MARCH 2011
PART 4
DEPOSITS, INDEMNITIES, AND REMUNERATION
This part deals with the various costs and financial matters that need to be considered and dealt with prior to, and during the course of, an interim receivership.
When an application is made for the appointment of the official receiver as interim receiver, the applicant must deposit with the official receiver (or secure to his/her satisfaction), a suitable deposit to cover such sum as the court directs before the order is made. This is to cover the expenses and remuneration which may be incurred by the interim receiver [note 1]. The court will fix the amount of the deposit on the official receiver’s advice (see paragraph 2A.110 for advice where an additional deposit is required).
As the deposit should be agreed prior to the order being made, the applicant should communicate with the official receiver prior to making the application to try and agree what sum the official receiver regards as reasonable in that particular case (see paragraphs 2A.13 to 2A.14). Ultimately, the amount to be deposited or secured is a matter for the court.
2A.108 Government Department indemnity instead of deposit
Where a Government Department is the applicant, a request should be made to indemnify the official receiver for his/her costs on a case by case basis instead of providing a monetary deposit or other security. The amount should cover the official receiver’s expected remunerations for the time likely to be spent dealing with the case, plus any additional costs needed such as insurance, a special manager, agents fees, forensic accountancy, legal advice.
2A.109 Amount of deposit or security
Where the applicant is not a Government Department the official receiver should always require an amount which reflects what the official receiver is likely to spend in dealing with a particular case, worked out on a case by case basis. The amount should cover the official receiver’s expected remunerations for the time likely to be spent dealing with the case, plus any additional costs needed such as insurance, a special manager, agents fees, forensic accountancy, legal advice.
Where the official receiver considers that he/she will incur greater costs than would usually be expected, then the amount of the deposit requested should, where possible, reflect this from the outset, e.g. where it is likely that trading will be continued.
2A.110 Deposit inadequate, further report
If the deposit proves to be insufficient, the official receiver must, as soon as he/she is aware that a further deposit is required, apply to the court (with notice to the original applicant) for an order that the required additional sum be deposited with him/her or security given [note 2]. At that stage the official receiver should give the applicant advance notice (by telephone, followed up in writing) of the sum for which he/she will be asking [note 3].
2A.111 Official receiver’s applications, abridging notice
Formal notice of the application will almost certainly have to be shorter than normal, since this application (and, indeed, most applications in an interim receivership) are likely to be urgent [note 4]. The official receiver should remember to ask the court to authorise short notice which can be done at the hearing.
2A.112 Non-payment of additional deposit
The official receiver must in his/her application give sufficient details of his/her requirements for an additional deposit to enable the court to make the appropriate order. If the further sum is not paid to the official receiver within two business days after service of the order on the person to whom it is directed, the official receiver should draw the court’s attention to the default and ask the court to discharge the original order of appointment [note 5]. The official receiver should not normally incur any substantial expenditure beyond the amount of the original deposit until the further deposit is received.
2A.113 Open ended indemnity to continue business
If the terms of the proposed order are to include a direction to the official receiver to continue the debtor’s business, he/she should, at the hearing of the application, draw the court’s attention to the additional need for a satisfactory indemnity supported by a cash deposit against loss in trading, so that provision can be made for these to be supplied by the applicant [note 6] (see paragraph 2A.114 below). The official receiver should also consider whether it is appropriate to request an open ended indemnity from the applicant to include any possible claim against him/her for damages (see paragraphs 2A.38 to 2A.39).
2A.114 Failure to honour undertaking
The official receiver should endeavour to persuade the court not to issue the order appointing him/her as interim receiver until the requirements of a satisfactory indemnity supported by a cash deposit are met (except where the applicant is a Government Department – see paragraph 2A.108). If the court nevertheless issues the order on the basis of an indemnity undertaking, and the applicant then fails to comply within a reasonable time (usually no later than the day after the order is made), the official receiver must immediately draw the court’s attention to the default with a view to the order being discharged (see paragraph 2A.112).
If a bankruptcy order is subsequently made any deposit should, assuming the assets are sufficient following payment of the remuneration and expenses of the interim receiver, be repaid to the person who made it (or as that person may direct) in the correct order of priority [note 7] [note 8], see Chapter 36, Part 3, unless it was provided out of the debtor’s own property, in which case it simply forms part of the debtor’s estate.
2A.116 Official receiver’s remuneration and time recording
The court does not fix the official receiver’s remuneration. This is charged on an hourly rate set out in legislation [note 9] [note 10] (see Chapter 36, paragraph 36.43). Details of the time spent on the case by the official receiver, as interim receiver, and his/her staff, should be recorded for the purpose of calculating that remuneration, which is on a time and rate basis. Time sheets should be kept prior to the interim receivership and divided into units of 15 minutes for any time spent on a case prior to the making of an interim receivership order. Following the making of an order, the time spent to date and from then onwards should be recorded on the ISCIS time recording system. The maintenance of proper records in this respect will avoid any dispute as to the amount to be charged to the case.
2A.117 Insolvency practitioner remuneration
Where an insolvency practitioner has been appointed as interim receiver, his/her remuneration is to be fixed by the court from time to time on his/her application. In fixing this remuneration, the court will take into account the time spent by the interim receiver and his/her staff, the complexity of the case, any exceptional responsibilities, the effectiveness he/she carries out his/her duties, and the value and nature of the assets with which he/she has to deal [note 11]. The court can appoint an assessor to assist in fixing the remuneration. Payments made on account should as a general rule be limited to two thirds of the amount estimated, but the court may allow a higher amount if the interim receiver has shown their estimates can be trusted [note 12].
2A.118 Source of payment of interim receiver’s remunerations
Without prejudice to any order the court may make as to cost, where either the official receiver or an insolvency practitioner is acting as interim receiver, his/her remunerations and any expenses incurred by him/her (including any special manager’s remunerations or expenses) should be reimbursed:
2A.119 Interim receiver’s expenses and tax liabilities when continue to trade
Where an interim receiver causes a debtor to continue trading until the business is sold as a going concern, and has collected VAT and deducted PAYE income tax and national insurance contributions from staff wages, these expenses are given superior priority to the normal insolvency expenses shown in Chapter 36, paragraph 36.51 [note 14]. In this provisional liquidator case, the High Court also ordered that other expenses incurred by the provisional liquidator in preserving, realising or getting in any of the assets should be paid in priority to the expenses of the official receiver or liquidator in undertaking the same type of work [note 15], but after the payment of the tax liabilities. Although this case was a provisional liquidation, it is likely that it would also apply to an interim receivership.
2A.120 Security when insolvency practitioner is interim receiver
When an insolvency practitioner is acting as interim receiver, he/she must maintain in force at all times security which meets the prescribed requirements in relation to that debtor [note 16]. If the interim receiver fails to give or maintain this security, the court may remove him/her and make such order as it thinks just as to costs. If the court makes such an order removing or discharging the interim receiver, it must give directions as to whether any, and if so what, steps should be taken for the appointment of another person in his/her place [note 17].
2A.121 Cost of insolvency practitioner providing security
Where an insolvency practitioner is appointed as interim receiver [note 18] the cost of providing security is to be paid in the first instance by the interim receiver, but:
2A.122 Interim receiver may use judgment in deciding whether to withhold funds under a contract
An interim receiver, when faced with having to decide whether to fund a contract that may turn out to be a disadvantageous contract, may exercise his/her judgment in the interests of the creditors in any future bankruptcy proceedings. He/she has the right to withhold payment under the contract if he/she feels it is the best thing to do [note 21]. Although this was decided in a provisional liquidation case, it is also likely to apply to a case where an interim receiver has been appointed.
2A.123 Costs of special manager
For information on the costs associated with a special manager, in particular the security that should be provided by a special manager prior to appointment, see Chapter 32.4, paragraph 32.4.15 onwards.
2A.124 Costs when interim receiver discharged prior to bankruptcy hearing
When the interim receiver is discharged prior to the bankruptcy petition hearing, legislation does not provide for the payment of his/her remuneration and expenses. The official receiver should therefore request the court to consider his/her remuneration and costs at the hearing for his/her discharge. The court has power [note 22] to direct as it thinks just with respect to the accounts of his/her administration, or any other matters which it thinks appropriate. This doesn’t protect the interim receiver if the debtor has insufficient funds, but the interim receiver should consider this possibility when ensuring an adequate deposit has been provided before the order appointing him/her is made (see paragraph 2A.108).
[Back to Part 3 – Action following appointment of official receiver] [On to Part 5 – Bankruptcy petition hearings and termination of appointment]