Ah, the Insolvency Act & Rules, what shall I compare thee to? Maybe an old Crown Derby figurine: looks in good nick when you first encounter it, but it’s only when you begin to handle it that you spot all number of hairline cracks and chips to the paint. I have been threatening to myself for many months now to blog on my top Act/Rules gripes. I have made a start here – with the tangle of provisions governing convening Administration meetings and fee approval – and I have many more that I intend to use as good blogging material for many months to come.

Administrators: To hold or not to hold a Creditors’ Meeting

Paragraph 52(1) of Schedule B1 of the Insolvency Act 1986 lists the circumstances in which the requirement to hold a creditors’ meeting to consider the Administrators’ Proposals shall not apply:

52(1) …where the statement of proposals states that the administrator thinks:

(a) That the company has sufficient property to enable each creditor of the company to be paid in full;
(b) That the company has insufficient property to enable a distribution to be made to unsecured creditors other than by virtue of Section 176A(2)(a) (“the prescribed part”); or
(c) That neither of the objectives specified in paragraph 3(1)(a) and (b) can be achieved

So if a creditors’ meeting is not held by reason of any of these circumstances, how does an Administrator get approval for his fees?

Rule 2.106(5A) states that “in a case where the administrator has made a statement under paragraph 52(1)(b)… the basis of the administrator’s remuneration may be fixed… by the approval of (a) each secured creditor of the company; or (b) if the administrator has made or intends to make a distribution to preferential creditors: (i) each secured creditor of the company; and (ii) preferential creditors whose debts amount to more than 50% of the preferential debts of the company, disregarding debts of any creditor who does not respond to an invitation to give or withhold approval”.

Therefore, it’s pretty clear (although see below) for Administrators who have made a Para 52(1)(b) statement, but what if they have made statement under either Para 52(1)(a) or (c)? They cannot use Rule 2.106(5A) and it seems to me that they have to use R2.106(5): “If… the case does not fall within paragraph 5A, the basis of the administrator’s remuneration may be fixed… by a resolution of a meeting of creditors” (or they can go to court, but only after they’ve tried to seek approval via (5)). Gripe number one: does anyone else think it’s nuts that the requirement to call a creditors’ meeting to consider the Administrator’s Proposals shall not apply, if he makes a Para 52(1)(a) or (c) statement, but then in those circumstances the only way it seems that he can get his fees approved is by a resolution of a meeting of creditors?! Some might suggest that this is met by the deemed approval route of R2.33(5), although personally I very much doubt it (as I do not think that Proposals “deemed to have been approved” equates to fees basis “deemed to have been fixed by a resolution of a meeting of creditors” and surely someone has to positively approve fees). At a stretch, I wonder if the drafter felt that, in Para 52(1)(a) or (c) cases, the rest of the Administrator’s Proposals were not up for discussion by the unsecureds – that would make sense, but then I still don’t understand why in those circumstances fee approval should rest with the unsecureds.

Is this just a theoretic gripe or can it arise in practice? Well, Para 52(1)(a) statements are extremely rare, but what about Para 52(1)(c) statements? How many Administrations end up simply meeting the third objective of “realising property in order to make a distribution to one or more secured or preferential creditors”? If that is the case, then take care that, if you make a Para 52(1)(c) statement, it seems (to me anyway) that you need to seek approval of your fees by a creditors’ meeting (or by correspondence, of course) resolution. This outcome also seems contrary to the so-called “spirit” of the Act/Rules, which I will return to later.

The Paragraph 52(1)(b) Statement

So let’s look a little closer at the Para 52(1)(b) statement that takes Administrators down the route of dispensing with a creditors’ meeting to consider their Proposals and seeking approval for their fees from secured (and preferential) creditors.

Firstly, how does an Administrator think about the outcome for creditors? If, as a creditor, you were to ask an office holder, “do you think I am going to get a dividend from this insolvency case?”, how would you expect him to answer you? Personally, I would expect him to consider what the realisations were likely to be, what costs were going to be deducted from those funds, and thus how much money was left over for creditors. I would accept that, if I look at the estimated Statement of Affairs as at the date of insolvency, the outcome does not incorporate the costs of administering the case, so this outcome is completely unrealistic. It does not reflect what the office holder thinks the outcome will be for creditors.

You might be wondering why I’m labouring such an obvious point. The issue is that I believe that opinions are divided on how Administrators should think about the likely outcome for creditors for the purposes of making Para 52(1)(b) statements: some believe it should be on a Statement of Affairs basis, i.e. exclusive of costs; others believe that the anticipated costs of the Administration should be taken into consideration. My personal view is that I believe that Para 52(1) asks the Administrator to think about the outcome and that any decision made without considering the likely costs that will be deducted is wholly unrealistic. However, I do accept that, in following what I believe is the letter of the Act, it could lead the Administrator in some circumstances down a route that does not observe the so-called “spirit” of the Act (see below), but what is an IP to do when he is expected to follow the Act/Rules?

I have another issue with the wording of Para 52(1)(b): what is meant by: “insufficient property to enable a distribution to be made to unsecured creditors other than by virtue of” the prescribed part”? At first glance, it suggests that a Para 52(1)(b) statement can only be made in cases where the Administrator thinks that there will be a prescribed part distribution (but no other unsecured dividend). But if that’s the case, then R2.106(5A)(a) would never kick in, as there would always be a pref distribution – in full – in order for there to be a prescribed part, so there would never be a case where only secured creditors’ approval – and not the prefs also – would be sufficient for fees. You could argue that R2.106(5A)(a) could be used in cases where there are no prefs, but then I still think R2.106(5A)(a) is unnecessary, as surely, with a bit of sensible drafting, you could just use the wording in (5A)(b) and accept that no prefs’ approval is needed as they don’t exist.

And does it make sense for Para 52(1)(b) to apply only when there is a prescribed part? As you know, the consequence of a Para 52(1)(b) statement is that the secureds (and prefs) have the authority to approve the Administrator’s fees. Does it make sense that, if unsecureds are only likely to receive something via a prescribed part, fees are approved by secureds (and prefs), but if unsecureds are not in the frame for any dividend at all (say, because the (net) realisations are going to be wiped out by the preferential claims or there is a pre-2003 debenture so that any surplus after the prefs goes to the secured creditor), the unsecureds get to approve the fees? If it is considered inappropriate from a policy point of view for unsecureds to have power over fees when there is likely to be only a prescribed part for them, then I would expect it to be considered similarly inappropriate for unsecureds to have such power when they are not likely to receive even a prescribed part. It seems to me that the policy point is that, just because S176A provides for a proportion of floating charge realisations to be divided off for the unsecureds, this does not mean that the floating charge-holder loses control over fees. If that is the policy, then it seems to me that Para 52(1)(b) only really makes sense if one reads it that it applies where there may, or may not be, a prescribed part distribution, but one thing is for certain: there is insufficient property to pay unsecureds a non-prescribed part dividend.

And who exactly are unsecured creditors? Another gripe of mine is that the Act/Rules – at least post-EA2002 – seem to have developed a convention of using the term “unsecured creditor” when referring only to non-preferential unsecured creditors. For example, R4.126(1E)(a)(xii) requires liquidators’ final reports to set out “the aggregate numbers of preferential and unsecured creditors”, which suggests that preferential creditors are not included in the unsecured creditors category. For definitions, we can look to S248, which states: “‘secured creditor’, in relation to a company, means a creditor of the company who hold in respect of his debt a security over property of the company, and ‘unsecured creditor’ is to be read accordingly”. So the Act, at least as originally drafted, acknowledges the reality that preferential creditors are included in “unsecured creditors”.

However, the concept that “unsecured creditors” includes prefs makes a nonsense of Para 52(1)(b), because in that case Para 52(1)(b) could not be used if the Administrator expected to pay prefs, although the only time R2.106(5A)(b) kicks in is when there is a pref distribution.

So, where does all that leave an IP who is simply trying to follow the Act/Rules? When should he be making Para 52(1)(b) statements?

The “Spirit” of the Act/Rules

Although I don’t think I’ve seen it written publicly or officially, I recall an exchange I had with someone at the Insolvency Service when I was at the IPA about the way the Administrators’ fees approval mechanism was intended to work. I believe the intention was that the creditors whose recovery prospects were affected by the Administrators’ fees would have authority to fix the basis of those fees – I don’t think anyone would disagree with that sensible principle. The problem is that it is extremely difficult to convert into legislation and, as I hope I demonstrate below, I do not believe it has been achieved.

As an example, take the argument above about whether the Administrator should think about the outcome to creditors before or after costs. Let me take a simple case: no prefs, just a fixed and floating charge creditor (fixed over a freehold property) and minimal floating charge assets. Before costs (i.e. on a Statement of Affairs (“SoA”) basis), the estimated-to-realise figures indicate that there would be a surplus available to unsecured creditors. However, when you take into consideration the likely costs of the administration (i.e. on an Estimated Outcome Statement (“EOS”) basis), it looks like the fixed charge surplus and the floating charge realisations are going to be eaten up in costs leaving nothing for the unsecureds. On that basis, it would seem that it would be fair for the unsecureds to have power over the fees, as they are the ones losing out by reason of the fees.

But what if the property value only just covers the secured creditor’s position – although the SoA still shows a small surplus for unsecureds – and therefore when the fees and costs are taken into consideration, there is a shortfall to the secured creditor? Now, it would not be fair to the secured creditor to look at it from an SoA basis – and give the power to the unsecureds who are losing very little by reason of the marginal surplus – but the EOS perspective would seem fairer.

But, in this scenario, to whom would you go for fees approval, if you were following the letter of the Act/Rules?

I attach here – Admin outcomes – a table on which I have tried to demonstrate the range of possible scenarios – both before and after costs – and the resultant party/parties holding power over the Administrator’s fees based on the alternative interpretations of the Act/Rules, together with who should have authority on the basis of what I think is the so-called spirit of the Act/Rules, as I’ve described it above. PLEASE NOTE, however, that I created this late at night and I haven’t checked it through. After a while, my mind boggled as I tried to picture the outcomes, Act/Rules interpretations, and which creditor(s) was/were being affected by the costs/fees. Whilst, as a consequence, I would not be surprised if I have got it wrong in some places, I think it demonstrates how none of the different interpretations of the Act/Rules reflects consistently the spirit (although it does show that some get it right more often than others). Thus, even if an IP tries to shoe-horn in a particular interpretation of an Act/Rules provision in a well-meaning attempt to reflect its spirit, they will come a cropper sooner or later if they consistently use that interpretation for every case.

Not all scenarios are explored by the attached table, for example where there is more than one secured creditor. The Act/Rules appear odd in the case of multiple secured creditors, because, rather than treating them as a queue of expectant claimants, only one of whom (assuming they have security over the same assets) is going to be impacted by the Administrator’s fees, they are treated as members of a group each with equal authority over the Administrator’s fees; in a Para 52(1)(b) case it seems that the approval to fees of all secured creditors must be sought.

But what if the company has several secured creditors who appear to have no financial interest – on either an SoA or EOS basis – by reason of the fact that the realisable value of the secured assets is only sufficient to return monies to the first charge-holder? It seems that this makes no difference – the approval of all secured creditors needs to be sought. And what if the subordinate uninterested charge-holders decline to respond to an invitation to give or withhold approval? It seems that the Act/Rules provide no solution… other than to apply to court under R2.106(6). This seems nonsensical: that a court order should be required to decide on an Administrator’s fees simply because a secured creditor, whose security is worthless, does not bother to respond to an invitation to approve the fees basis. The same seems to apply where there are priority secured creditors who are healthily secured and are facing zero risk of a shortfall whatever the fees are. Despite this, the Act/Rules still seem to require their positive approval of the fee basis (although there remains the thorny question as to whether they still count as a creditor once their debt has been discharged in full from the insolvent estate).

What about a different kind of multiple security case? What if a company has several creditors holding security over different assets, say a portfolio of mortgaged properties? The Act/Rules allow the Administrator to fix more than one fee basis “in respect of different things done by the administrator” (R2.106(3A)) and it would seem appropriate to go to each relevant secured creditor and ask for approval for fees, but only in relation to dealing with the property subject to that creditor’s security. However, I can see nothing in the Act/Rules that enables an Administrator to do that. It seems that every secured creditor needs to approve the Administrator’s fee basis in relation to everything that he does on the case, even if he is seeking to charge different bases for different items and irrespective of whether that secured creditor has any interest in the property that the Administrator is handling. I accept that in reality, if there are separate mortgaged properties involved, you might have some LPA/fixed charge receivers about, but you get my point, don’t you?

So where does that leave us? I think it leaves us with a tangle of statutory provisions governing one of the most sensitive areas of an IP’s activity – his fees – and, although I dread the day when I have to get my head around a completely new set of Rules, in some ways I feel that it cannot come soon enough.