Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The Future is… Complicated

 

 

1933 Yosemite

My autumn has been a CPE marathon: SWSCA, the R3 SPG Forum, the IPA roadshow, and the ICAEW roadshow. Thus I thought I’d try to summarise all the legislative and regulatory changes currently in prospect:

Statutory Instruments

  • Enterprise & Regulatory Reform Act 2013;
  • Deregulation Bill (est. commencement: May/October 2015);
  • Small Business, Enterprise and Employment Bill (October 2015 for IP regulation items, April 2016 for remainder);
  • The exemption for insolvency proceedings from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) comes to an end on 1 April 2015;
  • New Insolvency Rules (est. to be laid in Parliament in October 2015, to come into force in April 2016); and
  • A plethora of SIs to support the Bankruptcy and Debt Advice (Scotland) Act 2014 (coming into force on 1 April 2015, but, regrettably, I feel so out of the loop on Scottish insolvency now that I don’t dare pass comment!)

Consultation Outcomes

  • IP fees (consultation closed in March 2014);
  • DROs and threshold for creditors’ petitions for bankruptcy (consultation closed in October 2014); and
  • Continuity of essential supplies to insolvent businesses (consultation closed in October 2014).

Revision of SIPs etc.

  • Ethics Code Review;
  • SIP 1;
  • SIPs 16 & 13;
  • SIP 9 (depending on how the government turns on the issue of IP fees);
  • New Insolvency Guidance Paper on retention of title; and
  • Other SIPs affected by new statute.

 

Enterprise & Regulatory Reform Act 2013

The Insolvency Service’s timetable back in 2013 was that the changes enabled by this Act would be rolled out in 2015/16, but I haven’t heard a sniff about it since. However, the following elements of the Act are still in prospect:

  • Debtors’ bankruptcy petitions will move away from the courts and into the hands of SoS-appointed Adjudicators (not ORs).
  • There was talk of the fee being less than at present (£70 plus the administration fee of £525) and of it being paid in instalments, although my guess is that the Adjudicator is unlikely to deal with an application until the fee has been paid in full.
  • The application process is likely to be handled online. Questions had been raised on whether there would be safeguards in place to ensure that the debtor had received advice before applying. This would appear important given that the Adjudicator will have no discretion to reject an application on the basis that bankruptcy is not appropriate: if the debtor meets the criteria for bankruptcy, the Adjudicator must make the order.

The ERR Act is also the avenue for the proposed revisions to Ss233 and 372 of the IA86 – re. continuity of essential supplies – as it has granted the SoS the power to change these sections of the IA86.

The Deregulation Bill

Of course, the highlight of this Bill is the provision for partial insolvency licences. It was debated in the House of Lords last week (bit.ly/1tBmMhe – go to a time of 16.46) and whilst I think that, at the very least, the government’s efforts to widen the profession to greater competition are nonsensical in the current market where there is not enough insolvency work to keep the existing IPs gainfully employed, my sense of the debate is that the provision likely will stick.

I was surprised that Baroness Hayter’s closing gambit was to keep the door open at least to press another day for only personal insolvency-only licences (rather than also corporate insolvency-only ones).  Will that be a future compromise?  What with the ongoing fuzziness of (non-FCA-regulated) IPs’ freedom to advise individuals on their insolvency options and the rareness of bankruptcies, I wonder if the days in which smaller practice IPs handle a mixed portfolio of corporate and personal insolvencies are numbered in any event.

The Deregulation Bill contains other largely technical changes:

  • Finally, the Minmar/Virtualpurple chaos will be resolved in statute when the need to issue a Notice of Intention to Appoint an Administrator (“NoIA”) will be restricted to cases where a QFCH exists.
  • The consent requirements for an Administrator’s discharge will be amended so that, in Para 52(1)(b) cases, the consent of only the secured creditors, and where relevant a majority of preferential creditors, will be required. At present Para 98 can be interpreted to require the Administrator also to propose a resolution to the unsecured creditors.
  • A provision will be added so that, if a winding-up petition is presented after a NoIA has been filed at court, it will not prevent the appointment of an Administrator.
  • In addition to the OR, IPs will be able to be appointed by the court to act as interim receivers over debtors’ properties.
  • It will not be a requirement in every case for the bankrupt to submit a SoA, but the OR may choose to request one.
  • S307 IA86 will be amended so that Trustees will have to notify banks if they are seeking to claim specific after-acquired property. The government envisages that this will free up banks to provide accounts to bankrupts.
  • The SoS’ power to authorise IPs direct will be repealed, with existing IPs’ authorisations continuing for one year after the Act’s commencement.
  • The Deeds of Arrangement Act 1914 will be repealed.

The Small Business, Enterprise and Employment Bill

I won’t repeat all the provisions in this Bill, but I will highlight some that have created some debate recently.

The proposed new process for office holders to report on directors’ conduct proved to be a lively topic at the RPB roadshows. There seemed to be some expectation that IPs would report their “suspicion – not their evidenced belief – of director misconduct” (per the InsS slide), although this was downplayed at the later R3 Forum.  My initial thoughts were that perhaps the Service was looking to produce a kind-of SARs-reporting regime and I wondered whether that might work, if IPs could have the certainty that their reports would be kept confident.

However, I suspect that the Service had recognised that IPs would have difficulty with the proposed new timescale for a report within 3 months, but hoped that this would be mitigated if IPs could somehow be persuaded to report just the bare essentials – to enable the Service to decide whether the issues merit deeper enquiries – rather than putting them under a requirement to collect together substantial evidence. I suspect that the Service’s intentions are reasonable, but it seems that, at the moment, they haven’t got the language quite right.  Let’s hope it is sorted by the time the rules are drafted.

Phillip Sykes, R3 Vice President, gave evidence on the Bill to the Public Bill Committee a couple of weeks ago (see: http://goo.gl/V1XSbX or go to http://goo.gl/jSTmI0 for a transcript).  Phillip highlighted the value of physical meetings in engaging creditors in the process and in informing newly-appointed office holders of pre-appointment goings-on.  He also commented that the proposed provision to empower the courts to make compensation orders against directors on the back of disqualifications seems to run contrary to the ending of the LASPO insolvency exemption and that the suggestion that certain creditors might benefit from such orders offends the fundamental insolvency principle of pari passu. Phillip also explained the potential difficulties in assigning office holders’ rights of action to third parties and described a vision of good insolvency regulation.  Unfortunately, he was cut off in mid-sentence, but R3 has produced a punchy briefing paper at http://goo.gl/mBeU30, which goes further than Phillip was able to do in the short time allowed by the Committee.

Last week, a new Schedule was put to the Public Bill Committee (starts at: http://goo.gl/sY5QUG), setting out the proposed amendments to the IA86 to deal with the abolition of requirements to hold creditors’ meetings and opting-out creditors.  A quick scan of the schedule brought to my mind several queries, but it is very difficult to ascertain exactly how practically the new provisions will operate, not least because they refer in many places to processes set out in the rules, which themselves are a revision work in progress.

IP Fees

The consultation, which included a proposal to prohibit the use of time costs in certain cases, closed in March 2014 and there hasn’t exactly been a government response. All that has been published is a ministerial statement in June that referred to “discussing further with interested parties before finalising the way forward” (http://goo.gl/IbQsLd).  The recent events I have attended indicate that the Service’s current focus is more on exploring the value of providing up-front fee estimates together with creditors’ consent (or non-objection) to an exceeding of these estimates, rather than restricting the use of the time costs basis.  I understand that the government is expected to make a decision on how the IP fees structure might be changed by the end of the year.

Revision of SIPs etc.

I have Alison Curry of the IPA to thank for sharing with members at the recent roadshows current plans on these items:

  • A JIC review of the Insolvency Code of Ethics has commenced. Initial findings have queried whether the Code needs to incorporate more prescription, as it has been suggested that the prevalence of “may”s, rather than “shall”s, can make it difficult for regulators to enforce. The old chestnuts of commissions, marketing and referrals, also may be areas where the Code needs to be developed.
  • Although RPB rules include requirements for their members to report any knowledge of misconduct of another member, it has been noted that, of course, this is not effective where the misconduct involves a member of a different RPB. Therefore, the JIC is looking to amend SIP1 with a view to incorporating a profession-wide duty to report misconduct to the relevant RPB or perhaps via the complaints gateway.
  • As expected, SIP16 is being reviewed in line with Teresa Graham’s recommendations. This is working alongside the efforts to create the Pre-pack Pool, which will consider connected purchasers’ intentions and viability reviews. A consultation on a draft revised SIP16 is expected around Christmas-time. I had heard that the target is that a revised SIP16 will be issued by 1 February 2015 and the Pool will be operational by 1 March 2015, but that seems a little optimistic, given the need for a consultation.
  • SIP13 is ripe for review (in my opinion, it needed to be reviewed after the Enterprise Act 2002!) and it is recognised that it needs to be revised in short order after SIP16.
  • A new IGP on RoT has been drafted and is close to being issued. We received a preview of it at the IPA roadshow. To be honest, it isn’t rocket science, but then IGPs aren’t meant to be.
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SIP16: A Clean Slate

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Will this new SIP16 quench the fires burning for pre-packagers? Will it improve the transparency of, and confidence in, pre-packs, which was the stated aim three Secretaries of State ago when this SIP16 revision process began? Who knows, but woe betide any IP who turns out a non-compliant SIP16 disclosure after 1 November!

So what changes do firms need to make over the next four weeks?

Diaries

The new SIP16 timescale is half that of Dear IP 42: the explanation should be provided with the first notification to creditors and in any event within seven calendar days of the transaction (paragraph 11).

The “Information Disclosure Requirements”

Now that there are 25 disclosure points (as compared with the previous 17), I think there is no practical way of ensuring compliance unless templates stick rigidly to the list in the SIP; personally, I think that’s a shame, but there it is. To avoid any possible confusion, perhaps it is best to create a standalone document, which can form an appendix/attachment/enclosure to the letter to creditors and to the administrator’s proposals, as SIP16 now requires that the statement is provided in proposals (although I think most IPs are doing this already).

You may find that some disclosure points that look familiar to those in the current SIP have acquired subtle differences – e.g. not only does “any connection between the purchaser and the directors, shareholders or secured creditors of the company” need to be disclosed under the new SIP, but “or their associates” has been added. Therefore, rather than trying to edit SIP16 lists appearing in existing templates, perhaps it’s as well to tear them up and start afresh. Also, the new SIP16 groups points under sub-headings, which creates a better structure for the disclosure than the previous SIP, so I think it would help coherence (and help anyone checking off compliance) to follow the SIP’s order.

The old SIP’s paragraph 8, which was so loved by the regulators as encapsulating what the SIP16 disclosure was all about, appears almost word-for-word as a key principle in this new SIP. Paragraph 4 states: “Creditors should be provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, to demonstrate that the administrator has acted with due regard for their interests”. Although the Information Disclosure Requirements seem all-encompassing, could someone argue that ticking all those boxes does not meet the paragraph 4 requirement but that, in some cases, a bit more fleshing-out is required? Now that they have been beefed up, I don’t think there’s much risk that the Insolvency Service/RPBs would expect more than those Information Disclosure points, but it does suggest that a degree of sense-checking would be valuable: perhaps someone in the IP’s firm (but not involved in the case) could cold-read draft SIP16 disclosures and see whether they hang together well or whether they leave the reader with questions. I know that it’s a practice that some IP firms already conduct in the interests of transparency.

Other Required Disclosures

I think it would be easy to focus exclusively on the “Information Disclosure Requirements”, but that would be a mistake as there are other items nestled within the SIP that need to be taken care of.

• Paragraph 3 states: “An insolvency practitioner should differentiate clearly the roles that are associated with an administration that involves a pre-packaged sale (that is, the provision of advice to the company before any formal appointment and the functions and responsibilities of the administrator). The roles are to be explained to the directors and the creditors.” Although a similar paragraph appeared in the old SIP with regard to communicating with directors, it might be well to double-check that this, as well as the additional points in paragraph 5 of the SIP, are covered off in the engagement letter to directors. And note that, now, the distinction between the roles of the IP also needs to be explained to the creditors.

• Paragraph 9 introduces a new requirement. It states that the pre-pack explanation should include “a statement explaining the statutory purpose pursued and confirming that the sale price achieved was the best reasonably obtainable in all the circumstances”.

As in the old SIP16, if the disclosure points are not provided, the administrator should explain why. There are a couple of other required explanations for not providing things that are new:

• If the seven day timescale is not met for the SIP16 disclosure, the administrator should “provide a reasonable explanation for the delay” (paragraph 11). If this timescale cannot be met, the SIP requires the administrator to provide a reasonable explanation of the delay. Although the SIP does not state it, presumably you would provide this explanation within your SIP16 disclosure that you would send as swiftly as possible, albeit late.

• If the administrator has been unable to meet the requirement to seek the requisite approval of his proposals as soon as reasonably practicable after appointment, he should explain the reasons for the delay (paragraph 12), again presumably within the proposals whenever they are issued.

Internal Documents

The new SIP pretty-much repeats the old SIP’s requirements for some internal documents:

• Under the heading, Preparatory Work, paragraph 7 states: “An administrator should keep a detailed record of the reasoning behind the decision to undertake a pre-packaged sale” (this was in the old SIP’s introductory paragraphs).

• Under the heading, After Appointment, paragraph 8 states: “When considering the manner of disposal of the business or assets as administrator, an insolvency practitioner should be able to demonstrate that the duties of an administrator under the legislation have been considered”. Okay, it doesn’t mention explicitly internal documents, but it seems to me that contemporaneous file notes – justifying the manner of disposal as in the interests of creditors as a whole or, if the administrator does not believe that either of the first two administration objectives are achievable, that it does not unnecessarily harm the interests of the creditors as a whole (i.e. Paragraphs 3(2) and 3(4) of Schedule B1 of the Insolvency Act 1986) – should help demonstrate such consideration.

The Future

So is there anything in the old SIP that has been left out of the new SIP? No, nothing of any real consequence, although it did strike me how far we’ve come – that it was felt that the 2008 SIP16 needed to explain, with case precedent references, that administrators have the power to sell assets without the prior approval of the creditors or court. Have we moved on sufficiently from those days, do you think?

When you think of it, it wasn’t too long ago when we were faced with draft regulations requiring three days’ notice to creditors of any pre-pack; they were set to come into force on 1 October 2011. And I don’t think the other ideas, for example that all administrations involving pre-packs should exit via liquidation with a different IP/OR appointed liquidator, have completely disappeared.

However, I think that what this new SIP does is provide us with a clean slate. To some extent, we can file away the Insolvency Service’s statistics of non-compliance with the old SIP16 along with our copies of Dear IP 42 and we can concentrate on getting it right this time. However frustrated and irritated we might feel at having to meet these rigid disclosure requirements, I hope that IPs will strive hard to meet them. It may not silence the critics – let’s face it, it won’t – but it will give them one less stick with which to beat up the profession.


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Still not the Eurosail Judgment

0937 Antelope

Even if you’ve been living in a cave for the past few weeks, you will not have escaped the flood of comprehensive legal updates on Eurosail. Consequently, I’m not even going to attempt to cover the case here.

Instead, something completely different: I thought I would convey my thoughts on the recent SIP re-drafts, now that the consultations are over.

SIP3A (Scotland)

I feel ill-equipped to comment on this SIP, so I am sure that my peripheral thoughts stack up poorly against those of you who deal with Trust Deeds on a daily basis.

Having seen the substantial tone change of the draft SIP3 (E&W), i.e. the stripping-out of a vast amount of prescription from the current SIP3, I felt that this new draft SIP3A stood in stark contrast, containing much of the existing prescription and even adding to it in some areas. I sense that a fairly large proportion of insolvency professionals prefer prescription to principles – as I mention below, personally I don’t place myself in that crowd – but I do wonder whether even those people would feel that this SIP3A draft has the balance wrong.

I had to chuckle at the SIP consultation response form mentioning that “matters being addressed in the PTD Regulations will not be included in SIP3A”; I counted at least 13 paragraphs that pretty-much simply repeat a statutory requirement. For example, what exactly is the point of including in a SIP: “Trustees should comply with the procedures for bringing the Protected Trust Deed to a close as detailed in the Regulations”?!

I understand that I was not alone in questioning the SIP’s directions regarding face-to-face meetings. Put into an historical context, I am not surprised to see this draft SIP3A require visits to the business premises in all cases where the debtor is carrying on a business. E&W followed a 2-stage process to drop physical meetings for IVAs: the current SIP3 (E&W) requires meetings in person for trading individuals, but – thankfully, in my opinion – the re-draft SIP3 has left this to the IP’s judgment. However, do PTD Trustees need to take the same incremental steps? Can we not focus on what is the purpose of a physical meeting? Are all debtors in business so untrustworthy and difficult to read that the IP/staff have to check out every story for themselves?

There seem to have been some unhelpful cut-and-pastes from the AiB Guidance, resulting in some contradictions and some matters, which I feel are not fit for a SIP (e.g. the purely procedural requirement to advise the AiB of the debtor’s date of birth). There seems to be a contradiction in that para 6.9 requires the IP to “quantify the equity in each property as accurately as possible before the debtor signs the Trust Deed”, but para 6.13 sets a deadline of the presentation of the Trust Deed to creditors. This para also prescribes how the equity should be assessed, but it seems to me that desk-tops and drive-bys might meet para 6.13 but not the (excessive?) accuracy criterion set out in para 6.9. And what if the equity is clearly hopelessly negative? Does the IP really have to go to the expense of quantifying it as accurately as possible before the Trust Deed is signed?

I have never been keen on SIP3A covering fees issues that I feel should be placed in SIP9. This historical mismatch has led to a fees process for PTDs that, to my mind, has never mirrored that for other insolvency processes as per SIP9. This issue is repeated in this draft. For example, SIP3A para 8.4 refers to payments to associated parties as defined in statute, whereas for some time now SIP9 has wrapped up, not only payments to statutorily-defined associates, but also payments “that could reasonably be perceived as presenting a threat to the office-holder’s objectivity by virtue of a professional or personal relationship” (para 25). SIP3A’s overlap, but not quite, of this SIP9 point is less than helpful: Trustees might be lulled into a false sense of security in feeling that they are complying with SIP3A whilst overlooking a breach of SIP9.

I also feel that it is a shame that this draft repeats the current SIP3A words: “all fees must be properly approved in the course of the Trust Deed and in advance of being paid” (para 8.6). I know what the drafter is getting at, but how is it that fees that are properly set out in a Trust Deed, which has subsequently achieved protected status, are not already “properly approved”? And why do Trustees have to go through an additional step in the process that is not required for any other insolvency process per SIP9?

SIP3 (IVAs)

I understand that some have taken issue with the draft SIP’s perceived more onerous tone. I can see that repeated use of words like “be satisfied”, “ensure”, “demonstrate”, and “assessment” seem more onerous than the current heavily-prescriptive SIP3, but, speaking from my perspective as formerly working within a regulator, I am not sure if it is intended to mean much more in practice. If IPs are not already recording what they do, how they do it, and what conclusions they come to, I would have thought they were at risk of criticism by their authorising body. In addition, many of the requirements relate to having “procedures in place” to achieve an objective, which is how I think it should be – IPs should be free to use their own methods applied to their own circumstances; I believe that it is the outcome that should be defined, not the process – but I do accept that this means more thinking-time for IPs and perhaps more uncertainty as to whether they have the processes right so that they’re not doing too little or too much.

Overall, I think that the draft SIP focuses attention where it is needed; it highlights the softer skills needed by an IP that draw on ethical principles rather than statutory requirements.

I also welcome the reduced prescription. Although I suspect that many IPs will not change their standards as regards, for example, content of Nominees’ reports and Proposals, at least they may find that they are picked up less frequently than in the past where a document has failed to tick a particular SIP3 box… provided, of course, that they meet the principle of providing clear and accurate information to enable debtors and creditors to make informed decisions.

There are a few areas where I feel that more careful drafting is needed. For example, there seems to be a difference in expectations as regards the advice received by a debtor depending on who gives the advice. Paragraph 11 d states that, if an IP is giving the advice, “the debtor is provided with an explanation of all the options available, and the advantages and disadvantages of each, so that the solution best suited to the debtor’s circumstances can be identified and is understood by the debtor”. However, the level of satisfaction required by an IP who becomes involved with a debtor at a later stage is simply that he/she “has had, or receives, the appropriate advice in relation to an IVA” (paragraphs 12 a and 13 a). It would seem to me that “appropriate advice in relation to an IVA” may be interpreted as being far more limited than that described in paragraph 11 d.

Although I applaud the move to freeing IPs to exercise their professional judgment as to how to meet the principles and objectives, I confess that there are a few current SIP3 items that I am sad to see go. And having griped about SIP3A’s interference with fees issues, I feel doubly embarrassed to admit that I quite like the current SIP3’s treatment of disclosure of payments to referrers, which is narrowed in scope in the draft new SIP3 (e.g. under the new draft, a referring DMC’s fees (whether the DMC is independent of the IP/firm or not) for handling the debtor’s previous DMP need not be disclosed). I also like the current SIP3’s requirement to disclose information in reports if the original fees estimate will be exceeded (para 8.2) and the current SIP3’s direction on treatment of proxies where modifications have been proposed (paras 7.8 and 7.9). But I accept that, as a supporter of the principles-based SIP, I should be prepared to let these go.

Talking of principles v prescription…

SIP16

Before the draft revised SIP16 had been released, I had been encouraged by the Insolvency Service’s statement dated 12 March 2013, reporting the Government’s announcement of a review of pre-packs, which stated: “Strengthened measures are being introduce (sic) to improve the quality of the information insolvency practitioners are required to provide on pre-pack deals” (http://www.bis.gov.uk/insolvency/news/news-stories/2013/Mar/PrePackStatement). I was therefore most disappointed to read a re-draft SIP16 adding 14 new items of information for disclosure – would this really improve the quality of information or simply the quantity?

For example, would the addition of “a statement confirming that the transaction enables the statutory purpose of the administration to be achieved and that the price achieved was the best reasonably obtainable in the circumstances” really improve the quality? And what exactly is meant by “best price”? Does that take account of, say, the avoidance of some hefty liabilities on achieving a going-concern sale or the security of getting paid consideration up-front rather than substantially deferred from a less than reliable source or the avoidance of large costs of disposal and risk of depressed future realisations?

There also seems to be a mismatch between the explicit purpose of the disclosure – justification of why a pre-pack was undertaken, to demonstrate that the administrator has acted with due regard for creditors’ interests – and the bullet-point list. For example, how exactly does disclosure of the fact that the business/assets have been acquired from an IP within the previous 24 months (“or longer if the administrator deems that relevant to creditors’ understanding”!) support that objective? Such an acquisition may raise questions regarding the way the business was managed prior to the sale or it might even raise some suspicions of a serial pre-packer at work (wherever that gets you), but I think it contributes little, if anything, to the justification of the pre-pack sale itself.

I understand that there has been some dissatisfaction at the introduction of a 7 calendar day timescale (counting from when?) for disclosure. Personally, I think that it is damaging to the profession if creditors are not made aware of a sale for some time, but I would have preferred for there to be a relaxation of the detailed disclosure requirements so that initial notification, even if it is not complete in all respects (surely much of the detail can be provided later?), is pretty immediate. There may be all kinds of practical difficulties in getting a complete SIP16 disclosure out swiftly, particularly with the proposed additions, and I think it would be an own-goal if this meant that some IPs relied on the “unless it is impractical to do so” words to delay issuing the disclosure until they were sure that their SIP16 disclosure was perfect in all respects. Fortunately, I feel that IPs generally are cognisant of the criticisms/suspicions levelled at the profession when it comes to pre-packs and most will pretty-much clear their desks to ensure that a complete SIP16 disclosure gets out on time.

Finally, returning to my point about unnecessarily repeating statute in SIPs: it is a shame that the drafters have not taken the opportunity to remove the words: “the administrator should hold the initial creditors’ meeting as soon as practicable after appointment”, which apart from omitting the word “reasonably” (is that intended?) is an exact repetition of Paragraph 51(2) of Schedule B1 of the IA86.

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I could go on, but I’m sure I’ve bored you all already. I am certain that many of you will have come up with many more thoughts on the drafts – after all, that is the purpose of sending them out for consultation – I do hope that you have conveyed them to your RPB so that the resultant SIPs can be well-crafted, practical, unambiguous documents that support the high ethical standards of the profession.