Liquidator as trustee of recovered funds (Re Total Debt Relief Ltd (in liquidation))

Liquidator as trustee of recovered funds (Re Total Debt Relief Ltd (in liquidation))  

Frances Coulson, senior partner and head of Litigation & Insolvency at Moon Beever, points out that there are many cases where insolvency office-holders are becoming trustees of funds, but there has been limited guidance until now of how the costs of administering the fund are to be assessed.

Re Total Debt Relief Ltd (in liquidation) [2019] EWHC 2018 (Ch)

What are the practical implications of this decision?

In this case, the court determined that the liquidator of Total Debt Relief Limited (TDR) held recovered client monies of TDR as trustee. There are many cases where insolvency office-holders are becoming trustees of funds, but there has been limited guidance until now of how the costs of administering the fund are to be assessed.

The court assessed the costs of the liquidator dealing with the insolvency of TDR, a regulated firm, and approved a distribution plan in respect of client monies. The liquidator’s costs and legal costs were approved as drawn, the court considering that value had been provided to the full sum claimed and could be paid as an interim distribution from client funds.

In doing so, the court recognised the often-significant cost of complex actions to recover misappropriated funds, and that it was appropriate to enter into conditional fee agreements with solicitors and counsel. This is of comfort to those insolvency professionals who take substantial risk to seek redress from wrongdoers and deprive them of the fruits of their misfeasance.

What was the background?

The company was incorporated in 2009 as Happy Estates Ltd and filed dormant accounts. In February 2014, two American citizens, Lawrence Kopolov and Eric Puzaizter, became secretary/shareholder and director, respectively. The company changed its name to Total Debt Relief Ltd and then carried on a regulated business, advising clients on managing their debt.

One of the methods was a form of debt management plan between the company and the client—the client making a monthly payment to TDR and TDR then paying an amount to the client’s creditors, with the accumulating balance being paid into a pool of payments so that, as TDR represented to clients, a full and final settlement could be negotiated with their creditors. Following interest by the Financial Conduct Authority (FCA), and despite assurances by the officers of the company to the FCA, the FCA discovered that the client pool money had been misappropriated and transferred from the jurisdiction into the accounts of connected companies in New York. The FCA successfully applied for the appointment of Stephen Hunt of Griffins as provisional liquidator of TDR on 11 September 2018, and on 12 September 2018, Mr Hunt, acting by his solicitors Moon Beever and counsel, Daniel Lewis of 3 Hare Court, issued an application pursuant to section 234 of the Insolvency Act 1986 for repayment of the funds, and sought a worldwide freezing order against the officers and associated companies. He also filed for Chapter 15 of the Bankruptcy Code in New York. Following the liquidation of TDR on 31 October 2018, Mr Hunt was appointed liquidator. The bulk of the misappropriated funds were repatriated and recovered.

Because TDR was a regulated debt management company, the FCA’s Client Asset Rules (CASS) applied—in particular those in CASS 11 (debt management client money chapter). The appointment of the applicant was a ‘failure of a CASS debt management firm’ and was therefore a ‘primary pooling event’ under CASS 11.13.3 R (1). The effect of that was that all the recovered funds—being client money—were pooled together to form a notional pool, and the liquidator had to calculate the amount that it should be holding on behalf of each individual client—CASS 11.13.4 R (2). The firm must distribute client money comprising the notional pool so that each client receives a sum that is rateable to their entitlement to the notional pool calculated in CASS 11.13.4 R (2).

The liquidator sought an order:

  • approving a distribution plan, having at this stage recovered some but not all the clients’ funds, so that he could make an interim distribution of those recovered funds, and  
  • approving the remuneration, costs and expenses in respect of the work undertaken in effecting that recovery

On the failure of a CASS debt management firm, CASS rules provide for the payment of the costs properly attributable to the distribution of the client money to be paid.

What did the court decide?

His Honour Judge Monty QC (sitting as a High Court judge) considered that the court has an inherent jurisdiction to give directions to trustees to distribute trust property on particular bases when the court is satisfied it is just and expedient to do so—MF Global UK Ltd (in special administration) (No 3) [2013] 1 WLR 3874 per Richards J at para [26]. Further, that this extended to distribution notwithstanding the existence of claims or potential claims of third parties, and noting that the clients had been notified in broad terms of the intention, did not consider they needed to be served per se. The FCA had been served as an interested party but made no representations, nor was it represented though it provided no comment.

The court in respect of this application was following the order of 26 September 2018, when Birss J made an order that the applicant be entitled to be paid out of the recovered funds the remuneration, costs and expenses incurred for the purpose of enabling a distribution to be made to the company’s customers and the costs of making such a distribution, in accordance with CASS 11.6.1 R(2)—subject to the court’s approval as to the amount of remuneration, costs and expenses, Birss J also set out provisions for reviewing the liquidator’s accounts.

HHJ Monty QC agreed the liquidator’s proposed distribution plan in similar form to that in the MF Global case, ie that a bar date be set by the liquidator for filing of claims and an appeals procedure for rejected claims, and that, post the bar date, the liquidator can pay the approved costs and make an interim distribution with provision for a further distribution from further recoveries.

The judge also approved the liquidator’s costs (and his costs as provisional liquidator and his legal costs) as drawn. In doing so he considered the decision of the Court of Appeal in Brook v Reed – Practice Note [2012] 1 WLR 419 which set out the principles to be applied by the court when fixing or approving the remuneration of a trustee in bankruptcy—and which reviewed a number of cases as well as the Insolvency Rules 1986, SI 1986/1925 and the Practice Statement on the fixing and approval of the remuneration of appointees—largely that it is a question of value provided rather than time spent. He also considered the similar principles in the Part 6 of the Practice Direction on Insolvency Proceedings (PDIP), including proportionality. The liquidator had here provided sufficient detail and sufficient value to justify his costs.

What impact will this decision have on insolvency proceedings involving financial firms?

This was the first time that the court had considered the basis of assessment of the fees of a liquidator and their legal representatives when there had been an appointment by the FCA to preserve, recover and distribute client money on the insolvency of a regulated firm. This case related to a debt management firm, but the reasoning would apply to the insolvency of any firm subject to the Client Assets Sourcebook in the FCA Handbook, which sets out provisions required by the FCA relating to the safeguarding of client assets from investment business in the hands of financial firms. There are many cases now where liquidators and administrators will be effective trustees.

Frances Coulson is a regular speaker in the UK and abroad on debt, insolvency and practice management. She chairs the R3 Fraud Group, is a member of the Councils of R3 and of InsolEurope and a member of the Restructuring & Insolvency consulting editorial board. In Re Total Debt Relief Ltd, Frances Coulson and Ian Rees (an associate with the firm) represented the applicant, instructing Daniel Lewis of 3 Hare Court Chambers.

Interviewed by Kate Beaumont.

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

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About the author:

Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.