The remuneration received by bankruptcy administrators is set by a tariff approved in 2004, pending review for years, which establishes the amount to be received based on the assets and liabilities of the bankrupt, with a maximum limit. That is, the lower of the amount of one million five hundred thousand euros and 4% of assets. The insolvency reform in process lowers that limit to one million and also adds a rule by which this remuneration is reduced in each phase of the contest that takes, in general, more than six months.
In practice, one of the problems cited by these professionals is the insufficiency or absence of assets to cover their fees. However, the perception of society is that the remuneration of these professionals is very high. For this reason, a recent study by the Institute of Economics Applied to Business of the University of the Basque Country (UPV), at the request of ASPAC (Professional Association of Bankruptcy Administrators), has analyzed the reality of these fees. These are figures that are not public, so the study has used data from more than 3,200 competitions completed in one year and a survey system to estimate the average gross fees charged by these professionals, as well as the average dedication in hours depending on the size of the liability.
The highest fees accrued in that period were 562,000 euros for the common phase of a media contest, compared to 1.55 euros for the contest with the lowest pay. We speak with Unai Olabarrieta, vice president of ASPAC and bankruptcy administrator, who is also finalizing his thesis on the efficiency of the bankruptcy process in Spain.
Is it a myth that the compensation of bankruptcy administrators is exorbitant?
The myth is generated because the headlines are played by the insolvency proceedings of large companies, which are an isolated phenomenon, since most of the insolvencies in our country affect small companies. In addition, we do not have statistics on bankruptcy administration fees. This could be solved soon because the directive that transposes the pending bankruptcy reform encourages the member states to collect, among other data, that included in the UPV study on bankruptcy expenses and the level of recovery from creditors.
Is it always a single person who receives the remuneration?
Any bankruptcy administrator has behind him a professional and qualified team that assists him. It is impossible to work alone.
The report speaks of negative “net remuneration” in competitions with liabilities of less than 400,000 euros, what does it mean?
The study reveals that the estimated cost of this type of bankruptcy is higher than the actual income received by the bankruptcy administrator, which is why it is negative. Even so, an insolvency administrator may not resign an appointment except for just cause, as this would imply their removal from the lists of insolvency administrators for future appointments. In fact, entry into the profession usually comes from accepting small competitions to demonstrate qualification, since the current appointment system has very poor access requirements and does not provide information about our real professionalism. It is a system with significant problems of moral hazard and adverse selection.
Does it compensate what is gained in the “big” contests with what is lost in the “small” ones?
Not always because the current system for appointing insolvency administrators does not guarantee appointments that allow their subsistence. In fact, the succession of ruinous appointments has forced great professionals to abandon the exercise, generating important distortions, similar to those pointed out for the second-hand car market by Nobel Prize winner Akerlof in the 1970s in his famous article lemon’s market (describes how lack of information can cause good quality products to be pushed out of the market by mediocre ones or “lemons”). The bankruptcy administration market is a market for lemons.
How could the regulations help prevent these cases of negative net remuneration from occurring?
I am not at all in favor of the tariff guarantee system. In the first place, because it would simply distribute what was collected by the insolvency administrators, so that in the end the effective collection percentage would be exactly the same (approximately 50% of what was accrued). In addition, the UPV study allows calculating how much would be paid through this system and yields insufficient amounts to cover the fee deficit. For this reason, I believe that another compensation mechanism should be sought and included in the urgent approval of the insolvency administration statute, pending for more than eight years. In this regard, we can affirm, on the one hand, that all the agents agree that the calculation of remuneration in proportion to the volume of assets and liabilities is not correlated with the workload. On the other hand, the study highlights the average workload of a creditor’s meeting in hourly terms. I think that this data could serve as a reference to establish a minimum remuneration that the system should guarantee.
His doctoral thesis focuses on the efficiency of the bankruptcy process in Spain, what is it and what variables does it handle?
The efficiency of the bankruptcy process is measured based on the level of payment to creditors, which, in my thesis, I have quantified at an average of 26.89%, which means that more than 70% of the debts of a bankruptcy remain without paying. I have analyzed that this level of debt recovery is conditioned by three variables: the degree of deterioration of the company, the size of the bankrupt and the training and experience of the bankruptcy administrator. For example, the greater the business deterioration, the lower the recovery rate, so the company should go to bankruptcy as soon as possible. But the reality is that 40% of the insolvent companies present negative own funds when requesting the bankruptcy and are liquidated, not because of the process, but because they are late, an issue that, as if that were not enough, the bankruptcy moratorium has aggravated.
What stands out from the contribution of the bankruptcy administration to this efficiency?
With regard to bankruptcy administration, I have measured the positive effect of the value that an experienced professional brings to the procedure, in relation to its cost, in terms of greater credit recovery for creditors. If, in addition, we take into account that bankruptcy proceedings generate losses estimated at 1.5% – 2% of annual GDP, reducing these losses will contribute directly to economic growth.
Time can become a double-edged sword in bankruptcy reform, since it reduces the compensation of the bankruptcy administration if the phases take, in general, more than six months. What is your opinion of this new rule?
The problem it presents is its objectivity, especially in the case of liquidation, where regardless of whether the delay is attributable to the bankruptcy administrator or not, the remuneration will be reduced by 50%. It is not fair because the development of a liquidation within six months is objectively impossible, without significant damage to the value of the assets. The penalties should be inexcusably referred to delays objectively attributable to the professional.
What aspects would you prioritize in the petitions to the legislator regarding the remuneration of the bankruptcy administration?
An efficient framework for resolving the problem of insolvency requires the intervention of expert professionals, whose work must be fairly remunerated. For this reason, I would ask that the report that we have provided be analyzed in depth and that it be legislated based on reality and in-depth knowledge of the matter, that no penalties be established for remuneration that are not directly attributable to the professional’s performance and that it be valued that the bankruptcy administration is not a cost center, but rather adds value.
What conclusion would you highlight from the UPV study?
Beyond the logical and striking conclusions, the low fees and the alarming collection percentages, which speak for themselves, I emphasize that greater professional training implies greater dedication to the process. This is important because the exercise of the profession of administrator or insolvency administrator has a vocation component that the legislator must not forget. Our commitment implies that, regardless of the sanctions that the rejection of an appointment may entail, we accept processes that will suppose a loss for us. And it is that we must not forget that insolvency generates social dramas and that we work to improve the conditions of those affected. In any case, the solution cannot be to exclude the bankruptcy administrator from the smaller processes, since this will entail inefficiencies and losses for those affected.
We wish to say thanks to the author of this article for this incredible material
Olabarrieta: “The compensation of the bankruptcy administration should be calculated based on the work”