or Guaranteed Investment Certificates. Directive 5R4 requires the CQP Applied Knowledge Course July

82 Insolvency and Business Practices trustee to make reasonable efforts to obtain a competitive rate of return on estate funds that are invested. Directive 5R4 issued by the Superintendent of Bankruptcy provides further guidance on the requirements regarding the handling of trust funds. When opening and operating estate bank accounts the insolvency professional should ensure that the firm s policies and procedures are fully compliant with the Superintendent s Directive No. 5R4 and the CAIRP Standard of Professional Practice No Insolvency professionals should be mindful of one of the comments that has been made during the monitoring process conducted by the Official Receiver, namely that the trustee is deficient with respect to the reconciliation of the accounts. For example, the trustee s staff did the bank reconciliation and the trustee did not review and sign off on the reconciliation on a timely basis Trust Accounts Regulations BIA s and 155 Directive 5R The BIA General Rules and Directive 5R4 issued by the Superintendent of Bankruptcy regarding trust accounts must be carefully understood and followed. The trust account must be in the name of the firm and state the capacity in which the firm is acting (for example, as Trustee of the Estate of TYZ Limited. A consolidated trust account may only be used for: Summary administration bankruptcies and consumer proposals, as permitted under BIA s. 155 and s , provided that the requirements of the Superintendent s Directive on Estate funds and Banking are met; and, Fee retainers and items of an exceptional nature (for example, funds received prior to the opening of the estate bank account, deposits accompanying offers for the purchase of estate assets) that it may not be possible or appropriate to deposit in the estate bank account. Where a consolidated trust account is used, the necessary steps should be taken to ensure that the accounting records segregate the amounts relating to different estates and that interest earned is properly allocated on a regular basis. Entries to the consolidated trust account should reference the particular estate to ensure the integrity of the amounts allocated to each estate and to assist in the overall reconciliation of the consolidated accounts. If care is not taken, and the consolidated trust account contains CQP Applied Knowledge Course July

83 Insolvency and Business Practices numerous estates, the reconciliation process can become quite difficult and time consuming for the trustee to trace the correct entries. Superintendent s Directive 5R4 provides specific instructions for opening and operating a Consolidated Trust Account Financing Practices Cash Flow As mentioned in the previous section Preparing Business Plans, salaries are likely the most significant operating expense of a professional practice. Sources of funds for payment of salaries and other operating expenses are provided from collections of accounts receivable, borrowings, or contributions by the partners, proprietor or shareholders. Borrowings and contributions will have an associated interest cost that also has to be funded from cash flow. Accordingly, the most advantageous source of funds for an insolvency practice is receipts from collections of accounts receivable. Procedures have to be implemented, followed and enforced to ensure that billings are processed on a regular and timely basis, and that billings are collected on a regular and timely basis. An external source of funding, if required, is provided by financial institutions. In this instance, presentation of a well defined business plan, as discussed in Preparing Business Plans, is essential. At the start-up phase of a practice, capital may be provided by the partners, the proprietor or shareholders because external financing may not be as readily available as for an established practice. Capital to be provided by new partners can be related to a number of factors such as proportionate value of the practice, financing required for proportionate working capital or work in progress and accounts receivable or required funding for anticipated growth on a proportionate basis. Restrictions on withdrawal of capital typically form part of an agreement with the other stakeholders in the practice Work in Progress and Accounts Receivable Controls The use of time records and related description of tasks performed, with individual client codes should be encouraged to monitor staff utilization and efficiency. Time can be recorded in increments of fractions of an hour. While this may appear to be a mundane comment, there are insolvency practices, primarily concentrating on consumer debtors that do not record time. Failure to track such information leaves practice leaders without valuable statistics on staff utilization of time. In addition, unproductive staff time cannot be measured whether related to inefficiencies in engagement performance or excessive non-chargeable activities. Furthermore, if the administration of a summary administration bankruptcy requires a request for a change to an ordinary administration, re-creation of procedures performed and related time involved may be difficult and unsupportable. Because the trustee is required to have his accounts taxed, the proper recording of time will assist the trustee in preparing the Affidavit included with the Final Statement of Receipts and Disbursements in support of his fees. CQP Applied Knowledge Course July

84 Insolvency and Business Practices Client codes for purposes of recording time, and any directly related disbursements should be assigned at the time an engagement starts. Client codes for consumer engagements should be distinguished from client codes for corporate engagements to facilitate different billing and collection practices. Some practices insist that all staff, whether professional or administrative, record time against client codes. This procedure monitors the time utilization of all individuals associated with the practice. A drawback of such a procedure is that an administrative person may incur time on a number of clients particularly with tasks such as correspondence, mailings to creditors and filing. Allocation of time to individual engagements in such cases can be counter-productive from an efficiency viewpoint because substantial time may be incurred for the time recording process itself. A compromise in such situations is to only require charges of a particular matter if the time exceeds a minimum amount, for example, a half hour. With respect to engagements administered pursuant to the BIA, administrative time cannot be submitted in the account of the trustee. Furthermore, court appointments can also be subject to this limitation. Submission of time sheets by all staff does ensure, however, that absenteeism is tracked. Other practices will not have administrative staff submit time records. The rates for professional staff should be sufficient to recover administrative salaries. Rates are discussed in the previous section of this module dealing with Budgets. The time recording system should be linked to the internal accounting system to facilitate recording of revenue and work in progress. As discussed in Preparing Business Plans, the collection of fees and disbursements for summary administration bankruptcies and, possibly, Division II proposals, after initial draws permitted by the BIA, can be delayed for some time after the commencement of an engagement. As a consequence, the regular follow up procedures for billing such engagements are not relevant until the completion of the administration. The records for unbilled work in progress should incorporate the anticipated date of completion for each engagement. Unbilled work in progress and accounts receivable information should be accessible to the leader of a revenue centre at all times. Some systems will permit access by designated individuals to such information while restricting input functions. Other systems will provide printed copies of lists for distribution to relevant parties. Reminders of unbilled work in progress should be provided on a regular basis to parties responsible for billings, such as the leader of a revenue centre or other senior professional staff. Follow up procedures should exist, by which designated senior persons can address work in progress that has not been billed. Reminders should be made to the individual responsible for particular billings with feedback regarding the anticipated date of rendering such accounts. If work in progress exceeds a certain predetermined amount, such as a multiple of historic CQP Applied Knowledge Course July

85 Insolvency and Business Practices monthly revenue or collections, a financial penalty can be assessed against the leader of the revenue centre. Billing practices are discussed in the next section of this module. With respect to accounts receivable, the follow up procedures are similar to those with work in progress that can be billed. Accounts receivable aging statistics should be available coincident with the information on work in process. Follow up on unpaid accounts, with feedback to other designated senior persons, should be part of regular procedures for the individual responsible for the related accounts. Policies with respect to such follow up procedures on unpaid accounts should be defined. For example: telephone contact is to be made with the client 45 days after submission of an invoice; written request for payment is to be made 60 days after submission of an invoice; and placement with a collection agent is to be made 90 days after submission of an invoice. In the interim, telephone contact can be made with the client at periodic intervals prior to initiation of formal collection procedures. Similar criteria, as for unbilled work in progress, can be applied to uncollected accounts whereby accounts receivable should not exceed a multiple of historic work in progress. A financial penalty can also be assessed for uncollected accounts over 90 days Billing Practices Systems should be in place to ensure that billings, and collections, for consumer engagements are processed as permitted by the General Rules under the BIA. There is software available to highlight when billings should occur. Timely completion of the administration of consumer engagements, after realization of all assets including installment payments for a consumer proposal, has to be part of the regular procedures by any insolvency firm performing such engagements. Collection of the remainder of fees and disbursements after the initial permitted draws is delayed until completion of the administration and, thereby, tying up working capital until final accounts can be billed and paid. Some consumer debtors who choose to make a voluntary assignment into bankruptcy may not have sufficient assets to cover the costs of administration by the trustee. Some trustees, in this instance, will accept installment payments for the balance of the costs of administration that will not be available from realized assets and Goods and Services Tax credits. The debtor should be aware that the installment payments have to be made before their discharge from bankruptcy. Prudent practice would dictate that the trustee collects all of the installments before submission of the report on the bankrupt s application for discharge. In this instance, sufficient time should be available prior to the discharge of the bankrupt, to request replacement cheques for any cheques returned due to insufficient funds. CQP Applied Knowledge Course July

86 Insolvency and Business Practices Post-dated cheques usually are requested from consumer debtors for installment payments for costs of administration of a bankruptcy and for Division II proposals. In any event, the trustee, or administrator, should ensure that adequate procedures exist for reminders to debtors for installments that are due, where post-dated cheques are not held, and for any cheques returned due to insufficient funds. There also is software available that will track payments due by consumer debtors. Systems should also be in place to ensure that billings and collections for corporate engagements are processed and received on a timely basis. The appointment of Inspectors should be encouraged in corporate engagements administered under the BIA to facilitate submission and approval of interim accounts by the trustee. Mention also has been made previously that regular submission of accounts for other types of corporate engagements should be included in court orders or in engagement letters from appointing parties. Retainers should be obtained from appointers or other third parties for situations where realization from assets may be delayed for some time or may be at risk. There may be business decisions in delaying billings until realization from assets subject to the administration of the engagement has been made, to provide funds for time and disbursements incurred by an insolvency firm. Such exceptions should be subject to approval by the appropriate team, or firm, leader Planning and Control of Practice Appropriate Accounting The accounting and other records required to be maintained by the insolvency professional have been discussed in the section entitled: Planning the Engagement. Banking arrangements and trust accounts have been discussed in the Banking Arrangements and Trust Accounts sections of this module. Appropriate accounting software should be used to enable the practitioner to prepare receipts and disbursements accounts, dividend sheets and other financial information without difficulty on an as needed basis Internal Controls To reduce potential exposure to defalcation or error, the insolvency professional should ensure that there are adequate internal controls and delegation of duties within his office. The extent of such controls will depend partly on the number of people working in the practice. Some of the controls that could be put in place in respect of the recording and depositing of receipts in a larger office include the following: all cheques and monies received are restrictively endorsed and recorded immediately upon receipt in a daily receipts register by the support staff person responsible for opening the mail; CQP Applied Knowledge Course July

87 Insolvency and Business Practices the daily receipts register and cheques are reviewed and approved by a senior person; receipts are deposited daily (or on the next business day if received after banking hours) by someone who neither prepares the receipts register nor works on an engagement to which any of the receipts relate; cheques and cash are properly safeguarded until deposited; postdated cheques are deposited on the due date; and the receipts register is reviewed on a regular basis by a senior person to ensure that all receipts have been deposited in accordance with the above procedures. Good practice with respect to disbursements on estate accounts would include requiring that: requests for disbursements be supported by a cheque requisition accompanied by an original invoice or other supporting documentation showing evidence of the checks in payment, receipt of goods, and arithmetical accuracy; and the cheque signatories (other than the person preparing the request) initialing the cheque requisition as evidence of their review and approval. There should also be controls in the office to ensure that all incoming correspondence (by mail, fax or courier) is directed to the practitioner responsible for the engagement and that all incoming correspondence is dealt with promptly File Documentation and Retention BIA Rule 68 Directive 17 CAIRP Standard of Professional Practice No The benefits of good documentation include: an enhanced review trail; a record of events; evidence of thought process; recoverability of information at later dates; and re-tracing events in case of litigation. Documentation should, at a minimum, include the terms of the engagement, the work performed, correspondence with the client, reports issued, an appropriate record of important meetings and telephone discussions, the nature and extent of services rendered and the people and firms involved. CQP Applied Knowledge Course July

88 Insolvency and Business Practices It is suggested that each engagement should include, at a minimum, a Permanent File and one or more Engagement Files. For larger engagements a separate correspondence file containing a second copy of all outgoing correspondence may be useful. Files should be indexed to facilitate document search and retrieval. The filing system developed should include retention of, and access to, important s. Important documents (for example, appointment orders, discharge orders, etc.) should be stored electronically on a secured server for easy access in the future. Documentation should clearly indicate the event dates and the dates the documentation was prepared. All Permanent Files should include pre-acceptance checklists, engagement letters, other documents of a contractual nature (such as agreements, letters of intent, etc.), and court documents. The Permanent File for a bankruptcy engagement should include the following at a minimum: a copy of the bankruptcy order or the assignment into bankruptcy; the Certificate of Appointment; the Statement of Affairs; the Affidavit of Mailing; the Notice of the Bankruptcy and the First Meeting of Creditors; the signed minutes of creditors meetings and inspectors meetings; the notice of hearings for taxation of trustee s accounts and discharge of trustee or notice of deemed taxation of summary administrations; the taxed (or deemed taxed) Final Statement of Receipts and Disbursements and Dividend Sheet, and any amendments (usually for extra interest earned) and the Affidavit in support of the trustee s fees and disbursements; and the Notice of Trustee s Discharge and corresponding order. The Permanent File should be stored in a secure manner to ensure that the information is not lost. The Engagement Files should include all information relevant to the work performed, such as: copies of final reports appropriately referenced to supporting working papers; working papers and analysis supporting findings; the work plan; time analyses, budgets and billings; CQP Applied Knowledge Course July

89 Insolvency and Business Practices a record of important meetings and matters discussed; notes of telephone conversations; and correspondence with clients, creditors, legal counsel and others. In accordance with CAIRP Standard of Professional Practice No. 99-4, paragraph 5.00, the Assignment Files should be retained for at least four years after completion of the engagement (that is. in executory appointments for at least four years after discharge). BIA Rule 68 requires trustees to retain for a period of four years after their discharge, the books, records and documents that relate to the administration of the estate. Although not mandatory, practitioners may wish to retain Permanent Files for a longer period (for example, six to ten years or even longer depending on the practice requirements) to facilitate responding to inquiries. The books and records of the debtor are not the property of the insolvency professional and should be returned to the debtor or its directors on completion of the engagement. They should not be destroyed except: with the express written permission of the directors; in the case of bankruptcies or proposals under BIA, after having complied with BIA Rule 68; or with the permission of the court. Directive 17, issued by the Superintendent of Bankruptcy, provides a form for the directors to complete authorizing the disposition of a bankrupt s books and records. Typically, the trustee obtains the signature of the director at the start of the engagement. In addition, due to the requirements of the Canada Revenue Agency (CRA) for the trustee to retain books and records, the practitioner may wish to serve CRA with a notice of the court application to approve the destruction of the books and records or else CRA s consent Note Taking It is not practical to record every single discussion or telephone conversation held during the course of an insolvency engagement. However, notes should be taken and retained of significant conversations held, in particular those that either commit the practitioner s firm in any way, or that deal with matters that are, or that in the practitioner s view likely could become the subject of a dispute. Notes should indicate the time and place of the discussion/meeting, the people involved, the key points discussed and commitments given. The notes should be recorded during, or immediately following, the discussion/meeting. Such notes will be subject to discovery in the event of litigation; therefore, the practitioner should ensure that the statements contained in the notes are accurate and appropriate. CQP Applied Knowledge Course July

90 Insolvency and Business Practices Policies and Procedures Firms of insolvency professionals that operate from a number of locations will generally develop and issue policies and procedures setting out policies and guidance for the delivery of insolvency services. The objectives of these policies and procedures are: to ensure that insolvency services are provided at a uniformly high professional standard across the firm; and to minimize the professional risk to the firm in providing insolvency services Proceeds of Crime (Money Laundering) and Terrorist Financing Act The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is intended to: implement specific measures to detect and deter money laundering and the financing of terrorist activities and to facilitate the investigation and prosecution of money laundering offences and terrorist activity financing offences; and respond to the threat posed by organized crime by providing law enforcement officials with the information they need to deprive criminals of the proceeds of their criminal activities, while ensuring that appropriate safeguards are put in place to protect the privacy of persons with respect to personal information about themselves; and assist in fulfilling Canada s international commitments to participate in the fight against transnational crime, particularly money laundering, and the fight against terrorist activity. The legislation attempts to achieve these objectives by requiring certain transaction intermediaries to keep detailed records and to disclose transactions in specific circumstances, as well as a general obligation to disclose transactions that the intermediary considers suspect. Accountants (chartered accountants, certified general accountants, certified management accountants) and accounting firms are defined in the regulations as being transaction intermediaries that have obligations under the legislation. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the federal agency that enforces the PCMLTFA and its Regulations, has issued an interpretation notice to clarify the application of the money laundering law to insolvency professionals offering bankruptcy services Based on this notice, providing insolvency services does not trigger any obligations under the PCMLTFA. Trustee in bankruptcy services or services provided by insolvency professionals are not covered under the legislation. Insolvency professionals are not considered accountants or providing accounting services to the public for the purposes of the legislation, according to FINTRAC, if they are providing services as: receiver, pursuant to the provisions of a court order or by-way of a private letter appointment pursuant to the terms of a security interest; trustee in bankruptcy; or CQP Applied Knowledge Course July

91 Insolvency and Business Practices monitor under the provisions of the Companies' Creditors Arrangement Act or any other proceeding that results in the dissolution or restructuring of an enterprise or individual and to which the firm, individual or insolvency professional serves as an officer of the court or agent to a creditor(s) or the debtor. Given the seemingly limited scope of FINTRAC s interpretation, to the extent that accountant or accounting firm (as defined in the regulations) offers both insolvency services and accounting services to the public, the specific activities linked to the insolvency services would not trigger obligations under the legislation, but the other activities of the accountant or accounting firm would, if they involve: receiving or paying funds; purchasing or selling securities, real property or business assets or entities; or transferring funds or securities by any means. A more detailed summary on the Proceeds of Crime (Money Laundering) and Terrorist Financing Act can be found on FINTRAC s website Personal Information Protection and Electronic Documents Act (PIPEDA) The Personal Information Protection and Electronic Documents Act deals with personal information (recorded or not) about an identifiable individual, other than that individual s name, title, business address and phone number of an employee or an individual. PIPEDA deals with policies regarding the information collection, use and disclosure of personal information. Disclosure of another s personal information should not be made unless a consent form has been signed. CAIRP Bulletin includes a discussion on the impact of PIPEDA on insolvency professionals. Refer to Appendix C for CAIRP s letter to its members, with attachments, regarding PIPEDA. It should be noted that PIPEDA does not apply to all businesses in every circumstance. Other than the specific exemptions referred to in PIPEDA itself, s. 26 of the legislation states that it does not apply to certain organizations identified by the Governor in Council, if the Governor in Council is satisfied that legislation in a province that is substantially similar to PIPEDA applies to such an organization. By way of example (and without limitation), organizations in Québec that are subject to the Act Respecting the Protection of Personal Information in the Private Sector, organizations in British Columbia that are subject to the Personal Information Protection Act of B.C. and organizations in Alberta that are subject to the Personal Information Protection Act, of Alberta are exempted from the application of PIPEDA. 3 FINTRAC s website: 4 CAIRP Bulletin 03-5 can be found at CQP Applied Knowledge Course July

92 Insolvency and Business Practices Sarbanes-Oxley Act of 2002 (SOX) Besides new regulations concerning corporate ethical conduct and the responsibility of organizations to monitor the conduct of their employees, the SOX provides protection to employees who disclose information about corporate misconduct that violates any provision of U.S. federal law relating to fraud or Security Exchange Commission Rules. All publicly traded companies, their officers, employees, contractors, subcontractors and agents of these companies are subject to the SOA and may not discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee protected by the Act. The SOX also requires that publicly traded companies ensure that policies and procedures are in place to address whistle-blowing complaints as well as to provide education to management, supervisors and executives concerning recent whistle-blowing provisions. Section 301(4) of the SOX requires that each audit committee establish procedures for the receipt, retention, and treatment of complaints that are received by the company concerning accounting, internal accounting controls or auditing matters and the confidential and anonymous submissions by employees of concerns regarding questionable accounting or auditing standards SEC Independence Rules On January 28, 2003, the United States Securities and Exchange Commission released rules on Strengthening the Commission s Requirements Regarding Auditor Independence. These rules apply to Canadian companies that are SEC registrants. The rules: specify non-audit services that would impair auditor independence; require audit committee pre-approval of audit and non-audit services provided by the auditor; reaffirm that tax services do not impair independence provided that a pre-approval process has been followed; set rotation requirements for audit firm partners; address conflicts of interest related to former audit firm personnel in management positions at an audit client; require the auditor to communicate certain matters to the audit committee, including critical accounting policies used by the issuer ; mandate public disclosures of fees billed by auditors; and address compensation of partners on the audit engagement team. Refer to Appendix D for answers to frequently asked questions published by the United States Securities and Exchange Commission. CQP Applied Knowledge Course July

93 Insolvency and Business Practices Engagement Acceptance Policy Considerations The main factors to be considered before accepting an engagement are set out under the headings that follow: actual or potential conflict of interest; potential damage to an existing client relationship; payment of fees; engagement letter; level of risk; possibility of unfavourable media exposure; adequacy of staff with appropriate training and experience; indemnity; protection against environmental liability and other uninsured risks; employer/employee relationship issues, including pension liabilities and collective agreements, that is, the degree to which the insolvency professional can expect difficulties with a work force if he operates the business or engages staff to shut down; and insurance the ability to obtain insurance if operations are continued as some insurers no longer cover this risk. While these factors are typical, consideration should be given to whether or not any other significant factors or risks exist Conflict of Interest BIA Rules 34, 44, 47 and 50 CAIRP Rule of Professional Conduct 4 The practitioner must comply with the provisions of the BIA respecting conflicts of interest and the CAIRP Rules of Professional Conduct No. 4, as well as any other applicable federal and provincial legislation and all rules of professional conduct of professional associations of which the practitioner may be a member. Actual or potential conflicts of interest must be identified and resolved prior to accepting an engagement. In larger firms, this will likely include performing a search of the firm s databases to identify any potential conflicts, and sending out an Alert notice to partners and staff advising of the potential appointment. CQP Applied Knowledge Course July

94 Insolvency and Business Practices Every trustee must maintain the high standards of ethics that are central to the maintenance of public trust and confidence in the administration of the Act. Trustees who are acting with respect to any professional engagement shall avoid any influence, interest or relationship that impairs, or appears, in the opinion of an informed person, to impair their professional judgment. Trustees must not engage in any business or occupation that would compromise their ability to perform any professional engagement or that would jeopardize their integrity, independence or competence. Trustees must not obtain, solicit or conduct any engagement that would discredit their profession or jeopardize the integrity of the bankruptcy and insolvency process Damage to Existing Client Relationship Another factor to be considered is whether or not acceptance of the engagement, although not prohibited by any conflict of interest rules, could put the practitioner s firm into an adversarial position vis-à-vis another client of the firm (for instance, by taking or continuing legal action against that client). In these circumstances the engagement partner should consider the likelihood and potential extent of damage to the existing client relationship and consult, as appropriate, within the partnership or with the firm s senior management before accepting the engagement Engagement Letters CAIRP Standard of Professional Practice No It is strongly recommended that an engagement letter be obtained for every insolvency assignment except consumer estates. When the nature of the engagement changes (for example, from business review to monitoring, or from monitoring to receivership), a new engagement letter should be obtained. There are several elements to engagements letters including the following: representations of the appointing or applicant creditor/debtor; confirmation of advice given by the practitioner; commitments by the practitioner regarding quality of service (for example, frequency of reporting, personnel controlling engagement); fee arrangements, including a guarantee; and indemnity. While all these matters should be set out in writing they need not be contained in the same letter. The guarantee and/or indemnity may form a separate document. It may also be CQP Applied Knowledge Course July

95 Insolvency and Business Practices appropriate, in certain cases, to set out client service commitments in a separate, more personalized letter to the appointing creditor. The engagement letter should be signed by the appointing creditor/debtor before acceptance of the assignment. In the case of business reviews performed on behalf of creditors, it is recommended that the business review engagement letter should be signed by the creditor and acknowledged by the debtor before starting work on the engagement. Refer to Appendix E, to see a sample engagement letter for a privately appointed receiver. In a private appointment there is usually an engagement letter and a separate appointment letter. The engagement letter is not given to anyone as the terms of the indemnity and details of the engagement are between the insolvency professional and the secured creditor and should not be revealed to anyone else. The engagement is therefore evidenced by a simple appointment letter that is given to the Directors and creditors or interested parties who request it. The appointment letter references the security agreements under which the insolvency professional is appointed and sets out whether the engagement is as agent, receiver or receiver-manager, which will depend upon the terms of the security agreement under which the appointment is being made. CAIRP Standard of Professional Practice No states that the member should name in the engagement document the security agreements or the provisions of federal or provincial statutes pursuant to which the member is appointed. Where an engagement continues over an extended period of time, the member should: periodically review the engagement document to ensure it properly reflects the current terms of the engagement; and evidence, in writing, changes to the original terms of the engagement Level of Risk The practitioner must assess the level of risk associated with a prospective engagement and consult with his/her partners, where appropriate. Instances where the level of risk may be higher than normal include: assignments where there is a background of litigation and/or suspicion of criminal activity; where the engagement partner has doubts about the integrity of the appointing creditor/debtor; and where there are potential environmental and/or health and safety issues Risk Assessment Before accepting any appointment, the insolvency professional should carry out an assessment of the risks involved. Some of the questions to be asked are: CQP Applied Knowledge Course July

96 Insolvency and Business Practices Are there any conflicts of interests or independence issues that would preclude the firm from accepting this appointment? Will fees be paid in full and on a timely basis? Is the firm adequately protected against environmental liability and other foreseeable issues not covered by the firm s standard insurance coverage? Is the firm adequately protected against potential successor employer and pension benefit liabilities? Does this engagement entail more than normal risk for the firm? Does the firm have sufficient resources and expertise to perform the engagement in accordance with professional standards? If the answer to any of the questions above is No, the firm should take appropriate measures to protect itself, or decline the engagement. Another question to consider are whether the client is part of an SEC or Canadian public company group for which restrictions may apply regarding whether or not an appointment can be accepted. In addition, the practitioner should determine if insurance coverage is available, particularly if the company s insurance has lapsed or has been cancelled. For a more detailed discussion on risk assessment refer to the module on Practice Risk Management Model Orders Various jurisdictions across the country have developed model receivership orders and model CCAA orders. The intention is to create a standard order to assist the court and the bar in streamlining the process of dealing with what were previously cumbersome orders. If the applicant seeks relief that differs from that provided for in a model order, the applicant must: identify the difference by providing a black line copy of the order sought as compared with the model order; and explain to the court the basis upon which it should grant relief on terms different from those provided for in the model order. Reference should be made to the model order applicable in your jurisdiction. The Model Receivership Order for the Province of British Columbia and related notes referenced in Appendix F Fee Arrangements Prior to acceptance of an engagement, the engagement partner should ensure that adequate arrangements have been made to ensure that fees will be paid in full on a timely basis. Where fees will be paid out of estate assets, the engagement partner should satisfy himself to the CQP Applied Knowledge Course July

97 Insolvency and Business Practices extent possible, that assets will be sufficient to pay such fees and that the required authorizations can be obtained regularly. In the case of court appointments, the court order should allow the firm to draw its fees monthly on an interim basis, subject to court approval at a later date Costs and Payment of Fees Having accepted an appointment, the insolvency professional is obliged to perform the duties set out under the relevant legislation or court order, regardless of whether or not there are sufficient funds in the estate to pay its fees. In many cases, there are not sufficient funds, and the estate assets cannot be immediately realized, to enable the insolvency professional s fees to be paid in full on a timely basis. The prudent insolvency professional will protect himself by obtaining fee retainers ( third party deposits ), guarantees, and/or indemnities. In such cases, the engagement partner should satisfy himself that the retainer is adequate and that the guarantor will honour its obligations promptly. Third party deposits and guarantees BIA Directive 16 It is quite proper for a trustee to take a deposit or guarantee for payment of the trustee s fees and disbursements from a third party. The taking of such deposits and guarantees is covered in detail in Superintendent s Directive 16. If the trustee is taking such a deposit or guarantee, it must be in writing and it must, at a minimum, cover the matters specified in Directive 16. The funds received under such deposit or guarantee must be kept in a separate bank trust account clearly identified for that purpose. It is permissible for a trustee to have a consolidated account for such deposits and guarantees provided that the accounting records in respect of the account clearly allocate the funds to each estate and fully document deposits and withdrawals. Indemnities It is normal practice, especially in larger engagements, for the insolvency professional to obtain an indemnity from the appointer, or in a court appointment, from the creditor who applied for the appointment. The indemnity will normally cover both fees and liabilities to third parties. Wherever possible an indemnity that provides essentially for the following should be obtained from the appointing debtors: We agree to indemnify and save you harmless from all claims, liabilities, costs or expenses that you may incur or that may be asserted against you in connection with this appointment except to the extent that any such claim, liability, cost or expense is attributable to gross negligence or willful misconduct on the part of XYZ. A sample indemnity is attached in Appendix G. It should be noted, however, that some of the codes of ethics or codes of professional conduct to which a member of CAIRP may be subject, could prohibit or limit the ability to obtain an CQP Applied Knowledge Course July

98 Insolvency and Business Practices indemnity. As an example, the Code of Ethics of the Québec Order of Chartered Accountants provides that: A member who performs a contract, in whole or in part, in the practice of his profession, assumes full personal civil liability arising there from, regardless of his status within the partnership or company. He is forbidden to include in such contract any clause to the effect of directly or indirectly, fully or partially, excluding this liability. He may not invoke the liability of the partnership or company as a ground for excluding or limiting his own liability. In view of this provision, it appears acceptable for an insolvency professional who resides or carries out a mandate in Québec to obtain an indemnity from someone regarding claims from third parties that are not related to negligence (and in this context, it is likely that the exclusion would be for negligence as opposed to gross negligence), however the member could not be so indemnified in respect of (or obtain a waiver of) a claim by the appointing party. A refusal by an appointing creditor to provide the indemnity above raises questions about the acceptability of the engagement, as it could indicate that the creditor is asking the firm to take financial risks that it is not itself prepared to take. Before accepting an engagement in such circumstances, a careful examination of the risks involved must be performed, and appropriate consultation within the practitioner s firm should take place. Timely payment of fees Directive 27 Directive 27 issued by the Superintendent of Bankruptcy, Advances of Trustee Remuneration for Bankruptcies Under Ordinary Administration, deals with interim draws. The directive states that the trustee can only take an interim draw if it obtains a resolution authorizing the draw from a duly constituted meeting of creditors or inspectors, or alternatively, an order of the court. The request for an advance or interim draw must specify the amount of the draw and that same amount should be recorded in the minutes of the meetings of creditors, or inspectors or in the court order. In addition, the trustee must ensure that there are sufficient funds remaining in the estate trust account to conclude the administration of the estate. Trustees should have in their file the following information for each authorized advance on the remuneration: number of hours worked; tasks performed; hourly rates; other factors for consideration in the calculation of fees; and resolution of the inspectors meeting approving the advance. CQP Applied Knowledge Course July

99 Insolvency and Business Practices In court-appointed receiverships and monitor appointments under the CCAA, the fees of the receiver or monitor must be approved by the court. It is standard practice to incorporate in the initial court order provisions granting the firm a priority charge over the assets in respect of its remuneration, and authorizing the firm to withdraw its fees on a regular basis, subject to subsequent court approval. In private appointments the receiver should obtain the written approval of the appointing creditor prior to withdrawing funds to pay its remuneration Environmental Liabilities Before accepting an appointment, the engagement partner should assess the potential problems that could arise from taking possession of contaminated property, or from contamination resulting from continuation of operations. This assessment should include: consideration of the likelihood of contamination given the history and use of the property, and the nature of the debtor s business; the adequacy of the statutory protections provided by BIA s (which protects receivers and interim receivers as well as trustees); the existence or availability of any insurance coverage; whether environmental orders have been issued against the company; the existence and strength of an indemnity or limitation of liability provision contained in a court order; and any written agreements with any environmental regulatory authorities. Enquiries should be made regarding any current environmental orders that may be issued and outstanding to get an idea of the environmental situation that the insolvency professional is walking into. In certain cases it will be impossible to assess the risk adequately until a Phase One environmental audit has been performed. It is becoming quite common for banks to require a Phase One environmental audit as part of the terms of a lending agreement. Before accepting an executory appointment the engagement partner should enquire as to whether or not the appointing creditor has a Phase One environmental audit on file and ask to see a copy of it as part of the engagement due diligence. Other risks that an insolvency professional should consider are the inability to get insurance for certain types of engagements and for continuing operations. If operations are to be continued, an appropriate level of environmental monitoring must be maintained. Failure to do so could subject the practitioner to liability for the environmental damage if a party asserts that damage occurred as a result of the practitioner s gross negligence or wilful misconduct or, in the Province of Québec, the trustee s gross or intentional fault. In such a situation the protection under BIA s will not be available. CQP Applied Knowledge Course July

100 Insolvency and Business Practices Employee and Pension Related Liabilities The insolvency professional should address employee and pension-related liability risks in an engagement where there is a substantial labour force or where there is a collective agreement. Careful reference, with the assistance of legal counsel where appropriate, should be made to current employment, labour relations and pension legislation, as well as to related jurisprudence to ensure that the practitioner does not risk being found liable for employee or pension liabilities. The terms of a collective agreement may be onerous. In deciding whether or not to accept a proposed engagement, a practitioner may wish to consider an appointment as a receiver versus an appointment as a receiver-manager. If a receiver-manager operates or uses union employees for even a very short period of time, the receiver-manager may be liable for additional costs beyond the salary for work performed, as a successor employer under the collective agreement. Anyone purchasing the assets may also be bound by the terms of the collective agreement. For instance, it is uncertain whether the protection provided by BIA s would be sufficient to protect the trustee/receiver from becoming liable for unfunded pension plan liabilities if the trustee/receiver chooses to continue the plan and makes payments to the plan. In 2005, the Supreme Court of Canada issued a ruling regarding the status of collective agreements in bankruptcy and leave applications under BIA s. 215 in the context of bringing successor employer proceedings against an interim receiver to the labour board. 5 The rulings involved GMAC Commercial Credit Corporation of Canada v. T.C.T. Logistics Inc., T.C.T. Warehousing Logistics Inc., KPMG Inc., the Interim Receiver and Trustee in Bankruptcy of T.C.T. Logistics Inc. and T.C.T. Warehousing Logistics Inc. The Initial Order carried the following standard clauses: allowing the receiver to retain or discharge employees as the receiver considered necessary, provided that such employment would not constitute the receiver a successor employer within the meaning of the Ontario Labour Relations Act; disallowing action against the receiver without leave of the court; allowing the termination of the employment of all employees immediately prior to the appointment of the receiver; and deeming the receiver not to be a successor or related employer to TCT for any purpose, under either statute or the collective agreement. The ruling of the Supreme Court of Canada determined that a bankruptcy court has no power to make a declaration regarding successor interests and that the Labour Board has exclusive jurisdiction to make a successor employer determination. 5 Re: GMAC Commercial Credit Corporation Canada v. TCT Logistics Inc., 2006 CarswellOnt 4621 (SCC). CQP Applied Knowledge Course July

101 Insolvency and Business Practices Section 14.06(1.2) of the BIA and s of the CCAA were modified to address the ruling of the Supreme Court of Canada, further enhancing the protection of trustees, interim receivers, receivers and monitors against a liability as successor employer. The modifications to the provisions specify that a trustee, interim receiver, receiver or monitor, carrying on the business of the debtor or continuing the employment of employees, is not personally responsible for liabilities, including as successor employer. The modifications specify that the liabilities for which the professional is not liable include any liabilities to the employees or former employees or to a pension plan, that existed before the professional s appointment, or that are calculated in reference to a period that predates the appointment. While the modifications are reassuring and seem to address the concerns raised by the ruling in Re: TCT Logistics, the provisions have not been challenged in court, so it is impossible at this juncture to assess whether or not the modifications are effective in protecting professionals against a successor employer liability. Insolvency professionals now need to assess the costs of continuing to operate, including the risk of successor employer costs in relation to the value of the assets. In a brief submitted on June 25, 2010 to the House of Commons Standing Committee on Industry, Science and Technology, CAIRP addressed the proposed changes to Canadian insolvency legislation and related Acts, which are contained in a series of Bills (C-476, C-487, C-501, S-214 and S-216) introduced before the 40 th Parliament. 6 The proposed amendments deal with highly technical changes to a number of statutes, but they all would upgrade the priority (from an unsecured creditor s perspective) of amounts owing to employees, former employees and pensioners of enterprises that enter formal insolvency proceedings. CAIRP believes a significant number of financial, legal and practical issues arise from the proposed changes, which, if implemented, could have serious adverse impacts on the success, complexity and cost of restructuring proceedings, and may also harm solvent companies and the Canadian economy generally. The pension proposal could expand the super-priority claim of pension plans for unremitted employee deductions and employer pension contributions in insolvency proceedings, to include special payments ordered by a pension regulator to fund a solvency deficit in the pension plan. The brief is online at Staffing Requirements Before accepting an engagement, a practitioner should ensure that an engagement team can be assembled that has the training and experience required to perform the engagement to 6 The 40th Parliament was dissolved in March 2011, and as a result these bills have become moot. However, in view of the publicity surrounding the issue of pensions and the importance of the New Democratic Party as the official opposition in the 41 st Parliament, it is likely that similar bills will be introduced in Parliament as private members bills. CQP Applied Knowledge Course July

102 Insolvency and Business Practices professional standards. For instance, when an engagement requires the practitioner to take possession of multiple locations, appropriately qualified and properly instructed staff must attend at each location Industry Expertise Many businesses (for example, insurance companies, financial institutions, securities firms) are highly specialized and require industry specific expertise. Occasionally, the industry specific expertise required is not available from within the firm. If the industry specific expertise is not available from within the practitioner s own firm, the practitioner should identify and confirm the availability of appropriate experts who can be retained on a contractual basis, should the engagement be accepted Unfavourable Media Exposure The possibility of unfavourable media exposure will seldom be a reason for declining to accept an engagement. In most cases, through effective public relations, the statutory authority for the practitioner s actions and the prompt and impartial manner in which the firm performs its duties can be fully explained to the media without risk of blemishing the firm s reputation. Nevertheless, where there is a significant possibility of unfavourable media exposure, appropriate consultation within the practitioner s firm should take place Documentation Having considered all the above risks, the insolvency professional should document the rationale for accepting the engagement. In larger firms this is frequently achieved through the completion of a Pre-Acceptance Checklist, with covering memoranda where necessary, to be approved in accordance with the firm s risk management procedures Planning the Engagement Administration and Coordination Good planning is fundamental to the efficient administration of any insolvency engagement. As noted in the section entitled: Engagement Acceptance Policy, the practitioner must obtain sufficient information to be able to assess the potential risks involved and the resources and specialist expertise required to administer the engagement before accepting an appointment. It is especially important that the practitioner be able to take possession of and safeguard the estate assets immediately upon his or her appointment. This requires proper planning and coordination. As well, the practitioner must have appropriate procedures and suitably qualified and experienced staff to ensure that all required statutory steps (for example, notices, filings) are performed within the prescribed periods. CQP Applied Knowledge Course July

103 Insolvency and Business Practices For larger engagements, it will be necessary to create an engagement team, with responsibilities clearly defined and understood at the outset. As an example, such a team might include an engagement partner, a second engagement partner and an engagement manager. Engagement partner An engagement partner ensures that: all appropriate pre-acceptance procedures and conflict checks are fully completed and documented and the appropriate engagement letter is obtained; if accepted, the engagement is carried out in accordance with the law and the firm's professional standards (including CAIRP professional standards) and in a thoroughly professional manner by properly trained and supervised staff; the conduct of the engagement is properly planned; the planning of the engagement and the rationale for all important decisions are properly documented; the firm's integrity and reputation are maintained throughout the assignment; appropriate arrangements are made for the regular billing and collection of fees; and informative reports, which are carefully reviewed by the engagement partner, are issued on a timely basis. Second engagement partner The need for a second partner can be identified at the pre-acceptance stage or at any time during the engagement. The purpose of the second partner involvement is to mitigate risk and/or enhance client service. The scope of the second partner involvement and review will vary according to the nature of the engagement or specific concern, but will normally be such as to enable the second partner to: approve the client acceptance decision and the terms of the engagement; review and approve the plan for the engagement prior to commencement of the work; review the form and content of reports before they are issued; discuss and review with the engagement partner major strategic and business decisions before they are made; and discuss any significant problems and judgments with the engagement partner. CQP Applied Knowledge Course July

104 Insolvency and Business Practices Engagement manager The engagement partner will normally designate another person (the engagement manager ) to be responsible for the detailed day-to-day administration of the engagement and to report directly to the partner. The engagement manager shall have direct responsibility for the proper conduct of the engagement, included, but not limited to ensuring that: all assets under administration are promptly taken under control of the firm and are properly protected and insured; all assets under administration are properly inventoried as soon as possible after the commencement of the assignment; records are maintained of all important events, meetings, correspondence and discussions in compliance with CAIRP Standard of Professional Practice No. 99-4, and filed in a logical and secure manner; proper accounting and other records relating to the firm's administration are maintained; all receipts and disbursements are controlled and unnecessary expenses are eliminated on a timely basis; plans for the proper disposition of assets are formulated and correctly carried out; all necessary reports and returns are prepared and filed; the engagement partner is kept fully informed on any matters of importance; and the work of assistants (where applicable) is properly organized and supervised Delegation of Duties Where there is more than one partner or engagement manager working on an assignment, their respective duties and responsibilities must be clearly defined. An engagement manager should not delegate to any other person his responsibilities in connection with an assignment without the prior approval of the engagement partner Planning Memorandum Shortly after the start of each assignment, the engagement manager should prepare, for discussion with and approval of the engagement partner, a brief planning memorandum setting out the names of all staff members working on the assignment and their respective duties and responsibilities. In particular, there should be a clear understanding who has responsibility for: incurring expenses; approving expenses; signing cheques; CQP Applied Knowledge Course July

105 Insolvency and Business Practices signing correspondence; representing the firm at meetings, and signing documents, agreements and contracts that commit the firm Minimum Documentation Requirements BIA s. 26 CAIRP Standard of Professional Practice No Guidance on the minimum documentation required to be maintained in insolvency engagements is provided by BIA s. 26 and by CAIRP Standard of Professional Practice No BIA requirements BIA s. 26; Directive 17 The BIA requires the trustee to keep proper books and records for the administration of the estate and lists the matters to be recorded therein; including: a record of all monies received and distributed; a list of all creditors filing claims, the amount and disposition of those claims; a copy of all notices sent out; an original signed copy of all minutes, proceedings and resolutions passed at any meetings of creditors or inspectors; and court orders. The estate books, records and documents relating to the administration of the estate are the property of the estate and may be inspected and copies made at any reasonable time by: the Superintendent; the bankrupt; any creditor; or their representatives. CAIRP Standard of Professional Practice CAIRP Standard of Professional Practice 99 4 CAIRP Standard of Professional Practice No provides additional guidance on the documentation to be maintained on all types of insolvency engagements. Insolvency CQP Applied Knowledge Course July

106 Insolvency and Business Practices professionals are to keep the following documentation on file in connection with each appointment: the appointment documents; legal opinion with respect to the validity of the appointing creditor's security or right to make such appointment; communications: copies of correspondence pertaining to any assignment and memoranda of significant meetings or discussions held; copies of all statutory notices and reports; creditor list with amounts owing; a list of assets taken into the member's possession and/or control; documentation received in support of all claims including, secured, statutory, preferred, other unsecured including 30 day goods claims; copies or summaries of government returns; reports and financial information/statements, etc.; and minutes of important meetings. In addition, documentation to be retained in respect of significant decisions made or actions taken and the reasons supporting them could include: court orders; minutes of meetings; and banking/accounting records and supporting information and analyses, etc. Proper record keeping will assist the practitioner in answering any questions from: the Superintendent of Bankruptcy; government agencies regarding audits such as payroll (including deemed trusts), income taxes, GST, etc.; and any creditors or interested parties Documentation Review Bankruptcies and proposals BIA s. 26 CQP Applied Knowledge Course July

107 Insolvency and Business Practices Every insolvency engagement should be supervised by a licensed trustee who has overall responsibility for all matters relating to the file. For bankruptcies and proposals, a corporate trustee must name the individual trustee responsible for the estate when completing the Estate Information Summary. These responsibilities would include ensuring that the proper books and records required under BIA s. 26 are maintained. The trustee should ensure that: all documents required to be signed by the individual trustee are properly reviewed by that trustee; and documents that are allowed to be signed by a member of the trustee s staff are properly reviewed by an individual with appropriate experience and training/accreditation Duty of Care Trustees, in the course of their professional engagements, shall apply due care to ensure that the actions carried out by their agents, employees or any persons hired by them on a contract basis are carried out in accordance with the same professional standards that trustees themselves are required to follow in relation to that professional engagement OSB Directive Directive 4R Superintendent s Directive 4R sets out the circumstances in which trustees and administrators of consumer proposals may delegate certain tasks in the administration of an estate to other individuals and those tasks than cannot be delegated. The following tasks shall be performed by individual trustees or administrators where applicable, and cannot be delegated: the acceptance of an appointment; attendance at, or chairmanship of, meetings of creditors, for Division I proposal; ordinary administration bankruptcy; or summary administration bankruptcy and Division II proposal where a proven creditor, or the Official Receiver requests the trustee to chair the meeting; chairing a meeting of inspectors upon the request of an inspector; reviewing and signing of all cheques drawn on estate accounts; ensuring that the internal control system is adequate and operational; reviewing and signing of the forms and documents listed in Schedule "A" of the Directive; and CQP Applied Knowledge Course July

108 Insolvency and Business Practices other tasks specified by the Act, Rules or Directives. The forms and documents listed in Schedule A of the Directive are as follows: Application of Former Trustee to Pass Accounts Notice of Former Trustee s Application to Pass Accounts Application of Trustee for Discharge Statement of Receipts and Disbursements Certificate of Compliance and Deemed Discharge of Trustee or Administrator Trustee s Report on Cash Flow Statement Report of Trustee on Non-filing of Cash-Flow Statement or Proposal Report of Trustee on Refusal by Creditors to Approve Proposal Report of Trustee on Proposal Report of Trustee on Annulment of Proposal Certificate of Full Performance of Proposal Report of Administrator on Consumer Proposal Report of Administrator on Consumer Proposal and Conduct of Consumer Debtor Notice to Creditors and Report to Official Receiver on Annulment of Consumer Proposal of a Consumer Debtor who was not a Bankrupt Report to Official Receiver on Annulment of the Consumer Proposal of a Consumer Debtor who was a Bankrupt Report to Official Receiver on Deemed Annulment of Consumer Proposal of a Consumer Debtor who was a Bankrupt Notice of Disallowance of Claim, Right to Priority or Security or Notice of Valuation of Claim Report of Trustee on Bankrupt s Application for Discharge Report of Trustee under Subsections 171(1) and (2) Certificate of Discharge Notice of Hearing of Trustee s Report to Court after Three Years Report on the Financial Situation of the Debtor and the Cause of the Debtor s Financial Difficulties Report on the State of the Insolvent Person s Business and Financial Affairs when any Material Adverse Change CQP Applied Knowledge Course July

109 Insolvency and Business Practices Report on the State of the Insolvent Person s Business and Financial Affairs Consent by the Trustee to act as Trustee under the Proposal Report to the Superintendent and to the court on the State of the Insolvent Person s Business and Financial Affairs when any Material Adverse Change. Other engagements Similar principles should guide the insolvency professional in other types of engagements, such as receivership and monitor appointments. In some cases, especially in large and complex engagements, it will be appropriate for the firm appointed to create an engagement team with a number of qualified individuals assuming different responsibilities that are determined and agreed upon at the start of the engagement. This will include a determination of who is responsible for preparing, who is to review, and who is to sign documents such as: court reports; reports to the appointing lender; and reports prepared under BIA s Personnel Practices For an overview of key Human Resource Management practices and influences, refer to Appendix H Staff Reviews and Training BIA Rule 52 As with any professional firm, the insolvency practice should encourage all its staff members to seek to improve their performance continuously, through a combination of staff reviews and training. An effective review and training program should improve the quality of the practice by encouraging staff retention and raising the level of performance. Reviews are a means of providing each staff member with quality feedback to assist in development, to address areas of improvement, to provide guidance on career paths and progress and to provide time in which other concerns raised by staff can be addressed. Reviews may take the form of individual engagement/project reviews, or summary reviews where the staff member s performance on a variety of projects is considered. It is recommended that there be at least one face to face meeting every six months between the staff member and supervisor/counselor, at which are discussed not only the individual s work performance but also progress in achieving career goals and prospects of future promotion. Training is a key element in an individual s development as an insolvency professional. Training consists both of in-house training and external professional development courses as discussed below. CQP Applied Knowledge Course July

110 Insolvency and Business Practices An important element of in-house training is on the job training. Effective on the job training requires that the individual be introduced to new tasks and different types of insolvency engagements, and guided and encouraged by the supervisor to complete those tasks effectively. Other forms of in-house training include regular meetings to discuss technical topics or risk management or, in larger firms, in-house courses on insolvency, computer literacy and writing skills. Staff training is important, as the trustee is required to ensure that the staff or agents that he or she hire carry out the work with the same professional standards that the trustee is required to follow Professional Development Professional development for an insolvency professional can take a number of forms, such as: enrolment in an accounting course to obtain an accounting accreditation or designation; enrolment in the appropriate program of CAIRP to become an insolvency administrator or trustee; enrolment in a program to obtain an additional designation such as CBV, CFE or CFA in order to widen the professional services that the practitioner may choose to offer; attendance at annual seminars or conferences, such as those put on by CAIRP and professional training firms; and attendance at external courses designed to widen the individual s general skill sets, in areas such as computer literacy, writing, presentation or selling skills. In addition, the practitioner should be encouraged to keep up to date on technical matters through reading. The courses to be attended/enrolled in should be discussed and agreed with the staff member s supervisor/counselor. The amount of time (firm time/personal time, paid/unpaid) required to achieve development goals should be discussed and agreed and, once agreed upon, followed Mandatory Professional Development CAIRP Mandatory Professional Development Program Many professional organizations require their members to participate in a mandatory professional development program to insure that their members remain current in their field and CAIRP is no exception. In 2004 CAIRP adopted a Mandatory Professional Development (MPD) Program to maintain the knowledge base of CAIRP members who hold the CIRP certification mark, and to demonstrate CQP Applied Knowledge Course July

111 Insolvency and Business Practices to the public that the CAIRP members continue to be the most qualified, best trained professionals who are able to deal with financial problems at all levels. Starting January 1, 2010, general members are required to complete a minimum of twenty (20) hours of professional development activity in an insolvency and restructuring context, in each fiscal year, in accordance with Guidelines established by the Board of Directors. At least seven of these hours must be in an active presentation such as a seminar, dinner meeting or live or recorded internet presentation. For a newly admitted member who has just completed the CQP, the first yearly reporting period starts on April 1 following the year of admission. All other newly admitted general members have to satisfy the professional development requirements on a pro rata basis in the year of admission. The Board of Directors publishes, from time to time, guidelines as to what constitutes qualifying professional development activity. All general members who have not completed a sufficient number of hours of professional development activity or who fail to comply within 10 days of receiving a demand to provide details of their professional development activities shall thereupon be suspended until they have satisfied the MPD requirement. The Board of Directors or the Executive Committee may exercise discretion, with or without conditions, to waive compliance with the professional development activity requirements in exceptional circumstances, where a member is unable to complete the minimum yearly requirement, provided the exercise of such discretion is not inconsistent with the general philosophy of requiring members to engage in professional development activity. Any member whose membership is suspended because of a failure to meet the MPD requirement may, at any time before termination of membership, have the suspension lifted by complying with the MPD requirement and paying to CAIRP a reinstatement fee for suspended members. CAIRP recognizes the valuable contribution of many of its members who provide support to CAIRP in the following areas including, but not limited to, the preparation of conference materials, preparation of course materials, exam questions and marking of exams. A specific number of hours will be credited to those who continue to provide such support. In addition, a maximum of 13 hours per year can be credited for self-study Quality Review Superintendent s Monitoring OSB s Newsletters CCAA s Practice reviews and requests for bank confirmation: Introduction The BIA imposes a statutory duty on the Superintendent of Bankruptcy to supervise the administration of all estates. CQP Applied Knowledge Course July

112 Insolvency and Business Practices One aspect of the administration of estates is the compliance of trustees with the Act, Rules, Directives, Insolvency Circulars, Policy Statements and other applicable Acts and Regulations. The goals of the OSB in assessing the compliance of trustees are: to accomplish the legal mandate of the OSB; to prevent non-compliance; to detect non-compliance; and to deter non-compliance. To achieve these goals, the OSB uses a number of approaches. In the past, the Superintendent used the Monitoring and Audit Programs to assess compliance. Currently, one of the key methods used by the OSB is the Practice Review. What is a practice review? A Practice Review (PR) is an examination of an individual trustee s administration in one, all, or any combination of the following areas: Banking, Internal Control, Realization of Assets, Propriety of Costs, General Administration of Estates, Aging of Files, Acting as a Receiver, and Other, for any issue not previously defined. Following the examination, if any deficiencies are identified in the PR, the OSB and the trustee agree to an improvement that addresses the deficiencies. A PR is intended to ensure compliance with the Act, Rules, Directives, Insolvency Circulars, Policy Statements and other applicable Acts and Regulations. Highlights of the practice review process: PR are carried out with regard to individual trustees, not corporate licences. There is no limit to the number of PRs that may be undertaken with regard to any given trustee. There is no limit to the number of estates selected for review. The selection method of the estates can be random, specific or a combination of the two. A report is prepared on the findings of the PR and provided to the trustee. The trustee is required to produce a formalized improvement plan that must be approved by the OSB after each PR. Bank confirmations Directive 5R4 CQP Applied Knowledge Course July

113 Insolvency and Business Practices Every year, all trustees file an Annual Banking Report with the OSB pursuant to Directive 5R4 Estate Funds and Banking. Part of this submission is the inclusion of Schedule 1 Request for Bank Confirmation. The confirmation of estate trust fund balances is an important tool in determining compliance with the BIA and to detect and deter potential defalcation. What is a banking review? BIA s. 6 A Banking Review is a careful and systematic review of documents related exclusively to the banking functions and estate account balances in a trustee s practice. The review provides an assessment of the trustee s administration of estate trust bank accounts. A Banking Review can be undertaken as a stand-alone process or as part of a Practice Review. The OSB requests that trustees submit specific documents for review either electronically, by mail, or by another method. Up until now, the OSB has been carrying out Bank Confirmations on an ad hoc basis. This policy has recently come under review. Consequently, the OSB will now ask trustees to provide confirmation of trust account balances during a Banking Review or Practice Review on those accounts selected for review. When conducting a Banking Review or Practice Review, the OSB will ask the trustee to request, from the financial institution that holds the selected accounts, an original Letter of Verification of Funds as at a certain date. Financial institutions should forward the letter directly to the OSB analyst who is conducting the review. This process does not preclude the OSB from exercising its powers as they are outlined in s. 6 of the BIA. As a result of amendments to the CCAA that came into force on September 18, 2009, the Superintendent of Bankruptcy has a new mandate with respect to the CCAA. Specifically he: is required to keep a record of public filings under the CCAA; may apply to the court to review the appointment or the conduct of a monitor; must keep a record of all complaints regarding the conduct of a monitor; and may make any inquiry or investigation regarding the monitor s conduct In House Quality Reviews Many firms have established their own quality review programs to monitor the quality of work performed by their partners and offices. Such review also assesses any risk with respect to nonmembers of the CAIRP for which a CAIRP member, who in practice is associated with nonmembers, is responsible. The CAIRP member is responsible for any failures of the nonmembers to abide by CAIRP s Rules of Professional Conduct. CQP Applied Knowledge Course July

114 Insolvency and Business Practices The purpose of an Office Risk Quality Review (QR) is to evaluate the quality of insolvency services delivered by an office on selected individual engagements and to ensure on-going compliance with professional standards and the firm s policies concerning management of risk in insolvency assignments. The QR is directed at determining that: engagements are accepted and performed in accordance with professional and firm standards; engagements accepted, work done and reports issues do not unduly expose the firm to litigation risk; working papers and files document the work done and support the reports issued; major deficiencies and their underlying causes are identified and corrected; and individual offices are in compliance with fidelity standards. To accomplish the review objectives, the review process will normally include: review of general risk management procedures for all assignments; examination of selected engagements; and a limited fidelity or trust account audit. CICA and provincial chartered accounting institutes also perform periodic reviews Review of General Risk Management Procedures The purpose of this portion of the review is to assess operations and procedures of the office and to identify any factors that may increase the firm's risk. It covers a wide range of topics such as the mix of client work and office resources. It also addresses compliance with firm policies and procedures (for example client acceptance and retention procedures). Because of the sensitive nature of many of the issues contained in the review document, it should normally be completed by the review team leader. The reviewer will consider, through analysis, observation and discussion, various attributes of the practice that could, potentially, give rise to an unacceptable level of risk. Attributes to be considered include: Environmental factors: Local/national economy; financial regulation; growth in the practice; practice restrictions; legislation; competition; litigation Client work profile: Risk assessments of individual clients; extent of high profile work; public company clients; dominance of client work by one/few clients CQP Applied Knowledge Course July

115 Insolvency and Business Practices Nature of work: Risks of specific services offered: bankruptcies; proposals; restructuring under CCAA; receiverships; liquidations; business reviews; monitoring; (experience /expertise in these services) Partner profile: Numbers and calibre of partners, age profile, experience Office resources: Staff pyramid; hours supervised by managers/partners; availability of staff; calibre of professional staff; overtime levels; administrative resources; financial resources Technical and training matters: Technical support function; investment in training; quality of training; adequacy of technical material Risk management: Internal quality assurance procedures; second partner review; client acceptance procedures; engagement letters; independence; limits on authority to sign; office security; etc. Recent review results: Last QR report; progress on action plan; recent Superintendent of Bankruptcy Audits Recent litigation history: Potential for litigation; status of open litigation matters Conduct of Engagement Reviews Team members carrying out individual engagement reviews will find it helpful to follow the procedures outlined below: assemble a background information sheet and all files relative to the individual engagement, including document file, accounting records, subject matter files, report files and general correspondence, as appropriate; read any background material and, where applicable, the final report (to the client, the court, the appointing creditor, etc.); have a brief discussion with the engagement partner to develop a general understanding of the nature of the engagement, the areas of greatest risk, and important legal and commercial considerations peculiar to the engagement; CQP Applied Knowledge Course July

116 Insolvency and Business Practices review the files, covering the content of the appropriate checklists and making rough notes of points noted, concentrating on important areas, and keeping in mind that it is not necessary to read every piece of paper in a file; go over the points noted with the engagement partner; complete the checklists and prepare a draft memorandum on the engagement. This memorandum should include: a statement as to overall satisfaction with performance on the engagement; and any specific criticisms, observations and recommendations; discuss the draft memorandum with the engagement partner. This discussion is most important to make sure there is no misunderstanding as to the facts. Include in the final memorandum the comments of the engagement partner; and forward the memorandum in final form to the engagement partner, the engagement partner s direct report, and the individual in charge of the firm s risk management function Conduct of Fidelity Audit Procedures for the fidelity audit should include the following: selecting a number of files for review including, in all cases where a consumer bankruptcy practice exists, the consolidated trust account; completing the checklists cash receipts, cash disbursements, bank reconciliations and control of assets, for files selected, ensuring that the conclusion section of each checklist is properly documented; going over any deficiencies noted with the engagement partner; preparing a draft memorandum summarizing the conclusions reached in the fidelity audit and discussing this with the engagement partner. This discussion is most important to make sure there is no misunderstanding as to the facts. Include in the final memorandum the comments of the engagement partner; and forwarding the memorandum in final form to the engagement partner, the engagement partner s direct report, and the individual in charge of the firm s risk management function Information Technology Insolvency Programs Available Programs There are two main providers of Canadian insolvency administration software: CQP Applied Knowledge Course July

117 Insolvency and Business Practices Promeric Technologies Inc., Toronto, Ontario - Ascend; and UBERbase, Ottawa, Ontario - Insolvency Process System (IPS). Both software providers indicate that their programs are reliable and easy to use. Both providers update their software regularly to incorporate changes to the BIA, the General Rules under the BIA, and Directives issued by the Superintendent of Bankruptcy. Both provide E-filing capability. The advantage to the practitioner in using this software is that it provides a turn key package that is regularly updated. The cost of the software will undoubtedly be important to the practitioner. Some vendors charge an initial licence fee to purchase and an annual subscription fee thereafter; others charge a license fee to the practitioner on a per estate basis so some costing analysis should be done to determine which package best suits the needs of the practitioner In-House Development Developing and maintaining proprietary software is possible and has been done, but doing so should only be done by those practitioners with a keen interest and well developed computer skills. Creating one s own software is not an inexpensive approach when one considers the number of hours required to develop software and then to test it for accuracy and reliability. An advantage to developing custom software is that the owner or developer is in control of the product and it can be tailor made to suit specific needs and odified as required. Apart from cost, another disadvantage is the need to maintain software expertise to make changes when necessary and to ensure that the modifications work as intended, producing acceptable results Office Technology Data Integrity As soon as two or more computers are connected issues arise: Who has access to and control of the data? Where will the data be stored? Will it be secure? These are important considerations that should be thoroughly addressed. Practitioners should have some type of data backup plan. It is good practice to have data files backed up on a regular basis which may mean daily back-ups, depending on the nature and volume of work. Data files should be stored in an approved location on the network to ensure that data access, data integrity, and data security are maintained. Access to data files should be protected. Protection generally occurs in the form of user identification and passwords. Staff should have to identify themselves to the system and/or the software. Office policies should be developed regarding: system access; CQP Applied Knowledge Course July

118 Insolvency and Business Practices file access; granting/revoking of user IDs and passwords; and data creation, modification and deletion. Preserving the integrity of data files is of paramount importance. There is no single method that may be better than any other method so thought must go into the frequency and extent of data file backup and storage. As a general rule, data files should be backed up on a daily basis, with a copy of the files stored in a location removed from the office. Backups can be made in a variety of ways; including: removable storage media (portable hard drive, CDs, tapes, etc.); remotely over the internet; or remotely by a third party back up service. The practitioner is advised to try to restore files from backed up copies from time to time to test the restore procedure and the integrity of the backup data. It is better to discover under a test scenario that the data files do not exist or are corrupted than to discover such issues in an emergency Internet Connection to the internet presents a whole set of issues. Most insolvency professionals have a presence on the web and many debtors are using the internet to research the insolvency process and to make contact with trustees. The Office of the Superintendent of Bankruptcy accepts the filing of certain bankruptcy forms electronically. The E-filing system works well and provides prompt response in most cases. In the future it is contemplated that creditors will be able to file claims with trustees electronically. In some cases trustees keep online catalogues of assets available for purchase. Being on the net is important to insolvency professionals both for marketing and communicating. Security on the net is an important consideration. Connection to the world wide web may mean that the connected PC can be reached or possibly attacked from anywhere in the world. Care should be taken to ensure that all PCs connected to the internet have: virus protection software; and firewall security (generally installed at the internet access point to protect the entire internal network). The practitioner should also develop policies with respect to downloading software or any files from the internet including audio and video files, pornography or any other material not necessary to the practice. Policies with respect to access to and use of internet resources should be clearly communicated to staff. The practitioner may wish to monitor staff use of the internet to ensure that they are not accessing the internet for unauthorized or illegal activities, or activities that may impact on the reputation of the trustee firm. CQP Applied Knowledge Course July

119 Insolvency and Business Practices Video Conferencing Some practitioners make use of audio and video devices over the internet to facilitate long distance communication. The advantages to using such devices lie in the ability of the participants to communicate with one another as if they were in the same room without traveling any distance. Disadvantages may be in the cost of purchasing, setting up and maintaining the equipment or in the reluctance of individuals to communicate in this manner Remote Access Accessing a computer system from outside the office is essential. Engagements are often conducted at off-site locations and many practitioners and their staff travel to various geographic locations in different time zones, or work from home outside regular business hours. A host of internet providers throughout North America offer high speed internet connections either via cable, T1, or ASDL or, in some locations, via satellite or wireless connections. These media carry data at high speeds allowing for efficient communication. Remote access does present security risks in that unauthorized individuals or hackers may try to breach security systems either to gain access to data or to vandalize systems. The practitioner is advised to consult with internet security providers in planning for remote access Electronic Research Services Available The trend in legal research has shifted from written to electronic medium. Companies such as LexisNexis and Thomson Carswell provide on-line internet databases of bankruptcy and other legal material that can be searched from the practitioner s PC. Both of these electronic services are available on-line and searching the information is facilitated by prompts on the web pages. Thomson Carswell Insolvency Source 7 provides internet access to current in-depth insolvency material. Carswell provides the service on an annual subscription basis and the fee includes access to the following: Bankruptcy and Insolvency Act, General Rules and Forms; Directives and Bulletins issued by the Office of the Superintendent of Bankruptcy; Canadian Bankruptcy Reports (CBR); Insolvency Institute of Canada court filings and articles; Federal and Provincial Legislation; and full text case law. 7 Thomson Carswell has generously provided all candidates free access to Insolvency throughout their study time. CQP Applied Knowledge Course July

120 Insolvency and Business Practices Each of the above is searchable by word, phrase or topic that greatly reduces research time. In many cases the material is cross-referenced with the BIA, Directives, etc. There is also access to judicial decisions and the Canadian Bankruptcy Reports, which is helpful in reviewing recent decisions and precedent setting cases. Access to the foregoing research material is not inexpensive and the practitioner should give careful consideration to the cost of the service compared to the benefit of having it available on PC. In many cases it is cost effective to subscribe to the electronic material when one compares this cost to the cost of maintaining a library of reference materials E-Filing System Methods of Filing Documents BIA Rule 6 Different methods can be used to serve or send documents pursuant to the BIA. BIA Rule 6 states that every notice or other document must be served, delivered personally, or sent by mail, courier, facsimile or electronic transmission Time of Transmission BIA Rule 5 Directive 9R3 Regarding the time of the transmission, BIA Rule 5 states that a notice or other document that is received by a Division Office outside of its business hours is deemed to have been received on the next business day of that Division Office, if it was received between the end of business hours and midnight, local time, on a business day, or on a Saturday or holiday. If it was received between midnight and the beginning of business hours, local time, on a business day, it is deemed to have been received at the beginning of business hours of that Division Office. However, this presumption does not apply to documents related to proceedings under BIA Part III that are filed by facsimile or by electronic filing. Pursuant to Directive 9R3 Electronic filing and other methods, these documents are deemed to be filed with the Official Receiver on the date and at the time they are received by the OSB. The time and date of receipt shall be the time and date as recorded by the fax machine or the electronic filing system that received the document(s). The same Directive also states that for the purposes of assignments made pursuant to BIA s. 49, the date and time of the filing of a bankruptcy is the date and time when the assignment is examined and accepted by the Official Receiver, using such technological tools as are available to assist in this task, namely, the E-Filing system. CQP Applied Knowledge Course July

121 Insolvency and Business Practices Finally, it should be noted that the Directive defines "business hours" for the purposes of the electronic filing of documents as 24 hours a day, 7 days a week, except for those periods required for system maintenance. This signifies that all insolvency proceedings pursuant to the BIA can be filed at any time when the system is fully functional Electronic Filing In December 2002, the Office of the Superintendent of Bankruptcy introduced an E-Filing system that allows trustees to electronically file all forms, documents and supporting information associated with the following: bankruptcy estates under summary administration; bankruptcy estates under ordinary administration; consumer proposals; and Division I proposals. The following proceedings cannot be filed using the OSB s E-filing system: receiverships; partnership assignments and partnership proposals; and assignments deriving from bankruptcy orders What You Will Need To use the E-Filing system, you will need the following: off-the-shelf or proprietary software with an E-Filing module; Windows 98 (or a more recent version); a basic internet connection (high-speed access is not necessary); the latest version of Adobe Acrobat Reader; and a Strategis username and password E-Filing Registration A trustee using the E-Filing system must register with the OSB. He must first obtain a Username from Industry Canada s Strategis business site: Then, the trustee must sign and forward a User Agreement to the Division Assistant Superintendent of the division in which the trustee practices. This form is available on the OSB web site at A trustee may also register staff members who will use the E-Filing system. CQP Applied Knowledge Course July

122 Insolvency and Business Practices User Agreement In signing the User Agreement, the trustee agrees to the conditions of use of the E-Filing system. He must retain in the appropriate file all documents related to this file, especially, signed paper copies of all electronic documents. He shall ensure that these documents are signed by the appropriate person. If staff members are registered as E-Filing users, the trustee must assume responsibility for the documents submitted by these persons on behalf of the trustee. Finally, the trustee must use the E-Filing system in a responsible manner. In case of non-compliance with any conditions set out in the agreement, the OSB may suspend or cease offering the E-Filing Service Benefits The E-Filing system is efficient and facilitates the work of trustees since it is quick, easy and secure. In addition, the system informs the trustee at the beginning of the process if a submission does not meet the BIA requirements. It will automatically reject any forms with errors that might have been overlooked when using the paper format. The E-Filing system also has the advantage of explaining how to correct the errors. The E-Filing system may be used at any time and the Certificate of Appointment will be issued in a few seconds, 24 hours a day, seven days a week. Reference numbers help the trustee track every electronic submission. Even though the transactions are automatic, in specific circumstances the filing may need to be manually reviewed by the Official Receiver, for example, when the debtor resides outside of Canada. Should such a situation occur, the screen will show a note informing the trustee that the document electronically transmitted will be manually reviewed. Throughout the administration of the estate, the E-Filing system may be used in updating the file. This will be the case when the Report of Trustee on Bankrupt s Application for Discharge or the Trustee s Statement of Receipts and Disbursements is filed. In the latter case, when there is no reason requiring a manual review, the system will automatically generate a Letter of Comment, which is sent by . The system also allows switching from paper to E-Filing. During the course of the administration of an estate, the trustee may electronically file any documents related to an estate. Once an estate has been switched from paper to electronic format, however, all filings to the estate must be done though the E-Filing system Finally, the OSB web site contains a user manual that provides more details on the use of the E- Filing system. It also refers to a help desk for technical problems. The web site also shows tips on using the E-Filing system and the online bulletins on E-Filing. All these documents are available on the OSB web site at CQP Applied Knowledge Course July

123 Insolvency and Business Practices General Business Knowledge General Business Knowledge Approach to the Business Problem There is no substitute for sound business judgment in identifying potential problems. Care should be taken to address all relevant business aspects in any engagement Business Aspects There are several background business aspects that should be considered by an insolvency professional during a review of a company s situation to help put the situation in context before making comments or recommendations on potential courses of action or drafting a commentary on financial projections, including knowledge of: the management, its knowledge of the business and its ability to steer the business through the current difficulties; the commercial and technical environment in which the business operates, the variety of problems, pressures and changes that it might be experiencing as a result of that environment and the threats and opportunities that they present; the financing circumstances of the business, actual and potential; the accounting and management information systems, which ought to provide the basic data for fundamental business decision making; and the overall performance of the business Quality of Management The inadequacy of management is probably the most common cause of business failure, hence the review conducted by the insolvency professional should devote adequate resources to assessing the quality of management. A clear understanding of management relationships, responsibilities and capabilities is critical to the conduct of a comprehensive business review. However, it is important to bear in mind that it is all too easy to blame management. It should not be assumed that management is at fault without careful consideration. Nor does it follow that managers who bear some responsibility should be replaced. Recruiting good new management to a troubled business is difficult and does not always succeed. If bad management is evident, the specific underlying causes should be identified. Some of the more common reasons are: retention of management responsibility in a family business by family members regardless of their capability or suitability for the requirements of the position. This not only gives rise to CQP Applied Knowledge Course July

124 Insolvency and Business Practices individual bad managers but may also de-motivate and disillusion non-family members who are unable to aspire to the more senior management positions; an autocratic chief executive officer which may have the effect of suppressing good managers (if they exist) and will almost certainly give rise to poor decision-making in those aspects of the business in which the CEO is not expert; an inadequate range of management skills available to the business coupled with a reluctance to consult outside advisers (in particular, the lack of a strong financial officer who is able to influence the decision-making process); rapid changes in the size or nature of the business that have not been matched by an expansion of compatible management resources, leading to the gradual loss of control of the business; an ill-defined reporting structure, possibly giving rise to poor definition of responsibilities; the lack of an effective chief executive to provide overall control and cohesion; the devotion of excessive management resources to peripheral or loss-making activities within the organization; a top heavy head office function funded by operating subsidiaries, leading to disgruntled subsidiary management and adversely affecting overall business performance; and, lack of proper delegation, often in conjunction with other causes referred to above. Management failings Symptoms of such management failings include: high turnover of key employees, which might further indicate a less than cohesive management structure; personality conflicts; the absence of any obvious management succession plan, particularly where the current management has grown old together; the absence of regular board and management meetings at which problems and progress can be communicated; the absence of a corporate business plan, targets and objectives to motivate individual managers; breakdowns in internal controls; reluctance of the owners to inject new capital into the business, reflecting a lack of confidence in and commitment to its future; CQP Applied Knowledge Course July

125 Insolvency and Business Practices evidence of extravagant expenditure on salaries, travel and entertaining can be indicative of the improper ordering of business priorities; preoccupation of management with interests outside the business, particularly projects that enhance management's prestige or personal finances; and poor or non-existent communication with creditors, customers or other important third parties. Timely financial information Perhaps the most important failure of any management is their inability or refusal to produce, and react promptly to, timely financial information. Such a situation will almost inevitably mean that insufficient attention is being paid to planning and control, which are essential to good management Vulnerability to Changes In today's rapidly changing environment, it is becoming increasingly difficult for management to respond to changing technical and commercial circumstances. A business is most vulnerable if it operates in volatile markets, or is susceptible to rapid changes in costs, fashion, technology, legislation, social and political attitudes, exchange rate fluctuations and so on, particularly if its products or production processes are subject to obsolescence. It is particularly vulnerable if it is dependent on a limited customer base or a small number of high value contracts or is unprepared for competitive marketing challenges. If the overhead cost structure is very high and cannot easily be reduced in response to a prolonged downturn in demand, its viability will be seriously threatened in times of falling sale volume. Problems can arise where pricing is based on marginal costing techniques and the business has acquired or defended market share by reducing margins rather than looking to lower volumes of different qualities at higher margins. Other commercial considerations include: the degree of vertical integration, and the length of product lead times that this gives rise to, leading to excessive inventories, late deliveries, production shut-downs, etc.; an unusually large proportion of rejects being manufactured, where the business specializes in high value-added products; limited sources of supply, perhaps with long lead times and unpredictable price fluctuations, particularly if the supplier is suffering; the downtime effect on production facilities in businesses where there is no standby capacity can also be crucial; and CQP Applied Knowledge Course July

126 Insolvency and Business Practices a unionized labor environment, poor labor relations, out-of-date remuneration systems and a mobile labor force Capital Replacement In a business that requires high value capital replacement programs, the consequences of poor investment decisions or technical innovations must be considered carefully. Also, any changes in the commercial environment in which it operates may dramatically reduce asset values. In such circumstances it may be appropriate for the insolvency professional or the client to consult specialist professional advisers and valuators on current and expected future replacement costs and realizable values of assets. Problems often arise when business priorities are mismanaged as a result of technical or commercial pressures. Artificial internal pressures can be created that may lead to premature product launches or an untimely raising of market expectations, and the excessive pursuit of research and development can lead to over-reliance on a single project and a fatal detachment from the real marketplace. Any business dependent on a single project or contract has inherent potential for trouble. Likewise, dependence on getting a research project to end product in a given lead time creates vulnerability. The pursuit of profit at the expense of cash or vice versa, or the pursuit of sales for the sake of volume, often contributes to the downfall of a business. A key point in the downward path of a business is often a change in its credibility in the eyes of its customers, suppliers, the workforce or regulatory authorities. Conversely, a changing technical or commercial environment can present opportunities and these should not be overlooked. The true core business of the enterprise may have shifted over time without this being recognized and the necessary emphasis being placed on new profitable ventures. Typically, the business under review is over-leveraged with borrowings largely repayable in the short term. Dividends may have been paid despite losses and increased security may have been granted to obtain further credit. The business may have expanded without due regard to raising additional finance to meet the expenditure involved, or a capital expenditure program with a relatively long term payback may have been financed with short term debt, giving rise to short term cash flow problems in meeting the debt repayment program. In short, there is likely to have been a lack of attention to cash flow. A lack of properly structured finance often shows up in the use of "off balance sheet debt", factoring of accounts receivable, sale and leasebacks, consignment agreements or other finance obtained from outside the normal banking industry, which are often expensive and therefore gradually impact upon earnings. CQP Applied Knowledge Course July

127 Insolvency and Business Practices Lack of proper finance ultimately leads to lack of investment and reduced competitiveness. All too often such problems are compounded by a deteriorating debt collection record, evidencing either customer dissatisfaction, poor credit control or the granting of more favorable credit terms in order to induce sales. On the purchasing front, late, irregular or "on account" payments to creditors lead to inefficient buying, and failure to achieve volume and settlement discounts Subsidiaries The insolvency professional should understand the relationships between separate subsidiaries within a group of businesses in order to identify those with strong cash flow that will probably be funding other loss-making operations. Elimination of cross-subsidies between product types may assist in achieving an on-going viable operation. Consideration should be given to the likelihood of existing or new investors providing additional finance to the business (if it is considered to have a viable future) and to the potential for creditors participating in this process, particularly where the survival of the business is important to them Financial Information Effective management of any reasonable sized business requires regular, timely and accurate financial information, which must be presented in an appropriate manner and be intelligently interpreted and used as a basis for decision making. The most important financial information normally includes: projections of future profitability, cash flows and financial position based on comprehensive, credible and relevant assumptions; and financial statements prepared on a timely basis and broken down by areas of responsibility, which compare actual performance with projections and explain variances. Common warning signs that problems exist with the accounting and management information systems include: the inadequacy of provisions for bad debts and obsolete inventory; practices involving invoicing before delivery of goods or services; cheques made out but not issued; changes in accounting policies, such as the capitalization of research and development; major swings in accounts receivable aging, particularly at key reporting dates; the issue of post year-end credit notes, a practice sometimes indicating artificially inflated sales and accounts receivable; the use of standard gross margins and valuing inventory at sales price less a stated percentage; CQP Applied Knowledge Course July

128 Insolvency and Business Practices the production of excessive and irrelevant management information (which may be masking a problem); inadequate segregation of divisional or unit results (which may disguise loss-making activities); the production of "unofficial" information and reports by operating employees (indicating the perceived inadequacy of "official" information or reports); poor costing and budgeting systems; and frequent accounting adjustments or "surprises". It will often be appropriate to read product/divisional profitability and cash flow information, assessing whether or not a fair allocation of overheads and attributable costs has been achieved. It will often also be appropriate to assess what overheads are really necessary and the principles of allocation of overheads in the context of what overheads are attributable to loss-making activities and would be saved on closure of those activities (which may differ markedly from the treatment of overheads in the management accounts). It is not unusual for management under pressure to claim that it is particularly difficult or irrelevant in its specific business to produce credible financial forecasts. In practice, this may mean management is reluctant to provide a benchmark against which outsiders can judge its performance Strategy for Survival Before developing a survival strategy, it is important to determine what the risks and rewards of the business are, and for whose account they are. If the risks are being borne by one class of creditor or shareholder for the benefit of another, then support for the business may be unstable and any such plan is doomed to failure. If support is stable, a strategy for survival should be developed that must include an action plan defining the specific tasks involved, the time frame for completion and identification of the individuals who carry the responsibility for each task. This will, amongst other things, provide a benchmark for measuring progress in pursuing the strategy. For a business to have survival prospects beyond the very short term, it must have the capacity to earn profits without which the cash flow and balance sheet will inevitably deteriorate, no matter what short term improvements are made. Short term cash flow is, however, vital. Cash flow problems usually prompt a review in the first place. Without adequate cash flow, the business may not survive long enough for a review to be brought to a successful conclusion. The fundamental questions to be answered therefore are: Does cash flow and creditor pressure permit the business to survive at least until the business review is completed? Is the business presently generating profits? CQP Applied Knowledge Course July

129 Insolvency and Business Practices If not, can it be made profitable, for example, by: removing loss making activities; better marketing; expanding profitable activities; or eliminating unnecessary expenditure? If it can be made profitable, when will cash flow become positive and what financial resources are required in the meantime? Can cash flow be improved, for example, by: paying better attention to debt collection; eliminating unnecessary inventories; or selling of surplus or non-essential assets? Although an understanding of the existing problems within the business is useful in working out a survival strategy, it is also necessary to look for the positive features. Attention should be paid to the strengths of the enterprise, the activities within it that are vigorous and the opportunities that present themselves (for example, the shifting of resources from declining to expanding markets, the improvement of productivity and securing of a management team committed to the resurgence of the business, any of which will produce acceptable products at the right price points in the market that are engineered or manufactured to optimize gross profit at those price points. A detailed study of the subjects noted above could involve an extensive management consultancy exercise. Often considerations of cost or the lack of time due to creditor pressure will not allow a full study to be carried out and subjective judgments will have to be made both by management and by the reviewer. The approach therefore needs to be kept under discussion with the debtor business (and, if different, the client) and matters may need to be highlighted for further study at a later date. If the business is in serious difficulty, it will often encounter resistance in raising financing to explore new opportunities. As a result, the appropriate business strategy at the outset may be a strict survival regime restricted to identifying: profitable core businesses on which available resources and efforts can be concentrated; and loss making or peripheral activities that are candidates for early closure or sale. The immediate sale of surplus assets or non-core businesses can provide essential breathing space, even if a higher value could be realized in the long run. Also, the sale of peripheral activities usually frees management from distraction and allows them to concentrate on the core businesses. CQP Applied Knowledge Course July

130 Insolvency and Business Practices It should be remembered that the strategy for dealing with the problems of a business is the responsibility of management although they may be influenced by persuasion from influential creditors. This is the case whether the financial projections are prepared by management or if assistance in their compilation is provided by the practitioner performing the review. The practitioner s role is normally restricted to advising on a course of action or commenting on management's own strategy and financial projections. The practitioner s comments may be persuasive and adoption of his recommendations may even become a condition of creditor support. When conducting international engagements, the practitioner should note that lender liability laws in some countries are such that creditor clients may not want the practitioner to participate in developing a strategy for the survival of the business or appear in any way to influence the actions of the enterprise. In considering whether or not profitability can be restored, efforts should be concentrated initially on the relatively short term. A business in serious trouble should be analyzed first on the basis that no individual activity should be retained that fails to contribute to the profitability of the business as a whole. Potentially profitable long-term projects can be pursued once short term survival is assured. Avoidable expenditures must be identified, eliminated, postponed or at least reduced to a minimum (for example, surplus labor and excessive overheads). This might involve whole departments, for example research and development. Each income generating activity must be considered in turn, identifying attributable expenditures and therefore the level of contribution earned. Care must be taken to recognize and account for cross-subsidies between activities, or hidden costs. A business will have a viable longer-term future only if sufficient contribution can be earned from its various activities to cover the essential central overheads. It may therefore be necessary for financial projections to be produced from a base incorporating only the profitable operations and the overheads related to them, then to add any other activities that can be accommodated within the revised organization, such as research and development which may be essential if the business is to survive beyond the short term. By this process, it should be possible to establish whether or not the business has the capability of generating profit. If the capability for profit can be identified, it is necessary to assess whether or not there is adequate time for any requisite restructuring to be carried out. The impact on the balance sheet and cash flow of the restructuring needs to be projected as well as looking for ways in which both the balance sheet and cash flow might be improved generally (for example, through the sale of non-essential assets, improved stock control and improved debt control). Although debt factoring and sale and leaseback arrangements could provide additional financing, they will almost certainly reduce the secured lender's cover, prompting the lender to look for a corresponding reduction in its loan facility. It should then be possible for an assessment to be made as to whether or not: the end result will represent a "bankable" proposition; CQP Applied Knowledge Course July

131 Insolvency and Business Practices new equity capital can be obtained (bearing in mind that the financial position of the business may well discourage new investors and that the most realistic source of new funds will be the existing shareholders or creditors); and cash flow is a problem. If so, remedial steps can be expected to resolve the problem (for example, eliminating losses or disposing of assets) before creditors close in, whether the prospects of profit are likely to allow more equity to be raised or persuade credit grantors to give more support, or whether a more drastic solution is required. The matters referred to in this section and the judgment needed will ultimately be a matter for management and its bankers, other creditors or shareholders to decide. The insolvency professional s report (which will also contain a description of the scope and limitations of the practitioner s work) should contain findings, advice or comments designed to assist in that process Alternative Solutions If the answers to the questions above are negative, in that the profit potential cannot be demonstrated or creditor pressure does not appear likely to allow the time to achieve a return to profit, the avenues remaining other than formal insolvency should also be considered. These may include: a sale of the business; a gradual rundown; a moratorium, proposal to creditors or scheme of arrangement; or conversion of debt to equity. A going-concern sale of the business might be possible, probably to a financially sound organization that can identify benefits from integration or the injection of capital or management resources. If so the creditors should benefit either from being underwritten by the purchaser or because the asset values realized ought to be significantly higher than if sold on a break-up basis. However, such a sale can be difficult to achieve if a prospective purchaser believes the business assets could be acquired at a cheaper price or with less risk at a later date, following formal insolvency. Sometimes one of the most valuable (but difficult) roles for the practitioner is to persuade management or the owners of the business to seek a purchaser. Often the owner's reluctance to part with control of the business is only overcome when it is too late to bring about a rescue sale. A gradual run down can be a workable solution where the business has become an irreversible loss-maker after a period of considerable profitability, and its balance sheet can sustain the costs of closure. This alternative is particularly useful where there is a large difference between going concern values of the remaining assets and their "break up" value. An informal moratorium is a possible solution where the problem is largely one of temporary adverse cash flows and the creditors are willing to extend temporary support. A proposal to CQP Applied Knowledge Course July

132 Insolvency and Business Practices creditors or a scheme of arrangement whereby creditors extend time for payment and/or accept less than 100% in settlement may be appropriate if the problems have been recognized and the solutions are at hand. While often attractive to the owners, who may thereby retain control of the business, such moratoria, proposals or schemes require the goodwill and consent of creditors. To achieve such consent, the business must demonstrate to each creditor that the proposed moratorium, proposal or scheme is in the creditor's best interests as well as the debtor's. Accordingly, the proposed extension/reduction of debt repayments will have to be balanced against the likely recovery from a liquidation of the assets. Retention of a good customer is often a factor. Frequently, it is difficult to satisfy creditors who are well secured with anything less than payment in full. A conversion of debt to equity may be appropriate in similar situations to, and perhaps in conjunction with, a moratorium, proposal or scheme, and can sometimes assist in balancing the requirements of secured and unsecured creditors. Considerations include: The new equity would normally dilute existing equity. The new equity may take a variety of forms, including preference shares, options or convertible warrants. An appeal to market investors to subscribe for new equity under a rights issue may be appropriate where the prospects of the business seem favorable. Not every creditor is able to enter easily into such arrangements. Smaller creditors may encounter their own liquidity problems. Regulated lenders such as banks may have to seek permission from their regulators. The tax position, including the difficulties of preserving any tax losses, the fact that different types of equity may attract differing tax treatment for both debtor and creditor, and the possibility that the transaction may need to be justified to the tax authorities. An alternative to a straight conversion is the issue of equity in exchange for past due interest, but such interest forgiveness schemes take a long time to mature and can be somewhat uneven in their impact. Practical problems arising on such proposals or schemes include: Having agreed to a formal debt restructure, the debtor business may not be able to provide a satisfactory return on investment to the increased number of shareholders as well as servicing the residual debt. Reconstructions are generally complicated, with technical processes which are time consuming and understood properly by only a limited number of practitioners; the attitudes of both the creditors and the debtor's management will be crucial. Management is often unable to combine both the restructuring negotiations and efficient management of the business. It will probably be essential for their duties to be organized or reorganized so that both aspects can go ahead reasonably smoothly. Management must CQP Applied Knowledge Course July

133 Insolvency and Business Practices take a positive attitude to the wide range of decisions needed, and the appointment of a financial adviser with some experience of this work will be helpful. Most restructuring will require changes in management responsibility and if management requires strengthening it may be difficult to find people of the right caliber. The time taken in getting agreement if there are a number of creditors involved can be substantial. Many lenders will have to go through the process of explaining the proposals in great detail to their credit committees. Some larger extensions of credits may involve syndicates of several financial institutions and the proposal or scheme would have to be approved by each. Foreign lenders may have the further problem of getting approvals from their head offices in other parts of the world Dealing with Debt and Equity Holders There are a number of potential problems in dealing with a business's debt and equity holders, such as: Small shareholders and minorities might have power to frustrate the restructuring even they may be in a weak position and their only alternative is liquidation of the business. The position of bondholders or debenture holders issued under trust deeds also needs to be considered. Trustees under the trust deeds have very limited powers. If the holders are all institutional, the trustee may be constructive but at best it cannot be much more than a neutral force. In the case of some instruments such as Eurobonds, it is difficult to trace the actual holders and therefore the role of the trustee is constrained. Trustees have very few powers other than those in the trust deed and will find it almost impossible to amend them. In the case of some bond issues, there is no formal trustee arrangement with the debtor acting as paying agent. Care needs to be taken to ensure that the reconstruction scheme does not inhibit any further capital raising. Sometimes this is impossible and there is a need for a second capital reorganization at a time when the debtor's fortunes are clearer. A successful reconstruction operation sometimes heightens the possibility of a takeover, a position that the creditors as well as the owners, may welcome. The need to develop some form of creditor support program, to control payments and to ensure continuity of supplies. Care will also be needed in making satisfactory arrangements with Canada Revenue Agency and other government agencies. It will be important for the debtor to ensure that customer relationships are maintained and, where necessary, reassurance is given. Few customers are dependent on one source of supply and all dislike suppliers who are financially unreliable. It may well be difficult to secure worthwhile orders and maintain profitable trading during the period of restructuring. CQP Applied Knowledge Course July

134 Insolvency and Business Practices There are additional dimensions to international refinancings, which generally have more in common with the negotiation of diplomatic treaties and sovereign debt rescheduling than with commercial banking transactions The Security Review An important component of the insolvency professional s review of a business will often be an assessment of the security (collateral) cover available to the holder of debentures or other charges over the assets of the business, and such lender's continued support may, rightly or wrongly, be as dependent upon the level of cover that exists as it is upon the prospective viability of the business itself. Where the engagement letter requires it, the report should summarize the various assets comprising security held by individual lenders and the available information or assumptions about the value attributable to each. It is generally expected that the practitioner will not act as valuator, but will assemble the available evidence of value and make such qualified assessments as the evidence permits. The report should clearly state the limitations of any assessment made, and the methods of valuation or assumptions on which the assessment has been based. It should also incorporate comments on possible ways in which existing security might be improved. The report should clearly state, assuming such is the case, that the practitioner has not taken legal advice on the validity of the security and that the practitioner has relied upon other parties or sources of information when assembling evidence of security values and has not acted as a valuator of assets that the practitioner is not qualified to evaluate. It is also advisable to draw attention to the fact that the amounts that may be recovered from security will fluctuate from day to day (for example, the level of receivables and inventories) and that an illustration of the outcome of the hypothetical realization of security based on figures at one date may be quite different from that achievable at another date. Instructions to report on the security available to the debtor's bankers should not be accepted unless the practitioner has available to it (or can engage for the purpose) professional expertise sufficient to enable it to undertake this work Estimating Future Values The security review should be based on the latest available balance sheet, and will often involve an estimation of future security values by reference to projected balance sheets. General points to consider include: The need to analyze major balance sheet headings during the review, so as to assist in valuing the various separate asset categories and assessing the nature and amount of deemed trusts, etc. The importance of reviewing any recent professional valuations of assets obtained by management. If none exist and the value of the asset is critical to the security value, the need for obtaining a professional valuation should be discussed with the client. CQP Applied Knowledge Course July

135 Insolvency and Business Practices The need to identify or sound a note of caution about assets that are not owned by the debtor or encumbered, having been obtained on terms which reserve title to the vendor until full payment has been tendered, or that are hired or leased. The critical importance of understanding the relative priorities of secured lenders and to consider any early repayment penalties or contract cancellation charges that might rank, particularly where prior charges exist, in favor of secondary lenders (for example, venture capitalists). In some cases, it may be necessary to take legal advice on this point Assessing Realizable Value In some instances, the calculation of an asset's value may be within the capability of the practitioner s (for example, shares in subsidiaries may be valued by the practitioner s valuation specialists). Experience gained as a liquidator or receiver may also assist in assessing the realizable value of such assets as receivables and inventories. Other assets may be valued by reference to recent professional valuations (for example, real estate). Also, the secured creditor may have criteria for the evaluation of its security, and that it wishes to be applied. What is essential is that the report includes: a full note on the way in which estimated realization of each asset is arrived at; a clear statement that the practitioner is not a valuator and cannot accept professional responsibility for recoveries under security; a statement of important bases, assumptions and qualifications in any valuation report by others which are referred to in the report; a clear statement that the practitioner has, or has not, verified the validity of security; and explanation of the differences between going concern valuations and break-up valuations, emphasizing the relevance of each to the assignment in question Specific Considerations Specific points for attention include the following. As regards accounts receivable: individual major balances should be extracted and reviewed; adequate provision should be made for bad and doubtful debts, both by reference to major balances and by general provisions based on an age analysis, taking account of any credit insurance; the nature of the receivables should be considered with particular care regarding: progress payments and retentions on contracts are unlikely to be realized at full value if the contracts are not completed; CQP Applied Knowledge Course July

136 Insolvency and Business Practices retail accounts and ledgers with a large number of small value items can only be collected at substantial cost; receivables due in relation to products that involve warranty liabilities are also unlikely to be recovered at full value in a break-up situation; receivables with balances due from debtors who are also suppliers, as any such balances may be subject to legal setoff but, in any event, will be troublesome and costly to collect, whatever the legal situation might be; ensuring that the invoicing procedures are properly understood, and that invoices are not processed in advance of the goods or services to which they relate being provided; and reviewing correspondence from debtors who contest transactions with the business. If plant and machinery is of high book value and/or specialized in nature, a professional valuation may well be essential. In other circumstances it may be appropriate to base realizable values on book values but it is important to suggest suitable assumptions and sound a note of caution about their reliability or recommend that a professional valuation be made. In considering appropriate bases, regard should be had to: present location and transportability; the extent to which book value includes capitalized "know-how", installation charges, own labor and/or overheads, and other items that a prospective purchaser would not be willing to pay for; the impact of technological changes; age, general condition, and the quantity available - will it support an auction on-site? the possibility that, through distress or "affixation" to the premises, the lessor may have a claim; or the existence of "purchase money security interests" or reservations of title; Inventories the existence and likely validity of reservation of title clauses attaching to inventory must be considered when calculating realizable values. Where relevant, consideration should be given to possible significant liens (for example, unpaid carriers claiming over goods in transit). Other points include: age and general condition; the possibility of sale in its existing state (for example, as raw materials or components); and the costs and risks of conversion to finished products (for example, product warranties); Work in progress the realizable value will depend greatly on its nature; it is unlikely that it will be readily realizable in its existing state (unless a going-concern sale can be achieved) therefore the costs and risks of completion are critical. For example: CQP Applied Knowledge Course July

137 Insolvency and Business Practices long term fixed price contracts may not be completed in a formal insolvency; for certain types of products, customers will be lost immediately due to the uncertainty of continued supply and/or warranty support; and the work in progress may have no value except to a specific customer. Real estate comment on property values should be confined to reporting on the available evidence rather than expressing an opinion. Where there has been recent professional valuation this may be good evidence but normally any such valuation will have been on an "open market value for existing use" basis, rather than on the "forced sale" basis more relevant to most insolvencies. Leasehold improvements special factors include arrears of rent and service charges, liability for damage or extraordinary wear and tear, any restriction on assignment, and forfeiture clauses. This is another area where legal advice can be invaluable. Non arms-length transaction the relationships that exist between the various businesses in a group can be very relevant to an assessment of the values of security available to creditors and should be described in the report. In particular it is important to consider: Which business in the group owns which assets (the report will usually indicate that title has not been verified). Any balances that exist between the various businesses in the group. It is not unusual for amounts owed by other businesses in the group to be unrecoverable in an insolvency and therefore should be specifically excluded from realizations. The identity of the principal debtor business and the extent to which businesses in the group have guaranteed each other s liabilities can give rise to complex situations particularly where there are several secured lenders. Preference creditors when reporting to a secured creditor or for the purpose of raising funds against security, it is important to establish the extent of creditors and contingent creditors who may have a prior claim on assets over which the secured creditor holds or will hold security. Costs of realization it is normally difficult to estimate with any degree of precision the likely costs of realization, including professional fees as well as continuing overheads of the business pending realization of its assets. Nevertheless an allowance should be made for these costs, in order to identify more closely the amount actually available to secured and preferred creditors. Such an estimate is likely to be set as a percentage of estimated realizations based on experience of similar situations, but the report should make it clear that it is an estimate and not a guarantee of accuracy in any way. It should be noted that financial information of a complex corporate group is often presented on a consolidated basis, to meet the requirements of generally accepted accounting principles. While presenting consolidated financial information may reflect the economic impact of a corporate group as a whole, it is important to realize that an analysis of assets and liabilities on CQP Applied Knowledge Course July

138 Insolvency and Business Practices a consolidated basis may not properly reflect the legal rights of creditors, and that an analysis on a company by company basis, of the unconsolidated assets and liabilities, may be required. By way of example, the creditors of a subsidiary may not have access to the assets of the parent or of other subsidiaries to satisfy their claims, and the creditors of the parent company may in effect be in the same position as the shareholders of the subsidiary companies in terms of rights against the assets of these subsidiaries. CQP Applied Knowledge Course July

139 Risk Management Risk Management 3. Risk Management Introduction Client / Engagement Acceptance Client Acceptance Engagement Acceptance Professionalism Professional Associations Independence Conflicts of Interest Confidentiality Supervision Signing Authority File Administration Reports Relationships with Guarantors Communications with Creditors Insurance Coverage Operating the Business Auctioneers / Appraisers Practice Administration Trust Banking CQP Applied Knowledge Course July

140 Risk Management Internal Controls Personal Computers Resources Files Records Retention Reporting of Claims Made Against the CIRP CQP Applied Knowledge Course July

141 Risk Management 3. Risk Management 3.1. Introduction This section is intended to provide insolvency professionals with a broad appreciation of the risks of operating an insolvency and restructuring practice, and provide general advice in terms of how to manage and mitigate these risks. This document is not intended to offer advice relative to specific files or circumstances. It is intended as a practical guide that should trigger greater thought and consultation where higher risk situations are encountered. It should be noted from the outset that it is impossible to eliminate risk outright and that the best that can be hoped for is that the risk be managed and minimized. All business operations and transactions involve some degree of risk and an expected reward. A successful business venture will be one where the decision makers are capable of assessing the risk/reward relationship in the decision-making process. An insolvency professional s work is no different. The insolvency professional should not take unnecessary risks, but should not be risk adverse either. Decisions should be made carefully, after an analysis of the risks and possible rewards based on the information available, and after a full discussion of these with the principal stakeholders, to make sure the risks are undertaken with awareness of the potential consequences. It is possible that the expected benefit(s) may not materialize, but that does not mean that the decision to assume a risk was faulty, if it was carefully considered, analyzed and authorized. An example of such a situation would be a decision as to whether or not to continue to operate a business at the beginning of a receivership or bankruptcy mandate. This decision involves risk, such as the risk of incurring a further loss of value through operating expenses, changes in market conditions, or even possibly increased liability for the professional. The decision to operate the business could lead to a benefit for the stakeholders if the business can be sold as a going-concern, rather than being liquidated in a piecemeal manner. After the decision is made, it is possible that a sale as a going concern may not materialize, that pressure from the suppliers or customers render the business unviable, that operating losses are incurred, or that other factors arise that result in an increased loss as compared with the value expected from a liquidation. That does not mean, however, that the decision was erroneous it may have been the best possible decision given the available information and market conditions prevailing at the time the decision was made. Such a decision should not be criticized after the fact just because the anticipated benefit(s) did not materialize. A reasoned decision that does not yield the anticipated benefits is very different from a situation where a decision to operate is made with little or no forethought or analysis, and without some assessment of whether or not the business could be viable, or without assessing the merit of continuing operations to enhance value. While some degree of risk may be unavoidable, risks can be minimized and controlled by applying sound business practices and by following the guidelines set out in: the Code of Professional Conduct to which CIRPs adhere; the Standards of Professional Practice issued by CAIRP; CQP Applied Knowledge Course July

142 Risk Management the Bankruptcy and Insolvency General Rules or other regulations to legislation pursuant to which a mandate is carried out; any court order made in connection with a mandate; the directives issued by the Office of the Superintendent of Bankruptcy; or other like pronouncements. Risks should also be continually monitored, as they may change over time, which may necessitate a possible re-evaluation of the original decision or additional actions to be taken. While the focus of the material in this portion of the course is primarily on practice risk management, the principles outlined can and should be applied in the management of any organization under a restructuring mandate Client / Engagement Acceptance CAIRP Standard of Professional Practice No Client Acceptance Some points to consider when deciding whether or not to accept a particular engagement: Who is the client / debtor? Insolvency professionals need to fully understand their role in the engagement since it may be larger than just contractual and their duty of care may cover a group of stakeholders. Conflict of issues could arise that require the insolvency professional to set certain procedures in place to avoid conflict of interest or the appearance of such a conflict. In consumer bankruptcy and proposal cases, it is very important for the insolvency professional to explain to the debtor, who generally will not have a deep understanding of the process, the role of the trustee, including who the trustee acts for, and the power and duties of the trustee. Client / lender reputation What do we know about the reputation of the client or appointing party? It is very important to gather information about the client, or principals of the client, to determine whether or not there is any risk over and above the business and industry risks. The client s business and industry Does the client s business or industry present increased risk (legal, professional or reputation) for the insolvency professional? CQP Applied Knowledge Course July

143 Risk Management Audit / accounting relationships BIA s CAIRP Rule of Professional Conduct No. 4 and Interpretation of the Rule Insolvency professionals associated with audit firms must consider whether or not the firm has provided audit or accounting services to the client within the past two years. Whether the firm acted as auditor or accountant in the relevant period is a matter of fact, however, the interpretation of CAIRP s Rules of Professional Conduct suggests that the two year period should start with the date of the last audit report or accountant s comment. The insolvency professional should also consider the following for example: Is the client/debtor or the lender a Securities Exchange Commission (SEC) registrant audit client (USA), or Canadian reporting issuer audit client? Have appropriate searches of all insolvency professional firm data bases and debtor/lender inquiries been made to identify all relationships and potential conflicts of interest? Fees Assuming the client s financial or other problems are likely to affect its continued existence and/or ability to pay fees, what arrangements are in place to assure payment of the insolvency professionals professional fees and expenses? On a consumer file, the insolvency professional may have less upfront knowledge regarding assets and their value and may need to spend additional time prior to accepting the engagement verifying the existence and value of assets, that is, house appraisals and any other unencumbered assets Engagement Acceptance Some points to consider when deciding whether to accept a particular engagement: Scope When accepting an engagement, it is helpful to have an understanding of the likely scope of the project. As well, consider available methodology; experience with similar files; and industry knowledge. In addition, timing, duration, and fee arrangements need to be set. Project team A knowledgeable, experienced and available engagement team is required. The team should include an appropriately experienced and hands on leader, manager and field staff, together with access to specialists (for example, forensic, corporate finance, taxation, valuation, information technology) if required. Consideration should be given regarding contingency plans in the event any key team members become unavailable during the project. CQP Applied Knowledge Course July

144 Risk Management Oversight / quality control Depending on the insolvency professional s firm s policies, an oversight/quality control role may be defined, with particular responsibilities prescribed for the very experienced individual assuming that role. Depending on the engagement, this role could be restricted to approving the client/engagement acceptance decisions and engagement letter/draft court order documentation, or it could be extended to a more active role on the file, including, for example, reviewing drafts of key deliverables and reports and/or acting as a sounding board on key strategic and operational decisions. It is very important to ensure that assistants are adequately trained and supervised so as to ensure debtors are given proper advice regarding all debt solution options available and only engagements with appropriate options are accepted by the trustee. Cross border work On cross-border files, consideration should be given to how the issues will be managed and by whose staff. It may be appropriate to put in place sub-contract or other agreements to address these situations, including such sensitive matters as fees and any allocation of liabilities that may arise through the subject engagement. Fee protection Insolvency and restructuring engagements can be more risky than most audit, tax or consulting/ advisory assignments, given the potential for insolvency professionals to become intricately involved in situations where there is a shortage of money and competing interests. Accordingly, insolvency professionals must take steps to protect their financial interests, including consideration of one or more of the following: fee guarantees from a solvent party; indemnities; security/deposit/retainer for fees; court protection; and, the availability of unencumbered assets to protect fees. Fee protection in consumer files is a key issue because the cost associated with time spent carrying out the required work may exceed the value of the unencumbered assets fairly quickly. In cases where the insolvency professional determines a need for a fee protection, Directive 16 provides guidance for Third Party Deposits and Third Party Guarantees. The insolvency professional must be aware of the quality of any Third Party Guarantee and confident in the ability to collect on such a guarantee. CQP Applied Knowledge Course July

145 Risk Management Stakeholders It is useful to understand and assess the insolvency professionals historic and current business relationship with the key stakeholders including, but not limited to: bank and/or bank syndicate members; other secured lenders; note holders; bond holders; shareholders; directors; large/key suppliers; large/key customers; and landlord(s). Litigation risk Insolvency professionals should consider the risk of litigation being brought against them by the client s principals or other stakeholders. Industry-specific risks The insolvency professional should consider company and industry-specific risks of a particular assignment, especially if the insolvency professional is to be involved in taking possession of assets or managing the business or operations of the subject company. Such issues include, but are not limited to: nature of the business/assets; labour issues; environmental hazards; remote locations; industry regulation; and pension plans. The Insolvency Insurance Program Manual prepared by Firstbrook, Cassie & Anderson Ltd. includes a list of exposures requiring immediate action. Such matters necessitate advising the insurance broker, so that the situation/assets can be evaluated for insurance coverage, where CQP Applied Knowledge Course July

146 Risk Management required. This list, reproduced in Appendix I, provides insolvency professionals with a useful checklist regarding higher risk asset situations. Engagement terms and conditions CAIRP Standard of Professional Practice No To the extent possible, the insolvency professional should be using a standard engagement letter with appropriate terms and conditions or, if the proposed appointment is subject to a Court Order, a model/appropriate Court Order precedent used in similar situations. Thought should be given as to the adequacy and appropriateness of the standard letter or Order in the particular circumstances. Consideration should also be given to an independent legal review of security documentation, prior to accepting certain engagements. Summary The insolvency professional should, having considered all of the above-noted points, obtain appropriate approvals and document the decision to accept both the client and the engagement Professionalism Professional Associations Introduction Insolvency professionals may be members of a recognized, self regulating profession. They may, for example, be chartered accountants (CA), certified management accountants (CMA), certified general accountants (CGA), lawyers, etc. As such, the insolvency professional would be subject to the rules of professional conduct, or code of ethics of the association to which he or she is a member. If the insolvency professional is also a trustee licensed under the Bankruptcy and Insolvency Act, he or she is subject to the code of ethics contained in the Bankruptcy and Insolvency General Rules. Canadian Association of Insolvency and Restructuring Practitioners (CAIRP) As well, the insolvency professional will generally be a member of and support the Canadian Association of Insolvency and Restructuring Professionals, adhering to the Rules of Professional Conduct and the Standards of Professional Practice proclaimed by the Association. These can be accessed through the member portion of the CAIRP web site, CQP Applied Knowledge Course July

147 Risk Management Institutes / Order of Chartered Accountants CAIRP s Rules of Professional Conduct incorporate, by reference, the bylaws, rules and regulations of the applicable Provincial Institutes/Order of Chartered Accountants and require adherence to the standards of the Canadian Institute of Chartered Accountants, to the extent they apply to the work of insolvency professionals. As a result, a member of CAIRP must abide by the rules, bylaws, standards and pronouncements of the CICA and of the provincial institute or order of the province in which the member resides or carries out an engagement Independence Introduction Insolvency professionals must maintain their independence and must be seen to be free of any influences that might affect their judgment. Potential conflict situations may be unavoidable during the course of some engagements. For example, insolvency professionals or their clients may be found to be debtors of the file under administration, or a client creditor may be found to have invalid security documentation, or be the recipient of a possible fraudulent preference. Care must be taken to ensure that such matters are dealt with fairly and in a manner that will ensure a continuing maintenance of independence. In many such instances, open communication can result in an equitable solution that is satisfactory to all of the parties involved in the potential conflict. Solutions may involve the appointment of a third party to deal with the matter in question, for example, or the making of an application for directions to the court. Purchases of assets CAIRP Rules or Professional Conduct No 4 and 13 Bankruptcy and Insolvency General Rules, sections 42, 43 Neither insolvency professionals, nor their immediate families, should gain financial advantage through the administration or sale of assets by the insolvency professional. The rules of professional conduct for which insolvency and restructuring professionals are responsible provide specific rules regarding the possibility or restrictions in acquiring assets. The rules will vary depending on the circumstances and the governing body that issued the relevant rules, so insolvency and restructuring professionals must carefully review the rules that apply in their specific individual circumstances. By way of example, insolvency and restructuring professionals who are members of CAIRP must abide by the rules of ethics or rules of professional conduct of the Chartered Professional Accountants of Canada (CPA Canada), and of the provincial institute or order of the province in which the member resides or in which the member carries out an engagement, inasmuch as these rules apply to the practice of insolvency. This requirement is found in the rules of CQP Applied Knowledge Course July

148 Risk Management professional conduct of CAIRP, and has the effect of importing by reference the rules of ethics of the CPA and of the provincial orders or institutes of chartered accountants or chartered professional accountants that apply to the practice of insolvency. One such rule of ethics of chartered accountants or chartered professional accountants would be the general requirement to avoid situations where independence could be compromised, or where there is a conflict of interest. Certainly, acquiring assets in a situation where the member is or is perceived to be able to set prices and conditions of the sale, would be a clear conflict of interest. The rules of professional conduct of CAIRP also include a requirement that the member remain free from influence, interest or relationship which impairs his professional judgement or objectivity or which, in the view of a reasonable and informed observer, has that effect. CAIRP s interpretation of this rule states that a member, his partners, his associates, his staff and their respective households shall not acquire directly or indirectly, in any manner whatsoever any assets under the administration of the member, provided that any of the foregoing may acquire assets from a retail operation under administration of the member where those assets are available to the general public for sale and that no special treatment or preference over and above that granted to the public is offered to or accepted by the member, his partners, his associates, his staff and their respective households. This interpretation of CAIRP s rule would preclude a member (or the other restricted persons) from acquiring assets at an auction, since an auction is not a retail sale (even though it is open to the public), but would allow a member to purchase goods in the context of the continuing operations of a retail store that is under the administration of the member, if the sale is made during regular business hours, at the same terms and conditions as all other sales made to the general public. If the insolvency and restructuring professional is acting in a formal capacity as trustee in bankruptcy, trustee under a proposal or interim receiver appointed under the BIA, or as monitor appointed under the CCAA, the insolvency professional would also be subject to the restrictions provided in the Bankruptcy and Insolvency General Rules (sections 42 and 43), which specify that a trustee (which would include an interim receiver or monitor) may not acquire assets of the debtor in respect of whom it is acting, directly or indirectly, and may not sell assets to its employees, to persons related to the trustee, or to persons not dealing at arm s length with the trustee or its employees. The Bankruptcy and Insolvency General Rules have a particularity when compared to, for example, the rules of professional conduct of CAIRP, in that: The Bankruptcy and Insolvency General Rules also include a prohibition against knowingly selling property to another trustee, or against a trustee acquiring property from another estate to which the BIA (or the CCAA) applies, even though the trustee is not involved in that other estate; While the Bankruptcy and Insolvency General Rules also provide an exception for sales made during regular business hours, in the normal course of business of the debtor, at the same price and at the same time as other sales to the general public, that exception only applies to people other than the trustee, or to the acquisition of assets by a trustee from an estate in which the trustee is not involved. As such, the Bankruptcy and Insolvency General Rules would preclude a trustee (or his staff, related persons, persons not dealing at arm s length and other trustees) from acquiring assets CQP Applied Knowledge Course July

149 Risk Management at an auction conducted in the course of the trustee s professional engagement, because an auction is not a retail sale in the normal course of business of the debtor, even though the sale is open to the public. As well the Bankruptcy and Insolvency General Rules would preclude the trustee (but not the other restricted persons) from purchasing assets in a retail store that is under the administration of the trustee.. Gifts Discretion must be exercised in accepting gifts or favours from auctioneers, prospective purchasers of assets, suppliers, or other stakeholders in an insolvency or restructuring engagement. Generally, gifts must not be accepted unless they are consumables and of a value that would not be seen as unduly influencing the judgment of the insolvency professional Conflicts of Interest Previous appointments BIA s and 13.4 CAIRP Rule of Professional Conduct No 4 and Interpretation of the Rule No insolvency professional shall accept an engagement to act in any capacity on behalf of a creditor or creditors, or as trustee in bankruptcy, in respect of any person or corporation where the insolvency professional or his or her firm is, or at any time during the immediately preceding two years, was the auditor or accountant of the person or corporation. For the purposes of calculating time, the period will commence at the date of the last audit or review engagement report issued by the auditor or accountant. The two-year time period must expire on or before the date of bankruptcy which, in case of a petition, shall be the date of filing of a petition from a Receiving Order. Where the insolvency professional has provided any other accounting, tax or business assistance or advice, the insolvency professional should carefully consider the circumstances before accepting the engagement. One of the considerations should be the extent and nature of any confidential information gained during the previous appointments. Multiple appointments There are instances when insolvency professionals may be asked to accept engagements to act in multiple professional capacities, such as: trustee in bankruptcy and receiver or agent; or receiver or agent on behalf of more than one creditor. CQP Applied Knowledge Course July

150 Risk Management When considering acting in such joint/multiple appointments, directly or indirectly, with the exception of appointments combining receiver and agent for the same creditor and in the absence of statutory or professional prohibition, the insolvency professional must ensure that independence with respect to each of the appointments is maintained. The insolvency professional should ensure that each party for whom the insolvency professional is to act, has legal counsel and, if the insolvency professional acts as trustee in bankruptcy or court-appointed receiver, the insolvency professional should have separate and independent legal counsel. In other multiple appointments it may be appropriate for joint legal counsel to act on the insolvency professional s behalf and on behalf of the appointing creditor(s), provided that all of the parties have given their prior informed consent. The insolvency professional must also make full disclosure to all parties for whom the insolvency professional is to act and, where deemed necessary, obtain their written consent before accepting the joint or multiple appointments; court permission should also be sought, where necessary. If in doubt the insolvency professional should consult with a more experienced CIRP. Subsequent appointments When an insolvency professional is appointed to act in a capacity such as receiver on behalf of a secured creditor and is later asked to accept an appointment as trustee in bankruptcy, the insolvency professional must advise the Bankruptcy Court of the prior appointment when a Bankruptcy Order is being made (or the Official Receiver, in the case of the filing of an Assignment). Thereafter, at the first meeting of creditors, the insolvency professional should inform the creditors of the bankrupt of his or her prior appointment prior to having the subsequent appointment confirmed. If the insolvency professional s appointment is as trustee in bankruptcy and the insolvency professional is asked to accept a subsequent appointment to act on behalf of a secured creditor, the insolvency professional must first obtain an independent legal opinion as to the validity of the security and notify the Superintendent of Bankruptcy and the inspectors or creditors of the appointment. If inspectors have not yet been appointed, the insolvency professional should, at the first meeting of creditors, inform the creditors of the bankrupt of having taken the second appointment. If the insolvency professional has been retained by a secured creditor as a consultant to conduct a business assessment, or to act as monitor, the insolvency professional should consider the circumstances of this role if subsequently asked to accept an appointment to act as receiver for that secured creditor. Generally, there should be nothing to prevent the insolvency professional from accepting the subsequent appointment. There may, however, be circumstances that would result in a perceived conflict of interest that the secured creditor and/or insolvency professional would wish to avoid. In the original letter of appointment CQP Applied Knowledge Course July

151 Risk Management regarding the consulting engagement it is desirable to obtain approval regarding possible subsequent appointment as receiver. If the insolvency professional s initial appointment was as consultant to the debtor, the insolvency professional is precluded from accepting a subsequent appointment to act on behalf of a secured creditor without the written consent of the debtor. Conflicts with clients Care should be taken by the insolvency professional, in accepting appointments, to be sensitive to the existence of specific conflicts with assurance clients over disputed matters such as questions of priority that might arise between the insolvency professional as receiver and an assurance client as a creditor or landlord. Insolvency professionals must not allow assurance client involvement to affect the performance of their duties Confidentiality General statement Insolvency professionals should keep confidential, at all times, information regarding the affairs of the debtor or the insolvency professional s client(s), if not the debtor. The only exceptions are where: there is a professional duty to disclose information; disclosure is required by a legal or judicial process; disclosure is required by statute; or, the insolvency professional determines disclosure is necessary under the circumstances to protect the insolvency professional or his/her personnel. To avoid misunderstandings during engagements, disclosure exceptions should be set out in engagement letters. In consumer insolvencies there is a requirement for the debtor to receive counselling from the trustee or another qualified individual. During the course of the counselling, the insolvency professional may obtain confidential information. The information obtained during counselling is to be treated as confidential unless required by law or otherwise specified: these limitations must be clearly defined and be provided to debtors in advance so that they are fully informed. Confidential information may also be disclosed under BIA requirements, specifically public documents such as the Section 170 report and the Statement of Affairs in regard to the causes of bankruptcy, such as disclosing alcoholism, gambling, drug or marital issues. CQP Applied Knowledge Course July

152 Risk Management 3.4. Supervision Signing Authority Correspondence Authorization for signing correspondence may be delegated by the insolvency professional to his or her personnel, in accordance with his or her firm s rules. Where an opinion is being expressed or advice given, however, the letter should be approved for issue by the insolvency professional (in accordance with his or her firm s rules, as applicable). Reports Generally, reports should be signed by an insolvency professional. The insolvency professional may, however, approve reports for signature by another team member, again depending on the insolvency professional s firm s policies and procedures. Certain documents require the trustee s signature. Release of assets encumbered by third parties Assets should only be released when the insolvency professional, or the insolvency professional s delegate, is satisfied as to the validity and priority of the claim of the third party to whom they are to be released, and only after first obtaining such legal opinions or valuations as the insolvency professional considers necessary. Contracts / purchase orders / cheques / borrowing Policies should be established to guide the insolvency professional team s authority to sign cheques, purchase orders, etc., and to enter into borrowing arrangements. Similarly, access to, and use of, corporate seals should be controlled. For mandates that relate to proceedings under the BIA, namely a mandate as trustee in bankruptcy, trustee under a proposal, administrator of a consumer proposal or interim receiver, the requirements of the BIA and of the directives issued by the OSB must be adhered to strictly. As such, cheques can only be drawn on an estate trust account when signed by a licensed trustee (see in this respect the current version of Directive 5 dealing with estate funds and banking). In cases where two signatures are required, at least one of the signatures must be that of an authorized licensed trustee. As a result, since the cheques must be signed by a trustee, controls have to be in place to ensure that the obligations incurred (which will necessarily require a payment in due course) are properly approved of by the trustee before they are incurred. CQP Applied Knowledge Course July

153 Risk Management 3.5. File Administration Reports Content It is important to keep the following in mind: reports should present a professional image in keeping with the insolvency professional s commitment to quality service; reports should provide a comprehensive summary of the actions that have been taken or that are planned and that will assist the insolvency professional s client in making decisions; reports must contain appropriate disclaimers or other narratives to ensure that the reader is aware of any limitations in the material presented; and the form of the report for BIA engagements may be set by a prescribed form or dictated by Directive or BIA Rules Timing The BIA provides detailed timing and content requirements for reports and information to be provided in a variety of engagements. Insolvency professionals, therefore, must be aware of strict timing requirements under the BIA and other statutes. While not an exhaustive list the following are examples of such timing requirements: A first receivership report should be issued in conformity with the provisions of the BIA as soon as possible after commencement of the engagement and subsequent reports should be issued at intervals agreed upon with the client or as required by the BIA, the applicable personal property security legislation or the civil code. If the receiver is court-appointed, reporting will generally be determined by the terms of the court order, the circumstances of the engagement and the requirements of the BIA. Insolvency professionals must be aware of strict timing requirements for proposals, given the risk of a deemed bankruptcy. In the case of Independent Business Reviews (also referred to as look-sees or viability assessments), the reports should be in accordance with the scope of work set forth in the governing engagement letter. Financial information professional standards When financial information is included in reports it must be prepared in accordance with the professional standards set out in the rules of professional conduct of the provincial Institute/Order of Chartered Accountants or other professional regulatory bodies. These CQP Applied Knowledge Course July

154 Risk Management standards emphasize, among other things, integrity and due care, professional competence and that professionals cannot associate themselves with false or misleading information. Accordingly, insolvency professionals must ensure that financial information they provide is presented in a manner that avoids misunderstanding and is accompanied by explanations of the source and purposes of the material so as to avoid any misunderstanding. Such financial information, including the insolvency professional s cash receipts and disbursements, operating results, assets and liabilities, and forecasts of realization, should be referred to as schedules and not as financial statements. In those occasional circumstances when insolvency professionals are required to prepare financial statements for an entity under their administration, professional standards require that such statements be prepared or compiled in accordance with the recommendations set out in the CICA Handbook. Financial statements required to be prepared in accordance with generally accepted accounting standards normally include a balance sheet, income statement, statement of retained earnings and statement of changes in cash. Before their release, such statements should be reviewed and approved by an audit practitioner. The reporting standards for review engagements (CICA Handbook) are not intended to apply to financial statements that are prepared by an accountant acting in the capacity of receiver. When future oriented financial information (FOFI) is presented in the format of general purpose financial statements such as a balance sheet, statement of income and cash flow, or in such special purpose format as agreed to by the parties for external users, the standards set out in CICA Handbook are to be applied Relationships with Guarantors Guarantors are to be treated reasonably and fairly. The insolvency professional, acting as a receiver, should consider the effect on a guarantor of any decisions made regarding continuing the operations of the business and the sale of assets. The insolvency professional must ensure, however, that guarantors do not unduly interfere with the timely administration of the engagement. The insolvency professional must act in a commercially reasonable manner, so as to avoid allegations of improvident realizations. If guarantors are potential purchasers of receivership assets, care must be taken to ensure that they are not provided with confidential information about other bidders offers. The insolvency professional must ensure the integrity of the sale process Communications with Creditors Creditors are to be treated fairly, with understanding, courtesy and professionalism. Legal advice should be sought if there is doubt as to the appropriate extent of disclosure that should be made to creditors. CQP Applied Knowledge Course July

155 Risk Management Creditors should be made aware of insolvency proceeding involvement, and the probable amounts of funds from estimated realizations as soon as practicable after commencement of the assignment and as considered appropriate in the circumstances thereafter. The Bankruptcy and Insolvency Act prescribes the statutory reporting obligations of an insolvency professional Insurance Coverage Introduction Careful consideration must be given to the types and amounts of insurance to be carried on any particular engagement. Consultation Generally, the insolvency professional s insurance brokers, Firstbrook, Cassie & Anderson Ltd. or others such as AON Parizeau, AON Reed Stenhouse, etc. should be advised of the appointment and provided with details of the assets at risk. The broker s assistance should be sought in assessing insurance requirements and the adequacy of any policies presently in force, or the placing of adequate coverage, if required, either through the insolvency professional s automatic coverage or through supplementary or special risk coverage. The advice of a risk management consultant, appraiser, or other consultants, may also be sought as warranted in the circumstances. Levels of coverage The automatic insurance arranged through the insurer is the minimum level of insurance coverage. Lesser coverage may be approved by the secured creditor, the court, or the inspectors in a bankruptcy, depending on the particular appointment, following appropriate insolvency professional/stakeholder consultation. Without a review of the requirements, however, the level of liability and property coverage to be maintained generally will not be less than the coverage that was in place before the insolvency professional s appointment. If operations are to continue, coverage will generally be at replacement values. Otherwise, cash disposal values may be appropriate. Existing policies Existing client insurance coverage may be retained if it is adequate to the insolvency professional s needs. When existing policies are continued, arrangements must be made to add the insolvency professional, in the appointed capacity, to the policy as a named insured. CQP Applied Knowledge Course July

156 Risk Management Operating the Business Decision to operate Ongoing operations will often be desirable for an initial period during which the insolvency professionals may give final consideration to the realization strategy. This may or may not include a continuation of operations. Even if operations are to be discontinued, sustaining temporary operations may help to ensure an orderly wind down. For operations beyond this initial stage, insolvency professionals must give careful consideration to the problems, risks benefits and consequences of operating before committing to a continuation. Before arriving at a decision, a memo documenting the factors supporting the decision to operate or not to operate should be prepared and placed on file. Secured lender The insolvency professional should get the agreement of the secured lender to continue operating the business and must ensure that adequate funds will be forthcoming to finance the ongoing operations. The interests of subsequent encumbrancers should also be considered and, in some jurisdictions, concurrence should be sought or consideration given to proceeding by way of court appointment. Throughout the period of operations, the secured lender should be kept informed of the results of operations, of any difficulties encountered and of any deviations from original projections. Goods and services received Insolvency professionals must satisfy themselves as to the adequacy of controls over purchasing and the acceptance of goods and services because the insolvency professional may be responsible for payment for any goods or services received, whether or not ordered in a personal or representative capacity. To protect against incurring personal liability for such expenses, the insolvency professional would be wise to ensure inclusion of a specific clause excluding potential liability in the documentation provided to suppliers of goods and services when incurring obligations Auctioneers / Appraisers Introduction CAIRP Standards of Professional Practice No and 10-2 Auctioneers and appraisers engaged to act on the insolvency professional s behalf must be carefully chosen considering their reputation, financial stability and ability to bring quality and timely service to the assignment for maximum results. Insolvency professionals should review CAIRP standards in regard to auctioneers and appraisers. CQP Applied Knowledge Course July

157 Risk Management Contract There must be an appropriate contract to ensure that there are no misunderstandings about the terms of the agreement. Controls over an auction process Insolvency professionals must ensure that controls over auction proceeds are adequate in the circumstances, taking into account the potential risks of loss and the amounts involved. Consideration should be given to: attendance at the sale to audit the bids received; control over cash received, either directly or by the establishment of a joint trust account; obtaining irrevocable letters of credit or performance bonds; the reputation and experience of the auctioneer; the terms of the sale and the contractual arrangements with the auctioneer; and the listing of, and controls over, assets to be offered for sale Practice Administration Trust Banking Bankruptcy BIA Directive 5 Banking arrangements for bankruptcy accounts must be made and maintained in accordance with the requirements of the Office of the Superintendent of Bankruptcy as set out in particular in the current version of BIA Directive 5 on estate funds and banking. All bank accounts should be reconciled on a monthly basis and the reconciliations should be approved by the insolvency professional. Investments Funds in excess of immediate needs should be placed in an interest bearing account or used to purchase a term deposit with a major chartered bank or a Government of Canada Treasury Bill. Where an insolvency professional s firm audits a bank, the insolvency professional should maintain its trust accounts and investments elsewhere. CQP Applied Knowledge Course July

158 Risk Management Consolidated accounts The insolvency professional should take care to ensure that components of consolidated bank accounts are reported annually to the banks in which the funds are deposited when such accounts exceed the limits for insurability of the Canada Deposit Insurance Corporation (currently $100,000). Audit To ensure continuous monitoring of controls and procedures over trust accounts, the insolvency professional should consider having an audit done by staff, independent of the trust accounting function, at intervals not exceeding one year. The audit should be designed to assess the controls in effect and to compensate for any weaknesses in those controls Internal Controls Introduction Insolvency professionals must put controls in place to reduce the possibility of loss, misappropriation of assets and the improper recording of transactions. Trust accounts Insolvency professionals should ensure that controls over office trust accounts, to the extent practical in the circumstances, are adequate to provide assurance that: there is an overall accounting for all trust bank accounts, both those administered within the office and those for operations outside of the office; all receipts are recorded; all disbursements are authorized in accordance with the insolvency professional s policies and the requirements of the Office of the Superintendent of Bankruptcy, if applicable; and there is a proper accounting for all transactions. Basic features of a trust banking system include: pre-numbered receipt forms; and disbursement requisition forms or alternative approval mechanisms supported by invoices or other documentation. It is desirable that there be a segregation of duties so that the preparation or check of bank reconciliations is independent from the preparation of trust account records and from the cash receipts function. CQP Applied Knowledge Course July

159 Risk Management Business operations When a business is to be operated in receivership, insolvency professionals must satisfy themselves as to the adequacy of internal controls over all aspects of the debtors operations Personal Computers Controls Insolvency professionals should take care with personal computers, including having controls and procedures in place related to, among other things, the following: preventing loss of records and retaining the ability to retrieve documentation; procedures to control access and to safeguard the integrity and confidentiality of computer records; procedures to duplicate (back up) computer records on a regular basis. Consideration should be given to off-site storage and/or file or loss protection of such records; and where hard copy of records or information has not been placed on file, there should be procedures for identifying and retrieving such records from the computer or server Resources Library An insolvency professional should maintain an adequate library of relevant statutes, case law and other reference material suitable to the operation of an insolvency and restructuring practice. Professional development The insolvency professional should obtain the continuing professional development credits required by CAIRP, through participation in CAIRP professional development events or conferences and through other avenues that are most suitable to the CAIRP s own requirements (for example, industry-based seminars, relevant to the insolvency professional s practice) Files Introduction As well as facilitating the administration of engagements, the insolvency professional s files provide historical evidence of the conduct of assignments and the quality of the services rendered. Accordingly, insolvency professionals must ensure the excellence of their files, both as to their structure and content. CQP Applied Knowledge Course July

160 Risk Management Structure and content Files must be structured and indexed in a manner that facilitates the conduct of the assignment and the retrieval of information, both during the course of the engagement and thereafter. This applies to both physical and electronic files. Without restricting the generality of the requirement that file content must provide a record of all aspects of the conduct of the assignment: the files should contain supporting documentation and memoranda to record the insolvency professional s observations, the matters considered and the conclusions reached in arriving at decisions; and, the time spent by the insolvency professional and his or her team in the conduct of assignments should be recorded in detail sufficient to support each fee billing and/or an application to the court for approval of accounts for services rendered, if required Records Retention Records considered The records to be considered are both the records of the debtor and the administration records prepared in the insolvency professional s capacity as receiver or as trustee in bankruptcy, preparer of an Independent Business Review, or other role. The insolvency professional must maintain adequate records to support facts, opinions, conclusions and recommendations stated in any such report. Records of the debtor taking possession Receivers or trustees should exercise caution in taking debtor records into possession and should restrict such seizures to the records and documents required for the proper performance of their duties. Such records will include any documentation required to comply with government reporting requirements. As well, they must have all documentation required to realize on the encumbered assets such as current accounts receivable records and documentation that is itself an encumbered and saleable asset such as blue prints, title documents, customer lists, etc. Records of the debtor in receivership Receivers have a responsibility to safeguard the accounting records during their administration and to return them to the debtor upon completion of their duties. Frequently, however, the receiver faces the dilemma of having had the officers or directors of the debtor company resign during the receivership or where the receiver is unable to locate them or, if located, where the officers and directors refuse to re-take possession of the corporation s records. The various Corporations Acts appear to be mainly silent on this point. It does, however, appear that the receiver continues to have some responsibility for the retention of the records. CQP Applied Knowledge Course July

161 Risk Management The receiver should notify the directors and officers of the corporation, by registered mail at their last known address, that they are required to take delivery of the records. If they ignore the receiver s request, the receiver s decision regarding what to do will depend for the most part on the individual circumstances. Among the matters to be considered by the receiver will be whether or not the corporation or any segment of its operation will be continued; the reliability or possible usefulness of the various documents; and the existence or probability of any dispute or litigation that may require the documentation. The receiver should have regard to the requirements of the Canada Revenue Agency (CRA). Applicable income tax regulations provide that most books and records, except for some permanent records such as general ledger and minutes of directors and shareholders meetings, are not required to be kept longer than six years. Permission may be obtained from the CRA to dispose of the debtor s records after they are no longer required. Depending on the jurisdiction, the permission of other regulatory authorities such as Sales Tax or Workers Compensation may also be a consideration. In addition, consideration should also be given to the various Statutes of Limitation. A court-appointed receiver may obtain an order of the court to destroy records. Records of the debtor in bankruptcy Practitioners should be aware of the requirements of the BIA for the taking of possession of the bankrupt s records. The rules governing the retention of the debtor s records in a bankruptcy can also be found in the Bankruptcy and Insolvency General Rules. In very general terms, these rules permit the trustee to return the books and records to the bankrupt or to destroy them with the permission of the debtor upon the trustee receiving its discharge. To facilitate this destruction, it is desirable for the insolvency professional to obtain the necessary direction from the bankrupt at the commencement of the engagement. Records of the receiver / trustee Insofar as the administration records are concerned, the receiver or trustee should be cognizant of, and conform to, any insolvency professional policy as it relates to the retention and destruction of working paper files. The Bankruptcy and Insolvency Act General Rules require the retention of estate records for a period of at least four years. Consideration should be given to the various Statutes of Limitation. CQP Applied Knowledge Course July

162 Risk Management Reporting of Claims Made Against the CIRP Initial reporting An insolvency professional should have a policy related to claims against him or her or the practice. Written advice of the claim to management and/or the insurance company should include a summary of the matter in dispute with an assessment of the claim and its merits. As and when they become available, the following additional information should be gathered and provided to internal or external counsel, as appropriate: a copy of the Statement of Claim, Notice of Motion, etc., a copy of the Statement of Defence; a copy of the pertinent correspondence from the insolvency professional s solicitors; legal counsel, noting whether independent or joint; the source of funds for payment of defence; arrangements with secured creditor outlining whether or not: the insolvency professional is presenting a joint defence with a secured creditor for whom he or she acts; there is any agreement as to an apportionment of liability and defence costs between the insolvency professional and the secured creditor; the insolvency professional has an indemnification agreement; that indemnification has been confirmed to include the present matter and a copy of any such agreements; and, any other information that will assist in providing an understanding of the nature of the claim and its merits. Depending on the terms of the insurance policy, the insolvency professional may find himself or herself following the insurer s lead in regard to defending any action arising from a claim. Ongoing monitoring As litigation progresses, the insolvency professional and his or her counsel, who shall monitor the progress and resolution of the claim, shall be kept informed of developments. Additional requirements may be appropriate depending on the insolvency professional s practice situation within a larger firm. CQP Applied Knowledge Course July

163 Critical Thinking Critical Thinking for Insolvency and Restructuring Professionals 4. Critical Thinking for Insolvency and Restructuring Professionals Introduction Critical Thinking and the CIRP Qualification Program Competency Map Critical Thinking Model: Steps for Better Thinking Foundation: Knowing Step 1: Identifying the Problem, Relevant Information, and Uncertainties Identifying the Problem Identifying Uncertainties Identifying Relevant Information Step 2: Exploring Interpretations and Connections Qualitatively Interpreting Information Recognizing and Controlling Biases Articulating and Evaluating Assumptions Exploring Viewpoints Organizing Information Step 3: Prioritizing Alternatives and Communicating Conclusions Step 4: Envisioning and Re-Visioning the Problem General Decision-Making Process Patterns of Thinking and Self-Assessment Confused Fact-Finders Biased Jumpers CQP Applied Knowledge Course July

164 Critical Thinking Perpetual Analyzers Pragmatic Performers Strategic Re-Visioners Suggested Use of Chapter Materials Exhibit 6: Critical Thinking Rubric End of Chapter Problems Problem 1: Northern Mountain Problem 2: Mr. Evans, Mrs. Evans, and Harold CQP Applied Knowledge Course July

165 Critical Thinking 4. Critical Thinking for Insolvency and Restructuring Professionals Learning objective This chapter introduces a process for thinking critically about insolvency and restructuring problems and provides opportunities to practice essential critical thinking skills Introduction Most people, including those in the CIRP Qualification Program, probably do not think as well as they could. People often practice low-quality thinking, such as rushing to an opinion before thoroughly exploring the problem or alternatives. Even people who use high-quality thinking in some situations might have a tendency to rely on ill-founded analyses and biased opinions. This chapter introduces a process for higher-quality thinking and strategies for recognizing and avoiding common pitfalls. The process applies to any situation in which high-quality thinking is needed: in professional, personal, and civic spheres Critical Thinking and the CIRP Qualification Program Competency Map Although critical thinking is required for virtually all of the competencies in the CIRP Qualification Program Competency Map, it is most closely related to the following competencies: Excerpts: CIRP Qualification Program Competency Map C. Professional skills 1. Makes decisions based on the best available information 1.1 Develops an understanding of the operating environment 1.2 Identifies the needs of internal and external clients/stakeholders and develops a plan to meet those needs 1.3 Decides/recommends/provides advice as required 2. Gathers and researches information and develops ideas based on constraints (time, financial, etc.) 3. Solves problems by examining and interpreting information and ideas critically 3.1 Analyzes information or idea /identifies and diagnoses problems and/or issues 3.2 Verifies and validates information 3.3 Evaluates information and ideas 3.4 Integrates ideas and information from various sources 3.5 Draws conclusions; forms opinions; makes recommendations 4 Identifies and manages risks for the insolvency professional and on behalf of the CQP Applied Knowledge Course July

166 Critical Thinking stakeholders 4.1 Comprehensively evaluates risks and rewards 4.2 Understands the roles and responsibilities of all parties involved in an engagement, the client, appointing party, debtor company, guarantors, and especially that of the CIRP 8 Applies effective negotiating skills, demonstrates an ability to understand the objectives and desires of each of the stakeholders in a negotiation to facilitate a resolution 9 Manages change, identifies and explains the importance of change management in the context of an insolvency or restructuring engagement, applies change management principles in dealing with an insolvency mandate 9.1 Assesses the quality of available information 9.2 Balances the quality of information vs. reaction time. Understands the importance of making decisions based on imperfect information and the relevance of historical information that is accurate but dated. 9.3 Recognizes changes in external factors and their likely impact on the enterprise (information systems, sources of information, cash flow monitoring, etc.) 9.4 Proactively plans for change (cash flow budgets, contingency planning) The skills listed above are pervasive; they are applied in conjunction with specific competencies, and proficiency in these skills (that is, Level 1) is required for admission as a CIRP. This module introduces a model called Steps for Better Thinking. This model is used to explore a general decision-making process that insolvency professionals can utilize to focus on the skills listed above in addressing the issues identified in insolvency and restructuring engagements Critical Thinking Model: Steps for Better Thinking The critical thinking model, Steps for Better Thinking, provides a structure for studying and learning critical thinking skills. The model, shown in Exhibit 1, is a process for addressing openended problems, ones that have no single correct solution because of the existence of significant uncertainties, such as the accuracy and reliability of financial information, the willingness of creditors to agree to a particular arrangement, or the viability of a business plan. CQP Applied Knowledge Course July

167 Critical Thinking Exhibit 1: Steps for Better Thinking 2006, Susan K. Wolcott. Used with permission. Model evolved from ideas presented in King and Kitchener's reflective judgment model of cognitive development and Fischer's dynamic skill theory. More information is available at Steps for Better Thinking is portrayed as a series of increasingly difficult skills that are needed for higher-quality thinking. It is portrayed as a set of steps because strong performance in the lower-level skills sets the stage for strong performance in the higher-level skills. Conversely, if the lower-level skills are weak, then the entire structure will also be weak. For example, misdiagnosis of the problem (Step 1) often leads to inadequate or irrelevant analyses (Step 2) and inappropriate recommendations (Step 3). Insolvency and restructuring problems tend to fall on a continuum from very well-structured problems to very difficult open-ended problems, as shown in Exhibit 2. Some problems have only one answer. For example, an insolvency professional is expected to correctly recognize and recite the statutory responsibilities of the appointing party, debtor, guarantor, and CIRP. Some problems are open-ended, but they require little analysis before reaching a conclusion. CQP Applied Knowledge Course July