Scottish bankruptcy fees increase
Fees payable to the Accountant in Bankruptcy will increase significantly from 3 April 2017. David Menzies looks at the changes and their implications.
The Scottish Government have set out plans to increase fees payable to the Accountant in Bankruptcy (AiB) by creditors and Insolvency Practitioners (IPs).
The new fees set out in The Bankruptcy Fees (Scotland) Regulations 2017 are expected to become payable on sequestrations and trust deeds commenced on or after 3 April 2017.
The Impact Assessment which accompanies the legislation estimates that the new fees will benefit the AiB by over £1.6m in additional fees over the next five years, money which would otherwise go to creditors. The last published accounts for the Scottish Government Agency disclosed an operating surplus of £812,000 during 2014/15.
The fee increases are generally in the region of 40% to 50% although some fees are increased by as much as 160%. Several fees remain unchanged.
The Personal Insolvency Unit of the Govan Law Centre have calculated that where the AiB is appointed as trustee in a sequestration, the amount which they will take for the realisation of heritable property will increase by up to 188%, with an increase of at least 150% where equity in property exceeds £140,000.
Creditors to pay
The impact of the changes being made will be felt mostly by creditors. Increased fees payable as an expense of the sequestration or trust deed will result in a lower level of realisations available to pay a dividend to creditors.
Where a creditor is pursuing recovery of a debt and considering petitioning the Court for the debtor’s bankruptcy the up-front costs which must be borne by the creditor may increase significantly. Creditors who default to the AiB as the trustee will face costs of £450 (up from £300). AiB analysis suggests that two thirds of creditor petitions are presented by HMRC or local authorities and therefore the impact of this change is most likely to be felt in the public purse. Creditors may wish to consider approaching an IP to be appointed where the costs payable would be only £150.
With increased costs to pursue recovery of a debt and the prospect of lower returns, it may be expected that creditors will once again have cause to think seriously about whether to incur costs pursuing a debt where they are unlikely to recover fully what they are due.
This of course leads to a situation where the number of creditor led insolvencies will continue to reduce, causing a reduction in income for the AiB which in turn is likely to result in a need to increase fees further in years to come as ‘full cost recovery’ is pursued.
A welcome change (in part)
There is some welcome news in amongst the new fees where the AiB and Scottish Government have been listening to concerns raised by ICAS.
Where there are no commissioners in sequestrations, the AiB is required to audit a trustee’s accounts and determine the trustee’s remuneration. The fee for issuing each determination is currently 17.5% of the determined remuneration and outlays.
There are known instances where the AiB audit fee runs to significant five digit sums, not because of the trustee’s remuneration but because the fee is also applied to outlays such as legal fees. The AiB will for new cases cap the fee payable at £5,000. The cap will therefore only apply where remuneration and outlays claimed for any accounting period are more than £28,572.
Analysis carried out by the AiB suggests that this is likely to benefit fewer than 20 instances per year at a total cost of only £86,000.
While the fee cap is welcome and a step in the right direction, the fee payable to the AiB in many instances will still represent a disproportionate charge to the time spent carrying out the audit and determination and thus will be excessive.
The AiB have also taken steps to deal with late payers, with provision made within the new Regulations for the AiB to charge interest on fees unpaid 30 days after they are due. This change will apply to existing sequestrations and trust deeds as well as new cases from 3 April 2017.
Minutes of the AiB Board meetings suggest that there have been issues in the past where fees payable by trustees have remained outstanding for considerable periods. It therefore seems reasonable on one view that interest should be charged to encourage prompt payment.
However, this masks the fact that in many instances the IP may not realise assets for a considerable period and may therefore require to fund the fees incurring a working capital cost. Unless assets have been realised, the reality is that the working capital costs require funding from the AiB or the commercial trustee’s firm.
The sting in this tale is that the AiB will recover interest at 8% per annum – a rate which vastly exceeds normal commercial terms and is the same rate payable when a party has to revert to judicial recourse to recover a debt.
ICAS has already called for the rate of interest payable in sequestrations to be reduced from the current rate provided in legislation of 8%. Providing evidence to the Delegated Powers and Law Reform Committee on 1 November 2016, Paul Wheelhouse, Minister for Business, Innovation and Energy said: "I agree that, in the context of current low interest rates, a rate of 8 per cent seems punitive.
"We are aware of the concern and I have shared it with the AIB...It has been suggested that a 1.5% premium on the base lending rate would be a more acceptable and fairer rate, and I am sympathetic to such arguments.
I will allow you to draw your own conclusions on why it is considered that the same interest rate described above as ‘punitive’ has been set in these Regulations.
The Regulations require the AiB to ‘serve’ a written request for the fee and interest. This suggests that the interest will be discretionary by the AiB. It is not known yet what policy will be adopted and whether the discretion will be replaced by an automatic policy.
Regulation 10(4) also gives the AiB the power to waive any interest payable. This perhaps suggests that it is likely that the AiB will automatically serve a written request for the fee and interest and that it may be possible in certain (expected limited) circumstances to make a case as to why interest should be waived.
There are no changes proposed to the fees payable by debtors who apply for their own bankruptcy. In a separate announcement, the AiB have confirmed that paper applications will cease from 30 September 2017. With reduced processing costs as a result of only accepting electronic applications, it remains to be seen whether there will be a reduction in the debtor application fee in future.
ICAS acknowledges that the AiB requires to be funded. There are some fundamental questions to be answered however on how the AiB are funded given the ‘new norm’ of lower personal insolvency rates than have been seen historically.
Funding questions cannot be looked at in isolation as the funding requirement is a factor of expenditure which in turn is a factor based on functions and roles performed. ICAS, and others, have highlighted the conflict of interest which the AiB has as policy advisor to the Scottish Government, quasi-regulator, provider of trustee services and appeal adjudicator. Removing the conflict of interests would result in reduced expenditure, allow reduced funding requirement and a greater return to creditors.
Ultimately the return to creditors provides a return to the economy which can only be a positive in the current economic climate.
The time is overdue for a fundamental review and full public consultation of how the AiB is funded and their role.