Thursday, 7 June 2012

Conflicts of interest and insolvency appointments

A great deal has been written on this subject following Mark Daly's recent BBC programme on Rangers FC.  Both the press and Duff and Phelps have focused on the role of David Grier, a partner in D&P, in Whyte's bid to gain control of RFC.  Specifically, the question which has been asked is did Mr Grier know that Craig Whyte intended to use money from Ticketus to fund his acquisition of the club?

That question is an important one but may not be entirely the right focus in deciding whether or not Mr Grier's role gave rise to a conflict of interest which should have prevented D&P from accepting an appointment as administrators. 

To understand the argument, we have to consider more generally what we mean by a conflict of interest in the context of an insolvency appointment. 

The Insolvency Code of Ethics, which underpins the work of all insolvency practitioners, gives a number of examples of situations which may give rise to a conflict of interest. (1)  Amongst these is a case where a   ‘significant relationship’ has existed between the insolvency practice and the insolvent entity (Rangers FC) or someone connected with the entity (Craig Whyte).   

So what constitutes a ‘significant relationship’ in this context? 

In deciding whether a prior relationship with an insolvent is ‘significant’, the code of Ethics require practitioners to take a number of factors into account.  These include, but are not restricted to, the following:
  • The nature of the work done by the practice for that entity
  • The impact of the work done on the financial state and/or the financial stability of the entity
  • Whether the fee received for the work is or was significant to the practice or is or was substantial
  • Whether the insolvency appointment involves consideration of the work previously undertaken by the practice, and 
  • Whether reporting obligations arise in respect of the individual with whom the relationship exists (e.g. report on the conduct of directors of the entity).
So, before accepting Craig Whyte’s nomination to act as administrators, Duff and Phelps would have considered the nature of the work David Grier had undertaken for Craig Whyte and RFC both before and after Whyte’s acquisition of the club.  They should also have considered whether their appointment as administrators would require them to review that work.  

On the question of reporting obligations, every administrator is required to report on the conduct of those individuals who were directors of the company at the date of his appointment as administrator as well as those who have been directors in the 3 years prior to that appointment.  In this case, the question for D&P would have been was the pre existing relationship with Craig Whyte sufficiently close that their objectivity in considering his conduct would be impaired.

David Grier’s work for Craig Whyte and RFC

What precisely did David Grier do for Craig Whyte and RFC?  
The Report to Creditors issued by Duff and Phelps on 5 April 2012 confirms that MCR (now Duff and Phelps) assisted Liberty Capital in negotiating a settlement of the debt owed by RFC to Lloyds.  MCR was also present at the meeting of the Independent Directors’ Committee when Whyte provided details of Liberty Capital’s ability to fund the acquisition and also to provide a working capital facility in the future.  The report does not specifically state that the person in attendance was David Grier neither does it clarify what role David Grier/MCR had at that meeting. 

Duff and Phelps/MCR’s involvement with RFC/Craig Whyte continued following Whyte’s acquisition.  According to the 5 April report, this involved the provision of advice to the management team at RFC, the preparation of cash flows, liaising with a major creditor (HMRC) and reviewing the staff structure.  MCR further reviewed the finances in June 2011.  This review projected a ‘working capital shortfall’ in the following 3 months i.e. the projections indicate that the company will become insolvent insofar as it will be unable to pay its bills as they fall due within a fairly short period.  The report is silent on what advice, if any, was given to the board of RFC in the light of these projections.

A further review followed in August 2011 which considered fund raising and restructuring options.

MCR’s role in negotiating with HMRC was terminated in September.  It is not clear from the report whether the firm was retained in any other capacity between that date and their appointment as administrators in February 2012.

So that was the nature of the work done by Duff and Phelps/MCR.  But was it ‘significant’?  

If we return to the list of factors to be taken into account in considering that question, Duff and Phelps would have had to consider additionally the fee they had received for their prior engagements, the impact of their work on the financial stability of RFC (if any), and whether their appointment as administrators would require them to review the work they had carried out during 2011.  They would have been clear that an appointment as administrator would carry an obligation to report on the conduct of their former client, Craig Whyte.

Duff and Phelps may have concluded that their relationship with Craig Whyte/RFC was not significant in this context.  However, even if they felt that it was, that does not necessarily mean they could not accept appointment as administrators.  In these circumstances, para 25 of the Ethical Code allows practitioners to consider whether they can take steps to mitigate any possible conflict of interest.

This may be done by changing members of the insolvency team or by putting guidelines in place to prevent an exchange of information between the insolvency team and any other team within the practice which had carried out work for the entity. (2)  David Grier could not be appointed as he does not appear to have an insolvency licence but did the appointment of 2 other partners in the practice put sufficient distance between Mr Grier and Mr Whyte/RFC?

Other measures include the appointment of other insolvency practitioners to carry out part of the work – a review of the work carried out by the practice in the period before the insolvency appointment for example, or a review of the conduct of the directors of the company.  In cases of substantial doubt, the practitioner might consult his authorising body.  No other practitioners have been appointed in this case so presumably Duff and Phelps were satisfied either that the relationship with Whyte was not ‘significant’ in a regulatory sense or that the appointment of Messrs Clark and Whitehouse was sufficient to regain the necessary objectivity in the appointment.  

The question of whether Grier knew that Whyte was relying on money from Ticketus to fund his acquisition, is important because it would imply a far closer relationship between the parties than was suggested by the Report to Creditors, in other words, more significant.  

Such knowledge would also make it difficult to attack the transaction.  Duff and Phelps have vigorously denied that Mr Grier or any other party in the firm had any such knowledge and have raised proceedings against Mr Whyte’s former lawyers in this regard. 

Insolvency is inherently unfair.  Because there is not enough money to pay everyone who is owed by the insolvent entity, there are always losers in the process. Some people will get more than others.  It is therefore essential that any insolvency process is conducted with openness and transparency and that the law which underpins the process and determines who the winners and losers will be, is applied fairly.

There's also a public interest argument.  Those who are losers in the process have to be assured that the conduct of those who were responsible for the affairs of the company before its insolvency is investigated objectively.  If the investigations reveal wrong doing or negligence in the conduct of the company's business then appropriate action has to be taken and the relevant sanctions applied.  

Insolvency practitioners have to be able to demonstrate that they are sufficiently objective to bring the full scrutiny of the law to bear on those who were in charge of a company prior to its failure.  If they cannot do so, public confidence in the process is undermined and that helps no-one.  

There is not enough information in the public domain to determine whether Duff and Phelps should or should not have accepted the appointment or whether the steps they took before doing so were sufficient to deal with perceptions of conflict of interest.  Presumably they have applied the tests in the Code and are satisfied with the outcome.  Perhaps they can strengthen public confidence by the rigour they apply to investigations into the conduct of those who brought RFC to the position it now finds itself in.  

Code of Ethics, para 31 
Code of Ethics, para 25

Maureen Leslie


  1. I'm impressed Maureen, you have an extensive and active interest in this case, are you involved professionally or is it more of a marketing exercise?

    1. Hi there. A bit of both really. The entire Rangers case has been really interesting from an insolvency point of view - the initial spat over appointees, the Ticketus decision, the sale process etc. Also, MLM has spent the last couple of years trying to increase the uptake of CVAs which we think are hugely underused rescue tool in the SME market (which is our natural market). So commenting on the Rangers case was another way to raise the profile not just of MLM but of CVAs in general.

  2. I think it is very important that IPs are guided by their Code of Ethics and that when their standards fall short they should be held to account, both in the interests of fairness and transparency but also to retain and enhance the public confidence in the insolvency process.

    1. This is the key point. As I said in the blog piece, insolvency is inherently unfair and tends to generate its share of those who lose out in the process. If public confidence in the rigour of the process is to be maintained, then practitioners have to be above reproach. In the matter of conflicts of interest, the Code also discussed the issue of perception of conflict. So, if others THINK you're conflicted, that's to be treated in exactly the same way as an ACTUAL conflict.

  3. Where you say "Presumably they have applied the tests in the Code and are satisfied with the outcome." That is very supportive of your collegues. Surely it would be for the creditors to seek to evidence and satisfy themselves of this as being the case. Were there any doubts in the creditors minds then they have recourse through the Act that enables the IP to tackle the appointment of the IP, as stated by the chap from the Inst Chartered Acc of Scot. I'm not sure, based on the BBC show I saw, about this issue, it seems to me creditors should be taking a more active interest in these types of cases. Is it common for creditors to act in any capacity during an administration or liquidation case or is it more common the IP rules the roost unchallenged, supported by collegues who are sure they've applied their Code of Ethics diligently? Bankers failed to self regulate, this whole insolvency process could be another time bomb.

    1. See above re PERCEIVED conflicts of interest. I made the comment to suggest the D&P presumably went over the tests in their own minds before they accepted Craig Whyte's nomination - if they did not, they ought to have done. (All the firms I have been associated with have a process for dealing with this). But, even if they satsfy themselves, they should also consider how a prospective appointment is perceived by others (Article 49). Interestingly, this was raised by HMRC who challenged D&P's appointment initially. They were heard by Lord Hodge, the same judge who heard the application for directions re Ticketus and one of the 2 best insolvency judges in Scotland). AS we all know, D&P got the job so presumably satisfied Lord Hodge (but I don't know what was actually said).
      Turning to creditor engagement, yes there are ways to get involved. Usually by way of a Creditors' Committee (Admin) or Liquidation Committee (Liquidation). You can also vote for or against proposals in both Admin and CVA. In this case, the original proposals set out by D&P and published on 5 April, confirmed their intended approach to the admin. Only HMRC seem to have engaged by proposing modifications to D&Ps proposals. However, I think this is because people didn't really understand the importance of the document and that's a problem. My profession are not good at explaining things and seeking engagement. Your point about self regulation is well made - for the avoidance of doubt, I'm a strong supporter of it but the quid pro quo is accepting close scrutiny and getting better at engaging with stakeholders in the process.

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