Wealthtek LLP (In Special Administration), Re
[2024] EWHC 3050 (Ch)
Wealthtek LLP, Re
4 October 2024
[2024] EWHC 2520 (Ch)
High Court
A bank went bankrupt, and its administrators proposed a plan to return client money. Because the bank's records were messy, the plan wasn't perfectly fair to everyone. The judge said it was okay to use this imperfect plan because speed was essential. But the judge rejected a plan to hold back money for potential lawsuits because it was unfair to some clients who were already losing money.
Key Facts
- •WealthTek LLP, an investment bank, was placed in special administration due to suspected criminal activity and regulatory breaches.
- •Significant shortfalls were found in client assets (£70.6m) and client money (£10m).
- •Joint special administrators applied for court approval of a distribution plan for approximately £148m of client assets.
- •The distribution plan proposes a retention of £18.4m for costs, including a £7.17m potential litigation reserve.
- •98% of clients are individual retail clients, many of whom lost life savings.
- •The Financial Services Compensation Scheme (FSCS) is expected to cover most shortfalls, but some clients will still face significant losses.
- •The distribution plan's reconciliation exercise deviates from clients' strict legal rights due to the unreliability of WealthTek's records.
- •The court reviewed the reconciliation exercise and the jurisdiction to approve a plan not fully conforming to clients' rights.
Legal Principles
Client assets held by an investment bank are held on bare trust for each client.
Trust Law
The IBSA Regulations override trust law to facilitate the swift return of client assets.
Investment Bank Special Administration Regulations 2011
The court has jurisdiction to approve a distribution plan that does not fully conform to clients' strict rights if it's fair and reasonable and promotes the objective of returning client assets as soon as reasonably practicable.
IBSA Regulations and Rules, Case law (Re SVS)
In a bare trust, the trustee has a duty to return the trust fund upon demand unless there are competing claims or other complications.
Trust Law
Outcomes
The court approved the distribution plan (except for the potential litigation reserve).
The plan, while deviating from strict client rights due to practical difficulties with the reconciliation exercise, was deemed a fair and reasonable means of achieving the objective of returning assets quickly. The court found it had jurisdiction to approve such a plan under the IBSA Regulations.
The court rejected the proposed potential litigation reserve in its current form.
The court found insufficient information provided on the potential litigation and lack of client consultation beyond the committee regarding the use of the reserve, particularly affecting 21% of clients with larger shortfalls. The court stated it was not fair or reasonable to impose a reserve on clients against their wishes without sufficient justification.
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