BRR E-alert - The Cost of Recovery

Business Recovery & Reconstruction E-alert - News & Views from The Bridge

On 21 July 2016 a new structure for the Official Receiver's fees came into force, entirely replacing the previous framework. These changes may see the Official Receiver keep more cases and see a poorer return to creditors.

The new structure:

  • Increases the deposits and administration fees payable in most cases

  • As well as introducing a new 'general' fee and a new 'realisation' fee.

There is no longer any Secretary of State (ad valorem) fee payable. In its place the new 'general' fee of £6,000 is payable on the making of any bankruptcy or winding-up order and a 'realisation' fee has been introduced at a flat rate of 15% of realisations (where the Official Receiver acts as trustee or liquidator). This is effectively a recast ad valorem fee but is now no longer subject to any cap.

The explanatory memorandum to the new order states that the Insolvency Service ("IS") has experienced a cash deficit as a result of the falling number of formal insolvency processes. They are therefore increasing the fees to reflect the true administrative costs of performing their statutory functions. Explanatory notes from the IS contrast the new £6,000 general fee with the previous ad valorem fee which could be up to £80,000. The IS say that "therefore there should be more funds available to return to creditors in cases that have assets", but this ignores the new realisation fee, which is not subject to any cap. Where the general fee and realisation fee are payable, returns to creditors could well be diminished by these changes.

Our view

We can't help thinking that another increase to the costs of insolvency processes, reducing the return to creditors, is a short-term solution that will not help if it ultimately contributes to further decline in the volume of processes.

These changes should also be considered against the recent increases to the threshold for presenting a bankruptcy petition and to court fees.

The increase of the bankruptcy threshold to £5,000 was a very significant uplift which means the bankruptcy process is now simply not an option for creditors in a large number of cases.

The very significant increases to the court fees for commencing civil proceedings are no doubt making it more difficult for officeholders to pursue causes of action and realise those assets. Whilst the court fees payable within insolvency proceedings are currently unchanged, it might only be a matter of time before they are also increased to better reflect the true cost of the court's services.

Whatever the primary reasons underlying the various changes, the balance between the interests of creditors and debtors is certainly tipping in favour of debtors as a result. Following the EU referendum vote other macro factors may soon come to have a more significant impact on the volume of insolvency processes, but these changes will not make formal processes any more attractive to creditors in the meantime.

We would be very interested to hear of any of your experiences. Please do get in touch with our Business Recovery & Reconstruction team if there is anything that you would like to discuss.