Insolvency information sheet

The purpose of this sheet is to provide guidance and information for RICS members and
regulated firms who may be experiencing financial difficulty. There is also some information
for clients of RICS regulated firms who are concerned about what might happen if the firm
were to become insolvent.
What is insolvency?
Insolvency is the inability of an individual or a company to pay debts when they become due
as defined in the Insolvency Act 1986.
There are different types of insolvency procedures for individuals and companies.
For individuals and partners:
• Bankruptcy
• Individual Voluntary Arrangement (IVA)
• Debt Orders (DRO)
• Dissolution of the partnership
• Winding up of the partnership
For companies:
• Compulsory Liquidation
• Creditors Voluntary Liquidation (CVL)
• Members Voluntary Liquidation (MVL)
• Administration
• Company Voluntary Arrangement (CVA)

What is the Insolvency Service?

The Insolvency Service is an executive agency within the Department for Business,
Innovation and Skills (formerly Department for Business, Enterprise and Regulatory Reform
(BERR)) which deals with insolvency matters.
It will either appoint Official Receivers or Insolvency Practitioners to administer and
investigate insolvency matters.
Official Receivers are civil servants who are appointed by the Insolvency Service to deal
with the early stages of bankruptcy or compulsory liquidation matters. In their investigations
they can also report any discoveries of misconduct on the part of bankrupts or company
directors. They will advise a company’s creditors (to whom they owe money) and
shareholders that the company is being wound up.
Insolvency Practitioners work in the private sector and are usually accountants or solicitors.
They advise on and investigate all formal individual and company voluntary arrangement
matters (except Fast Track Voluntary Arrangement, which is a procedure dealt with by an
Official Receiver following bankruptcy).
An Insolvency Practitioner is usually appointed if there is a significant amount of money or
assets involved in a case. They are paid out of the business’ finances and therefore will only
act if there is enough money to pay them.
The Insolvency Service provides further information about these proceedings via their
website. Their contact details are available at the end of this sheet.

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Advice for RICS member principals

My firm may be facing insolvency proceedings, what should I do?

• Take advice from the Insolvency Service about insolvency procedures. Their contact
details are available at the end of this information sheet
• Take professional advice about the best course of action from lawyers, accountants and
so on. Please note that neither RICS nor the Insolvency Service can give such
professional advice
• Ensure you do everything possible to minimise loss to your clients, creditors and
employees
• Notify RICS Regulation, in writing, of any personal and/or company insolvency
procedures immediately. You should provide as much information as you can about the
circumstances surrounding the events leading to the insolvency. Also include any steps
taken to mitigate losses to clients, creditors and employees - together with a copy of the
Statement of Affairs, the final trading accounts and last 3 years trading accounts, if
available
• Notify your clients, creditors and employees.

How will insolvency affect my Professional Indemnity Insurance (PII)?

• The receivers/administrators may cancel the PII policy to get some return of premium
already paid by the firm
• If the policy is not cancelled it may run its course to expiry. Thereafter it is unlikely to be
renewed because there may not be sufficient funds to renew.

What can I do to cover my PII liabilities?

• The principals can seek to cover their own liabilities separately under a joint run off policy.
One disadvantage is that if a principal retires this may leave the remaining partners as
potential ‘deep pockets’ for any claims that subsequently arise. This may mean that
insurers are reluctant to accept their past liabilities under a new policy
• The principals can seek personal cover individually although this may be very difficult and
indeed expensive to get
• If any of the principals take up employment with another firm then they may seek personal
cover under their new employer’s policy
• If the principals of the firm set up a new firm then they may seek to cover the previous
firms’ past liabilities under the policy for the new firm.

Will I be in breach of RICS rules?

You may be in breach of RICS Rules of Conduct 2007 as follows:
Rules relating to Solvency:
• Rule 11 of Rules of Conduct for Firms 2007 – Solvency states that:
A Firm shall ensure that its finances are managed appropriately.
• Rule 7 of Rules of Conduct for Members 2007 – Solvency states that:
Members shall ensure that their personal and professional finances are managed
appropriately.
This applies to matters concerning individual/partner insolvency. It will also apply to RICS
members who are directors of companies or members of Limited Liability Partnerships
subject to insolvency procedures, even if the firm is not regulated by RICS.

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Rules relating to PII:
• Rule 9 of the Rules of Conduct for Firms 2007 – Professional Indemnity Insurance
states that:
A Firm shall ensure that all previous and current professional work is covered by
adequate and appropriate professional indemnity insurance cover which meets standards
approved by the Regulatory Board.

How will RICS deal with the insolvency matter?

The matter will be referred to the Investigations Team who will investigate the circumstances
and events leading to the insolvency. They may contact the firm to discuss the matter further
and obtain any necessary additional information that is required.
The Investigations Team will establish whether there have been breaches of the rules.
Each case is dealt with individually, based on the facts and evidence provided and the
seriousness of the circumstances.

Will there be disciplinary action?

There will be disciplinary action if breaches of the rules are established. The nature of the
disciplinary action will depend on the circumstances. Types of disciplinary action include:
• Consent Order – an agreement between RICS and the member principals of a firm. This
could be an agreement to take or desist from taking certain actions; or
• Disciplinary Panel – an independent regulatory panel who has the power to reprimand
and/or expel a member, and impose a fine for serious breaches of the rules.

What will happen to my RICS membership?

There is no automatic expulsion from membership. A Disciplinary Panel will consider whether
its appropriate to expel members based on the circumstances. In addition, a Disciplinary
Panel may exercise its power to temporarily suspend a member from membership pending a
disciplinary hearing.
A member cannot resign from membership until the process has been fully concluded.
Disqualification of Directors
RICS member directors should be aware that if they are disqualified under the provisions of
the Company Directors Disqualification Act 1986, this will be taken into account by RICS
when deciding on a penalty. Refer to the Duties and responsibilities of Directors
information sheet for a definition of ‘Director’.

What will happen to my firm?

Regulated firms will not be permitted to use the ‘Regulated by RICS’ designation, RICS brand
or ‘chartered surveyors’ on its business literature pending the outcome of the insolvency
proceedings and RICS’ investigations. If the firm becomes dissolved, then we will close the
firm’s details on our systems and it will no longer be able to use RICS’ designations or brand.
If it is an individual insolvency, the member will need to seek advice from the Insolvency
Service as to whether this may affect their ability to trade as a sole practitioner or partner.

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Advice for RICS member employees of insolvent firms

I have concerns that my employer may be facing insolvency proceedings, what

should I do?
If a your employer becomes insolvent an independent Insolvency Practitioner or Official
Receiver will be appointed to deal with the firm’s affairs.

Will I be in breach of RICS rules?

When a firm becomes insolvent, RICS will not ordinarily discipline the member employees of
that firm for breaches of RICS’ rules on solvency as they would not normally have control of
the firm’s finances.
However, your obligations as an individual member when facing personal debts or personal
bankruptcy are clearly separate from those of an insolvent regulated firm or a member who is
a principal of an insolvent firm. If it is a personal insolvency, you may be in breach of Rule 7
of the Rules of Conduct for Members 2007 (as above) and you should inform RICS.

If I am made redundant, what should I do?

RICS and LionHeart (our benevolent fund for members and their families) have compiled a
redundancy guide which contains some useful support information for members on
redundancy issues. For further information:
• www.rics.org/redundancyhelp
• LionHeart 24-hour confidential helpline on 0845 603 9057 - qualified welfare advisors are
available to discuss any problems you may have and provide you with impartial advice
and information.
For legal advice about redundancy issues and employment rights, you can contact:
• Advisory Conciliation and Arbitration Service (ACAS) at www.acas.org.uk
• Your local Citizens Advice Bureau where you can seek free, confidential and impartial
advice on all employment law issues.
For confidential advice in relation to RICS Rules of Conduct or any regulatory matters contact
the RICS Members’ Confidential Helpline on 0207 334 3867.

Am I eligible for a reduction in my membership fees?

If you are out of work due to redundancy you may be eligible for a concession to reduce your
subscription fees. Please contact RICS Membership Renewals Team on 0870 333 1600 or
email membershiprenewals@rics.org to enquire.

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What will happen to my PII or run off cover?
When a firm goes into liquidation, the PII policy will usually be cancelled. This is because the
'employer' or firm no longer exists so there is no insurable interest. This is complicated by the
fact that there is no entity to fund the premium or the excess. It is also unlikely that there will
be anyone willing to administer such a policy for the period of liability.

Personal liability for work carried out for the firm

Member employees could be liable in tort as proved by Merrett v Babb and other similar
cases. In this case, Mr Babb was an employed surveyor who was sued personally for work he
had done for his employer, following the bankruptcy of his employer. The firm’s PII was
cancelled and the claimant sued Mr Babb personally, rather than his bankrupt employer, even
though Mr Babb had left the employment of the firm some 18 months before.

Obtaining PII or run off cover

Individuals may attempt to obtain cover in a personal capacity. This is difficult for underwriters
to quantify and rate the risk so, accordingly, it is expensive.
Obtaining cover in a personal capacity may initially sound attractive, but could in fact attract
claims - something that is commonly referred to as a 'deep pocket scenario’.
More realistically individuals can try to persuade their new employers to offer some cover for
liabilities arising out of a former employment. However, in the current economic and
insurance climate, and with the added pressures of the credit crunch, this may be difficult to
negotiate.

RICS’ Member Support Service (MSS)

As a result of the judgement in Merrett v Babb, RICS set up the Member Support Service. It is
a support service designed to assist member employees who find themselves being
personally sued and have no access to PII (i.e. former employer has no PII). It is not an
insurance product and there is no recourse for the public and claimants via this fund
whatsoever.
Further details of the MSS can be found on the RICS website at http://www.rics.org/pii
or you can contact Marie McDermott in the Insurance Team at mmcdermott@rics.org.

Can RICS cover members via a compensation scheme?

RICS does not have a compensation scheme. It would not only prove very costly for RICS
under current market conditions, but it could also mean an increase in subscriptions for all
members to subsidise such a scheme.

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Advice for clients of regulated firms:

The firm I instructed has gone into liquidation, what should I do?
• You should contact either Companies House or the Insolvency Service to find out who is
dealing with the firm’s insolvency proceedings:
— If it is a Limited company, visit the Companies House website for further information:
http://www.companieshouse.gov.uk/
— For other firms, visit the Insolvency Service website for further information:
http://www.insolvency.gov.uk/
• You may also wish to notify RICS Regulation, in writing, of any company insolvency
proceedings.

Did the firm have professional indemnity insurance?

All regulated firms are required to have professional indemnity insurance. RICS cannot
disclose firm insurance details. Any potential claims should be directed to the Liquidator.

The redress scheme is dealing with an existing complaint. Will they still deal
with the matter?
You should contact the redress scheme direct to discuss your existing complaint.

What about the work they were carrying out for me, my papers/files and/or any
on-going dispute they were acting on?
Again, you should contact the Liquidator and raise any questions you have. One of their
responsibilities will be to bring any existing contracts to a conclusion.

How do I get back the money the firm was holding for me? Is my money
protected?
Any money held by the firm should be protected in a designated “client” account. This
prevents the money being used to offset the debts of the firm. Clients should contact the
Liquidator to reclaim any money held by the firm on their behalf.
If the client’s money is not held in a client account, the Clients’ Money Protection Scheme is a
scheme of last resort and may be able to assist after all other avenues have been exhausted.

Further information

Insolvency Service
The Insolvency Service
21 Bloomsbury Street
London, WC1B 3QW
t 0845 602 9848
e insolvency.enquiryline@insolvency.gsi.gov.uk
www.insolvency.gov.uk

RICS Regulation
Regulation Helpline: t + 44 (0)20 7695 1670
Members’ Confidential Helpline: +44 (0)20 7334 3867
e regulation@rics.org
www.rics.org/regulation

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