The debate about when and where to charge time costs has been sharpening, not just because of the coming rule changes but the increasingly demanding terms of SIP 9. I have heard a variety of opinions over the last year – I hope it will help to put all the arguments together in one place.
- Fixed fees
Fixed fees have been expressly allowed since 2010, but have actually been used for many more years in larger, group MVLs, where fees as a whole would be agreed and paid by the parent company, direct. Their main advantage is that they offer all sides a degree of certainty and avoid the need for any SIP 9 disclosures (having been paid outside the estate). But MVL work is supposed to be much more predictable than other insolvencies, especially if all tax and accounting matters have been dealt with elsewhere.
I have also seen a handful of recent cases where fixed fees have been agreed in CVLs, but these have all been cases where the issues were simple, prospective realisations limited and the directors or other connected parties have controlled the voting process. Even so, the IPs have still had to keep time records for the case and still been obliged to report on all their activities at least in summary and those requirements are not going to change.
As for more complicated cases of less certain outcome, I just can’t see the attraction of a fully fixed fee. After all, with a capped estimate, you can still go back to creditors – not so easy when you have promised to do everything for one price, all in.
- Percentage of recoveries
Cases based entirely on percentages are rare. I have usually only seen them in Court appointments, usually because the case offered a large and easy, immediate recovery and the IP was pretty certain that the percentage would be higher than his time costs, in any event. More usually, percentages get applied to a specific asset class (as in recoveries for fixed charge-holders) with the IP expecting to get time costs from other recoveries to deal with the remainder of costs in the case.
A big draw back with percentages is that they restrict your fees to less than the total net recoveries. This means that you must plan for a distribution to at least one class of creditors, with all the extra rigmarole that can entail. And, looking forward, I think you will find that a percentage, once agreed, is as hard as a fixed fee to change.
- Mixed* fixed and percentage
I have only once seen this proposed and that was earlier this year. The IP was essentially experimenting with the idea that if he charged a fixed fee to cover all expected estate maintenance costs (including reports over the expected lifetime of the case) and a percentage of recoveries, he would come out roughly the same as if he had taken time costs, with a prospect that if things went really well, he would get a little extra.
But this IP had taken the trouble to do a lot of work bench-marking his charges across his most typical types of case before committing himself to the rates to be applied. And also, the case was a relatively predictable one, in a sector he had dealt with before. The accounts looked clean, there were good books and records, debtors looked stable, etc. He also made sure it was placed with his most efficient manager.
The question you have to ask is, how often do you get cases which are that clear to begin with.
- Time costs, only.
I think the reason why IPs have not made more use of percentage and fixed fees in the past is simple – they don’t really work that well for the majority of our case work. And there is nothing about the new rules which changes that underlying reality.
While it may seem an additional burden to estimate your time costs in advance and then report annually on how you did, the saving with percentage or fixed fee cases won’t actually be that great as the rules and the new SIP 9 will still require you to keep tie records and report on what you have done in a manner that is accurate to the case.
- Mixed* time costs and percentage
We have had these for a long time – In ADMs, CVLs and Receveiverships we have all charged a percentage on fixed charge recoveries with time costs applied on all other matters applied against floating charge recoveries.
I have also seen percentages applied in specific cases where a Committee (usually) wanted an IP to have some extra incentive for steering a successful litigation to a conclusion. However, there remains no room for success uplifts (multiples of time costs) as such, so be careful that your resolutions don’t mistakenly give the impression that is what you are getting.
I am not convinced that anyone should rush out to quote fees on any basis other than time costs except in quite specific circumstances. If I were still in practice, I would instead,
- Do some benchmarking of historic costs in the main areas were they might be predictable – annual estate maintenance costs, creditor reporting, dealing with meetings, closure, dividends (per creditor) and preliminary investigations. If you have someone on board who understands statistics, standard deviations and the like, you could even try to work out “risk-ranges”. If you aren’t sure or want some help, give me a call. Subject to take-up and compatibility of categories, I am offering a service to benchmark a number of firms simultaneously, at reduced cost to all.
- Take a careful look at how some types of recovery might be remunerated successfully. This means not only looking for what might be a reasonable level of percentage to charge, but how to make best use of, and match your fees to that of agents.
- Review your approach to strategic planning and budgeting of case costs. Despite recovery rates continuing to fall across the profession, many IPs still seem to do planning in the same old way, i.e. not much. For tips on this subject, see my next blog.
(*By the way, be careful about this term, “mixed”. Yes, you can use more than one base in the same case, but be wary of applying two bases to the same area of work (e.g. book debts) – I worry that it could be seen as double-counting, under trust rules of value and benefit.
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