You will already be aware that office-holders are required to set aside certain realisations for the benefit of unsecured creditors under the Insolvency Act 1986 (Section 176A). Those realisations are carved out from assets which would otherwise be subject to a post-Enterprise Act floating charge.
Failing to comply with this duty will place the office-holder at risk of censure and sanction. The office-holder must therefore be sure the prescribed part is disapplied and not, unintentionally, misapplied.
In this blog post we cover points worth considering for office-holders faced with disapplying the prescribed part.
The legislation is clear on the circumstances in which an office-holder can lawfully disapply the prescribed part, being:
- the net property is less than £10,000 and the office-holder thinks the cost of making a distribution to unsecured creditors would be disproportionate to the benefits;
- the net property is greater than £10,000 and the court makes an order disapplying the prescribed part where the costs would, again, be disproportionate; or
- the prescribed part is disapplied by the terms of a CVA; or other prescribed arrangement.
Based on previous experiences, it is the second limb which crops up the most, and we advise office-holders about the necessary Court application. We have found that the Courts have adopted a cautious approach, which we believe supports the aim behind the legislation.
Office-holders must be aware that the court’s blessing is discretionary and the application is by no means a rubber-stamping exercise.
Bearing this in mind, the following considerations are key:
- It is the entirety of the prescribed part that may be disapplied; there is no halfway house. This appears sensible and avoids the office-holder having to put forward a business case to the court on which unsecured creditors he should pay and what should be prescribed. This way – the law treats all of the unsecured creditors on an equal footing and, fairly, at least among one another
- The decision to disapply the prescribed part should not be made light-heartedly. The courts are reluctant to grant this relief except in obvious cases. “A small return is better than no return” appears to be the motto, and proportionality is key. For example, it has been held that where the costs of sharing the prescribed part eat into nearly 50% of the prescribed part itself the part should still be paid
- What is more, the fact the cost of processing creditors’ claims might exceed the distribution to those creditors is not a relevant consideration. The office-holder should therefore consider innovative time and cost saving means of achieving the goal of distributing to unsecured creditors
- Office holders should take all available steps to ensure that only what is strictly necessary is done to distribute the prescribed part. The courts have supported a more ‘rough and ready’ approach to valuing claims in these types of cases
- Secured creditors cannot waive their security to benefit from the prescribed part after any interim distribution to unsecured creditors is made. By that stage the horse had already bolted
- The costs of making the application to disapply the prescribed part should be brought to the attention of the court. It would be absurd to incur costs in making an application which are close to the costs savings which the office-holder is seeking to avoid in disapplying the prescribed part. As always, costs should be restricted wherever possible
- Where relevant, administrators could make an application to court to disapply the prescribed part combined with an alternative application for permission to make distributions to unsecured creditors. This often guides the court into agreeing with the office-holder that he or she is actively trying to lessen costs and improving the level of distributions
These key principles are by no means exhaustive and a detailed examination of the facts and issues must be made in each case.
While it is the office-holder that must first form a view whether the lack of proportionality merits an application to disapply the prescribed part, the decision is the court’s. Even where the Judges have agreed with the office-holder’s view that the costs of distribution are disproportionate to the benefit to creditors, they have still been reluctant to, and have refused to disapply the prescribed part.
This confusing, and perhaps unhelpful, approach serves to highlight that disapplying the prescribed part must be reserved for the most exceptional cases, where there are clear and objectively demonstrable reasons to support the application.
For more information, email firstname.lastname@example.org.