At the moment, insolvency practitioners (“IPs”) working as administrators, liquidators and trustees in bankruptcy have discretion as to how they charge fees. It may be a percentage of realisations, a fixed fee, on a time basis or a combination. Charging according to how much time has been spent on the instruction is currently the most popular method of fee charging. However, IPs’ fees have come under intense scrutiny over the last few years amidst a growing concern that unsecured creditors in particular are losing out in insolvencies.

Two reports have highlighted the issue of IPs’ fees. A report by the Office of Fair Trading in June 2010 found that in just over a third of insolvency cases where unsecured creditors are paid, fees were approximately 9% higher in like-for-like cases than where secured creditors have influence over an IP’s fees. A subsequent report prepared by Professor Kempson and commissioned by the Insolvency Service in July 2013, echoed the OFT’s findings and suggested that the estimate of 9% difference is probably conservative. It is suggested that the difference stems from the way the market works, as the secured creditors are often banks who will play an active part in an insolvency. IPs naturally would like the Bank’s repeat business and will price the work competitively. The same does not apply to small unsecured creditors with limited or no prior insolvency experience. It is difficult for them to work together and have an influence or oversight over IPs’ work. The reports explored ways of making the insolvency process more competitive and firms more accountable for their fees. They also considered how to reduce fees and allow unsecured creditors a greater level of involvement in the fee process.

Continuing with this theme, the Insolvency Service has been consulting on new powers for itself, as the oversight regulator, to sanction the recognised professional bodies (“RPBs”) which license IPs. There are eight different RPBs (being mainly accounting and legal regulators) for less than 2,000 IPs. The new powers would seek to influence the behaviour of the RPBs which have been accused of acting inconsistently. In a bid to promote uniformity of approach, the Insolvency Service is suggesting new regulatory objectives for RPBs including protecting and promoting public interest and ensuring fees charged by IPs represent value for money. If these measures are adopted but prove unsuccessful, the Insolvency Service is also suggesting the Government adopt powers to appoint a single regulator to effect the necessary changes.

Further reforms being considered are changes to the Insolvency Rules 1986 to require IPs to charge fixed fees either as a percentage of the realisation or a flat fixed fee. It is suggested that the exceptions to this should be where there is a creditor’s committee, where secured creditors remain in control of fees, or when dealing with Individual Voluntary Arrangements /Company Voluntary Arrangements (where the creditors maintain control over fees) or Members’ Voluntary Liquidation (where the company is solvent and all creditors are paid in full). The consultation also asks if there are circumstances where time and rate charges are acceptable such as where IPs have to do investigative work.

In matters where IPs are required to charge fees as either a percentage of realisations or a fixed fee, it is proposed that creditor approval is given for the intended fee by a vote in favour by a simple majority of the creditors voting. If an agreement is not reached, a statutory scale for fees as a percentage of realisations would apply. It is proposed that IPs will still be able to apply to court if they disagree with the fees but must show why they consider that the default amount under the statutory scale is not appropriate.

The consultation ends today (28 March) and some IP groups have voiced concerns with the potential inflexibility of the suggested changes and with the consultation’s focus on the return to creditors as opposed to the value of the IP’s work. However, it seems that there is impetus to implement change in this area quickly given that draft legislation has already been produced and put before Parliament. So watch this space to see whether there will be a potential upheaval to the regulation and way insolvencies are dealt with in the future.

For further information, please contact James Walton or the partner with whom you usually deal.