Wealthtek LLP (In Special Administration), Re

Administrators proposing a distribution plan affecting unrepresented trust beneficiaries owe the court full and frank disclosure of all material matters. Costs of pursuing recoveries cannot ordinarily be shifted from the company estate or the Financial Services Compensation Scheme to client assets. Under the Investment Bank Special Administration Regulations 2011, client assets may bear only costs properly incurred in achieving the objective of returning those assets as soon as reasonably practicable. A substantial reserve for speculative or future litigation is inconsistent with that objective without proper justification and court approval. Investigation costs may be recoverable where they genuinely assist reconciliation and identification of client assets. Regulatory cooperation may justify a modest payment from trust assets under the court’s supervisory jurisdiction, but unsupported or excessive reserves will not be approved.

This was a consequentials hearing following the court’s judgment of 4 October 2024, in which it approved WealthTek’s distribution plan but refused to approve a proposed £7.168 million Potential Litigation Reserve from client assets.

The joint special administrators sought directions on whether to submit a revised litigation-reserve proposal, whether declaratory relief should be granted, whether approximately £1.625 million of investigation costs could be included in the plan, whether the reserve for returning client assets should be increased, and whether future assistance to the FCA should be funded from client assets. The central issues concerned the scope of Objective 1, the effect of the FSCS’s subrogation and recovery obligations, the administrators’ duty of candour, and the proper allocation of costs.

1. The administrators and their legal advisers, as officers of the court presenting a plan affecting 1,320 unrepresented clients, owed a duty of candour requiring full and frank disclosure of all matters relevant to the court’s decision. The failure to disclose the operation and significance of COMP 7 was a serious breach of that duty.

2. Once the FSCS paid compensation and became subrogated to a client’s rights under COMP 7.3.8, the FSCS, rather than the client, had the interest in future recovery litigation. Under COMP 7.4, qualifying recoveries were to be pursued at the FSCS’s risk and expense. Funding such litigation from client assets would shift risk and upfront costs contrary to the COMP 7 scheme.

3. The Investment Bank Special Administration Regulations 2011 did not require administrators to pursue third-party claims on behalf of clients at the expense of client assets. Costs chargeable to client assets were limited to costs of achieving Objective 1: returning client assets, including choses in action representing claims, as soon as reasonably practicable. The court refused permission to put forward a further client-funded Potential Litigation Reserve.

4. The administrators were not obliged, as part of Objective 1, to incur further recovery costs unless funded. They nevertheless remained responsible for returning client assets, including choses in action, and the court declined to direct that nothing further needed to be done.

5. Costs of early investigations to establish the position of client assets and client money could in principle fall within Objective 1. The court allowed identified funds-flow and 2023 potential-claims investigation costs, but disallowed the costs of section 236 applications as litigation-related costs. The administrators’ failure to provide an adequate breakdown prevented wider apportionment.

6. The court declined relief from the consequences of the administrators’ serious blunder under section 61 of the Trustee Act 1925 and the principles discussed in Re Capitol Films. It approved a £600,000 increase in the Objective 1 costs contribution. Assistance to the FCA was not an Objective 1 cost, but £85,000 incurred and a further £85,000 reserve were fair and reasonable under the court’s inherent supervisory jurisdiction. The proposed £900,000 reserve was refused.