Distribution of the Prescribed Part

Background

In corporate insolvencies where there is a post September 2003 floating charge, a prescribed part is of course reserved to unsecured creditors. We are, from time to time, asked for our view about the practicalities of distributing the prescribed part (particularly when there is a minimal dividend for unsecured creditors). Floating Charge holders wish to maximise their dividend return. They are increasingly concerned that the costs of an IP adjudicating prescribed part claims are disproportionate and in effect there is a cost to the insolvency with minimal payments being made to any creditor.

QMD Hotels Ltd (in administration)

Lord Glennie issued his opinion in this case on 16th December 2010. The Joint Administrators of the Company applied for an order under s176A(5) of the 1986 Act. That section provides that the IP does not need to make a prescribed part available to unsecured creditors:

“ if—

(a) the liquidator, administrator or receiver applies to the court for an order under this subsection on the ground that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits, and

(b) the court orders that subsection (2) [this section provides for the prescribed part] shall not apply.”

In this case the administrators calculated the prescribed part as £5,699. They estimated their costs for distribution and relevant adjudication of claims would be around £5,000. That would, they estimated, result in a dividend of 0.2p in the pound. It was argued that given the likely dividend was so minimal the prescribed part should be disapplied and assets should be preserved for the floating charge holder.

Lord Glennie refused to grant the order sought. In his view the administrators had to carry out their duty to adjudicate claims from unsecured creditors in a proportionate way. The administrators confirmed that the cost of simply distributing the part to those with a claim (as opposed to formally corresponding on claims etc) would cost less than £600 and result in a dividend of approximately 1.8p in the pound. The administrators were ordered to proceed in this way.

Advice

Lord Glennie’s short opinion raises a number of interesting points:

1. It seems as a matter of policy the courts will want to uphold the unsecured creditor’s rights to the prescribed part;

2. Lord Glennie suggests duties should be carried out in a proportionate manner; that is to say what is appropriate in a large insolvency may not be appropriate where there are few assets;

3. IP’s need to ensure they take advice when necessary to avoid allegations duties (e.g. adjudication of claims) were not carried out in a proportionate way.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb@bbmsolicitors.co.uk) or Alasdair Baijal (agb@bbmsolicitors.co.uk).