Distribution of surplus assets in a creditors’ voluntary liquidation

In a precedent-setting judgment, the High Court gave directions regarding the distribution of a surplus remaining in a company’s liquidation to its members where the usual operation of section 107 of the Insolvency Act 1986 (the “IA 86”) would result in issues of proportionality and fairness. Eversheds Sutherland acted for Mr Scott Christian Bevan and Mr Simon David Chandler of Mazars LLP, the joint liquidators of Torotrak plc (the “Liquidators”).

The Surplus

Torotrak plc (the “Company”) first entered into administration which was subsequently converted to a creditors’ voluntary liquidation. After all of the Company’s creditors were paid in full, there remained a surplus of £304,859.20 (before costs and expenses) (the “Surplus”) in the liquidation.

Pursuant to section 107 IA 86, the Surplus was to be distributed among the Company’s members in proportions equal to the number of shares held by them. However, following this provision would result in issues of practicality, proportionality and fairness: the Company was a listed company with some 8,759 members, the vast majority of which were individuals from various jurisdictions across the globe, and the Liquidators could not be certain that they had accurate information regarding the shares held by those members or the contact details needed to effect the distribution. There was therefore a real risk that the costs involved with the distribution would significantly diminish, if not exhaust, the Surplus. In addition, the Liquidators’ fees had been capped.

The Liquidators applied to the Court for directions under section 112 IA 86 as to how they should distribute the Surplus and for approval of the associated fees in effecting that distribution above the cap pursuant to rules 18.24 and 18.28 of the Insolvency (England and Wales) Rules 2016.

The Way Forward

HHJ Hodge KC recognised that whilst it was not open to the Court to effectively seek to readjust the individual shareholders’ rights by limiting the number of members to whom a distribution should be made, the Court should not be blind to seeking to adopt a cost-effective and pragmatic approach to the distribution of surplus assets. The appropriate solution was as follows:

1. The Liquidators should write to the known members at their last-known addresses, inviting claims to be made within an appropriate period of time, and making it clear that no such claims would be considered after the cut-off date. The letter should also make clear the limited amount that is likely to be payable and what form of evidence is required from the members regarding their shares;
2. A single advertisement should be placed in the London Gazette (containing a similar cut-off date and information as the letter); and
3. Notice of the proposed distribution should be given via the online insolvency portal maintained by the Liquidators.

As the steps outlined above were likely to involve the Liquidators incurring costs and expenses in excess of those on which the cap was based, the Court directed that their remuneration for any additional work to distribute the Surplus should be increased from the capped fee and be on a time-costs basis (subject to certain caveats).

Pursuant to section 1157 of the Companies Act 2006, the Liquidators were also given prospective relief from any liability in distributing the Surplus in accordance with the Court’s directions, which would be deemed a good and sufficient receipt for the Liquidators.

Conclusions

Whilst it is unusual for insolvency practitioners to be faced with a surplus in a company’s liquidation, the statutory insolvency regime provides for how a company’s assets should be distributed to its members in such a scenario. However, where this approach causes issues of practicality and fairness to the economic detriment of a company’s members (as it did in this case), the Court retains a discretion to provide a more workable solution for all concerned.

How Eversheds Sutherland can assist

Should you require advice on any aspects of liquidations, or any other restructuring and insolvency matters, Eversheds Sutherland can leverage its market-leading strength and depth of experience in these areas to assist.

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