The cost of reforming insolvency practitioners’ fees

What’s the future for the insolvency practitioners’ fees regime? Ian Defty, a director in the niche London insolvency firm of DDJ Insolvency Limited, comments on the proposed new regulations of IP fees.

Original news

Insolvency practitioners will be required to provide extra information to creditors about their fees from October 2015. They will need to give a summary of estimated costs and work to be undertaken, following concerns the current system permits excessive hourly fees to be charged.

For further information, see blog post: The need to be up-front with creditors on fees.

What are the key changes/most important points of the new regulations?

At present, insolvency practitioners are able to charge their fees in a variety of ways in an insolvency estate:

  • on a time actually spent basis (ie, if a matter takes ten hours then the insolvency practitioner gets paid their rate for those 10 hours)
  • on a percentage charged on the value of the realisations recovered in an estate, or
  • on what is called the Officials Receiver’s scale rate (which is a percentage based upon prevailing statute)

The new legislation is saying that where insolvency practitioners take the most common route (that is on a time cost) they must provide an estimate of their fees for creditor approval in advance.

What prompted these changes?

The insolvency industry is one of the most heavily regulated industries. Notwithstanding that the government brought in the ‘Complaints Gateway’ and notwithstanding there are already court remedies in statute to deal with insolvency practitioners’ fees, there is a constant fiddling by government to stop insolvency practitioners actually getting on with their statutory and regulatory duties. It is unfortunate that as various organisations constantly think of ways to (they believe) improve an already established system, new ideas get rolled into changes to the way we do our work. Arguably, the majority of them are actually to the detriment of all stakeholders—including creditors.

Could there be any unintended consequences?

It is extremely difficult for an insolvency practitioner to actually give an estimate of costs on what is often an unknown quantity. For instance, if a bankrupt or director (or indeed other third) fully cooperates with an officeholder then that matter would obviously be cheaper than if an individual fails to cooperate—it is often the case that an officeholder will not and cannot know that at the beginning of a matter.

If an officeholder has spent an agreed £5,000 but has to now call an officeholder for an examination, they will have to go back to the creditors, spending more time and cost, to get an agreement to incur more costs in the cases where previously an officeholder was just allowed to get on with their job and take, as the minister says in her statement, ‘decisions and actions’. It is likely that insolvency practitioners will either just decide not to take on some actions, or others will cease them prematurely as they have no way of recovering their costs.

What should those advising in this area of law take note of?

There is a wealth of case law, reports and regulations dealing with insolvency practitioners’ fees. This will, in my opinion, give lawyers more opportunities to assist insolvency practitioners going to court to get orders that creditors are being unreasonable in not agreeing an increase in fees for an insolvency practitioner to actually fulfil their role.

What are the trends? Do you have any predictions for the future?

Insolvency practitioners have, and always will be, very careful over the fees we charge. It is generally the case that most officeholders write off substantial fees in any event due to poor recoveries or to ensure that creditors get a return. I do not believe there isn’t confidence in the insolvency practitioners’ fee regime. In the recent analysis of complaints made to the Complaints Gateway the issue of a lack of confidence in fees is a minor concern. I can see some small insolvency practitioners ‘shutting up shop’ as the insolvency regime becomes more onerous. I can also see the larger firms refusing to take on some matters as they will be similarly onerous and not cost effective. This, at the same time that the government is seeking to assist creditors, is likely taking away or reducing remedies that have worked perfectly fine for many years.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Restructuring and Insolvency

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