NOTE BY BLAIR CARNEGIE NIMMO AND GERARD ANTHONY FRIAR, THE JOINT ADMINISTRATORS OF CASTLEBRIDGE PLANT LIMITED (IN ADMINISTRATION) FOR AN ORDER UNDER SECTION 176A(5) OF THE INSOLVENCY ACT 1986
OUTER HOUSE, COURT OF SESSION
[2015] CSOH 165
P1141/15
OPINION OF LORD DOHERTY
In the Note by
BLAIR CARNEGIE NIMMO and GERARD ANTHONY FRIAR
the joint administrators of
CASTLEBRIDGE PLANT LIMITED (in administration)
Noters;
for
an order under section 176A(5) of the Insolvency Act 1986
Noters: Clubb, Solicitor Advocate; HBJ Gateley
9 December 2015
Introduction
[1] In this case the joint administrators of Castlebridge Plant Limited (“the Company”) apply by note for an order under section 176A(5) of the Insolvency Act 1986 disapplying section 176A(2) of that Act which requires them to make a “prescribed part” of the Company's net property available to satisfy the claims of unsecured creditors. The matter came before me for a hearing on 25 November 2015.
The statutory provisions
[2] Section 176A provides:
“176A Share of assets for unsecured creditors
(1) This section applies where a floating charge relates to property of a company—
(a) which has gone into liquidation,
(b) which is in administration,
(c) of which there is a provisional liquidator, or
(d) of which there is a receiver.
(2) The liquidator, administrator or receiver—
(a) shall make a prescribed part of the company's net property available for the satisfaction of unsecured debts, and
(b) shall not distribute that part to the proprietor of a floating charge except in so far as it exceeds the amount required for the satisfaction of unsecured debts.
(3) Subsection (2) shall not apply to a company if—
(a) the company's net property is less than the prescribed minimum, and
(b) the liquidator, administrator or receiver thinks that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.
…
(5) Subsection (2) shall also not apply to a company 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) shall not apply.
…
(9) In this section—
…
‘prescribed’ means prescribed by order by the Secretary of State.
…”
The note and the hearing
[3] The Company’s net property is estimated to amount to £465,000, and the sum of £96,000 is estimated by the noters to be available for the prescribed part. The Company owes the floating charge holder in excess of £42 million. The directors’ statement of affairs (12/11 of process) discloses 211 unsecured creditors with claims totalling £85,466,686: but, to date, only 76 claims by unsecured creditors have been received by the noters, which claims total £13,914,850.32. Of those 76, 61 are claims for up to £50,000, eight are claims for between £50,000 and £250,000, five are claims for between £250,000 and £1,000,000, and two are for in excess of £1,000,000 (one for £6.8 million and one for £2.112 million). From the directors’ statement of affairs it appears that the bulk of the difference between the figures of £85,466,686 and £13,914,850.32 is accounted for by five potential contingent claims totalling £41,732,000 in respect of restoration bonds, and by a potential claim of £22,663,207 in respect of operating lease rentals.
[4] The noters estimate that if a further 50 claims are received the costs of reviewing and adjudicating upon all 126 claims would be about £27,799.50, which they would restrict to £25,000. On that basis £71,000 from the prescribed part would be available to meet those claims. In arriving at that sum the noters have assumed that 30 of the 50 further claims would be for sums up to £50,000, 10 would be claims for between £50,000 and £250,000, five would be claims for between £250,000 and £1,000,000, and five would be for in excess of £1,000,000.
[5] In article 5.3 of the note, and at the hearing, it was maintained for the noters that the dividend payable to the unsecured creditors would be between 0.005 pence in the pound and 0.001 pence in the pound depending on how many creditors lodged claims in the administration. It would be about 0.005 pence on the basis of 76 claims and about 0.001 pence if there were 211 claims. Mr Clubb submitted that whether or not any further claims were made that level of dividend did not justify the expense of adjudicating upon and otherwise dealing with the unsecured creditors' claims. The court should therefore disapply section 176A(2), with the result that the prescribed part would be added to the other assets available to the floating charge holder, Bank of Scotland plc. In the course of his submission Mr Clubb referred me to Re Hydroserve Ltd [2007] BCC 175, Re International Sections Ltd [2009] BCC 574, and Stephen & Hill (Administrators of QMD Hotels Ltd) [2010] CSOH 168, [2012] BCC 794. He relied particularly upon observations of Lord Glennie in Stephen & Hill at paragraph 3.
The cases discussed at the hearing
[6] In Re Hydroserve Ltd Rimer J granted an application to disapply section 176A(2). The facts were far removed from the circumstances of the present case. 126 unsecured creditors had submitted claims totalling £3.5 million, of which £3 million was represented by four companies in the same group as the company which was in administration. The prescribed part available to all 126 unsecured creditors was at most £40,000, resulting in £5,000 being distributable to the 122 outside creditors. The dividend payable to them would have been unlikely to be more than 1p in the pound, and the cost of agreeing their claims and paying a dividend to them would have exceeded the dividend payments.
[7] In Re International Sections Ltd HH Judge Purle QC, sitting as an additional High Court judge, refused to disapply section 176A(2). The net property realised by the liquidators was £18,655.46. There were 66 known unsecured creditors owed £230,613 in total. 46 of them were owed less than £1,000. The amount of the prescribed part was £6,731 and the estimated cost of agreeing unsecured claims and making distributions was £3,332, leaving a balance of not more than £3,409. The result would have been a dividend of not more than 1.48p in the pound, which would have translated into payments of not more than £14.80 for 46 creditors and payments of between £312 and £907 for the four largest creditors. Judge Purle observed:
“9. It is clear that the ultimate arbiter where subs. (5) applies is the court. In deciding whether to disapply subs.(2), the court must be satisfied that the cost of making a distribution would be disproportionate to the benefits, and that it is right to disapply the section on that ground. The court may well take the view, even where the cost of making a distribution would be disproportionate, that unsecured creditors should still receive the remaining crumbs …
10. The ‘disproportionate’ criterion is said to be met in this case because:
(a) The net property of the company is £18,655.46.
(b) The amount of the prescribed part is £6,731.09.
(c) The estimated costs of agreeing unsecured claims and making distributions are £3,332.00 (although they could be higher depending on the work actually required to agree claims and pay dividends).
(d) Those costs would have to be taken out of the prescribed part (Insolvency Rules 1986 (SI 1986/1925) r.12.2(2) ), leaving a balance of not more than £3,409.09 to be distributed;
(e) This would result in a dividend of only 1.48p in the £ to each of the 66 unsecured creditors;
(f) 46 creditors are owed less than £1,000 and therefore the maximum dividend they would receive would be £14.80 each (and many would receive far less than that);
(g) Even the four largest creditors would only receive modest sums - between £311.80 and £906.70.
…
14. In Re Courts Plc …[ [2008] B.C.C. 917.], it was held that there was no power in the court under subs.(5) to disapply in relation to some only of the creditors. In the course of so deciding, Blackburne J. said at [19]: ‘. . . the cost/benefit balance is to be approached treating creditors as a body . . .’. That suggests, albeit in a different context, that analysis of the benefit to individual creditors is not permissible, so that factors (f) and (g) in [10] above should be ignored.
15. In my judgment, the proper approach in this context too is to look at the benefits to creditors as a body. The court should not be too ready to disapply the section because the dividend would be small. That, sadly, is often the case irrespective of the costs of making any distribution. In the present case, a significant albeit relatively small sum would remain for distribution once the costs are catered for. I do not think it would be right to deprive the unsecured creditors of what remains and I therefore decline to disapply subs.(2). I am not persuaded that the cost of making the distribution would be disproportionate to the admittedly small benefit to unsecured creditors and would not in any event exercise my power of disapplication as a matter of discretion. The disapplication of subs.(2) under subs.(5) should be the exception, and not the rule.”
[8] In Stephen & Hill administrators estimated the value of the claims of unsecured creditors at £278,985 whereas the prescribed part was only £5,699. They estimated their reasonable costs of adjudicating upon the unsecured creditors’ claims and making a distribution of the prescribed part to be in the region of £5,000. Thus only £699 would be available from the prescribed part for the payment of unsecured creditors, resulting in a dividend of no more than 0.2p in the pound. Lord Glennie refused to disapply section 176A(2) and opined:
“3. …Re International Sections Ltd … makes it clear that the court should not be too ready to disapply s.176A(2) simply because the dividend would be small. Regrettably, that is often the case, even without taking account of the costs of making a distribution. Nonetheless, where the dividend to the unsecured creditors is likely to be less than 1p in the pound, it may be appropriate to consider making such an order. On the face of it, a likely dividend of no more than 0.02p in the pound would seem to justify the disapplication of s.176A(2).
4. If, as the joint administrators say in the Note, the costs of adjudicating upon the claims of unsecured creditors and making a distribution would be in the region of £5,000, then it is clear, following the words of s.176A(5), that the costs of making the distribution to the unsecured creditors would be disproportionate to the benefits. But the logic of that, to my mind, does not inevitably point to the desirability of making the order sought. The court should ask whether the incurring of costs on that scale is reasonably necessary for the purpose. The intention of Parliament was to ensure that there was something left for the unsecured creditors. Just as the court should not be too ready to disapply the section simply because the dividend would be small, so also it should endeavour to ensure that that already small dividend payable to the unsecured creditors out of the prescribed part is not further reduced by an overzealous approach to the adjudication of such claims. The spending of £5,000 on that exercise in this case would reduce the dividend from about 2p in the pound to about 0.2p. Although, of course, administrators and liquidators are under a statutory duty to adjudicate upon claims, it seems to me that this duty had to be carried out in a proportionate way. Each case will no doubt turn on its own facts. It may be necessary for some rough and ready adjudication to be carried out. There may be questions as to the validity of large claims which, in fairness to other unsecured creditors, require more detailed attention. But the need for proportionality must be borne in mind, as must the potential prejudice to unsecured creditors with good claims if the investigations take up too much time and expense.
5. I am satisfied that, in this case, to incur expenditure of £5,000 in adjudicating and otherwise dealing with the claims of unsecured creditors when the effect of so doing will be to reduce the prescribed part available for payment of those claims to no more than £699, resulting in an inevitable application to disapply s.176A(2), would be disproportionate. The only persons who might benefit from that exercise are (i) the floating charge holders, if the court, faced with the prescribed part being further diminished by such costs, were to grant the motion to disapply that section; or (ii) the joint administrators, if the court were to refuse to disapply s.176A(2) and insisted on the exercise being done. In either case the parties who would suffer would be those whom Parliament intended to benefit, namely the body of unsecured creditors. Whilst it may be the case that a less thorough adjudication of unsecured claims could result in some claimants receiving a small dividend which they should not have received, at least the unsecured creditors will all receive something. On the alternative approach of requiring full scrutiny of all the claims, none of the unsecured creditors will get anything, even if their claims are found to be good. That makes no sense.”
Clarification after the hearing
[9] At the close of the hearing I decided to take the matter to Avizandum. On re‑reading the papers it seemed to me that the suggested dividends of 0.005 pence in the pound and 0.001 pence in the pound had not been correctly calculated. On my instructions my clerk emailed Mr Clubb on the morning of 26 November 2015 in the following terms:
“…[U]pon considering the papers following yesterday’s hearing it appears to his lordship that the averments in article 5.3 of the Note contain errors. If creditor claims of £85,466,686 were made and allowed the gross dividend (before allowing for expenses) would be 0.11p in the £ (not 0.001p) (i.e. £96,000 divided by £85,466,686). The same error seems to have been made in para.3.3 of the progress report of 29 September 2015 (12/6 of process) and in the Estimated Outcome Statement as at 9 October 2015 (12/9 of process): both state that the estimated dividend to unsecured creditors is 0.001p in the £.
If only the 76 claims already made were made and were allowed in full the gross dividend (before allowing for expenses) would be almost 0.7p in the £ (i.e. £96,000 divided by £13,914,850) not 0.005p in the £ as averred in article 5.3 of the Note.
Please revert to me to confirm that his lordship’s arithmetic is correct and that the Note and the other documents are not correct…”
[10] Mr Clubb replied by email that afternoon:
“I have considered the figures and calculations in the Note again, and have also discussed these figures again with KPMG.
Having done so, I must apologise to His Lordship as on further consideration I agree that his arithmetic is correct; the estimated dividend is incorrectly expressed in the documents as 0.001p in the £.
With the correct figures (shown in bold and underlined), paragraph 5.3 of the Note should have read:
The directors' statement of affairs discloses 211 unsecured creditors, with claims totalling £85,466,686. As at the date of presentation of this Note, the Administrators had only received claims from 76 of those unsecured creditors, which claims total £13,914,850.32. The anticipated dividend payable to creditors in terms of the prescribed part is estimated to amount to 0.083p in the £ (on the basis of unsecured creditor claims totalling £85,466,686). On the hypothesis that no more claims are received and the unsecured claims do not exceed £13,914,850.32, the anticipated dividend payable to creditors in terms of the prescribed part is estimated to amount to 0.510p in the £. The Administrators reasonably anticipate however that further unsecured creditor claims will be submitted.
I would be grateful if you could please pass on my sincere apologies to His Lordship for this error...”
[11] Mr Clubb’s amended figures do not quite coincide with the figures in the email which was sent to him: but the remaining difference is, I think, due to the fact that his corrected figures are net dividend figures after allowance is made for expenses, whereas my figures were gross dividend figures.
Decision and reasons
[12] The court is being asked to exercise the statutory power which Parliament has conferred upon it in terms of section 176A(5). It cannot exercise the power unless it is satisfied that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits. That is a relatively open-textured ground. It involves questions of balance and judgement, and the application of common sense. The circumstances of applications may vary enormously. Rather than be over‑prescriptive, Parliament has recognised that the court is best able to determine when the requirement is met. It has also recognised that even if the requirement is met it may not be appropriate in the whole circumstances for the court to exercise the power. Some of the factors which may be relevant at the second stage may be similar to factors considered at the first stage.
[13] Given the exercise which the court has to carry out, reference to decisions reached in other cases is likely to be of limited assistance. As already noted, Re Hydroserve Ltd involved a very different scenario indeed. I agree with Judge Purle QC (in Re International Sections Ltd) that the court should not be too ready to disapply the section because the dividend would be small; and that the disapplication of subsection (2) should be the exception, and not the rule. I also agree that it is relevant - and is likely often to be important - to look at the benefits to creditors as a body. However, I respectfully part company with the learned judge in so far as he appears to suggest that that is the only proper approach - and that looking at the effects on individual creditors is not permissible (paragraph 14 read together with paragraph 10; and paragraph 15). I agree with Lord Glennie (in Stephen & Hill) that in some cases the fact that a dividend rate would be very small would be likely to be a weighty factor, especially if the total sum which would be returned to unsecured creditors was small. However the situation would be very different if the total sum available to unsecured creditors was substantial - something worth having - and the costs of making a distribution would not use up the lion’s share of the prescribed part. In my opinion the court is entitled to take all of these matters into account. The weight it attaches to each of them, or to any other relevant factors, will be a matter for it and will be likely to vary from case to case. The court should keep in mind Parliament’s intention that the prescribed part should normally be used to benefit unsecured creditors (cf. Re Permacell Finesse Ltd (in liq.) [2008] BCC 208, per Judge Purle QC at paragraphs 16-18; Stephen & Hill, per Lord Glennie at paragraph 4).
[14] I turn then to the circumstances of the present application. The best possible outcome for the 76 creditors who have made claims in the administration would be that no further claims are made. In that event only a rateable proportion of the £25,000 estimated costs for dealing with 126 claims would fall to be deducted from the prescribed part of £96,000. On the assumption that that would be about £15,000 the sum available for distribution to the 76 claimants would be about £81,000. The dividend would in fact be about 0.58p in the pound (£81,000 divided by £13,914,850.32). If all 76 claims were allowed the average dividend payment would be about £1,065. On the basis of the breakdown of the 76 claims noted above the claim for £6.8 million might receive £39,440, and the claim for £2.112 million might receive £12,249; the five claims between £250,000 and £1,000,000 might receive dividends of between £1,450 and £5,800; the eight claims between £50,000 and £250,000 might receive dividends of between £290 and £1,450; and the 61 claims of up to £50,000 would receive at most £290. In fact most of the 61 claims would be likely to receive very much less. My reckoning is that only 10 of the 61 might be entitled to a dividend payment of in excess of £100.
[15] Mr Clubb submitted that a reasonable basis upon which to proceed was to assume that 126 claims would be made. In that event if all of them were allowed in full the average dividend payment would be about £563 (£71,000 divided by 126). The dividend would be lower than 0.58p in the pound. It is not possible to put a precise figure on it because the court was not provided with the total assumed value of the 126 claims. However, it seems not unreasonable to proceed on the footing that the relationship between dividend rates would broadly correspond to the relationship between the average dividend payments of £1,065 and £563. That would result in a dividend of about 0.3p in the pound. On the basis of the breakdown of the 126 claims noted above the seven for more than £1 million might receive dividends of at least £3,000 (the claim for £6.8 million might receive £20,400 and the claim for £2.112 million might receive £6,336); the 10 claims between £250,000 and £1,000,000 might receive dividends of between £750 and £3,000; the 18 claims between £50,000 and £250,000 might receive dividends of between £150 and £750; and the 91 claims of up to £50,000 would receive at most £150 (but most would be likely to receive very much less).
[16] Whether one proceeds on the basis of the 76 claims already made or one assumes that the claims will rise to 126, I find it quite impossible to accept that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits. In each case the global sum payable to unsecured creditors would be substantial (£81,000 and £71,000). In each case the sums receivable by a significant number of individual creditors would be worth having. In each case the estimated costs of making the distribution (£15,000 or £25,000) represent only a fraction of the prescribed part - about one-sixth if there are only the 76 claims and just over one-quarter if one proceeds on the assumption of 126 claims.
[17] Given that I am clear that the requirements of section 176A(5) are not satisfied, the application falls to be refused. The question of how the court should exercise its discretion does not arise.
[18] Two further matters merit mention.
[19] First, it is a matter of concern that incorrect information was provided to the creditors and to the court (in paragraph 3.3 of the noters’ progress report dated 29 September 2015 (12/6 of process); in the estimated outcome statement of 9 October 2015 (12/9 of process); in article 5.3 of the note; and in oral submissions at the hearing on 25 November 2015). I stress that I do not intend any personal criticism of Mr Clubb, and I accept the apology which he made. The errors in the note largely repeated errors in the documents which had been provided to him by the noters or their assistants. Nonetheless in applications under section 176A(5) the court relies upon the provision by the noters of accurate information. So do the creditors. The inaccuracy here could well have gone unnoticed.
[20] Second, I respectfully agree with the observations of Lord Glennie in paragraphs 4 and 5 of Stephen & Hill. Administrators ought to act in a proportionate way when carrying out their statutory duty to adjudicate upon claims. In the present case the breakdown of the noters’ estimated time and costs (12/10 of process) allocates to the lowest value claims a very large part of the time to be expended and the cost to be incurred. That seems disproportionate given the relatively small dividend payments likely to be made in relation to those claims. Serious consideration should be given to a more rough and ready (and less time-consuming and costly) adjudication being carried out in respect of at least those claims.