With little more than benign overviews of the new fees rules out there, I thought I would examine them a bit closer. What are the practical implications of the rules and do they contain any risky trap-doors?
My overriding thoughts are similar to those I have on the pre-pack changes: in an apparent effort to improve transparency, is the whole process becoming so unwieldy that it will turn IPs off altogether? Maybe that’s the plan: make it so difficult to seek time costs that IPs switch to fixed/% fees.
As you know, the new rules take effect from 1 October 2015. They can be found at: http://goo.gl/mekR5j.
Stephen Leslie, for Lexis Nexis, has produced a good basic summary of what they contain at: http://goo.gl/eqs9Aq. R3’s Technical Bulletin 109 and Dear IP 65 also cover the subject.
S98s: same problem, different solutions
For CVLs, when should the liquidator set out his fees estimate?
R4.127(2A) will state that “the liquidator must prior to the determination of” the fee basis give the fees estimate (and details of expenses) to each creditor. It seems to me that reference to “liquidator” requires the IP to be in office – so the fees estimate cannot be provided, say, along with notice of the S98 meeting.
But am I reading too much into this? After all, R2.33 currently refers to pre-administration costs incurred by the “administrator”, when clearly the IP isn’t in office as administrator when the costs are incurred. Therefore, maybe reference in the new rules to “liquidator” similarly is sloppy-hand to include “the person who would become liquidator”. If that is the case, then maybe the expectation is that IPs will provide fees estimates along with S98 notices with a view to running S98 meetings along the same lines as they are at present.
Of course, then there’s the argument about how an IP is supposed to come up with a sensible estimate before he knows anything about the case. Ok, he will have a better idea – but still not a great one – when the Statement of Affairs is drafted, but that’s little more than a few scribbles on a page, if that, at the stage when the S98 notices are issued. So how long “prior” to the resolution should the liquidator “give” the information? Given that S98s are pretty swift events anyway, would it be acceptable to send estimates the day before the S98 meeting..?
A confabulation of compliance consultants, especially with nothing more to guide us than a handful of new rules, is bound to generate a variety of proposed solutions. Here are just three of them:
(i) The return of the Centrebind
A Centrebind would overcome the problem of the IP being in office at the time of issuing the estimate and 14 days or thereabouts would seem sufficient to provide creditors with a reasonable estimate before the S98 meeting.
Of course, Centrebinds went out of fashion because of the limited powers the members’ liquidator has before the S98 meeting is held. It’s not a great place to be as an office holder. Do we really want to return to that practice wholesale? And given the Cork Committee’s dissatisfaction over Centrebinds, would the regulators take a dim view if the practice were taken up again just to ensure that the IP could get his fees approved at the S98 meeting? Some might argue that it’s the most practical way of working with the rules, but are there alternative solutions..?
(ii) A second creditors’ meeting
This was my first thought when I read the rules: why seek a fees resolution at the S98 meeting? Would it really be such a chore to convene another creditors’ meeting soon after appointment?
True, it would add another chunk of costs to the estate, but would IPs be criticised for taking this approach? After all, how much of a solid estimate can an IP give before he truly knows what is involved in the case? In my view, the costs of convening a second meeting would be entirely justifiable, as it seems to be the way the rules are pushing IPs. Indeed, the rules as a whole are hardly cost-saving, given the additional work IPs will need to undertake to provide estimates and seek increases, if necessary later on.
Of course, in having a second meeting, IPs run the risk that the creditors already will have lost interest and they’re left with inquorate meetings and no resolution. Also, as the liquidator (or an associate) will be chairman of the second meeting, they won’t be able to rely on the director-chairman’s vote or his use of general proxies. However, the practice of looking to the director to approve the liquidator’s fees is viewed with scepticism anyway – many observers don’t recognise that, with so little creditor engagement, it’s sometimes the only practical way – so maybe it is a practice that we should be distancing ourselves from in any event.
(iii) Fixed fees
This wasn’t my idea, but I see the attraction of it, particularly for “burial jobs”.
Given all the hassle of providing a detailed estimate of time costs, why bother, especially on jobs where in all likelihood the time costs incurred will outstrip the asset realisations net of other costs? If liquidators were to seek a fixed fee, they would still need to provide, prior to the fees resolution, “details of the work the liquidator proposes to undertake and the expenses the liquidator considers will, or are likely to be, incurred”, but they could avoid providing the full estimated time costs breakdown.
Thus (provided that the IP doesn’t need to be in office as liquidator at the time), along with the S98 notices or just before the meeting, the IP can provide a pretty standard summary of tasks to undertake in any liquidation and set out the proposal to seek fees of £X. If the SoA shows assets of, say, £15,000, the SoA/S98 fee is £7,500 of this and there are a few £hundreds of standard expenses, a fixed fee of £10,000 would seem reasonable to cover everything that a liquidator needs to do and, 9 times out of 10, there would be no need to seek an increase.
I guess that the proxy forms should list the proposed fee resolution in full, which would suggest that the IP knows what he wants to charge at the point of issuing the S98 notices. As mentioned above, this would involve a degree of uncertainty, but for IPs working in the burial market, I can see that the risk is outweighed by the simplicity of this approach. With Reg 13 ditched, IPs might not need to maintain time records* – what could be simpler?! – and they wouldn’t suffer the closure Catch 22 of billing time costs at a point when they haven’t yet spent the time closing the case.
But does this solution have legs for anything other than the simplest of jobs, where the IP would always be looking at a time costs write-off from the word go? On its own, I don’t think so. However, I don’t think it would be beyond the realms of possibility to devise a fairly standard formula for seeking fees on a combination of a fixed sum and a percentage basis. This might help address any unexpected asset realisations, for example antecedent transactions or hidden directors’ loans. Seeking percentage fees of such asset realisations would also deal with the concerns that it may be both impractical and indiscrete to propose fees estimates detailing what investigatory work is anticipated and how much that is likely to cost.
With several possibilities available, evidently S98s will require some thought and planning in readiness for 1 October.
* Although the Insolvency Practitioners (Amendment) Regulations 2015 are removing the Regulation 13 IP Case Record and thus, with it, the specific requirement to maintain “records of the amount of time spent on the case”, I do wonder whether an IP will be expected to continue to be prepared to meet the requirements of R1.55, R5.66 and Reg 36A of the 1994 Regs as regards providing time cost information to pretty-much any interested party who asks. I know that no one asks, but with the continued existence of these Rules and Reg, does the abolition of Reg 13 really mean the abolition of time cost records in fixed/percentage fee cases?
Of course, when tinkering with fee approval, it was always going to prove confusing for Administrations! Here are a few reasons why:
Para 52(1)(b) cases
The current Act & Rules do not prescribe the process for seeking fee approval from secured (and preferential) creditors in Para 52(1)(b) cases. Therefore, particularly where the Administrator has been appointed by a secured creditor and so will be reporting to his appointor outside of the statutory process, often a request is made very early on for approval for fees.
In future, if the Administrator is looking for time costs, he will need to “give to each creditor” the fees and expenses estimates before “determination” of the fee basis. This indicates to me that an Administrator will not be able to seek approval for fees from a secured creditor before he has issued his Proposals to all creditors… unless he sends the estimates to all creditors in something other than his Proposals (unlikely)… or unless approval rests with other creditors in addition to his appointor – i.e. another secured creditor or also the preferential creditors – because it would seem to me that the basis of his fees is not “determined” until all necessary creditors have approved it.
This also means that an Administrator’s Proposals will have to include the fees and expenses estimates even for Para 52(1)(b) cases. I can see some sense in this, as unsecured creditors can always requisition a meeting to form a committee that will override the secureds’/prefs’ approval of fees. However, it seems quite a leap in policy, given that the full SIP9 information is not currently required in Proposals in these cases.
I am not surprised that the Service has introduced a new rule to deal with some Administrations where the prospective outcome has changed so that a different class of creditors is now in the frame for a recovery. The Enterprise Act’s dual mechanism for obtaining fee approval depending on the anticipated outcome was always meant to have ensured that fees were approved by the party whose recovery was reduced because of the fees. It’s true that the Act & Rules often do not deliver that consequence (not least because Para 52(1)(c) cases aren’t dealt with at all properly), but that has always been touted as the policy objective.
Sure enough, Dear IP 65 repeats this objective: “the new provision revises to whom the office holder must make a request or application in such circumstances [as described below] to make sure that such matters are determined by parties with the appropriate economic interest”. Yes, but does it..?
In future, if fees have been approved on a Para 52(1)(b) case by secureds/prefs and the Administrator wants to draw fees in excess of the previous estimate, but he now thinks that a (non-p part) unsecured dividend will be made, he will need to seek approval from the unsecured creditors. Fine.
However, there is no new provision to deal with outcomes changing in the other direction. For example, if an Administrator originally thought that there would be a (non-p part) unsecured dividend – so he sought approval for fees by a resolution of the unsecured creditors – but now he thinks that there won’t be a dividend and maybe even that the secureds/prefs will suffer a shortfall, to whom does he look for approval of fees in excess of the previous estimate? From what I can see, he will still go to the unsecured creditors.
[Theoretically, he might be able to issue revised Proposals in which he makes a Para 52(1)(b) statement, so that the secureds/prefs have authority to approve his fees. In any event, the changed outcome might make revised Proposals appropriate. But then what? Would that result in the basis of his fees not being “determined” with the consequence that he has to issue fees and expenses estimates again to every creditor before he can seek the secureds’/prefs’ approval to the basis of his fees?]
Given that the OFT study concluded that secured creditors are so much better at controlling fees than unsecureds are, why not hand the power to secured creditors automatically by means of the new rules when the outcome deteriorates, in the same way that they shift the power automatically from the secureds to the unsecureds when the outcome improves?
This is more just a headache than confusing: one more permutation to accommodate in systems.
In general, the transitional provisions are designed so that, if an IP takes office after 1 October 2015, he will need to go through the new process to get his fees approved. In effect, they treat Para 83 CVLs as new appointments, so the new rules disapply R4.127(5A) for Para 83 CVLs beginning after October in relation to Administrations that began before October. Thus, Para 83 CVL Liquidators will not be able to rely on any fee approvals in the Administration. Instead, they will have to go through the new process.
However, R4.127(5A) kicks back in for Para 83 CVLs following Administrations that begin after 1 October. This is because, in these cases, the Administrator will have already gone through the new process in order to get fee approval, so it seems reasonable that the Liquidator can continue to rely on this approval. Of course, the Liquidator will be subject to the Administrator’s fee estimate, so if he wants to draw fees in excess of the estimate, he will need to go through the new process for approval.
It might seem a bit much to expect an Administrator to be able to estimate a subsequent Liquidator’s fees. For once, I think that the Insolvency Service has been sensible: the rules state that the Administrator’s estimates may include any subsequent Liquidator’s fees and expenses, not must – it’s good to see office holders left with a choice for a change! Thus, where the Administrator’s estimates have not provided anything for the Liquidator, an increase in the estimate is probably going to be one of his first tasks.
I wonder if an Administrator’s estimate might be devised so that, if he has not used up his estimate in full, then it can be treated as the Liquidator’s estimate..? I suspect the regulators might take a dim view of that…
Compulsory Liquidations: inconsistent treatment?
I didn’t spot this one, but it was passed to me by a Technical & Compliance Manager (thank you, D).
As explained above, the transitional provisions seem to be designed so that the critical date is the date of the IP’s appointment, rather than the more commonly-used insolvency event date.
It gets complicated, however, when one tries to define every way that an IP can be appointed. For compulsory liquidations, the transitional provisions cover appointments (post-1 Oct) by: creditors’ meeting (S139(4)); contributories’ meeting (139(3)); and the court following an administration or CVA (S140).
What about appointments by the Secretary of State (S137)?
I cannot see why these appointments should be treated differently. Does this mean that no Secretary of State appointments will be subject to the new rules? Or does it mean that all SoS appointments will be subject to them..?
I have asked the Insolvency Service for comments.
Of course, there are practical difficulties in devising fee and expenses estimates for each case. The Impact Assessment for the new rules (http://goo.gl/vCOsnS) state: “Based on informal discussions with IPs and internal analysis by the Insolvency Service it has been estimated that the costs of learning about the new requirements will be relatively moderate as in many cases IPs produce estimates of the work they will be undertaking for their own budgeting purposes. Therefore the industry has the pre existing infrastructure in place to produce estimates and so there will no additional set up costs for business. All the information that will be needed for the estimates is already available to IPs so there will be no additional costs of gathering information” (paragraph 34). What nonsense! Even if IPs do estimate fees at the start of a job, they are little more than finger-in-the-air estimates and are way less sophisticated than the new rules envisage.
The Insolvency Service followed up this nonsense with the suggestion that it would take IPs 1 hour to get their systems up to scratch for the changes! Personally, I feel that such a fantasy-based statement is an insult to my intelligence.
In relation to generating fee and expenses estimates, the Impact Assessment states: “The work is likely to be an administrative task extended from the existing practice to produce estimates for business planning so we believe the work is likely to be completed by support staff within practices. It is estimated that the task will take around 15 minutes per case” (paragraph 36). This is just so much nonsense!
Anyway, back to the practicalities…
The Insolvency Service has explained that it is working with the JIC to tackle “the key challenge… to present this information [the fees and expenses estimates] in a clear, concise format that the creditor, i.e. the end user, finds both useful and informative” (Dear IP 65, article 55). I guess we are talking here about a revised SIP9.
Given that it has taken the IS/JIC ten months (and counting) to complete a revised SIP16 following Teresa Graham’s report, how close to the 1 October deadline do you think we’ll get before we see a revised SIP9? I know that the SIP16 revision has been dependent on the pre-pack pool being set up, but I reckon it’s all going to get a bit tense towards early autumn.
The issue is: do we gamble now on what we think the regulators will want or do we sit and wait to see? The new rules require that time costs fee estimates specify:
“details of the work the insolvency practitioner and his staff propose to undertake… [and] the time the insolvency practitioner anticipates each part of that work will take”.
Is it a safe bet to assume that the regulators will expect a SIP9-style matrix, classifying work as Admin & Planning, Investigations, Realisation of Assets etc.? Will they also want the estimate to list, not only the total time costs per work category, but also the time costs per staff grade, i.e. the hours plus time costs? Will they also want a greater level of detail, say breaking down the Admin & Planning etc. categories into sub-categories, for cases where time costs are anticipated to exceed £50,000? Conversely, what level of detail will they expect for cases with time costs estimated at less than £10,000, given that at present SIP9 requires only the number of hours and average hourly rate to be disclosed for fee-reporting purposes? Finally, will these expectations be, as they are now, set out as a Suggested Format, or will there be required disclosure points?
Given that the rules refer to “each part of that work”, personally I would get cracking now to devise systems and models to produce fees estimates styled on the table in the SIP9 appendix. I might run some analyses of past cases to see if I could come up with some sensible tables for “typical” cases, maybe examine some outliers to see, for example, how much it costs to realise some difficult assets or pay dividends, depending on the class and number of creditors. Setting up such templates and systems to capture the key elements of each case is going to take time. We have less than six months.
Not quite so urgent, but just as systems-based, is the need to design mechanisms for monitoring fees estimates. It would be useful to know if the major software-providers are designing tools to compare fees estimates to fees taken – much like the bond adequacy review – and whether these tools can be used to identify cases where fees are approaching estimates.
And of course, the rules provide loads more work on creating and revising standard documents and checklists *sigh*!
Finally, an obvious practical difficulty will be ensuring that creditors are still sufficiently engaged some way down the insolvency process to put pen to paper and approve additional fees.
I know that the following points are nit-picky, but, as we’re talking about fees approval, I felt that they were important to get right.
When does remuneration arise..?
We’ve had drummed into us that “remuneration is charged when the work to which it relates is done” (R13.13(19)). This definition was introduced with the new progress reports so that IPs disclose time costs incurred, not just remuneration drawn.
But how does this definition fit with the new rules that state that “the remuneration must not exceed the total amount set out in the fees estimate without approval”? Does this mean that we need to ask creditors to approve an excess before the time costs are incurred, i.e. before the work is done? And what if the IP is prepared to write off the excess, does he still need to seek approval?
Yeah, I know, it’s pretty obvious what the intention of the rules is, but I asked the Insolvency Service anyway. Their lawyer’s view was that the “court would resolve any tension” between the rules by coming to the conclusion that the new rules make it “sufficiently clear that the office holder is permitted to incur additional fees above the level of the estimate, before securing further approval”, because the same rules state that a request for approval must specify the reasons why the office holder “had exceeded” (or is likely to exceed) the fees estimate. It’s the drawing down of additional fees that would be prohibited without approval, not the incurring of them. Fair enough.
What “creditors” should be asked in Para 52(1)(b) Administrations..?
I have drafted the article above on the basis of the Insolvency Service’s answer to my second question, although I have to say that I think they could have done a better job at drafting the rules on this one.
New R2.109AB(2) explains which party/parties the Administrator should approach for approval of fees in excess of the estimate. There are three choices, dependent on who fixed the fee basis in the first place:
“(a) where the creditors’ committee fixed the basis, to the committee;
“(b) where the creditors fixed the basis, to the creditors;
“(c) where the court fixed the basis, by application to the court”.
My question was: if a secured creditor alone fixed the basis, who should approve the excess? It can hardly be said that “the creditors” approved the basis. Also, given that the OFT study had concluded that secured creditors seem to control fees quite adequately, perhaps it was felt that there was no need to add another layer of control in these cases…
The Insolvency Service’s response was: “it would be for the secured/preferential creditors to approve if the para 52(1)(b) statement held good. We think the wording of the Rules is sufficiently clear in this regard”. Well, I’m glad I asked!