This article was first published on Lexis PSL on 22 January 2013.
Restructuring & Insolvency analysis: Frances Coulson, head of Insolvency and Business Recovery at Moon Beever, discusses what an intensifying focus on value for money could mean for the industry.
The Insolvency Service will be turning its scrutiny on the remuneration of practitioners in 2013, with the launch of a new consultation on fees. Coming on the heels of a recent Scottish case where the remuneration of an insolvency practitioner was questioned by the court, it seems insolvency practitioners more than ever have to demonstrate their worth to creditors when making applications for remuneration.
What issues did this case raise?
This was a case where the liquidator, who had previously been the provisional liquidator of St Margaret's School in Edinburgh, was seeking court approval for his fees. The court approved them but the court set a review hearing as it was concerned at the size of the fee (approx £120,000 for 20 days of provisional appointment).
To what extent can the points raised by the Scottish court be applied to insolvency practice in England?
While there is more court scrutiny of fees overall in Scotland, in England provisional liquidation fees also have to be routinely approved by the court. There is broader application in any event but it is not a case which changes things, rather draws attention to the factors to be taken into account.
What is the current position on remuneration applications?
In personal insolvency there is more scrutiny now than previously. The Insolvency Act 1986 and the Insolvency Rules 1986, SI 1986/1925 provide for the remuneration of a trustee in bankruptcy (and other appointees) to be set by the creditors, but the Insolvency (Amendment) Rules 2010, SI 2010/686 introduced a right for the bankrupt to challenge his trustees. Previously, only creditors could apply and such an application needed the support of 25% of the creditors by value.
In corporate insolvency, 10% in value of unsecured or a secured creditor can now apply to challenge. Also important is the requirement to provide free of charge, proper information about the fees to creditors who ask.
What is the best way for insolvency practitioners to deal with remuneration applications?
Hopefully it won't reach this stage because they will have justified their fees properly to those who express concern, but if not, they should provide their detailed breakdowns to their experienced insolvency solicitor. They will probably have used a solicitor on the case if the fees are sufficient to be challenged. Solicitors are used to having costs assessed by the courts (whether between the parties or their own client) and have a wealth of knowledge and experience in dealing with such applications in all forums. Failing that, they should be prepared to provide detail and factual matrices and rationale and follow the 2012 Practice Direction on Insolvency Proceedings properly.
What can insolvency practitioners take from this judgment?
I think this is just another reminder that the attitudes shown in Re Cabletel Installations Ltd (in liquidation)  BPIR 28 get reinforced by the courts. It isn't enough just to list time spent. In this case the judge thought the fees were too high until he actually looked at the detail and then they were approved unchanged. However, a lot of detail must be produced, not just of time spent, but also of the results of that time for the estate. The judge thought it good that cases were regularly considered to keep the court up to speed with practice.
The St Margaret's case reiterates how any doubt will be construed against the insolvency practitioner, which is somewhat harsh. This is why it is all the more important for an insolvency practitioner to record the reasons for decisions/actions/outcomes.
Insolvency practitioners and their solicitors should be able to justify their worth to third parties, but ideally should justify it to the creditors before they have to do it in court--the latter route costs money and carries risk.
Do you think as a result we will now see more creditors launching judicial challenges against insolvency practitioner fees?
Not as a result of this case, but the Insolvency Service has launched a consultation into insolvency practitioner fees in January 2013, alongside moving towards promoting complainants' access to regulators and regulators dealing with fee complaints. There will be a complaints portal on the Insolvency Service website and they will be checking regulators' responses to those complaints.
In anything but the smallest case fees are a difficult issue for regulators who haven't the staff or necessarily the expertise to undertake a massive fee assessment, which could lead to them not dealing with the complaint and the complainant having to resort to court. Unless there has been a clear overcharge, where time spent is much less than the fee charged on a time basis, a proper detailed look at the work is needed.
Insolvency practitioners need to take on board the increasing focus on their fees and value for money and take care to record it, and to deal properly with complainants. A creditors' committee, if it can be achieved, is an excellent way to deal with fees as the committee can represent the body of creditors, receive more detail and understand the whys and wherefores and approve fees. In cases with no committee and perhaps unsophisticated creditors (eg consumers), the message can be very difficult for the insolvency practitioner to convey.
Any predictions as to the industry response to the insolvency practitioner fees consultation?
I would think the industry will resist change, rightly proclaiming that the existing regime is fit for purpose. Insolvency practitioners do a difficult job in a distressed situation--skilled professionals are needed to get the best result and they need to be appropriately remunerated. I think duplication of work in insolvency firms, principally driven by regulatory risk, adds cost and if clearer guidance can be given to enable reduced costs then they may be able to reduce fees. However, as in all professions, regulation, risk, insurance, complaints and compliance all create more paper, more reviews and more cost.
Is the current guidance, as per the Practice Direction 2012, fit for purpose?
Yes, I believe so. It details what information the insolvency practitioner must provide. In most courts the review is undertaken by an experienced Registrar or District Judge or the Costs Office, sometimes with the aid of an external expert, and they are, in the main, cognisant of the issues an insolvency practitioner must face.
Interviewed by Duncan Wood
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