Addressing the myths around insolvency fees
19 April 2022
Every year, tens of thousands of businesses experience financial difficulties, putting jobs and supply chains at risk. Research published by R3 in May 2021 demonstrates the significant contribution the insolvency and restructuring profession makes to tackling this issue, rescuing 297,000 jobs and returning £1.82bn to creditors in insolvency cases in 2019 – the equivalent of around 800 jobs and £5m a day.
Yet media headlines often focus on the “costs” of an insolvency process, rather than the outcomes of the work and the help the profession provides to insolvent companies and individuals to help them repay their debts, promote economic growth and uphold the UK’s status as an international centre for financial services. They also fail to note the difference between the charges that are recorded and the charges that are actually paid.
To help tackle the most common misconceptions about insolvency fees, R3’s Press, Policy and Public Affairs team has published new research which aims to address how the fees are broken down, the typical costs involved in an insolvency procedure, and how the costs reported in an insolvency case often bear little resemblance to the amount insolvency practitioners (IPs) are actually paid for the work they undertake in these cases.
How are insolvency fees charged?
IPs’ fees are most commonly calculated on a time-cost basis, and IPs are required by law to provide regular reports of the time they and their staff spend on a case, as well as a breakdown of the activities they undertook, and their fees and expenses.
The number of hours an IP will take to carry out a task varies greatly, depending on the company size and the complexity of the case. Large, high-profile cases often involve more complex, highly specialised work, and therefore incur greater time costs.
For example, if the company has multiple sites, IPs and their teams will often have to travel to these various locations in order to access records, speak to staff and secure assets, while a business which has a high number of stakeholders (such as staff and suppliers) will require a significantly larger time commitment on its a case – as well as higher associated costs – than a smaller business with a smaller number of stakeholders.
And in instances where the creditors have agreed the IP will assume control of the business – either in place of or working alongside the company’s directors – time costs will increase as the Office Holder will have to manage both the operational and the restructuring element of running the business.
It’s also important to note that there is often a vast difference between the amount that Insolvency Practitioners record as being charged in the statutory reports they are required to file and in the amount they are paid once a case is completed.
How are insolvency fees regulated?
Insolvency fees are regulated via the Insolvency Act (1986) and the Insolvency (England and Wales) Rules 2016.
For each type of insolvency procedure, the Insolvency Rules provide a detailed description of a range of areas relating to fees. This includes: the ways in which IPs can charge fees, the information that IPs must report to creditors on fees and expenses, and the circumstances where an IP may need to apply to court for approval of their fees, among others.
In addition to this, SIP 9 includes a set of principles on insolvency payments to help ensure that payments are fair, reasonable and proportionate to the insolvency appointment.
The principles state that insolvency office holders must disclose to creditors “what was done, why it was done, and how much it cost”, in a way that is transparent and of assistance to creditors, and office holders must supply the information in sufficient time for creditors to be able to make an informed judgement about the reasonableness of the office holder’s requests.
IPs can be fined, sanctioned and can lose their license for failing to comply with their regulatory requirements.
What are insolvency practitioners actually paid?
Stories about insolvency fees often focus on the hourly rate IPs charge, but this doesn’t tell the whole story.
An insolvency procedure ultimately aims to return as much money as possible to an insolvent company or individual’s creditors. Unfortunately, because of the very nature of insolvency there is usually not enough money available to repay everyone what they are owed, including the IP.
Often, IPs often do not receive payment in full for the amount of work they have carried out. In smaller cases, it is common for the insolvent company to have insufficient assets to pay an IP in full, and can lead to the IP being paid none of their time costs.
In other cases, creditors may negotiate a lower fee after the insolvency procedure has concluded, which means the IP will not receive full payment for the time they have spent on a case.
And there are instances where an IP agrees to waive part of their fee in order to return more money to the business’ creditors.
There are three cases studies of instances when an IP has not been paid in full for their work in the fee paper, as well as an explanation of why this happened.
Download the free guide
As demonstrated, a closer look at insolvency fees shows that the detail behind them is much more complex than headlines make out. We hope that this new guide will be a useful resource for members to help provide more context around this issue.
To learn more about insolvency fees, download a copy of R3’s fee paper.
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