Insolvency fees: the good, the bad and the misunderstood
In response to increasing scrutiny and at times negative media surrounding the role, regulation and cost of using insolvency practitioners, R3 have put together a report outlining the role of insolvency practitioners as well as some more detail on how fees are regulated and charged. Here we summarise some of the main points and give further detail on the Bretts Business Recovery approach to fees.
The role of Insolvency Practitioners
Before we look at the fee structure for Insolvency Practitioners, let’s quickly recap what their role can involve. By definition, a licensed Insolvency Practitioner, or IP, is an individual authorised under the provisions of the Insolvency Act 1986, to deal with personal and company insolvency appointments. IPs work with businesses and individuals who are struggling financially with both formal (statutory) and informal insolvency procedures. These processes help financially distressed and insolvent companies and individuals to repay what they owe – and to turn their fortunes around where possible.
When a company becomes insolvent, an IP is usually appointed as an office holder (for example, as a liquidator or administrator). When acting as an office holder, IPs are personally responsible for protecting the interests of the company’s creditors, and can be held personally responsible for the company’s actions. IPs will always seek to maximise returns to the company’s creditors – which often include the taxpayer and other businesses. IPs are also required to investigate the actions of the company’s directors, which can involve them investigating cases of fraud. And, where rescuing the company as a going concern is not possible, they will wind-up the company in an orderly fashion.
What qualifications must an Insolvency Practitioner have?
Due to the career path many insolvency practitioners take to get into the job, many will have accountancy qualifications such as ACCA, ACA, or CIMA. However, this is not necessary, nor does an accountancy qualification mean you are able to work as an insolvency practitioner.
In order to be a licensed insolvency practitioner, an individual needs to pass the JIEB (Joint Insolvency Examination Board) set of examinations. The exams are made up of two papers, both of which need to be passed in order for the full qualification to be awarded. The exams test candidates’ knowledge of both personal and corporate insolvency law as well as assessing how well they can apply this to real-world scenarios. The JIEB exams are known for being extremely tough, and only those holding an in-depth working understanding of insolvency will be able to pass and qualify as an IP.
How are IPs regulated?
As well as adhering to the relevant rules of their regulator, (there are currently 4 Recognised Professional Bodies which are regulators -: Chartered Accountants Ireland (CAI); the Insolvency Practitioners Association (IPA); the Institute of Chartered Accountants in England and Wales (ICAEW);and the Institute of Chartered Accountants of Scotland (ICAS), IPs must adhere to insolvency legislation, with the Insolvency Act (1986) and the Insolvency (England and Wales) Rules 2016 being the primary and secondary sources of legislation from which most regulatory requirements derive.
IPs must adhere to the Insolvency Code of Ethics and the Statements of Insolvency Practice (SIPs), which are a series of guidance notes issued to licensed IPs which set out required principles and best practice. They can receive reprimands and sanctions for breaching these various regulations, and can also lose their license, and consequently their ability to trade as an IP, for doing so.
IPs and their teams must also ensure they comply with numerous other types of legislation and regulations, such as the Environmental Protection Act 1990, the Companies Act 2006, the Pensions Act 2014, the National Security and Investment Act 2021, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, and many others. When appointed to a case as an office holder, IPs are legally required to perform a number of activities. All insolvency appointments are personal to the IP, and the IP risks incurring personal liability if some of these activities are not undertaken. All these activities incur a cost to the IP and their team – and therefore directly link to the fees they charge.
How are fees charged and regulated?
Insolvency fees are usually charged in one of three ways, or possibly in combination:
• As a percentage of the value of the assets realised during an insolvency procedure, or as a percentage of the assets with which an IP has had to deal in an insolvency procedure;
• As a fixed amount;
• By reference to the amount of time spent on a case by the IP and their staff – known as a “time cost” basis;
Insolvency fees are most commonly calculated on a time cost basis. This means that IPs are required to provide an analysis of the time spent on a case both by themselves and their staff, alongside their fees and expenses. The number of hours an IP will take to carry out a task varies greatly, depending on the company size and the complexity of the case. More complex cases will also often involve additional activities, which may increase the total fees charged.
Insolvency fees are linked to the activities IPs have to undertake on a case to meet their strict regulatory requirements. Fees themselves are also heavily regulated via the Insolvency Act (1986) and the Insolvency (England and Wales) Rules 2016.
For example, for each type of insolvency procedure, the Insolvency Rules prescribe in detail:
• The ways in which IPs can charge fees (such as a percentage of value of assets, as time costs or as a fixed amount,
• The information that IPs must report to creditors on fees and expenses, including estimates;
• Conditions that must be taken into account when calculating fees, such as the complexity of the case, or the value and nature of the property within the case;
• The consent required by creditors to approve fees;
• How a creditor can apply to court if they believe the fees charged are excessive;
• The circumstances where an IP may need to apply to court for approval of their fees; Other various complicating factors which may impact on the fees charged.
Who pays insolvency fees?
Sometimes it is assumed that insolvency fees are paid by the director of the insolvent company, when in actual fact they usually come from the insolvent company’s available remaining assets.
An insolvency procedure ultimately aims to return as much money as possible to an insolvent company or individual’s creditors. Unfortunately, because of the very nature of insolvency there is usually not enough money available to repay everyone what they are owed. To help manage competing creditors’ claims, creditors are repaid in a strict hierarchy set out by legislation.
In all cases where an IP is the office holder, their fees must be approved by creditors, or, in a Members’ Voluntary Liquidation, by shareholders. As outlined above, Insolvency fees are highly regulated, with strict requirements existing around the information IPs must provide to creditors or shareholders.
Media headlines have often focused on the hourly rate charged by IPs. However, a focus on this rate is misrepresentative, as IPs often do not actually receive this amount in full.
It is particularly common in smaller cases for the insolvent company to have insufficient assets to pay an IP the full amount owed. IPs working on smaller cases are frequently paid none of their time costs and must instead “write-off” substantial amounts. Creditors may sometimes negotiate a lower fee after the insolvency procedure has taken place, which again means the IP will not receive full payment for the time they have spent on a case. Or an IP may sometimes agree to waive part of their fee in order to return more money to creditors.
Criticisms of IP fees usually overlook the significant personal liability IPs face when carrying out their work, the strict regulatory requirements they must adhere to, the complex and numerous activities they must carry out, and the complicated and unpredictable nature of their cases.
Fees at Bretts Business Recovery
Bretts Business Recovery has a transparent pricing structure and, unlike some of the bigger firms, are not target driven. Negative press attention, mainly levelled at the larger firms who charge premium rates, have led people to be suspicious of fee levels.
Bretts Business Recovery have fixed fees for MVLS and CVL pre appointment work and our prices are competitive – we don’t charge London-level prices and the fact that we are a small, independent firm means that we can price sensitively and pragmatically.
Bretts Business Recovery offers free consultations and will only start charging once a client is formally engaged with us. Usually the client will have a couple of hours of our time for free at the front end of the process to ensure the best possible action is agreed on and instigated.
For more details on our fees and the services we offer, please see: www.brettsbr.co.uk
For the full report from the R3 on Insolvency Fees see here.