Insolvency Oracle

Developments in UK insolvency by Michelle Butler

October Fees Rules: Draft in Haste, Repent at Leisure

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In my last blog, I set out a few questions that had been raised in the spring/summer R3 SPG Technical Reviews. Now that I’ve returned from my intriguing holiday in Russia, I’ll answer them.

I haven’t commented on the draft SIP9, as I shall be working on my consultation response. I also need to focus primarily on the Rules, as I’m presenting a webinar for the ICAEW on 9 September and at the R3 Regional event on 22 September. Maybe by then, we’ll have a final SIP9 that we can all work to (and then I can record a webinar for the Compliance Alliance 🙂 ). Is that too much to ask..?

 

When can/should a CVL Liquidator seek approval for his fees: (i) prior to being appointed by the shareholders; (ii) after the general meeting but before the S98 meeting (via a Centrebind); or (iii) after the S98 meeting?

This question has been covered at length by myself (http://goo.gl/9mrWl4), Gareth Limb (http://goo.gl/9LvB2U) and I’m sure many others, but as it was the most frequently-asked question – and probably affects a significant majority of IPs – I thought it was worth covering again.

The answer seems to be any of the above, but each comes with its own difficulties:

(i)    The difficulty here is that the Rules require the “liquidator” to circulate his fees estimate. I’ve heard more than one person within the Insolvency Service express the view that this is intended to encompass a fees estimate from the IP prior to his appointment as liquidator, but there has been nothing written down. I understand that a Dear IP is on its way, although there will still be an element of risk in following a Dear IP over the letter of the Rules (remember Minmar..?)

There was a rumour that the revised SIP9 would try to clarify the matter, but if the words, “an insolvency practitioner is not precluded from providing information within pre-appointment communications (such as when assisting directors in commencing an insolvency process)” (para 7, draft revised SIP9), are meant to take care of it, then I think they fall far short – and, as Gareth pointed out, a SIP cannot address a deficiency in legislation either.

(ii)    At the R3 Reviews, several expressed the view that a Centrebind can only be used when there are company assets at risk that require a liquidator to deal with them immediately. I have to say that I am not aware of any such restriction and I have not heard – at least via the IPA within the past 10 years – of any pressure to discourage IPs from engaging in Centrebinds. The fact that directors can appoint their choice of Administrator in short order, I think reduces the perception that it is somehow shady to get a non-creditors’ IP in office. Rather, I suspect that many IPs naturally avoid Centrebinds because they do not want to be appointed with only limited powers to deal with the company’s assets.

At first glance, Centrebind appears to have some value in the context of the Fees Rules, as it gives the liquidator a week or so to circulate his fees estimate before the S98 meeting but after his appointment by the members. However, what would the sequence of events be? Either the S98 notice would not be issued until after the members’ meeting (which would contravene SIP8 para 13) so that it can accompany the liquidator’s fees estimate, or the fees estimate would be sent separately, a few days’ after the S98 notice is sent. This latter sequence does not appear to be prohibited, but I would be surprised if it were the most attractive option from the regulators’ perspective, as I understand that the preference is that the fees estimate is sent along with the S98 notice and proxy form, not days later.

(iii)   There is an additional cost in convening a R4.54 general meeting of creditors after the S98 meeting so that the liquidator may issue his fees estimate. However, given the issues around the two alternatives, I cannot see why the regulators would protest. From the IP’s perspective, however, the effect of the liquidator being the chairman at a R4.54 meeting, rather than the director at the S98 meeting, is bound to increase the risk that there is no positive vote from creditors on the fees resolution. And of course, who wants to provide a fees estimate before they’re appointed? I appreciate that this was one of the ideas behind the Rules (job-tendering even being suggested), but in that case the Insolvency Service should have drafted the Rules correctly, shouldn’t they?!

 

To make life easier, you could switch from time costs to a fixed or percentage fee basis. However, if the response at the R3 Reviews is anything to go by, it does seem that IPs may be reluctant to start seeking resolutions on a fixed/percentage fee basis. In any event, this doesn’t solve the problem. Whilst it means that you won’t need to provide a “fees estimate”, you do still need to provide information on the work you propose to undertake and an expenses estimate. The draft SIP9 also adds to the list of information required to propose fixed/percentage fees, making it not quite the easy fix it originally appeared.

 

Would it be sufficient to provide a fees estimate to attendees of the S98 meeting? How else can an IP who takes the appointment from the floor of the S98 meeting deal with a fees resolution?

These have been pretty-much answered above, but I think the fact that they were asked demonstrates how we’re exploring the Fees Rules and realising that S98s will never be the same again. Dare I mention that the 2016 Rules only make matters a thousand times worse for S98s? For example, in future the Director’s Estimated Statement of Affairs will need to be circulated to all creditors with notice of the S98 “meeting”, which will mean wholesale changes to our S98 process.

Returning to 1 October, it will not be sufficient to circulate a fees estimate only to S98 meeting attendees, as the Rules state that “the liquidator must, prior to determination of which of the bases [of fees] are to be fixed, give [the estimate(s)] to each creditor of the company of whose claim and address the liquidator is aware…” Although the Rules do not state how long before “determination” of the fees basis the fees estimate needs to be circulated, I think this means it will be very difficult for an incoming IP to obtain a fees resolution at the S98 meeting. I suspect that this can only really be tackled by a subsequent R4.54 meeting.

 

What level of breakdown is needed to comply with the new rules’ requirement to provide the (time cost) fees estimate broken down by “each part of the work”? For example, is “asset realisation” sufficient, or does it need to be broken down into book debt collection, sale of business/assets, etc.?

The answer to this is not in the Rules and I understand that the Insolvency Service did not envisage a greater breakdown than the old SIP9 six categories (administration & planning, asset realisation, investigations, trading, creditors and other case-specific matters).

Neither do the Rules provide for a proportionate approach, such that a larger case may be expected to have a greater degree of breakdown than a small one. The Rules treat all cases the same and simply require fees estimates to specify, inter alia, “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”.

The draft revised SIP9 avoids being prescriptive, but is worded in such a way that I think it will be an easy step for the RPB monitors to assert SIP9 breaches if its “spirit” is not observed. The draft SIP states:

“Each part of an office holder’s activities will require different levels of expertise, and therefore related cost. It will generally assist the understanding of creditors and other interested parties to divide the office holder’s explanations into areas such as:

  • Statutory compliance
  • Asset realisation
  • Distribution
  • Investigations

“These are examples of common activities and not an exhaustive list. Alternative or further sub-divisions may be appropriate, depending on the nature and complexity of the case and the bases of remuneration sought and/or approved. It is unlikely that the same divisions will be appropriate in all cases and an office holder should consider what divisions are likely to be appropriate and proportionate in the circumstances of each case. An office holder should endeavour to use consistent divisions throughout the duration of the case. The use of additional categories or further division may become necessary where a task was not foreseen at the commencement of the appointment.”

Thus, it seems that, generally, “asset realisation” is one “part of the work” and will not usually need to be broken down into sub-divisions.

 

Given that the new rules require the (time cost) fees estimate to be broken down by “each part of the work”, does the IP need to revert to creditors if the time costs are exceeded for one part of the work, but the total estimate is not exceeded?

There seem to be some differences of opinion on this question. Personally, I believe that the Rules are very clear. They state that “the [office-holder’s] remuneration must not exceed the total amount set out in the fees estimate without approval”. The Rules require no comparison of the fees estimate breakdown in reports and it seems that, once the fees estimate has been approved, the breakdown has no further relevance (although, when seeking approval for exceeding the estimate, a comparison may come in handy in order to explain the reasons for the excess and what additional work has proven necessary).

The draft SIP9 states that creditors/other interested parties will commonly be concerned with “the actual costs of the work, including any expenses incurred in connection with it, as against any estimate provided” and that the IP should report “in a way which facilitates clarity of understanding of these key issues”. I guess you can still take these words either way: does it require only a comparison of the total costs incurred against the fees estimate as a single figure? Or should a comparison be made of “each part” of the fees estimate against the actual costs incurred in each of those categories? Keeping in mind what creditors want to know (if anything!), I would argue that, if it appears that the original fees estimate will not be exceeded, then creditors are unlikely to be interested in seeing a comparison of each category.

However, the speaker’s answer at an R3 Review worried me. Although he may have been answering the question on the hoof, he indicated that there was an expectation that creditors would be asked to approve an increased fees estimate even where only one of the work categories was going to be exceeded, but where the original fees estimate in total was not under threat of being exceeded. I really cannot see that this is required by the Rules – and it is not hinted at in the draft SIP9 – and I struggle to see how an IP might be justified in incurring additional costs in seeking creditors’ approval where it is clearly not required under statute.

 

Can a (time cost) fees estimate provide a range of likely costs or does it need to be a single figure? If the latter, how should IPs estimate, for example, the costs of realising the interest in a bankrupt’s property at an early stage of the case?

The Fees Rules do not allow a range approach. The fees estimate acts as a simple cap. The draft SIP9 reinforces this message: fees estimates “may not be presented on the basis of alternative scenarios and/or provide a range of estimated charges”.

I think that Dear IP 65 attempted to answer the second question by referring to “milestone” fees estimates. This idea was reinforced at the R3 Reviews. When dealing with something like realising interest in a home, where a straightforward deal might be achieved quickly or the matter could run and run, it seems that the expectation is that the Trustee would estimate the costs for establishing a strategy and then revert to creditors if it became clear that a court application would be necessary.

I do wonder how practical this is, especially when the Rules require the expenses estimate at the initial approval stage to be the total expenses anticipated for the case. Thus, the Trustee needs to estimate his third party costs right at the start; the Rules do not provide a similar “milestone” approach for expenses estimates.

True, the Rules also do not require an expenses estimate to be approved, either up front or if it looks like it will be exceeded, but it does not help answer the question of how to present a Day One expenses estimate: should the Trustee include the likely costs of applications for possession and sales orders, especially if his fees estimate only reflects “milestone” costs not including the time costs of dealing with a court application scenario? But if he omits the likely legal costs, how transparent is the estimate and is it even compliant with the Rules?

 

What consequences does the expenses estimate have for the future administration of the case?

Finally, a bit of good news: the office holder is not constrained by the expenses estimate. If he needs to incur additional expenses, he can do so without creditor approval. The draft SIP9 seems to treat Category 2 disbursements in this way too.

Progress reports will need to include reference to whether the original expenses (and fees) estimate remains sound. If the expenses incurred/anticipated are likely to exceed (or have exceeded) the original expenses estimate, the reasons for that excess need to be included in the next – and seemingly all subsequent – progress reports (which could get a bit repetitive!). There is no requirement, however, to provide a revised estimate.

 

Can an IP stop working on a case if creditors vote against an exceeding of the fees estimate?

The R3 Review speaker’s answer was: no. The IP would need to continue with his work and, if he wanted any more fees, then he would need to use the statutory remedies such as applying to court.

When the Insolvency Service’s fees consultation was ongoing a year or so ago, I remember having a conversation with some Insolvency Service staff on this question. Their view was that IPs should not be expected to continue to work if they were not comfortable they would be paid for it.

Personally, I think both views have merit… depending on the circumstances. Clearly, an office holder has work to do in concluding a case and the Rules do not provide failure to be paid as a reason for resignation. However, I do struggle to see how an IP can be forced to take “non-statutory” steps if the creditors have not supported a request by the office holder to be paid for the work.

The Insolvency Service’s “milestone” view of the Rules seems to support the idea that an office holder can down tools. The original fees estimate needs to detail “the work the insolvency practitioner and his staff propose to undertake”, so in a milestone case the IP might propose, say, to chase the easy book debts as stage one. When things get a bit tough and the IP needs to consider taking stronger measures to squeeze out a few more pounds, perhaps this is when he proposes stage two along with a request for approval of “excess” fees. If the creditors reject this proposal, might the IP be justified in moving to close the case? Or is he required by statute to collect in the company’s assets regardless?

Wouldn’t it be correct to give creditors a choice: either I bring this to an end now and distribute what balance I have or I spend some/all of that money in pursuing an uncertain/difficult asset? Doesn’t SIP2 lead us in that direction already?

Of course, it would be a harder sell if the IP were to say: erm, the RoT claims have proven to be bigger and tougher than I’d originally contemplated, so I’m going to have to spend more of the pot resolving them, is that ok?

With these kinds of questions looming, is it any wonder that the expectation is that fees estimates will tend to be drafted on a worst-case scenario basis? Personally, I don’t see that anything else is practical.

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