Challenge to insolvency fees risks backfiring on creditors

New rules coming in next year strengthening creditors’ powers to challenge insolvency practitioners’ fees may backfire because of the high cost of preparing detailed creditors' reports, experts have warned.

Concerns were raised that strengthening creditors’ rights would hamper the administration process, but IPs also warned they would use existing rights to have their fees approved through the courts.

From April 2010, IPs will be forced to provide fuller details of how they bill for work and the expenses they charge if a creditor demands it. This is in addition to providing regular progress reports, but IPs said the legislation may prove to be a double-edged sword.

Chris Laughton, member of the insolvency body Insol Europe and partner at Mercer & Hole, said: ‘Anything that makes an IP’s remuneration clearer to creditors is a good thing, but you always have to be careful when tightening regulation because there’s usually a cost involved.

‘There is either a cost to the IP or the insolvent estate. This may cause an additional rise in the rates to reflect the fact they are doing more work in drawing up these detailed reports.

‘IPs still have the ability to go through the courts for fee approval, so the devil will be in the detail.’

The Department for Business, Innovation & Skills, and the Insolvency Service, confirmed the new rules in response to sweeping plans put forward by the influential business and enterprise committee of MPs.

‘Creditors will also be given new rights to request fuller particulars of the amounts detailed within those progress reports and to challenge them by making an application to court where they consider them to be excessive,’ BIS and the Insolvency Service said. ‘Requiring office-holders to report remuneration and expenses more regularly should enable creditors to scrutinise those details on a more timely basis.’

The extra reporting burden will come after company collapses hit heights not seen since the last recession. The hostile business climate has seen IPs being panned by politicians and creditors, leading to drastic government steps to ensure creditors were not being disadvantaged.

The business panel, chaired by MP Peter Luff, has been scathing in its criticism of IPs, especially on the controversial issue of pre-pack administrations.

It urged the Insolvency Service to lift the lid on data showing IPs were adhering to laws governing approval of fees, even calling for a strengthening of control of IPs’ ‘remuneration beyond the limited power to do so currently exercised by creditors’ through independent arbitration’.

Although the government stopped short of endorsing third party vetting, Luff said the panel was pleased with the government’s position.

‘[The Business panel was] certainly encouraged by the government’s response. The committee remains concerned about the level of fees, concerned about pre-packs and the effects on trade creditors.’

R3, the trade body for the insolvency profession, said it would not comment but was keeping a close eye on the situation, adopting a ‘wait-and-see’ approach.

It is still unclear whether there will be a body appointed to sign off on IPs fees. ‘The service doesn’t have a “position” as such on the third-party vetting of IPs fees,’ an Insolvency Service spokesman added.