The new SIPs might be the RPBs’ worst-kept secret: they’re available on the ICAEW’s website, but the ICAEW has yet to announce their release; in its recent webinar advert, the IPA mentioned in passing that three revised SIPs are “due to be issued in the beginning of March”; whereas ICAS has already presented a (free) webinar on them.
And thank goodness ICAS has been upfront about them! While R3 stated that “the changes are not expected to be far reaching”, Jo and I think that they very well could be for IPs who still bill Category 2 disbursements.
In this blog, I take a look at the revised SIP9, which takes effect from 1 April 2021 in relation to all relevant cases, i.e. including existing cases. My recommended to-do list includes:
- Review whether your existing Category 2 disbursements recharges will be prohibited from 1 April and set up safeguards to avoid billing these from that date
- Revisit all documents that refer to Category 1 or 2 disbursements and change definitions to meet the new SIP9’s, including referring now to Category 1 and 2 “expenses”
- Ensure that fee proposal and/or progress report templates meet the enhanced disclosure requirements for:
- The use of associates or those with whom you have a professional or personal relationship that falls short of a legal association
- Sub-contracting work that could be done by you or your staff
- Explaining what you expect to be paid (not only what it should cost) and an indication of the likely return to creditors in all cases
- Making clear what direct costs are included in fixed/percentage fee bases
- For fees estimates, check that you calculate a blended rate correctly
- Don’t get too hung up on your MVL documentation, as MVLs are (almost) carved out of the new SIP9
You can access all the revised SIPs (for E&W) from https://www.icaew.com/regulation/insolvency/sips-regulations-and-guidance/statements-of-insolvency-practice/statements-of-insolvency-practice-sips-england
You can access ICAS’ webinar at http://ow.ly/tcGU50DKuCp
Changes to recharging costs to estates
Jungle drums have been rumbling for several years now on the topic of whether a cost can be recharged to an estate as an expense or whether it is an overhead that is not permitted to be recharged. This SIP9 goes some way to clarifying the distinction:
- Whereas the current SIP9 (I’ll call this the old SIP9 from here on) states that “basic overhead costs” are not permissible as disbursements, the new SIP9 widens the scope to “any overheads other than those absorbed in the charge out rates”.
- The new SIP9 no longer refers to Category 1 and 2 “disbursements”, but to Category 1 and 2 “expenses”. If you managed to avoid getting into a debate about this with an RPB monitor over the past few years, you may find this an odd and subtle change. The point is that a “disbursement” is an expense that is first paid by a party (e.g. the IP/firm) and only later recharged to the estate. The consequence of this change is that direct payments from an estate to an associate are now Category 2 expenses (whereas under the old SIP9, such a payment would be neither a Category 1 nor 2 disbursement, as it is not a disbursement at all). A more frustrating consequence is that lots of templates – fee proposal packs, disbursements policies, progress reports, Fees Guides – will also need changing to reflect the new terminology.
- The most important change is the new SIP9’s statement that:
“All payments should be directly attributable to the estate from which they are being made or sought”.
Is this the end of Category 2 disbursements?
What does “directly attributable” mean? Does this mean that you will no longer be able to be paid Category 2 disbursements on a roughly calculated basis, say, £x per creditor to cover stationery and photocopying? Or internal room hire of £x per meeting?
Here’s the odd thing: although only “directly attributable” costs can be passed on, the SIP still allows “shared or allocated payments”. An example of a shared cost that David Menzies of ICAS gave in his webinar was where an office holder hires an external conference room for physical meetings in relation to three connected insolvencies: this charge could be split up and passed on to the three cases… but as it is a shared cost, it would be a Category 2 expense… so it would need to be approved before being paid from the estate.
David Menzies helpfully suggested that, for a cost to be directly attributable, there needs to be a direct causal relationship between the cost and the case. He suggested asking yourself the question: would the cost have been incurred if the case did not exist? On this basis, it seems to me that photocopying and internal room hire charges could not be viewed as “shared costs”, as the firm would still incur the cost of the photocopier or premises rental whether or not the one case to which you are aiming to recharge the costs existed.
What is an “overhead”?
David’s own definition was that overheads are costs that are not directly attributable to an individual insolvency estate but which are incurred in support of insolvency appointments for the IP or are costs associated with other services that the IP/firm provides as part of their business.
So if the cost is incurred to support the administration of a case plus other aspects of the business, it is likely to be an overhead. Here are some other examples from ICAS’ webinar:
- Where an IP’s office space is used to store company records, the IP could not charge the estate for storage
- Where an external storage company charges, e.g., £x per box per quarter, this could be charged to an estate based on the number of boxes stored on that case
- Where an external storage company charges a global fee for the facility, which is used to store case files and office admin files, this is probably an overhead that could not be split up and charged to the estate
- Where a mailing company produces a monthly itemised bill, the items relevant to each case could be charged to the estate as a Category 1 expense
- Where a software provider charges on a per case basis, this could be considered an expense
- Where a firm pays a global fee for software, e.g. a Microsoft licence, this could not be split up across the cases
I have tried to reflect as closely as possible what was said on the ICAS webinar – and I do see the logic of these examples – but please note that the strict wording of the revised SIP9 does not lead unequivocally to these conclusions. We expect to see some additional guidance from the RPBs, which may help clearly define the boundaries explored by these examples.
How will this affect recharging?
Although the revised SIP comes into force on 1 April 2021, it does not relate only to new appointments from that date. Therefore, even if you have already obtained approval for Category 2 disbursements that will not be allowed under the revised SIP, you will not be able to draw payment for them from the estate after 1 April.
I suggest that you revisit all your current Category 2 disbursements practices and decide now how you will put safeguards in place to make sure that no “overheads” are inappropriately billed after 1 April.
Other Category 2 clarifications: Associates
The revised SIP9 makes it clearer that even the charges from parties with whom the IP/firm has no legal association may fall within the scope of Category 2 treatment. It states: “Where a reasonable and informed third party might consider there would be an association, payments should be treated as if they are being made to an associate”, i.e. they will need to be approved as a Category 2 expense.
But what is an “association”? In my response to the JIC consultation, I gave the example that, as an IPA member, I have “an association” with the IPA, so does this mean that I would treat the IPA as an associate (e.g. if I were to hire its boardroom for a creditors’ meeting)? David Menzies was helpful in his webinar: he suggested that the context here might be the Code of Ethics’ significant professional or personal relationship concept – if such a relationship were present (or might be perceived by a reasonable and informed third party to be present), then this would equate to an association for the purposes of SIP9.
The revised SIP9 adds to the required disclosure: now, office holders must disclose “the form and nature of any professional or personal relationships between the office holder and their associates”… presumably where it is proposed that the insolvent estate shall bear the associate’s fees/costs.
It’s not all extra burdens
I suspect that a big relief to many IPs will come in the form of a reduction in scope of SIP9. With effect from 1 April, SIP9 will no longer apply to MVLs… “unless those paying the fees require such disclosures”.
In the ICAS webinar, it was suggested that a prospective liquidator might ask the members upfront whether they want to receive such disclosures and keep evidence that they had been so asked and what their response is. But this isn’t in the SIP and personally I hope that this does not become the regulatory expectation for all MVLs. Quite frankly, if a party is paying your fees, I’m sure you will give them whatever information they so require irrespective of what a SIP does or does not say.
Sensibly, the new SIP9 clarifies that it does not reach to Moratoriums, although I’m not sure that this needed saying considering there isn’t really an “estate” in a Moratorium appointment, is there, there’s simply a “client”?
The small print
Here are the other most material changes in the revised SIP that I have seen:
- Proportionate payments
“All payments from an estate should be fair and reasonable and proportionate to the insolvency appointment” – how do you measure proportionality?
I often query IPs who instruct agents to deal with chattels that are only worth, say, £3,000 when they include agents’ costs of £3,000 (and in some cases, more!) in an expenses estimate. The IPs often respond that the agents are doing much more than simply realising chattels – will arguments like this fall foul of the proportionate test in future? Instructing solicitors is another minefield: hindsight sometimes makes such costs look disproportionate to what has been achieved.
- Consider who is approving your fees
“Payments should not be approved by any party with whom the office holder has a professional or personal relationship which gives rise to a conflict of interest”.
For example… a firm’s IPs are often appointed on Admins by a secured creditor and now you need your fees approved by that secured creditor. Or… you have paid or plan to pay the company’s accountants for helping on a Statement of Affairs, as you have done on a number of cases before, and those accountants are the only unsecured creditor to vote on your fees.
These relationships certainly give rise to self-interest threats, but do they overstep the SIP9 conflict of interests threshold? David Menzies suggested that the barrier is reached where there is an unacceptable conflict, not simply an ethical threat that can be managed to an acceptable level with safeguards.
- More disclosure on sub-contractors
The old SIP9 required disclosure where the office holder sub-contracts work that could otherwise by carried out by them or their staff. Now the disclosure must also include “what is being done and how much it will cost”.
- Not so much what it will cost, but what do you expect to be paid?
Whereas the old SIP9 included as a key issue of concern the anticipated cost of work proposed to be done, now the SIP includes the anticipated payment for the work. So, for example, while a fees estimate may set out that time costs of £30,000 are anticipated to be incurred, it seems you now need to disclose that, due to insufficient assets, you only expect to be paid £10,000. Also, where you are seeking (or have approved) a percentage basis, what payment will this likely equate to?
- Always provide an indication of the likely return to creditors
Further crystal ball-gazing now appears necessary: whereas the old SIP stated that “where it is practical to do so”, you need to provide “an indication of the likely return to creditors when seeking approval for the basis of” fees, this has been toughened to a requirement in all cases, whether or not it is practical to do so.
- What is included in your fixed/percentage fee?
Oddly, “where a set amount or a percentage basis is being used, an explanation should be provided of the direct costs included”. I would think it were more important to be clear about what direct costs are excluded. The new SIP continues: “The office holder should not seek to separately recover sums already included in a set amount or percentage basis fee and should be transparent in presenting any information”.
- How to calculate a blended rate
Helpfully, the SIP now explains what is meant by a “blended rate”: it “is calculated as the prospective average cost per hour for the appointment (or category of work in the appointment), based upon the estimated time to be expended by each grade of staff at their specific charge out rate”.
You might think this is an obvious definition. However, I have seen several fees estimates based on a “blended rate” calculated as simply the average of the charge-out rates, e.g. IP at £400 per hour and case-worker at £200 per hour, so the estimate is calculated at £300 per hour. This method generates an artificially inflated fees estimate where, as you would expect, the case-worker spends the majority of time on the case.
The method that the SIP now promotes is use of a blended rate that reflects the estimated time to be spent on the case. In the above example, if the IP is estimated to spend 10 hours and the case-worker 60 hours on the case, the blended rate would be c.£229 per hour, leading to a total fees estimate of £16,000, which is much more realistic than the £21,000 (i.e. 70 hours at £300) reflected by the earlier method.
Yep, there’s a new SIP7 and SIP3.2… and we expect a revision to SIP16 before the end of April. Never a dull moment!