Introduction
This blog article is shaping up to be the longest we have ever written, so we have used headings to break it up and give you something to help you organise your thoughts, but it is still a significant lump of reading. Having said that, it is so fundamental to your fee approval that we think that you have to read it all and we wrote it when the Insolvency Service, most of the regulators and others have all been noticeable quiet, so we claim the moral high ground. If you have read the rules, digested the consultation draft of SIP 9, and changed all of your documents and systems to be ready for the changes, well done, but we think you are in the minority. Our impression, gathered from email and phone queries and discussions at various visits and events since our holidays, is that those who have done anything have only just started and many people are waiting for this guidance before doing anything at all. While that is quite flattering, it is also a heavy burden to carry and we therefore have to make sure that this is as comprehensive and clear as we can. Even then, it comes with a significant health warning. These are just our amalgamated thoughts. They are not legal advice and you have to make your own decisions about how to approach the changes. We’ve put some pretty strongly worded arguments in places, and if enough of you follow our arguments, then what we are suggesting may become the norm, helping to protect you from some of the possible regulatory criticism. However, at the end of the day, we are as much in the dark as you are.
Although this article includes elements where we rant and moan about poor drafting, lack of leadership and guidance, and legal uncertainty, it is, above all, a practical guide. It is too late now for us to repeat our criticism and just whine about all of the things that the legislation and rules do not do. You have to use this stuff from 1 October, which is less than three weeks away. It is now time for us to say what you should do and why, rather than just asking questions and pointing out problems. If you agree with us and adopt our blueprint, it might just work and, as we explain at the very end of the article, you might even find that there is little substantive change to the way that you do business.
The New Fee Rules
Let’s start with the basics. The New Fee Rules, full title The Insolvency (Amendment) Rules 2015, follow the traditional approach of amending rules in the Insolvency Rules 1986. That means that they become those rules and do not stand alone, so don’t let some techy-obsessed person change all your rule references to the New Fee Rules ones. Instead, get into the habit of avoiding rule numbers completely unless they are absolutely essential.
They apply to new appointments from 1 October 2015. That means that they apply to Administrations where you are appointed on or after that date. They apply to CVLs and CWUs where you are appointed Liquidator on or after that date. They apply to Bankruptcies where you are appointed Trustee on or after that date. Note that this is a departure from past transitional provisions, where the date of commencement of the insolvency procedure was the trigger. It is just the date of appointment that matters for the New Fee Rules. Note also that they do not apply to MVLs or VAs, but approach them with caution, as the current draft of SIP 9 applies the SIP to those case types (see the SIP 9 section further down this article).
The New Fee Rules take the same approach for each appointment. The office holder can still seek fees on a fixed cost, percentage, or time costs basis, or on mixed bases depending on the work being done. The New Fee Rules indicate that where, as office holder, you are seeking approval of your fees on a basis other than time costs you have to explain the work you intend to undertake and “details” of expenses that will be, or are likely to be, incurred. Where you are seeking approval of your fees on a time cost basis, however, you have to go further and provide creditors with a Fees Estimate (detail below) and “details” of expenses that will be, or are likely to be, incurred. They also say that the Fees Estimate then acts as a cap, so you have to tell the creditors in your progress reports if you expect that your time costs incurred will exceed the cap and if so, why, and then seek further approval if you actually want to draw fees in excess of the cap.
The Fees Estimate has to set out:
1) The work you intend to undertake
2) Hourly rates you and your staff propose to charge for “each part of that work”
3) The time that you anticipate “each part of that work” will take
As we have made clear before, we think that the legislation is drafted very poorly and terms like “details” and “each part of the work” do not set out the requirement in enough detail to enable an IP to be certain of complying. We see this as a significant risk area and our recommended approach seeks to minimise the amount of your remuneration that depends on time costs and is therefore subject to that unacceptable risk.
You have to seek approval to draw further fees in excess of the Fees Estimate from the body that approved your fee basis in the first place. You have to give the reasons why you have exceeded, or are likely to exceed, the Fees Estimate. You then have to specify the additional work taken, or proposed to be taken, and the hourly rates proposed for “each part” of the additional work, together with the time that the additional work has taken, or is expected to take. Finally, you again have to say whether you anticipate needing further approval and if so, why it will be necessary to seek further approval.
There is one area of contention where we have taken a fairly robust view in developing our advice to you. In our response to the recent consultation about the draft revised SIP 9, we asked whether “exceeding the fees estimate” applies to the total fees estimated or to those estimated for each part of the work to be done. So, if you estimate that you’ll spend £3,000 on book debt chasing, out of a total Fees Estimate of £15,000, would you have to seek further approval when book debt chasing costs more than £3k, or only when you exceed the £15k total? The wording in the New Fee Rules seems fairly clear-cut to us in that it refers to “the total amount set out in the fees estimate”, but there is some chatter in compliance circles that the original intention might have been to mean “the total amount set out in the estimate for each part…”. We consider that the legislation does not say that and our advice is based on only exceeding the total Fees Estimate as triggering the need for further approval.
There is another area where we have been far more cautious. The rules say that the Fees Estimate has to be given by “the office holder”, which in CVLs, means “the liquidator” and, as you all know, the liquidator is not appointed until the members’ meeting. In CVLs you would normally want to give creditors the estimate when you are issuing notices for the S98 meeting. We’ve taken advice on the liquidator point and despite what we hear about what the Insolvency Service intended and the draft version of SIP 9 may be trying to suggest, we still consider that the legislation incorrectly requires the liquidator to give out the estimate. We have heard that the Insolvency Service considers that liquidator includes “proposed” or “intended” liquidator, but if they meant that, shouldn’t they have actually said that in the rules? Furthermore, if they are so sure that is what it means, why didn’t someone find a quiet moment over the summer holidays to write a Dear IP to explain that? We understand from the recent IPA Newsletter that a Dear IP is imminent, but even then, it is just guidance and it does not change the wording in the legislation. We have been cautious and stuck with what the legislation says.
The Court might validate an estimate issued by a proposed liquidator when sending out the S98 meeting notices if challenged, if it was happy with any statements from the Service as to the legislative intention, but there is no certainty and we don’t like there being uncertainty around fees. Our fear is that we could have a series of Court decisions like those seen in Re Minmar, Re Virtualpurple, etc., where the Court took a pragmatic view where matters were uncontested and all parties were satisfied with the outcome, but took a stricter view in contested cases. That could mean that fees would be valid if nobody objected, but could be retrospectively ruled invalid if a disgruntled, director, creditor or successor practitioner pushed the technical deficiency.
One solution that has been suggested would be to do a Centrebind to get into office and hold the S98 meeting later, but since Centrebinds are for cases with assets at risk it would probably be inappropriate to use them as a tool to fix your fee approval, and if you do so you run the risk of regulatory criticism or action. As a result, the interim solution for anyone that shares our concern about the rule wording is likely to be to take the job and then call a meeting of creditors or pass resolutions by correspondence to agree your fees. As our commentary on SIP 9 below explains, we don’t think that you can just drop the Fees Estimate in at the S98 meeting without any notice, having been appointed liquidator half an hour earlier, and expect them to approve your fees immediately. Holding a second meeting, or obtaining approval by correspondence may well lead to bigger up-front SA fees, as IPs try to reduce the risk of not getting fee approval later. We think that it will also increase costs, as you will have the S98 meeting, then a separate fee approval stage, albeit probably approval by correspondence rather than a meeting, but that still needs a report, which might work well combined with the rule 4.49 report in CVLs, and some administration of the approval process. In the end, the amount of detail you have to provide and the parts of the case you break your estimate into may turn out to be more difficult than the technical point around when you give creditors the estimate.
SIP 9
This blog article is shaping up to be the longest we have ever written, so we have used headings to break it up and give you something to help you organise your thoughts, but it is still a significant lump of reading. Having said that, it is so fundamental to your fee approval that we think that you have to read it all and we wrote it when the Insolvency Service, most of the regulators and others have all been noticeable quiet, so we claim the moral high ground. If you have read the rules, digested the consultation draft of SIP 9, and changed all of your documents and systems to be ready for the changes, well done, but we think you are in the minority. Our impression, gathered from email and phone queries and discussions at various visits and events since our holidays, is that those who have done anything have only just started and many people are waiting for this guidance before doing anything at all. While that is quite flattering, it is also a heavy burden to carry and we therefore have to make sure that this is as comprehensive and clear as we can. Even then, it comes with a significant health warning. These are just our amalgamated thoughts. They are not legal advice and you have to make your own decisions about how to approach the changes. We’ve put some pretty strongly worded arguments in places, and if enough of you follow our arguments, then what we are suggesting may become the norm, helping to protect you from some of the possible regulatory criticism. However, at the end of the day, we are as much in the dark as you are.
Although this article includes elements where we rant and moan about poor drafting, lack of leadership and guidance, and legal uncertainty, it is, above all, a practical guide. It is too late now for us to repeat our criticism and just whine about all of the things that the legislation and rules do not do. You have to use this stuff from 1 October, which is less than three weeks away. It is now time for us to say what you should do and why, rather than just asking questions and pointing out problems. If you agree with us and adopt our blueprint, it might just work and, as we explain at the very end of the article, you might even find that there is little substantive change to the way that you do business.
The New Fee Rules
Let’s start with the basics. The New Fee Rules, full title The Insolvency (Amendment) Rules 2015, follow the traditional approach of amending rules in the Insolvency Rules 1986. That means that they become those rules and do not stand alone, so don’t let some techy-obsessed person change all your rule references to the New Fee Rules ones. Instead, get into the habit of avoiding rule numbers completely unless they are absolutely essential.
They apply to new appointments from 1 October 2015. That means that they apply to Administrations where you are appointed on or after that date. They apply to CVLs and CWUs where you are appointed Liquidator on or after that date. They apply to Bankruptcies where you are appointed Trustee on or after that date. Note that this is a departure from past transitional provisions, where the date of commencement of the insolvency procedure was the trigger. It is just the date of appointment that matters for the New Fee Rules. Note also that they do not apply to MVLs or VAs, but approach them with caution, as the current draft of SIP 9 applies the SIP to those case types (see the SIP 9 section further down this article).
The New Fee Rules take the same approach for each appointment. The office holder can still seek fees on a fixed cost, percentage, or time costs basis, or on mixed bases depending on the work being done. The New Fee Rules indicate that where, as office holder, you are seeking approval of your fees on a basis other than time costs you have to explain the work you intend to undertake and “details” of expenses that will be, or are likely to be, incurred. Where you are seeking approval of your fees on a time cost basis, however, you have to go further and provide creditors with a Fees Estimate (detail below) and “details” of expenses that will be, or are likely to be, incurred. They also say that the Fees Estimate then acts as a cap, so you have to tell the creditors in your progress reports if you expect that your time costs incurred will exceed the cap and if so, why, and then seek further approval if you actually want to draw fees in excess of the cap.
The Fees Estimate has to set out:
1) The work you intend to undertake
2) Hourly rates you and your staff propose to charge for “each part of that work”
3) The time that you anticipate “each part of that work” will take
As we have made clear before, we think that the legislation is drafted very poorly and terms like “details” and “each part of the work” do not set out the requirement in enough detail to enable an IP to be certain of complying. We see this as a significant risk area and our recommended approach seeks to minimise the amount of your remuneration that depends on time costs and is therefore subject to that unacceptable risk.
You have to seek approval to draw further fees in excess of the Fees Estimate from the body that approved your fee basis in the first place. You have to give the reasons why you have exceeded, or are likely to exceed, the Fees Estimate. You then have to specify the additional work taken, or proposed to be taken, and the hourly rates proposed for “each part” of the additional work, together with the time that the additional work has taken, or is expected to take. Finally, you again have to say whether you anticipate needing further approval and if so, why it will be necessary to seek further approval.
There is one area of contention where we have taken a fairly robust view in developing our advice to you. In our response to the recent consultation about the draft revised SIP 9, we asked whether “exceeding the fees estimate” applies to the total fees estimated or to those estimated for each part of the work to be done. So, if you estimate that you’ll spend £3,000 on book debt chasing, out of a total Fees Estimate of £15,000, would you have to seek further approval when book debt chasing costs more than £3k, or only when you exceed the £15k total? The wording in the New Fee Rules seems fairly clear-cut to us in that it refers to “the total amount set out in the fees estimate”, but there is some chatter in compliance circles that the original intention might have been to mean “the total amount set out in the estimate for each part…”. We consider that the legislation does not say that and our advice is based on only exceeding the total Fees Estimate as triggering the need for further approval.
There is another area where we have been far more cautious. The rules say that the Fees Estimate has to be given by “the office holder”, which in CVLs, means “the liquidator” and, as you all know, the liquidator is not appointed until the members’ meeting. In CVLs you would normally want to give creditors the estimate when you are issuing notices for the S98 meeting. We’ve taken advice on the liquidator point and despite what we hear about what the Insolvency Service intended and the draft version of SIP 9 may be trying to suggest, we still consider that the legislation incorrectly requires the liquidator to give out the estimate. We have heard that the Insolvency Service considers that liquidator includes “proposed” or “intended” liquidator, but if they meant that, shouldn’t they have actually said that in the rules? Furthermore, if they are so sure that is what it means, why didn’t someone find a quiet moment over the summer holidays to write a Dear IP to explain that? We understand from the recent IPA Newsletter that a Dear IP is imminent, but even then, it is just guidance and it does not change the wording in the legislation. We have been cautious and stuck with what the legislation says.
The Court might validate an estimate issued by a proposed liquidator when sending out the S98 meeting notices if challenged, if it was happy with any statements from the Service as to the legislative intention, but there is no certainty and we don’t like there being uncertainty around fees. Our fear is that we could have a series of Court decisions like those seen in Re Minmar, Re Virtualpurple, etc., where the Court took a pragmatic view where matters were uncontested and all parties were satisfied with the outcome, but took a stricter view in contested cases. That could mean that fees would be valid if nobody objected, but could be retrospectively ruled invalid if a disgruntled, director, creditor or successor practitioner pushed the technical deficiency.
One solution that has been suggested would be to do a Centrebind to get into office and hold the S98 meeting later, but since Centrebinds are for cases with assets at risk it would probably be inappropriate to use them as a tool to fix your fee approval, and if you do so you run the risk of regulatory criticism or action. As a result, the interim solution for anyone that shares our concern about the rule wording is likely to be to take the job and then call a meeting of creditors or pass resolutions by correspondence to agree your fees. As our commentary on SIP 9 below explains, we don’t think that you can just drop the Fees Estimate in at the S98 meeting without any notice, having been appointed liquidator half an hour earlier, and expect them to approve your fees immediately. Holding a second meeting, or obtaining approval by correspondence may well lead to bigger up-front SA fees, as IPs try to reduce the risk of not getting fee approval later. We think that it will also increase costs, as you will have the S98 meeting, then a separate fee approval stage, albeit probably approval by correspondence rather than a meeting, but that still needs a report, which might work well combined with the rule 4.49 report in CVLs, and some administration of the approval process. In the end, the amount of detail you have to provide and the parts of the case you break your estimate into may turn out to be more difficult than the technical point around when you give creditors the estimate.
SIP 9
First, the big caveat, this article is based on the consultation draft of the revised SIP 9 and we all hope and pray that the final version will be more help than that version! This section again just sets out the basic requirements with a few comments. The advice that we eventually give further down on how to apply everything is based on how we consider that the New Fee Rules and SIP 9 could interact if no changes are made, together with some crystal ball gazing in case common sense prevails and the SIP is amended. The consultation only closed on 4 September and with the New Fee Rules applying to appointments from 1 October, we have to wonder whether any revised SIP is likely to be issued in time for you to use it. We have taken a pessimistic approach and assumed that the first month or two at least will be done without the dubious benefit of a supporting SIP.
The first point to note about the SIP is that, unlike the rule changes, it includes a statement in the introduction that applies it to all proceedings. That means that even though the New Fee Rules do not apply to MVLs or VAs, the SIP applies some of the disclosure principles designed to comply with the Rules to those case types. We suggested that a carve-out be drafted in our consultation response, but for now we have to bear the extra disclosure requirement in mind.
The SIP also now includes reference to your expenses, stating that they, like payments made to the office holder or his associates, should be reasonable and commensurate reflections of the work properly undertaken. The principles have been re-ordered a bit, but essentially it boils down to you having to provide enough information for those approving payments to make an informed judgement about how reasonable they are. There is, however, a new principle that says that any such information should be “transparent, consistent throughout the life of the case and useful to creditors and other interested parties” whilst remaining proportionate.
As a result, when planning our practical advice below we had to consider what “transparent” might mean in this context. For example, if the creditor agents have always been happy with the disclosure in IVAs, which are not included in the New Fee Rules, does that mean that the disclosure is already transparent without needing to apply additional layers of disclosure just for this SIP? Alternatively, does this mean that any disclosure under the New Fee Rules has to be even more detailed? Combine the New Fee Rules requirement for “details” and the SIP requirement for “transparency” do you have to provide more information, just to be on the safe side? We have assumed that you do. Similarly, when looking at the practical advice below, we had to consider what “useful to creditors and other interested parties” might mean. After all, if the fee being disclosed is going to be more than the available assets by anyone’s calculation of “reasonable”, then are there likely to be any “interested parties” and if there are, is anything likely to be “useful”? Again, to avoid the risk of you being criticised for not complying with such vague terms, we have taken a fairly draconian approach and suggested some fairly extensive disclosure, using different fee bases to make it more manageable.
We also had to consider the requirement to produce information that is “consistent throughout the life of the case”. It seems to us that this is a pretty idealistic requirement, or at least that it is a bit unrealistic for the next few months. Anyone doing notices in October will, because of the lack of guidance issued by the Insolvency Service and the Regulators, almost certainly be different from that produced in subsequent months, especially if there are subsequent changes to SIP 9 and even the legislation. Even if the revised SIP comes out in the next three weeks, the legislation remains unchanged and everyone knows exactly what to say at the start of each case, the nature of insolvency appointments means that there will be subsequent changes during the life of a case that will probably not be consistent with the original disclosure. At that point there may even be conflict between the transparency and consistency principles. We have tried to structure our advice to avoid the worst of the problems and driven a pragmatic bus through the rest, but only time will tell whether that is enough to satisfy someone looking at a complaint or challenge with the benefit of hindsight.
One point in the consultation draft of SIP 9 may be a good idea, especially in relation to the Ethical Code, and it is worth mentioning. Paragraph 6 says that the office holder has to disclose business or personal relationships with anyone approving fees or providing services. We see a couple of cases a year where an IP employs an agent or solicitor where there is a clear personal relationship and, in some cases, a direct family relationship or emotional entanglement. If you find yourself in that position, no matter how junior or senior the relative/associate is in the other firm, and no matter what the business terms (often better than commercial rates from what we see), you still have to make full disclosure. Keep an eye on the relationship over time as well, since we sometimes see a referral source, agent or creditor contact become more than just a business contact, so that while the original contact did not require disclosure, later work or new appointments might require a different approach.
The next area we need to look at is paragraph 7 and what we, and some other commentators, initially thought might have been an attempt at fixing the deficiency about the use of the term “office holder” in the rules and the impact that has on CVLs. We covered this above in the Rules section, so we won’t repeat it here, but there is a statement at the end of paragraph 7 of SIP 9 that purports to allow the liquidator to provide information pre-appointment. We have spoken to quite a few people that thought this might provide a solution, but our first concern is simply that we don’t think a SIP can fix even faulty legislation. Secondly, if you look at the placement of the statement, it is at the end of a paragraph about issuing the SIP 9 fee guides. We think that the statement therefore only applies to the issue of the fee guides, not to the Fees Estimate required by the New Fee Rules. The approach that we have taken in our practical advice below is that only the liquidator in a CVL can issue a Fees Estimate.
The biggest substantive change in the consultation draft of SIP 9 was at paragraph 9 where the SIP introduced the idea of “Key Issues” and requires an office holder to provide information in a way that “facilitates clarity of understanding of these key issues”. The key issues themselves are not rocket science:
1) Anticipated work and why necessary
2) Anticipated cost and expenses
3) Anticipated financial benefit (or none)
4) Work already done and why
5) Cost of work and expenses against any estimate
6) Achieved financial benefit (or none)
Unfortunately, there are some pretty basic problems with applying the SIP. Points 1, 2, 4 and 5 are essentially what is in the New Fee Rules, which is fine for anything except MVLs and VAs where those Rules don’t apply. Instead, we have a SIP imposing a level of disclosure that even the legislators felt was not worth doing. Given how rare it is for a rule-maker to step back from making rules, it is disappointing to see regulatory guidance trampling all over that decision, especially in the wake of the Red Tape Challenge and the Insolvency Service’s public commitment to reducing unnecessary regulation.
Furthermore, our email inbox suggests that that people are unsure how far to go to “facilitate clarity of understanding”, especially when addressing points 3 and 6 and trying to explain the lack of financial benefit in a low asset “burials”. We have, in accordance with our usual risk-averse stance, opted in our advice for quite detailed disclosure. There is an argument that such a level of detail is, in itself, counter-productive, but we would prefer you to provide too much rather than too little information, at least while the new requirements are bedding in.
Obviously, we cannot talk about SIP 9 without mentioning our #gizzatemplate campaign. Our worst fears have already come to life and we know that half of the profession are designing overlapping, and in some cases conflicting, templates for the disclosure after the SIP drafters decided that they would suggest different names for the time cost categories the profession has been using since about 2004 and produce a SIP with no template guidance for the Fees Estimate. We understand that the pressure that, so we have heard, around 85% of IPs are bringing to bear, may result in the next draft including some sort of outline template. That, in turn, might allow the main software providers to enable automatic completion from existing time codes. Despite that, we have still produced templates to support this guidance that our clients can use if they see fit. We are a bit short of sympathy with any non-clients who won’t be able to access our templates, as we have been in business for nearly 10 years and you had plenty of chances to become clients before now! For everyone’s sake, however, we will continue with our campaign to get templates included in the SIP. Nothing would make us happier than to be able to abandon our templates and use something agreed across the wider profession.
Paragraph 10 of the consultation draft neatly summarises the concerns that we have about the conflict between the transparency and consistency principles. On the one hand the paragraph requires office holders to use consistent work divisions throughout a case, but then also says that more categories or further divisions may be necessary for unforeseen work. We’ve taken a fairly robust view in our guidance and used a lot of different tasks in our templates, so that you are more likely to be able to be consistent throughout the case, even if that might make the disclosure a bit less transparent at the outset.
Just when you thought it could not get any worse, the SIP then comes up with the concept of “The Blended Rate”. A note to the SIP tells us that The Blended Rate is “calculated as the prospective average cost per hour for the case (or category of work in the case), based upon the estimated time to be expended by each grade of staff at their specific charge out rate”. You are told to use it in the Fees Estimate. Once you have approval for fees on a time cost basis, however, the SIP tells us that future reports should provide the “average rate (or rates) of the costs charged for each activity” for comparison. Is that the blended rate again? Why is it defined differently in the Fees Estimate when compared to the progress report, and how is that supposed to improve comparison through the life of the case? We have decided that you won’t go far wrong if you disclose all of the detail and then also summarise it in terms of a blended rate. It may be more than you strictly need, but it should avoid you missing anything.
Those of you with a particularly long memory will recall that one of the New Fee Rules mentioned earlier said that if you were on a fixed or percentage fee you did not have to produce a fee estimate, just an explanation of the work you expected to do. The SIP, however, adds a layer of complexity that might, arguably, be justified in terms of case types that the New Fee Rules apply to, but is surely misplaced in the context of VAs and MVLs that those Rules do not apply to. Paragraph 12 says that the office holder is required to explain why the fixed or percentage fee is expected to provide an “appropriate, reasonable and commensurate” reflection of the anticipated work. The office holder also has to indicate when the fixed fee will be taken. Paragraph 13 of the SIP says that you have to give enough time for creditors to absorb the information that supports your application for fee approval. No guidance is given for how long that might be, but we are pretty sure that it precludes any attempted solution to the CVL rule drafting problem by just handing the Fees Estimate out at the S98 meeting and seeking approval on the spot. The SIP also says that you cannot use ranges or alternative outcomes, so we’ve avoided being too woolly and we’ve gone for some pretty precise disclosure in our practical guidance.
The SIP contains a section, Paragraphs 14 to 16, about reports to creditors that requires the office holder to “ensure” that the disclosure assists the understanding of what was done. That seems like a hard thing to “ensure” if you ask us. It then also goes on to require the office holder to provide a narrative update on the key issues and any template-type information in subsequent reports, which again seems a bit harsh in the context of MVLs and VAs. It also requires you to use a consistent format for the period and the cumulative disclosure, which could be tricky on early cases where the interpretation of the SIP and New Fee Rules leads to different approaches being taken. Once again, this has driven us to use more detail at first, our thinking being that it is easier to remain consistent while combining a lot of categories disclosed at the start than it is to start off with few categories and split them later.
If we ignore the drafting errors that missed out the requirement to seek category 2 disbursement approval from the SIP and also shuffled the paragraph numbers a bit at the end, the remaining content after paragraph 17 is largely consistent with the old SIP, so that it did not present as much of a challenge to the development of our practical advice below. We did notice, however, that the wording that had been used in the old SIP, which we thought probably caught the need to make disclosure at the S98 meeting about the work done in respect of S98 meeting/preparation of SA fees, has been strengthened so that we think it must now catch them. The argument put forward around the old SIP was that the JIC never meant to catch S98 fees, but the new wording refers to “pre-appointment costs where recovery is expressly permitted” and payment is sought from the insolvent estate. Given the controversy before, they had the opportunity to exclude S98 fees and limit the wording to Administration pre-appointment costs, but this wording makes it more likely than ever that it would catch payments to the IP out of the assets of the company post appointment that are specifically allowed by rules 4.62 and 4.38 in CVLs.
Making a living
This is the part of this inordinately long post that finally tells you what we think you will probably have to do. It presupposes that you have read the New Fee Rules and SIP 9 sections above, even if you have not read the actual Rules and SIP themselves. The decisions we have taken and the disclosure we have made is based on the complex interaction of all of those requirements and although we have tried to explain clearly, if you have cheated and skipped to here you may be a bit puzzled in places. If you subsequently email to ask about something that is already in the prior sections, we will just refer you to it, as we cannot answer everyone’s individual variation on the same questions.
Administrations
Your current approach is to include information about fees within your proposals, such that approval of your proposals at a meeting of creditors approves the basis of your fees where it falls to the unsecured creditors to approve them, and to obtain separate pre-appointment fee approval at the meeting of creditors as required at that time. Where it does not actually fall to the unsecured creditors to approve the basis of your fees you are still making disclosure to them. The New Fee Rules won’t change that timing or approach, but you’ll need to add a Fees Estimate into your proposals for any time cost element that you seek. Your engagement letter will also need updating and your checklists, proposals and proxy forms will need some of the wording fine-tuned, but those of our clients that use our templates on our online portal will be told when we have done the updated engagement letters and checklists and uploaded them.
CVA
CVAs are not caught in the new rules, but you need to be aware of SIP 9. When the final version comes out, if it still applies to VAs and MVLs, we will issue updated versions of our VA packs to our Silver and Gold clients.
MVL
MVLs are also not caught in the new rules, but the consultation draft of SIP 9 still caught them. We will keep an eye out for the final version and make any amendments to the engagement letters and checklists on our online portal, notifying clients when we have done so.
CVL
As stated in both the New Rules and SIP 9 sections above, despite the possibility that a Dear IP may be issued implying that the Fee Estimate can be issued before you are liquidator, we have stuck with a strict interpretation of the wording in the legislation and developed the approach that follows. In short, we assume that you will only seek approval of your S98 meeting/SA fee at the S98 meeting, and you will seek approval of your remuneration once you have been appointed liquidator, probably by providing information in the rule 4.49 report and obtaining approval by correspondence. Quite apart from the legal technicality, one client also mentioned that by that time they would have more knowledge of the circumstances of the case, so would be in a better position to produce a reasonable Fee Estimate. You will, eventually, want to change your meeting notices so that they just refer to the possibility of seeking S98 meeting/SA fee approval, but for now it does not do any harm to mention that a fee resolution “may” be sought, even if you don’t actually intend seeking one, just in case there is a proper fix introduced to allow the “proposed” liquidator to issue the Fees Estimate. Most IPs are sending out blank proxies for S98 meetings, so there is no need to change those. Checklists will need updating for the New Fee Rules and, in due course, the final SIP 9, but the biggest change, if you follow our logic, is to adapt your Rule 4.49 report, i.e. the report that you issue just after the S98 meeting. We think that because the liquidator has to give out the Fees Estimate and other pre-approval information, the first opportunity to seek it is in the Rule 4.49 report. We therefore think that you will include a section in the Rule 4.49 report saying what you have done since you were appointed and why, and providing a Fees Estimate and an explanation of any fixed or percentage fees and expenses. You should then seek approval, which might be by a meeting or by passing resolutions by correspondence. You will therefore need something like the Fees Estimate templates that we have issued to clients and an appropriately worded proxy form.
CWU
You will seek fee approval at a meeting, or by correspondence, as you do at present, so the New Fees Rules will require some updated checklists and a Fees Estimate template, but the procedure itself will be as it is now. Those of our clients that use our templates on our online portal will be told when we have done the updated checklists and uploaded them.
IVA
IVAs are not caught in the new rules, but you need to be aware of SIP 9. When the final version comes out, if it still applies to VAs and MVLs, we will issue updated versions of our VA packs to our Silver and Gold clients.
BKY
You will seek fee approval at a meeting, or by correspondence, as you do at present, so the New Fee Rules will require some updated checklists and a Fees Estimate template, but the procedure itself will be as it is now. Those of our clients that use our templates on our online portal will be told when we have done the updated checklists and uploaded them.
Reducing the risk – our suggested approach across all case types
The problem, as we see it, across all case types is the uncertainty that the new legislation creates. That uncertainty is explained in more detail earlier in this article, but covers both the regulatory risk of not providing enough detail in the Fees Estimate and the financial risk that the cap impose by the Fees Estimate creates. Ever since the New Fee Rules came out in April we have been developing an approach that we think could make the risk manageable, while also reducing the ongoing reporting burden. Our view is that by reducing the Fees Estimate to just truly uncertain areas, you can reduce your exposure. We therefore suggest that you consider seeking your fee on a mixture of the three bases.
First, we recommend that you seek a fixed fee for the sort of routine administrative, statutory and cashiering tasks that you have to undertake on every case. Exactly where you set that fee will be your own commercial decision, but our experience suggests that it may well be at least £10,000 for corporate appointments and not much lower for Bankruptcies, where the OR also takes an early slice. We rarely see a corporate case closed with less than £10,000 in time charged and higher amounts are common, but you need to be able to justify the level of fixed fee that you seek in the context of your case. You would have to disclose the work that you intend to do for that fee and you would have to explain that these are administrative tasks or statutory/regulatory requirements that bring no tangible financial benefit to the appointment. Because this would be a standard fixed fee across all cases, however, you would be able to draft a standard explanation that you refer to every time, similar to the sort of practice fee recovery sheet that we see people use to explain their charge out rates and disbursements policy. There would need to be small differences between case types, such as no references to Companies House filings in Bankruptcies and no reference to CDDA reports in CWUs or Bankruptcies, but once the outlines are drafted, they should remain fairly constant. In small “burials”, even if you obtained authority for a £10,000 fixed fee, you might only recover the £3,000 or whatever there is available, but it would give you some headroom if unexpected assets are recovered. In larger cases, this would at least secure your overhead recovery, reducing the damage if time costs recovery became difficult later in the case.
We then recommend that you look at what we call the “known assets”. These are assets like book debts, equipment and property where you know about their likely value and their ownership is undisputed. We think that rather than risk time cost approval exposure and an increased reporting requirement, you could instead seek approval to deal with those assets on a percentage basis. We think that the percentage could be quite high, given that you, as the office holder, take the commercial risk and will not get paid if there are insufficient recoveries. On a risk/reward argument, we think that you could seek as much as 50% of some complex assets, but that might be less appropriate when “recovery” of a large sum is dependent on sending just a couple of letters to the bank asking for it. You will, of course, need to provide creditors with a justification that is commensurate with the percentage you are seeking, particularly whenever you are seeking to recover more than the statutory scale. For the avoidance of any doubt, responding to a complainant or regulator with “Compliance On Call mentioned 50%” is not going to be sufficient justification! By only seeking a percentage of the known assets, this potentially leaves a sum of money available for distribution or to meet your time costs for investigation and other uncertain areas.
Finally, having secured your fixed fee for administrative and statutory tasks and your percentage fee for known asset recoveries, you could seek time costs only for those areas where you don’t know how much work will be needed and you need to limit your exposure and that of the creditors. You might, initially, seek approval for a certain amount of investigation, disclosing that you expect to need more if you find potential recoveries and want to do more investigation or take recovery action. This will enable you to limit your Fees Estimate and subsequent time costs disclosure to just the few areas around investigations and, potentially, admitting claims and paying dividends. At least the first tranche should be covered by the balance of any known assets, and future tranches can be approached on a commercial basis. If you and the creditors don’t think it is worth it, you could explain why you think the investigation should be abandoned and close the case.
Some time after we first suggested this approach at a road show, the Pension Protection Fund issued their guidance on IP remuneration and we note that at paragraph 3.4 pf that guide it says, “We are prepared to consider fee proposals which incorporate a different basis of charging for different aspects of the work required (e.g. fixed fee for statutory work, percentage basis for asset realisation work and time cost basis for investigation or contentious litigation type work).” Our approach goes a little beyond that simple breakdown, but we think it could work.
Templates
Whether you follow our logic and seek mixed fee bases or cling to your old system and risk seeking just time costs, the templates that we have issued to our clients allow you to make appropriate disclosure in your Fees Estimate and they include narrative that can be adapted for use with any fixed fee or percentage basis elements. Hopefully, as we said earlier, they will be superseded by national standards in the final SIP 9 and eventually automated in your computer software, but for now these should help you seek approval in the first few cases.
For now, there are two templates. Both use the work categories in the simple (i.e. under £50,000 fees) table in the old SIP 9 appendix D table. One template is designed for use if you are keeping to a time cost basis for everything. It has all five of the old categories and a lot of extra breakdown under each of those headings. You won’t need some lines in some cases and you may want to add extra lines in others, so we have included some prompts to help explain what to do when you make changes. The second template is designed for anyone that takes the mixed fee approach that we advocate. That template only includes categories and extra details for the areas that you are seeking time costs. You only have to give a Fee Estimate for areas where you are seeking time costs, so we have done this to make it a completely separate document from the document providing information about your other bases. We are drafting narrative disclosure to use when you are seeking the fixed and percentage based elements, which we anticipate issuing next week, along with our updated checklists, etc.
It is important to remember that narrative explanations of what you have done or intend doing will be given significant weight under the new SIP 9. No template will be enough on its own and the quality of the narrative that you use in any accompanying report will potentially be more important than the details in your template or numerical disclosure.
The future
This is only the start. We will use the next few weeks to make the consequential changes to our standard documents that follow on from the early approval and some of those will be issued next week. By 1 October, we will produce a pro-forma rule 4.49 report for use in CVLs where clients follow our approach and seek fee approval after the S98 meeting. It will contain the usual rule 4.49 report content, but also a report on actions already taken and those proposed to be taken, together with reference to the Fees Estimate. If the legislation is amended before then, you won’t need it, but we think it may still be needed if all you have to rely on is an uncertain reference in SIP 9 and something that we have not yet seen in Dear IP. We will amend our online progress report and final report templates so that when you start reporting on post 1 October 2015 cases we have the resources available to help you with that stage as well. In the meantime, we will continue to update the full document packs that we are developing alongside our improved CVA and IVA packs, so that when the rest of the rules are consolidated and new rules, like those dealing with the alternative decision making procedures that will replace meetings, are ready, we are in a position to offer fully coded packs for anyone using IPS or Vision Blue for their case administration.
We will shortly be recruiting for someone to help with the document production and supervise the delivery of packs to those who want them, so this really is just the start of an exciting period and we hope that this has shown that working with us can simplify (?!) even the most technical and time-pressured regulatory developments.
Will it make any difference?
When we first started looking at the New Fee Rules and consultation draft of SIP 9, the outlook was pretty gloomy, but the more we have looked at the mechanics of approval, the more we feel that this might not be quite the shock that we feared. Taking CVLs as the most common bread and butter case type that most IPs outside the IVA specialists will see, the old approval was usually done on open ended time costs, at a poorly attended meeting, where the only voting creditors were often the director and the company’s accountant, possibly with the odd proxy in favour of the chairman. There was usually a fee for convening the meeting and helping with the statement of affairs which was sometimes paid before the meeting so that it just had to be disclosed, not approved. Despite the fact that the fee was, in theory, open ended, it was limited to the available assets. Usually there was a contribution from the director, or possible a small asset sale and the possibility of a bit extra if investigations led to additional recoveries.
Under the new system, assuming that you wait until after the S98 meeting to seek fee approval, for most of those cases you should notice little real difference. You will still get an SA fee that can still be approved, if necessary, at the S98 meeting, because the New Rules don’t apply to pre-appointment fees. You may have to make a bit more disclosure to comply with SIP 9. You will then seek separate fee approval which, while no longer open-ended, will still be limited to the assets available. There will be a bit more information to disclose, but we don’t anticipate a sudden rush of creditor enthusiasm to vote at meetings. If they could not be bothered before to send in a proxy when they did not know what the outcome would be, why, in the smaller asset cases, would they now rush to respond when you have told them that you are unlikely to recover all of your fixed fee for the case administration and statutory work? As a result, we think that the fee approval is still likely to come from the director and the accountant, but even they may need chasing up. Larger cases may face greater scrutiny and getting clearance for investigation time costs may be tricky, which could be awkward for practices that have traditionally done a lot of speculative work. We think that you are likely to be more reluctant to “take a punt” if you cannot be sure of fee approval, which may result in potential assets not being investigated and lower returns for creditors, but only time will tell.
