International Sections Ltd, Re Insolvency Act 1986

Under section 176A(5) of the Insolvency Act 1986, the court may disapply the prescribed-part regime only where distribution costs would be disproportionate to the benefit to unsecured creditors, and where disapplication is justified. The assessment concerns unsecured creditors as a body, not individual dividends. A small dividend alone is insufficient. Disapplication is exceptional, and the court retains a discretion even where disproportion is established.

The liquidator of a company in creditors’ voluntary liquidation applied under section 176A(5) of the Insolvency Act 1986 to disapply the requirement that part of the company’s net property be made available to unsecured creditors.

The prescribed part was £6,731.09. After estimated distribution costs, approximately £3,409.09 would remain, producing a dividend of about 1.48 pence in the pound. The central issue was whether that cost-benefit balance justified an order under section 176A(5).

1. Application refused. The court declined to disapply section 176A(2).
2. Section 176A(3) operates automatically where net property is below the prescribed minimum and the office-holder considers distribution costs disproportionate. By contrast, section 176A(5) requires a court order. The court must be satisfied both that the cost of distribution would be disproportionate to the benefit and that disapplication is appropriate.
3. The benefit must be assessed by reference to unsecured creditors as a body. Individual creditors’ likely dividends were not the proper basis for the assessment.
4. The court should not readily disapply the prescribed-part regime merely because the dividend would be small. Disapplication under section 176A(5) should be the exception rather than the rule.
5. A significant sum would remain for distribution after provision for costs. The court was not persuaded that the cost was disproportionate to the collective benefit and would not in any event have exercised its discretion to disapply the provision.
6. As a postscript, “costs” in rule 12.2(2) of the Insolvency Rules 1986 includes the liquidator’s and staff’s charges for work referable to the distribution, including identifying creditors and quantifying their debts. It is shorthand for the wider category of fees, costs, charges and other expenses in rule 12.2(1).