How Does an Insolvency Practitioner Make Money?
Insolvency practitioners are assigned to advise on and oversee insolvency procedures for businesses and individuals facing financial difficulties. They specialise in administering companies, taking businesses into liquidation, and organising repayments for creditors.
Despite the financial distress of the businesses they deal with, insolvency practitioners still need to ensure that they can make money in order to provide a high-quality service to their clients. Due to the nature and timing of their work, insolvency practitioners also have a moral and legal responsibility to be upfront about their fees and where the money comes from.
In the interest of transparency, in this article we explain how insolvency practitioners make money.
How Much Money Do Insolvency Practitioners Make?
Insolvency occurs when a business or individual can no longer pay their debts. Insolvency isn’t a pleasant experience for anyone. Suppliers are chasing their payments, banks are recalling their loans, and directors are being scrutinised for their decisions. Anyone who is owed money wants their money back before the business potentially folds and they’re left out of pocket.
The role of an insolvency practitioner amongst all of this is to provide the best possible solution for insolvency. This could mean winding down and liquidation, or it could mean administration or a company voluntary arrangement. Ultimately, the goal of the insolvency practitioner is to ensure that as many creditors as possible get their money back.
Of course, insolvency practitioners take a fee for their services, but the exact fee can range drastically depending on the size of the liquidation, the length of time needed to complete the insolvency proceedings, and the difficulty of the scenario. No single insolvency case is ever the same, and insolvency practitioners need to charge accordingly for their work, while ensuring that creditors receive their money too.
In all cases, an insolvency practitioner’s fees are paid in one of two ways, or a combination thereof throughout the proceeding:
- Fixed fees: insolvency practitioners are paid for the time spent providing services. This can be a fixed hourly fee or a fixed fee for the entire project.
- Percentage fees: insolvency practitioners can be paid a percentage value of the company entering insolvency or a percentage value of the assets and gains that are realised through liquidation.
Before and After Appointment Fees
Insolvency practitioners need to be ‘appointed’ by creditors when a particular insolvency process is agreed upon by all parties. However, before this appointment is made insolvency practitioners are already providing their services and advice.
For example, a business becomes insolvent and suppliers are attempting to get their money back. The suppliers seek advice from an insolvency practitioner who advises that administration is the best way forward. The creditors agree and only then do they legally appoint the insolvency practitioner to implement and oversee the administration period.
Most insolvency practices charge a fixed fee for the time spent advising and working on the case pre-appointment. For the post-appointment stage of the proceedings, insolvency practitioners often charge a variable, percentage-based fee, with proceedings often lasting up to 12 months.
When Does an Insolvency Practitioner Get Paid?
Insolvency practitioners need to be prudent when it comes down to getting paid for their services. After all, they don’t want to end up as another creditor in the insolvency process.
Insolvency practitioners usually require their pre-appointment fixed fees upfront or before the post-appointment process begins. This ensures that they see the money for the work they’ve put in before moving onto the next step.
Once appointed this is less of a worry, as the insolvency practitioner is then in charge of the insolvency process and no longer simply advising. For this reason, insolvency practitioners can take more risks and agree on percentage fees rather than fixed fees. Insolvency proceedings last 12 months in the majority of cases, and the insolvency practitioner can be paid at the end, on a monthly basis, or as and when funds become available.
Where Does the Money Come From to Pay Insolvency Practitioners?
Insolvency practitioners need to be careful when it comes to getting paid. After all, they don’t want to end up in debt themselves or trying to claim back their fees as yet another creditor. In order to provide a high-quality service that works towards the best solution for all involved, insolvency practitioners need to know where their fees are coming from and how they are going to be paid for their time.
Where the money comes from, depends on the process. Pre-appointment fees are generally going to be paid for by the creditors, as they invest their cash to ensure they get the money that’s owed to them. For creditors with lots of outstanding payments due, this investment can prove to be a good one.
Post-appointment, it can vary. In order to raise money to pay creditors, insolvency practitioners oversee insolvency proceedings. These are aimed at either turning the business around or liquidating the business.
If a business turnaround is being attempted, then the insolvency practitioner can take a fee from any realised profit gains that are made. However this is rare at this stage in the process. Insolvency often results in the sale of assets or parts of the company instead, in order to streamline and save the business, or to liquidate.
The money raised by these sales of stock and assets then goes towards paying creditors. The insolvency practitioner takes a percentage cut of the money that’s been raised through sales. As the insolvency practitioner is in charge of the proceedings, they are expected to take their percentage before distributing the remaining money to other creditors.
How Do Insolvency Practitioners Remain Transparent?
With so many creditors lining up for their payments, insolvency practitioners need to remain transparent and fair throughout the insolvency process, while also ensuring they themselves get paid.
The Insolvency Service sets out strict government regulations that must legally be adhered to. Insolvency practitioners must disclose any conflicts of interest that might arise through liquidation, and they must also file detailed reports if their fees are above £50,000. This report details their insolvency fees, legal costs, and any expenses accrued.
Ultimately, insolvency practitioners make their money by helping creditors secure the debts owed to them. Without their experience, skills, and knowledge, these payments might never be realised.