Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The Kempson Review of IP Fees – a case of Aussie Rules?

5436 Sydney

Whilst this atypical British weather may have brought out the Aussie in many of us, as we settle down to sipping a stubby over the barbie, Professor Kempson seems to be gazing at the Southern Cross a little more completely.

Kempson’s report to the Insolvency Service was tagged quite unceremoniously to the foot of the page, http://www.bis.gov.uk/insolvency/news/news-stories/2013/Jul/transparency-and-trust, which headines Mr Cables’ Transparency & Trust Paper. Her report even had to follow the uninspiring terms of reference of the pre-pack review and so here I will follow the antipodean theme and blog about the bottom item of that press release first.

I’ll also start from the back of Kempson’s report and summarise her recommendations, uncontaminated by any personal opinion (for the moment):

• Consideration of the potential for limited competitive tendering (section 6.1.1)
• A radical revision or replacement of SIP9 (section 6.1.2)
• Consideration of the Australian approach of providing a costs estimate at the outset of the case with an agreed cap on fees (section 6.1.2)
• The creation and adoption of a Code on the lines of the Insolvency Practitioners Association of Australia Code of Professional Practice (section 6.1.2)
• Some contextual information from an independent body to help creditors assess the reasonableness of the remuneration and disbursements (section 6.1.2)
• Greater oversight exercised by the Crown creditors, HMRC, RPS and PPF, working together (section 6.1.3)
• Consideration of Austria’s model of creditor protection associations acting on creditors’ committees (section 6.1.3)
• Reconsideration of the circumstances in which creditors’ meetings need not be held in Administrations (section 6.1.3)
• Exploration of non-time cost bases or a mixture of bases for fees (section 6.1.4)
• Increasing the debt threshold for bankruptcy petitions (section 6.1.5)
• Extending S273 to creditors’ petitions (section 6.1.5)
• Provision of information (e.g. Insolvency Service booklet) to debtors regarding the likely costs of bankruptcy (section 6.1.5)
• Provision of generic information (e.g. Insolvency Service booklet) to directors subject to personal guarantees as well as case-specific information, e.g. by treating them on a par with creditors (section 6.1.5)
• A single regulator, perhaps the Financial Conduct Authority, for IPs (section 6.1.6)
• A simple low-cost mediation and adjudication service for disputes about low-level fees, perhaps by means of the Financial Ombudsman Service (section 6.1.7)
• Alternatively, some form of independent oversight of fees, such as that used in Scotland via court reporters and the AiB (section 6.1.8)

Charge-out rates – a surprisingly positive outcome!

Given the “how much?!” reaction often resulting from a disclosure of charge-out rates, I was ready to wince at this section, but actually I think the insolvency profession comes out of it fairly well.

The report details the charge-out rates gathered via the IP survey (which was responded to by 253 IPs):

Partner/Director: average £366; range £212-£800
Manager: average £253; range £100-460
Other senior staff: average £182; range £75-445
Assistants/support: average £103; range £25-260

Encouragingly, Kempson reports that these charge-out levels “are not, however, unusual in the accountancy and legal professions to which most IPs belong” (section 3.1). From my experience, I’d also suggest that the firms that charge the top end for partners/directors usually charge junior staff at the lower end and vice versa, i.e. I doubt that any firm charges £260 for juniors and £800 for partners/directors.

Professor Kempson also acknowledges that these “headline rates” are not always charged because IPs normally agree lower rates in order to sit on banks’ panels and, in other cases, the time costs are not recovered in full due to lack of realisations. Setting aside panel cases, Kempson suggests that fees were below headline rates “in about a half of cases, including: the great majority of compulsory liquidations, about two thirds of administrations; half of creditors’ voluntary liquidations and a third of personal bankruptcy cases” (section 3.2). Putting those two observations together, is it arguable, therefore, that IPs provide a far better value for money service than others in the accountancy and legal professions?

Panel Discounts – not so great

The report states that, at appointment stage, secured creditors negotiate discounts of between 10% and 40% on IPs’ headline rates and that some banks may achieve a further discount by entertaining tenders. “The implicit sanction underpinning all negotiations was to remove a firm from the panel. None of the banks interviewed could remember a firm choosing to leave their panel because the appointments they received were un-remunerative. From this they surmised that (individual cases aside) work was being done on a lower profit margin rather than a loss” (section 4.1.1).

Kempson does not suggest it, but I wonder if some might conclude that, notwithstanding the comments made above about charge-out rates, this indicates that IPs’ headline rates could drop by 10-40% for all cases. Personally, I do wonder if banks’ pressuring for discounts from panel firms could be un-remunerative in some cases, but that firms feel locked in to the process, unable to feed hungry mouths from the infrequent non-panel work, and perhaps there is an element of cross-subsidising going on. If Kempson had asked the question, not whether firms chose to leave a panel, but whether any chose not to re-tender when the panel was up for renewal, I wonder if she would have received a different answer.

Seedy Market?

To illustrate the apparent clout of bank panels, the report describes a service “that is marketed to IPs, offering to buy out the debts of secured creditors, thereby ensuring that an IP retains an appointment and giving them greater control over the fees that they can charge” (section 4.1.1).

Is it just me or is there something ethically questionable about an IP seeking to secure his/her appointment in this manner? Presumably someone is losing out and I’m not talking about the estate just by reason of the possibly higher charge-out rates that may have not been discounted to the degree that the bank would have managed with a panel IP. Presumably there’s an upside for the newly-introduced secured creditor? How do their interest/arrangement/termination charges compare to the original lender’s? Is the insolvent estate being hit with an increased liability from this direction? And why… because an IP wanted to secure the appointment..?

Is the problem simply creditor apathy?

Reading Kempson’s report did give me an insight – a more expansive one than I’ve read anywhere else – into an unsecured creditor’s predicament. They don’t come across insolvencies very often, so have little understanding of what is involved in the different insolvency processes (so maybe I shouldn’t get twitchy over the phrase “problems when administrations fail and a liquidation ensues”!). How can they judge whether hourly rates or the time charged are reasonable? They receive enormous progress reports that give them so much useless information (I’m pleased that one IP’s comment made it to print: “… For example saying that the prescribed part doesn’t apply. Well, if it doesn’t apply, what’s the point in confusing everybody in mentioning it?” (section 4.2.3)) and they struggle to extract from reports a clear picture of what’s gone on. Many believe that they’re a small fry in a big pond of creditors, so they’re sceptical that their vote will swing anything, and they have no contact with other creditors, so feel no solidarity. Personally, I used to think that creditors’ lack of engagement was an inevitable decision not to throw good money after bad, but this report has reminded me that their position is a consequence of far more obstacles than that.

Progress Reports – what progress?

The report majored on the apparent failure of many progress reports to inform creditors. Comments from contributors include: “Unfortunately the nature of the fee-approval regime can lead to compliance-driven reports, generated from templates by junior-level staff, which primarily focus on ensuring that all of the requirements of the statute and regulation are addressed in a somewhat tick-box-like manner. This very often means that the key argument is omitted or lost in the volume, which in turn make it difficult for us to make the objective assessment that is required of us” and from the author herself: “there were reports that clearly followed the requirements of the regulations and practice notes (including SIP9 relating to fees) slavishly and often had large amounts of text copied verbatim from previous reports. Consequently, they seemed formulaic and not a genuine attempt to communicate to creditors what they might want to know, including how the case was progressing and what work had been done, with what result and at what cost” (section 4.2.3).

To what was the unhelpful structure of progress reports attributed? Kempson highlighted the 2010 Rule changes (hear hear!) but she also mentions that IPs “criticised SIP9 as being too prescriptive”. I find this personally frustrating, because long ago I was persuaded of the value – and appropriateness – of principles-based SIPs. During my time attending meetings of the Joint Insolvency Committee and helping SIPs struggle through the creation, revision, consultation, and adoption process, I longed to see SIPs emerge as clearly-defined documents promoting laudable principles, respecting IPs to exercise their professional skills and judgment to do their job and not leaving IPs at the mercy of risk-averse box-tickers. I would be one of the first to acknowledge that even the most recent SIPs have not met this ideal of mine, but SIP9?! Personally, I feel that, particularly considering its sensitive and complex subject matter – fees – it is one of the least prescriptive SIPs we have. I believe that a fundamental problem with SIP9, however, is the Appendix: so many people – some IPs, compliance people, and RPB monitors – so frequently forget that it is a “Suggested Format”. Most of us create these pointless reports that churn out time cost matrices with little explanation or thought, produce pages of soporific script explaining the tasks of junior administrators… because we think that’s what SIP9 requires of us and because we think that this is what we’ll be strung up for the next time the inspector calls. And well it might be, but why not produce progress reports that meet the key principle of SIP9 – provide “an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed [and so that creditors are] able to understand whether the remuneration charged is reasonable in the circumstances of the case” (SIP9 paragraph 14)? And if an RPB monitor or compliance person points out that you’ve not met an element of the Appendix, ask them in what way they feel that you’ve breached SIP9. Alternatively, let’s do it the Kempson way: leave the Insolvency Service to come up with a Code on how to do it!

I do wonder, however, how much it would cost to craft the perfect progress report. The comment above highlighted that reports might be produced by junior staff working to a template, but isn’t that to be expected? Whilst my personal opinion is that reports are much better produced as a free text story told by someone with all-round knowledge of the case (that’s how I used to produce them in “my day”), I recognise the desire to sausage-machine as much of the work as possible and this is the best chance of keeping costs down, which is what creditors want, right? Therefore, apart from removing some of the (statute or SIP-inspired) rubbish in reports, I am not sure that the tide can be moved successfully to more reader-friendly and useful reporting.

Inconsistent monitoring?

The report states: “During 2012, visits made by RPBs identified 12.0 compliance issues relating to fees per 100 IPs. But there was a very wide variation between RPBs indeed; ranging from 0 to 44 instances per 100 IPs. Allowing for the differences in the numbers of IPs regulated by different RPBs, this suggests that there is a big variation in the rigour with which RPBs assess compliance, since it is implausible that there is that level of variation in the actual compliance of the firms they regulate” (section 4.5). I also find this quite implausible, but, having dealt with most of the RPB monitors and having attended their regular meetings to discuss monitoring issues in an effort to achieve consistency, I do struggle with Kempson’s explanation for the variation.

Although I can offer no alternative explanation, I would point to the results on SIP9 monitoring disclosed in the Insolvency Service’s 2009 Regulatory Report, which presented quite a different picture. In that year, the RPBs/IS reported an average of 10.6 SIP9 breaches per 100 IPs – interestingly close to Kempson’s 2012 figure of 12.0, particularly considering SIP9 breaches are not exactly equivalent to compliance issues relating to fees. However, the variation was a lot less – from 1.3 to 18 breaches per 100 IPs (and the next lowest-“ranking” RPB recorded 8.1). Of course, I have ignored the one RPB that recorded no SIP9 breaches in 2009, but that was probably only because that RPB had conducted no monitoring visits that year (and neither did it in 2012). Kempson similarly excluded that RPB from her calculations, didn’t she..?

Somewhat predictably, Kempson draws the conclusion (in section 6.1.6) that there is a case for fewer regulators, perhaps even one. She suggests setting a minimum threshold of the number of IPs that a body must regulate (which might at least lose the RPB that reports one monitoring visit only every three years… how can that even work for the RPB, I ask myself). In drawing a comparison with Australia, she suggests the sole RPB could be the Financial Conduct Authority – hmm…

Voluntary Arrangements: the exception?

“We have seen that the existing controls work well for secured creditors involved in larger corporate insolvencies. But they do not work as intended for unsecured creditors involved in corporate insolvencies, and this is particularly the case for small unsecured creditors with limited or no prior experience of insolvency. The exception to this is successful company voluntary arrangements” (section 5). Why does Kempson believe that the controls work in CVAs? She seems to put some weight to the fact that the requisite majority is 75% for CVAs, but she also acknowledges that unsecured creditors are incentivised to participate where there is the expectation of a dividend. If she truly believes the situation is different for CVAs – although I saw no real evidence for this in the report – then wouldn’t there be value in examining why that is? If it is down to the fact that creditors are anticipating a dividend, then there’s nothing much IPs can do to improve the situation across cases in general. But perhaps there are other reasons for it: I suspect that IPs charge up far fewer hours administering CVAs given the relative absence of statutory provisions controlling the process. I also suspect that CVA progress reports are more punchy, as they are not so bogged down by the Rules.

But I don’t think anyone would argue with Kempson’s observation that IVAs are a completely different kettle of fish and that certain creditors have acted aggressively to restrict fees in IVAs to the extent that, as IPs told Kempson, they “frequently found this work unremunerative” (section 4.2.3).

Disadvantages of Time Costs

I found this paragraph interesting: “several authoritative contributors said that, when challenged either by creditors or in the courts, IPs seldom provide an explanation of their hourly rates by reference to objective criteria, such [as] details of the overheads included and the amount they account for, and the proportion of time worked by an IP that is chargeable to cases. Instead they generally justify their fees by claiming that they are the ‘market rate’ for IPs and other professionals. Reference is invariably made to the fact that the case concerned was complex, involved a high level of risk and that the level of claims against the estate was high. More than one of the people commenting on this said that the complexity of cases was over-stated and they were rarely told that a case was a fairly standard one, but that there were things that could have been done better or more efficiently or the realisations ought to have been higher so perhaps a reduction in fees was appropriate. They believed that, by adopting this approach, IPs undermined the confidence others have in them” (section 5.2.1). It’s a shame, however, that no mention has been made of the instances – and I know that they do occur – of IPs who unilaterally accept to write-off some of their time costs so that they can pay a dividend on a case.

But this quote hints at the key disadvantage, I think, of time costs: there is a risk that it rewards inefficiency.

Kempson first suggests moving to a percentage basis as a presumed method of setting remuneration, although she acknowledges that this wouldn’t help creditors as they would still face the difficulty on knowing what a reasonable percentage looked like. She then suggests a “more promising approach” is the rarely-used mixed bases for fees that were introduced by the 2010 Rules (section 6.1.4). She states that this should be “explored further, for example fixed fees for statutory duties; a percentage of realisations for asset realisations (with a statutory sliding scale as described above); perhaps retaining time cost for investigations”. Whilst I agree that different fee bases certainly do have the potential to deliver better outcomes – I believe that it can incentivise IPs to work efficiently and effectively whilst ensuring that they still get paid for doing the necessary work that doesn’t generate realisations – it does make me wonder: if creditors already feel confused..!

Lessons from Down Under?

Kempson is clearly a fan of the Australian regime. She recommends the scrapping or radical revision of SIP9 in favour of something akin to the IPAA’s Code of Professional Practice (http://www.ipaa.com.au/docs/about-us-documents/copp-2nd-ed-18-1-11.pdf?sfvrsn=2). At first glance (I confess I have done no more than that), it doesn’t look to have much more content than SIP9, but it does seem more explanatory, more non-IP-friendly, and the fact that Kempson clearly rates it over SIP9 suggests to me that, at the very least, perhaps we could produce something like it that is targeted at the unsecured creditor audience.

She also refers to a Remuneration Request Approval Report template sheet (accessible from: http://www.ipaa.com.au/about-us/ipa-publications/code-of-professional-practice), which she acknowledges “is more detailed than SIP9” (section 6.1.2) – she’s not kidding! To me, it looks just like the SIP9 Appendix with more detailed breakdowns of every key time category, probably something akin to the information IPs provide on a >£50,000 case.

Finally, she refers to a “helpful information sheet” provided by the Australian regulator (ASIC) (http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Approving_fees_guide_for_creditors.pdf/$file/Approving_fees_guide_for_creditors.pdf), which looks much like R3’s Creditors’ Guides to Fees, although again the content does perhaps come over more readable.

Thus, whilst I can see some value in revisiting the UK documents (or producing different ones) so that they are more useful to non-IPs (although will anyone read them?), I am not sure that I see much in the argument that moving to an Aussie Code will change radically how IPs report fees matters. I am also dismayed at Kempson’s suggestion that “a detailed Code of this kind would be very difficult to compile by committee and would require a single body, almost certainly the Insolvency Service in consultation with the insolvency profession, to do it” (section 6.1.2). Wasn’t the Service behind the 2010 Rules on the content of progress reports..?

After singing Australia’s praises, she admits: “even with the additional information disclosure described above, creditor engagement remains a problem in Australia” (section 6.1.3) – hmm… so what exactly is the value of the Australian way..?

Other ideas for creditor engagement

Kempson recommends consideration of the Austrian model of creditor protection associations (section 6.1.3), which is a wild one and not a quick fix – there must be an easier way? I was interested to note that, even though creditors are paid to sit on committees in Germany, committees are only formed on 15-20% of cases – so paying creditors doesn’t work either…

The report also seems to swing in the opposite direction to the Red Tape Challenge in suggesting that the criteria for avoiding creditors’ meetings in Administrations should be reconsidered. Kempson highlights the situation where the secured creditor is paid in full yet no creditors’ meeting is held either because there are insufficient funds to pay a dividend or because the Administrator did not anticipate there would be sufficient funds at the Proposals stage. As I mentioned in an earlier post (http://wp.me/p2FU2Z-3p), in my view these Rules just do not work – something for the Insolvency Rules Committee…

However, raising these circumstances makes me think: whilst endeavours to improve creditor engagement are admirable, could we not all agree that there are some cases that are just not worth anyone getting excited about? There must be so many cases with negligible assets that barely cover the Category 1 costs plus a bit for the IP for discharging his/her statutory duties – is it really sensible to try to drag creditors kicking and screaming to show an interest in fixing, monitoring and reviewing the IP’s fees in such a case? Whatever measures are introduced, could they not restrict application to such low-value cases?

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The fact that the release of this report seems to have made fewer ripples than the Government’s announcement of its plan to conduct the fees review makes me wonder if anyone is really listening..? However, I’m sure we all know what will happen when the next high profile case hits the headlines, when the tabloids report the apparent eye-watering sums paid to the IPs and the corresponding meagre p in the £ return to creditors. Then there will be a revived call for fees to be curbed somehow.

In the meantime, we await the Government’s response to Professor Kempson’s report, expected “later this year”.

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Administration Tangles

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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.