New rules laid out in Parliament on 3 March 2015, are to be introduced in England and Wales to improve the transparency of the costs associated with insolvency cases. In a move designed to remove the uncertainty of unlimited hourly rates, insolvency practitioners will be required to provide upfront estimates of the costs of insolvency cases before they begin any work.
In a written statement to the House of Commons, business minister Jo Swinson said that along with a summary of the estimated costs, insolvency practitioners will also have to provide a list of the work they intend to undertake, a proposed hourly charge and an estimate of the timescale for the job to be complete.
Insolvency estimates can only be changed by agreement
The new rules proposed by the government follow the independent 2013 Kempson review, which looked more closely at how insolvency practitioners determine their fees. Concerns were raised that the current system gives insolvency practitioners too much leeway to charge excessive fees.
Under the current system, insolvency practitioners’ fees are typically charged on an hourly basis without any indication of the work that needs to be done or the amount of time it will take. The estimates will effectively act as a cap on any charges, and, once they have been agreed, costs will only be changed if an agreement is made between insolvency practitioners and company creditors.
The plans have been greeted positively by creditors and their representative groups, who will be happy to see exactly where the money tied up in insolvent companies is being spent. The measures will give creditors with a far clearer indication of the fees and costs associated with the insolvency, better equipping them to challenge unreasonable fees.
The move has also been well received by the insolvency practitioners themselves, who welcome the chance to work in a more transparent way.
Strengthening the hands of creditors
Commenting on the changes, the business minister Jo Swinson, said: “Insolvency practitioners do important and specialist work realising the assets of failed companies for distribution to suppliers and other parties that are owed money. Initial fee estimates, which can only be changed by agreement, will strengthen the position of creditors to ensure all fees are fair and reasonable.
“Increased transparency is a sensible and practical way to strengthen the hands of that owed money in an insolvency and will give practitioners the opportunity to demonstrate how their services provide value for money.”
Which insolvency procedures will be affected?
Insolvency practitioners act as office-holders in procedures including administration, administrative receivership, ltd company liquidation, bankruptcy and voluntary arrangements, and typically charge an industry average rate of £375 an hour.
The new rules will come into force in October 2015 and will affect a number of insolvency procedures, including:
– Creditors’ voluntary liquidation
– Compulsory liquidation
– Bankruptcy (unless the official receiver acts as trustee)
Giles Frampton, president of the insolvency trade body R3, said: “We are very pleased with the government’s practical proposals for updating the insolvency fees-setting process. An up-front estimate should work for both creditors and the insolvency profession and will help improve trust and transparency in our insolvency regime.
“The profession first supported an up-front estimate system in 2011, and we are pleased to see it set to become reality.”
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