Wealthtek LLP, Re
[2024] EWHC 2520 (Ch)
Wealthtek LLP (In Special Administration), Re
28 November 2024
[2024] EWHC 3050 (Ch)
High Court
A bank went bust, owing money to its customers. The people in charge tried to set aside money to sue others to get the money back, but the judge said no, because there's already a system to do this, and they didn't tell the judge about it. The judge is annoyed they didn't tell the truth and fixed the plan to make sure customers got their money back fairly.
Key Facts
- •WealthTek LLP (an investment bank) entered special administration with significant shortfalls in client assets (£70.6m in stocks/shares and £10m in cash).
- •Joint special administrators (BDO LLP) proposed a distribution plan for approximately £148m of client assets, including a £7.17m 'Potential Litigation Reserve' for recovering shortfalls from third parties.
- •The Financial Conduct Authority (FCA) is conducting a regulatory and criminal investigation.
- •The Financial Services Compensation Scheme (FSCS) expects to compensate most clients up to £85,000, but some will still face losses.
- •The IBSA Regulations set three special administration objectives, with Objective 1 being the return of client assets.
- •The court initially rejected the distribution plan due to concerns about the Litigation Reserve and lack of client consultation.
Legal Principles
Special administrators have a duty of candour to the court and must make full and frank disclosure.
Indah Kiat International Finance Company BV [2016] EWHC 246 (Ch)
IBSA Regulations prioritize returning client assets as soon as reasonably practicable (Objective 1). Costs for this objective are payable from client assets; other costs from company assets.
Investment Bank Special Administration Regulations 2011
The FSCS, upon compensating clients, is subrogated to their rights of recovery against WealthTek and third parties, and is obligated to pursue cost-effective recoveries.
COMP 7 (FCA Handbook)
A court may relieve a trustee from liability for breach of trust if they acted honestly and reasonably (s. 61 Trustee Act 1925).
s. 61 Trustee Act 1925
Depriving an officeholder of recoupment of expenses requires misconduct, serious mistakes, or injustice (Re Capitol Films [2010] EWHC 3223 (Ch)).
Re Capitol Films [2010] EWHC 3223 (Ch)
Outcomes
Rejected the proposed Potential Litigation Reserve.
The reserve unfairly shifted litigation risk and costs from the FSCS to clients, contradicting the COMP 7 recovery scheme and the IBSA Regulations. Insufficient client consultation.
Administrators are not obligated to pursue recoveries unless funded externally (e.g., by FSCS).
Align with the court's rejection of the Litigation Reserve and the FSCS's subrogation to client rights.
Rejected the request for a direction that administrators have nothing further to do regarding asset return.
Contradicts the administrators' duty to return assets. Only 5 clients remain unaffected by FSCS subrogation.
Disallowed the majority of incurred investigation costs (£1,625,460.08).
Insufficient detail provided on cost breakdown and allocation between Objective 1 and potential litigation. Failure to consult FSCS before incurring these costs.
Approved an increase of £600,000 to the costs of returning client assets.
Justified by unforeseen complexities and extended timelines.
Approved £85,000 for past and future costs of assisting the FCA, rejecting a larger request.
Cooperation with the FCA is in the public interest but these aren't Objective 1 costs and should not be borne by client assets.
Administrators' actions constituted a breach of duty to the court.
Failure to disclose material information about the FSCS subrogation and recovery scheme impacted the court's decision on the Litigation Reserve.
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