Code FAQ: Clarification of section 3.4 of COPP: Insolvency Services (4th edition)

This FAQ clarifies the intended scope of the phrase 'material business relationship' under clause at 3.4 of the COPP: Insolvency Services.

The clause reads:

A Member must not accept an Appointment where the Member or the Member’s Firm or their Partners or Managerial Employees have, or have had, any of the following relationships: …

(c) a material business relationship, including the holding of a material Financial Interest, whether directly or indirectly in or jointly in the previous two years with: …

(iv) an Entity that has provided finance to the Insolvent.

What was the clause intended to capture?

The clause was intended to prevent insolvency practitioners from accepting appointments from financiers where the relationship is not at arm’s length. While the Code addresses situations where the member, member’s firm or partners have a relationship with the insolvent entity, it is not clear that these clauses extend to a situation where, for example, shares are held in the financier by a close family member of the insolvency practitioner or a close family member of the insolvency practitioner’s partners.

Why is an FAQ required?

The above clause can be read very widely:

  • A 'material business relationship' could be read as the material provision of professional services (e.g. audit).
  • 'An Entity that has provided finance to the company' could be interpreted to include finance by way of extending credit when selling goods or providing services (trade creditor).

These were not the intended application of the clause.

Examples of the clause being read more widely than intended would be:

  • ABC Partners, a multidisciplinary accounting firm, provides audit services to XYZ, a large listed mining entity. ABC Partners would be prohibited from taking a formal insolvency appointment to any customer of XYZ that XYZ has provided trade credit to.
  • ABC Partners, a multidisciplinary accounting firm, provides audit services to Large Bank. ABC Partners would be prohibited from taking a formal insolvency appointment to any customer of Large Bank that Large Bank has provided any type of finance to.

This is not the intended purpose of the clause. Relationships beyond the intended purpose can be dealt with via the general test of independence in section 3.1 and section 3.7 Prior Professional Services of COPP: Insolvency Services.

Clarification of material business relationship

What is a material business relationship for the purposes of section 3.4 of the COPP; Insolvency Services?

'A material business relationship' for the purposes of section 3.4 of the COPP: Insolvency Services shall exclude Professional Services.

Professional services are deal with in section 3.7 of the COPP: Insolvency Services. Members must also continue to apply the test of independence in section 3.1 of the COPP: Insolvency Services when considering whether an appointment should be accepted or continued.

Date approved by the ARITA Board: 18 August 2020.