Wealthtek LLP, Re

The administrators applied for court approval of a distribution plan under the Investment Bank Special Administration Regulations 2011 (the IBSA Regulations) to return approximately 148m of client assets and 2.7m of client money where there were significant shortfalls and unreliable books and records. The court recognised that client assets were held on bare trust and reiterated the trustees usual duty to account and to return trust property, but held that the IBSA regime is intended to override strict proprietary rights where necessary to achieve the special administration objective in Regulation 10: to return client assets as soon as reasonably practicable.

The court concluded that it has jurisdiction to approve a distribution plan which departs from strict proprietary entitlements so long as the plan is fair and reasonable, taking into account the administrators duties, the creditors committees role and court supervision. The reconciliation exercise carried out by the administrators (with legal advice) was held to be a fair and reasonable practical basis for allocation of assets given the poor records, the need for speed and the objective of maximising return to clients generally, and the court approved the Distribution Plan on 23 July 2024 in that respect.

However, the court refused to approve a proposed Potential Litigation Reserve of 7,168,218 in the form proposed because the administrators provided no meaningful information about the contemplated claims, had not consulted affected clients, and the retention would unacceptably override individual beneficiaries rights to terminate their bare trusts and elect whether to fund litigation. The court held that, without further particularisation, consultation and safeguards, that element of the costs reserve was not fair and reasonable for the purposes of court approval.

Background and parties. WealthTek LLP was placed into special administration after an FCA intervention. Joint special administrators (BDO LLP) applied for court approval of a distribution plan for Client Assets and Client Money held for about 1,320 clients, many elderly retail investors, with substantial shortfalls in both assets and client money. The FSCS was involved and the creditors' committee (four clients and the FSCS) approved the plan.

Nature of the application. The administrators sought approval of a Distribution Plan under the IBSA Regulations and IBSA Rules that set out how to return client assets, the proposed retentions to meet administration and return costs, and a proposed Potential Litigation Reserve to fund possible claims to recover missing assets.

Issues before the court. (i) Whether the court has jurisdiction under the IBSA regime to approve a distribution plan that departs from clients' strict proprietary rights; (ii) whether the administrators' reconciliation exercise, used to determine clients' entitlements where records were unreliable, provided a fair and reasonable basis for distribution; and (iii) whether the proposed Potential Litigation Reserve could be approved in the form proposed.

Procedural posture and evidence. The application was heard on 7 June and 23 July 2024. Because the administrators initially resisted producing their legal opinion, the court directed independent counsel (Mr Matthew Weaver KC) to review the reconciliation approach. The administrators provided the joint opinion of their counsel to Mr Weaver and the court before the second hearing. The administrators relied on legal advice and Committee approval; the FSCS provided evidence of likely exposure and its interest in cost containment.

Courts reasoning. On jurisdiction the court held the IBSA regime was designed to permit departures from strict trust law to enable the speedy return of client assets and to provide certainty to recipients (including soft and hard bar date mechanisms). The IBSA Rules do not require distribution plans to conform to strict proprietary entitlements; the courts task is to determine whether any departure is fair and reasonable in light of Objective 1.

On the reconciliation exercise the court accepted that WealthTeks records were unreliable and that the administrators "robust, commercial" reconciliation, supported by legal advice and reviewed by independent counsel, was a fair and reasonable approximation of clients entitlements. Approving that approach promoted speed, avoided disproportionate costs that would reduce recoveries, and was in the interests of clients generally.

On the Potential Litigation Reserve the court found that the administrators had not particularised the contemplated claims, had not shown why litigation must be pursued by them rather than by individual beneficiaries, and had not properly consulted affected clients who would bear a disproportionate cost. The proposed open-ended retention would override beneficiaries' rights without adequate justification or safeguards, and so that element of the plan was not fair and reasonable and could not be approved in its current form.

Result. The court approved the Distribution Plan on 23 July 2024 except in relation to the Potential Litigation Reserve, which was not approved. The judgment emphasises the courts supervisory role under the IBSA regime, the need for fairness in departing from strict proprietary rights, and the requirement for particularisation, consultation and safeguards where client funds are to be retained to fund potential litigation.

This was a first-instance decision in which the court approved the Distribution Plan on 23 July 2024 except for the proposed Potential Litigation Reserve. Rationale: the IBSA regime permits departure from strict proprietary rights where necessary to achieve Regulation 10 Objective 1, and the administrators' reconciliation exercise — reviewed by independent counsel — provided a fair and reasonable practical basis for distribution given unreliable records, the need for speed and cost considerations; but the proposed 7,168,218 Potential Litigation Reserve was not approved because the administrators failed to particularise the contemplated claims, had not consulted affected clients, and the proposed indefinite retention would improperly override beneficiaries' rights without adequate justification or safeguards.