England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		The Rolls Building 7 Rolls Building, Fetter Lane, London EC4A 1NL
		20 November 2015

1. JUDGE KEYSER: This is an application by the joint special administrators of Hume Capital Securities Plc ("the Company"), pursuant to regulation 11 of the Investment Bank Special Administration Regulations 2011 ("the Regulations") and rule 146 of the Investment Bank Special Administration (England and Wales) Rules 2011 ("the Rules"), for permission to return client assets to clients pursuant to a distribution plan dated 30 October 2015 after the bar date of 30 June 2015 which was set by the administrators under regulation 11(1) and for approval of the distribution plan. The administrators also seek an order in respect of their costs.
2. The Company was incorporated on 1 June 2009 and re-registered as a public company on 21 July 2010. In 2012 it acquired an asset management business, and it was an investment bank within the meaning of section 232 of the Banking Act 2009. It was also regulated as an authorised person under the Financial Services and Markets Act 2000 ("FSMA"). It incurred substantial losses and in March 2015 it requested suspension of trading in its shares. It was suspended from membership of the Stock Exchange and agreed with the Financial Conduct Authority ("FCA") to stop carrying out its regulated activities except in respect of existing contracts. On 13 March 2015 the directors of the Company filed an application for a special administration order. The Company was placed into special administration by an order of Rose J on 16 March 2015 and the same order appointed the applicants as special administrators.
3. Pursuant to provisions in the Banking Act 2009, the Regulations have modified the law of insolvency as it applies to investment banks. Regulation 10 provides that the administrator of a company in special administration has three objectives. The first is material for present purposes: to ensure the return of client assets as soon as is reasonably practicable. In relation to that objective regulation 10(2) provides that the administrator is entitled to deal with and return client assets in whatever order the administrator thinks best achieves the objective. What is meant by "the return of client assets" is explained in regulation 10(5):

"For the purposes of Objective 1, 'return of client assets' or where the client assets are 'returned' to the client means that the investment bank relinquishes full control over the assets for the benefit of the client to the extent of— (a) the client's beneficial entitlement to those assets (where the assets in question have been held on trust by the investment bank); or (b) the client's right to those assets as bailor or otherwise (where the investment bank has been holding those assets as bailee (in Scotland, as custodier of those assets) or by some other means to the order of the client); having taken into account any entitlement the investment bank might have, or a third party might have, in respect of those assets, of which the administrator is aware at the time the assets are returned to the client."

4. Regulation 11 provides for the distribution of client assets in accordance with Objective 1. In particular regulation 11(1) provides that, if the administrator thinks it necessary in order to expedite the return of client assets, the administrator may set a bar date for the submission of claims. Regulation 11(3) makes clear that the bar date must allow a reasonable time after notice of the special administration for people to be able to submit their claims, and there are then provisions which deal with the position if claims are submitted after the bar date. In short, claims that have been met in accordance with what is submitted by the bar date are unimpeached by late claims, but the administrators must have regard to the late claims—the door is not shut by the operation of the bar date, which acts to expedite and to protect distributions made in accordance with timeously noted claims but not to close out other claims.
5. Regulation 11(8) provides that regulation 11 does not apply to client assets which are governed by rules made by the FCA under section 137B of FSMA. A separate regime under chapters 7 and 7A ("CASS 7" and "CASS 7A") in the Client Asset Sourcebook contained within the FCA Handbook applies to client money, but the present application relates to client assets other than client money, namely stocks and shares held for retail and professional clients.
6. The procedures involved regarding distribution in accordance with Objective 1 and the bar date are contained in Part 5 of the rules. Rule 138 contains provisions that are designed to ensure that those who have or who might have claims are given notice of the bar date, as must the FCA itself, which of course has a role in protecting the public interest. Rule 139 concerns the manner in which claims are to be submitted. Rule 143 relates to the notification of potential claimants after the bar date has passed (that is, those who did not make proprietary claims before the bar date). In the present case 0.19% of clients by value have not made claims by the expiry of the bar date.
7. Chapter 3 of Part 5 deals with the distribution plan. Rule 144 provides in part as follows:

"(2) The administrator shall draw up a distribution plan setting out— (a) subject to paragraph (3), a schedule of dates on which the client assets are to be returned ('a distribution'); (b) the unencumbered assets to be returned and to whom; ... (e) the amount and identity of client assets that are to be retained by the administrator to pay the expenses of the special administration in accordance with rules 135 and 137 and how the retention of these assets will affect the amount of client assets to be returned to clients.

(3) In setting out the schedule of dates for the return of the client assets, no date shall be sooner than the date which is 3 months after the bar date."

For present purposes, that means that no date shall be earlier than 30 September 2015.

8. Rule 145 provides that where there is a creditor's committee it must be convened to approve the distribution plan and it may do so with or without modification. Rule 146 deals with approval by the court. It contains a series of provisions designed to ensure that all interested parties (including those who have submitted claims, those who have been notified under rule 143, and the FCA) should be notified of the hearing as well as being provided with a distribution plan. Rule 146(5) provides:

"(5) On hearing the application under paragraph (2) the court may—

(a) make an order approving the distribution plan with or without modification if satisfied that— (i) where rule 143 applies, the administrator has made the necessary notifications in accordance with that rule; and (ii) where there is a creditors' committee, either that the committee has approved the distribution plan with or without modification or where the committee has been unable to approve the plan, the court has heard from the members of the committee or has given them an opportunity to explain why the committee were unable to approve the plan;

(b) dismiss the application;

(c) adjourn the hearing (generally or to a specified date); or

(d) make any other order which the court thinks appropriate."

9. The provisions of rule 146 do not give any specific guidance as to the relevant considerations for the court in deciding whether to approve a distribution plan. As Mr Goldring submits, the nature of the statutory regime means that the court will necessarily wish to be satisfied that the distribution plan furthers Objective 1 and that it is just and appropriate in the circumstances. The purpose of the distribution plan is of course to make a distribution of assets in accordance with clients' proprietary rights and pursuant to Objective 1, not to interfere with or alter those rights.
10. Mr Goldring further submits, and I accept, that the context in which an application must be brought to the court is of itself important. The distribution plan can only be approved if the creditors' committee has approved the plan or had opportunity to explain why it has not approved the plan. The creditors' committee is required to be representative of the different interests among the creditors of the company. Its approval of the distribution plan will be a particularly material factor in the court's decision. Again, individual claimants or potential claimants will have been notified both of the plan and of the hearing and will be able to make representations against the plan. Their input or lack of it will again be highly material. As I have indicated, rule 146 requires that the FCA be notified of the hearing; its objections or lack of objections will again be relevant. Finally, the making of the application will itself indicate the exercise of professional judgment on the part of the administrators as officers of the court, and due weight is to be given to their judgment.
11. None of those factors can be conclusive—if they were, the rules would say so or the approval of the court would not be required—but all are to be given proper weight. In particular, as it seems to me, if the court is satisfied that all relevant interests and persons have been given the proper opportunity to make representations on the proposals and have either specifically agreed to them or at least not objected to them and that the plan proposed by the administrators has been approved by the creditors' committee, the court is very likely to be slow to withhold approval or to substitute its own assessment of what is just and reasonable for that of the persons whose interests are affected.
12. In the present case, the assets comprise stocks and shares, which are more fully described at paragraphs 2.5 to 2.8 of the explanatory statement accompanying the distribution plan and are particularised in schedule 1 to the distribution plan itself. The aggregate value of the clients' assets exceeds £35.7 million. They are held, whether as nominee or by means of the device of a sub-trust, by Xcap Nominees Limited, which is referred to in the documentation as "the custodian". The custodian is a non-trading subsidiary of the Company and is now controlled by the special administrators.
13. On 22 May 2015 the administrators gave notice of a bar date of 30 June 2015, in accordance with regulation 11. One method, and perhaps the most obvious method, of returning assets would be by means of partitioning. The administrators considered that course and took advice on it from expert accountants, and in accordance with that advice and their own judgment they have concluded that such a course would be time-consuming, costly and, in the case of at least one particular unit trust, unworkable. There are 5,507 lines of stock in the client assets. They are held by over 500 clients. The assets are held in five depots, each of which comprises both an ISA account and a nominee account. Specific difficulties have been identified, going far beyond the simple (if that is the right word) but very great burden of inputting each transaction on both the market side and the client side of the transaction. The difficulties are set out in the third witness statement of Mr Julian Irving, one of the special administrators, dated 30 October 2015. I need not recite them. On the basis of that evidence, I am satisfied that, insofar as it was capable of being done at all, partitioning would be impractical by reason of time and cost.
14. What is proposed instead is something more elegant and simple but equally effective for the purpose of distribution of and return of assets. Shortly after the special administration had commenced, European Investment Management Limited ("EIM"), which is an investment manager regulated by the FCA and an authorised firm under FSMA, made an approach with a view to buying the assets of business of the Company, and it has maintained its interest since then. The administrators did not simply jump at EIM's initial approach but rather made investigations of the market. However, in the light of those investigations the proposal is that the shareholding in the custodian should be transferred to EIM. EIM will then control the custodian, which will remain the legal owner of the assets. The return of assets will be achieved through a device that is set out in detail in the distribution plan. In brief, each client will have a choice either to have a relationship with EIM in place of its former relationship with the Company (which will involve, at least at the outset, simply leaving the assets with the custodian) or, if it does not wish to do that, to notify the administrators accordingly and, so to speak, opt out and have its assets transferred to it. In fact, the great majority of the clients are clearly content that their assets pass to the control of EIM in place of the Company and continue to be held on their behalf by the custodian. For those clients who are not content with that approach ("the non-transferred clients"), the transfer of assets and business to EIM will provide that the custodian will hold the assets of the non-transferred clients on a trust directly for the administrators, who accordingly will for the time being retain control of the assets and remain subject to their obligation under the Rules to return them to the clients.
15. The distribution plan provides for the case of potential claimants. In particular, paragraph 9.5 makes provision for what will happen if, after the lapse of twelve months from the transfer to EIM, there are assets in respect of which non-transferred claimants have not given instructions. What is proposed is that the investments should be liquidated and converted into money, which would be held on the trusts in CASS 7 and CASS 7A, and that the administrators would make such application or take such other course as might be required in order to deal with and distribute the money, including ultimately seeking a direction that it cease to be client money and fall into the general assets of the company available to creditors or to the general expenses of the administration.
16. Costs are dealt with in section 5 of the distribution plan:

"The administrators have determined that the most equitable and time- and cost-effective approach to apportioning the expenses incurred in their pursuit of Objective 1 between claimants is to charge a fixed cost for the client assets of each of the claimants with an accepted client asset. For the avoidance of doubt, the fixed cost is charged by reference to each account held by the claimant as identified in schedule 1 client assets."

17. The rationale of a fixed cost is primarily that the return of client assets is being dealt with not on a piece-by-piece basis but by way of a general package transfer; accordingly this is not a situation in which particular costs will relate to particular assets. The proposal also has the merit of simplicity. As is explained in some detail in Mr Irving's third statement, the administrators have been mindful of the possibility that a fixed cost will fall with disproportionate burden on those who either have small investments in their account or have an unusually large number of accounts, but the conclusion that they have reached is that that is an unlikely consequence. By their estimation over 96% by number of the claimants are eligible for compensation from the Financial Services Compensation Scheme.
18. The way in which the FSCS has arranged to meet its compensation obligations is set out in a letter dated 18 November 2015 to the special administrators. They will pay the fixed costs for eligible claimants directly to the administrators, provided that the claimants indicate their agreement in writing to those payments. Claimants with entitlements less than £50,000, who might be disproportionately affected by fixed charges, will be compensated through this mechanism and their assets will be released upon the payment of costs by the FSCS. The administrators acknowledge that there may be "a handful" of clients who will not be compensated by the FSCS and will pay more by way of fixed costs than they would have paid if costs had been individuated. Their judgment nonetheless is that the possibility that this will occur in a very small number of cases does not affect the overall merits and equity of the proposal, and they make the point that an individuated-cost approach would impose an unfair burden upon claimants who had high-value client asset claims but were not eligible for FSCS compensation.
19. The position regarding the procedures for approval is as follows. The creditors' committee consists of the FSCS, which is automatically a member of the creditors' committee unless it chooses not to be, Old Mutual International, which has a significant client-asset claim and also a claim against the client money trust, and one David Taylor, who is a secure creditor. Therefore it represents the range of affected interests in the administration. The committee met on 20 October 2015 and approved the plan. The FSCS and David Taylor voted to approve it. Old Mutual International abstained from the vote; that was apparently because of a lack of ability to get instructions rather than because of misgivings or indeed approval concerning the plan, but it has not subsequently raised any objection to the distribution plan.
20. The position regarding affected clients is that the overwhelming majority by value (indeed practically all by value) and the great majority by number of the claimants have approved the transfer. A small but not insignificant number of claimants with low-value claims have not consented; of those, most have not responded, though a few have expressly not consented to the transfer. Of course, those who do not consent to the transfer are not prejudiced by the distribution plan itself, because if the transfer proceeds it will not have the effect of putting their assets in the control of EIM, as I have already explained.
21. Rule 143 has been complied with. That is proved by Mr Irving's third statement. No objections have been raised to the present application and no one has attended to oppose the application.
22. I am satisfied that the application is a highly convenient method of achieving Objective 1, that it works fairly, equitably and reasonably, and that the apparent alternative to it would be far less consistent with Objective 1 and far more likely to impose unnecessary delay and costs upon the claimants. In the circumstances I shall approve the distribution plan.