A new fee structure in respect of insolvency fees payable to the UK Insolvency Service came into force on 21 July 2016, pursuant to The Insolvency Proceedings (Fees) Order 2016 (SI 2016/692) (the “Order”), which revokes The Insolvency Proceedings (Fees) Order 2004 (SI 2004/593) and all ten subsequent amendment orders.

The Order increases the deposits and case administration fee payable in creditor’s petition bankruptcy proceedings (deposit increasing from £825 to £990 and case administration fee increasing from £1,990 to £2,775) and compulsory liquidations (deposit increasing from £1,350 to £1,600 and case administration fee moving from £2520 to £5000) in England and Wales. The case administration fee for debtor’s bankruptcy applications does not increase.

The Order also introduces a new general fixed fee, payable to the Official Receiver (“OR”) on the making of the insolvency order. This replaces the Secretary of State fee, which was dependent on the value of asset realisations and increased in bands with the amount paid into the Insolvency Service Account, being capped at £80,000. This new general fixed fee is £6,000 and is payable at the beginning of the insolvency, not at the end, ensuring the OR gets paid first.

Just last week, our Birmingham Restructuring & Insolvency team acted in respect of an administration application heard in the High Court where this fixed fee was considered in detail. One of the ancillary arguments advanced by Counsel during the hearing was that if the assets of the company were realised in a compulsory liquidation, rather than in an administration, fees of up to £80,000 would be payable to the Secretary of State thereby reducing the amount available for creditors. The Judge made the observation, however, that just a couple of days after the hearing, this fee would be reducing to a flat fee of £6,000. This was clearly a significant reduction and the advantages of proceeding via an administration rather than a compulsory liquidation, considered in respect of this ground alone, looked marginal. Fortunately, this was not the only argument in favour of an administration order over a compulsory liquidation.

This significant reduction in “ad valorem duty” will factor into long running administrations where one of the reasons for keeping the administration open and not moving into compulsory liquidation is to prevent ad valorem duty from being payable on assets yet to be realised. This new fee applies to any compulsory liquidation orders made after 21 July 2016.  With the fee having been potentially reduced so drastically, future estimated outcome statements prepared in support of applications to extend administrations will need to show (other) clear advantages to keeping such administrations open. In asset-rich cases, this may now prove more difficult to demonstrate.  That said, where assets left to be realised within the estate are of little value, a fixed fee of £6,000 will very quickly impact upon the already limited pot available for creditors. A move into creditors’ voluntary liquidation via paragraph 83 of Schedule B1 of the Insolvency Act 1986 is only possible if the administrator thinks a distribution will be made to unsecured creditors and, in circumstances where there is little left to be realised, this is unlikely to be a viable option.

Apart from the effect the Order will have on possible exit routes from administration, it is possible that the new fixed fee could deter insolvency practitioners from taking on smaller cases “off the OR’s rota”, knowing that the first £6,000 realised will have to be paid to the OR.  The aim of the new fees and deposits is to reflect the work the OR carries out and this general fee, payable at the outset of the bankruptcy or liquidation, ensures the OR is paid first. Conversely, however, for those practitioners dealing with asset-rich insolvencies, this has the potential of being a huge saving and increasing the ultimate pot available for distribution to unsecured creditors. The new fee could also be attractive to insolvency practitioners who are pursuing substantial claims against former directors or third parties. They could do so safe in the knowledge that regardless of the amount recovered in any claim, only £6,000 (and not potentially up to £80,000) has to be paid to the OR.