UK: England and Wales: rejecting an application to disapply the "prescribed part"

The High Court has considered the operation of Section 176A of the Insolvency Act (1986) in Re Courts plc [2008] EWHC 2339 (Ch). Section 176A was introduced by Section 252 of the Enterprise Act (2002) for the benefit of unsecured creditors. It requires the setting aside of a "prescribed part" from a company's net assets for the benefit of unsecured creditors by an administrator, liquidator or receiver.

In Re Courts plc, the joint liquidators applied for an order under Section 176A(5) to disapply selectively the application of Section 176A such that only the largest creditors would receive a share of the prescribed part. The liquidators argued that making a distribution to unsecured creditors with claims of £ 28,000 or less would be disproportionate to the benefits. They calculated that creditors would need to have claims in excess of £ 28,000 before the apportioned average claims handling cost of £ 168 would be exceeded by the likely dividend of 0.6p in the £.

The trial judge, Blackburne J., rejected the liquidators' application and provided a strong defence of the pari passu principle. His Lordship held that the Section 176A(5) power to disapply the application of Section 176A(2) operated on an "all or nothing" basis. Moreover, Blackburne J. observed that if he was wrong on this point he would not have granted the application and noted (para. [22]):

As the figures in the present application indicate, a calculation of the average cost per creditor is at best an informed guess. Yet, based on that informed guess, will be, if I make the qualified disapplication order, the point where the threshold for payment lies and whether therefore a creditor will receive anything. If the average cost per creditor should turn out to be less, the threshold for payment will be correspondingly lower and more creditors could expect to qualify for payment. Then there is the consideration that a creditor with an undisputed claim for £27,999 which it has cost the joint liquidators little or nothing to process might justifiably feel aggrieved if he gets nothing when a creditor with a claim of £28,001 which has involved the joint liquidators in much time and expense in processing, gets something. That does not strike me as at all fair. Indeed, it strikes me as altogether arbitrary".