What Are Insolvency Practitioner Expenses?

This guide is all about Insolvency Practitioner Expenses.

In this article you’ll learn about:

  • What Insolvency Practitioner Expenses are.
  • How expenses cannot be claimed from an insolvency case.
  • Category 1 Insolvency Practitioner Expenses.
  • Category 2 Insolvency Practitioner Expenses.

Let’s get cracking.

Insolvency Practitioner Expenses

Insolvency Practitioner Expenses Overview

When an Insolvency Practitioner is acting as office-holder such as Liquidator, they will incur expenses in the operation and running of the insolvency case.

The costs and expenses of an insolvency case have to be paid in accordance with the statutory order of payment in insolvencies.

These are costs incurred by the Insolvency Practitioner that are not part of their firm’s overheads. Such insolvency expenses are only incurred because of the insolvency case and that is the only reason they have arisen. The Insolvency Practitioner’s firm overheads cannot be recharged to the insolvency case.

An example of an Insolvency Practitioner expense would be the Insolvency Practitioner Bond that needs to be taken out in respect of each and every insolvency case. That is a cost to the insolvency case that is mandatory. Other expenses may well involve statutory advertising of appointments in the Gazette newspaper.

Those Insolvency Practitioner expenses are of two categories as set out in Statement of Insolvency Practice Number 9.

There are Category 1 expenses and Category 2 expenses. Such expenses will typically be explained to creditors in a document such as an Insolvency Practitioner Disbursement Policy.

Key Facts On Insolvency Practitioner Expenses

  • Category 1 expenses do not require approval from creditors.
  • Category 2 expenses do require approval from creditors.
  • An insolvency firm’s overheads cannot be claimed as an expense of the insolvency case.

Expenses That Cannot Be Claimed

The following are not permissible as an insolvency case expense:

  • An expense or any other charge calculated as a percentage of remuneration.
  • An administration fee or charge additional to an office holder’s remuneration.
  • The recovery of any overheads other than those absorbed in the charge out rates.

Category 1 Insolvency Practitioner Expenses?

Category 1 expenses are expenses incurred in the running of an insolvency case where the Insolvency Practitioner is not associated with the party providing the service to the insolvency case.

These Category 1 expenses do not require approval from creditors before they can be paid from the insolvency case.

Statement of Insolvency Practice Number 9 says:

Category 1 expenses: These are payments to persons providing the service to which the expense relates who are not an associate of the office holder. Category 1 expenses can be paid without prior approval.

Category 2 Insolvency Practitioner Expenses?

Category 2 expenses incurred by the Insolvency Practitioner whilst running the insolvency case are costs that can be recharged to the insolvency case.

However, when the Category 2 expense is incurred, it will usually be a shared cost.

Shared expenses cannot incorporate any benefit to the Insolvency Practitioner’s firm. To ensure there is complete separation from an Insolvency Practitioner’s firm’s overheads shared expenses cannot be shared with the expenses of the Insolvency Practitioner’s firm.

In the example below of storage costs, if an Insolvency Practitioner’s firm provides other services such as general accountancy services to clients for whom it also stores records within the same storage facility, it would not be permissible to attempt to recharge a calculated proportion of such costs as a Category 2 expense for the storage of the insolvency case’s records.

This tends to keep the costs and expenses of an insolvency case separate from the other overheads of the Insolvency Practitioner’s firm.

Statement of Insolvency Practice Number 9 says:

Category 2 expenses: These are payments to associates or which have an element of shared costs. Before being paid, category 2 expenses require approval in the same manner as an office holder’s remuneration. Category 2 expenses require approval whether paid directly from the estate or as a disbursement.

Storage Company Example Of Category 2 Expense

For example only, an Insolvency Practitioner whilst acting as Liquidator has a duty to take possession of the books and records of the company in Liquidation. As a result, a considerable amount of storage may be required for the records of a number of Liquidations.

However, when the storage company invoices the Insolvency Practitioner they might not do so for each case individually but for all cases. If they were to identify on a case-by-case basis a separate storage facility and invoice each insolvency case accordingly individually, then the expense would be a Category 1 expense.

Category 2 Expense Approval From Creditors

A Category 2 expense shared across a number of cases to safeguard the position of creditors, the Insolvency Practitioner is required to obtain approval from creditors with proper transparency to demonstrate the expense is fair and reasonable.

In providing for Category 2 expenses approval, creditors have the opportunity to reject the expense if they so wish.

Example: Storage An Expense Of Insolvency Or An Overhead?

In the case of Warburton v The Accountancy In Bankruptcy [2022] SAC (Civ) 21 the matter of whether storage costs were a firm’s overhead or an outlay ie. Category 1 expense was considered.

insolvency practitioner storage expense

The answer it would seem will depend on the facts of each case. However, the Court here offered some insight as to its considerations on how Category 1 Insolvency Practitioner expenses might be determined as opposed to being overheads:

  • If the service was supplied by an independent contractor.
  • Whether the contract fee has been determined by reference to an insolvency case.
  • Service required to comply with professional obligations.
  • Comparison with market rates to assess the fairness and reasonableness of the charges.
  • The charge is directly referrable to the insolvency case in question, not to any general arrangement.
  • Whether the expense would have been incurred if the insolvency case did not exist.

What Next?

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Disclaimer: What Are Insolvency Practitioner Expenses?

This page What Are Insolvency Practitioner Expenses? is not legal advice and should not be relied upon as such. This article What Are Insolvency Practitioner Expenses? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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