The recent reported case of Re Hydroserve [2007] All ER (D) 184 (Jun) mirrors closely our own (earlier) experiences of s.176A before the courts. Members of the IBR team in Southampton have successfully obtained such orders without the need for a hearing but the existence of a reported decision will assist in future when persuading the court to disapply the prescribed part.

relevant facts

In Re Hydroserve, there were 122 unsecured creditors and a prescribed part of £5,000 before costs, estimated at £2,000 after costs. The application to disapply the prescribed part was – perhaps unsurprisingly on these figures – successful. It seems to us that the distinguishing factor in this case that prevented the court from dealing with this application on paper is that it was combined with an application to extend the administration order. Whilst either application alone could have been granted on paper, together they merited representation.

Our own cases, which have arisen in similar circumstances, include the following examples where orders have been granted:

75 unsecured creditors with an estimated combined claim of £785,208.11 and a prescribed part of approximately £9,552.85. After estimated costs of £5,000 plus VAT for declaring and paying the dividend, but for the disapplication of the prescribed part the dividend would have been, at best, 0.5pence in the pound
100 unsecured creditors with an estimated combined claim of £230,000 and prescribed part funds of approximately £12,121. This would have resulted in a dividend of 5 pence in the pound. After approximately £6,000 costs of agreeing and paying such claims the dividend would fall to an estimated 2.5 pence in the pound. However, the single largest unsecured creditor would have received no more than £1,000

Neither of these examples took into account an estimated contingency of £2,000 for dealing with the more problematic claims in each case, which would potentially have reduced the final dividend even further.

Incidentally, we have also seen a number of cases where we have successfully obtained administration extensions as a paper exercise. As a rule of thumb, we have found that the more detailed the administrators’ report and evidence and the earlier we can submit the application, the more likely the court will consent to deal with these applications without a hearing.

implications for insolvency practitioners

It seems to us that the size of creditor pool and the likely size of any dividend to unsecured creditors (both in percentage and absolute terms) will be the factors requiring the most consideration before it can be shown that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits (s176A(5)).

Currently, the court has not adopted any formal guidelines as to the figures that they would consider to be acceptable, and every case will therefore fall to be considered on its own merits. However, being able to draw upon the figures in Re Hydroserve (albeit this was a fairly extreme and obvious example of where the prescribed part should be disapplied) will undoubtedly prove helpful when applying without notice.

From our own experience and the decision in Re Hydroserve it appears that, provided always the position is fully explained in the filed evidence, the course of action seems sensible in view of disproportionate costs of a distribution and the application is made in timely fashion, the courts will be persuaded to deal with such applications on paper.

If you have conflicting experiences of s.176A and/or you would like more information on this topic, please contact Mike Pavitt or Rachel Dannan of Blake Lapthorn’ Insolvency and Business Recovery team.