bulletin
Costly crumbs for unsecured creditors
17 February 2009
Even though the cost of distributing them may be
disproportionate, in cases where net property realised is more than
£10,000, meagre crumbs should still be paid to unsecured creditors.
This is because insolvency practitioners must look at the benefits
to creditors as a whole, not to individual creditors. In the case
of International Sections Ltd, the court held that it was
wrong to deprive the unsecured creditors of the relatively tiny
sums left in the prescribed part pot as the amount was still
significant having regard to the benefit to the creditors as a
body.
Under section 176A(2) of the Insolvency Act 1986 the 'prescribed
part' is ring fenced for the unsecured creditors. However, if an
insolvent company's net property is worth less than the prescribed
minimum of £10,000 and the relevant office holder considers that
the cost of distributing sums to the unsecured creditors would be
disproportionate to the benefits, then section 176A(2) is
automatically disapplied. If net property is £10,000 or more,
however, the liquidator must ask the court to disapply section
176A(2).
The liquidators in International Sections Ltd realised net
property of £18,655. There were 66 known unsecured creditors
collectively owed a total of £230,613 but the prescribed part only
amounted to £6,731. The estimated cost of agreeing the unsecured
claims and distributing this sum was put at £3,332. The cost would
come out of the prescribed part which would further reduce it to
£3,409. The liquidators therefore asked the court for an order
disapplying section 176A(2) on the basis that it would be
disproportionate to distribute the funds.
The court refused the order. Judge Purle QC observed that the
court may well take the view that even though the cost of making
the distribution was disproportionate, the unsecured creditors
should still receive "the remaining crumbs". The correct approach,
said the judge, was to look at the benefits to creditors as a whole
and the court should not be too ready to disapply section 176A(2)
just because the individual dividends would be small. So, even
though in this case the bulk of the unsecured creditors would
receive, at most, the princely sum of £14.80, the court refused the
order.
The judge drew a contrast with the smaller insolvencies where it
is for the office holder to make a commercial judgment to disapply
section 176A(2). In cases over the £10,000 threshold, the court is
the final arbiter and as well as being satisfied that the cost of
the distribution would be disproportionate to the benefits, the
court must also decide, in exercising its discretion, whether it
would be right to disapply the section. In this instance it was not
right and the judge held that disapplying section 176A(2) should be
the exception, not the rule.
As mentioned above, the estimated costs of agreeing the
unsecured claims and distributing sums are deducted from the
prescribed part for distribution, but what precisely are these
"costs"? Rule 12.2(2) of the Insolvency Rules 1986 refers to the
"costs associated with the prescribed part". In contrast, section
12.2(1) speaks of "fees, costs, charges and other expenses" so it
could be argued that only disbursements should be deducted from the
prescribed part before making a distribution. The judge took the
opportunity to clarify this point. The prescribed part creditors,
he said, should not be able to benefit from the work of a
liquidator without bearing the expense of the liquidator's work.
The word 'costs' is shorthand for the more general expression
"fees, costs, charges and other expenses" used in Rule 12.2(1).
talk to us
save to PDF
The content of this bulletin is provided for the purposes of
general interest and information. It contains only brief summaries
of aspects of the subject matter and does not provide comprehensive
statements of the law. It does not constitute legal advice and does
not provide a substitute for it.