Caroline Clark, director of RMCSC and a fellow of the Insolvency Practitioners Association and R3, explains how legislation for the approval of insolvency practitioner's remuneration has been affected by the new SIP 9.

SIP 9 - insolvency practitioners' remuneration

The remuneration of insolvency practitioners is always a subject of concern for creditors, regulators and other insolvency stakeholders. Reminders about the legislation that prescribe how insolvency practitioners' remuneration may be calculated, approved and paid are always relevant, especially at a time when the new Statement of Insolvency Practice 9 (SIP 9) for England and Wales became effective from 1 April 2021.

What does the new SIP 9 set out?

Insolvency practitioners are governed by Statements of Insolvency Practice (SIPs) and the new SIP 9 sets out the requirements for obtaining the correct approval of an office holder's remuneration and payments from an estate. SIP 9 applies to all types of insolvency other than moratoriums and members' voluntary liquidations.

Previous SIP 9s gave requirements regarding all payments to an office holder, whether or not the payments were from an insolvent estate. The requirements for the disclosure of payments to office holders that are not from an estate are given in SIP 7 and are no longer included in SIP 9.

The three principles of the previous SIP 9 have been expanded to nine principles and now include:

• All payments from an estate should be fair and reasonable and proportionate to the insolvency appointment and all payments should be directly attributable to the estate from which they are made. 
• Payments to an office holder and to associates of an office holder should be fair and reasonable reflections of the work necessarily and properly undertaken in an insolvency appointment.
• Payments that could be perceived as presenting a threat to the officeholder's objectivity of independence by virtue of a personal relationship, including to an associate, should only be made if properly approved as a category 2 expense.
• Payments from the estate should not be approved by any party with whom the office holder has a professional or personal relationship which gives rise to a conflict of interest.
• Those responsible for approving payments to an office holder should be provided with enough information to make an informed judgement about the reasonableness of the office holder's requests.
• Information provided by an office holder should be presented in a manner which is transparent, consistent throughout the life of the case and useful to creditors and other interested parties, whilst being proportionate to the circumstances of the case.
• Disclosures by an office holder should be of assistance to creditors and other interested parties in understanding what was done, why it was done and how much it cost.

The introduction of associates in SIP 9 is new and brings in new assessments of professional relationships. However, many of the new principles, perhaps because they are so important, are already followed by many insolvency practitioners as a matter of course.

Associates

Associates are defined in legislation, S249 and S435 Insolvency Act 1986, and this definition is expanded by SIP 9 to include anyone who might be perceived to be an associate by a reasonable and informed third party. As such, it’s important for office holders to review their professional relationships, how they are managed and how they may be perceived by a third party.

Disbursements and expenses

The new SIP 9 makes small but important changes to the categorisation of disbursements and expenses from an estate. Category 1 expenses do not need approval before payment but category 2 expenses, either payments to associates or payments which include an element of shared costs (the previous category 2 disbursements), are to be approved in the same way as the officeholder's remuneration before payment.

Office holder information

SIP 9 also gives detailed requirements about the nature of the information to be provided by office holder either when requesting approval for remuneration or providing information about remuneration already drawn.

What are the rules for the calculation and approval of insolvency practitioners' remuneration?

The detailed rules for the calculation and approval of the remuneration of administrators, liquidators and trustees in bankruptcy are in R18.15 to R18.38 The Insolvency (England and Wales) Rules 2016 (IR2016).

R18.16 IR2016 is the main rule, giving the principles for the officeholders' remuneration, including that administrators, liquidators or trustees in bankruptcy are entitled to receive remuneration for their services as officeholders.

Members' voluntary liquidations

Under R18.19 IR2016, it is for the members of the company to approve the remuneration of a liquidator in a members' voluntary liquidation.

Administrations, insolvent liquidations and bankruptcies

For administrations, insolvent liquidations and bankruptcies, the office holder's remuneration is to be approved initially by a creditors' committee, if there is one.

If there is no creditors' committee then the administrator, liquidator or trustee in bankruptcy must seek the approval of unsecured creditors. If the office holder must deal with secured assets, then the consent of the secured creditor would be needed for the office holder to draw remuneration from realisations from the secured assets:

• If creditors do not approve the office holder's remuneration in a compulsory liquidation or a bankruptcy, or the basis of the officeholder's remuneration has not been fixed within 18 months of appointment, then the officeholder in a compulsory liquidation or bankruptcy may calculate remuneration at the Official Receiver's scale rate, a combination of a percentage of realisations and a percentage of distributions.
• If creditors do not approve the office holder's remuneration in an administration or creditors' voluntary liquidation, or the basis of the officeholder's remuneration has not been fixed within 18 months of appointment, then the officeholder may apply to court for the approval of remuneration.

IVAs and CVAs

R2.43 IR2016 and R8.30 IR2016 require the approval of the remuneration of the supervisor of an individual voluntary arrangement (IVA) or company voluntary arrangement (CVA) to be by means of the sanction of the terms of the proposals for the voluntary arrangement. This means that the creditors who vote to approve the voluntary arrangement are those who also vote to approve the supervisor's remuneration. The proposals for the voluntary arrangement should accordingly give full information about the supervisor's future remuneration and how it is to be calculated.

All insolvencies

One vital requirement remains the same for all types of insolvency; that all officeholders obtain the correct approval for the calculation of their remuneration before their remuneration is paid. Both IR2016 and SIP 9 both give detailed information about the requirements for information given about remuneration and expenses paid from the estate to creditors and other interested parties. Transparency is vital, as ever. 

About the author

Caroline Clark is director of RMCSC, a fellow of the Insolvency Practitioners Association and R3, and has an MBA. She established RMCSC in 2013, providing consultancy advice for insolvency practitioners about compliance with insolvency and anti-money laundering legislation.

See also

The continuation of supplies during insolvency proceedings

What you need to know about Corporate Insolvency and Governance Act 2020

Insolvency notices

Find out more

SIP 9: PAYMENTS TO INSOLVENCY OFFICE HOLDERS AND THEIR ASSOCIATES (R3)

SIP 7: PRESENTATION OF FINANCIAL INFORMATION IN INSOLVENCY PROCEEDINGS (R3)

Insolvency Act 1986 (Legislation)

The Insolvency (England and Wales) Rules 2016 (Legislation)

Image: Getty Images

Publication date: 14 May 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.