Insolvency Office Holder (IOH) remuneration has caused recent controversy following reports to the Insolvency Service that fees charged did not represent value for money and service lacked quality and efficiency. As explored in a previous post, this led in part to the introduction of The Insolvency (Amendment) Rules 2015 (the 2015 Rules) which proposed changes to insolvency guidelines aimed at giving creditors, and other interested parties such as shareholders (‘Interested Parties’), a clearer understanding of fee calculation.
But what are these changes, and is there any evidence of them improving the IOH fee system?
Revisiting SIP 9:
The implementation of the 2015 Rules in October this year necessitated the revision of the Statement of Insolvency Practice (SIP) 9 with a view to achieving a principles-based regulation of remuneration rather than the existing more prescriptive format.
This means that Interested Parties are advised to better scrutinise IOH proposed fees; demanding more information from IOHs before authorising their proposed remuneration. This revised approach invites greater flexibility and accountability towards insolvency remuneration to take a step closer to the goal of transparent fee strategy.
According to SIP 9, payments must be ‘appropriate, reasonable and commensurate reflections of the work necessarily and properly undertaken’. The Interested Parties, particularly creditors, decide whether proposed fees are reasonable reflecting on whether the suggested remuneration is proportionate to the proposed work.
Requests for additional information relating to IOH remuneration by Interested Parties must be respected by IOHs, with information presented in a consistent format, providing detailed reports with figures for both the relevant period and on a cumulative basis.
IOHs must also abide by disclosure requirements including:
- disclosure of payments, remuneration and expenses arising from an insolvency appointment;
- disclosure of any conflicts of interest arising from business or personal relationships with parties responsible for approving remuneration;
- informing Interested Parties of their rights under the relevant legislation;
- disclosure of any sub-contracted work to third parties.
The previous SIP 9 did not cater for the provision of estimates but these are now required following implementation of the 2015 Rules. Interested Parties are now concerned with what work is anticipated, the anticipated cost/expenses, the time to complete such work and any financial benefit to creditors. These points form the basis of the fee estimate.
In addition, IOHs may need to offer a further explanation of their activities where certain expertise was required. Examples include matters involving statutory compliance and asset realisation/distribution. This narrative will aid Interested Parties in assessing the reasonableness of fee estimates.
Will these changes be effective?
Although transparency and fairness are principles valued in many aspects of the law, commercial considerations such as cost and efficiency have a key part to play in insolvency practice. Requiring provision of fee estimates by law may create higher costs for Insolvency Practitioner firms as these estimates require earlier, more complex fee calculation by IOH legal advisors. Provision of additional information to Interested Parties will also bear a financial burden on such firms – factors unsupportive of the revised approach to IOH remuneration.
The system is likely to benefit from a move away from ‘taxi-meter’ fees with fixed estimates improving the efficiency and quality of work by IOHs. The true impact of the changes may soon be revealed.