Sheriff Court considers question of reimbursement of storage charge in PTD
Steven Wood takes a look at a recent decision by the Sheriff at Edinburgh concerning whether a charge incurred by the trustee in a Protected Trust Deed (PTD) for “secure data and call recording storage” can properly be considered a charge on the estate of the debtor.
The debtor signed a Trust Deed on or about 28 January 2016, which subsequently became protected on 21 March 2016.
As part of the trustee’s scheme of division of the estate, she sought to recover a charge of £35 for “secure data and call recording storage” from the estate of the debtor. The storage was deemed necessary to comply with the requirements of insolvency legislation and GDPR surrounding the secure recording and retention of telephone calls providing advice to consumers entering into insolvency solutions.
The trustee contended that the £35 charge incurred was directly attributable to the PTD and therefore recoverable from the debtor’s estate.
The Accountant in Bankruptcy (AIB) disagreed and consequently made a direction to the trustee under section 179 of the Bankruptcy (Scotland) Act 2016 (the 2016 Act) to the effect that the sum of £35 could not be considered an allowable charge by the trustee.
The trustee subsequently appealed to the sheriff in terms of section 188(1)(c) of the 2016 Act.
It should be noted that the sheriff acknowledges that the 2016 Act does not apply to this matter because the PTD predates the commencement of the 2016 Act. The matter is actually governed by the Protected Trust Deed (Scotland) Regulations 2013 (the 2013 regulations). However, as the statutory provisions contained within the 2013 regulations and their equivalent in the 2016 Act are identical, the parties agreed to amend the writ and sought a direction from the court under regulation 28 of the 2013 regulations.
It is also worth highlighting that, although the issue at stake in this case concerns a small sum of money (£35), it is essentially a test case for one of thousands in which this issue has arisen. This is demonstrated by the value of the contract with the data storage provider being £2,336,740 to cover services for an initial 3-year period.
Both sides agreed that the matter is one of statutory interpretation and their arguments therefore centred around the provisions of the 2013 Regulations and SIP 9 (Scotland). It should be noted that the sheriff’s considerations relate to the version of SIP 9 (Scotland) issued in May 2012. That SIP was updated with effect from 1 April 2021.
Arguments put forward for the trustee contend that the charge of £35:
- is payable to an independent third party;
- is appropriate and reasonable;
- relates to storage costs for the trust deed alone; and
- is separately charged to each individual insolvency case.
Consequently, it was argued that the charge formed a category 1 disbursement in terms of SIP 9 (Scotland) and is recoverable by the trustee under regulation 23 of the 2013 Regulations.
The AiB disagree with this interpretation and consider that the charge is not directly referable to the PTD and therefore cannot be recovered from the PTD estate. In the AIB’s opinion, the appropriate mechanism by which the outlay might properly be capable of being recovered (being essentially an overhead) is via the fixed fee to which the trustee is entitled in terms of regulation 23 of the 2013 Regulations, and not by way of an outlay.
The AiB consider that the outlay is not directly referable to the appointment in question, but that it constitutes consideration for performance of a service to the trustee which is required for services which the trustee requires in order to operate her business. It follows that the outlay is in fact an overhead which is not properly recoverable from the PTD.
The sheriff admits within the judgment that “determining whether the charge is appropriate is not easy to resolve. There is a dividing line between an outlay and an overhead but where the line rests is less clear”.
He concluded that “data protection, whether of phone calls or other materials, is an increasing part, not just of commercial, but of daily life. Securing its protection, as well as its storage, is increasingly a fundamental part of good business and professional practice; it is not a matter of choice. I would regard it as an essential part of the business of an insolvency practitioner and should be treated as a cost of the business and not as an outlay”.
Consequently, the sheriff ultimately decided that the storage charge:
- is not a category 1 disbursement as defined in paragraph 18 of SIP 9 (Scotland) (2012 version);
- is not an outlay for the purposes of Regulation 23 of the Protected Trust Deeds (Scotland) Regulations 2013; and
- cannot be reimbursed to the trustee through the payment of a cost charged against the Trust Deed.
This is a Sheriff Court case so isn’t binding and, we understand, is likely to be appealed. This is perhaps not surprising given the consequential total sums involved for the IP firm in question.
Subject to the outcome of any appeal, it is however clear that this decision could have an impact for both current and historic cases. Those implications will not be restricted to PTDs or to Scotland, as although this case relates to a PTD, this is an issue that essentially concerns SIP 9 and the sheriff’s interpretation of an overhead. SIP 9 is the same UK-wide in all material aspects under consideration. The revised SIP 9 includes new definitions of Category 1 and Category 2 expenses but the fundamental requirement that overheads cannot be recovered other than as part of hourly charge-out rates remains. This case could therefore serve to steer the discussion in relation to all insolvency processes UK-wide.
The fundamental question surrounds what constitutes an overhead and should be absorbed into the charge-out rates of firms, and what is an expense (to use the terminology of the revised SIP 9) that is correctly recoverable from an estate? The sheriff’s considerations regarding what he considers are now “a fundamental part of good business and professional practice”, and the possible implications for other forms of expense, will be of particular interest.
However, it does seem slightly odd that the sheriff also states, in relation to the 2012 version of SIP 9: “The examples of what constitutes allowable category one disbursements seem to me to be a little old fashioned, even for 2012 (e.g. postage and telephone charges).” This seems to suggest that list was out of touch and that things like the expense under scrutiny in this case should have more appropriately been included within it, i.e. have been a category 1 disbursement. However, that is obviously at odds with the decision he ultimately reached.
The decision reached seems to be predicated on the basis that costs associated with good business and professional practice or which are required because of more general statutory obligations (such as GDPR) must be general business costs and treated as overheads. That seems a rather peculiar position to adopt and is clearly not what SIP 9 (2012) intended. Communicating with creditors is after all ”a fundamental part of good business and professional practice”. Irrespective of whether such methods were old fashioned in 2012 (which they weren’t given there was no ability in legislation to communicate via email or websites at that time), clearly the intention of SIP 9 is to permit such costs where they are directly attributable to cases.
The SIP 9 FAQ document issued earlier this year makes clear that the revised SIP deliberately didn’t include a definition of an overhead, and intentionally moved away from providing a list of potential overheads.
That document states: “The overhead provisions should be read alongside the principle that payments from an insolvency estate should be directly attributable to the estate from which they are sought. A useful and reasonable rule of thumb is that an overhead is a cost that is incurred which isn’t specific to an individual case but which is incurred for the running of the business / providing a service other than in relation to insolvency casework. The principle is that officeholders shouldn’t be recovering general costs from insolvency estates other than those which might be recoverable through the underlying basis of fixing hourly rate charges. Such costs are an underlying cost of being in business as an IP and it isn’t fair and reasonable to creditors to levy such costs to individual estates.”
As the sheriff himself admits, assessing the line between an overhead and an expense recoverable from an estate is not straightforward, and has been a matter of some debate within the insolvency profession for some time. This decision will certainly bring that debate to the fore once again and may force the profession to reassess where that line lies.
As a footnote the sheriff makes some comments about the use of and interpretation of the words “outlay” and “disbursement” within legislation and SIP 9. Those comments are largely superseded by changes made by the new version of SIP 9 introduced on 1 April 2021, which uses “expense” as a “catch-all” term for any payments from an estate which are neither an office holder’s remuneration nor a distribution to a creditor or a member.
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