The Insolvency (Amendment) Rules 2015 (“the Rules”) provide for changes relating to the approval of Insolvency Practitioners’ Fees to come into effect from 1 October 2015.
Insolvency Practitioner Fees are always subject to creditor approval where they relate to insolvent individuals, partnerships and companies. Fees are often charged on a time costs basis, or alternatively as a percentage of realisations and distributions or since 2010, on a fixed fee basis. In reality, in the vast majority of insolvency cases, fees have historically been approved on a time costs basis.
From 1 October 2015, where an Insolvency Practitioner is seeking approval of his fees on a time costs basis, he will be required to provide an estimate of his fees and expenses at the outset of the procedure. If he subsequently wishes to charge more than his original estimate, he must seek further approval from the creditors.
Whilst this increased transparency in fees is generally welcomed in the profession, it is likely to create some practical difficulties in some cases. In cases such as Administrations, where fee approval is usually sought some weeks after appointment, it should be a reasonably straight-forward process to estimate what the costs will be to carry out the proposals put forward by the Administrator.
In a Creditors Voluntary Liquidation however, the Insolvency Practitioner will be convening a meeting of creditors immediately upon his instruction, which is invariably after a relatively short meeting with the directors. At the time the notices are issued, he will, if he intends to seek a fee approval at the first meeting, be required to provide an estimate of his fees at a time when he does not really know exactly what he is going to have to do. This can be likened to asking a builder to provide an estimate to gut and refurbish a property without an internal inspection, based only on what the owner has told him.
An insolvency is a living thing. Matters to investigate are frequently discovered several weeks after the process has begun and numerous processes become protracted, such as receiving Reservation of Title claims from more suppliers than have been anticipated, or the settlement of the claims or collection of debts takes longer than anticipated.
There is a grave risk that Insolvency Practitioners may err on the side of prudence and estimate the time to be spent on certain tasks on a worst case basis, which is likely to create regulatory difficulties for them if they consistently overestimate their fees.
A solution may be to defer requesting a fee resolution at the first meeting of creditors and to convene a second meeting when the liquidator has carried out his initial post-appointment investigations. This however will have the effect of increasing costs, which his contrary to the intention of the amendment to the Rules. It is also possible that the meeting may not result in a resolution of any kind.
There is another apparent difficulty in that, unlike the existing requirement for an Insolvency Practitioner to report on time he has actually spent on a case when submitting progress reports, there is no prescribed form in which to produce an estimate. Creditors are therefore likely to receive estimates in as many different formats as there are insolvency firms, which cannot be good for the profession or for helping creditors to really understand how much is going to be spent and on what.
Let us have total transparency on costs and let us have greater creditor involvement on how their money is going to be spent, but please, please, please, let’s have a system that will give those results in a meaningful and inexpensive way.