Referral Agreements between Trustees and a Third Party


Many concerns have been raised and conveyed to the OSB regarding referral agreements entered into by Trustees with various individuals or business entities. These are often Credit Counselling Agencies, financial counsellors or even sometimes another trustee who has been prevented from filing new estates through conservatory measures issued pursuant to section 14.03 of the BIA. For the purpose of this position paper we will designate all these and other such parties to these agreements as a "third party". Many Trustees and CAIRP are concerned about the ethics of such agreements, their unfairness and their non compliance with legislation. This position paper therefore became necessary. Generally speaking, these agreements provide for the provision of certain services to debtors by a third party and the subsequent referral of the debtor to the trustee for the purposes of carrying out the administration of an insolvency proceeding under the Bankruptcy and Insolvency Act (BIA).

Presumably, the third party would perform a number of tasks associated with the filing of insolvency proceedings by the trustee. These tasks would normally include the evaluation of the debtor's circumstances, collection of documentation, scheduling a meeting between the debtor and the trustee, as well as the sourcing of the debtor. Upon referral, the trustee would then conduct his own assessment of the debtor and the trustee would pay a fee to a third party for each insolvency proceeding filed with and accepted by the Official Receiver. Some of these agreements provide that a fee only becomes payable once the trustee has drawn a set minimum amount in trustee fees.


Are the above mentioned types of agreements between Trustees in Bankruptcy and a third party permissible on a legal and ethical basis?

Such agreements are illegal and not permissible because they are contrary to the BIA and the code of ethics.


There are both legal and ethical grounds which prevent a trustee and a financial counsellor from entering into the above-mentioned type of agreement.

a) Payment by trustee for referral

Section 49 of the Bankruptcy and Insolvency Rules states the following:

49. 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.

Clearly the objective of this rule is to prohibit trustees from paying or accepting a referral payment.

Generally, referral agreements include, expressly or implicitly, provisions that allow for the "sourcing" of the debtor by the third party, which is taken to mean that the third party shall procure, find or identify the debtor. In our view, this is exactly what section 49 seeks to prohibit, i.e. paying a third party for obtaining a professional engagement.

Furthermore, in some cases payment is made only in the event that an insolvency proceeding is filed and accepted by the Official Receiver, and only after a certain minimum amount of fees have been drawn by the Trustee. The contingent nature of such provision, and the direct link between the trustee's fees and payment of a third party's account only confirm further that such agreements are contrary to section 49. Payment is not made when the work is completed, on the contrary, there is no payment unless there is a subsequent professional engagement.

Furthermore, there is no work for the Trustee, unless there is a referral for which consideration is later paid by the Trustee. It seems to us that there is a distinction between this situation and any work that already belongs to the Trustee where assistance is required from a third party in particular circumstances, such as vacation or increase in workload. In the present case, what we are faced with is clearly a scheme by which work is systematically referred to the Trustee who in turn pays for this referral. The essence of the contract is the payment of a fee for a referral and this is illegal.

b) Indirect Advertising

Trustees who enter into these types of referral arrangements are also in contravention to section 51 of the Bankruptcy and Insolvency Rules, which reads as follows:

51. Trustees shall not, directly or indirectly, advertise in a manner that

  1. they know, or should know, is false, misleading, materially incomplete or likely to induce error; or
  2. unfavourably reflects on the reputation or competence of another trustee or on the integrity of the bankruptcy and insolvency process.

It seems to us that any advertising undertaken by a third party in the circumstances previously discussed could be seen as indirect advertising on the part of the trustee and misleading by the fact that the debtor is not directly dealing with the trustee. It could be seen as falling within the scope of section 51 of the Bankruptcy and Insolvency Rules where the third party, in its own advertising, is essentially promoting the trustee's services with his or her knowledge and consent.

Section 44 of the same Rules states that:

44. 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.

According to Section 47:

47. 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.

Section 50 is also relevant:

50. Trustees shall not obtain, solicit or conduct any engagement that would discredit their profession or jeopardize the integrity of the bankruptcy and insolvency process.

All of these Rules can potentially be applied to referral agreements and will no doubt be considered by the OSB when dealing with a compliance issue where such an agreement is at play.

c) Are These Agreements Ethical?

From a broader perspective of a trustee's practice, the OSB takes the position that such agreements are unethical. These agreements essentially result in a regulated profession becoming to some extent unregulated through the use of non-licensed entities that are not subject to the jurisdiction and supervision of the Superintendent of Bankruptcy.

Trustees should also be conscious of the fact that in order to prevent this and to ensure a proper degree of supervision of such third party, the Superintendent of Bankruptcy would have no choice but to revisit its policy of restricting designation of administrators to trustee and provincial officials. Although this may be efficient to some extent in regulating such agreements, it would likely raise supervision issues of its own as well as impact on the position of trustees in the marketplace. Furthermore, these agreements also distort the level playing field in the trustee community and cannot be considered as being sound for the image of the profession. It is also doubtful that entering into such agreements would meet the Trustee's fiduciary duty towards debtors and creditors.


In our view, referral agreements entered into by trustees in bankruptcy, are contrary to the BIA and its rules. Consequently, such agreements will not be permitted and will be considered illegal and unethical from a professional conduct perspective.

Every trustee is requested and expected to abide by his or her obligation to cooperate with the Superintendent and with CAIRP on this matter. We believe it is essential for the well being and the image of the trustee profession as well as for the integrity of the insolvency system.