What is the Insolvency Act 1986?

The Insolvency Act 1986 is a UK act of law that governs insolvency proceedings and establishes the framework for corporate and individual insolvency. It governs the processes for liquidation (winding up), bankruptcy, administration, and company voluntary arrangements. The act sets out the rules for creditors, company directors, and insolvency practitioners.

Costs Incurred in Insolvency Proceedings

In insolvency proceedings, various costs can be incurred including:

1. Legal fees to cover the cost of advising directors of an insolvent company or person, as well as paying the costs of representation of the insolvent person or company, creditors, and licensed insolvency practitioners.
2. Accountant fees for preparing and presenting financial information.
3. Costs of drafting and submitting relevant paperwork to Companies House.
4. Costs for valuing the company’s assets, such as property or stocks.
5. Costs for running the insolvency process, such as maintaining records and holding meetings.
6. Remuneration for the insolvency practitioner, such as the liquidator, administrator or trustee.
7. Costs for realising assets, such as selling property or arranging for the disposal of stock.
8. Costs of making staff redundant and processing redundancy payments
9. Costs of liquidation: If you wish to liquidate your company, the liquidation fee and costs due to pay for the liquidation process will depend on a several factors, such as the number of assets, the size of the company and the number of creditors. Costs will also vary depending upon the type of liquidation process; for example compulsory liquidation can often be more expensive than voluntary liquidation. Moreover, a Creditors’ Voluntary Liquidation (CVL) is usually more expensive than a Members’ Voluntary Liquidation (MVL).

These costs are considered part of the expenses of the insolvency process and will typically be paid from the assets of the insolvent person or company. The specific costs that can be incurred will depend on the nature and complexity of the insolvency proceedings.

Who is Entitled to Recover Legal Costs in Insolvency Proceedings?

In insolvency proceedings, the costs of legal representation can be recovered from the estate of the insolvent person or company. The costs are considered a priority claim, meaning that they are paid ahead of other unsecured creditors. The costs will only be recoverable if they are deemed reasonable and have been incurred for the benefit of the estate. The specific entitlements for cost recovery are determined by the court overseeing the insolvency proceedings and can be subject to the provisions of the Insolvency Act 1986.

Recovering Insolvency Costs

Under the Insolvency (England and Wales) Rules 2016, legal costs of insolvency should be recovered using the detailed assessment procedure under CPR 47. Costs will be recovered on a standard basis, unless directed otherwise by the Court.

12.42.—(1) Where the costs of any person are payable as an expense out of the insolvent estate, the amount payable must be decided by detailed assessment unless agreed between the office-holder and the person entitled to payment.

(2) In the absence of agreement, the office-holder—

(a) may serve notice requiring the person entitled to payment to commence detailed assessment proceedings in accordance with CPR Part 47; and

(b) must serve such notice (except in an administrative receivership) where a liquidation or creditors’ committee formed in relation to the insolvency proceedings resolves that the amount of the costs must be decided by detailed assessment.

(3) Detailed assessment proceedings must be commenced in the court to which the insolvency proceedings are allocated or, where in relation to a company there is no such court, any court having jurisdiction to wind up the company.

The aim of the detailed assessment process is to ensure that legal costs incurred in insolvency proceedings are fair, reasonable, and proportionate to the matter in question. This helps to maintain the integrity of the insolvency process and promote fairness for all parties involved.

When recovering legal costs, the receiving party will be required to submit a bill of costs to the paying party alongside a Notice of Commencement to initiate the process of detailed assessment.

The paying party should respond to the bill of costs within 21 days and provide points of dispute if they wish to contest anything listed within the bill of costs. If the paying party does not submit their points of dispute within the specified time frame, the receiving party will be entitled to apply for a default costs certificate, which entitles them to recover all costs listed within the bill.

If the paying party submits their points of dispute, the receiving party should further negotiate using points of reply in an attempt to reach an agreement. If an agreement cannot be reached, the receiving party will be required to make an application to the court to have the costs assessed at a Detailed Assessment Hearing.

How can ARC Costs Assist?

ARC Costs have a team of experienced Costs Draftsmen and Costs Lawyers with the skills and expertise required to recover or dispute insolvency costs under the Insolvency Act 1986. We can assist by drafting your Costs Budgets, Bills of Costs and Replies to Points of Dispute, and can also conduct detailed assessment proceedings on your behalf. If you are the paying party, we can assist you in contesting legal costs by expertly drafting your points of dispute and handling negotiations.

Our team of Costs Lawyers can provide representation at Detailed Assessment whether you are the paying party or the receiving party.

We can be contacted via email at info@arccosts.co.uk, or by telephone on 01204 397302. For more information on legal costs, please find out more about our speciality areas of expertise and our services on our legal costs page.

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