Insolvency Oracle

Developments in UK insolvency by Michelle Butler

50 Things I Hate about the Rules – Part 2: Fees

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New Rules, Old Problems

Regrettably, most of the things I hate in this category are the Rules’ ambiguities, so I apologise in advance for failing to provide you with answers.  Nothing is as licence-threatening as fees failures, so it is particularly unfair that the Rules aren’t written in a way that helps us to comply.

In addition, most of these bug-bears were issues under the 1986 Rules.  What a missed opportunity the InsS had to fix them in 2017!  Jo and I had met with InsS staff and tried to attract their attention to many of these issues.  Their answer was that the 2016 Rules were not intended to change the status quo and that, as IPs had evidently coped with the 1986 Rules, surely they could continue to cope!

 

  1. Fee Approval at S100 Meetings

In December last year, out of the blue, I heard an ICAEW webinar raise questions about the validity of fee resolutions passed at S100 virtual meetings.  The speaker said that she was “flag[ging] the risks” only – and, to be fair, it did seem that she was highlighting that most of the risks lay in seeking fee approval via S100-concurrent decision procedures other than at a meeting (about which I have blogged before) – but it worried us enough to alert our clients to the voiced concern.

The speaker’s concern related to the absence of any Rule empowering the director/convener of a S100 meeting to propose a fee-related resolution.  Indeed, such an explicit power is absent, and the drafters of the 2016 Rules saw fit not to reproduce Rs4.51(1) and 4.53, which had set out the resolutions that could be passed at first liquidation meetings – thanks guys!  Presumably, they believed that it was unnecessary to define what resolutions could be proposed at meetings, because I cannot believe that the Insolvency Service wished S100 meetings to be handled any differently from S98s (other than the obvious shift from physical to virtual meetings), especially in light of the fact that they introduced the ability for proposed liquidators to issue fee-related information pre-appointment (R18.16(10)) – why would they do that if the fees could not be approved at the S100 meeting?

In light of the webinar speaker’s observations, if the Rules are considered inadequate to allow a director’s notice of S100 meeting to set out a proposed resolution on the liquidator’s fees, then it seems to me that the argument applies equally to resolutions seeking approval of a pre-CVL fee… and I suspect there may be hundreds of IPs who have drawn fees, either pre or post, on the basis of a S100 meeting resolution.

 

  1. Pre-CVL Fees

Over the last couple of years, RPB monitors have been taking issue with pre-CVL fees that have included payment for work that does not strictly meet the Rules’ definition, where those fees are paid for out of the liquidation estate after appointment.

I think it is generally accepted now that, ok, R6.7 does not provide that the costs relating to advising the company and dealing with the members’ resolutions can be paid from the estate after appointment.  In practice, most IPs have reacted to this by, in effect, doing these tasks for free or by seeking up-front fees from the company/directors.

But the Rules’ restriction seems unnecessarily restrictive: why should these tasks, especially dealing with the members’ winding-up resolution, not be paid for from the estate?  After all, it’s not as if a S100 CVL can be started without a members’ resolution.  Why couldn’t R6.7 mirror the pre-Administration costs’ definition, which refers to work carried on “with a view to” the company entering Administration?

 

  1. The 18-month Rule

The long-running debate over the 1986 Rule has continued, albeit with a subtle change.  The question has always been: if fees are not fixed by creditors in the first 18 months of an appointment, can they be fixed by creditors thereafter?

Firstly, in relation to ADM, CVL and MVL, those in the “no” camp point to R18.23(1), which states that, if the basis of fees is not fixed by creditors (etc.), then the office holder “must” apply to court for it to be fixed… and, as the office holder can only make such application within 18 months, then this time limit applies similarly to creditors’ approval, because it would be impossible to deal with the consequences of a creditors’ failure to fix fees after 18 months.

However, those in the “yes” camp (in which I sit) do not see this as an issue: true, if creditors do not approve fees in month 19, then the office holder cannot go to court, but why does this somehow invalidate a creditors’ decision to fix fees in month 19?  In my view, R18.23(1) is not offended, because the scenario does not arise.  The “must” in R18.23(1) is clearly not mandatory, because, for instance, surely no one is suggesting that an office holder who decides to vacate office without drawing any fees “must” first go to court to seek fee approval.  Similarly, R18.23(1) seems to be triggered as soon as an IP takes office: on Day 1, the basis of their fees is usually not fixed, but surely no one is suggesting that this means the IP “must” go to court.

I think that another reason for sitting in the “yes” camp goes to the heart of creditor engagement in insolvency processes: why should creditors lose the power to decide the basis of fees after 18 months?

Also compare the position for compulsory liquidators and trustees in bankruptcy: R18.22 means that, if the creditors do not approve the basis of fees within 18 months, the office holder is entitled to Schedule 11 scale rate fees.  So does this mean that the office holder has no choice but to rely on Scale Rate fees after 18 months?  I think (but I could be wrong) that, as R18.29(2)(e) specifically refers to fees “determined under R18.22”, this enables the office holder to seek a review of that fee basis after 18 months, provided there is “a material and substantial change in circumstances which were taken into account when fixing” the fees under R18.22 (which perhaps can be met, because the only factor taken into account in the statutory fixing of R18.22 fees was the creditors’ silence, which hopefully can be changed by proposing a new decision procedure).

Thus, in bankruptcies and compulsories, there seems to be a fairly simple way to seek creditors’ approval to decide on the basis of fees after 18 months, but the “no” camp does not think this works for other case types… but why as a matter of principle there should be this difference, I do not understand.

 

  1. Changing the Fee Basis… or Quantum..?

We all know that the Rules allow fees in excess of a time costs fees estimate to be approved.  But what do you do if you want creditors to revisit fees based on a set amount or percentage?  It would seem that the fixed/% equivalent of “exceeding the fee estimate” is at R18.29.  As mentioned above, this enables an office holder to ask creditors to “review” the fee basis where there is a material and substantial change.  However, it may not be as useful as it at first appears.

R18.29(1) states that the office holder “may request that the basis be changed”.  The bases are set out in R18.16(2), i.e. time costs, percentage and/or a set amount.  R18.29(1) does not state that the rate or amount of the fee may be changed.

But surely that’s what it means, doesn’t it?  Not necessarily.  Compare, for example, R18.25, which refers to an office holder asking “for an increase in the rate or amount of remuneration or a change in the basis”.  If R18.29 were intended to encompass also rate and amount changes, wouldn’t it have simply repeated this phrase?

Ok, so if we can’t use R18.29, then can we use any of the other Rules, e.g. R18.25?  There are a number of Rules providing for a variety of routes to amending the fee in a variety of situations… but none (except for the time costs excess Rule) deal with the most common scenario where the general body of creditors has approved the fee and you want to be able to ask the same body to approve a revised fee.

This does seem nonsensical, especially if you want to propose fees on a “milestone” fixed fee basis.  Surely you should simply be able to tell creditors, say, what you’re going to do for Year 1 and how much it will cost and then revert later regarding Year 2.  After all, isn’t that what the Oct-15 Rule changes were all about?

It may be for this reason that I understand some RPB monitors (and InsS staff) see no issue with using R18.29 to change the rate or amount of a fixed/% fee… but I wish the Rules would help us out!

 

  1. Excess Fee Requests

R18.30 sets out what must be done to seek approval for fees in excess of an approved fee estimate.  Well, sort of…  What I have trouble with is the vague “…and rules 18.16 to 18.23 apply as appropriate” (R18.30(2)).

For example, do you need to provide refreshed details of expenses to be incurred (R18.16(4)(b)), even though it would seem sensible to have listed this requirement in R18.30 along with the menu of other items listed?  It seems to me unlikely to have been the intention, as a refreshed list of expenses does not fit with R18.4(1)(e)(ii), which requires progress reports to relate back to the original expenses estimate.

And does R18.16(6) mean that the “excess fee” information needs to be issued to all creditors prior to the decision in the same way that the initial fees estimate was, even if there is a Committee?  (See Gripe 21 below.)

And trying to capture Rs18.22 and 18.23 with this vague reference seems to me particularly lazy, given that those Rules require fairly substantial distorting to get them to squeeze into an excess fee request scenario, if R18.22 has any application to excess fee requests at all.

 

  1. Who gets the information?

So yes: R18.16(6) requires the office holder to “deliver to the creditors the [fee-related information] before the determination of” the fee basis is fixed.  Who are “the creditors”?  Are they all the creditors or did the drafter mean: the creditors who have the responsibility under the Rules to decide on the fees?

Here are a couple of scenarios where it matters:

  1. Administrators’ Proposals contain a Para 52(1)(b) statement and so the fees are to be approved by the secured creditors… and perhaps also the prefs
  2. A Creditors’/Liquidation Committee is in operation

If the purpose of R18.16(6) was to enable all creditors who may be able to interject in the approval process to have the information, then I can understand why it may mean all creditors in scenario (a), because unsecured creditors may be able to form a Committee (although it seems to me that the non-prefs would need to requisition a decision procedure in order to form one) and then the Committee would take the decision away from the secureds/prefs.

However, what purpose is served by all creditors receiving the information where there is a Committee?  The time for creditors to express dissatisfaction over fees in this scenario is within 8 weeks of receiving a progress report, not before the Committee decides on the fees.

But, setting logical arguments aside, it seems that R18.16(6) requires all creditors to receive the information before the fee decision is made, whether or not they have any power over the decision.

 

  1. All secured creditors?

I had understood that the Enterprise Act’s design for an Administrator’s fee-approval was to ensure that the creditors whose recovery prospects were eaten away by the fees were the creditors who had the power to decide on the Administrator’s fees.

Clearly, a Committee’s veto power crushes that idea for a start, especially in Para 52(1)(b) cases.  Also, in those cases, I confess that I have struggled to understand why all secured creditors must approve the fees.  Where there are subordinate floating charge creditors with absolutely zero chance of seeing any recovery from the assets even if the Administrator were to work for free, why do they need to approve the fees?  And try getting those creditors to engage!

 

  1. What about paid creditors?

This question has been rumbling on for many years: if a creditor’s claim is discharged post-appointment, should they continue to be treated as a creditor?

I understand the general “yes” answer: a creditor is treated as someone with a debt as at the relevant date and a post-appointment payment does not change the fact that the creditor had a debt at the relevant date, so the creditor remains a creditor even if their claim is settled

In view of the apparent objective of the fee-approval process (and a great deal of case law), it does seem inappropriate to enable a “creditor” who no longer has an interest in the process to influence it.  In addition, I am not persuaded that the technical argument stacks up.

Firstly, let’s look at the Act’s definition of creditor for personal insolvencies: S383(1) defines a creditor as someone “to whom any of the bankruptcy debts is owed”, so this seems to apply only as long as the debt is owed, not after it has been settled.

It would be odd if a creditor were defined differently in corporate insolvency, but unfortunately we don’t have such a tidy definition.  There is a definition of “secured creditor” in S248, which also seems temporary: it defines them as a creditor “who holds in respect of his debt a security…”.  Thus, again, it seems to me that this criterion is only met as long as the security is held.

But, over the years, my conversations with various RPB and InsS people have led me to believe that, even if a creditor – especially a secured creditor in a Para 52(1)(b) Administration – is paid out in full post-appointment, IPs would do well to track down their approval for fees… just in case.  But also on the flip-side, I suspect that it would be frowned upon (if not seriously questioned) if an office holder relied on a creditor’s approval where they were not a creditor at the time of their decision.  You’re damned if you do, damned if you don’t.

 

  1. What about paid preferential creditors?

I know of one compliance manager (and I’m sure there are others) who strongly maintains that pref creditors must still be invited to vote on decisions put to pref creditors even when their pref elements have been paid in full.

In addition to the points made above, we have R15.11, which states in the table that creditors whose claims “have subsequently been paid in full” do not receive notice of decision procedures in Administrations.  You might think: ah, but usually pref creditors also have non-pref claims, so they won’t have been “paid in full”.  Ok, but R15.31(1)(a) states that creditors’ values for voting purposes in Administrations are their claims less any payments made to them after the Administration began.  I think it is generally accepted (although admittedly the Rules don’t actually say so) that, to determine a decision put to pref creditors, their value for voting purposes should be only their pref element… so, if prefs have been paid in full, their voting value would be nil… so how would you achieve a decision put to paid pref creditors?

But if you take it that the intention of Rs15.11 and 15.31(1)(a) was to eliminate the need to canvass paid pref creditors in Para 52(1)(b) Administrations (which is certainly how the InsS answered on their pre-Rules blog), it gets a bit tricky when looking at excess fee requests…

 

  1. What about paid pref creditors and excess fee requests?

R18.30(2)(b) states that excess fee requests must be directed to the class of creditors that originally fixed the fee basis.  For Para 52(1)(b) cases, this is varied by R18.33, which states that, if, at the time of the request, a non-prescribed part dividend is now likely to be paid, effectively the Para 52(1)(b) route is closed off so that unsecured creditors get to decide.

But what if you still think it is a Para 52(1)(b) case and the prefs have been paid in full?  It is impossible to follow R18.30(2)(b) and achieve a pref decision, isn’t it?

The moral of the story, I think, is to make sure that you don’t pay creditors in full until you have dealt with all your fee requests, which to be fair is what many Trustees in Bankruptcy have been accustomed to observing for years.

 

  1. Fee Bases for Para 83 Liquidators

R18.20(4) states that the fee basis fixed for the Administrator “is treated as having been fixed” for the Para 83 Liquidator, provided that they are the same person.  This seems fairly straightforward for fees fixed on time costs and it can work for percentage fees, but what about fees as a set amount?

Is it the case, as per Gripe 19, that the basis has been fixed as a set amount, but the quantum isn’t treated as having been fixed?  First, let me take the approach mentioned at Gripe 19 that I understand is fairly widely-held amongst regulator staff, which is that “basis” should be read as meaning the basis and the quantum.  This would lead to a conclusion that, say, creditors approved the Administrator’s fees at £50K all-in, then the subsequent Liquidator’s fees would also be fixed at another £50K.  This cannot be right, can it?

The alternative is that “basis” means basis, so the Liquidator’s fees would be fixed as a set amount (which they could always ask to be changed under R18.29), but the quantum of that set amount would not.  In this case, presumably there would be no problem in the liquidator reverting to creditors to fix the quantum of their set-amount fee.  This would be similar to the position of a liquidator on a time costs basis where the Administrator had not factored in any fee estimate for the liquidation: in my view, the liquidator effectively begins life with a time costs basis with a nil fee estimate, so the next step would be to ask creditors to approve an “excess” fee request.

 

  1. What to do if Creditors won’t Engage

Up and down the country, I understand that IPs are having problems extracting votes from creditors.  The consequence is that more and more applications are being made to court for fee approvals.  This should not be the direction of travel.

This problem cannot be put entirely at the new Rules’ door, but I think that the 2016 Rules have not helped.  The plethora of documents and forms that accompany a fees-related decision procedure must be seriously off-putting for creditors (after all, it’s off-putting for all of us to have to produce this stuff!).  Also, this world’s climate of making every second count does not encourage creditors to engage, especially if their prospects of recovery are nil or close to it.

Of course, not every case of silence leads to a court application.  Applications can be relatively costly animals and so where funds are thin on the ground, I’m seeing IPs simply foregoing all hope of a fee and deciding to Bona Vacantia small balances and close the case.

When the Oct-15 Rules were being considered, many people suggested a de minimis process for fees.  Much like the OR’s £6,000 fee, could there not simply be a modest flat fee for IP office holders that requires no creditor approval?  Most IPs would dance a jig if they could rely on a statutory fee of £6,000, like the OR can!  It wouldn’t even need to be £6,000 to help despatch a great deal of small-value insolvencies… and the costs of conducting the decision process could be saved.  We all know the work that an IP has to put in to administer even the simplest of cases, including D-reports, progress and final reporting, not to mention the host of regulatory work keeping records and conducting reviews.  If IPs cannot rely on being remunerated for this work in a large proportion of their cases without having to resort to court, then we will see more IPs leaving the profession.

 

Author: insolvencyoracle

In working life, I am a partner of the Compliance Alliance, providing compliance services to insolvency practitioners in the UK. In my blogging life, I remain pretty-much Insolvency Oracle, set up after leaving the IPA in 2012 on becoming free to express my personal opinions in public.

One thought on “50 Things I Hate about the Rules – Part 2: Fees

  1. Hi Michelle

    Loved, loved, loved your article. You absolutely echo my thoughts and the suggestion about the flat fee, a la OR, please make it so.

    You have my vote where do I sign….?

    Sent from Outlook

    ________________________________

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