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New Insolvency Fees from 21 July 2016

There is quite a substantial change to the insolvency fee structure on the horizon. 

From 21 July 2016, the fees are changing to reflect the findings of the Managing Peoples Money guidance which was delivered to the Treasury in 2014. The key deliverable of the guidance is that fees should cover costs.

An impact assessment exercise was concluded on 18 March 2016 and assessed the overall impact is that Insolvency Service income will rise by £7.9m per year  ( +/- 3.5%  and based on current workload assumptions). Across the entire suite of fee changes, it is expected to cost Creditors £1.4m more over the year, with Local Government and DCA’s being expected to be hardest hit.

The new fees will affect both personal insolvencies and company winding up petitions and will apply to any Order (Bankruptcy or Winding Up) made on, or after, that date.

In this article we will cover only the new fees that have been raised. I’ll put together a similar piece on the fee changes for distribution shortly.

The introduction of new fees and scrapping of the Secretary of State fee cap is supposed to allow Creditors the knowledge of how much the administration of the insolvency will cost them. In our view, it provides the transparency for Creditors to make informed choices based on it being easier to calculate the likely costs of a bankruptcy or liquidation.

The new fees are as follows:

 Fee Type  Current Fee Structure  New Fee Structure
 Official Receivers General Fee   Sliding scale, but capped at £80,000  £6,000.00 fixed fee. No cap.
Trustee/Liquidator Fee N/A 15% of the value of all assets realised
 Setting up an Income Payments Agreement/Order N/A £150
Dismissed or Withdrawn Petition N/A £50

Official Receivers General Fee and Trustee/Liquidator Fee

Currently, the OR charges a ‘Secretary of State’ fee at the end of a case which covers the work done by the OR as trustee or liquidator . This fee can vary according to a sliding scale (although it is capped at £80,000.00) and will often be charged once all the assets are realised. Under the new regime, a fee representing 15% of the value of all assets realised will be charged as a Trustee/Liquidator Fee in relation to the work done by the OR as trustee or liquidator.

The new regime will involve charging a fixed fee of £6,000.00 at the start of the case. Previously, the OR was able to charge an administration fee which was tied to the type of Petition being brought. In the case of bankruptcy petitions this was £1,990 and winding up petitions it was £2,520.

Example

The OR realises £450,000 worth of assets as Trustee in Bankruptcy on a Creditors Petition.

   Pre 21 July 2016 Regime    Post 21 July 2016 Regime
Official Receivers Administration Fee – £1,990.00

Secretary of State Fee

First £2000 – 0% – NIL

Next £1700 – 75% – £1275

Next £1500 – 50% – £750

Next £396,000 – 15% -£59400

Remainder – 1% – £487.99

TOTAL : £63,902.99

 Official Receivers General Fee – £6,000

15% of Assets Realised – £67,500

TOTAL: £73,500.00

As can be seen above, the new regime will generally result in more money being charged in the bankruptcy/liquidation.

By our rough calculation, under the previous regime, the OR would have to realise roughly £2,179,000 worth of assets to charge the maximum fee of £80,000.00. Under the new regime, the OR only has to realise £495,000.00 to result in the same costs.

This new regime basically ensures that cases with significant assets pay larger fees to cover the costs of cases with no assets.

Bear in mind that this will only apply where the Petitioner or body of Creditors wish to use the OR to deal with assets. In our view, this will, in asset rich cases, drive this activity to private sector Insolvency Practitioners.

Setting Up an Income Payments Arrangement or Order

This fee is charged in all bankruptcy cases where an IPA/IPO is set up. The fee will be collected from the first payment(s) made by the Debtor into the arrangement. This is capped at one fee per case. This means it is possible for a debtor to default on their payments under an IPA, resulting in the OR applying to the Court to enforce under an IPO, without an additional charge.

Interestingly, it was estimated that only 2000 cases per year (based on current workload) will be required to pay the £150 fee. It is estimated that this will essentially generate £300,000 for the Treasury over the year.

Setting Up an Income Payments Arrangement or Order

This fee is solely designed to cover the cost for the OR to raise a cheque to refund the OR’s deposit. This fee will be deducted from the refund paid back to the petitioning creditor. The number of cases that are withdrawn or dismissed each year is roughly 5500. By our rough calculation, this fee will generate £200,000.00 for the Treasury over the year.

Impact

As alluded to above, we expect the OR to be dealing with fewer asset rich cases as Creditors are simply not getting the benefit of the previous cost cap of £80,000.00. The new fees alone certainly make IP’s look more attractive for cases where there are expected to be property assets.

We also expect institutional Creditors to put more effort into asset discovery prior to the enforcement action being undertaken. This will pave the way for cost:benefit calculations to be made. Certainly, these calculations have been made a bit simpler. 

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