Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The Regulators present a unified front on fees

 

In an unprecedented step, the IPA and the ICAEW have issued largely consistent articles on fees, SIP9 and reporting. I think some of the points are well worth repeating, not only because in the past few months, I’ve seen more IPs get into a fix over fees than anything else, the new rules having simply compounded the complexities, but also because the articles contain some important new messages.

In this post, I explore how you can make your fee proposals bullet-proof:

  • What pre-administration work is an allowable expense?
  • What pre-administration costs detail is often missing?
  • What pre-CVL work is allowable as an expense?
  • What Rules/SIP9 detail is commonly missing from fee proposals?
  • How do the monitors view Rules/SIP9 omissions?
  • What problems can arise when using percentage or mixed basis fees?

The articles can be found at:

The effort seems to have originated from a well-received presentation at the autumn’s R3 SPG Forum, given by the ICAEW’s Manager, Alison Morgan (nee Timperley) and the IPA’s Senior Monitoring Manager, Shelley Bullman.

As the ICAEW and the IPA monitor c.90% of all appointment-taking IPs, I think this is a fantastic demonstration of how the RPBs can get out to us useful guidance. Of course, such articles do not have the regulatory clout of SIPs or statute (see below). However, I believe it is an essential part of the RPBs’ role to reach out to members in this way in written form. Although roadshow presentations are valuable, they can only reach the ears of a proportion of those in need and the messages soon settle into a foggy memory (if you’re lucky!).

  • Do the articles represent the RPBs’ views?

The IPA article ends with a disclaimer that “IPA staff responses” cannot fetter the determinations of the IPA’s committees and the ICAEW article is clearly authored by Alison Morgan, rather than being something that can strictly be relied upon as representing the ICAEW’s views (for the sake of simplicity, I have referred throughout to the articles as written by “the monitors”).

That’s a shame, but I know only so well how extraordinarily troublesome it is to push anything through the impenetrable doors of an RPB – that’s why SIPs seem to emerge so often long after the horse has bolted… and I suspect why we are still waiting for an insolvency appendix to the new CCAB MLR guidance. However, at a time when the Insolvency Service’s mind is beginning to contemplate again the question of a single regulator, issuing prompt and authoritative guidance serves the RPBs’ purposes, not only ours.

 

Pre-Administration Costs

Over the past few years, I’ve seen an evolving approach from the RPBs. In the early days, the focus was on the process of getting pre-administration costs approved. The statutory requirement for pre-administration costs to be approved by a resolution separate from the Proposals has taken a while to sink in… and the fact that the two articles repeat this requirement suggests that it is still being overlooked on occasion.

Then, the focus turned to the fact that it was, not only pre-administration fees that required approval, but also other costs. I still see cases where IPs only seek approval of their own costs, apparently not recognising that, if the Administration estate is going to be paying, say, agents’ or solicitors’ costs incurred pre-administration, these also need to go through the approval process.

  • What pre-administration work is an allowable expense?

Now, it seems that the monitors’ focus has returned to the IP’s own fees. Their attention seems fixed on the definition of pre-administration costs being (R3.1):

“fees charged, and expenses incurred by the administrator, or another person qualified to act as an insolvency practitioner in relation to the company, before the company entered administration but with a view to it doing so.”

The IPA article states that this “would exclude any insolvency or other advice that may or may not lead directly to the administration appointment” and the ICAEW article states that it “would exclude any general insolvency or other advice”.

I do wonder at the fuzzy edges: if a secured creditor who is hovering over the administration red button asks an IP to speak with a director, doesn’t the IP’s meeting with the director fit the description? Or if an IP seeks the advice of an agent or solicitor about what might happen if an administration were pursued, wouldn’t this advice count? But nevertheless, the monitors do have a point. If a firm were originally instructed to conduct an IBR, this work would not appear to fall into the definition of pre-administration costs. Also, if an IP originally took steps to help a company into liquidation but then the QFCH decided to step in with an Administration, the pre-liquidation costs could not be paid from the Administration estate.

  • What pre-administration costs detail is often missing?

As mentioned above, the monitors remind us that pre-administration costs require a decision separate from any approval of the Proposals – there is no wriggle-room on this point and deemed consent will not work. The monitors also list other details required by statute that are sometimes missing, of which these are my own bugbears:

  • R3.35(10): a statement that the payment of any unpaid pre-administration costs as an expense of the Administration is subject to approval under R3.52 and is not part of the Proposals subject to approval under Para 53 of Schedule B1
  • R3.36(a): details of any agreement about pre-administration fees and/or expenses, including the parties to the agreement and the date of the agreement
  • R3.36(b): details of the work done
  • R3.36(c): an explanation of why the work was done before the company entered administration and how it had been intended to further the achievement of an Administration objective
  • R3.36(d) makes clear that details of paid pre-administration costs, as well as any that we don’t envisage paying from the Administration estate, should be provided
  • R3.36(e): the identities of anyone who has made a payment in respect of the pre-administration costs and which type(s) of costs they discharged
  • R3.36(g) although it will be a statement of the obvious if you have provided the above, you also need to detail the balance of unpaid costs (per category)

 

Pre-CVL Costs

Another example of an evolving approach relates to the scope of pre-CVL costs allowable for payment from the liquidation estate. Again, over recent years we have seen the RPB monitors get tougher on the fact that the rules (old and new) do not provide that the IP’s costs of advising the company can be charged to the liquidation estate. This has been repeated in the recent articles, but the IPA’s article chips away further still.

  • A new category of pre-CVL work that is not allowable as an expense?

R6.7 provides that the following may be paid from the company’s assets:

  • R6.7(1): “Any reasonable and necessary expenses of preparing the statement of affairs under Section 99” and
  • R6.7(2): “Any reasonable and necessary expenses of the decision procedure or deemed consent procedure to seek a decision from the creditors on the nomination of a liquidator under Rule 6.14”.

Consequently, the IPA article states that:

“Pre-appointment advice and costs for convening a general meeting of the company cannot be drawn from estate funds after the date of appointment, even if you have sought approval for them.”

So how do you protect yourself from tripping up on this?

If you’re seeking a fixed fee for the pre-CVL work, make sure that your paperwork reflects that the fee is to cover only the costs of the R6.7(1) and (2) work listed above. Of course, SIP9 also requires an explanation of why the fixed fee sought is expected to produce a fair and reasonable reflection of the R6.7(1)/(2) work undertaken. Does this mean that you should be setting the quantum lower than you would have done under the 1986 Rules, given that you should now exclude the costs of obtaining the members’ resolutions? Well, personally, I don’t see that the effort expended under the 2016 Rules is any less than it was before, even if you cut out the work in dealing with the members, but you will need to consider (and, at least in exceptional cases, document) how you assess that the quantum reflects the “reasonable and necessary” costs of dealing with the R6.7(1)/(2) work.

Alternatively, if you’re seeking pre-CVL fees on a time costs basis, make sure that you isolate the time spent in carrying out only the R6.7(1)/(2) work and that you don’t seek to bill anything else to the liquidation estate.

Although the articles don’t cover it, I think it’s also worth mentioning that, as liquidator, you need to take care when discharging any other party’s pre-CVL costs that they fall into the R6.7(1)/(2) work.

 

Proposing a Decision on Office Holders’ Fees

  • What Rules/SIP9 detail is commonly missing from fee proposals?

The articles list some relatively common shortcomings in fee proposals (whether involving time costs or otherwise):

  • lack of detail of anticipated work and why the work is necessary
  • no statement about whether the anticipated work will provide a financial benefit to creditors and, if so, what benefit
  • no indication of the likely return to creditors (SIP9 requires this “where it is practical to do so” – personally, I cannot see how it would be impractical if you’re providing an SoA/EOS and proposed fees/expenses)
  • generic listings of tasks to be undertaken that include items irrelevant to the case in question
  • last-minute delivery of information, resulting in the approving body having insufficient time to make an informed judgment

The IPA article states that “presenting the fee estimate to the meeting is not considered to be giving creditors as a body sufficient time to make a reasoned judgement”. Personally, I would go further and question whether giving the required information to only some of the creditors (i.e. only those attending a meeting) meets the requirement in R18.16(4) to “deliver [it] to the creditors”. At the R3 SPG Forum, one of the monitors also expressed the view that, if fee-related information is being delivered along with the Statement of Affairs at the one business day point for a S100 decision, this is “likely to be insufficient time”.

  • fee estimates not based on the information available or providing for alternative scenarios or bases

I wonder whether the monitors are referring primarily to the fairly common approaches to investigation work, where an IP might estimate the time costs where nothing of material concern is discovered and those that might arise where an action to be pursued is identified down the line. You might also be tempted to set out different scenarios when dealing with, say, a bankrupt’s property: will a straightforward deal be agreed or will you need to go the whole hog with an order for possession and sale?

Some IPs’ preference for seeking fee approval only once is understandable – it would save the costs of reverting to creditors and potentially of hassling them to extract a decision – but at the SPG Forum the monitors recommended a milestone approach to deal with such uncertainties: a fee estimate to deal with the initial assessment and later an “excess fee” request for anything over and above this once the position is clearer. This approach would often require a sensitive touch, as you would need to be careful how you presented your second request as regards the next steps you proposed to undertake to pursue a contentious recovery and the financial benefit you were hoping to achieve. But it better meets what is envisaged by SIP2 and would help to justify your decision either to pursue or to drop an action.

Alternatively, perhaps the monitors have in mind the fees proposed on the basis of only a Statement of Affairs containing a string of “uncertain”-valued assets. Depending on what other information you provide, it could be questioned whether creditors have sufficient information to make an informed judgment.

  • no disclosure of anticipated expenses

Under the Rules, this detail must be “deliver[ed] to the creditors” prior to the determination of the fee basis, whether time costs or otherwise, for all but MVLs and VAs… and SIP9 and SIPs3 require it in those other cases as well. It is important to remember also that this relates to all expenses, not simply Category 2 disbursements, and including those to be paid directly from the estate, e.g. to solicitors and agents.

  •  How do the monitors view Rules/SIP9 omissions?

At the R3 SPG Forum, one of the monitors stated that, if the Rules and SIP9 requirements are not strictly complied with, the RPB could ask the IP to revert to creditors with the omitted information in order to make sure that the creditors understood what they were approving and that this would be at the cost of the IP, not the estate. The IPA’s article states that “where a resolution for fees has been passed and insufficient information is provided we would recommend that the correct information is provided to creditors at the next available opportunity and ratification of the fee sought”. Logically, such a recommendation would depend on the materiality of the omission.

When considering the validity of any fee decision, personally I would put more weight on the Rules’ requirements, rather than SIP9 (nothing personal RPBs, but I believe the court would be more concerned with a breach of the Rules). For example, I would have serious concerns about the validity of a fees decision where no details of expenses are provided – minor technical breaches may not be fatal to a fees decision, but surely there comes a point where the breach kills the purported decision.

 

Fixed and Percentage Fees

  • How can you address the SIP9 “fair and reasonable” explanation?

It is evident that in some cases the SIP9 (paragraph 10) requirement for a “fair and reasonable” explanation for proposed fixed or % fees is not being met to the monitors’ expectations. The ICAEW article highlights the need to deal with this even for IVAs… which could be difficult, as I suspect that most IPs proposing an IVA would consider that the fee that would get past creditors is both unfair and unreasonable! MVL fixed fees also are usually modest sums in view of the work involved.

The articles don’t elaborate on what kind of explanation would pass the SIP9 test. Where the fee is modest, I would have thought that a simple explanation of the work proposed to be undertaken would demonstrate the reasonableness, but a sentence including words such as “I consider the proposed fee to be a fair and reasonable reflection of the work to be undertaken, because…” might help isolate the explanation from the surrounding gumpf. For IVAs, it might be appropriate to note how the proposed fee compares to the known expectations of what the major/common creditors believe to be fair and reasonable.

  • What is an acceptable percentage?

Soon after the new fees regime began, the RPB monitors started expressing concern about large percentage fees sought on simple assets, such as cash at bank. Their concerns have now crystallised into something that I think is sensible. Although a fee of 20% of cash at bank may seem alarming in view of the work involved in recovering those funds, very likely the fee is intended to cover other work, perhaps all other work involved in the case from cradle to grave. In addressing the fair and reasonable test, clearly it is necessary to explain what work will be covered by the proposed fee. Of course, if you were to seek 20% of a substantial bank balance simply to cover the work in recovering the cash, you can expect to be challenged!

Equally, it is important to be clear on what the proposed fee does not cover. For example, as mentioned above, the extent of investigation work and potential recoveries may be largely unknown when you seek fee approval. It may be wise to define to which assets a % fee relates and flag up to creditors the potential for other assets to come to light, which may involve other work excluded from the early-day proposed fee. The IPA article repeats the message that a fee cannot be proposed on unknown assets.

 

Mixed Fee Bases

It seems to me that it can be tricky enough to get correct the fee decision and billing of a single basis fee, without complicating things by looking for more than one basis! To my relief, personally I have seen few mixed fee bases being used.

  • How is mixing time costs with fixed/% viewed?

In particular, I think it is hazardous to seek a fee on time costs plus one other basis. Only where tasks are clearly defined – for example, a % on all work related to book debt collections and time costs on everything else – could I see this working reasonably successfully. The IPA article notes that:

  • when proposing fees, you need to state clearly to what work each basis relates; and
  • your time recording system must be “sufficiently robust to ensure the correct time is accurately recorded against the appropriate tasks”.
  • I would add a third: mistakes are almost inevitable, so I would recommend a review of the time costs incurred before billing – the narrative or staff members involved should help you spot mis-postings.

 

Of course, there are plenty of other Rules/SIP areas where mistakes are commonly made – for example, the two articles highlight some common issues with progress reports, which are well worth a read. However, few breaches of Rules or SIPs have the potential to be more damaging. Therefore, I welcome the RPB monitors’ efforts in highlighting the pitfalls around fees. Prevention is far better than cure.

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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”.