Amended Insolvency Rules 1986: administrator's remuneration and expenses

A note setting out the amendments to the Insolvency Rules 1986 (SI 1986/1925), in particular rule 2.67 relating to administration expenses and rules 2.106 to 2.109 relating to administrator's remuneration, implemented by the Insolvency (Amendment) Rules 2010 (SI 2010/686) (2010 Rules), with effect from 6 April 2010. This note also disucsses the creation of the administrator's ability to recover pre-appointment costs under the 2010 Rules.

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Contents

A summary of the changes

On 6 April 2010, the Insolvency (Amendment) Rules 2010 (SI 2010/686) (2010 Rules) come into force. The 2010 Rules amend the Insolvency Rules 1986 (SI 1986/1925) (1986 Rules).

The 2010 Rules make three main amendments to the 1986 Rules that relate to the remuneration of administrators (www.practicallaw.com/2-107-6366) and administration (www.practicallaw.com/9-107-6363) expenses. Under the 1986 Rules, as amended by the 2010 Rules, an administrator can:

 

What is the present position?

An administrator of a company pays his remuneration as an expense of a company's insolvent estate (rule 2.67(h), 1986 Rules). For more information on the distribution of the assets of an insolvent company, see Practice note, How are assets distributed to creditors in corporate insolvency procedures? (www.practicallaw.com/5-422-4145).

There are two ways of calculating an administrator's remuneration:

  • As a percentage of the value of the assets that the administrator deals with during his appointment (asset value basis).

  • By reference to the time spent by the administrator and his staff in dealing with the affairs of the insolvent company (time cost basis).

    (Rule 2.106, 1986 Rules.)

An administrator can only recover fees incurred after his appointment as an expense of the administration (rule 2.106, 1986 Rules). The administrator cannot recover fees for work done before his appointment.

In the context of a pre-pack (www.practicallaw.com/8-384-7073) asset sale, where the negotiation of the transaction takes place before the company goes into administration, the present rules prevent an administrator from recovering a significant proportion of the fees incurred in concluding the sale, even though those fees are incurred in anticipation of a virtually inevitable administration appointment.

For more information on pre-pack asset sales, see Practice note, Pre-packs in administration: a quick guide (www.practicallaw.com/7-385-0829).

 

Recovering pre-appointment costs under the 2010 Rules

What are pre-appointment costs?

The 2010 Rules extend the scope of the definition of an administrator's remuneration to include certain fees, charges and expenses incurred by an insolvency practitioner (www.practicallaw.com/5-107-6261) before the company enters administration (pre-appointment costs) (rule 2.67(h), 1986 Rules, as amended by the 2010 Rules).

The only fees and expenses incurred by an insolvency practitioner that are potentially recoverable as pre-appointment costs are those that meet both of the following criteria:

  • They are fees and expenses that the insolvency practitioner has not been paid for at the date when the company goes into administration (unpaid pre-appointment costs) (rule 2.67A, 1986 Rules, as amended by the 2010 Rules).

  • The insolvency practitioner incurred the fees and expenses with a view to the administration of the company (rule 2.33(2A)(a), 1986 Rules, as amended by the 2010 Rules).

The 2010 Rules do not define what is meant by "a view to" the administration of the company. However, query whether:

  • Work can be done with a "view to the administration of a company" unless and until there has been a firm decision to place the company into administration.

  • Advising the directors of a company or a secured creditor about the company's financial position and the options available to respond to that position will constitute work done with a view to the company's administration.

It may make sense for insolvency practitioners to record that they are working with a view to the administration of the company in their retainer contract (see Changes to professional retainers).

The 2010 Rules only allow the recovery of pre-administration costs and expenses incurred by:

  • The administrator himself.

  • Any other insolvency practitioner, who:

    • carries out work with a view to the administration of the company; and

    • who does not become the administrator himself.

(Rule 2.33(2A)(a), 1986 Rules, as amended by the 2010 Rules.)

The 2010 Rules do not define what constitutes an expense of an insolvency practitioner who is engaged with a view to the administration of a company. "Expense" would seem to encompass:

  • Out of pocket disbursements.

  • Fees of professional advisors retained by the insolvency practitioner.

An insolvency practitioner's pre-appointment expenses rank equally for payment with his pre-appointment fees (rule 2.67(h), 1986 Rules, as amended by the 2010 Rules).

Fees and expenses may be recovered as pre-appointment costs even if incurred under a retainer with a party other than the company itself (rule 2.33(2B)(a), 1986 Rules, as amended by the 2010 Rules).

How does an insolvency practitioner recover pre-appointment costs?

The pre-appointment costs of the administrator

The administrator must set out details of all pre-appointment costs (both those incurred by him and any incurred by other insolvency practitioners) in the proposals he circulates to creditors in accordance with paragraph 49 of Schedule B1 to the Insolvency Act 1986 (rule 2.33(2B), 1986 Rules, as amended by the 2010 Rules).

For more information on what details the proposals to creditors must include, see The administrator's proposals to creditors. For more information on an administrator's proposals to creditors generally, see Practice note, Administration: Administrator's proposals (www.practicallaw.com/3-107-3975).

If there is a creditors' committee (www.practicallaw.com/9-382-5462), the administrator must seek approval from the committee to pay the pre-appointment costs as an expense of the administration (rule 2.67A(1), 1986 Rules, as amended by the 2010 Rules).

If there is no creditors' committee or the creditors' committee does not reach a conclusion, then:

  • If the administrator has made a statement that there are insufficient funds to make a distribution to unsecured creditors under paragraph 52(1)(b) of Schedule B1 to the Insolvency Act 1986 (paragraph 52 statement), he must seek the approval of:

    • each secured creditor of the company and 50%, by value, of the preferential creditors (www.practicallaw.com/5-107-7029) of the company, where there are sufficient funds to make a distribution to preferential creditors; or

    • each secured creditor, if there are insufficient funds to make a distribution to preferential creditors.

      (Rules 2.67A(2)(b) and (c), 1986 Rules, as amended by the 2010 Rules.)

  • If the administrator has not made a paragraph 52 statement, he must seek the approval of the unsecured creditors in general meeting (rule 2.67A(2)(a), 1986 Rules, as amended by the 2010 Rules).

The administrator can apply to the court for an order approving the payment of pre-appointment costs as an expense if either:

  • The creditors fail to approve the pre-appointment costs in one of the ways set out above.

  • The administrator feels that the amount of pre-appointment costs he is allowed to pay as an expense is insufficient.

(Rule 2.67A(5), 1986 Rules, as amended by the 2010 Rules.)

The pre-appointment costs of an insolvency practitioner other than the administrator

An insolvency practitioner other than the administrator has no right to ask the creditors to authorise the payment of any of his fees or expenses incurred with a view to the administration of the company as an expense of the administration.

Instead, an insolvency practitioner has the right to require the administrator to seek the approval of the creditors to pay such pre-appointment costs as an expense (rule 2.67A(4), 1986 Rules, as amended by the 2010 Rules). The procedure for approving the pre-appointment costs of an insolvency practitioner other than the administrator is identical to that used to approve the administrator's own pre-appointment costs (rule 2.67A(4)-(6), 1986 Rules, as amended by the 2010 Rules).

If the administrator fails to call a creditors' meeting at the request of an insolvency practitioner with outstanding pre-appointment costs, the insolvency practitioner in question may apply to court for an order compelling the administrator to call a creditors' meeting (rule 2.67A(7), 1986 Rules, as amended by the 2010 Rules).

 

Fixing the basis of an administrator's remuneration under the 2010 Rules

On what basis can an administrator calculate his remuneration?

An administrator may recover his remuneration for acting as administrator in one or more of the following ways:

  • The asset value basis.

  • The time cost basis.

  • As a fixed fee.

    (Rule 2.106(2), 1986 Rules, as amended by the 2010 Rules.)

The administrator can adopt a different remuneration basis for different aspects of the administration assignment (rule 2.106(3A), 1986 Rules, as amended by the 2010 Rules). For example, an administrator may receive a fixed fee for his work in negotiating the sale of the business and assets of the insolvent company and charge for work done in agreeing the claims of creditors on the time cost basis. Similarly, where an administrator receives remuneration on the asset value basis, he may charge different percentages of asset value as remuneration for different elements of work done (rule 2.106(3B), 1986 Rules, as amended by the 2010 Rules).

How does an administrator fix his remuneration?

What criteria apply when deciding the basis of an administrator's remuneration?

The creditors or the court fix the basis of an administrator's remuneration (for more information, see What is the process for fixing an administrator's remuneration?). In each case, the same criteria apply.

The basis of remuneration must be appropriate to the work for which the administrator seeks remuneration, having regard to:

  • How complex or straightforward the case or element of the case in question is.

  • The extent to which the administrator has assumed an exceptional level of responsibility in relation to the work in question.

  • How effectively the administrator has conducted the work in question.

  • The value and nature of the assets dealt with by the administrator.

(Rule 2.106(4), 1986 Rules, as amended by the 2010 Rules.)

What is the process for fixing the basis of an administrator's remuneration?

If there is a creditors' committee, the creditors' committee fixes the basis of the administrator's remuneration (rule 2.106, 1986 Rules, as amended by the 2010 Rules).

If any of the following conditions applies:

  • There is no creditors' committee.

  • The creditors' committee fails to reach a conclusion on the basis of the administrator's remuneration.

  • The administrator is dissatisfied with the basis of his remuneration as fixed by the creditors' committee.

Then:

  • If the administrator has made a paragraph 52 statement, the basis of his remuneration is fixed by the approval of:

    • each secured creditor of the company and 50%, by value, of the preferential creditors (www.practicallaw.com/5-107-7029) of the company, where there are sufficient funds to make a distribution to preferential creditors; or

    • each secured creditor, if there are insufficient funds to make a distribution to preferential creditors.

    (Rule 2.106(5A), 1986 Rules, as amended by the 2010 Rules, where the creditors' committee fails to approve the basis of remuneration; rule 2.107(2), 1986 Rules, as amended by the 2010 Rules, where the administrator is dissatisfied with the decision of the creditors' committee.)

  • If the administrator has not made a paragraph 52 statement, he must seek the approval of the unsecured creditors in general meeting (rule 2.106(5), 1986 Rules, as amended by the 2010 Rules, where the creditors' committee fails to approve the basis of remuneration; rule 2.107(1), 1986 Rules, as amended by the 2010 Rules, where the administrator is dissatisfied with the decision of the creditors' committee).

If the creditors fail to set the basis of his remuneration in one of the ways set out above or the administrator is dissatisfied with the basis of remuneration set, he may apply to court for an order setting the basis of his remuneration (rule 2.106(6), 1986 Rules, as amended by the 2010 Rules, where the creditors fail to set the basis of remuneration; rule 2.108, 1986 Rules, as amended by the 2010 Rules, where the administrator is dissatisfied with the basis on which his remuneration is fixed). However, the administrator cannot apply to court for an order of this kind if more than 18 months have passed since his appointment. Where more than 18 months have passed, only the creditors can fix the basis of remuneration.

 

What changes to practice do the new rules require?

The administrator's proposals to creditors

Basis of remuneration

The proposals must set out the basis on which the administrator proposes to receive payment for his work as administrator (rule 2.33(2)(k), 1986 Rules, as amended by the 2010 Rules). If the administrator proposes to adopt a different basis for remuneration for different elements of his work as administrator, he must set out details in the proposals.

Reporting pre-appointment costs

The proposals must include a statement of all pre-appointment costs (rule 2.33(2)(ka), 1986 Rules, as amended by the 2010 Rules). This is the case even if the administrator does not intend to ask the creditors for permission to pay such costs as an expense of the insolvent estate.

The administrator must set out, in his proposals, whether he wants the creditors to approve the payment of unpaid pre-appointment costs as an expense of the administration (rule 2.33(2B)(h), 1986 Rules, as amended by the 2010 Rules). The amended rules do not expressly allow an administrator to seek payment of a proportion only of the unpaid pre-appointment costs, although there seems no reason why, in practice, the administrator could not seek partial approval of unpaid pre-appointment costs from creditors.

The administrator's proposals must include details of:

  • The contract or contracts of retainer under which the pre-administration costs were incurred, including the date of each retainer and the parties to it (rule 2.33(2B)(a), 1986 Rules, as amended by the 2010 Rules).

  • The work done for which the pre-appointment costs were charged (rule 2.33(2B)(b), 1986 Rules, as amended by the 2010 Rules), including:

    (Rule 2.33(2B)(c), 1986 Rules, as amended by the 2010 Rules.)

  • The amount of pre-appointment costs incurred by:

    • the administrator, separating out the fees charged by the administrator for work undertaken by him with a view to the administration of the company before his appointment as administrator and the expenses he incurred in that period; and

    • every other insolvency practitioner, other than the administrator, who undertook pre-appointment work with a view to the administration of the company.

    (Rule 2.33(2B)(d), 1986 Rules, as amended by the 2010 Rules.)

  • The amount of pre-appointment costs (if any) paid to the administrator, or any other insolvency practitioner, as at the date of the administrator's proposal. Also set out how much the administrator and every other insolvency practitioner has received in respect of fees and how much in respect of expenses.

  • Full details of each payment made in respect of the pre-appointment costs, including:

    • who made each payment and to whom; and

    • the amount of the payment.

  • The amount of unpaid pre-appointment costs as at the date of the administrator's proposals, with details of:

    • the amount of outstanding fees for pre-appointment work owing to the administrator;

    • the amount of outstanding expenses incurred by the administrator before his appointment; and

    • the amount of outstanding fees for pre-appointment work owing to insolvency practitioners other than the administrator.

    (Rules 2.33(2B)(e)-(g), 1986 Rules, as amended by the 2010 Rules.)

Changes to professional retainers

Insolvency practitioners

Given the detail in which administrators must report to creditors about pre-appointment costs, it makes sense to enter into a specific retainer that expressly engages the insolvency practitioner to carry out work with a view to the administration of the company (see Reporting pre-appointment costs).

Advisors to insolvency practitioners

Where a legal advisor carries out work with a view to the administration of a company, it may make sense for the prospective administrator, rather than the company itself, to engage solicitors to carry out this work.

In the absence of a provision allowing non-insolvency practitioners to recover pre-appointment costs, it appears that advisors who are not insolvency practitioners can only recover their pre-appointment fees and disbursements as expenses of the administration of a company if those fees and disbursements are recoverable by an insolvency practitioner. Consequently, it appears that the fees of an advisor who is not an insolvency practitioner can only be recovered as pre-appointment costs if they are both:

  • An expense of an insolvency practitioner.

  • Incurred with a view to the administration of the company.

(Rule 2.33(2A), 1986 Rules, as amended by the 2010 Rules.)

However, it seems that fees and disbursements will only be an expense of an insolvency practitioner if they are incurred under a retainer with that insolvency practitioner and will not be recoverable if they are entered into under a retainer with any of the following:

  • The company itself.

  • The directors of the company.

  • Creditors (secured or unsecured) of the company.

Changes to time recording procedures

Under the 1986 Rules, as amended by the 2010 Rules, an administrator may calculate his remuneration in one of three ways, and may adopt a different basis of remuneration for different aspects of the work that he does in the course of his appointment (see On what basis can an administrator calculate his remuneration?).

In a case where the administrator adopts a different basis of remuneration for different aspects of work, it is important that, when the administrator or his staff record time in relation to the administration, they clearly record the aspect of the administration that they are working on.

 
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