On the face of it, producing a fees estimate is a simple process. In practice, however, there are some important issues IPs need to keep in mind.
As far as the basic rules are concerned, putting in a fees estimate is relatively straightforward. “It consists of the details of the work you’re going to undertake and how long it’s going to take you,” explains Michelle.
“It gets more interesting, however, when you look at Statement of Insolvency Practice 9 (SIP9),” she says. “This talks about giving information to enable people to make an informed judgment about the reasonableness of your request. And that information needs to be useful while being proportionate to the circumstances of the appointment.”
The key compliance standards in SIP9 highlight the main issues for creditors that IPs need to explain. “These cover not only what work you’re going to do,” explains Michelle, “but also why that work is necessary and what financial benefit it will generate.”
Tallying up
SIP9 is not prescriptive, but it suggests fee assessments might be split into six main categories. “The first question is whether your own time recording system actually uses those six categories,” says Michelle.
In most instances, the answer to that question will be yes. But there are still a few ambiguous areas where anomalies might arise. “SIP9 puts statutory reporting in the administration category and suggests the creditors category is only about claims and distribution time,” she notes. “So, is that how your time recording system is set up?”
It’s important to consider this because your fees estimates must follow how your time recording systems work. “Look at your time recording system,” suggests Michelle. “Identify which sub-category of time you’re using for progress reports, and for things like administrator’s proposals and secured creditor reporting (which isn’t statutory but adds time elements). Make sure your recording system is unambiguous and that you know which category that time is going to fall under: is it administration or is it creditors?”
“Your fees estimate – both the narrative and the numerical tools you use to come up with the numbers – has to tally with your time recording system,” she advises. Because if time costs are recorded to different categories, it will be difficult for progress reports to compare actual costs per work category with those estimated. “You might find you’re dealing with a mismatch,” she warns.
“If it’s possible, amend your time recording sub-categories to avoid any of these ambiguities or duplications,” she says. “And if that’s not possible, set a firm-wide policy so that time is recorded consistently to a specific sub-category, and ensure staff follow that policy.”
Case specific matters
Another category that sometimes causes difficulties is case specific matters. “Most time recording systems have something relating to this,” says Michelle. “But it’s sometimes difficult to estimate time in this category, especially if you’re issuing a fees estimate right at the beginning of the case.”
It can also be difficult to explain the work you propose to do in this category unless there is something obvious and specific for the case.
Time recording systems will sometimes have “meetings” as a sub-category under case specific matters. “But what is a meeting?” asks Michelle. “Is it to do with asset realisation or investigation, or is it an internal case strategy meeting? If it is any of those, then why would it come under case specific matters? Why wouldn’t it come under the other main categories?”
Another difficulty is if you don’t allocate any part of the fees estimate to case specific matters, but time is then incurred in this category, it is arguable there is no approval for that.
To remove any ambiguities, Michelle suggests avoiding case specific matters altogether, unless there’s an obvious specific issue relating to the case.
“In most cases, time that gets posted to case specific matters could, with a bit more thought, be better placed under asset realisation, investigation or internal strategy meetings,” she says.
Drawing boundaries
Another area for doubt is the line between the investigation and realisation of assets categories. “Is there a boundary where time flips into the other category?” says Michelle.
A good example of this is pursuing antecedent transactions. “Obviously, when you’re investigating, that would be investigation, but once you’ve established the amount and are negotiating with the parties to get money in, is that asset realisation? Where do you draw the line?”
“There’s nothing prescriptive here to say how to do this,” emphasises Michelle. “But you do need to make sure that everyone knows where that line is drawn.”
“Also, make sure there is a staff policy so that there is a consistent approach on how they post their time and how they draw up fees estimates.”
Overstepping the estimate
One of the areas where fees estimates are often exceeded is administration and planning. This sometimes happens because the tools used to create fees estimates are simply understating this category. “Look at these tools regularly and refresh them,” advises Michelle, “especially when charge out rates are generally increasing, and when you’re promoting staff.”
Another likely reason for under-estimation in administration and planning is that IPs and staff are being too optimistic about how quickly a case can be closed. “We sometimes estimate on the basis of a straightforward case and, actually, things don’t go according to plan,” says Michelle. “So maybe we just need to be a bit more realistic.”
Time recording practice could also be at fault. If staff are not being precise enough about where they’re putting their time, recording in real time could help.
“If you get to the end of day, it can be difficult to identify time specifically to perhaps assets or investigation,” says Michelle. “But if we do record each time we do a task, we can be more precise and avoid putting it down to the vaguer administration and planning categories.”
Best or worst?
A common question with fees estimation is whether to estimate for the best or worst case scenarios. “Should we be considering it’s going to be a straightforward case, or do we expect things to go off the rails?” asks Michelle.
Rule 1.2 of the Insolvency (England & Wales) Rules 2016 states a fee estimate must specify the time the IP anticipates each part of the work will take. “It does expect us to have a realistic assessment,” emphasises Michelle. “So I don’t think the rules suggest we put either a best or worse case; it’s actually about what we realistically think this particular case is going to cost.”
Given all the uncertainties involved in fees estimation, another common question is whether it can be helpful to use milestone fee estimates.
“This is where you propose your fees be fixed on a time cost basis, but your fee estimate doesn’t include all the time anticipated to complete the case,” explains Michelle. “You tell creditors: this is the estimate for this work, but we’ll come back to you at a later stage, if and when needed, to get approval for time spent on other pieces of work.”
“Rule 1.2 requires us to put in more information if we’re doing a milestone estimate,” she notes. So if you do decide to take this route, it’s important to set clear boundaries to explain what work is included or excluded.
Making it reasonable
To help you comply with SIP9 requirements on ensuring people can make an informed judgement about reasonability, Michelle has a few tips on how to sense-check your fees estimate.
For example, she recommends that if you envisage incurring a lot of time on a task then make sure the narrative justifies that.
She also suggests double-checking the average charge-out rate isn’t too wide of the mark. “We’d expect your work in progress average charge-out rate per work category to be not a million miles away from that in the fee estimate,” she says.
Above all, you should always make sure the narrative properly explains the work. “We sometimes find, particularly in asset realisations, that this aspect isn’t done very well,” she says.
To learn more about what Michelle has to say about checking the reasonableness of your fees, watch ICAEW’s compliance update webinar.
Key points
Michelle concludes her discussion of fee estimates by summarising the key points IPs need to cover:
- check that the numerical and narrative categories match;
- ensure that the fee estimate categories reflect your time recording system;
- conduct a sense check to satisfy yourself the estimate is fair and reasonable, and that creditors have enough information to make a judgement;
- set out your assumptions and the limits of the estimate; and
- double check whether the fee estimate has accommodated all work in progress to date per work category and realistically allowed for sufficient future time.
In the second part of the compliance update webinar, Michelle looks at why time recording systems are so important. In a future article, we will be covering this topic in more detail.
