186 the context of corporate insolvency law

make their own regulations and impose their own penalties and the RPBs responsible for solicitors have statutory powers of intervention.

Further harmonisation of approach is encouraged by the Insolvency Ethical Guide which was published by the IS and introduced in January 2004. It operates as a standardising measure across all insolvency practitioners, regardless of the particular authorising body. During 2006 and 2007 the JIC engaged in the process of revising a draft Insolvency Code of Ethics for putting out to further consultation.

Evaluating the structure

Efficiency

In 2004 57 per cent of respondents to a survey of R3 members stated that the regime for regulation did not work efficiently.41 Frequently made criticisms are said to be that regulators have not established an information and monitoring system that would underpin effective regulation – and that this is because of insufficiencies of time, money, organisation, co-ordination and clarity of objectives.42 Such internal concerns have been echoed from outside the profession where criticisms of IP performance have focused on the charges made for services rendered and the value for money that has been supplied.43 Matters came to prominence in 1997 when, in three large insolvencies, accountants acting as IPs charged huge fees but recovered little for creditors. The three accounting firms handling the administration of the Maxwell empire reported fees of nearly £35 million and the receivers to the Robert Maxwell estate, accountants Buchler Phillips, recovered £1.672 million, but their bills, together with those of solicitors Nabarro Nathanson, came to £1.628 million, leaving only £44,000 for creditors.44 In Mirror Group Newspapers plc v. Maxwell 45 Ferris J described the fee claim as ‘profoundly shocking’, adding: ‘If the amounts claimed are allowed in full, this receivership will have produced substantial rewards for the receivers

41L. Verrill, ‘The R3 Regulation Survey’ (2004) Recovery (Autumn) 27.

42See G. Rumney and R. Smith, ‘Sorting Out the Bad Apples’ (2005) Recovery (Winter) 36.

43Press comments on IPs’ fees have used terms such as ‘obscene’, ‘vultures’ and ‘vampires’: see Flood and Skordaki, Insolvency Practitioners, p. 23.

44See ‘Insolvency Experts in Firing Line over Fees’, Financial Times, 1 August 1997. The collapse of the Bank of Credit and Commerce International (BCCI) yielded fees of over $169.2m for Touche Ross, and the administrators of Polly Peck International charged (with legal fees) nearly £25m.

45[1998] BCC 324.

and their lawyers and nothing at all for the creditors of the estate. I find it shameful that a court receivership should produce this result in relation to an order of more than £1.5 million.’46

Mr Justice Ferris noted increased concern at the generally perceived high level of costs in insolvency cases and other judges had already spoken out on the subject. Mr Justice Lightman expressed concern in a November 1995 lecture to the Insolvency Lawyers’ Association47 and, returning to the topic in 1998, he noted the ‘visceral disquiet’ in the press on the subject.48

How then should charging levels be approached? At present, those who have power to fix the remuneration of office holders fall into two categories. In the first, there are liquidation committees, creditors’ committees, general bodies of creditors, or (in some cases) those persons appointing the office holder. In the second, there is the court, which may act in exercise of an original jurisdiction or in an appellate capacity.49 In the case of most IPs, who act as receivers, their fees are fixed by the debenture holders (usually the banks) and are based on time and expenses.50 In liquidations, IPs may charge a percentage of the value of assets realised or distributed, or they may bill by time, bearing in mind also any complexities, exceptional responsibilities and so forth.51 The creditors’ committees authorise remuneration. This has given rise to the criticism that, in a professionally comfortable arrangement, accountants,

46Mr Justice Ferris passed the issue to a taxing officer, Master Hurst, whose judgment was delivered in April 1999: see Mirror Group Newspapers v. Maxwell and Others [1999] BCC 684. Buchler Phillips was awarded 99 per cent of its claim and no wrongdoing was found in its conduct. Blame was laid on the way Maxwell had organised his business: ‘Many assets which on the face of it appeared to be the personal property of Mr Maxwell were either worthless or, because of the immensely complex financial labyrinth which he had constructed, could not ultimately be recovered as personal property.’ See J. Kelly, ‘The Recovery Position’, Financial Times, 22 April 1999.

47See Mr Justice Lightman, ‘The Challenges Ahead’ [1996] JBL 113.

48See Mr Justice Lightman, ‘Office Holders’ Charges: Cost, Control and Transparency’ (1998) 11 Insolvency Intelligence 1. See also Mr Justice Lightman, ‘Office Holders: Evidence, Security and Independence’ [1997] CfiLR 145.

49See Report of Mr Justice Ferris’ Working Party on The Remuneration of Office Holders and Certain Related Matters (London, 1998) (‘Ferris Report’).

50Under the Insolvency Regulations 1994 (SI 1994/2507) Regulation 36A, as inserted by the Insolvency (Amendment) Regulations 2005 (SI 2005/512), an IP is obliged, on request in writing by a creditor, director, contributory or individual, to supply free of charge, and within twenty-eight days, a statement setting out, inter alia, the number of hours spent on a case, and the hourly rate charged for staff.

51See also Regulation 36A, note 50 above.

The costs of the IS have in the past also been the subject of criticism.57 Before April 2004 fees raised by the IS were paid to the (then) DTI (now BERR) and there was no direct relationship between the fees charged and the cost of the function they related to. This meant that fees raised for one function might be used to cross-subsidise other actions. Since April 2004, though, fees have been set to recover costs and a system of average costs per process has been applied.58

Criticism has furthermore attached in the past to the use made of the Insolvency Services Account (ISA)59 – the account into which creditors’ money, as realised by trustees in bankruptcy and liquidators, must be paid. In 1996–7 this account generated banking fees of £16 million and a £37 million surplus investment income, but did not pay more than a low rate of interest (subject to tax) to creditors. The overall effect, said critics, was to penalise creditors – most strikingly in those years when the investment account produced a surplus.60

The Cork Committee received strong and widespread criticism of the ISA regime,61 particularly with regard to the low rate of return on compulsory deposits. The requirement that an IP deposit surplus funds in the ISA was also attacked as providing an incentive for liquidators to protract proceedings and delay the submission of accounts. Cork urged that the administration of insolvency was a public service and should be paid for out of general taxation rather than funded by creditors. The existing system, said Cork, was costly, time-consuming and unfair62 and,

‘He Who Pays the Piper Calls the Tune? Administrators’ Remuneration under the New Administration Regime’ (2006) 19 Insolvency Intelligence 33; M. Mulligan and J. Tribe, ‘The Remuneration of Office Holders in Corporate Insolvency – Liquidators, Administrators and Administrative Receivers: Part 1’ (2003) 3 Ins. Law. 101.

57See H. Anderson, ‘A Fair Share of the Company Failures Cake’, Financial Times, 7 April 1998.

58See IS Annual Report 2006–7 p. 13. 59 See Anderson, ‘Fair Share’.

60See Justice, Insolvency Law: An Agenda for Reform (Justice, London, 1994) paras. 5.7– 5.11; Cork Report, ch. 17, paras. 847–55. In 1991–2 the IS paid a surplus of £5 million to the (then) DTI (Financial Times, 2 September 1992) and in 1992–3 the surplus was £9 million: Justice, Insolvency Law. Net income from the Insolvency Services Investment Account in the years 1995–6 and 1996–7 was £45 million and £31.4 million respectively.

61Cork Report, paras. 847–55.

62Ibid., p. 201. For further criticism see Justice, Insolvency Law.

190 the context of corporate insolvency law

instead, liquidators should be obliged to deposit funds in an interestbearing account. As an alternative to public funding of the IS, Cork recommended that there should be a levy on the registration of new companies.63

The rationale for use of the ISA was, moreover, undermined by the 1986 Insolvency Act. Historically the ISA was used to prevent unscrupulous practitioners misappropriating funds but the 1986 Act set up a licensing and bonding system64 that offered protection from, and compensation for, such abuse. The Government took these points in its 2001 White Paper65 when it concluded that paying the bulk of the interest generated on insolvency funds into government coffers could no longer be justified.66 Action has since been taken so that, after 1 April 2004, moneys from voluntary liquidations do not have to be paid into the ISA (though the requirement remains for compulsory liquidations)67 and under the 2004 Regulations, deposits earn interest at a ‘competitive’ rate that can be varied by the Secretary of State.68 Additionally, with effect from 6 April 2008, unclaimed dividends in administrations and administrative receiverships can be paid into the ISA.69

63Cork Report, p. 201.

64IPs must obtain and deposit with their authorising RPB (or the Secretary of State) a bond issued by an insurance company by which it makes itself jointly and severally liable with the IP for the proper performance of his duties: Insolvency Act 1986 s. 390(3); Insolvency Practitioners Regulations 2005, Regulation 10, Sch. 2, Part 2. The bond must be for the general sum of £250,000 and for additional specific sums in accordance with the prescribed limit applicable to particular cases in which the IP is to act. (The amount of required cover is calculated by reference to the value of the assets of the insolvent with a minimum of £5,000 and a maximum of £5 million.) See further G. Todd and S. Todd, ‘Insolvency Practitioners have to be Bonded – Is it as Simple as it Seems?’ (2006) 19

Insolvency Intelligence 129.

65DTI/Insolvency Service, Productivity and Enterprise: Insolvency – A Second Chance (Cm 5234, July 2001).

66Ibid., para. 1.51.

67See Insolvency Act 1986 s. 415A (as inserted by Enterprise Act 2002 s. 270); Insolvency Practitioners and Insolvency Services Account (Fees) Order 2003 (SI 2003/3363) as amended by the Insolvency Practitioners and Insolvency Services Account (Fees) (Amendment) Order 2008 (SI 2008/3), Insolvency (Amendment) Regulations 2004 (SI 2004/472), Insolvency Proceedings (Fees) Order 2004 (SI 2004/593). Liquidators of voluntary liquidations may still pay into the ISA if they wish. For cases commenced before 1 April 2004 (to which earlier fees orders still apply) see further the Insolvency Proceedings (Fees) (Amendment) Order 2006 (SI 2006/561).

68See Enterprise Act 2002 s. 271. The rate of interest from 10 July 2007 was 7 per cent.

69See the Insolvency (Amendment) Regulations 2008 (SI 2008/670).