We reported earlier this year that there are set to be reforms to Insolvency Practitioner (IP) remuneration that will come into force on 1 October 2015 as part of The Insolvency (Amendment) Rules 2015 (the Rules).

These changes will soon be implemented, but what do they mean in practice?

Why the need for change?

In 2010, the Office of Fair Trading investigated concerns expressed by unsecured creditors that IP’s fees did not represent ‘value for money’. IPs have, allegedly, been able to manipulate fees by purposefully taking longer to do the same work which is deteriorating quality and efficiency and results in overcharging of creditors.

Reports indicate that this has led to loss of confidence in the profession and an estimated annual net cost to business of £5.96m.

The new model:

This so-called ‘market failure’ is being addressed by making the remuneration process more transparent and fair to creditors. IPs must provide advance information to creditors on new appointments before their fees can be approved. This includes details such as what work they intend to undertake and the expenses that will be, or are likely to be, incurred.

In the case of fees proposed to be charged on a time costs basis, the IP must also supply a fee estimate for approval which will act as a cap on fees. The written estimate must specify additional matters such as the time the IP anticipates each part of the work to take and whether the IP anticipates it will be necessary to seek further approval for fees (and the reasons why it will be necessary to do so).

The bottom line is that the IP’s remuneration must not exceed the total amount set out in the fees estimate without approval.

Once approved, IPs must seek further approval if they anticipate that they will exceed the amount specified in the fee estimate. Additional fee requests must include details of why the IP exceeded the fee estimate, what additional work is proposed, any changes to hourly rates charged for the additional work and how long that work is expected to take.

What this means in practice:

Providing this information to creditors should arguably mitigate the current concerns by increasing engagement with creditors and providing an opportunity for increased scrutiny of IP remuneration.

Whilst the changes have been known for some time now, query whether IPs have already implemented protocols and systems to be operational from 1 October 2015.

If implemented, how effective can these protocols and systems realistically be? Is it possible for an IP to envisage the exact and complete scope of work which may be required to be undertaken in the future? The information available to the IP has the potential to change drastically from the appointment date.

Will the relevant category fixing the basis of remuneration approve a revised fee estimate, including the costs of the IP seeking such consent?

Bearing this in mind, perhaps there still remains the potential for IPs to overstate a fee estimate to guard against having to seek further approval (possibly multiple approvals) and which potentially may involve an unsupportive creditor base.

As with all structural changes, it is hoped that IPs will become familiar with the new model fairly quickly with little or no detriment on their part. Only time will tell whether the next cost to business per year will be reduced to £0.49m per year as a direct result of these changes.

This post was edited by Kassia Lewis-DeBoos. For more information, email blogs@gateleyplc.com.

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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.