No distribution of the ring-fenced fund in an administration. 1

Not a novel point or an unexpected result, but Hydroserve is the first known case of the court disapplying the ring-fenced fund provisions in section 176A(2) of the Insolvency Act.

Section 176A(3) says that the requirement in sub-section (2) to make the ring-fenced fund available for unsecured creditors will not apply if the liquidator or administrator thinks the cost of making a distribution to unsecured creditors would be disproportionate to the benefits. Section 176A(2) may also be disapplied if the administrator applies to court on the grounds that the cost of making a distribution would be disproportionate to the benefits and the court so orders.

In this case the company had gone into administration, owing about £3.5 million to 126 unsecured creditors, and having given a floating charge to its bank. A major part of the £3.5 million was owed to the four group creditors. The ring-fenced fund would have amounted to some £35-40,000, but the share of this which would have been available for the 122 non-group creditors would have been only about £5,000 before costs, and a mere £2,000 or so after the costs of agreeing their claims. The group creditors were prepared to forego their share of the ring-fenced fund provided that it was paid to the bank, which had the benefit of group guarantees. The company argued that the cost of agreeing the claims of the 122 non-group creditors, and making a distribution to them, would be disproportionate to the benefits.

The court agreed and made an order disapplying section 176(A)(2).

Case: Re Hydroserve Ltd [2007] All ER (D) 184 (Jun) Chancery Division Rimer J 19 June 2007