Pre-appointment Administration Costs

We consulted on this issue in June 2007, which formed part of the process of considering whether legislative amendments to the Insolvency Rules 1986 were required to allow the recovery of pre-appointment administration costs by Insolvency Practitioners (“IPs”), subject to approval by creditors. In the light of responses to that consultation and other evidence to suggest that pre-appointment work has continued to increase, Ministers have agreed that this change, which will apply to any pre-appointment work undertaken with a view to the company entering administration,  should be made. The changes will be made by way of amendments to the Insolvency Rules as part of the project being undertaken to modernise the Rules, which are expected to come into force in April 2010.

Ministers have also decided that as well as applying to the administrator, the proposed amendments should be extended  to any IP who has advised the insolvent company, without having subsequently been appointed administrator, (“advisor IPs”). This is intended to ensure that IPs are not placed in a position of needing to take appointment to recover their fees when for other reasons they ought not to (so-called “moral hazard”).

As a pre-condition for inviting the approval of creditors to the pre-appointment costs, the administrator will be required to include in their administration proposals a statement setting out details of the costs incurred prior to his appointment and amongst other things an explanation of why the work was done before the company entered administration and how it was in the interest of the creditors as a whole. It will then be a matter for the creditors committee or the creditors  to approve the request or not, as they see fit. Such approval will be sought retrospectively by an IP post appointment, rather than involving creditors and requiring their approval before the formal onset of the procedure. It is also proposed that the administrator will have the right to apply to court if the costs are not approved or if they consider the amount approved to be insufficient.

In the case of the costs incurred by the advisor IP, who will be reliant on the administrator including such a statement in the proposals and thereafter taking the necessary action to enable those costs to be considered for approval by the creditors, the amendments provide a right for the advisor IP to make a direct application to court for the approval of their unpaid costs if the administrator fails to do this.