OFT to investigate corproate insolvency fees

And the backlash begins.

By Insolvency News, 16 November 2009. Posted in Corporate

The Office of Fair Trading (OFT) is to launch a market study into corporate insolvency amid criticism of the high fees charged by insolvency practitioners administering over a corporate bankruptcy.

The move follows a report by the World Bank, which found that the cost of closing a business was higher in the UK than other countries with similar or better recovery rates.
Clive Maxwell, OFT Senior Director of Services, said: 'We want to identify any potential problems within the corporate insolvency market to ensure that firms and practitioners are competing freely and that the market is working well for the end consumers.

"Efficient insolvency services are an important component of a modern market economy."
The investigation is due to be completed by the end of 2010 and will cover the whole of the UK market.

R3, the trade body for insolvency practitioners said it welcomed the OFT corporate insolvency study, saying it "hopes that unfounded claims about insolvency practitioners' fees can be put to bed for once and for all".

It claimed that the study would demonstrate the value the industry brings when dealing with companies in administration.

According to the industry body, insolvency practitioners do not get paid in all circumstances and they work in one of the most heavily regulated industries in the UK.

"We welcome this chance to prove our worth and we are proud of what we do in terms of rescuing businesses and saving jobs," said R3 vice-president Steven Law.

The Forum of Private Business, has said the investigation should also investigate phoenix companies and directors who abuse the process.

"When a business drops out of the market, banks and the government take their cut, but what about the small business which has supplied that company and has never been paid?" asked Matt Goodman, the FPB’s policy representative.

"Or, if a competitor wipes the slate clean of debts and carries on trading – where does that leave those small businesses struggling with their own finances?"

Coinciding with the OFT’s investigation, an Early Day Motion, which calls on the government to carry out a review of the UK’s insolvency laws in order to protect unsecured creditors, has now been signed by more than 30 MPs.

Comments What do you think?

  • Yellow Beard | 12:57 16 November 2009

    Hopefully they will realise pretty promptly that the issue is the legislative regime and it is actually a strength of our economy. Whilst I am not an expert on foreign regimes, many other countries have processes that give lots of protection to certain classes of creditors etc… Whilst this may mean that they have a higher return it does not create the level of enterprise that we have in this country, hence why the UK is such an attractive international law venue. I would make the following observations:

    1. In most cases IP’s would have found that had they been on Schedule 6 rates, i.e. that which parliament has endorsed, they would have received greater fee income. I do not see how you can criticise costs if the man in charge has said you can take more.

    2. Excuse me Mr Civil Servant, but do you not know that in compulsory cases the Official Receiver takes 15% of everything – and that is on top of the IP’s fees.

    3. I have not seen the R3 data that they refer to, but I do wonder if they have taken into account returns to secured creditors?

    4. If costs are greater than many countries with similar returns then there has clearly been a more efficient realisation process?

    5. Charge out rates are commensurate with that of other professionals and Insolvency Practitioners are rarer


    I do, however, accept there are two issues that could be addressed to improve things

    1. At some point the profession is going to have to take a similar approach to lawyers, i.e. similar to costs draftsman, but this could be done internally.

    2. I think we have to recognise that some of the larger firms do tend to take an aggressive approach to trading, i.e. lets get as many people out as we can… I think that in such cases we should be looking to obtain a narrative from each person involved (on site etc.) purely for internal records (and fee justification), because the narrative process laid out in SIP9 is inadequate for this job. How can the IP possibly know everything that everyone has done? Large cases rely upon delegation and trust. Perhaps this would apply to cases such as more than 10 people on site?

  • Anonymous | 13:17 16 November 2009

    This investigation should focus on the large cases at the bigger firms. To claim that creditors have control if fees is clearly a fallacy - the banks control an IPs fees and appointment.

    How much time do IPs spend wining and dining bankers? How much legal work is based on reciprocal work exchanges? X supported our appointment on a case that brought in fees of £300k, therefore we should use them on this other case for £50k of work (obviously out of the estate's pot). I've seen it happen - spreadsheets circulated round big firms.

  • Alan R Price | 15:42 16 November 2009

    I wonder if insolvency practitioners in other countries have to suffer as much regulation as we do in the UK? Compliance issues account for a disproportionately high percentage of IPs' fees. Does this really benefit creditors?

  • Been-around-a-while | 15:47 16 November 2009

    What should come under scrutiny is "time-dumping" on jobs in the bigger firms. We all know it happens. It never ceases to amaze me how many hours they charge to cases (even small ones), compared to smaller and medium-sized practices.

  • Ginge | 07:59 17 November 2009

    IP's earn a very good living and a fair number of them do abuse the process. Having been an employee at a few insolvency firms I have always been encouraged to ensure that my timesheets are full and that time is not allocated to jobs where fees cannot be recovered. We all know it goes on.

    The costs draftsmen approach for particularly large fees is an excellent idea but I fear that the reduction in IP fees would simply be replaced by the cost of the draftsmen. It's a difficult thing to police.

    Perhaps a way of solving the matter is for the law to state that fees can only be taken with the approval of creditors after the work carried out has been completed. This way creditors would have to e satisfied that they have received value for money. I know that this will create other problems but something has to be done to ensure that the profession is free from constant crticism in this area.

  • Anonymous | 08:25 17 November 2009

    Creditors see charge-out rates of £350 an hour for a partner and think this is high - but partners at larger firms are actually making a loss charging themselves out at this price. They pay themselves more than £350 an hour in drawings because the profit is in charging 5 administrators at £120 an hour and paying £12.

  • Anonymous | 09:18 17 November 2009

    If fees were based purely on percentage of realisations wouldn't that simplify anmd clarify the position.

    For example, and up for debate, if the IP was allowed 100% of the first £5000 realised from floating charge assets, 50% of next £5000, 20% of next £10,000, 10% thereafter everybody would know what the fee was going to be at the commencement of the liquidation. The firms could decide wheher they could afford to take the appointment and creditors would have a good idea of their return.

  • Nick Goodman | 09:58 17 November 2009

    The machinery already exists for creditors to challenge fees. HMRC are substantial creditors in most insolvencies but have rarely seen fit to intervene. I suspect this has been driven by US creditors who are maybe more used to debtor-in-possession regimes which involve less intense professional supervision than UK systems.

  • Bust | 10:08 17 November 2009

    I think it would be a mistake to assume that this is only about fees - look closely at the remit. The scope of this review could go wide and deep indeed.

  • Over Here | 11:33 17 November 2009

    I haven't worked there but, being with a Big Firm that had a practice in the US, my impression is that the supervision of insolvencies by the US bankruptcy courts is more intense than here. American courts require strict supporting documentation for every penny that gets spent. Maybe having costs draftsmen for UK insolvencies would be similar?

  • Anonymous | 12:02 17 November 2009

    Time dumping happens at all ip practices. There is often little honesty in the way timesheets are completed. The heavy regulation is just treated as something that is there. It is put up with and does not contribute greatly to controlling or improving anything. What we need is Creditors to exert control. Creditors stand up and be counted.

  • Gimmeabreak | 03:03 19 November 2009

    Sooo...its ok for companies to lose the plot and squander creditors money....but hey....its not cool for the guys who sort out their freakin mess to earn a decent crack after years of studying and under mountains of cardiac arresting regulations......

  • Alan R Price | 13:05 19 November 2009

    Dear Anonymous (12.02, 17 November)

    Time dumping certainly doesn't take place in my practice. I wonder where you get your evidence from? Or are you just making a sweeping generalisation that you can't support by reference to the facts? Put up or shut up.

Follow these comments

We'll send you an email whenever there's a new comment. No spam, promise.


Add a comment

You must be logged in to comment on articles and blog posts. Log in or Register