1.1 When a company goes into liquidation the costs of the proceedings are paid out of its assets. The creditors, who hope to recover some of their debts out of the assets, therefore have a direct interest in the level of costs, and in particular the remuneration of the insolvency practitioner appointed to act as liquidator. The insolvency legislation recognises this interest by providing mechanisms for creditors to fix the basis of the liquidator’s fees. This guide is intended to help creditors be aware of their rights to approve and monitor fees, explains the basis on which fees are fixed and how creditors can seek information about expenses incurred by the liquidator and challenge those they consider to be excessive.
2 Liquidation procedure
3 The liquidation committee
progress of the liquidation, unless the committee directs otherwise. This provides an opportunity for the committee to monitor and discuss the progress of the insolvency and the level of the liquidator’s fees.
4 Fixing the liquidator’s remuneration
The basis for fixing the liquidator’s remuneration is set out in Rules 4.127 – 4.127B of the Insolvency Rules 1986. The Rules state that the remuneration shall be fixed:
Any combination of these bases may be used to fix the remuneration, and different bases may be used for different things done by the liquidator. Where the remuneration is fixed as a percentage, different percentages may be used for different things done by the liquidator.
Prior to the determination of the basis of remuneration, the liquidator must give the creditors details of the work the liquidator proposes to undertake, and the expenses he considers will be, or are likely to be, incurred. However, where the liquidator proposes to take any part or all of his remuneration on a time cost basis, he must provide more detailed information in the form of a ‘fees estimate’, as explained below.
Where the liquidator proposes to take remuneration based on time costs, he must first provide the creditors with detailed information in the form of a ‘fees estimate’. A fees estimate is a written estimate that specifies –
part of that work;
approval under the Rules; and
In addition, the liquidator must give the creditors details of the expenses he considers will be, or are likely to be, incurred.
It is for the liquidation committee (if there is one) to determine on which of these bases, or combination of bases, the remuneration is to be fixed. Where it is fixed as a percentage, it is for the committee to determine the percentage or percentages to be applied. Rule 4.127 says that in arriving at its decision the committee shall have regard to the following matters:
connection with the insolvency;
carried out, his duties;
the value and nature of the assets which the liquidator has to deal with.
Where there has been a material and substantial change in circumstances since the basis of the liquidator’s remuneration was fixed, the liquidator may request that it be changed. The request must be made to the same body as initially approved the remuneration, and the same rules apply as to the original approval.
6 What information should be provided by the liquidator?
6.1 General principles
The liquidator should inform creditors of their rights under insolvency legislation, and should advise them how they may access suitable information setting out their rights within the first communication with them and in each subsequent report.
6.2 Key issues
6.2.1 The key issues of concern to those with a financial interest in the level of payments from the insolvency estate will commonly be:
the work the liquidator anticipates will be done, and why that work is necessary;
it, as against any estimate provided;
benefit (or if the work provided no direct financial benefit, but was required by statute).
When providing information about payments, fees and expenses, the liquidator should do so in a way which facilitates clarity of understanding of these key issues. . Narrative explanations should be provided to support any numerical information supplied. Where it is practical to do so, the liquidator should provide an indication of the likely return to creditors when seeking approval for the basis of his remuneration.
6.2.2 When approval for a fixed amount or a percentage basis is sought, the liquidator should explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the liquidator anticipates will be undertaken.
6.3 Fee estimates and subsequent reports
6.3.1 When providing a fee estimate, the liquidator should supply that information in sufficient time to facilitate that body making an informed judgement about the reasonableness of the liquidator’s requests. The estimate should clearly describe what activities are anticipated to be conducted in respect of the estimated fee. When subsequently reporting to creditors, the actual hours and average rate (or rates) of the costs charged for each activity should be provided for comparison.
6.4.1 Costs met by and reimbursed to the liquidator in connection with the liquidation will fall into two categories:
Category 1 disbursements: These are payments to independent third parties where there is specific expenditure directly referable to the liquidation. Category 1 disbursements can be drawn without prior approval, although the liquidator should be prepared to disclose information about them in the same way as any other expenses. Category 2 disbursements: These are costs that are directly referable to the liquidation but not to a payment to an independent third party. They may include shared or allocated costs that may be incurred by the liquidator or their firm, and that can be allocated to the liquidation on a proper and reasonable basis.
When seeking approval, the liquidator should explain, for each category of cost, the basis on which the charge is being made. If the liquidator has obtained approval for the basis of Category 2 disbursements, that basis may continue to be used in a sequential appointment where further approval of the basis of remuneration is not required, or where the liquidator is replaced.
6.4.2 The following are not permissible as disbursements:
depreciation and finance charges.
6.5 Realisations for secured creditors
Where the liquidator realises an asset on behalf of a secured creditor and receives remuneration out of the proceeds (see paragraph 11.1 below), he should disclose the amount of that remuneration to the committee (if there is one), to any meeting of creditors convened for the purpose of determining his fees, and in any reports he sends to creditors.
Remuneration must not exceed the fees estimate without approval by the body which fixed the original basis of the remuneration. The request for approval must specify –
8.1 The liquidator is required to send annual progress reports to creditors. The reports must include:
Where appropriate, a statement –
A statement of the creditors’ rights to request further information, as explained in paragraph 8.2, and their right to challenge the liquidator’s remuneration and expenses.
8.2 Within 21 days of receipt of a progress report (or 7 business days where the report has been prepared for the purposes of a meeting to receive the liquidator’s resignation) a creditor may request the liquidator to provide further information about the remuneration and expenses set out in the report. A request must be in writing, and may be made either by a secured creditor, or by an unsecured creditor with the
concurrence of at least 5% in value of unsecured creditors (including himself) or the permission of the court.
8.3 The liquidator must provide the requested information within 14 days, unless he considers that:
expected to lead to violence against any person, or
in which case he must give the reasons for not providing the information.
Any creditor may apply to the court within 21 days of the liquidator’s refusal to provide the requested information, or the expiry of the 14 days time limit for the provision of the information.
9. Provision of information – additional requirements
The liquidator must provide certain information about the time spent on the case, free of charge, upon request by any creditor, director or shareholder of the company.
The information which must be provided is –
The period for which the information must be provided is the period from appointment to the end of the most recent period of six months reckoned from the date of the liquidator’s appointment, or where he has vacated office, the date that he vacated office.
The information must be provided within 28 days of receipt of the request by the liquidator, and requests must be made within two years from vacation of office.
10 What if a creditor is dissatisfied?
10.4 If the court considers the application well founded, it may order that the remuneration be reduced, the basis be changed, or the expenses be disallowed or repaid. Unless the court orders otherwise, the costs of the application must by paid by the applicant and not out of the assets of the insolvent company.
11. What if the liquidator is dissatisfied?
If the liquidator considers that the remuneration fixed by the liquidation committee, or in the preceding administration, is insufficient or that the basis used to fix it is inappropriate he may request that the amount or rate be increased, or the basis changed, by resolution of the creditors. If he considers that the remuneration fixed by the liquidation committee, the creditors, in the preceding administration or in accordance with the statutory scale is insufficient, or that the basis used to fix it is inappropriate, he may apply to the court for the amount or rate to be increased or the basis changed. If he decides to apply to the court he must give at least 14 days’ notice to the members of the committee and the committee may nominate one or more of its members to appear or be represented at the court hearing. If there is no committee, the liquidator’s notice of his application must be sent to such of the creditors as the court may direct, and they may nominate one or more of their number to appear or be represented. The court may order the costs to be paid out of the assets.
12 Other matters relating to remuneration
13. Effective date
This guide applies where a company goes into liquidation on or after 1 October 2015.
Suggested format for the provision of information
Professional guidance issued to insolvency practitioners sets out the following suggested format for the provision of information when seeking approval of remuneration. However, the level of disclosure suggested below may not be appropriate in all cases, and will be subject to considerations of proportionality. In larger or more complex cases the circumstances of each case may dictate the information provided and its format.
Narrative overview of the case
In all cases, reports on remuneration should provide a narrative overview of the case. Matters relevant to an overview are:
The information provided will depend upon the basis or bases being sought or reported upon, and the stage at which it is being provided. An overview might include:
Time cost basis
Where any part of the remuneration is or is proposed to be calculated on a time costs basis, requests for and reports on remuneration should provide:
An explanation of the liquidator’s time charging policy, clearly stating the units of time that have been used, the grades of staff and rates that have been charged to the assignment, and the policy for recovering the cost of support staff. There is an expectation that time will be recorded in units of not greater than 6 minutes.
A description of work carried out, which might include:
and the reasons why it was appropriate for those grades to be used;
request the liquidator wishes to make.
Time spent and charge-out summaries, in an appropriate format.
It is useful to provide time spent and charge-out value information in a tabular form for each of the time periods reported upon, with work classified (and sub-divided) in a way relevant to the circumstances of the case
The following areas of activity are suggested as a basis for the analysis of time spent:
The following categories are suggested as a basis for analysis by grade of staff:
The level of disclosure suggested above will not be appropriate in all cases, and considerations of proportionality will apply: