Remuneration in bankruptcies

In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk looked at setting remuneration in bankruptcies.

Malcolm discussed the different types of basis that you can set, and how to get approval from creditors, committee and Court.

This is the summary of that briefing.

If you'd like to watch the webinar back, you can do so below, if not, read on for our summary...

Quick Links

• Setting remuneration - What are the bases?
• Setting remuneration - Who makes the decision?
• The ‘default setting’ for remuneration in bankruptcies
• Setting remuneration in a new bankruptcy
• Changing remuneration in an established bankruptcy
• Remuneration in other procedures

What are the bases for setting remuneration?

You can choose from three options, or mix and match between them (You are expressly permitted by the insolvency rules to do so).

Percentage

When working on a percentage basis, you can adopt the statutory scale rates which are set for the work done by the official receiver.

They set one rate for the value of the assets that you realise, and a second rate for the value of the assets that you then distribute to creditors.

You’re not confined to work on these rates, you can work on any other scale rates.

When asking for a percentage basis, you must set the percentage at that time.

Fixed fees

You can propose a fixed fee for the whole case, or just specific parts of the case.

When asking for a fixed fee, you must set the fixed fee amount at that time.

Time costs

You may ask for time costs for the whole case, or specific parts.

Asking for time costs will trigger the rules on fee estimates, so you must say not only what the work will cost but also what work you think you’ll do.

If you’re not asking for time costs, SIP9 requires you to say why you think working on a percentage or fixed fee is fair and reasonable.

Statutory factors that inform your decision

These statutory factors must inform the decision for which bases you wish to adopt:

• Complexity
• Whether there is any exceptional responsibility arising from the bankrupt’s affairs
  • Only in a small number of cases will you be able to argue that you’re accepting any exceptional responsibility
• How effectively you are doing the work
  • This is difficult, as you can’t assess how effectively you will do the work in advance.  The result you get for creditors may be from factors outside your control.
  • You may want to put some assumptions about effectiveness into your estimate
• Value and nature of the property
  • In cases with significant value, you should be entitled to be remunerated on a more generous basis

You may have to refer back to these to justify your costs, if they are challenged.

SIP 9 factors

There are also factors that are identified in SIP 9. These aren’t statutory or legal factors, they’re more practical factors in terms of what objections creditors might raise when they’re not happy with fees.

Creditors may consider what work you’re doing and why, how much you’ll actually be paid as remuneration and what benefit the creditors will receive from the work that is being done (which will include work that is legally or professionally necessary even if it does not directly benefit creditors).

Who sets the basis for remuneration?

There are three bodies that can set the basis.

1. The committee (if applicable)
2. The creditors (if you don’t have a committee, or if you do and they have not made a decision, or you don’t like the decision they have made)
   1. This has to be by a decision procedure, not deemed consent
3. The court (if you’ve been to the committee & creditors, you can go to the court within 18 months of your appointment)
   1. If you haven’t been to the committee or creditors first, you can go to the court after 18 months – but they’ll ask why!

If you’re happy with the official receiver’s statutory scale rate, you can simply decide not to ask for any other basis.

The ‘default setting’ for remuneration in bankruptcies

In a bankruptcy, statutory scale rates are the default setting.

They apply:

• Automatically, after 18 months, if you have not asked the committee or creditors to set something else
• Earlier, in cases where you have asked the creditors to set something else and the creditors have refused to do so
• And, perhaps earlier too in cases where you have asked the committee to set something else, they have refused and you have not then gone to the creditors

Setting remuneration in a new bankruptcy

When asking for something other than statutory scale rates:

• Start with the committee – if you have one
• Go to the creditors if
  • You have no committee
  • Or the committee says no (but there is no point if the committee is representative of the views of the creditors as a whole).
• Go to the court if:
  • There is no committee,
  • And if the creditors are not interested
  • Or if the committee or creditors are obstructive
  • (Those are suggestions. You can wait 18 months and then start with the court, but the judge will want to know what the creditors think.)

Remember also that you need to offer a fee estimate if asking for time costs.

And you need to give good information to creditors if asking for something else (which may often imply a fee estimate).

Changing remuneration in an established bankruptcy

You may wish to change the basis for your remuneration, either for the whole bankruptcy from its start, or only from the time of its change.

Changing remuneration for the whole bankruptcy

You might want to ask to change the basis for your remuneration from the start of the bankruptcy:

1. If the rate or amount is too low
2. Or, if the basis is not appropriate

This is effectively an appeal procedure.

If the committee set the remuneration that you are effectively appealing, you can ask the creditors to change it. If the creditors then refuse, you can go to Court.

If the creditors set it, you can call another creditors’ decision procedure, effectively, to ask them to review their earlier decision. Again, if they refuse you can go to Court.

If it was the Court who set the remuneration, you can ask them to change it – likely through an appeal. You will probably need to go to a higher court to do this.

Changing remuneration from that point onwards

The rules are slightly different if you only wish to change the basis for your remuneration from this point onwards, and not backdate changes to remuneration.

You can ask for a change if the basis set is what you asked for, but something has since changed so it is not now appropriate for the future work.

If the committee set it then you’re not appealing the decision, so you should go back to the committee and ask them to change it. If the committee refuses, you can appeal their decision to the creditors and, beyond that, the Court.

Similarly, if the creditors set it, you can ask them and go to Court if they refuse.

If the Court set it, you can go back to them and ask them to change it. In this case, it should be the same Court. If they say no, you have the ability to appeal to higher court – though this is again unlikely to be successful.

Remuneration – What’s different in other procedures?

These are some of the main differences:

• Statutory scale rates apply automatically only in compulsory liquidations and bankruptcies.
• In voluntary liquidations and administrations, you have to set the basis within 18 months (that’s the deadline for applying to Court).
• You can agree the basis for your remuneration with the committee or creditors after that.  But, if the negotiations are difficult, you are unlikely to have the option of going to court to bring matters to a head.
• In administrations, it can get complicated to work out which creditors have the right to set the basis
  • When ordinary unsecured creditors are expected to be ‘out of the money’, it’s for the secured creditors (and sometimes unsecured preferential creditors) to decide

Presentation

A copy of the presentation can be downloaded here.

Stay up to date

Thank you for reading this summary. You can watch back our previous briefings and read back previous summaries here.

Our next briefing is will be one Monday 12^th December, where Malcolm will be looking at debt financing and how invoice discounting and factoring agreements work.

Booking details for the webinar will be sent to our email list in due course. If you’re not yet signed up to our list, you can do so here.

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