Administrators’ fee approval

The Insolvency Legislation contains a number of grey areas where interpretations can vary. Occasionally, rather than post a clear, defining opinion on the Blog, we explore an issue with a view to generating some debate and considering whether steps should be taken to improve the way that the profession operates. This is one such article. Near the end of last year we lost a bit of sleep over whether an IP had to have a separate resolution to approve their administrator’s remuneration at a meeting of creditors to approve their proposals. The issue that triggered our interest appears to have receded and we are not as excited about it as we were at the time, so whilst we don’t want to stir it up again we thought it was worth airing our thoughts.

Whether or not a separate fee resolution is required in administrations has been the subject of occasional debate, particularly amongst the monitors, since the current provisions were introduced over 11 years ago, in 2003, but we are not aware that a monitor has ever raised this as an issue on a monitoring visit to a client. Our view is, and always has been, that where a meeting of creditors is being held to consider the administrator’s proposals, a separate resolution to approve administrator’s remuneration is not required and that the resolution approving the proposals approves the basis of remuneration since the proposals are required to include information on the basis of the administrator’s remuneration.

Rule 2.106 set out the provisions for fixing administrator’s remuneration and distinguishes between cases where the administrator has made a statement under paragraph 52(1)(b) (i.e. that there are either sufficient funds to pay all creditors in full, or there will only be a distribution of the prescribed part to unsecured creditors, or the administrator is pursuing objective c)), and those where the administrator has not. As you are aware, a meeting of creditors need only be held where the administrator has not made a statement under paragraph 52(1)(b), and rule 2.106(5) indicates that “the administrator’s remuneration may be fixed by a resolution of creditors.” Rule 2.33 sets out the prescribed content of the administrator’s proposals and makes it clear that they should contain “the basis upon which it is proposed that the administrator’s remuneration should be fixed under rule 2.106.” Thus the basis of remuneration is required by statute to be specified in the proposals, which in turn have to be approved at the meeting of creditors to be effective. As a result, our view is that, in just the same way that remuneration in voluntary arrangements is approved by the approval of the proposals, then a resolution approving the administrator’s proposals also fixes the basis of the administrator’s remuneration without the need for a separate resolution.

Our argument is also supported by the provisions relating to the approval of pre-administration costs that were introduced in April 2010. Rule 2.67A(3) makes it clear that in cases where the administrator has not made a statement under paragraph 52(1)(b) and a meeting of creditors is held, then the approval of such costs “shall be by resolution of a meeting of creditors.” The wording used differs from that in rule 2.106, using “shall be” rather than “may be”, and if the Insolvency Service had thought that the existing wording under rule 2.106 was sufficient to require a separate resolution then they would mirrored the wording used in rule 2.67A. In addition, rule 2.33(2B)(h) makes it clear that the pre-appointment approval must be by a separate resolution. If Parliament had intended that to be the case for post-appointment remuneration then it would have been specified in the same way. Accordingly, our view is that only pre-appointment costs currently require a separate resolution. The same arguments apply whether you are holding a physical meeting or one by correspondence. We informally discussed this with a barrister and a regulatory monitor and they both indicated that they share our view.

We have seen several practices where they used to seek a range of separate resolutions, including ones approving fees, but then ran into trouble with allocating votes and modifications, in some instances casting doubt on whether “the proposals” had been approved at all. The solution at those practices to date has always been to stop taking multiple resolutions and limit the resolutions to those approving the proposals and any pre-appointment costs, but we do wonder whether the time has come to consider having separate fee approval in every case type. That would mean minor amendments to the rules for administrations and company and individual voluntary arrangements, but it might improve transparency. On the other hand, it could lead to confusion around voting when creditors only vote, for example, in favour of the administrator’s proposals, but not on the other resolutions, or when one of the major voting agents uses its own version of the proxy form that does not then include the separate resolution. This is something that already happens with the separate joint and several powers resolution required in IVAs and CVAs where there are joint supervisors.

As with many proposed changes to our legislation, we are not sure that there will be enough benefit to outweigh the costs of the revised documentation and increased confusion it will cause when seeking approval of the resolutions, but it will be interesting to see whether such a change is proposed in due course.