Anyone from the Insolvency Service who reads our Blog this month will think we have got it in for them, so I’ll start with a brief explanation. We have been quiet on the Blog during a busy June, so are now catching up on a few of the more interesting issues that have come to light recently. We try not to repeat too much content that you can read elsewhere, so we don’t analyse recently decided cases, which others tend to do far better than us, or jump on every Twitter feed about the latest appointments. Because of this approach, the points that we tend to raise can be pretty technical and often relate to parts of the regulatory framework or public policy. Where our view differs from that being generally publicised by other commentators, this will often mean that we are challenging regulators or the Insolvency Service. We see this as a positive contribution to the debate, even though we understand that sometimes our contribution may not be welcomed in some quarters.
This article is all about rules 6.138(6), 6.138A and 6.141, which apply to bankruptcies and combine to form the so-called “18 month rule”, together with their liquidation counterparts, rules 4.127 (CVL and CWU), 4.127A (CWU only) and 4.148A(4) (MVL), which are somewhat different but are also worthy of comment.
We’ll start with the bankruptcy provisions. Rule 6.138(6) says that where the trustee is not the OR and the basis of their remuneration is not fixed by the usual committee or creditors’ meeting resolution route within 18 months after the trustee’s appointment then they “shall be entitled to remuneration calculated in accordance with Rule 6.138A. Rule 6.138A sets out the scale rates that can be used, subject to the usual restriction to the realisation scale so that it only applies to realisations needed to pay the bankruptcy debts including any costs and fees in administering the estate in full. Rule 6.141 says that remuneration fixed by the committee, or the creditors, or under rule 6.138(6) is insufficient or inappropriate, they can apply to Court to change it.
The problem we have with all of this is that we understand that the Insolvency Service consider that this means that if a trustee has not had their fee basis fixed within 18 months of their appointment, they can only use the statutory scale, that is unless they apply to Court under rule 6.141. We think that rule 6.136(6) does not actually say that. It says that once the 18 months are up the trustee “shall be entitled to” scale rates. It does not say “shall only” or “shall be limited to”. We consider that “shall be entitled to” is permissive, allowing the trustee to default to scale rates if they want, but they still have the option to revert to the committee or creditors should they so wish.
To address the issue in practice, since it is probably not worth going to war with the Regulator of Regulators on the topic, and they will have directed your Regulator how they expect the rule to be read, we recommend that you seek fee approval as early as possible in the proceedings. That way, you will be seeking approval earlier in the proceedings when creditors are more likely to be interested and prepared to vote, and if you have a problem case you will know about it early and plan your work with that knowledge in mind.
In liquidation, the equivalent rules are slightly different and we think it helps to consider how they impact on each case type.
Starting with CVLs, which are probably your highest priority, most of rule 4.127 sets out the usual committee/creditor approval, but rule 4.127(6) does not apply, so you have no fall back to scale rates, and rule 4.127(7) says that if you don’t get the basis fixed you can go to Court, but only if you have tried for approval from the committee or creditors first and then only within the first 18 months. The upshot of this is that if you don’t get approval within 18 months, whether from the committee/creditors or the Court, you can only get it from the committee/creditors thereafter. You cannot apply to Court.
In CWUs, most of rule 4.127 applies and you have the usual committee/creditor approval route, but rule 4.127(6) applies instead of rule 4.127(7) and that says that if the liquidator’s fee basis is not set within 18 months after their appointment, they shall be entitled to the scale rates set out in rule 4.127A. Rule 4.130 goes on to say that if the liquidator thinks that the basis set by the committee/creditors under rule 4.127(5A) or (6) is insufficient or inappropriate, they may apply to the Court for a change. As with bankruptcy, our understanding is that the Insolvency Service thinks that this means that if a liquidator has not had their fee basis fixed within 18 months they can only use the statutory scale unless they apply to Court under rule 4.130. As with the equivalent bankruptcy rule we think that rule 4.127(6) does not actually say that. It says that once the 18 months are up the liquidator “shall be entitled to” scale rates. It does not say “shall only” or “shall be limited to”. We consider that “shall be entitled to” is permissive, allowing the liquidator to default to scale rates if they want, but they still have the option to revert to the committee or creditors should they so wish.
Once again though, we cannot recommend that you go head to head with the Insolvency Service and we therefore suggest that you seek fee approval as early as possible in the proceedings, when creditors are more likely to be interested and prepared to vote and if you have a problem case you will know about it early enough to plan your work with that knowledge in mind
The MVL provisions are interesting, but probably only in theoretical terms. We cannot think of a case where we have seen an MVL require anything other than the original approval from members at the general meeting. However, for completeness, rule 4.148A sets out the need for the members’ approval and allows a liquidator to apply to Court if the members fail to set out a basis, so long as any such application is made within 18 months. As with CVLs, therefore, if you don’t get approval within 18 months, whether from the members or the Court, you can only get it from the members thereafter. You cannot apply to Court once 18 months has elapsed.
The original draft of this article, to my eternal shame, included reference to a rule that was revoked in 2010. I have amended the article rather than leave it up, although I have also published an explanatory note later in the blog in case anyone had already read the incorrect post.
