What our fees are charged for

Published: 23/03/2022 By Hannah McCormack

Last week we posted about what happens when you instruct us to carry out a creditors’ voluntary liquidation, so today we thought we would tell you why we charge what we do for assisting you with an insolvency procedure.

The R3 who are “the trade associate for the UK’s insolvency and restructuring professionals” have recently released an informative paper called “Insolvency fees and the cost of regulation” which we have put a link to below. In this report they explain how insolvency fees are charged, but how these charges are heavily regulated and monitored and in no way unfair on any party.

R3 Insolvency fees and the cost of regulation document

We are aware about the misconceptions that Insolvency Practitioners (IPs) charge an extortionate hourly rate but what is often left out is how much of an IP's time is actually written off. Often the IP does not receive the full amount owed, as the aim is always to ensure the creditors get the maximum amount out of any insolvency procedure. What we tend to find especially in the smaller cases, is that there are insufficient funds to pay an IP in full and more over than not, none of the IP’s time is actually remunerated.  
However, any fee that is charged is directly linked to the legal requirements an IP must fulfil when carrying out any insolvency procedure; every case is different and therefore the fees can be hugely different from case to case.

Who pays for the fees?
Usually, the fees are paid from the available assets of the company not from the director as many people may think.

Who gets paid and when?
As we have mentioned an IP's main aim is to pay as much as possible to the creditors; to ensure this is fair the creditors are paid in order of importance which is set out by the law. Please see our page here on who gets paid in what order.
No. 2 on the list is an IP’s fee’s, however any fee to an IP is agreed by either the creditors or shareholders depending on the type of insolvency procedure but these fees are strictly regulated.

What can an IP legally charge?
R3 state the following:
As set out by legislation, IP fees may be charged in the following three ways, or in a combination of all three:

  • As a percentage of the value of the assets realised during an insolvency procedure, or as a percentage of the assets with which an IP has had to deal in an insolvency procedure; 
  • As a fixed amount; 
  • By reference to the amount of time spent on a case by the IP and their staff – known as a “time cost” basis

Most of the time the fees will be calculated on a time cost basis but an IP must provide a breakdown of their time spent on a case as well as any other member of staff (they will have a different charge out rate to the IP), this breakdown must include all fees and expenses. But as we have stated, what time an IP and their staff spend on a case is often not fully remunerated.

How are the fees regulated by the law?
The fees that are charged by an IP are directly linked to the legal obligations the IP has to undertake to carry out an insolvency procedure. Fees themselves are also regulated by the Insolvency Act (1986) and the Insolvency (England and Wales) Rules 2016.

R3 advise the following:
For each type of insolvency procedure, the Insolvency Rules prescribe in detail:

  • The ways in which IPs can charge fees (such as a percentage of value of assets, as time costs or as a fixed amount); 
  • The information that IPs must report to creditors on fees and expenses, including estimates; 
  • Conditions that must be taken into account when calculating fees, such as the complexity of the case, or the value and nature of the property within the case;  
  • The consent required by creditors to approve fees;  
  • How a creditor can apply to court if they believe the fees charged are excessive;  
  • The circumstances where an IP may need to apply to court for approval of their fees;  
  • Other various complicating factors which may impact on the fees charged

As well as these listed above, SIP 9 (SIP’s are issued to IP’s to maintain certain standards of practice) sets out rules that insolvency payments must be fair, reasonable and proportionate to the specific insolvency case, stating it must be made clear “what was done, why it was done and how much it has cost” therefore providing complete transparency to creditors.
IP’s can be fined or even lose their license if they fail to comply with any of these regulations.