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How fixed fees work in insolvency – 1,796 companies at £6000 each = £1600 per company

An English Chancery Court decision has given guidance on the reasonableness of fixed fees in an insolvency, albeit the fees of a corporate adviser acting for companies in assisting with their entry into liquidation.

Insolvency practitioners’ remuneration in Australia, and internationally, is generally determined in a time cost basis, one reason being the unpredictable nature of the insolvency process. 

However, where an administration falls within a predictable type, or is offered “in bulk”, a fixed fee may be commercially sensible and appropriate.

The English case – David Rubin & Partners v Cohen and Crooks – involved a corporate adviser applying to the Court for directions whether it should be paid a fixed fee for work carried out for 1,796 companies to enable each company to be placed into creditors’ voluntary liquidation.

The adviser was retained to produce statements of affairs and to summon, advertise and hold meetings of members and creditors in consideration of payment by each of the companies of £6000, or the sum equal to each company’s maximum available realisable assets, whichever was the lower.

The adviser sought payment of just over £2.87 million, at an average fee of about £1600 per company. If it were to receive that sum, there would be nothing left for creditors of the companies.

The adviser argued that a reasonable fixed fee had been negotiated for work that had to be done; the fact that it might leave nothing for creditors, or the costs and expenses of the liquidation, was simply attributable to the companies’ financial position. The liquidators of the companies argued that the fees were unreasonable. 

Under English law, expenses incurred in a winding up may only be paid if they are reasonable and necessary. This includes pre-liquidation expenses incurred for the purposes of achieving a creditors’ voluntary winding up, such as the cost of a person employed to assist in the preparation of a statement of affairs or of accounts.

The Court found in this case that fixed fees were, in principle, an appropriate basis upon which to determine the remuneration.

Any assessment of the reasonableness of the amount should done by assessing the necessary work required at the time the fixed fees were agreed, and that assessment should not change as a result of the time it actually took to do the work. That is, time taken in actual performance was not the agreed basis, and should not be taken into account in any assessment.   

The fixed fee would need to be separately assessed by the court on the basis of the work agreed to be undertaken; whether that work was necessary taking into account the factual circumstances at the time; and in respect of the necessary work, what was a reasonable fixed fee.

Comment

Under the new Australian law, fixed fee liquidations and bankruptcies exist to the extent there is $5000 remuneration payable without the need for creditor approval; and in relation to appointments by ASIC, under s 489EA. Lawyers’ fees as disbursements on a winding up or bankruptcy application can likewise be fixed at a set amount. The Productivity Commission has recommended fixed fee payments for administering small company insolvencies.

As to the work done in this English case by the adviser, s 475(8) of the Corporations Act allows the reasonable costs of preparing a report as to affairs to be paid by the liquidator. The RATA may have been prepared by the company’s adviser.

In bankruptcy, the creditors may approve payment for the costs of work done beforehand, such as assisting with preparing a statement of affairs: s 109(1)(j) BA.

As to remuneration of the practitioner, creditors may determine that a liquidator or trustee may charge by a fixed fee, agreed by the creditors.    

In any review by the Court or the Inspector-General, a principle stated in this case should apply, that whatever work was actually done is not the basis upon which the fee was agreed and it should not therefore be the basis for later assessment.

The inference is that if the matter takes much less work than was initially contemplated, the fixed fee should stand. And likewise if it takes more.  While the practitioner might be wise to have some agreed outer limits on what work would be done, even if not, the court would have an ultimate discretion to re-determine the fixed fee, and, under the new law, the Inspector-General in Bankruptcy.

A reality in insolvency played out in this English case.  While a high £6000 per company was agreed, it was also agreed that payment would be the sum equal to each company’s maximum available realisable assets, whichever was the lower.  In the end result, the case records that the adviser would in fact receive, on average, less than a third of that, of £1600 per company.

INSOL Special Report

Fixed fees generally might typically err on the side of a higher and cautious amount, but the pressures of competition and tenders will counter that.  In insolvency, that caution is heightened, to the extent that conservative time costing remains preferred.

The March 2017 INSOL Special Report on Office-Holder Remuneration explains the attraction of a fixed fee, in providing certainty to ‘unsophisticated creditors’, and offering economy to any government or regulator that is paying office-holders’ costs. However, of nearly all the countries considered in the Report, fixed fees are not widely used. Where they do exist, a concern is that they offer no incentive “to do a better job” given that a set fee is paid irrespective of performance or thoroughness. As the Report says, “the cheapest approach may not be the one that ultimately provides best value to creditors”.  The report suggests that research would be required to establish the correlation, if any, between fixed fees and lack of return to creditors.

Indeed, with any fee setting arrangements, assessments according to principles of behavioural economics are needed on the different approaches available.  It is well debated that time costing is said to encourage more work than is necessary, and commission based fees to encourage quick realisations, however honourable the practitioner. Having the law drafted so as to provide proper incentives and disincentives in accord with those principles should ensure greater integrity in what is a contentions aspect of insolvency practice.  

Note: I have relied on an excellent report of this decision, which in my researches, is not on Bailii, written by the international law firmGowling WLG. Any errors are my own.

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