Special administration distribution plan approved in part

A distribution plan proposed by the special administrators of an investment bank was approved to enable returns of client money, but the court did not approve a retention intended to act as a litigation reserve.

This case concerned Wealthtek LLP, an investment bank placed into special administration after the FCA required the firm to cease operations amid investigations into regulatory breaches, fraud and money laundering. Shortfalls of over £70m were identified and following a reconciliation exercise, the special administrators applied for approval of a plan to distribute £148m assets held for 1,320 clients. They also planned to hold back around 2% to cover the costs relating to the return of client monies, as well as a “litigation reserve” of £7m.  

The reconciliation exercise was intended to identify what funds and assets belonged to which client and while described as a robust and commercial exercise, some clients might end up better than others. Many clients would be compensated by the FSCS, but some had shortfalls in excess of the FSCS limit of £85,000 and the analysis might not be identical for them all. The court accepted that there were real practical difficulties in adopting a different approach, and that alternatives would involve more time, potentially eroding available funds. It was therefore fair and reasonable to approve the distribution plan even though it might interfere with the strict rights of some clients, as it was consistent with the objective of ensuring the return of clients assets as soon as reasonably practicable.

It also approved the holding back of a cost reserve, but not the potential litigation reserve. The litigation reserve was intended to cover the costs of potential claims against third parties to recover shortfalls. The special administrators provided no specific details of those (perhaps understandably since investigations were ongoing). Most clients would be unaffected by this because the FSCS covered their shortfall, but those with larger shortfalls potentially would be impacted and they had not been consulted about whether they wished to forego a right of recovery in return for a larger distribution now. Holding that back indefinitely was inconsistent with those clients’ rights to demand the return of their assets, which were held on trust for them. The court was not prepared to approve that element of the plan in that form.

In regards to Wealthtek LLP (in Special Administration) [2024] EWHC 2520 (Ch).

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