Third party payments to Insolvency Practitioners

There has, of late, been some focus upon the appropriate way for an office-holder to treat payments made by third parties. Two cases (both English), in particular, have addressed this issue in recent months:

Safier v Wardell and another [2017] EWHC 20 (Ch)

MK Airlines Limited -v- Katz and another (as Joint Liquidators of MK Airlines Limited) [2018] EWHC 540 (Ch)

Both of these cases help to clarify the correct approach to the specific situation that I want to address: where payments are made by third parties to an office-holder in respect of the office-holder’s fees for carrying out a function. These can either be fees for a function that the appointment requires that they carry out (a “necessary” function) or one that the third party requests that the office-holder performs (a “discretionary” function).

The latter, it is suggested, is clearly a payment by the third party in recognition of the fact that the estate should not bear the cost as there is no benefit to the estate. As such, I shall not dwell upon this aspect; the payment is one that is agreed between the office-holder and the third party and does not require to be either shown through the accounts of the case or subject to any process for the approval of remuneration. Examples of these would be renouncing a lease, co-operating in expedited recovery proceedings, etc. The office-holder can choose to do nothing and allow the third party to exercise their rights on the basis that there is no benefit to the estate. If the third party sees a benefit in the office-holder co-operating, the third party must assume responsibility for the costs of the office-holder in doing so.

The former, a necessary function, where the function would (or should, there is a slight difference between these) be carried out by the office-holder is slightly different. The background is twofold: firstly, that the estate was always going to have to bear the cost and so the creditors have lost nothing by the office-holder carrying out the necessary function; and, secondly, the office-holder would, in these circumstances, have his remuneration for carrying out this necessary function determined through the usual process for the approval of remuneration. This is where I want to concentrate my attention and there are a number of issues that arise.

Firstly, there is the issue of the “accounting” treatment of the payment. One argument that can be made is that any payment by a third party for the office-holder to carry out a necessary function should be shown through the accounts of the case. The counter-argument is that this payment is not a “realisation” of an asset or a receipt to which the estate is “entitled”. In either a realisation or a recovery, an office-holder has to account for the sum received or explain why the amount due to the estate was not received. In the case of a payment by a third party for the office-holder to undertake a necessary function it is, clearly, a voluntary undertaking by the third party. I would suggest, therefore, that such a payment need not be shown through the accounts of the estate, subject to the comments that I make, below.

Secondly, there is the remuneration issue. Just because an office-holder is required to undertake a necessary function does not mean that they are required to charge for it or, indeed, to charge the same amount as any other office-holder might charge in a similar case. If an office-holder chooses not to charge the estate for a particular task, that is surely a matter for them. As I have said, we are dealing with a payment being made voluntarily by a third party who has reached a view on the benefit that will accrue to them. If they value the necessary function more highly than the process of fixing the remuneration of the office-holder would, that is a commercial decision of theirs. Equally, if they do not value the exercise of the necessary function by the office-holder as highly as might be the case in any assessment of remuneration but the office-holder accepts their valuation, that is a matter for the office-holder. Is this any different from an office-holder whose hourly rate is substantially higher (or substantially lower) than another office-holder’s?

Thirdly, there is the issue of the basis upon which the third party is making payment – indemnity or recompense. If a third party agrees to indemnify an office-holder against costs incurred in carrying out a necessary function in the event that there are insufficient funds in the estate to cover the costs of doing so then, clearly, the actual costs incurred by the office-holder would have to be determined through the usual process for the approval of remuneration. Once this has been determined the shortfall, if any, can then be fixed and the indemnity will have effect. If the third party agrees to accept responsibility for the costs (“recompense”), the question is whether the third party and the office-holder agree the costs in advance; whether the third party simply agrees to pay whatever costs are charged by the office-holder; or, whether the third party requires that the costs be determined through the usual process for the approval of remuneration. In the first two scenarios there is no problem, it is an entirely separate and private agreement between the third party and the office-holder. In the last scenario, the usual process for the approval of remuneration has to be undertaken, first. As the function is a necessary function, the estate cannot complain about bearing the costs of this remuneration-approval process, but at least it is being relieved of the costs of the exercise of the function, itself.

What if, however, the third party agrees an amount for the exercise of the necessary function and, due to commendable caution by the insolvency practitioner, this amount is paid in advance of the office-holder carrying out the necessary function? What if the function is the conduct of the entire insolvency and the insolvency practitioner has quoted in advance and is paid that amount? This is not, I would suggest, a “necessary” function. If the insolvency has yet to be commenced, the insolvency practitioner does not require to accept the appointment. As a result, the correct analysis of this situation is that it is a “discretionary” function. This is not particularly unusual. Large corporates often want a troubled subsidiary to have a “decent burial”, with the parent, quite often, being the major creditor. A secured creditor may seek the insolvency of the borrower as an easier and more cost-effective way of recovering the value of the secured assets. If the payment is made in advance of the appointment then, clearly, it cannot have been made to the office-holder, as such. The correct analysis of this approach is that the payment is made to the business of which the insolvency practitioner is part (partner, employee, etc.) and the funds are retained by the business in lieu of receiving payment for the office-holder’s time and trouble from the estate. There is no question of the sum held by the business being an asset of the estate. There is also no question of the office-holder requiring their remuneration to be approved – they are not charging any. They are, in effect, writing off their time insofar as the creditors of the estate are concerned as a result of an agreement to do so with the third party.

What if the office-holder is already in post but receives payment from the third party in advance of embarking upon the necessary functions? Once again, this is not a payment to which the estate is “entitled” and not, therefore, a transaction which should be reflected in the accounts of the estate. The payment is not to the office-holder as such, it is a payment to the office-holder’s business to compensate the business for the costs of the office-holder carrying out a function for which the estate either cannot pay or which the office-holder has elected not to charge to the estate.

There has, of late, been a rather unfortunate “muddying” of the waters in the comments upon and analysis of situations such as those outlined above and I hope that this helps to bring some clarity to this area of practice.

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