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AIA

Practitioner rebuked over ‘improper’ advice

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6th Jan 2012
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The ICAEW’s Disciplinary Orders and Regulatory Decisions contained thin pickings for January 2012, with the majority of cases concerning issues such as practicing without certificates or withdrawing audit licences.

The most severe ruling involved insolvency practitioner Eric Stonham who the institute severely reprimanded and fined for wrongly advising a client to recover his pre-appointment fees.

In order to recover payment in respect of acting as administrator of R-Bar and Restaurant, Stonham improperly advised Mrs King and her daughter (both directors and employees) to pay themselves a bonus to pay those fees.

This proposal would have resulted in those fees being paid by the company - which by virtue of the company being in administration - was not permitted.

The company had initially gone into administration and then entered a Company Voluntary Arrangement (CVA).  A note of a meeting from 17 November 2006, said that:

“As far as fees for work up to the appointment of the administrator EJS said that there was a school of thought which cast doubt on the previous practice of making them an expense of the liquidation and he would be looking to the directors to underwrite a minimum fee of £2,000 plus VAT. Both [directors] said that they had insufficient funds at the time to pay such fee as they had not been drawing any remuneration from the company and had their own financial problems. EJS confirmed that he was happy to wait for them to be in a position to pay this fee at a later date when their personal finances were improved. It was proper for directors of companies in administration be remunerated for working in the business as they were doing that for the benefit of creditors. Indeed given the busy period around Christmas and the critical need to keep the business alive until the creditors meeting after some 10 weeks, and with the extra problems insolvency would bring a Christmas bonus might be in order. On that basis the directors agreed to pay pre-admin cost of £2,000 plus VAT.”

The administration commenced on 20 November 2006, but there was a dispute between Stonham and the directors as to his fees for the initial advice and pre-appointment work.

At a creditors meeting on 30 March 2007 it was agreed that £15,000 would be paid towards the administrator’s remuneration and that the balance of his fee would be deferred and paid from the subsequent CVA. Stonham contended that at this meeting the directors said that they would honour their obligation to personally settle his pre-administration fees of £2,000.

The directors never awarded themselves the bonus and the pre-appointment fees were, despite further reminders, not paid. Stonham then issued a statutory demand and a claim in the county court, which were both unsuccessful.

In spite of Stonham’s argument that there was then a legal doubt over whether pre-appointment fees could be properly recovered as an administration expense and that he needed a ‘new strategy’ for dealing with this, the tribunal noted that this did not lead to a suggestion that a proper way round this would be the awarding of a personal bonus to the directors.

The tribunal found that there was nothing wrong in Stonham seeking remuneration for that work from the directors, but he should have given the directors a letter of engagement in respect of this work, which would set out any agreed fee.

Stonham told the tribunal that he accepted “that a part of my motivation in suggesting the bonuses which I suggested in the 25 April 2007 letters must have been to increase the chances of my pre-appointment fees being paid.” He stated further that he “would be lying if I said that this thought did not cross my mind at all when I drafted the …letters - it must have done” and accepted that he should not have allowed himself to be placed in a position where such “improper considerations could influence my judgement”.

The tribunal found that Stonham, who had two previous disciplinary matters over a conflict of interest and unauthorised remuneration, was “primarily motivated by a desire to release funds to the directors of the company he was acting as administrator for, in order that they pay fees”.

The hearing took place on 4 August and the tribunal ordered that Stonham be severely reprimanded, pay a fine of £5,000 and pay costs of £7,000.

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