The remuneration of insolvency practitioners is always a subject of concern for creditors and other insolvency stakeholders. Caroline Clark of RMCSC explains how insolvency practitioners' remuneration may be calculated, approved and paid.

Insolvency practitioners' remuneration rules

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

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

How is insolvency practitioners' remuneration calculated?

The officeholder's remuneration may be calculated either as a percentage of the value of the assets realised or distributed, by reference to the time properly given by the officeholder and the officeholder's staff in dealing with the administration, liquidation or bankruptcy (the time cost basis), or as a set amount (the fixed fee). It is also possible for the officeholder to calculate remuneration on a combination of these three bases.

The rules regarding the remuneration of supervisors in company voluntary arrangements and individual voluntary arrangements are R2.43 IR2016 and R8.30 IR2016, respectively. The fees of the supervisor are those that are sanctioned by the terms of proposals for individual or company voluntary arrangement. The rules do not give the same restrictions as to the basis on which the supervisor's remuneration may be calculated for administrators, liquidators or trustees in bankruptcy. However, many supervisors use one or more of the three bases given above, for the sake of transparency.

How is insolvency practitioners' remuneration approved?

One vital requirement remains the same for all types of insolvency; namely that all officeholders obtain the correct approval for the calculation of their remuneration before their remuneration is paid. Under R18.19 IR2016, it is for the members of the company to approve the remuneration of a liquidator in a members' voluntary liquidation.

For administrations, insolvent liquidations and bankruptcies of 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 by a decision procedure. Should the office holder be required to 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.

R2.43 IR2016 and R8.30 IR2016 require the approval of the remuneration of the supervisor of an individual or company voluntary arrangement 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.

Alternatively, if the remuneration is not sanctioned by the terms of the proposal, the supervisor will be entitled to the fees or expenses which would be payable in an administration or winding up.

Insolvency practitioners' remuneration legislation – SIP 9

As might be expected for a subject as important and sensitive as insolvency practitioners' remuneration, the nature and detail of the information to be provided to creditors when seeking their approval of the basis of an office holder's remuneration is prescribed by legislation. This is particularly so the estimate of fees to be charged must be provided when seeking approval of remuneration on a time cost basis.

Insolvency practitioners are governed by statements of insolvency practice (SIPs) and SIP 9 sets out the requirements for obtaining the correct approval of an office holder's remuneration. SIP 9 applies to all office holders whether administrators, liquidators, trustees in bankruptcy or supervisors of individual and company voluntary arrangements.

Important principles that are set out in SIP 9

• Payments to an office holder or their associates, and expenses incurred by an officeholder, should be fair and reasonable reflections of the work necessarily and properly undertaken.
• Those responsible for approving payments to an office holder (creditors, court or members) should be provided with sufficient 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 and consistent throughout the life of the case, and useful to creditors and other interested parties, whilst being proportionate to the circumstances of the case.

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. If you would like to read SIP 9, it is available (with all the other SIPs) on the IPA website.

About the authors

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 compliance consultancy advice for insolvency practitioners.

See also

Income tax relief when a business ends, under SEIS and EIS

What are debentures, and what are the risks?

How to collect business debts promptly

Find out more

The Insolvency (England and Wales) Rules 2016

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