Insolvency compliance, SIP 9, remuneration and category 2 disbursements.

Compliance with SIP 9, approval of remuneration and disbursements are right at the top of the list of regulatory priorities for all insolvency practitioners and RPBs.  In spite of this material errors are frequently seen in processes for the approval of remuneration and category 2 disbursements.

SIP 9 is highly unusual among SIPs as it specifically applies to all forms of proceedings under the Insolvency Act 1986. SIP 9 is headed up ‘Payments to insolvency office holders and their associates’ and all except one of its sections refers specifically to remuneration and disbursements. A very important principle is given at paragraph 5, however, that applies to all situations where information is provided by an officeholder and this should not be overlooked.

‘Information provided by an officeholder should be presented in a manner which is transparent, consistent throughout the life of the case and useful to creditors and other interested parties, whilst being proportionate to the circumstances of the case’ (Para 5 SIP 9).

If, since the Insolvency Rules 2016 became law, you have routinely sent out exactly the same style of lengthy reports in all cases that include exactly the same amount of standard information and that are designed in such a way that you question their relevance, accuracy and whether creditors will ever read past the first couple of pages, you could be in breach of SIP 9.

Paragraph 9 SIP 9 requires narrative information to be given to those with a financial interest in the level of payments from the insolvent estate. Many officeholders provide this narrative information in tabular form. It is understood that RPBs may dispute that information provided in tabular form can be accepted as ‘narrative’ for the purposes of SIP 9.

There is a clear difference between a few sentences (a narrative) giving information about the work done to realise a property; the valuation, marketing, negotiations, legal advice sought,  decisions made and the reasons for those decisions, for example, and a section in a table that includes ‘property’ under the heading ‘Sale of assets’. SIP 9 requires the narrative to support the financial information provided in the report and the intention of the narrative information is that it should allow creditors and other interested parties to better recognise the office holder’s role. Brief words and headings in a table are much less likely to achieve this than relevant information in written sentences that are specific to the case in question – and it seems to me that if these sentences are then presented in tabular form they should still be compliant with SIP 9.

It is interesting to note that SIP 9 differentiates between those with a financial interest in the level of payments from the insolvent estate (creditors or in members’ voluntary liquidations, shareholders) and those who approve the officeholder’s remuneration. Information about remuneration is to be provided to creditors regardless of whether the remuneration is approved by a liquidation or creditors’ committee.

Major errors are still noted regarding the definition of category 1 and category 2 disbursements. On occasion, expenses are confused with disbursements.

SIP 9 gives very clear definitions of expenses and disbursements. Expenses are amounts properly payable by the office holder from the estate which are not otherwise categorised as remuneration or a distribution to creditors.

Disbursements are expenses met by and reimbursed to an officeholder in connection with an insolvency appointment.

Legal costs to sell a property owned by the insolvent estate would be an expense but if the officeholder paid the legal costs from the office account and was subsequently reimbursed by the insolvent estate, this would also be a disbursement.

Category 1 disbursements are payments to independent third parties where there is specific expenditure directly referable to the appointment in question. Using the example above, the legal costs referred to would be a category 1 disbursement and category 1 disbursements may be reimbursed to the officeholder without prior approval.

Category 2 disbursements are expenses that are directly referable to the appointment in question but are not a payment to an independent third party. They may include an element of shared or allocated costs that have been incurred by the officeholder, such as the costs of storing books and records, photocopying and mileage.  Category 2 disbursements must be approved in the same way as remuneration before being paid from the insolvent estate.

If you would like to read SIP 9 it is available (with all the other SIPs) on the IPA website at https://www.insolvency-practitioners.org.uk/regulation-and-guidance/england-wales.

At RMCSC we carry out focussed reviews of specific aspects of insolvency administration as well as full case file reviews as part of our insolvency compliance reviews. Compliance with SIP 9 extends beyond obtaining the correct approval for the payment of remuneration and category 2 disbursements and please contact me on 07854 967976 or caroline.clark@rmcsc.co.uk to learn more about the compliance consultancy service RMCSC provides to insolvency practitioners.