Wealthtek LLP (In Special Administration), Re

I will make clear that the Administrators are under no obligation as part of achieving Objective 1 to take any further steps in relation to making recoveries unless they are placed in funds to do so. If the FSCS wishes the Administrators to bring claims it will have to fund them.

At paragraph 49 of the Judgment I said:

“The starting point must be that the return of the chose in action “as soon as is reasonably practicable” is to take the steps necessary to empower the client to bring a claim in the client’s own name against the third parties. This may not require any action by the Administrators - in a bare trust the beneficial owner of the trust fund will have a concurrent right with the trustee to bring certain types of claim in relation to the trust property, joining the trustee as defendant if necessary to make good the beneficiary’s title.” (emphasis added)

On the basis of what I said in paragraph 49, the Administrators ask for a direction that they have nothing further to do in respect of returning the assets. They say an express assignment “would clearly be costly, time-consuming and potentially unnecessary given what was said in the Judgment”.

This is not a direction which flows from the judgment. It is contrary to it. The Administrators have a duty to return the assets, including the choses in action representing claims, to the person entitled to them. I am in no position to decide whether anything further needs to be done to give effect to that, and I did not say otherwise in paragraph 49 as the emphasised words make clear. The Administrators have chosen not to put any information about their investigations, the claims they were considering, by whom, against whom, on behalf of whom or what for, before the court. I simply do not know what needs to be done and I will not, therefore direct that nothing needs to be done.

Any judicial sympathy for the Administrators on the application for this direction evaporated when it became clear that there are only 5 clients who are affected because the FSCS has subrogated to the rights of all other clients. Mr Fletcher readily accepted that the FSCS automatic subrogation under COMP7.3.8(4) suggests that nothing further needs to be done on behalf of any clients in respect of which the FSCS has subrogated. Which leaves just 5 clients out of 1320. I do not consider that an express assignment in respect of 5 clients should (if handled with a modicum of common sense) be costly or time-consuming, or justified the application for this direction. It is for the Administrators (who have the benefit of advice from Norton Rose Fulbright and specialist counsel) to decide if it is unnecessary.

The Administrators have incurred costs of £1,625,460.08 certain investigations-related work (“Incurred Investigations Costs”). They ask whether these costs should “should continue to be included within the costs contribution to be paid as part of the Distribution plan, in full or in part”; see the NRF letter. I directed that in relation to this issue “the evidence will need to identify, quantify and explain the investigations and recovery related costs in respect of which the Joint Administrators want clarification”; my clerk’s email of 6 November 2024.

This sum of £1,625,460.08 was included in the Potential Litigation Reserve (I was told at the hearing - it is not in the evidence) – it is not included in the c. £11 million costs for the return of assets under the control of the Administrators (“the Objective 1 costs”). As such it has been disallowed pursuant to the 4 October judgment and is not part of the costs which may be paid from client assets pursuant to the Distribution Plan. It is not “included within the costs contribution to be paid as part of the Distribution Plan”. It is not a question of confirming that these costs may remain in the costs contribution which was approved. It is a question of whether these costs should now be added to the costs contribution which was approved in the Distribution Plan. That is the starting point.

Mr Crooks’ ninth witness statement was filed in purported compliance with my direction to “identify, quantify and explain” the costs which I was being asked to approve “in full or in part”. It states the amount of costs incurred in relation to potential litigation amounts to £1,625,460.08 and it breaks down the periods in which costs were incurred (essentially into pre and post 6 April 2024). Mr Crooks said that all these costs were allocated to a future recoveries workstream but that this was indicative only and an approximation. He said that different categories of costs tend to overlap and “bleed into” into each other. He said that some of this work, although carried out with future litigation in mind, was necessary for the purposes of the return of assets.

No schedules of work done were provided. No breakdown of what specific workstreams make up the £1,625,460.08 or how much is attributed to each workstream. There is more specific information in a costs schedule for summary assessment of costs in the sum of £50,000 than there is this witness statement seeking approval of £1,625,460.08. I do not consider this witness statement complied with my direction. As I said at the consequentials hearing to Mr Fletcher this appeared to be a deliberate tactical decision not to provide a detailed breakdown. Although the NRF letter envisaged that I might not allow all the costs, but only part, the decision to simply state a headline figure inferred an all or nothing strategy. That is not consistent with the Administrators’ duty to put all relevant material before the court in respect of a decision it is asked to make. It is also a high risk strategy. Paragraph 48 of Mr Crooks’ ninth witness statement said that details of the nature of the enquiries and investigations were not being disclosed for reasons of confidentiality and so as not to prejudice potential litigation against third parties. A breakdown of costs could have been worded in a way which did not disclose any confidential information and in any event the Court has a range of powers including reporting restrictions and sitting in private which could have been deployed to protect confidentiality if there was anything truly confidential. No request was made for such orders.

I accept that in principle special administrators should make investigations when they are appointed, to work out what client assets there are, what client assets should be there, and what has become of them. They can do some work which identifies whether there are claims to be made on behalf of clients, against whom and by whom, and how such claims should be funded (such claims as I have said are capable of being Client Assets within Objective 1 which need to be returned). The costs of such work are in principle costs incurred in pursuing Objective 1 and can properly be paid from Client Assets. In light of the 4 October judgment and this judgment special administrators should not assume that they will be authorised to bring proceedings at the expense of clients. This is particularly so if it is likely that there will be substantial subrogation of rights to the FSCS. In a case where the FSCS is likely to subrogate to the rights of a substantial number of clients, the FSCS ought to be approached to agree that it will bear the costs properly categorised as costs incurred in relation to recoveries. The products of their inquiries and investigations ought to be passed on to the clients or the FSCS if it has subrogated to the rights of the clients, unless there is a very good reason not to.

In this case these steps have not happened but I would have been minded to apportion costs between costs relating to the return of assets and claims related costs before considering whether relief should be granted to the Administrators in respect of the costs which ought not to have been incurred. Also, the FSCS has supported the work and costs incurred by the Administrators and, it might consider it appropriate to pay the claim related costs if it chooses to fund the Administrators to bring proceedings for recoveries pursuant to its COMP 7 obligations.

The failure to provide a detailed breakdown, or indeed any breakdown, meant that I could not make a summary apportionment. When it became clear that I was not minded to approve the headline figure of £1,625,460.08 expenditure, Mr Fletcher said that a breakdown could be provided in short order (all considerations of confidentiality apparently having disappeared). This was followed up after the hearing with an email from Norton Rose Fulbright offering to provide a further breakdown (no mention being made of any need for confidentiality) and that the costs of that exercise would not be charged to the client estate or the company estate. I came very close to refusing to accept any further evidence. The consequentials hearing was the hearing to deal with the issue of what if any part of the Incurred Investigations Costs were to be included in the Distribution Plan. The Administrators were expected to make full and frank disclosure when they presented the issue to the Court, not test the water on their most self-serving case. Nevertheless, and some may say with too much leniency, I allowed Mr Crooks to file his tenth witness statement which runs to some 21 pages and provides a more detailed breakdown. That witness statement states, at my request, that the Administrators, and all who act for them, are aware of their duty to be entirely candid and make full and frank disclosure to the Court. I observe that there is nothing confidential in the contents of the tenth witness statement.

The FSCS letter says that the FSCS were not aware that the Incurred Investigations Costs amounted to £1.625 million, although Mr Crooks says this must be read in light of the fact that some of these costs have been approved by the Committee.

Mr Crooks’ tenth witness statement set out a breakdown of the costs incurred in a table.

The first category of costs sought to be recategorized as Objective 1 costs are the costs attributable to a “funds flow” analysis which was carried out. Although this will prove valuable and useful to those bringing future litigation the Administrators say, and I accept, that this was necessary to conduct the Client Asset reconciliation exercise which is part of the Objective 1 costs. I will include the identified costs under this head in the Distribution Plan.

The largest category of costs (£605,966.66 plus VAT) relate to applications under section 236 Insolvency Act to obtain bank statements from three bank accounts which had received funds from WealthTek accounts (“the s. 236 applications”). Orders were made by ICC Judge Greenwood on 1 July 2024 and bank statements were received on 5, 11 and 17 July 2024. The costs of those applications were ordered to be paid as an expense of the special administration by ICC Judge Greenwood. I observe that the orders do not direct that those costs should be paid from client assets rather than company assets and leaves the incidence of those costs as between the client estate and the house estate at large.

The Administrators say that this work is (in hindsight) mixed Objective 1 costs and future litigation costs. They say it helped verify the funds flow analysis by “joining the dots” but was also advancing potential future litigation by following where the missing assets and money had gone. They propose that such costs should be recoverable up to 23 July 2024 (when the Court raised concerns in relation to the costs of potential litigation-related work), on the basis that, up to that point, the Joint Administrators had pursued this strategy in good faith, in the belief that it was in the interests of clients and that these were properly recoverable costs. The costs thereafter they propose should not be recoverable – this is roughly one third of the costs incurred under this head.

The justification for the proposed apportionment seems to me to be based on the submission that that the Court should be slow to deprive an officeholder of a right to recoup expenses incurred in the conduct of the insolvency process. I deal with that submission later in the judgment. It does not help with an apportionment of how much should properly be regarded as Objective 1 costs before addressing that submission in relation to the rest.

I am not satisfied that any of these costs are properly attributable to Objective 1 costs. The funds flow analysis was largely done and dusted by April 2024. The Distribution Plan had been prepared, and I had already held the first hearing seeking its approval on 7 June 2024, before ICC Judge Greenwood made his order on 1 July 2024, and before the bank statements were received later that month. The costs incurred in relation to the funds flow analysis in “joining the dots” or otherwise after the bank statements were received appears from the table to be minimal. These points on timing are not considered or explained in Mr Crooks’ tenth witness statement, notwithstanding the duty to be candid. The time has come to draw a line under the issue of the Incurred Investigation Costs. I will treat all the costs of the section 236 applications as costs relating to potential litigation and not Objective 1 costs.

The Administrators identify £85,687.96 as costs of assisting the FCA. I deal with those costs later as part of the bigger question of how costs of assisting FCA investigations should be borne.

The Administrators say the work done in identifying potential claims has been limited, preliminary and high-level in nature, and that much of it was incurred around the time of the first clients’ and creditors’ meetings in June 2023. It mainly consisted of correspondence with individuals who wanted to provide the Administrators with information relevant to what claims might lie and against whom. It was then substantially revisited in March 2024. The Administrators propose that these costs should not be included, but it seems to me the initial work, immediately upon taking up their appointment, to work out how the land lay in relation to Client Assets and Client Money, falls within the investigations I described in paragraph 35 above. I will allow the costs incurred in 2023, which I am told are £79,179.99, under this head.

This relates to the Administrators’ statutory reporting on the conduct of WeathTek’s officers and represents an apportionment between the client and house estates. The Administrators acknowledge that these are not Objective 1 costs.

That leaves Mr Fletcher’s submission that the Court should not act to deprive an officeholder of a right to recoup expenses incurred in the conduct of the insolvency process. He relies on Re Capitol Films [2010] EWHC 3223 (Ch) where Richard Snowden QC (sitting as a Deputy High Court judge) considered at [101] that depriving an officeholder of a right of recoupment (in the context of litigation pursued by them as officeholders) included: “cases in which the office-holder has been guilty of misconduct…; where he has made a “blunder” or serious mistake…; or where it would be unjust for other reasons to permit such recoupment…”

The Administrators are officeholders in relation to WealthTek. As such, the Court has the jurisdiction over them envisaged in Re Capitol Films. They have not been deprived of recoupment from WealthTek’s assets. It is just that WealthTek no longer has any assets. This is why they wish to take fees out of Client Assets which WealthTek does not own, but holds on trust. Their only authority to do so is to be found in the IBSA Regulations that the costs of returning Client Assets in accordance with Objective 1 are costs which are to be borne by the Client Assets. All other costs of the administration are to be borne from WealthTek’s assets. If the determination is that these costs are not costs of Objective 1 then what is the jurisdiction the Court is exercising to impose “other” costs on these third party clients? If there is any jurisdiction I suspect it lies in s. 61 of the Trustee Act 1925 which allows a court to relieve a trustee from personal liability for a breach of trust (which could include payment of remuneration and expenses out of trust assets which should not have been so paid) if the trustee has acted “honestly and reasonably and ought fairly to be excused”. WealthTek is the trustee but it acts through the Administrators and I think any further distinction is overtechnical; see also In re Berkeley Applegate Ltd [1989] Ch 32 at 52D-F. Mr Fletcher says the principles are much the same whether it is section 61 or the principles in Re Capitol Hill and I agree.

One of the things that has gone wrong here is that the Administrators have assumed that they are entitled to bring litigation to make recoveries, funded from client assets, if they so decide and without requiring the consent of clients or the court. Mr Fletcher says the Administrators were acting reasonably in believing they were so entitled until the 4 October judgment was handed down saying that this was wrong. I do not agree. There seems to have been a failure from the outset to appreciate the difference between being appointed an administrator of a trustee to administer trust property and being appointed an administrator of an insolvent company to deal with the company’s assets. The IBSA Regulations provide a limited role for the Administrators in relation to Client Assets and a limited right to take costs from the trust fund. They make no express provision for litigation to be brought by special administrators. A long term retention is contrary to Objective 1. I find it hard to understand how or why this did not ring alarm bells amongst the Administrators and their legal team. The justification advanced by the Administrators for believing they were entitled to bring litigation funded from client assets is based on the definition of Client Assets to be returned to clients in Regulation 10B as assets which WealthTek had “undertaken” to hold for clients, the argument being that this definition therefore placed the Administrators under an obligation to find and return assets which should have been there but were not. That construction of Regulation 10B is not an obvious one, (and even less obvious if the COMP 7.4 duty on the FSCS had been taken into account) and is a very slim basis for forming the view that the Administrators were entitled to bring litigation funded from client assets. When the Distribution Plan was put before the Court, the Administrators nevertheless did not raise this question of construction, did not ask the Court to confirm their understanding of Regulation 10B and they did not ask for the Court’s blessing of their decision to pursue litigation at the cost of Client Assets. The Administrators and their legal team are expert specialists who charge accordingly. It seems to me that they must be held to the highest standards of expertise when it comes to their area. Against those standards this is a serious blunder. It was not acting reasonably.

The more serious point can be put more shortly. The failure of the Administrators and their team to identify the intended subrogation of the FSCS to all of the rights of clients who received any compensation (COMP 7.3.8) and the then arising duty to make recoveries for them on the part of the FSCS (COMP 7.4) and to identify even the potential relevance of these matters to the Distribution Plan and the Potential Litigation Reserve is a serious blunder, which they have acknowledged. I repeat my observations above at paragraphs 21 to 27. It was not acting reasonably.

I do not consider that the Administrators meet the criteria for relief. I do not consider that it would be fair and reasonable to grant relief.

The projected Objective 1 costs have increased from £10,977,799. The Administrators now anticipate that the total costs in returning Client Assets will ultimately be a maximum of £11,577,779 in total (a maximum of £14,300 per client). The incremental impact on the cost of returning Client Assets is £600,000 in total.

Mr Crooks explains the reasons for this in his witness statement. In summary: (i) the process of selecting a suitable nominated broker to take on WealthTek’s clients was more protracted than expected; (ii) the Administrators were required to engage with clients more deeply (given the complexities encountered) and over a longer period than expected; (iii) a number of unforeseen tax issues have required in-depth interactions with financial intermediaries representing clients and parties previously connected with WealthTek; (iv) operational costs have been required to be incurred for a longer period than originally anticipated and it has been necessary to keep in place funding arrangements for more time than expected until FSCS compensation can be paid; and (iv) higher legal and time-costs have been incurred in the process of the approval of the Distribution Plan than the Administrators had anticipated.

I will approve an increase of £600,000 to the maximum Costs Contribution under the Distribution Plan.

Some of the Incurred Investigation Costs include costs incurred by the Administrators in providing assistance to the FCA in its criminal investigations into WealthTek and Mr Dance. The FCA is unable to share information in relation to its own investigations with WealthTek. However, the Administrators say that the FCA has indicated that any assets recovered from a confiscation order will ultimately be made available for WealthTek’s clients (i.e. primarily the FSCS who has subrogated to the rights of almost all clients). The Administrators have incurred £85,687.96 in such costs and intend to continue providing assistance to the FCS. They would like a reserve of £900,000 for the costs of doing so.

Objective 2 of the Administrators in a special administration is to ensure the timely engagement with market infrastructure bodies, including the FCA. As Mr Fletcher readily accepted, IBSA Regulation 13 makes clear that the engagement envisaged is concerned with a different type of assistance aimed at avoiding market disruption. These are not Objective 2 costs which in any event have to be met from the company’s property not the Client Assets.

Nor are these Objective 1 costs. The Administrators contend that the FCA proceedings could result in a successful prosecution, which might then result in a successful confiscation order. If that happens they are confident the FCA would return funds to them for distribution (to the FSCS save for 5 clients). The FSCS letter says it is still considering whether these are Objective 1 costs. Let me therefore be clear. These are not the costs of returning assets within the Administrators’ control to the clients. These are not Objective 1 costs to be borne by Client Assets.

I accept, however, that appropriate cooperation by the Administrators with the FCA is in the public interest. I think it is also in the beneficiaries’ interests that there is such cooperation with the regulator in bringing to book those who are responsible for their misfortune and possibly making recoveries for those beneficiaries. Even though these are not Objective 1 costs, a Distribution Plan which included a modest sum for such cooperation and assistance, when the house estate is bare, is in my judgment fair and reasonable. I note that I also have jurisdiction to direct the payment of a sum by way of remuneration to the Administrators from trust assets for such cooperation under the Court’s inherent supervisory jurisdiction over trusts; see In re Berkeley Applegate Ltd. I will therefore allow the £85000 which has been incurred and allow a retention of a further £85,000 for future cooperation. In the scale of the costs being incurred by the Administrators (over £11 million), this is not significant.

I will not authorise a retention of £900,000 for assisting the FCA – no breakdown or explanation of the size of this figure has been given to me. To the extent that the FSCS considers that the FCA investigations are a proper cost of recovery in accordance with COMP 7.4 they can fund any future cooperation of the Administrators with the FCA beyond the £85000 authorised above.

I direct that the costs which have been incurred in relation to the Administrators’ application for approval of the Distribution Plan since 23 July should not be charged to the client estate. In my judgment the Potential Litigation Reserve should never have formed part of the Distribution Plan and much costs have been wasted because it was. The order I propose to make seems to me to be a proportionate way of reflecting those wasted costs as well as marking the Court’s disapproval of the breach of duty to the court referred to above.

An order will be submitted which identifies the maximum sum which may be retained to meet incurred and future costs of the Administrators in accordance with this judgment and if necessary amending the Distribution Plan. The inclusion of costs pursuant to this judgment in this maximum sum does not mean that the costs incurred or to be incurred are reasonable. As I observed in the 4 October judgment (paragraph 43) it is for the FSCS to monitor the costs incurred by the Administrators in this case.

At some point after 26 September 2024 the Administrators were told that three clients had died. This sombre fact ought to remind everyone involved of the reasons for and importance of Objective 1. It underlines the need for the Administrators to reunite the clients with what is left of their money and investments, and to do so as soon as possible.