Insolvency practitioners and trust office-holders—Re Allanfield Property Insurance Services Ltd (in administration)

Insolvency practitioners and trust office-holders—Re Allanfield Property Insurance Services Ltd (in administration)

How should office-holders of trusts deal with the management and distribution of funds? Matthew Weaver, barrister at St Philips Chambers, considers the court’s inherent jurisdiction following the decision in Re Allanfield Property Insurance Service Ltd (in administration) and others.

Original news

Re Allanfield Property Insurance Services Ltd (in administration); Re Industrial and Commercial Property Insurance Consultants Ltd (in administration); Allanfield Property Insurance Services Ltd (in administration) ("Apis") and others v Aviva Insurance Ltd and another [2015] EWHC 3721 (Ch), [2015] All ER (D) 198 (Dec)

The Companies Court held that directions for the administration of the statutory trusts could be given on an application under paragraph 63 to Schedule B1 to the Insolvency Act 1986 (IA 1986) and, on the application of the administrators, it gave directions regarding the distribution of money in the client accounts of insurance intermediary companies which had gone into administration.

What are the key take-aways?

As with all applications by office-holders regarding trusts and how they should be managed and distributed, this case is highly fact specific. However, there were some general observations which will prove helpful to insolvency practitioners (IPs) faced with similar or analogous situations.

Applications under IA 1986, Sch B1, para 63 can cover trusts and issues in respect of trusts. The Civil Procedure Rules 1998 (CPR), SI 1998/3132, Pt 64.2 does not apply to these applications and the court’s inherent jurisdiction allows a wide range of directions to be made.

Office-holders should attempt to deal with trusts even if the lack of information creates an imperfect solution which could prejudice one or more classes of creditors. The court will look to balance all interests as fairly as possible.

There is no principle why trusts ought not to be able to trace into other trusts in cases of breach of trust and, therefore, benefit the beneficiaries of that trust. If the tracing claim is not unanswerable, joint office-holders can each adopt the position of the competing trusts, take separate legal advice on the issue, agree a compromise of any claim and then seek the court’s approval of the same. However, proportionality in respect of costs spent doing so will be an important consideration and courts may cap such costs.

The Re Berkeley Applegate jurisdiction (arising from Re Berkeley Applegate (Investment Consultants) Ltd; Harris cv Conway and others [1988] 3 All ER 71) in respect of remuneration and expenses incurred dealing with trust property was not removed by the simple existence of express rules governing the costs incurred dealing with trust property and the court was entitled to exercise that jurisdiction to allow remuneration and expenses even if the express regime did not extend to the costs in question.

How did the issues arise?

Two insurance intermediaries went into administration and the same joint administrators were appointed over both.

Both companies had client accounts which held monies paid to them by customers which had not been paid over to insurers.

Under Financial Conduct Authority (FCA) rules, the accounts were trust accounts with the sums being held for each customer and, upon administration, the sums were pooled so that each customer had a claim to the sums held. The companies had not maintained accurate records for the accounts and, as such, it was impossible to determine with any certainty for whom the sums had been held. Further, the sums in at least one of the accounts was insufficient to pay those for whom monies were being held in full.

What arguments did the administrators put forward?

This wasn’t so much a case involving legal argument advanced by the administrators (save for a couple of issues where interested parties took a contrary view to the administrators, particularly in respect of remuneration). As such, the administrators identified the issues they faced and the decisions that the court needed to make while suggesting what they considered to be the most appropriate solution to those issues. It was then for the court to decide to what extent those solutions were correct and needed any changes implemented.

What did the judge decide?

Many of the judge’s decisions were particularly fact sensitive and were dependent on the specific facts of the trusts involved and the issues faced by the joint administrators. However, the judge made the following decisions which could be said to have more general application:

  • the judge determined that while the nature of the application to was to resolve issues concerning trusts, this did not preclude an application being made under IA 1986, Sch B1, para 63 and, as a matter of procedure, did not require to be made by Part 8 Claim Form as per CPR 64.2 which did not apply to such applications
  • the judge accepted that the accounts were trust accounts holding client money. This was irrespective of the fact that the companies’ records could not necessarily identify the beneficiaries with any certainty
  • the judge determined that all customers who contributed to the trust account should be entitled to participate in the distribution of the same not just those whose contributions could be clearly identified
  • customers were entitled to participate in a distribution even where insurers had provided gratuitous insurance cover, as to do otherwise would be to allow insurers to impact upon the customers’ entitled to the funds in the accounts simply by providing gratuitous cover without the customers’ agreement or consent
  • while the situation facing the administrators and the court was imperfect due to the lack of clear information regarding the trust accounts, a distribution should still be made using as best a formula as possible to do justice to all interested parties. To decline to deal with the trust accounts in the absence of clear information would not be appropriate or proportionate
  • once claims to the sums in the trust accounts have been invited by the joint administrators (through correspondence and advertising) and received by a set date, the claims are to be adjudicated by the joint administrators with an appeal mechanism to the court being available to dissatisfied customers
  • there is no legal principle why one of the trust accounts should not be able to trace into the other trust account in instances of a breach of trust by the transferring of monies from one to the other. To the extent that such a claim can be advanced, the joint administrators were to each advance one of the trust accounts’ arguments against the other (supported by separate legal advice) with the intention of reach a settlement which the court would then consider and, it was hoped, approve. The costs of this exercise would be capped by the court
  • the FCA rules were sufficiently broadly drafted to allow the joint administrators to recover the costs of investigating the trust accounts and determining the distributions to be made (as well as the costs of simply distributing the funds) from the monies in the accounts. Had the rules not allowed this, then the court would have approved it on the basis of the Re Berkeley Applegate jurisdiction

What are the practical implications for IPs dealing with client monies on an insurance insolvency?

Dealing with monies which are arguably held on trust is always an issue which requires care by an IP. In this case, matters were complicated by two different trusts existing, holding monies for different classes of beneficiaries and having transferred monies between the trusts so as to create an arguable case for tracing from one trust into the other.

However, in all trust cases, the IP must balance the costs of investigating the trusts and the sums within the trust. There will not always be a simple way to determine trusts and how to distribute the funds therein and an application to court to resolve issues is appropriate and helpful. The fact that all of the relevant information is not available will not prevent the court from endorsing what it considers to the most appropriate way of dealing with the trust property.

Obtaining sanction for costs in advance (or, at least, as early as possible) reduces the risk of not recovering such costs from the fund after the event but is not an absolute requirement.

Matthew Weaver has developed an impressive chancery/commercial practice with a particular specialisation in insolvency. He regularly appears in the specialist courts in both Birmingham and London. While Matthew’s commercial practice is founded on significant insolvency and company law expertise, he also specialises in the areas of banking and finance law, commercial fraud and professional liability.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.