Thursday, June 13, 2013

Is the prescribed part really ring-fenced?

Every now and again we have to ask a question, fearing that we would rather not know the answer. Such an issue has arisen over the prescribed part. Rather than quote all of the statutory references, we will start by assuming that any reader of our occasionally turgid technical musings is familiar with the requirement to ring-fence some of the realisations that would otherwise be payable to the holder of a floating charge for distribution to unsecured creditors.  

It is now pretty well accepted that the office holder’s costs to date come out of the money first to arrive at the “net property” that would be available to a secured creditor, but for the operation of the prescribed part. The prescribed part can then be calculated and the office holder starts the process of agreeing claims and distributing the prescribed part, the costs of which come out of the prescribed part itself. In a simple example, therefore, you might have £100,000 in realisations, £50,000 in time costs to date and therefore £50,000 in net property. Ignoring those pesky preferential creditors who mess up the maths, you are required to set aside a prescribed part of 50% of the first £10,000 and 20% of the other £40,000 giving a prescribed part of £13,000. Because the costs of admitting claims and paying the prescribed part come out of the ring-fenced funds, it should therefore be possible to pay the secured creditor their £27,000 straight away.

But what happens if you “flip” into CVL? You will incur additional general costs that you may not be entitled to out of the prescribed part money. Even if you have not yet paid the secured creditor their money, is it acceptable to take more fees out of the pot and re-calculate the prescribed part? In an extreme case you might legitimately enter CVL believing a prescribed part distribution to be likely and then find that the costs of the CVL have such an impact that there is no longer any chance of the unsecured creditors receiving a distribution. Indeed, using the numbers in our example, that is probably the most likely outcome.

One possible solution, which might not improve your chances of getting on a bank panel any time soon, would be to sit on the money and flip out to CVL before paying anything to the chargeholder. That way, you do the prescribed part calculation at the last minute in the CVL and all of your general costs come out first, reducing the net property and prescribed part accordingly.  

A potentially fairer approach, but one which has no real foundation in law, is to do the calculation in the administration and pay the secured creditor part of the money, keeping some of the net property and the whole prescribed part on one side for creditors until more is known in the CVL, negotiating a final position with the secured creditor. That way, the unsecured creditors get the expected prescribed part and the secured creditor shares some of the risk, and pain, accepting a lower share agreed by negotiation with the liquidator, who is unlikely to recover all of his costs.  

The other possibility, which appears harsh on the unsecured creditors, is to say that the prescribed part calculation in the administration is not binding on the CVL liquidator at all, even if it is the same person, such that the liquidator’s general costs can be deducted from the balance received from the administration, even though it was originally nominally ring-fenced for the prescribed part. If the liquidator is a different person then realistically this is the only option unless the liquidator is prepared to take on the job for no remuneration.

We think that the only safe solutions are to either apply to Court and make the distribution in the administration, or to leave the calculation until the last minute and make the secured creditor wait until you are ready to make the final calculation in the CVL. As we said though, there may be another answer that we would rather not hear.