The future of remuneration: changes to Insolvency Office Holder remuneration approval

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The Insolvency (Amendment) Rules 2015 (the "2015 Rules") came into force on 1 October 2015. They amended the 1986 Insolvency Rules to introduce a new approach to the approval and payment of insolvency office holders ("IOH"s)’ fees and disbursements.

IOHs will no longer be able to use a taxi-meter approach to using hourly rates in order to record and charge their time. The changes in the 2015 Rules aim to end the "uncertainty of unlimited hourly charges", following a 2010 OFT review, and 2013 government review (the "Kempson Review"), both of which highlighted creditor concerns that the current system allowed IOHs to charge excessive fees. The government’s press release of March 2015, published as the 2015 Rules were laid in Parliament, acknowledged that IOHs do "important and specialist work", and stated that the aim of the changes is to ensure that fees are fair and reasonable, and to provide increased transparency, whilst providing IOHs with "the opportunity to demonstrate how their services provide value for money".

Essentially, the new regime will mean that IOHs acting as administrators, liquidators (other than in an MVL) and trustees in bankruptcy will have to provide fee estimates to creditors, giving details of the likely remuneration they will charge, and any expenses that are likely to be incurred in the case. These estimates must be provided before the basis of the office holder’s remuneration is determined. The approval of the fee estimate will then effectively cap remuneration at that level, unless further approval is sought. Note that although an estimate of expenses is required, there is no requirement for the expenses to be approved.

In addition, each progress report must contain a statement as to whether the remuneration or expenses incurred or anticipated to be incurred are likely to, or have already exceeded the estimates given. If the remuneration is expected to, or has already exceeded, the estimates given, then the report must detail a) the reasons why the estimate has been exceeded, b) the additional work required or proposed, c) the hourly rate proposed, d) the time the work has taken, or it is anticipated to take, e) whether it is likely to be necessary to seek further approval, and f) the reasons why it will be necessary to seek that approval. The excess remuneration must then be approved before it can be paid.

What are the practical implications of the amended rules?

How will the estimates be calculated?

As estimates of both fees and expenses must be provided before the determination of the basis on which the office holder’s fees are to be calculated, IOHs will need to make accurate estimates at a very early stage in the insolvency process. Any under-estimation of fees will effectively place a cap on remuneration, and require further recourse to creditors for approval at a later stage. It can be very difficult, especially in complex cases, to estimate the fees to be incurred accurately at the start of the case, when the precise work an insolvency may produce is unknown, and information may be very limited, or ultimately prove to be wrong. Questions to be asked may include: is litigation likely to be needed? Will the directors comply, or prove hostile? Will there be difficult creditors to deal with?

It may therefore be tempting to over-estimate fees. However, not only would over-estimation make remuneration more unlikely to be approved, but the Insolvency Service will no doubt be comparing estimates given to time costs actually incurred, and will surely take a dim view of those who deliberately over-estimate. It is not clear whether it will be possible to caveat or qualify estimates in order to allow increases in the estimated amount without the need to refer back to creditors for approval.

How much detail will be required?

There are as yet no guidelines as to the detail that will be required in the fee estimates. The task will be most difficult where remuneration is to be determined by reference to time spent. In these cases, the rules require IOHs to provide creditors with a "fees estimate" and details of the expenses the IOH considers will be, or are likely to be, incurred. No further guidance is given as to what a "fees estimate" means in practice (although SIP 9 and the criteria in the 2015 Rules for information to be provided on any excess will be useful). We understand that SIP 9 is currently being amended to take account of the amended rules. The current SIP 9 reminds practitioners that they should be "mindful at all times of the rights accorded to creditors in relation to remuneration under insolvency legislation", and includes as Appendix D, a suggested format for production of information in relation to remuneration. It is hoped that the new version of SIP 9 will include a similar suggested format to be used to formulate estimates under the 2015 Rules. At present, however, there is no published timescale with respect to the release of a new SIP 9.

Where remuneration is to be calculated on a percentage basis, or is to be fixed as a set amount, the rules require IOHs to provide creditors with details of the work proposed and the expenses the IOH considers will, or are likely to be, incurred. As these requirements are likely to be simpler, we may see an increase in the number of cases in which remuneration is approved on a percentage or fixed fee basis. Of course, this may not be possible in high value cases, and/or complicated cases, for example where there may be litigation, a complicated asset base, a period of trading, and/or a large employee body.

Costs implications

Although the Impact Assessment for the new rules states that the new requirements, and the setting up of administrative measures to meet them, are not expected to result in significant additional costs for IP firms, it is argued that this view is unrealistic. Prudent IP practices will already be preparing for the changes, and developing systems to prepare fee estimates using experience gained acting on past cases, using the suggested format for production of information as set out in Appendix D of the current SIP 9.

How will the changes affect IOHs’ legal advisers?

The changes in relation to expenses will also impact IOHs’ legal advisers, who will now be asked to provide estimates of their fees in advance, for provision to creditors. The provision of these estimates will rely on IOHs providing clear and accurate guidance as to what assistance they will require in any particular case.

The 2015 Rules require IOHs to report to creditors as to whether the expenses have exceeded, or are likely to exceed, the estimate given, and if so, the reasons for that excess. However, in contrast to the IOH’s remuneration, there is no requirement to seek further approval before payment is made. It remains to be seen how this will evolve in practice, and whether there will be any rebalancing of what work is delegated to the IOH’s legal advisers.

Timing

In an administration, the basis on which it is proposed that the administrator’s remuneration should be fixed must be set out in the proposals to creditors. It follows that the estimates must be provided with those proposals.

In the case of a compulsory liquidation or bankruptcy, the estimates need to be provided before the meeting of creditors’ at which the basis of remuneration will be determined, or before the first meeting of the creditors’ committee, if there is one. There is no minimum or maximum period of time given in the new rules to govern how far in advance the information must be provided.

There is some ambiguity in the case of a CVL, where it is common practice to hold the members’ meeting to resolve to enter into voluntary liquidation, and the first creditors’ meeting under s98, on the same day. The amended rules state that it is for "the liquidator" to provide the estimate of fees and expenses to creditors. In order to hold the members’ and creditors’ meetings on the same day, can the estimates be sent out by the proposed liquidator, before he is appointed, with the notice of the s98 meeting, so that the meetings may continue to be held on the same day?

There is as yet no guidance on this point, so a liquidator is left with a choice. He can either hold the s98 meeting within the 14 day time period required after the members’ meeting at which he is provisionally appointed, pending the s98 meeting, or he could obtain approval either by written resolution of creditors after the s98 meeting or by calling a further creditors’ meeting for the purpose of approving the basis of his remuneration. Calling a second meeting and obtaining written resolutions would add costs to the administration of the estate, so we may see the end of the practice of calling both members’ and creditors’ meetings on the same day, as liquidators use the 14 day statutory period between the two meetings to investigate the case and put together their fee and expenses estimates.

Have similar measures been successful elsewhere?

A similar regime has been in use in Australia for some time, which permits (but does not require) prospective remuneration approval. Commonly, remuneration approval is sought both retrospectively (for fees already incurred) and prospectively (up to a fixed cap). Remuneration may not be drawn unless approved (either retrospectively or prospectively), usually by meeting of creditors. Part 15 of the Australian Restructuring, Insolvency and Turnaround Association (ARITA) Code of Professional Practice sets out the expected standards of conduct for Australian IPs when seeking remuneration approval. The ARITA has also published a detailed Remuneration Report Template, for use by practitioners preparing estimates reports on of their remuneration for which approval is sought, including prospective remuneration approval. The Kempson Review cited the Australian system as an example of good practice, and suggested that a detailed code of this kind could be used in the UK as part of a self-regulatory regime. The report did however acknowledge that such a code would require a single body, probably the Insolvency Service, to compile it in consultation with the insolvency profession. For the time being, we wait to see what the revised SIP 9 will look like..

Increased creditor participation

The reforms aim to provide creditors, particularly unsecured creditors, who are unlikely to be exposed to insolvent debtors on a regular basis, with more information and greater involvement in insolvency situations when they meet them. Where remuneration is based on a time-cost basis under the current rules, with only the hourly rate being known in advance, a creditor would need considerable experience before being able to engage in any meaningful way in any discussion about the work undertaken, or fees and expenses charged. With this in mind, R3 has published a new website to encourage creditor participation in insolvency (see www.creditorinsolvencyguide.co.uk) aimed at helping unsecured creditors in particular "negotiate what can often be a complicated process". However, it remains to be seen whether the new system will result in increased creditor involvement insolvencies.

Practical pointers

  • consider whether remuneration on a fixed or percentage fee may be appropriate;
  • get up to speed preparing templates for fee analysis;
  • do not deliberately over-estimate, but beware under-estimating!;
  • quick and efficient estimation of expenses will be required;
  • be prepared to give clear guidance as to what assistance will be needed in any particular case, so that legal advisers can prepare accurate estimates of likely expenses;
  • watch this space for a new SIP 9.

This article first appeared in Corporate Rescue and Insolvency journal, August 2015.  Since original publication, the changes referred to in the article have come into force, a new SIP 9 has been published to accompany the changes.

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