Wealthtek LLP, Re

Under the investment bank special administration regime, the court may approve a distribution plan that departs from clients’ strict proprietary rights. The plan must nevertheless be a fair and reasonable means of returning client assets as soon as reasonably practicable.

The court may approve a practical reconciliation that produces winners and losers where strict determination of individual rights would cause disproportionate cost and delay. A proposed retention for litigation costs requires sufficient information to assess its necessity, fairness and relationship to the interests of affected clients. A reserve imposed indefinitely on clients who may not benefit from the litigation will not ordinarily satisfy the statutory objective.

WealthTek LLP was placed into investment bank special administration after substantial shortfalls were identified in client assets and client money. Its administrators sought approval of a distribution plan for approximately £148 million of client assets held for about 1,320 clients.

The administrators’ records were unreliable. Their reconciliation exercise therefore adopted practical assumptions that did not always reflect clients’ strict legal rights. The plan also included an £18.4 million costs reserve, including a proposed £7,168,218 reserve for potential litigation against third parties.

The issues were whether the court had jurisdiction to approve a plan departing from strict proprietary rights and whether the potential litigation reserve was fair and reasonable.

1. Jurisdiction and governing approach. The court held that the Investment Bank Special Administration Regulations 2011 and the Investment Bank Special Administration (England and Wales) Rules 2011 modify ordinary trust law. The court’s discretion under rule 146 is unfettered, but approval requires satisfaction that the plan is a fair and reasonable means of effecting the distribution and promotes the objective of returning client assets as soon as reasonably practicable. [2024] EWHC 2520 (Ch) [25]-[34].
2. The regime does not require every distribution plan to give effect to each client’s strict proprietary rights. It is designed to address uncertainty, shortfalls and the need for speed. A departure from those rights may therefore be approved where it is rational, causes the least practicable prejudice, avoids disproportionate cost and delay, and is fair and reasonable for clients considered as a whole. [2024] EWHC 2520 (Ch) [33]-[40].
3. The reconciliation exercise was approved. Determining the disputed issues through assumed fact patterns and representative clients would have been expensive, time-consuming and contrary to the statutory objective. The adopted approach was a fair approximation of clients’ interests in circumstances where informed individual elections were practically impossible. [2024] EWHC 2520 (Ch) [35]-[40].
4. The proposed potential litigation reserve was refused. A chose in action representing missing client assets may itself constitute a client asset, but the starting point is that it should be returned by enabling the client to pursue the claim. The administrators had provided insufficient information about the proposed claims, their necessity, or why they should be pursued at the expense of all clients. [2024] EWHC 2520 (Ch) [49]-[51].
5. The reserve was particularly objectionable because it would affect clients who might prefer an immediate enhanced distribution and might not benefit from future litigation. The court was not satisfied that the reserve was fair and reasonable or promoted Objective 1. The court approved the distribution plan except for the potential litigation reserve.