On 17 February 2014, Government Minister Jenny Willott announced the Government intends to place limits on the fees Insolvency Practitioners (IPs) can charge.

IP’s may be obliged to charge fees based on the value of the property they are dealing with, rather than charging based on hourly rates.  In some circumstances, they may be required to work for fixed fees. The proposals are arguably creditor-driven and aim to ensure that creditors are not losing out on dividends to IPs, through their ‘excessive and disproportionate’ costs.

The proposals are also aimed at helping businesses and individuals that instruct IPs. The idea is that they will have a clearer idea of how much IPs will charge them from the outset of any insolvency process.

These changes are just one element of a six-week consultation the Insolvency Service is carrying out. The changes come out of last year’s Report by Professor Elaine Kempson of Bristol University. She found that although unsecured creditors are presumed to oversee the work IPs carry out, that checking exercise is largely futile. The Report also suggests that:

  • fee flexibility for IPs has meant that over time IPs have been increasing their fees; and
  • on average the fees IPs charged were 9% more in cases where large secured creditors (who have no incentive to control their fees) were paid in full compared to cases where the large secured creditors suffered a shortfall.

Overall,  Ms Willott claims that changes will “give the Insolvency Service stronger powers to effectively monitor and regulate practitioners and industry regulators“.

Besides increased control over the fees charged by IPs, the proposed changes will give the regulators the responsibility of dealing with excessive fee complaints and give the Insolvency Service stronger powers to reprimand industry regulators for poor performance. 

Good or bad? 

This approach to strengthen the regulatory regime could help ensure the market improves and encourage a more independent and competitive insolvency profession. Surely, unsecured creditors are likely to agree.

However, it is unlikely that IPs will agree. R3, the Association of Business Recovery Professionals, have argued that in practice, the new rules are “unfair” and “arbitrary”. They are concerned the ever-changing nature of insolvency work makes these changes incompatible with the structure of insolvency matters in practice.

Giles Frampton, vice-president of R3 has suggested that it will be the creditors who will lose out and in particular, the unsecured creditors. Unsecured creditors are usually less engaged and so he argues the Government should instead focus on “boosting unsecured creditor engagement and should avoid experimenting with the basic fee-setting mechanisms“.

We await the updated proposals following the end of the six week consultation on 28 March 2014. Watch this space…

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.