While the level of fees accumulated appears vast, experts say the size of the task means the sums thrown around are not uncommon and the cost should reduce significantly over time.
The Big Four firm was appointed in May by the official receiver to help the government prop up the steel manufacturer until a buyer is found. British Steel was placed in compulsory liquidation following a breakdown in rescue talks between the government and the company's owner, Greybull.
A compulsory liquidation of the group was ordered by the High Court after the government denied British Steel a second loan of £30m just a month after the company borrowed £120m to avoid an EU fine.
EY stands to make more than £40m if the sale is not completed before February. Earlier this month China’s Jingye Group announced a provisional deal to buy the stricken manufacturer but this remains subject to regulatory approval.
A specialist court heard in August that the accountants appointed had run up fees of more than £13m in three months, and now that figure has inflated to £25m.
Three senior staff at EY had “incurred time costs” after being made “special managers” by a High Court judge, the Insolvency and Companies Court in London was told. Further issues relating to trio’s fees are expected to be discussed at a follow-up hearing in December.
Sizeable task
“While this figure may seem eye-watering, EY will have had to tool up significantly to take on the job and will have had to familiarise themselves with all aspects of the business,” said Patrick Elliot a corporate recovery and insolvency specialist at Keystone Law.
British Steel employs about 4,000 people directly in the UK and supports more than 20,000 jobs in its supply chains.
“In these circumstances, these fees are not so extraordinary,” said Elliot. “However, I would hope that British Steel’s creditors are keeping a close eye on how EY is managing the administration and that they will carefully monitor EY’s fees with a view to reducing them where possible.”
He said as the administration continues, the level of fees should reduce as EY “become more familiar with the business and there is less urgent work to be carried out”.
Between May 22 and July 12, special managers had “incurred time costs” of about £13.1m, which included £2.1m in VAT.
The court was told the work being done was “complex and time-intensive”. EY initially engaged 89 people involved full-time, however that number later fell to 56 and is expected to drop further.
Inflated fees
Officials at Britain’s audit watchdog the Financial Reporting Council have frequently criticised excessive pay for partners at large audit firms, after many signs were missed to stop high-profile collapses including Carillion, BHS, HBOS, Patisserie Valerie and Thomas Cook.
Earlier in the year, MPs slammed PwC for “milking the cash cow dry” after it charged £44m for a year’s work as special project managers on the administration of Carillion.
Members of a select committee accused the firms of “feasting on what was soon to become a carcass” as their enquiries revealed that the Big Four had also charged £71.6m for work relating to Carillion in the ten years leading up to its financial collapse.
The Competition and Markets Authority, which monitors antitrust issues, proposed a revamp of the market that would split the audit and consulting functions of the Big Four (PwC, Deloitte, EY and KPMG), forcing them to install alternate management teams, accounts and pay policies. However, this week the Conservative Party stated as part of its manifesto that it would not be taking these recommendations forward.
Insolvency Act red tape
December’s insolvency court update should provide further clarity of the costs involved, and industry watchers say they expect the projection to fall, but also believe the government should look at legislative tweaks that would cut billable hours.
“EY was appointed because the official receiver did not have the expertise or resources to manage the continuing trade of British Steel following the liquidation,” said Paul Formby, insolvency and corporate recovery partner at SAS Daniels Solicitors. “Without special managers, British Steel would not have been able to continue to trade, affecting employees, suppliers and the value of the business.”
Formby said costs are incurred on a so-called “time costs basis” and are a reflection of the work that has been required to keep British Steel trading.
“It is for the government and ultimately the public to decide if this is money well spent,” said Formby. “Work undertaken by special managers in cases like this will include statutory requirements under the Insolvency Act 1986. This Act could be reviewed to cut ‘red tape’ and therefore time billed and escalating fees in future scenarios such as this.”
A sale of the business and assets of British Steel has been agreed in principle with Jingye Steel Ltd and Jingye Steel Holding Limited, the government announced on November 11. EY’s costs are estimated to be £1m per week plus up to half of the proposed sale price.
The deal includes the Scunthorpe steelworks, UK mills and shares of FN Steel BV, British Steel France Rail SAS and TSP Engineering, and the sale also includes the shares owned by BSL in Redcar Bulk Terminal Ltd. Completion of the contract is conditional on a number of factors, including gaining the necessary regulatory approvals.
A spokesman for the official receiver said EY’s support was ‘essential’ to keep British Steel running.