Good time recording systems are essential to compliance with Statement of Insolvency Practice 9 (SIP9). Without accurate time recording systems, it’s difficult for insolvency practitioners (IPs) to show they’re adhering to the principle that the payments made to them are ‘fair and reasonable reflections’ of the work they’ve ‘necessarily and properly undertaken’.
In addition, Part 6 of the Practice Direction – Insolvency Proceedings refers to the need to ensure that the amount and/or basis of any remuneration by the court is fair, reasonable and commensurate with the nature and extent of the work undertaken.
“The Practice Direction also says that if you’re going to court for approval for fees then it’s up to you to justify the level of fees you’re asking for,” says Michelle.
“And it makes clear that if there’s any doubt that you can’t justify your fees are appropriate, fair or reasonable, the court will find against you,” she adds. “So, again, it’s important that your time recording system supports you in this respect.”
To bring home the issues you need to be considering in this context, Michelle suggests imagining you have taken on a job from another office holder in a hostile situation, and asking yourself: what would make me question that removed IP’s time costs?
Warning signs
Vague narratives should immediately raise concern, according to Michelle, and particularly where these relate to time recorded in 30-minute blocks, rather than the 6-minute units required by SIP9.
Another warning sign might be apparently excessive time given to report-writing or case reviews, especially if this is over a long period and by several staff.
Time sheets that have not been posted promptly are also a red flag. Hints that this might be happening include repeat narratives and time posted to the wrong date.
“In the work in progress (WIP) report, we might see that an email was sent on say 3 October, but time has been posted to 6 October, which would make me question what’s going on,” explains Michelle.
“If it’s only one instance and a small amount of time, you might think it’s simply human error,” she explains. “But it also makes you wonder whether others could be inaccurate too, and question whether there is enough diligence in posting time accurately and promptly.”
Record everything
During the webinar, Michelle refers to a recent court case, Future Renewables Eco plc (in Admin) ([2023] CSOH 27), to show how courts handle fee applications and to draw out what they expect.
This case shows that the court focused not only on the time incurred and whether it was accurate and proper, but also on what benefit this generated for the estate.
“Again, this emphasises how important it is for us to think about time we’re incurring and whether we’re achieving a benefit to the estate and it’s therefore appropriate to bill it,” says Michelle.
Based on this, the obvious next question is whether, if the court does not expect all time recorded to be billed, then should all time be recorded?
Michelle takes the view that all time spent should always be recorded. This is because Regulation 36A of the Insolvency Regulations 1994, introduced in 2005, states that you must be able to provide creditors, on request, with the number of hours spent on the case by the IP and staff.
“It’s the number of hours spent,” stresses Michelle. “There’s no reference [in the regulations] to the number of ‘fair and reasonable’ hours spent.”
“Staff should be given a strong policy that if they spend time on a case, they record it,” she advises. “You need to demonstrate your time recording system is accurate – so if time is spent, it goes on the time sheet.”
This can also be a useful practice management tool to help IPs identify whether staff are performing as expected, and to identify if and when they’re incurring too much time on particular tasks.
Fair and reasonable
“Although all time should be recorded, clearly not all time should be billed,” says Michelle. “There is going to be unfair or unreasonable time that the Practice Direction reminds us we shouldn’t be charging. The remuneration should reflect the value of the service, not simply reimburse us for the time spent.”
Examples of time costs that might not be fair and reasonable include:
- time spent on mistakes and remedying them
- expensive learning curves for new or inexperienced staff
- unnecessarily stagnant cases
- unnecessary handovers – handovers can achieve something useful, for example if you use the opportunity for a timely case review when handing over due to a staff change. But if a case is being handed over repeatedly due to high staff turnover, it may not be classed as fair and reasonable.
- fruitless investigations or pursuits – where there is no clear rationale or internal strategy
- responding to complaints – if vexatious complaints from creditors take a lot of time, this might be considered fair and reasonable. But if the recognised professional body (RPB) is doing an investigation, it’s not appropriate to pass the costs of time spent to the estate.
Dealing with unfair or unreasonable time
If you identify time costs that shouldn’t be billed, there are several ways to deal with it. For example, where you know in advance that the time shouldn’t be billed, then you could record it to a non-chargeable time code specifically relating to the individual case.
Michelle believes this would be in line with the regulations because the system would be recording time spent but not recording time costs for the case.
“That would skew the average charge-out rate because you would be recording time spent at zero charge-out rate,” she notes. “But it would still fit in with your fees estimate scenario.”
Regardless of how you choose to handle unbillable time, she advises having a clear procedure to thoroughly review WIP before the billing process.
“Then you’re making it clear to your RPB that while you’re recording the time spent, you’re accepting there needs to be a review about whether it’s fair or reasonable before you bill the time cost,” she says.
A robust approach to time recording
Michelle concludes with three key tips for ensuring your time recording system supports SIP9 compliance:
- agree and enforce policies on diligent and prompt time recording (ideally in real time);
- avoid vague narratives and 30-minute blocks; and
- implement a procedure evidencing a review of WIP before billing so you can show unfair or unreasonable time is not billed.
To hear more from Michelle, including full details of the Future Renewables Eco case study, watch the Restructuring and Insolvency Roadshow compliance update webinar on demand.
