The field of insolvency, particularly in Scotland, is shrouded in complexities. One frequent question revolves around the remuneration of Insolvency Practitioners (IPs). Who pays them, and how does the process work?

This article aims to demystify the subject, providing clarity for creditors and stakeholders alike.

Understanding the Basics

IPs, like other professionals, need compensation for their time, expertise, and resources. Generally, the remuneration for an IP comes from the assets of the insolvent estate. The idea is straightforward: an IP works to recover assets, streamline operations, and address debts. The monies garnered from these activities are then used to compensate the IP for their services.

Asset Realisation

A primary role of an IP is to identify and realise the assets of the insolvent company. This could be in the form of property, stock, machinery, or outstanding invoices. The sale or recovery of these assets typically provides the funds to cover the IP’s fees. However, it’s essential to note that the IP’s remuneration is only one part of the disbursement as other creditors also await their share.

Creditors’ Approval

In Scotland, the amount or rate of an IP’s remuneration often requires approval from the company’s creditors. The IP will present a detailed report, outlining the work done, the hours spent, and the associated costs. This transparency ensures that creditors are kept in the loop and can contest any fees they deem unreasonable.

Fixed Fee vs. Time Costs

There are generally two prevalent models for IP remuneration in Scotland:

  • Fixed Fee: A pre-agreed amount for the entire insolvency process. This method offers predictability but may not always reflect the actual work involved, especially in complex cases.
  • Time Costs: Here, the IP charges based on the actual time spent on the insolvency process. While this can offer a more accurate reflection of work, it may lead to uncertainties regarding the final bill.

The choice between these models often depends on the nature of the insolvency and the agreement with creditors.

What if the Assets are Insufficient?

In cases where the assets are meagre or non-existent, Insolvency Practitioners may find their fees reduced or unpaid. Some IPs might ask for an upfront payment or an indemnity to cover their costs. especially if they anticipate that asset recovery could prove challenging.

Role of Regulatory Bodies

All insolvency practitioners are authorised and regulated by one of four recognised professional bodies. Statements of Insolvency Practice (SIPs) are issued to licensed insolvency practitioners and aim to maintain high standards in insolvency work. There are SIPs covering many subjects that are of interest to the creditors and others as well as insolvency practitioners, and these include guidelines on the remuneration of Insolvency Practitioners. These guidelines ensure that IPs charge fairly and that stakeholders understand the fee structure.

In the Case of Voluntary Arrangements

In situations involving Company Voluntary Arrangements (CVAs) the IP’s fees are typically drawn from the monthly contributions made by the debtor. These are predetermined and are an integral part of the arrangement proposal.

Stakeholders and Directors

In instances where company directors seek the services of an Insolvency Practitioner proactively, they might agree to cover initial costs, especially if they believe that the business can be rescued or if they are pursuing a pre-pack administration.

Transparency is Paramount

Regardless of the source or method of remuneration, transparency is vital. Scottish IPs are bound by a code of ethics, and the basis of remuneration must be agreed by the members and creditors and formal determination by the Court or by the Creditors Committee. Any hint of breaching regulations can have serious professional consequences.

The Bigger Picture

While it’s crucial to understand the ins and outs of IP remuneration, it’s equally important to appreciate the broader scope of their role. IPs don’t just ‘liquidate’; they rescue, recover, and rejuvenate businesses, often salvaging jobs and economic value in the process.

To Summarise

Financing insolvency is a nuanced area, influenced by many factors. While Insolvency Partitioners undoubtedly deserve fair compensation for their pivotal role in managing and resolving insolvencies, the process is designed to be transparent and equitable for all parties involved. Stakeholders and creditors in Scotland can take solace in the robust regulatory framework that governs IP remuneration, ensuring fairness and accountability at every turn.