Trustee’s fees in annulments

The recently decided case of Hunt v Yearwood-Grazette ([2009] EWHC B4 (Ch)) involved appeal against the Court’s determination of the trustee’s fees in an annulment case. The case report records that in response to the debtor’s request for details of his remuneration in January 2005 the trustee first indicated that costs should be no more than £2,100 including VAT, which appeared to have been based on the statutory scale. There was then a delay in the trustee providing precise information about the level of remuneration he was seeking, but in April 2006 he indicated that it was in the region of £10,000. The debtor took issue with this and ultimately the trustee applied to Court on various matters, but the principle issue for consideration was the quantum of his remuneration. The claim considered by the Court was for £19,611.75 comprising: £11,420.50 remuneration; £500 for closure; £891.37 trustee’s disbursements excluding legal fees; and £6,345.88 legal fees plus £454 legal disbursements. However, the Court only permitted the trustee to recover from the estate the sum of £2,100 in respect of remuneration and £1,296.43 in respect of expenses and disbursements. He also ordered the trustee personally to pay the debtor’s costs of the application, assessed at £4,840.75.

From reading the report of the judgement it contains some salutary warnings for IPs when dealing with debtors in such cases.

1. Ensure that you respond accurately to a request from the debtor as to the amount of remuneration you are seeking. Clearly a debtor will be more likely to take the matter to Court themselves, or complain to your regulator, if there is a significant increase in the amount that you are claiming as remuneration for no apparent reason.

2. In connection with the above, consider whether or not it would be cheaper and easier in the long run to “do a deal” with the debtor to avoid the matter being considered by the Court and possibly also your regulator, rather than seek to recover your remuneration in full.

3. Do not delay in responding to requests from the debtor for information about the level of your remuneration, particularly if it increases in the period between the first request being made and the final figure being given. Such a delay will clearly fail to impress the Court given that you are an officer of the Court in such circumstances, and will almost certainly lead to a complaint being found proved against you should one be made by the debtor.

4. The Court will apply the Practice Statement, “The Fixing and Approval of the Remuneration of Appointees 2004”. The judgement referred to the Court’s task as being “to balance all the various criteria, resolving any conflict between them arising in the particular case, in order to arrive at the proper level of remuneration. In doing so, it is settled law that the court has to reward the value and benefits of the services rendered rather than the cost of rendering such services. Thus, in fixing the remuneration, time spent is less relevant than value provided.” This is a timely reminder of the approach that the Court will take and it appears that in this case the Court concluded that there was little value provided by the trustee given the level of remuneration approved.

Updating and consolidating the secondary legislation

The Insolvency Service is now making significant progress on its project to update and consolidate the secondary legislation. Having already amended the advertising rules, they are about to publish details of the new rules dealing with notices, meetings and Court filing among others. Although not likely to enter the statute books until April next year, the Insolvency Service has decided to publish a draft set of rules with the amendments incorporated and highlighted that will be available on their website. This is too late in the legislative process to be treated as consultation, but is a great way of helping us all to get ready for the changes when they come in. We have been known to have the odd “pop” at the Service and other regulators in the past, but this seems like a great idea and we look forward to getting into the detail.

For now, we’ve prepared a very brief summary setting out the main areas that are likely to be affected by the changes. Most of the changes appear logical and could even produce savings, although we do not share the Service’s opinion that it should all get back to creditors because we think that many of the relevant costs are already absorbed in write-offs that IPs suffer in most cases. Our biggest concern, and probably your own, is the proposed change in how remuneration is approved and reported. Change was bound to happen after the adverse publicity of the last two years, but we have not seen the detail yet. We will keep a close eye on the proposed changes and ensure that our clients’ systems are amended to account for them as soon as the rules change.

This is only an initial blog article on the topic and we hope to provide more detail when we receive it from the Service. The main areas are likely to be:

1. Electronic Communication

We expect the changes to allow IPs to communicate electronically with creditors, members and third parties by consent, although hard copies are likely to have to still be available on request.

2. Authentication

New authentication provisions are proposed, to replace the existing requirement that all insolvency documents must be physically signed.

3. Meetings

Meetings must generally be held at a physical venue under the current legislation. The changes should give you the option to allow attendance at a meeting by telephone or electronic means (e.g. via an internet chat room or video conference).

4. Internet use

You may be allowed to place reports and proposals on a website as an alternative to sending them to all creditors by post, although you will still be required to notify creditors about how to access them in a posted or e-mailed notice. Again, creditors will be able to request a hard copy of any document if they wish.

5. Statements of truth

We expect the changes to allow for documents that currently have to be affirmed by an affidavit to be verified by a statement of truth. Proceedings for contempt of court may be taken against any person who makes a false statement in a document verified by a statement of truth, so this should still be a reliable way of obtaining information.

6. Remuneration and Reporting

This is the change that causes us most concern and we will have to wait for the detail to see what further comment is appropriate. We expect the new rules to introduce more options for the basis of remuneration that creditors and members can fix, and also provide a system of more regular reporting to creditors. Creditors may be able to request fuller particulars and to challenge any amounts where they consider them excessive.

There will be a bonus to offset this, in that we expect the requirement for annual meetings in liquidations which have lasted for more than a year to be dropped. However, as we said in one of our earlier articles about the advertising changes, we must wait to see if the change to annual meetings will be retrospective in any way. It could either just cover the single year’s appointments (6 April 2009 to 6 April 2010) where you will have to gazette annual meetings, or it could be truly retrospective and do away with annual meetings in all liquidations that pre-date the legislation, so that all cases can be treated consistently after the new rules are introduced...but that may be too much to hope for.

7. Pre-appointment Administration Expenses

At last!! There will be specific rules allowing you to seek approval for pre-appointment work in administrations provided that the work has helped to achieve the objective of the administration. There will be a requirement for details of that work to be disclosed and approved within the administration proposals.

8. Standard Content for gazette notices and advertisements

Notice of insolvency events for the London Gazette (and any other form of advertisement that you see fit to use) will be required to follow a standard format. The Service thinks that this will not cost the estates any more and we go further, anticipating a reduced cost, as case management software providers should be able to produce notices within your standard packs and you will be able to take advantage of online instructions to cut out the time and cost incurred by using agents.

9. Reduction in Court Filings

Many of the requirements for documents to be filed with the court will be removed. In some cases documents will only be filed with the Registrar of Companies, where they will be more accessible to creditors

10. Disclosure in bankruptcy

The Rules will allow debtors facing bankruptcy who consider themselves at risk of violence to apply to the court for an order to limit disclosure of their address.

As we have already indicated, all of this is subject to confirmation and receipt of more details, but the initial brief appears positive and we await developments with interest.

New Companies House Forms

Those of you whose practices are limited companies or LLPs will already have received a leaflet explaining about the next set of changes being introduced by the Companies Act 2009 with effect from 1 October 2009. In this article I want to draw your attention to the fact that new forms that are being introduced for filing documents with Companies House, and that those forms must be used for all documents filed after 1 October 2009. Any document filed using the old Companies Act 1985 forms after that date will be rejected by Companies House.

Only about 25 of the new forms affect IPs, and amongst the forms affected are: change of registered office (AD01); satisfaction of a mortgage or charge (MG02); notice of appointment of an administrative receiver, receiver or manager (LQ01); notice of ceasing to act as an administrative receiver, receiver or manager (LQ02); and similar documents for LLPs. A full list of the forms affected can be found at http://www.companieshouse.gov.uk/forms/formsAvailable.shtml#non_companies_act.

I understand that Turnkey will be incorporating the new forms into a release planned for the end of this month, and those of you using CCH or Insolv should contact your providers to make sure that they are also going to incorporate the new forms in their systems.

One other point to bear in mind is that Companies House intend to start charging for filing certain documents. The documents for which a charge will be made, or the level of those charges is not yet known, but details will appear on the page of their web-site given above in due course.

Consolidation of Insolvency Legislation

As the Insolvency Service keep promising us, in addition to the planned legislative changes in the pipeline they are also going to consolidate the secondary legislation in 2011. This means that the period of change that the profession has been going through for the past few years is going to continue for a while yet. These constant changes cause difficulties in keeping staff trained and up to date and also in keeping standard documents accurate and current.

Ideally you should try and help minimise the number of changes that you will need to make to your standard documents when the proposed consolidation of insolvency legislation takes place in 2011. In order to do this we suggest that when you review and revise your standard documents between now and the consolidation, you remove all unnecessary legislative references making them as generic as possible whilst still meeting the statutory and SIP requirements. The vast majority of legislative references in documents are unnecessary, and only seem to have been included as a form of comfort for the IP since they mean little or nothing to the average creditor recipient. For each legislative, or indeed SIP reference in a standard document ask yourself whether it can be removed without leading to that document no longer being statutory or SIP compliant. You will be surprised how many references can be removed.

This approach also has the added benefit of making the documents more "user friendly" for the recipients and hence complying with the approach to reporting to creditors set out in the new Insolvency Code of Ethics.

Dividends and variations of terms in IVAs

Creditors, particularly creditors’ agents, now require dividends to be paid at least quarterly in IVAs. However, the dividend terms in the current version of the R3 Standard Terms and Conditions are too cumbersome to permit the payment of frequent dividends. In particular they require the supervisor to issue a notice of intended dividend before declaring each dividend and to issue a notice of declaration of dividend when making the distribution. This is also costly for the supervisor when paying frequent dividends. Consequently, where IPs use the R3 Standard Terms and Conditions we are suggesting that they consider seeking a variation of the IVA with a view to replacing the dividend terms in the arrangement with those from the protocol standard terms. In order to keep costs down a variation is best sought by convening a meeting of creditors when sending the annual report to creditors.

That then brings me on the second point of this article, which is a reminder that to effectively vary an IVA, the requirements set out in the legislation relating to the approval of an arrangement must be satisfied. This means that it is both necessary to obtain the approval of the relevant percentages of creditors and the agreement of the debtor to the variation, prior to, or at the meeting to consider the variation. When you are initiating the variation this second part is easily over-looked. As with consents to modifications when seeking the approval of an arrangement at an initial meeting of creditors, ideally the consent to the variation by the debtor should be obtained in writing, but if that is not possible then a detailed file note recording the discussions held with the debtor should be kept.

The new Advertising Regime – some clarification

In our last article on this subject we indicated that we would be seeking to clarify a couple of further issues with the Insolvency Service. We are pleased to say that we have received a response and that further legislative changes are planned which will deal with the issues raised. The Insolvency Service indicate that they intend to implement the following changes as part of the further modernisation planned for 6 April 2010. However, at present these are only proposed changes and so are subject to Parliamentary scrutiny and approval.

1. We raised the issue that the approach taken to advertising general meetings of creditors in bankruptcies differs from that in liquidations and pointed out that in bankruptcies the rule changes introduced gives two levels of discretion; a discretion to give notice of the meeting by advertising as well as written notice and a requirement to gazette if you decide to exercise that discretion; and then, if you gazette, a further discretion to “advertise in such other manner as the convenor thinks fit.” The Insolvency Service indicate that the introduction of mandatory gazetting requirements was reflected generally in the April 2009 Rule changes, but that it has not yet been introduced in rule 6.81(4) for bankruptcies, and that as a result the gazetting requirements in liquidations now differ from those in bankruptcy. They indicate that they intend to introduce a similar mandatory provision into rule 6.81(4) to bring bankruptcy into line with the general policy for insolvency advertising.

2. We also pointed out that our interpretation of the insolvency legislation meant that a consequence of the April 2009 rule changes was to require the gazetting of annual meetings in CVLs for all cases commenced on or after 6 April 2009. The Insolvency Service confirmed that our interpretation was correct, but indicated that they intend to remove the requirement for annual meetings in CVLs. It will be interesting to see if the removal of the requirement to hold annual meetings has retrospective effect, i.e. it will apply to all cases, or if it will only apply to cases commenced on or after 6 April 2010, the planned date of the legislative change. If it is the latter, then this will mean that there will be 12 months of cases where it is necessary to gazette annual meeting, i.e. those commenced between 6 April 2009 and 5 April 2010, and we hope that the regulators will take a pragmatic approach to the enforcement of the legislative requirement in respect of such cases.

Winding up resolutions

Issues with winding up resolutions have come up twice this week and we thought that we’d share our thoughts with you in the light of the issues raised.

You should check both the nature and the wording of the winding up resolution that you are seeking and confirm that the same nature and wording are used in the notices that are then published in the Gazette.

Make sure that the resolution complies with the requirements of section 84(1)(b). It has to be a special resolution and it must include the wording “that the company be wound up voluntarily.” We have seen a variety of different resolution wordings in our travels and in the Gazette, and it is apparent that at least one version of one of the proprietary case management software systems still refers to an “extraordinary” resolution in its standard general meeting documents and Gazette notices.

Fiddling while Rome burns?

Our last two Blog articles about pre-appointment fees in administrations and what costs should be deducted when calculating the net property have something in common, the Court not addressing issues that are key to IPs. However, we do not lay the blame at the doors of the Court. Their role is to interpret the legislation, not to draft new sections where the Insolvency Act is deficient. IPs have had to fudge both issues since the legislation was introduced when they are so important that they could do with greater certainty, not least to avoid arguments with their regulators over interpretation. We think that the Insolvency Service should consult and legislate on these points to eradicate any doubt.

Although the SIPs are being reviewed and may yet become more relevant and streamlined, the introduction of SIP 16 has increased the amount of work an administrator has to do pre-appointment and immediately on taking office. Without some clarity on how those costs can be recovered, we think that the increased disclosure, which is of dubious benefit to unsecured creditors anyway, will merely increase the cost and regulatory burden.

The Insolvency Service is in the middle of its review of the secondary legislation and consolidation of the legislation. The first tranche of the revision to the insolvency rules and regulations dealt with advertising on the stated expectation that cost savings will be passed on to creditors, an expectation that we have already suggested may be optimistic. We hope that further revisions will address issues such as these, which are important both for IPs and as key parts of a homogeneous insolvency regime.

Pre-appointment costs in Administrations

Another instance where the initial thoughts that the Court has finally pronounced on a key were dashed by a reading of the judgement was in Kayley Vending Ltd. The Court had made an Administration Order in a case involving a pre-pack sale at arm’s length and was then subsequently invited to make an order approving the administrator’s pre-appointment costs. It did so, but using its discretionary power under paragraph 13 of Schedule B1 rather than rule 2.67(1)(c), and so failed to provide any guidance for pre-appointment costs in out of Court appointments.

The Court did indicate that “it was appropriate in the exercise of this discretion to make the order sought where the court is satisfied that the balance of benefit arising from the incurring of pre-appointment costs is in favour of the creditors rather than (in a pre-pack case) the management as potential purchasers of the business.” Reading between the lines, be careful if you apply to Court for approval of your pre-appointment costs where it is a pre-pack back to the directors without proper exposure to the market. The Court did, however, seem to approve the approach set out in Dear IP, which may or may not be useful when arguing whether you are entitled to pre-appointment costs on a particular case with your regulator!

The other matter considered by the Court was what information it should consider when deciding whether or not to “endorse” a pre-pack by making an Administration Order. In doing so it endorsed SIP 16 by concluding that whilst the “... information may not be limited to the matters identified in SIP 16 ...”, in most cases just the information required by SIP 16, “... insofar as known or ascertainable at the date of application ...” would be sufficient.

Prescribed part – the exercise of discretion

At first sight the case of International Sections Ltd appeared to be the one that all IP’s were waiting for – the one that set out what costs can be deducted when calculating the net property and hence the prescribed part available to unsecured creditors - but no, the Judge ducked the issue. Instead, he merely indicated that “the Liquidators have realised in the present case net property of £18,655.46” before deciding whether the costs of distributing the prescribed part of that net property would be disproportionate to the benefits.

It does not really come as a surprise that the court felt unable to grasp the nettle and give an indication of what costs it might be acceptable to deduct in calculating the company’s net property. After all, if Parliament did not see fit to define the parameters in the legislation, the Court is unlikely to want to do the legislature’s job. So we are left with an uncertain position where IPs are left to second guess the intention behind the legislation in a way that is only likely to be tested, at some cost, when a case arises that carries enough significance to make it worth pursuing as a test case. We have seen a legal opinion that indicates that all of the general costs of the administration, including the office holder’s costs, fees and charges, can be deducted before the net property is calculated, but Gareth and Bill cannot even agree on this within Compliance On Call and it would be a very brave IP that takes such a black and white approach without a clear indication from the Insolvency Service or the Courts.

Whilst the case therefore appears to have only limited application, since it related to an application to Court under section 176A(5), we think that given the similarity of wording with section 176A(3) the principles set out in that case should also be applied by an IP where the net property is below the statutory minimum of £10,000 and they have to decides whether to exercise their discretion and not distribute the prescribed part on the basis that the costs of distributing the prescribed part of that net property would be disproportionate to the benefits.

As a result, applying the principles of International Sections Ltd the IP should “look at the benefits to creditors as a body” and not be too ready to use their discretion just because the dividend would be small, and remembering that not applying the prescribed part provisions should be the exception, and not the rule.