When a company enters administration, it is often assumed that the administrator’s fee will be paid by the owner of the insolvent company, but that is not the case.
In fact, the costs of the administration, including the insolvency practitioner’s fee, will be paid out of the company’s assets before money owing to creditors’ is paid. Effectively, that means it is the creditors who pay the insolvency practitioner’s fee. For that reason, the company’s creditors have a direct interest in exactly how much an administrator is paid.
Determining the Insolvency Practitioner’s fee
At the start of every administration, the insolvency practitioner must create a statement of proposals which explains what their aims are and how they intend to achieve them. This must also include an estimation of the costs of the procedure upon which their remuneration should be fixed.
These proposals must be sent to every company creditor along with an invitation to attend the initial creditors’ meeting to vote on the proposals. When the creditors review the proposal they can ask for amendments to be made to the administrator’s fees by voting at the creditors’ meeting. The vote can change the basis on which the administrator’s fees are calculated. Generally, if a sufficient number of creditors believe an IP’s fees to be excessive, they can apply to the court for the fee to be reduced.
The administrator’s fee will usually be a fixed percentage of the value of the property dealt with, a fixed fee, or based on the time spent by the administrator and their staff. It will also take into account factors like:
- The complexity of the case
- Any exceptional responsibilities are taken on by the administrator
- The nature of the company’s assets
- The effectiveness with which the administrator carries out their duties
The Role of the Court
As describe above, it is the job of creditors and ultimately the court to determine the administrator’s fee. However, the creditors are made up of a number of different groups, and not all get a say. It is the creditors’ committee’s job, which is established at the creditors’ meeting, to determine the basis for the administrator’s remuneration. This will be done based on:
- The work which has been reasonably undertaken by the administrator;
- The extent of the administrator’s responsibilities in administering the company’s assets.
If no creditors’ committee has been formed, the administrator’s fee will be fixed by the creditors at the creditors’ meeting. If no creditors’ meeting is held, the remuneration will be approved by each secured creditor of the company. However, if there are enough funds to pay secured creditors in full, then, in effect, the administration costs will fall on the preferential creditors, as they are next in line to be paid. In that case, they will vote on the administrator’s remuneration package.
What Information must the Administrator Provide?
Claims made by the administrator for costs they have incurred and for their remuneration should be submitted to the creditors’ committee (or to the creditors if there’s no committee) within two weeks after the end of the accounting period. The claim for outlays and remuneration should be broken down into:
- Category 1 disbursements – Costs where the expenditure relates to payments to third parties in respect of the administration of the insolvent company’s affairs.
- Category 2 disbursements – Costs which includes elements of shared or allocated costs paid internally by the administrator’s own firm.
When seeking agreement for their fees and disbursements, the administrator should provide sufficient supporting information to enable the committee or the creditors to form a judgement as to whether the proposed fee and disbursements are reasonable. They should also provide the details of the charge-out rates of all grades of staff that are likely to be involved in the case, as well as an up to date receipts and payments account. Where the proposed remuneration is based on time costs, the administrator should disclose to the committee or the creditors the time spent and the charge-out value in each case.
If you are considering putting your business into administration, you should always seek professional advice in advance. We’re always happy to help, simply give us a call on 08000 746 757 for a no-obligation, free consultation. or chat using the Live Chat box on the bottom right of the screen.