Amy GallimoreThe High Court has handed down a decision offering important guidance on the appropriate timing and scope of court involvement in the preparation of distribution plans under the Investment Bank Special Administration (IBSA) regime. The judgment clarifies the statutory process and confirms the breadth of discretion available to joint special administrators (JSAs) when determining how to proceed.
Background
In June 2021, Dolfin Financial (UK) Limited entered investment bank special administration, with Adam Stephens and Kevin Ley of S&W (then Evelyn) appointed as JSAs.
Dolfin operated as an investment bank, providing services to clients seeking immigration status under the former Tier 1 Investor route. At the relevant time, the immigration rules required applicants to demonstrate that they controlled at least £2 million held with a regulated financial institution and that the funds were available for qualifying investments. Dolfin facilitated this process, including by arranging for clients to hold bonds issued by UK trading companies.
In 2019, the FCA discovered that the bonds offered by Dolfin’s scheme were not based on the level of financial history or business required to give the bonds “any real value”. The firm agreed to a voluntary requirement to cease promoting or distributing the conflicted bonds. Later, the FCA concluded that the business had inadequate financial crime control frameworks – including inadequately qualified personnel – and a high level of money laundering risk. The FCA issued a supervisory notice in March 2021 which effectively terminated Dolfin’s business with immediate effect and the firm proceeded to wind down. The High Court did not make any findings as to the nature or legality of the firm’s schemes.
Application for directions and proposed protocol
Under the IBSA rules, special administrators must draw up a distribution plan for client money and assets, place this before the creditors’ committee for comment, and then submit to the Court for approval.
After 4 years realising assets, the JSAs were in a position to make a distribution. The JSAs’ application in Dolfin was made at an early stage, designed to seek the Court’s endorsement of certain principles and parameters (the Protocol) that would inform the JSAs’ approach, with a view to promoting efficiency and reducing cost. The application also requested the ability to apply to clarify, vary or modify the terms of the Protocol. Importantly, the Protocol did not seek to surrender the JSA’s discretion, or to obtain further powers.
The Court’s guidance
The Court declined to approve the Protocol at this preliminary stage, but did so on a principled and procedural basis rather than as a rejection of the JSAs’ approach.
The Judge emphasised that the preparation and approval of a distribution plan is a structured statutory process. In particular, the Court considered that it would be premature to rule on detailed matters of principle before a full distribution plan had been prepared and before the creditors’ committee had had the opportunity to consider and comment on it. Any observations made by the Court at an earlier stage would not bind the committee in any event.
The judgment made clear that the steps contemplated by the Protocol were already within the JSAs’ existing powers and discretion under the IBSA regime. As such, the Court’s decision did not restrict the JSAs’ ability to proceed in the manner they considered appropriate.
Approach to potential illegality and factual uncertainty
One of the issues underlying the application was whether the JSAs were required to investigate further the potential illegality of aspects of Dolfin’s Tier 1 Investor business before making distributions. The JSAs proposed to proceed on the basis of entitlements ascertainable from available information, without embarking on potentially extensive investigations into historic conduct.
The Court observed that this approach bore similarities to the use of a Benjamin order, which permits office-holders to proceed on a defined factual basis where there is uncertainty, while affording protection against later claims. The judgment confirmed that such an order was not incompatible with the IBSA regime and might, in an appropriate case, form part of a distribution plan.
However, the Court considered that it would be more appropriate for any such request to be brought forward as part of the distribution plan itself, following review by the creditors’ committee, rather than being addressed in isolation at this stage.
No criticism of the JSAs’ conduct
Crucially, the Court expressly stated that its decision not to approve the Protocol should not be understood as criticism of the JSAs or their proposed course. The judgment did not disagree with the substance of the JSAs’ approach, nor did it suggest that further investigation was required. Instead, the Court left the decision as to how best to proceed firmly within the JSAs’ discretion, consistent with the statutory framework.
Interim distribution
In a related application brought by Firestone, a significant client and creditor of Dolfin, the Court approved a 90% interim distribution of client money claims. This was in line with the JSAs’ intention to make an interim distribution, albeit at a lower percentage. The Court declined to make any declaration that the JSAs had failed to perform their functions efficiently or expeditiously.
Key takeaway
The decision provides helpful clarification on the limits of early court involvement in the IBSA distribution process and confirms that special administrators retain broad discretion in determining how and when to formulate their distribution plans. The judgment reinforces that the statutory process – culminating in creditor committee review and court approval of a final plan – remains the appropriate forum for resolving substantive issues.