Wednesday, September 23, 2015

No, Dear IP 68 is not enough!

It seems that the last three days have seen an endless stream of emails along the lines of, “Now that Dear IP 68 has come out, are we alright to issue CVL Fee Estimates pre-appointment?”

The short answer is that in our opinion it is still too risky to do so. This was covered in our main post about the new Fee Rules and SIP 9, but that was, of necessity, long and our comments anticipating a Dear IP on the subject were buried in it:

“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. “

Dear IP 68 has now been issued and it says, “The use of the word ‘liquidator’ is not intended to preclude an insolvency practitioner from providing this information ahead of a s98 meeting at which s/he is subsequently appointed. What is important is that creditors are given sufficient time to make an informed decision about the reasonableness of the information provided. It would not be appropriate for the estimate to be provided for the first time at the meeting, and creditors expected to vote on it at the same time. If it is not possible to provide the information ahead of a meeting then a resolution should be subsequently sought by correspondence.”

We can only state the risk and let you decide what to do. We are going to use something like the following wording at the top of our own reviewing checklists because we recognise that some clients may follow the Service guidance and send notices early:

The position regarding approval of fees in CVLs is somewhat unclear. The Insolvency (Amendment) Rules 2015 indicate that it is for the liquidator to issue a fees estimate when some or all of the remuneration is to be fixed on a time cost basis, or information about work to be done when remuneration is to be fixed on a % or fixed fee basis. However, Dear IP 68 indicates that the Rules were not intended to preclude an IP from providing the information ahead of the section 98 meeting, and that what is important is that creditors are given sufficient time to make an informed decision about the reasonableness of the information provided. Dear IP does make it clear that it would not be appropriate for the information to be provided for the first time at the section 98 meeting. As a result, although Dear IP suggests that you may be able to issue notices before you are liquidator and seek approval at the S98 meeting, we are not sure that it is technically correct and we consider that too great a risk to take on fee approval. Accordingly, until the legislation is changed or there is case law confirming the stance in Dear IP 68, we recommend that fee approval is only sought once the liquidator has been appointed and we consider that it is likely to be easiest to enclose appropriate notice with the rule 4.49 report. The approach taken in this Work Programme is to include both approaches, although from a risk perspective we consider that the safest approach, to ensure that there is no doubt that the basis of the liquidator's remuneration has been fixed, is to convene a separate general meeting of creditors, or seek approval of a resolution by post, after the section 98 meeting, i.e. when in office as liquidator.

 On a lighter note, just think how mad the world would become if all legislation was to be reinterpreted by those affected by it, based on what the drafters might have meant to say at the time! We don’t think it is particularly unreasonable to expect that if the people who draft the law and are responsible for the regulation of the whole insolvency system want something to happen, they should have the basic drafting skills necessary to say so?! The problem here though was the lack of consultation with the profession about the Rules, the Insolvency Service appear to have just drafted them and issued them, and we are now suffering the consequences.