The need to be up-front with creditors on fees

Following the recent announcement that insolvency practitioners (IPs) will in future be required to provide estimates of fees upfront to creditors, the statutory instrument that gives effect to that announcement has been laid before Parliament.

Original news

Jo Swinson MP, Parliamentary Under Secretary of State for Employment Relations and Consumer Affairs, announced by written statement on 3 March 2015 that IPs 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.

In responding to the announcement, Giles Frampton, president of R3, said:

'We are very pleased with the government's practical proposals for updating the insolvency fees-setting process. An up-front estimate should work for both creditors and the insolvency profession, and will help improve trust and transparency in our insolvency regime. The profession first supported an up-front estimate system in 2011 and we are pleased to see it set to become a reality.'

What is the significance of this development?

The Insolvency (Amendment) Rules 2015 (SI 2015/443) were laid before Parliament on 3 March 2015, and will come into force on 1 October 2015 insofar as the requirement for IPs to provide upfront estimates of costs to creditors. This will give IPs time in which to adapt their systems in readiness for the change.

Transitional provisions mean that this requirement will essentially only apply where an insolvency office holder is appointed after 1 October 2015. Further, this requirement applies only to administrations, compulsory and creditors' voluntary liquidations, and bankruptcies.

The announcement and the statutory instrument are underpinned by the office holder providing a 'fees estimate', which is defined as meaning a written statement that specifies:

  • details of the work the office holder and his staff propose to undertake
  • the hourly rate or rates the office holder and his staff propose to charge for each part of that work
  • the time the office holder anticipates each part of that work will take
  • whether the office holder anticipates it will be necessary to seek approval or further approval from creditors
  • the reasons it will be necessary to seek such approval

What changes will be made by the statutory instrument in relation to office holder remuneration?

The main changes made by the statutory instrument are:

  • where an office holder proposes to take all or any part of his remuneration on a time-cost basis then, prior to that basis being fixed, the office holder must give to each creditor that he is aware of a fees estimate and details of the expenses that the office holder considers will be, or are likely to be, incurred
  • where an office holder proposes to take all or part of his remuneration on either a percentage of realisations or fixed fee basis, he must give to each creditor that he is aware of details of the work that he proposes to undertake and the expenses that he considers will be, or are likely to be, incurred. No fees estimate is required for either of these bases
  • where progress reports are sent to creditors by the office holder, they must contain a statement setting out whether as at the date of the report:
    • the remuneration anticipated to be charged is likely to exceed the fees estimate or any approval given
    • the expenses incurred or anticipated to be incurred are likely to exceed, or have exceeded, the details given to the creditors prior to the determination of the basis of remuneration
    • the reasons for any excess
  • the fees estimate acts as a cap on the office holder's remuneration. If the office holder wishes to recover remuneration beyond that cap, approval to do so will need to be sought from whoever originally fixed the basis of remuneration, ie either the creditors'/liquidation committee, the creditors, or the court. The request for approval must specify:
    • the reasons why the office holder has exceeded, or is likely to exceed, the fees estimate
    • the additional work the office holder has undertaken or proposes to undertake
    • the hourly rate or rates the office holder proposes to charge for each part of that additional work
    • the time that additional work has taken or the office holder anticipates that work will take
    • whether the office holder anticipates that it will be necessary to seek further approval and the reasons it will be necessary to do so
  • in respect of administrations and liquidations which follow on from administrations, where the basis of remuneration was previously approved by the secured creditors, or by secured and preferential creditors, and:
    • the office holder seeks to have the basis of his remuneration changed (whether as a result of a material and substantial change in circumstances, or because the office holder has been newly-appointed), or seeks to have a set fee apportioned between a new and former office holder, and
    • the office holder considers that there are sufficient assets to make a distribution to unsecured creditors (other than by way of the prescribed part)

new rules set out to whom the request or application should be made, notwithstanding any previous statement made by the administrator that the company had insufficient property to enable a distribution to be made to unsecured creditors (other than by way of the prescribed part)

Have any other changes been made by the statutory instrument?

The statutory instrument also makes a minor amendment to rule 2.106(6) of the Insolvency Rules 1986 (IR 1986) to correct an omission. This amendment will come into force on 1 October 2015.

Additionally, the statutory instrument amends IR 1986, r 7.11(1) to allow the High Court to transfer winding-up proceedings to the County Court at Central London. This amendment comes into force on 6 April 2015. Currently, the High Court can only transfer winding-up proceedings to county court hearing centres in which winding-up proceedings can be commenced—this does not include the County Court at Central London. While it will still not be possible to commence winding-up proceedings in that county court hearing centre after this amendment comes into force, the ability to transfer such proceedings to it will allow a more efficient distribution of business.

The statutory instrument can be found here.

Stephen Leslie, solicitor in the Lexis®PSL Restructuring & Insolvency team.

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