A. Source of Courts’ Authority to Fix and Review Remuneration in the UK
Courts in the UK may fix or review corporate insolvency practitioner remuneration in liquidations, administrations and receiverships. The rules for the fixing of remuneration for administrators and the basis of the remuneration are largely similar to those applicable to liquidators.
Accordingly, the discussion in this section focuses on liquidators and gives the equivalent provisions relating to administrators in the footnotes. Receiver remuneration is usually determined by agreement between the receiver and the holder of the charge, but Section 36 of the Insolvency Act 1986 also allows the court to fix the remuneration of receivers on the application of the liquidator.
In a liquidation, where the basis of remuneration is not fixed by a liquidation committee or by the creditors within eighteen months after the date of the liquidator’s appointment,
it will be determined either by reference to scale fees,
or the liquidator may apply to court to fix the remuneration.
If the liquidator considers the rate or amount of remuneration fixed to be insufficient or the basis fixed to be inappropriate, the liquidator may apply to the court for an order changing the basis of the remuneration or increasing the amount or rate.
Any secured creditor, or any unsecured creditor with either the concurrence of at least 10 per cent in value of the creditors (including that creditor) or the permission of the court, may apply to the court for relief
on the ground that the remuneration charged, the basis for the remuneration, or expenses incurred, is or are excessive or inappropriate.
There are three bases that may be used to fix the remuneration of a liquidator (or administrator), and they may be used in combination:
a percentage of the value of the assets realized or distributed, the time properly spent in attending to the matters arising from the winding up, or a set amount. This position was reached in two stages of development. Under earlier law and practice, time spent was not stated expressly as a basis for charging, and courts viewed it with suspicion.
Time-based charging was first stated expressly as a basis for charging when the Insolvency Rules 1986 (IR 1986) came into force,
which implemented the recommendations of the Cork Committee,
and since then has become the predominant method of charging in the UK.
Subsequently, the Insolvency (Amendment) Rules 2010 provided more flexibility by expressly allowing the use of any one or more of the three bases of computation: time-costs, fixed fees and percentage basis.
The IR 1986 have been replaced by the Insolvency Rules 2016 (IR 2016), which came into force on 6 April 2017. References in this article are provided to both the IR 1986 and the IR 2016. The liquidation committee or creditors should take into account the following matters when determining which basis or bases of remuneration to approve: complexity (or otherwise) of the case; any responsibility of an exceptional kind that fell on the liquidator; the effectiveness with which the liquidator appears to be carrying out or to have carried out his or her duties; and the value and nature of the assets with which the liquidator has to deal.
Pursuant to reforms in 2015, where the liquidator proposes to use time-based charging, the liquidator is required, before the fixing of the basis or bases of remuneration, to give to the creditors of the company a fee estimate and details of the expenses the liquidator considers will be, or are likely to be, incurred.
A fee estimate contains details such as the work proposed to be undertaken, the charge-out rates the insolvency practitioner proposes to charge for each part of that work, the anticipated time for the work, whether the insolvency practitioner anticipates it will be necessary to seek approval for charging beyond the fee estimate, and the reasons it will be necessary to seek such approval.
Fee estimates are important because the liquidator is not entitled to claim remuneration beyond that set out in the fee estimate without approval by the entity that had previously fixed the basis of the liquidator’s remuneration.
Where an application is made to the courts for fixing or approval of an insolvency practitioner’s remuneration, the Practice Statement sets out guiding principles to be considered by the courts.
The principles state that the remuneration should ‘reflect the value of the service rendered’ and ‘represent fair and reasonable remuneration for the work properly undertaken’.
The principles emphasize the need for proportionality, stating that remuneration should be proportionate to the nature, complexity and extent of the work; the value and nature of the assets and liabilities dealt with; the nature and extent of responsibility and risk assumed; and the efficiency with which the work has been completed.
The courts may also have regard to statements of practice issued by relevant professional bodies. The guiding principles emphasize the need for the insolvency practitioner to justify the claim, stating that any doubt as to the reasonableness of remuneration should be resolved by the court against the insolvency practitioner.
Where the matter is sufficiently complex, the Practice Statement provides that the court may direct an assessor or a Costs Judge to prepare a report in respect of the remuneration, or direct that the matter be heard by a Registrar or a Judge sitting with an assessor or Costs Judge.
B. UK Developments: Mirror Group Newspapers, Practice Statement and 2015 Legislative Reforms
The rapid development of the profession of insolvency practitioners after the Insolvency Act 1986 came into force and a spate of high profile bankruptcies and insolvencies in the 1990s involving high levels of fees led to public disquiet about corporate insolvency practitioner remuneration in the UK.
The seminal case of Mirror Group Newspapers plc v Maxwell (No 2) brought the issue of how to approach time-based charging into sharp focus.
The court-appointed receivers sought the court’s approval of their time-based remuneration of around £0.78m and a total bill of over £1.628m when the assets realized amounted to £1.672m. Ferris J took judicial notice of the general perception that costs in insolvency cases had reached an unacceptably high level and that there was little by way of controls or effective supervision.
But faced with the twin problems of inadequate legislation
and the lack of judicial experience on how to fix the remuneration of court-appointed receivers, Ferris J examined the issue of remuneration of insolvency practitioners generally by having recourse to general principles from which ‘a much firmer picture emerges’.
Since then, this approach of developing general principles across different insolvency proceedings to supplement legislation has been adopted in the UK.
According to Ferris J in Mirror Group Newspapers, the essential point is that ‘office holders are fiduciaries charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong not to themselves but to creditors or beneficiaries of one kind or another’.
Based on this line of reasoning, it is for an office holder to justify the expenditure incurred and any claim for remuneration. This fiduciary principle serves two important purposes. First, it places the burden of justifying the remuneration sought on the office holders. This concept was later incorporated as a guiding principle (the ‘justification’ principle) in the Practice Statement. The fiduciary principle also led to another guiding principle (‘the benefit of the doubt’ principle), which is that where there is doubt as to the appropriateness or reasonableness of the remuneration sought, such doubt should be resolved against the office holder. Secondly, the fiduciary principle legitimizes the protective stance towards the interests of the unsecured creditors that Ferris J adopted when he laid down the guiding principles on remuneration. The IR 2016 gives the courts jurisdiction to fix the fees of office holders, but the Rules offer little guidance on how judicial discretion should be exercised. The factors that creditors or courts should take into account when fixing remuneration, referred to above, tell us nothing of the approach that should be adopted. Should, for example, the fixing of the remuneration of an office holder be treated no differently from that of any service provider; is it simply a bargain between the relevant creditors and the office holder, and they should be left to protect their own interests? The fiduciary principle enabled Ferris J to propound a set of subsidiary principles that lean towards protecting unsecured creditors by subjecting the remuneration sought by office holders to a closer and more intense scrutiny than what would ordinarily apply in a willing seller, willing buyer arms-length transaction.
The most important subsidiary principle that Ferris J laid down in the Mirror Group case is that the aim of the court in fixing or reviewing remuneration is to reward the value of the services rendered by the office holder.
He drew a distinction between the time spent on a piece of work, and the value of the services rendered in doing the work. Time spent represents a measure not of the value of the service rendered but of the cost of rendering it. According to Ferris J’s approach, ‘remuneration should be fixed so as to reward value, not so as to indemnify against cost’.
While Ferris J was hearing applications relating to the Maxwell estate, the de facto head of the Chancery Division of the High Court (on which Ferris J served) Vice Chancellor Scott (later Lord Scott of Foscote) took an important step to develop the law on insolvency practitioner remuneration. He appointed Ferris J to chair a working party to consider that whole subject. The members of the working party consisted of senior officials from the Insolvency Service, senior practitioners, and a senior bankruptcy registrar.
Notably, there was no representation of any creditor group on the working party. This omission is part of a larger problem of limited unsecured creditor engagement in insolvency proceedings.
The discussions of the working party would have informed Ferris J when he wrote the judgment in the Mirror Group case. Therefore, although the judgment in the Mirror Group case was formally the product of a judicial process, the UK Government and the professions had a voice in the process leading to the judgment. Accordingly, the Mirror Group judgment and the Ferris Report were fundamental to the development of the English common law on the remuneration of office holders. Some principles from the Report have been approved judicially,
and it influenced the development of the Practice Statement. The Practice Statement was drafted by a sub-committee of the Bankruptcy and Companies Court Users’ Committee, previously known as the Insolvency Court Users’ Committee,
which included senior officials from the Insolvency Service and representatives of the relevant professions.
Although the Practice Statement ‘of itself cannot make law on substantive issues’,
it ‘acquires authority as a statement of guiding principles if it is expressly approved and applied as such in judgments at an appropriate level’.
Since the Practice Statement has been so approved and applied,
‘the stage has been reached’
that it is to be applied unless the party objecting to its application shows that it would be wrong in principle to apply it.
Ferris J also experimented with using cost assessors in 2002 with great acclaim for the efficiencies that he achieved by incorporating external expertise into his judgment on fees.
The idea was referred to as ‘imaginative’ at the time.
It is not clear to what extent cost assessors are currently being used to assist English judges to decide remuneration disputes. A commentary from the time suggests that even Ferris J did not consider that a cost assessor would be appropriate in every case due to the cost involved, and the judge did not adopt all of the assessor’s report.
Ferris J held, in a preliminary hearing, that it was for the court, not any body of creditors, to fix the remuneration of provisional liquidators. However, as the court by itself is ill-equipped to perform this task without assistance, he invoked the power under Section 70 of the Supreme Court Act 1981 (now Senior Courts Act 1981)
to appoint an assessor to assist the court, which he believed had never been done before.
The assessor submitted a report setting out the general principles then accepted by the insolvency profession as the basis for claiming insolvency remuneration. The report was sent to the provisional liquidator’s solicitors with an invitation to submit comments. The assessor also sat with Ferris J at the remuneration hearing. Ferris J concluded that the appointment was ‘an unqualified success’
and that the report was ‘a valuable contribution to the debate concerning the approach which should be adopted to office holders’ remuneration’
and attached it to his judgment in summary form.
These developments show an English judiciary active in developing common law principles to supplement legislative provisions and introducing external expert participation in fixing and reviewing insolvency practitioner remuneration in the 1990s and 2000s. The UK Government was involved through its participation in drafting the Ferris Report and the Practice Statement, but other than that, during this time it did not take active steps to reform the applicable legislation. The judge-made law provides some guidance on the regulation of time-based charging but difficulties remain. First, while the principles were helpful in focusing attention on the main criteria to apply when fixing remuneration, they lacked precision, and arguably leaned too heavily in favour of unsecured creditors at the expense of insolvency practitioners.
Second, while it is relatively easy to state the guiding principles, the application of the criteria to the facts of any particular case remains difficult. As David Richards J explained in Simion v Brown:
The task for the court was to arrive at a level or remuneration which balanced the various criteria of the value of the service rendered, the proportionality of the remuneration and a fair and reasonable remuneration for the work properly undertaken, as those criteria were explained in the Practice Statement. The result had to resolve the conflict which might in a particular case exist between those criteria.
The case of Re Cabletel Installations Ltd also highlights the practical difficulties encountered by courts in fixing remuneration.
The case concerned the fixing of the remuneration of administrators in a failed administration. The matter took six days, witnesses were cross-examined and voluminous evidence was presented, but the court still faced uncertainty in determining the proper remuneration to award. After going through the work streams where he disallowed or reduced some of the sums claimed, Registrar Baister looked at the larger picture and considered the case in terms of value.
He also used this second stage to take into account some of his earlier concerns for which he could not reach clear conclusions. Thus, in the totality of his findings, he imposed a discount of 20 per cent on the overall figure otherwise allowed. No reasons were given for choosing that figure, or indeed the figures by which the sums claimed in the first stage were reduced. In this regard, Registrar Baister acknowledged that ‘[q]uestions of costs can never be wholly objective’
and that consideration of the criteria on fixing costs ‘can be objective up to a point, but there is necessarily an element of impression that cannot be wholly disregarded’.
Gabriel Moss QC pointed out that these comments ‘emphasise the lack of predictability in the fee approval process’.
Third, English judges have sought to regulate fees by developing principles to govern how disputes over fees should be resolved in court. They have not sought to ‘address the problem at source: ie, to lay down guidelines at the start rather than deal with the problem after the fact’.
Recent law reforms, however, have sought to address this issue.
The recent law reforms owe their genesis to the 2010 report of the then Office of Fair Trading (OFT).
The report concluded that there was a market failure where the insolvency practitioner’s remuneration was fixed in matters involving unsecured creditors. Although the basis for the report was challenged by the insolvency profession, the subsequent Kempson Report commissioned by the UK Government largely supported the conclusions of the OFT report.
It devoted greater attention than the OFT report to the problems of time-based remuneration and offered more suggestions for reform. The most important recommendation was based on the Insolvency Practitioners Association of Australia’s Code of Professional Practice.
The Kempson Report proposed following the approach in the abovementioned Code by requiring an office holder who proposes charging remuneration on a time-cost basis to agree with the creditors on an estimate of fees which serves as a fee cap at the outset of the case, and that creditor approval is required if the practitioner seeks additional fees.
This proposal was eventually adopted in the Insolvency (Amendment) Rules 2015, after the insolvency profession objected strongly to the UK Government proposal in the consultation exercise
to limit the use of time-based charging to cases where there is tight control over the work being done (ie, generally, by either a creditors’ committee or secured creditors).
The 2010 OFT report also led to substantial reforms of the regulation of the insolvency profession with the enactment of the Deregulation Act 2015 and the Small Business, Enterprise and Employment Act 2015.
Fragmented professional bodies have caused difficulties for the UK Government as oversight regulator and made it difficult to establish legislative rules in relation to remuneration. In the long run, the 2015 regulatory reforms may have a more significant impact on approaches to remuneration than the fee cap. Regulatory objectives of the insolvency profession were spelled out in legislation for the first time, and they require encouragement of an independent and competitive insolvency practitioner profession whose members provide high quality services at a cost to the recipient which is fair and reasonable, promoting the maximization of the value of returns to creditors and promptness in making those returns.
The new regime also gives the Secretary of State, as oversight regulator, a broad range of sanctions to be used against any professional body that fails to adequately fulfil its role as a regulator, the power to apply to court for a direct sanctions order against an insolvency practitioner, and even a reserve power to designate a single regulator of insolvency practitioners.