Distributions - Pre - distribution and expense matters - Company and Bankruptcy Cases (ISCIS)

Distributions - Pre- distribution  and expense matters - Company and Bankruptcy Cases (ISCIS)

February 2011

(Information given in this part should be read in conjunction with Technical Manual(TM) Chapter 36 and 36A.)

Introduction

Whenever the liquidator or trustee has sufficient funds in the estate he/she will declare and distribute dividends among the creditors in respect of the debts for which they have proved. However, these distributions are subject to payment of the fees and expenses of the winding up/bankruptcy and the retention of such sums as may be necessary to meet the expenses of the winding up/bankruptcy.

1. Does the official receiver charge fees for distributing such funds?

On 1 April 2004, The Insolvency Service's revised financial regime came into force which seeks, in all cases, to simplify the fee structure applicable in relation to insolvency proceedings and official receivers duties. One of the provisions of the financial regime is that creditors will pay for the full costs of the official receiver's administration via a single administration fee charged to the estate. This does not include the function of distributing funds to creditors, as that is a liquidator/trustee function.

2.What are the fees and expenses of the winding up/bankruptcy ?

Fees and expenses charged in both company winding up and bankruptcy proceedings are governed by primary and secondary legislation, details of which can be found in the Technical Manual(TM) at Chapter 36 Parts 1 and 3.

Generally speaking,  any fees, costs, charges and other expenses properly incurred in the course of the insolvency proceedings are to be regarded as expenses of the insolvency proceedings and are payable prior to any distribution. (See TM 36.50 for further details).

3. What is the official receiver’s administration fee and what does it cover?

The official receiver’s administration fee is a flat, fixed rate fee (bankruptcy (Fee B1) ,compulsory company cases (Fee W1))which is charged on the making of the bankruptcy order and winding-up order respectively. From 6 April 2010 Fee B1 is £1715 (no change) and Fee W1 is £2235 (increased from £2160). This fee covers the stationery fee, as well as disbursements such as Gazettes, travel and subsistence and some advertising costs. The definition of the fee has been further extended to also include the duty of the official receiver to investigate and report upon the affairs of companies in liquidation and bankrupts, but investigation and enforcement costs will continue to be met centrally. 

It should be noted that there is a distinction between costs that are covered by the administration fee and costs incurred in the realisation of assets. For example, re-direction of mail or the process server’s expenses for a public examination is included in the official receiver’s administration fee but the cost of a Form J restriction (£40) is not covered by the administration fee, as it relates to the realisation of assets. Other disbursements incurred during the realisation of assets, for example insurance premiums  and agent’s costs, are not included and should be charged to the relevant estate as before, but no time and rate fees are included for this activity(See Case Help Manual(CHM) part : Distributions  - Company and Bankruptcy Cases). A table summarizing the treatment of disbursements in insolvency cases pre and post 1 April 2004 can be found at TM 36.17.

The official receiver’s administration fee (W1/B1) is not to be confused with the Secretary of State’s administration fee(SoS)(W2/B2) which is the fee charged in respect of asset realisation monies paid into the Insolvency Services Account. 

4. How does the financial regime affect distributions?

The single administration fee (W1/B1) does not cover the function of distributing funds to creditors. The financial regime provides  that the official receiver may charge general remuneration based on a time and rate basis, as set out in The Insolvency Regulations 1994 (as amended) for the activity of distributing funds to creditors. This is applicable to all distributions made on or after 1 April 2004 whether the insolvency order was made pre or post 1 April 2004, but does not include the time spent on returning the petition deposit or payment of the petitioning creditor's costs for which no separate charge is made. See CHM part : Distributions – Company and Bankruptcy cases for further information regarding official receiver's remuneration when distributing funds to creditors.

5. What is the order of priority of payments ?

If there is a credit balance remaining on the estate after all fees and expenses of the official receiver as liquidator or trustee have been charged, the monies must be distributed in the proper order of priority according to the Act and Rules.

Insolvency Rules 4.218 and 6.224 specify the priorities regarding expenses and should be referred to as useful checklists on the types of expenses to be paid before a distribution to creditors takes place. A full list of expenses in insolvency proceedings can be found at TM Chapter 36 Part 3.

As a general guide the following are the main payments made in order of priority :

  1. return of deposit on petition
  2. payment of petition costs
  3. distribution to preferential creditors (if there are any) N.B. where there are floating charge holders see CHM part : Distributions – Company and Bankruptcy cases paragraph 18                                                                                                                                         
  4. dividend to ordinary unsecured creditors
  5. payment of statutory interest to ordinary unsecured creditors
  6. deferred creditors e.g. payment of any spouse’s or civil partner’s claim in respect of “credit provided” (bankruptcy only)(See Notes d). For details of other less common debts see TM paragraph 36A.116 (b)

6. What if there have been prior administrative receivership, voluntary liquidation, Individual Voluntary Arrangement(IVA) or bankruptcy proceedings?

The above order of priority may change and may be more complex if the company has previously been in administration, administrative receivership, voluntary liquidation or subject to a voluntary arrangement (CVA) or the bankrupt has been subject to an individual voluntary arrangement or prior bankruptcy.

For example, in company cases under the Insolvency Act 1986, any voluntary liquidator’s remuneration is payable prior to other distributions, whereas any debenture holder’s debt and expenses (floating charge) are payable in priority to non-preferential claims,(subject to the ring-fencing provisions in cases where the charge was created after 15 September 2003 - see CHM part : Distributions - Company and Bankruptcy cases paragraph 18)                                                                                                                                        

Similarly, under the Insolvency Act 1986 provisions, where a second/subsequent bankruptcy order is made against an undischarged bankrupt any undistributed funds in the earlier bankruptcy in respect of after-acquired property or money paid under an income payments order/income payments agreement, will form part of the estate in the later bankruptcy, subject to the payment of any expenses incurred by the first trustee in dealing with those assets.

It should be noted that where a bankruptcy order is made on a petition by a supervisor of an IVA, any unpaid expenses properly incurred as expenses of the IVA will be a first charge on the bankrupt’s estate. See TM Chapter 20 for further information on the official receiver’s role in voluntary arrangements.

Further detailed guidance on the order of priority of payments in company and bankruptcy cases can be found in TM Chapter 36 paragraph 36.51. Any queries regarding the ranking of an expense should be taken up in the first instance with the B1/SOM.

7. What happens to the deposit?

A winding -up or bankruptcy petition cannot be presented to court unless a deposit has been paid to the court (except for frequent petitioner accounts – see Notes a). The deposit paid by the petitioner on presentation of a winding-up or bankruptcy petition is security for the payment of the official receiver’s administration fee(fees W1 and B1).

In a creditor’s petition case where an order is made, any deposit paid must be returned to the person who paid it to the extent that the assets are sufficient to repay or part-repay that fee. Therefore, if there are only sufficient funds to make a part-repayment, the deposit must not be refunded in full but only in part. In a debtor’s petition case the deposit will not be repaid unless it was paid by a third party to whom the deposit, or part thereof, should be repaid. In the majority of cases the deposit is retained as an asset of the estate.

However, there are different rules that apply to the return of deposits on petitions presented before 1 April 1995 (the order of priority is explained in Notes b and c and in further detail in TM Chapter 36 paragraphs 36.72-73). Special considerations may also apply where the bankruptcy order is subsequently annulled. For example, the provision for the return of the deposit may be included in the wording of the annulment order.

8. What are the petition costs?

The petition costs are made up of a petition deposit towards the costs of administration of the insolvency, a court fee and any costs incurred by instructing a solicitor.

The court usually includes in the insolvency order reference to the payment of the petition costs. However, this does not need to be covered in the order, there being a general entitlement to these costs as set out in the Rules (4.218(h) and 6.224(h)).

If a distribution is to be made then a bill of costs or costs certificate may be obtained but  a formal bill of costs is not always required, as payment can be made upon receipt of a letter from the petitioning (or supporting or opposing) creditor’s solicitor giving a breakdown of their costs if that provides sufficient detail and is otherwise satisfactory (see paragraph 9).

The bill of costs is prepared by the petitioning (or supporting) creditor’s solicitors. They are allowed by the Civil Procedure Rules to claim for work done and certain out of pocket expenses in connection with the pursuit of the petition seeking the insolvency order.

Solicitors should be asked to submit their bill of costs net of VAT if their client, the petitioning (or supporting ) creditor, is registered for VAT. The solicitors should recover any VAT element from their client, who being registered for VAT, will be able to recover it from HMRC. 

9. How do we assess the petition costs ?

As a general guide, a bill of petition costs up to £2000 in companies and £1500 in bankruptcies may be approved by the official receiver (or his/her deputy) for immediate payment. For bills in excess of these amounts, the official receiver may consider requesting that the bill of costs be referred to the court for detailed assessment (form CDETAS). However, where extra costs have been incurred, for example due to service evasion, a higher amount may be justified and reasonable. Where costs are considered excessive, the official receiver should write to the petitioning creditor’s solicitor informing them of this view and asking that they either reduce their bill to an acceptable level or submit the bill of costs for approval by the court and  provide a costs certificate. More detailed guidance as to when a bill of costs should be subject to detailed assessment is given at TM Chapter 39 paragraph 39.17. A request for detailed assessment should only be made where there are sufficient funds to enable the costs to be paid in full or such funds are to become available shortly.

If a person who has been requested (form CDETAS) to commence detailed assessment for a bill of costs by the official receiver fails to do so within 3 months of the requirement,(or within such further time as the court on application, may grant) the official receiver may deal with the insolvent estate without regard to any claim by that person, whose claim is forfeited by their failure to commence proceedings in court. The result of this is that the insolvent estate can be distributed without taking into account this particular expense. In practice, and in the absence of agreement to the contrary,  this enables the estate to be distributed without a lengthy wait for a petitioning creditor’s solicitors bill of costs to be submitted. 

10.  What is the National Dividends Unit (NDU) ?

The NDU is a national unit (part of Centralised Activities Directorate(CAD)based in Croydon, Manchester and Stoke) which deals with most of the dividend work for official receiver’s offices. All cases where release can be applied for that have a credit balance on the estate and where a dividend can be declared and paid may be transferred to the NDU. (See ISCIS Protocols – Communication with NDU).

There is a ‘Credit Balance Transfer Protocol’ document on the Intranet that offers guidance for transferring credit balance cases to the NDU. The protocol covers which cases are eligible for transfer, how to transfer cases and the mandatory requirements for such transfers. Click HERE to view this document which also contains links to NDU Transfer Form and the London or provincial OR office, Dividend Probability Calculators.  

Notes:

a. The Insolvency (Amendment) Rules 2004, applicable from 1 April 2004, allow creditors to make alternative arrangements for the payment of deposits. The Rules provide that a deposit must be paid to the court before a petition can be filed, unless the Secretary of State has given written notice to the court that the petitioner has made suitable alternative arrangements to pay the deposit. Petitioners may set up an account with Estate Account Services(EAS), which will fund only the deposits on any petitions presented which result in orders being made. This means that those petitioners with approved accounts would no longer be required to pay a deposit to the court on filing a petition. This provision will benefit those creditors who issue large numbers of petitions that are subsequently dismissed/withdrawn as funds are only taken when the order is made. EAS will notify the Civil Business Branch of the Court Service with the particulars of creditors who open a Frequent Petitioner account with The Service. HMRC operates a Frequent Petitioner account but it is not anticipated that many other petitioners will take up this option.

b. Where the petition was presented before 1 April 1995, the petition deposit should be refunded after the expenses of preserving, realising or getting in the assets, the expenses or disbursements incurred by the official receiver and the old administration fee have been charged to the estate but before all other fees, including realisation and Secretary of State fees. In such cases it is possible to refund the deposit (or part of it) and leave a debit balance on the estate account.

c. Where proceedings commenced on or after 1 April 1995, the Insolvency (Amendment) Rules 1995 apply. This amendment substituted new rules and changed the order of priority in which the expenses are payable. The position of the administration fee and repayable deposit and the order of their priority was changed. They now appear immediately after the payment of other statutory fees, instead of before. The effect of this is that the petition deposit will only be refunded from any credit balance remaining after all statutory fees and costs have been deducted.

d. In bankruptcy cases only, the claims of the spouse or civil partner at the date of the bankruptcy order, must be deferred for consideration and may only be paid after all preferential and unsecured creditors have been paid and have received any statutory interest on their claims

Where can I find out more?

The Insolvency Regulations 1994 (as amended)

The Insolvency Proceedings (Fees) Order 2004 (as amended)

The Insolvency Proceedings (Fees) (Amendment) Order 2007

The Insolvency Proceedings (Fees) (Amendment) Order 2008

Insolvency Rules 1986

4.218 Priority of payment of expenses from estate (company)

6.224 Priority of payment of expenses from estate (bankruptcy)

7.34 Costs etc. payable out of estate

Technical Manual

Chapter 5 – Publication of insolvency information

Chapter 6– Appeals, stays, rescissions and annulments

Chapter 36 - Estate Accounting

Chapter 36A - Distributions

Chapter 39 –Detailed Assessment 

Case Help Manual:

Annulments, Rescissions and Recalls

Closing a Case

Distributions – Company and Bankruptcy Cases

ISCIS Protocols 

NDU Protocol - Credit Balance Transfers  

Dividend Probability calculator - Provincial

Dividend Probability calculator - London

Forms to be used:

CDETAS - Costs, detailed assessment (available only from OROS homepage)

PDREF - Petition deposit refund

 

Pre-Distributions Company and Bankruptcy Cases Flowchart

 

Procedure

ISCIS tabs that must be used to record/view information are given in brackets, e.g. (‘Case Header’).

1. After checking all disbursements regarding the realisation of assets have been paid and all fees, costs and charges have been appropriately charged, arrange to repay deposit, either in part or in full, depending on the amount of funds available. Record details on ISCIS under ‘Notes’ tab.

2. If a credit balance remains check the file to see if details of the petition costs have been received. If not, write to the petitioning creditor’s solicitors asking them to submit details of their costs in this matter. Their name and address can be found on the insolvency order and ‘Case header’ tab on ISCIS. Include any references quoted and their client’s name.

Solicitors should be requested to submit their bill of costs net of VAT if their client is registered for VAT.

3. Check to see whether any creditors who supported the petition are to be paid their costs from the estate. If so, write to their solicitors to submit their bill of costs, as above.

4. When details of petition costs are received, send to designated officer for approval, enclosing the following:

  1. copy of the petition;
  2. copy of the bankruptcy or winding-up order;
  3. any correspondence with solicitors; and a
  4. copy of the estate ledger showing the credit balance available.

5. If the bill of costs appears to be excessive and there are funds to enable the costs to be paid in full, write to the solicitors asking them to reduce the bill to an acceptable level or to submit the bill of costs for detailed assessment (form CDETAS).

6. Once the bill of costs has been approved, or has been assessed by the court, arrange for payment up to the limit of the available funds. Record details on ISCIS under ‘Notes’ tab.

7. If the case has not been closed, and there are no more funds available for creditors, proceed with official receiver’s application for release following the procedure outlined in CHM part : Closing a case.

8. If the case has been ‘re-opened’ and the official receiver has previously obtained his/her release, providing there are no further matters to be dealt with and no more funds available, close the case. (ISCIS –‘Case Header’ tab)

9. Where further funds are available see CHM part Distributions – Company and Bankruptcy cases