Beware the precise wording of insolvency practitioners’ letters of engagement!

When you as a director approach an insolvency practitioner for advice and support in connection with your insolvent company, the IP has to provide you with a letter of engagement.  The purpose of that letter is to set out:

  • Your legal responsibilities as a director
  • The legal processes that need to be followed to put your company in to CVL / Creditors Voluntary Liquidation (or similar), and in the period immediately after then (including the creditor decision procedure)
  • What the IP’s duties are and what you will do to help them fulfil those duties
  • How the IP gets paid
  • A good number of other things the IP must point out either because his governing body or law require him to do so.

The prime purpose of such letters is to ensure you and the IP both know exactly where each stand.

But do you really know where you stand?

I’ve been approached several times recently by directors looking for a second opinion, a different set of eyes, after they’ve taken advice from bigger firms of IPs.

And they brought with them the IPs’ letter of engagement… which in my view was impossible for the directors to fully understand because the letters were incredibly long, detailed and complicated.  But it goes further than that… a few words amongst the ten pages – which were explained erroneously by the work getter in the IPs’ firm – would have had a major impact on the directors.

Let’s explore this…

The basis of the IPs’ fees were explained in the letter – they would be paid an agreed sum for the work they did up to the date the creditors decide whether or not to allow them to carry out the liquidation, and then once their appointment was confirmed their fees would be agreed by the creditors, or in another way which the directors / shareholders had no input into.  Quoting one such case, £5k plus VAT, ie £6k up to the creditor decision date, but no figure estimated for their post decision fees.

The letter in that case said that ‘in the event that the assets of the company are insufficient to discharge our fees, any shortfall will be paid by the directors of the company personally.  The signature of the enclosed copy of the letter of engagement letter by the directors shall be evidence and confirmation of your joint and several guarantee of all monies owed to us’.

Tell me… how much have you guaranteed?

Nothing, because you hope the IP realises at least £6k.  £5k, the figure before vat (can the IP claim back the vat?)? £6k?  £10k?  £20k? More?

The point is you don’t know, you have no idea?  Did you notice the word ‘all’ in the last few words of the quotation?

Because of this you are guaranteeing the IPs’ entire fees, including that post the creditors’ position.

And you have no control over the his fees or the extent of his work post creditor decision – here his fees will probably be calculated as follows:

    1.  At his rate per hour per staff grade – you have no control over
      -what grade of staff they get to do what;
      – whether he asks the creditors to enhance his rates (he can do so under Insolvency Law if he thinks his work or the circumstances of the case make it appropriate he’s paid more) – and it’s the creditors who get to decide, not you; or
      – by how much he increases his charge out rates each year – you only know his current charge out rates – and as you will see, they are hefty)multiplied by
    2. The number of hours spent – post creditor decision, you have no control over:
      – what work they choose to do;
      – What complexities are caused by others, such as creditors, employees, HMRC etc
      – how many hours they spend;
      – how long the liquidation takes (the longer it takes generally the more time is spent).

All you know is it’s a minimum of £6k plus the reasonable fees of the IP post creditor decision date – work on at least double the £6k figure as a bare minimum.  In reality by signing the letter of engagement you’re signing a blank cheque in favour of the IP.

So was that explained to you?

No it never is – it’s always explained that you’re guaranteeing the IPs’ fees only up to the decision date, his costs after that are conveniently ignored, never raised with you.

And that is why it’s often a good idea to get a second opinion, even if you’ve been introduced to the IP by someone you trust such as our accountant – because the person who introduced you will simply not know about these issues, you’re putting blind trust in your adviser’s recommendation, blind trust that could cost you dearly.

If you would like to arrange a meeting for a second opinion, call me on 01902 672323.

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