STATEMENT OF INSOLVENCY PRACTICE 9 (E&W)

This Statement of Insolvency Practice (SIP) is one of a series issued to licensed insolvency practitioners under procedures agreed between the insolvency regulatory authorities acting through the Joint Insolvency Committee (JIC), with a view to maintaining high standards by setting out required practice and harmonising practitioners' approach to particular aspects of insolvency.

SIP 9 was produced by the JIC, and has been adopted by each of the regulatory authorities listed below:

Recognised Professional Bodies:

• The Association of Chartered Certified Accountants
• The Insolvency Practitioners' Association
• The Institute of Chartered Accountants in England and Wales
• The Institute of Chartered Accountants in Ireland
• The Institute of Chartered Accountants of Scotland
• The Law Society
• The Law Society of Scotland

Competent Authority:

• The Insolvency Service (for the Secretary of State for Trade and Industry)

The purpose of SIPs is to set out basic principles and essential procedures with which insolvency practitioners are required to comply. Departure from the standard(s) set out in the SIP(s) is a matter that may be considered by a practitioner's regulatory authority for the purposes of possible disciplinary or regulatory action.

SIPs should not be relied upon as definitive statements of the law. No liability attaches to any body or person involved in the preparation or promulgation of SIPs.

The purpose of this statement of insolvency practice is to:

• set out required practice with regard to the observance of the statutory provisions;
• set out required practice with regard to the provision of information to those responsible for the approval of remuneration to enable them to exercise their rights under the insolvency legislation;
• set out required practice with regard to the disclosure and drawing of remuneration and disbursements and other expenses to enable creditors (and where relevant members and the bankrupt) to exercise their rights under the insolvency legislation.

The statement has been produced in recognition of the principle that those with a direct financial interest in the level of office holders’ remuneration, disbursements and other expenses should be confident that the rules relating to charging have been properly complied with. Those charged with responsibility for approval of remuneration, or with the right to challenge remuneration or expenses, should have access to sufficient information about those charges to be able to make an informed judgement about their level in any particular case.

Practitioners should be aware that the drawing of remuneration otherwise than in accordance with the relevant statutory provisions will render them in breach of the law.

The statement is divided into the following sections:

• The statutory provisions
• Provision of information when seeking fee approval
• Provision of information after fee approval
• Asset realisations
• Expenses and disbursements
• Payment in full
• Closure of cases

The statutory provisions relating to the remuneration of office holders are set out in The Insolvency Rules 1986 (‘the Rules’) as amended. The rules for cases commended prior to 06 April 2010 differ from those after that date by virtue of the application of the Insolvency (Amendment) Rules 2010. 

There are also disclosure requirements in the Insolvency Regulations 1994, as amended, and time recording requirements contained in the Insolvency Practitioner Regulations 2005, as amended, and the Insolvency Rules 1986, as amended.

In addition to the statutory provisions, remuneration should not be drawn on the statutory scale without first attempting to obtain the agreement of the committee or the creditors to a basis for the fixing of the remuneration, nor as an interim measure pending the agreement of the committee or creditors. This does not, however, preclude the fixing of remuneration by the committee or the creditors on the basis of the scale or the automatic application of the scale upon the expiry of 18 months from the commencement of the office holder’s appointment in bankruptcy or compulsory liquidation matters commencing on or after 06 April 2010.

Practitioners should be mindful at all times of the rights accorded to creditors in relation to remuneration under insolvency legislation, and when acting in an advisory capacity or as office holder should ensure that adequate steps are taken to bring those rights to their attention.  Appendix C contains the text of a set of explanatory notes on the bases on which office holders’ remuneration is fixed in a format suitable for making creditors aware of the relevant provisions. It also explains creditors’ rights to seek further information about and challenge the level of remuneration, disbursements and other expenses.  Practitioners are required to ensure that information on how to access the explanatory note appropriate to both type of insolvency proceedings concerned and the legislation applicable, or the equivalent information in some other suitable format, is made available to creditors before any resolution is passed to fix or approve the office holder’s remuneration.

The particular nature of an insolvency office holder’s position renders if of primary importance that all payments made to his own firm out of funds under his control should be disclosed and explained to challenge his remuneration, disbursements or other expenses. When seeking agreement to payments made to his own firm, the office holder should provide sufficient supporting information to enable those responsible for approving those payments (“the approving body”) to form a judgement as to whether they are reasonable having regard to all the circumstances of the case. The nature and extent of the supporting information which should be provided will depend on:

 

• the nature of the approval being sought;
• the stage during the administration of the case at which it is being sought; and
• the size and complexity of the case.

Where, at any creditors’ or committee meeting, agreement is sought to the terms on which the office holder is to be remunerated, he should provide the meeting with details of the charge-out rates of all grades of staff, including principals, which are likely to be involved on the case.

Where agreement is sought to remuneration during the course of the assignment, an up to date receipts and payments account should always be provided.  Where the proposed remuneration is based on time costs the office holder should disclose to the approving body the time spent and the charge-out value in the particular case, together with, where appropriate, such additional information as may reasonably be required having regard to the size and complexity of the case.  The additional information should comprise a sufficient explanation of what the office holder has achieved and how it was achieved to enable the value of the exercise to be assessed (whilst recognising that the office holder must fulfill certain statutory obligations that might be seen to bring no added value for creditors) and to establish that the time spent has been properly given.  That assessment will need to be made having regard to the time spent and the rates at which that time was charged, bearing in mind the complexity of the case, any responsibility of an exceptional kind which falls on the officeholder, and the value and nature of the assets which the office-holder has to deal with. Appendix D sets out a suggested format, with explanatory notes, for producing the information required to enable staff and sets out suggested categories for the purposes of this analysis.  Whilst the approach embodied in Appendix D is potentially applicable to all types and sizes of case, the degree of analysis and form of presentation should be proportionate to the size and complexity of the case, and not all categories of activity will always be relevant.

Where the remuneration, or any part of it, is charged on a percentage basis or as a set amount, the office holder should provide the approving body with details of any work which has been or is intended to be sub-contracted out which would normally be carried out by office holders themselves.

 

On the request of the company’s liquidator, a receiver appointed in relation to a company should provide the information specified in paragraph 3.4 and a record of time spent on the case by him and any persons assigned to the case.

 

When notices are sent out convening meetings under section 98 of the Insolvency Act 1986 they should include a statement to the effect that the resolutions to be taken at the meeting may include a resolution specifying the terms on which the liquidator is to be remunerated, and that the meeting may receive information about, or be called upon to approve, the costs of preparing the statement of affairs and convening the meeting.  Practitioners should advise directors when convening section 98 meetings that the notices dispatched to creditors should include such a statement and contain the information on how to access the appropriate explanatory note referred to in paragraph 3.1.  If that advice is given orally and not accepted by the directors it should be confirmed in writing.

 

Where a resolution fixing the basis of remuneration is passed at any creditors’ meeting held before he has substantially completed his functions the office holder should notify the creditors of the details of the resolution in his next report or circular to them.  In all subsequent reports to creditors the office holder should specify the amount of remuneration he has drawn in accordance with the resolution.  Where the remuneration, or any part of it, is based on time costs he also should provide details of the time spent and charge-out value to date of the remuneration so charged and any material changes in the rates charged for the various grades since the resolution was first passed.  He should also provide such additional information as may be required in accordance with the principles set out in paragraph 3.4.  Where the remuneration, or any part of it, is charged on a percentage basis or as a set amount, the office holder should provide the details set out in paragraph 3.5 above regarding work so charged which has been sub-contracted out.  The requirements of this paragraph also apply where the basis of the remuneration of a supervisor in a voluntary arrangement as set out in the proposal does not require any further approvals by the creditors or any creditors’ committee established under the proposal.

It should be borne in mind that creditors (and in a Members Voluntary Liquidation, also members) of the company may have the right to seek further information regarding remuneration, disbursements and other expenses, to requisition a meeting, or to apply to the court if they consider the office holder’s remuneration to be excessive, or the basis of remuneration to be inappropriate.  The office holder should provide creditors (and where relevant, members) with sufficient information to enable them to decide whether to exercise those rights.  The information provided in relation to remuneration in accordance with paragraph 3.4 should, where the basis of the remuneration is on time costs, normally be sufficient for this purpose. Where, however, creditors (and where relevant, members) make a reasonable request for further information, it should be provided in all cases.

In a liquidation or a bankruptcy, where the office holder realises an asset on behalf of a secured creditor and receives remuneration out of the proceeds, he should disclose the amount of that remuneration to the committee (if there is one), to any meeting of creditors convened for the purposes of determining his remuneration, and in his reports to creditors.

 

Approval is not required for the drawing of necessary disbursements.  However, not all costs properly charged in connection with insolvency assignments may necessarily be regarded as disbursements.  The precise demarcation line between disbursements and remuneration is not defined by statue and has not been specifically determined by the courts.  Particular difficulties arise in connection with charges that involve calculations of shared and overhead costs, as these may include an element of remuneration.

In the absence of a clear statutory definition only those costs that clearly meet the definition of disbursements, where there is specific expenditure relating to the administration of the insolvent’s affairs and referable to payment to an independent third party, are treated as disbursements recoverable without approval.  In this statement these are referred to as ‘category 1 disbursements’ (approval not required).  Category 1 disbursements will generally comprise external supplies of incidental services specifically identifiable to the case, typically for items such as identifiable telephone calls, postage, case advertising, invoiced travel and properly reimbursed expenses incurred by personnel in connection with the case.  Also included will be services specific to the case where these cannot practically be provided internally such as printing, room hire and document storage.  Practitioners should be prepared to disclose information about specific category 1 disbursements where reasonably requested in all cases.

Where it is proposed to recover costs which, whilst being in the nature of expenses or disbursements, include elements of shared or allocated costs, they should be identified and subject to approval by those responsible for approving remuneration.  If the office holder wishes to make a separate charge for expenses in this second category, he may do so provided that:

• such expenses are of an incidental nature and are directly incurred on the case, and there is a reasonable method of calculation and allocation; it will be persuasive evidence of reasonableness, if the resultant charge to creditors is in line with the cost of external provision; and

• the basis of the proposed charge is disclosed and is authorised by those responsible for approving his remuneration.

These are defined as category 2 disbursements (approval required).  Category 2 disbursements will comprise cost allocations which may arise on some of the category 1 expense where supplied internally: typically, items such as room hire and document storage.  Also typically included will be routine or more specialist copying and printing, and allocated communication costs provided by the practitioner or his firm.

A charge for disbursements calculated as a percentage of the amount charged for remuneration is not permissible.

Basic non-incidental costs, including such items as time costs, office and equipment rental, depreciation, standing charges, finance charges, accounting and administration costs, may not be the subject of separate charges.

Payments to outside parties in which the office holder or his firm or any associate (as defined by section 435 of the Insolvency Act 1986) has an interest should be treated as category 2 disbursements.

Where, in liquidation or a bankruptcy, remuneration is being taken on the statutory scale and there is no committee and it has not been possible to obtain a resolution of the creditors, category 2 disbursements may only be recovered if authorised by the creditors.

It is the office holder’s obligation to satisfy himself of the appropriateness of disbursements and the office holder should bear in mind the matters referred to in paragraph 4.2 above.

 

There are additional statutory requirements in relation to expenses incurred in certain cases commenced after 6 April 2010.  Creditors (and in a Members Voluntary Liquidation, also members) may have the statutory right to seek information regarding expenses, and to apply to the court if they consider them to be excessive in all the circumstances of the case.

 

In a bankruptcy, voluntary arrangement, administration or initially insolvent liquidation where realizations are sufficient for payment of creditors in full with interest, it should be remembered that, notwithstanding the right of the creditors or the committee to fix the office holder’s remuneration, it will be the debtor or the members, as the case may be, who will have the principal financial interest in the level of remuneration.  The office holder should therefore on request provide them with information, in accordance with the principles set out in this Statement of Insolvency Practice, about how the remuneration, disbursements and other expenses have been calculated.

In bankruptcy cases where realizations are not sufficient for payment of creditors in full, the office holder should consider requests for information from the bankrupt about how the remuneration, disbursements and other expenses have been calculated and approved to provide the bankrupt with sufficient information to enable him to make an informed judgement about exercising his rights.

Version 2 of Statement of Insolvency Practice 9, which was the first to require a degree of analysis of time by activity and grade of staff, came into effect on 31 December 2002 and should be complied with in all cases beginning on or after that date.  As regards cases commenced previously, any reports issued or resolutions taken after that date should comply with this SIP.  However, where any analysis or disclose required for such a report or resolution relates to a period prior to 31 December 2002, it should comply with this SIP as far as the available records reasonably allow.

The present version of the SIP has been revised to take account of legislative changes relating to remuneration, disbursements and other expenses introduced since that time, including those introduced by The Insolvency (Amendment) Rules 2010, and will apply in all cases.