Reasonable remuneration
Justine Carruthers, Head of Insolvency Investigations, ICAEW Conduct Department summarises the themes that came out of the case.
The case was referred for investigation by the Conduct Department following a routine quality assurance review. The issue related to the appropriateness of the level of time costs recorded and fees drawn in two similar liquidations.
Following investigation, and in line with the relevant prima facie test at the time, the Conduct Committee found there to be evidence that, amongst other matters, part of the remuneration drawn in the two liquidations had been unreasonable and/or excessive. The Conduct Committee determined that the matter should be referred to the Tribunals Committee for sanction, with the matter ultimately being concluded by settlement.
Sanction
The IP accepted that the liquidation fees recovered in the two estates contained an element that was unreasonable and excessive. The IP also accepted that there had been a failure to maintain sufficient records.
The IP received a severe reprimand, a financial penalty of a five figure sum and was required to pay costs of another five figure sum. The IP also agreed to repay £100,000 of their remuneration back into the insolvent estates, which necessitated restoring the companies.
Key takeaways
An IP is required to justify the level of time costs incurred and all key decisions. It is not sufficient to merely have a valid fee resolution. All IPs must maintain sufficient records to demonstrate the actions taken by the IP and to allow an informed third party to reach a view on the appropriateness of those actions, this also extends to time records.
An IP is obliged to consider the overall reasonableness of their work and the impact of the costs incurred on the insolvent estate.
All IPs should consider the appropriateness of work undertaken by different grades of staff, and if junior staff members are not available to resource relatively simple tasks, then the IP should consider reducing the charge out rate for senior staff for those specific tasks.
Even when an IP has ceased to act and the company in question has been dissolved, ICAEW is still able to investigate complaints and, as demonstrated in this case, the IP could be required to repay an element of their fees. In addition, even if fees have been properly approved by creditors and there have been no external complaints, that would not prevent ICAEW from investigating whether fees are reasonable.
What does the Insolvency Act say?
The introduction of the Regulatory Objectives in 2015 in section 391C(3) of the Insolvency Act require recognised professional bodies such as ICAEW to discharge their regulatory functions in a way that is compatible with the regulatory objectives. Two of these have relevance to the level of an IP’s fees; the requirement in section 391C(3)(b) to provide high quality services at a cost to the recipient which is fair and reasonable and that in (c) to promote the maximisation of the value of returns to creditors.
Common quality assurance review findings
Allison Broad, Senior Manager, ICAEW Quality Assurance Department explains what our reviewers look for regarding time cost-based fees and highlights some of the issues that would cause concern during a monitoring visit.
It won’t come as any surprise to hear that ICAEW’s Quality Assurance Department looks at IP fees during monitoring reviews. That doesn’t just mean whether fees have been properly authorised and correctly calculated, but also extends to the amount sought in an estimate and the fees that are drawn.
Quality assurance monitoring process
Where we have concerns about an IP’s fees, we will first raise that in our written queries and ask for comments and additional information. If we still have concerns, the next stage is for us to report the issue to ICAEW’s Insolvency Licensing Committee. The IP has a further opportunity to make additional comments at that stage. If the committee believes that the matter requires further review (as in the case described above) it will refer the matter to ICAEW’s Conduct Department. The Conduct team will have the opportunity to investigate the position in much more detail than we have time to do during a monitoring visit.
Some of the issues that cause us concern are set out below, and we would encourage ICAEW-licensed insolvency practitioners to take note of these and check they aren’t making any of these mistakes.
Activities that aren’t relevant to a case
We question time included in a fee estimate for areas of work that aren’t applicable to the case. For example, including time in a fee estimate for:
- trading, when the business had already ceased trading;
- agreeing creditor claims, when the IP has already said that there’s no prospect of a dividend; or
- debt collection work, where the company doesn’t have any debts.
Similarly, we would question time entries allocated to activities that don’t appear to be relevant to a case, or time entries that relate to staff who don’t appear to have been involved in the case.
Narrative
As the case above highlights, maintaining sufficient records is important. When looking at time records, our reviewers can find it difficult to understand the work that has been undertaken if there’s limited narrative. SIP 9 requires that time should be recorded in a minimum of six minute units. Even so narrative is important.
Some firms have very detailed time codes with a vast array of sub-codes beneath them, but even then, some narrative is useful to clarify the work undertaken. This is particularly true if large periods of time are allocated to certain tasks and we can’t see evidence of that work. We don’t need to see war and peace – but we do need enough to understand what the time relates to. That detail can be useful for IPs as well, in terms of managing staff, and also if fees are challenged.
Level of staff
Again, concerns also arise where a senior member of staff (or the IP) is undertaking work seemingly more suited to someone more junior. Where that’s necessary, for example if more junior staff aren’t available, we would expect the IP to discount their charge out rate so that the rate being charged reflects the underlying task. This is also relevant to sole IPs who don’t have junior staff. In this case we expect to see the work more suited to junior staff being charged at a lower rate.
We’d also expect IPs to consider the recoverability of costs incurred where cases are being handed over from one team member to another. Is it right for the creditors to bear the cost of new members of staff reviewing the files to get up to speed with the case? We would say not.
Insolvency practitioners are in a privileged position to draw their fees from funds under their control, and it’s critical that this isn’t abused.
