Following recent complaint about the level of fees being charged by the Insolvency practitioner the public should be reassured that they are within their rights to expect and insist that the Insolvency practitioner compliance with the certain conditions when charging or preparing to raise the invoice for the bankrupt estate.

Where fees being sought are disproportionately high given the nature of the bankruptcy, one should as a bankrupt be aware that when assessing the level of fees charge by trustees that the court will have regard to the matters set out in The Practice Statement: The Fixing and Approval of the Remuneration of Appointees (2004). There are a number of guiding principles to which the Insolvency Practitioner must comply when seeking to be remunerated by the bankrupt.

The guiding principle 4 requires that the remuneration reflect the value of the service rendered. It expressly states that the remuneration ought to not simply reimburse the Insolvency Practitioner for time expended. The courts have said repeatedly that the purpose of a trustee’s remuneration is not to compensate for time spent or to provide an indemnity against costs incurred. It is to reward value.

Therefore it is inappropriate for the bankrupt to rely on the fact that the creditors agreed the basis of the remuneration to be time costs as a justification for seeking this level of fees. The fact that the basis of remuneration was so set does not mean that the Insolvency Practitioner is now entitled to simply multiply hours spent by the hourly rate. It is also inappropriate, therefore, for the Insolvency Practitioner to maintain that they consider the costs to be “reasonable in light of the duration” of the bankruptcy. They must instead consider the value of the service rendered.

The fifth guiding principle the Insolvency Practitioner must abide by requires that the remuneration sought must be fair and reasonable. The sixth guiding principle requires the remuneration to be proportionate to the nature, complexity and extent of work undertaken. Where the estate is not complicated (as is the case in many cases) as it is fees charged should not be manifestly unfair, unreasonable and disproportionate.

The Practice Statement also provides that it is for the Insolvency Practitioner, as trustee, to justify their claim for remuneration (the first guiding principle). As stated by Ferris J in Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638, 648, it is not sufficient to simply state the number of hours spent and multiply by the hourly rate. He went on to say that the Insolvency Practitioner must explain the nature of each main task undertaken, the considerations which led them to embark upon it, and, where it proved more difficult or expensive, and the considerations which led the Insolvency Practitioner to seek his fees. Time spent must be linked to this explanation. So the Insolvency Practitioner must provide a narrative as to what was done in order to administer an estate.

The Insolvency Practitioner must also explained why it was that each of these steps was undertaken and, crucially, and link the steps undertaken to the costs incurred. The Insolvency Practitioner ought to have contemporaneous documents to prove the justification for each task and the cost associated with each. The second guiding principle provides that the benefit of the doubt be given to the bankrupt where there is doubt as to the appropriateness, fairness or reasonableness of the amount sought.

The Insolvency Practitioner is a fiduciary and they have a duty to account to the bankrupt for the manner in which the assets were treated. They are also under a duty to be frank with the bankrupt (and ultimately the court) about how costs and expenses were incurred. Their status as a fiduciary imposes upon them a duty not to advance a claim for any payment beyond that which they conscientiously consider they are entitled. And although time is a relevant factor, they are entitled to be remunerated only for that time which was properly spent in accordance with the principles set out in the guiding principle.

Bankrupts are therefore encouraged to challenge unreasonably high fees in terms of the tests the court would apply on any application. Most Insolvency Practitioner will accept that remuneration at the level currently claimed is excessive and cannot be supported. But without any challenge they will continue to claim such amounts.

Insolvency Practitioners are therefore urged to move beyond the hourly rate multiplied by hours spent calculation and apply the principle of fairness to the bankrupt who is already in a serious predicament.

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