Scottish Court of Session Decisions

Noters: Ower; DLA Piper Scotland LLP

9 December 2010

[1] In this case the joint administrators of QMD Hotels Ltd ("the Company") apply by Note for an order under s.176A(5) of the Insolvency Act 1986, disapplying s.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.

[2] It is submitted on behalf of the joint administrators that in this case the costs of making a distribution to unsecured creditors would be disproportionate to the benefits resulting therefrom, having regard to the expenses of such a distribution. The figures put forward in their Note appear, on the face of it, to bear this out. The Estimated Outcome Statement lodged in process by the joint administrators estimates the value of the claims of unsecured creditors at some £278,985. By contrast, the prescribed part is only £5,699. The joint administrators say that their reasonable costs of adjudicating upon the unsecured creditors' claims and making a distribution would be in the region of £5,000. This has to be paid out of the prescribed part. Accordingly, only £699 would be available from the prescribed part for the payment of such claims. That would result in a dividend of no more than 0.2p in the pound. That level of dividend does not justify the expense of adjudicating upon and otherwise dealing with the unsecured creditors' claims. They argue that the court should therefore disapply s.176A(2). If that section is disapplied, then the prescribed part will be added to the other assets available to the floating charge holder, RBS, which is out of pocket to the tune of some millions of pounds.

[3] In the course of the hearing, I was referred to Re Hydroserve Limited [2008] BCC 175 and Re International Sections Limited [2009] BCC 574. The latter case 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.

[6] I indicated to Miss Ower that, for those reasons, I was minded to refuse the application to disapply s.176A(2) and, instead, to direct that the joint administrators should do no more than was necessary to effect payment of a dividend to the unsecured creditors without carrying out further investigations into the merits of the claims. I allowed an opportunity for her to take instructions as to the practicalities. I was later sent an e-mail in which it was made clear that the joint administrators could reduce their costs of the exercise to £570; and could make a distribution to the unsecured creditors in sums representing a dividend of approximately 1.8p in the pound. It is not much, but it is better than nothing. I therefore made an order directing the joint administrators to make the payments to the unsecured creditors on that basis, in the sums identified in a Schedule attached to their email and lodged in process.