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The prescribed part - its all or nothing!

28 October 2008

Earlier this month the joint liquidators of Courts Plc failed to persuade the court to disregard the pari passu principle when deciding whether to dispense with the prescribed part. This decision has provided much needed clarity for insolvency practitioners and creditors alike.

Since the introduction of s176A into the Insolvency Act 1986 there has been a requirement for a prescribed part of an insolvent companys net assets to be paid to unsecured creditors, ahead of those creditors with a floating charge. However, it is possible for an application to be made to the court for an order that the prescribed part be dispensed with where the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.

Re Courts Plc [2008] EWHC 2339 concerned an application of this nature. In this case the prescribed part fund consisted of the maximum £600,000. The joint liquidators anticipated that their costs in making the distribution would be approximately £50,000. This would leave £550,000 in the pot to be distributed to the 297 unsecured creditors. With an estimated total claim of £94 million this would result in a dividend of around 0.6 pence per pound. Although there had been substantial realisations, it was anticipated that the unsecured creditors would not receive any dividend other than that paid from the prescribed part.

The joint liquidators divided their anticipated costs by the number of unsecured creditors and calculated that they would each need to have a claim of more that £28,000 in order to receive a dividend in excess of their share of the costs. On this basis the joint liquidators made an application to the court for an order that the requirement for the prescribed part should not apply, so as to require a distribution to unsecured creditors with claim of £28,000 or less as the cost of making the payment would be disproportionate to the benefit.

Mr Justice Blackburne considered whether he had the jurisdiction to make this order and concluded that he did not. His interpretation of the legislation was that the prescribed part could not be disapplied in part, it was all or nothing!

Two fundamental principles formed the basis of this decision. First was the pari passu principle which underlies the treatment of unsecured creditors. If the application had been granted, it would have resulted in only 13 of the unsecured creditors receiving a dividend. The other 87 would have received nothing! Second, the unsecured creditors should be treated as a body of creditors and not as individuals. As the costs of making the distribution would be paid in priority to the dividend to unsecured creditors, these costs should be considered as a whole and not divided between each individual creditor.

Finally, Mr Justice Blackburne held that he was being asked to make an inherently unfair order and therefore, even if he did have jurisdiction, he would still not allow the application.

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