Fees in Insolvency Proceedings

Introduction

Changes to UK insolvency law that came into force on 1st October 2015, give creditors a better insight into the fees charged by Insolvency Practitioners (“IPs”) over the life of a Creditor’s Voluntary Liquidation, Administration or Bankruptcy.

Insolvency Practitioners are required to provide a written estimate of the costs and expenses for the duration of an insolvency case and to put this estimate to creditors to approve.

As well as giving transparency and greater confidence in the insolvency process it should, over time, help to drive down the level of fees charged by IPs and deliver a better return to creditors, as well as giving creditors an opportunity to consider and comment on the likely costs of the office holder from an early stage.

How Does the Fee Regime Work?

As an example, in a Creditors’ Voluntary Liquidation (CVL) there are two different types of fees charged by an Insolvency Practitioner:

1. The Statement of Affairs or Pre-Appointment Fee– this covers the work carried out to prepare for the liquidation, including assisting with the preparation of the Statement of Affairs and calling the formal meetings of shareholders and a creditors’ decision process. This fee is required to be clearly stated in the client’s engagement paperwork and disclosed to creditors in advance of the proposed Liquidation date.
2. The Liquidator’s Post-Appointment Fees– these fees can be fixed, a percentage of realisations, or via a time cost resolution. Historically fees were “open-ended” and not quantified at the start of the liquidation

Companies were taken into liquidation with an expectation from creditors and directors that the assets of the company would be sufficient to cover the costs of the liquidation and pay a dividend to creditors. However, because the level of Liquidator’s fees had not been disclosed or estimated upfront, it often came as a surprise to the creditors and former company directors, that all of the available money, was used to cover fees and expenses of the Liquidator, even in cases where the asset realisations were substantial.

The new regime therefore aims to provide complete transparency for all stakeholders so that IPs’ fees do not come as a ‘surprise’.

Insolvency Practitioners must now provide a written summary of their estimated fees and expenses to creditors before requesting that creditors approve their remuneration. Set alongside the company’s Statement of Affairs, it gives creditors a clearer indication of whether or not a dividend is likely to be paid in the future.

How Might This Benefit You or Your Clients?

This legislation gives creditors the opportunity to question or challenge the IP on their fee structure ahead of their formal appointment and, if appropriate, for creditors to put forward their own suggestions for how the office holder should be remunerated. It also gives creditors an opportunity to nominate IPs who are known to charge reasonable and proportionate fees.

Over time therefore, this legislative change should result in an overall lowering of the fees being charged by IPs, with a resultant benefit to creditors. So, in liquidation cases where the company has significant assets and the directors are creditors themselves, or hold personal guarantees, the choice of Liquidator is vitally important.

Even before this legislative change, Bridgewood always put forward its own “fee cap” to demonstrate its commitment to fairness and returning funds to creditors where possible.