In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk looked at Berkeley Applegate Orders and dealing with third party funds held by the insolvent.
This is the summary of that briefing.
If you'd like to watch the webinar back, you can do so below, if not, read on for our summary...
Quick Links
- Can I use the money in the client account to pay my fees?
- Will I be paid for sorting out the money in the client account?
- Berkeley Applegate - Key Points
A possible scenario
If you have been doing insolvency for a few years, I’m sure you will have heard about Berkeley Applegate orders. I imagine the context will be something like this: You will be dealing with the liquidation of something like an estate agent’s practice. There may be very little in the way of assets. But there will perhaps be a client account with some money in it. Perhaps, sometimes, not as much as there should be, but rather more than the value of everything else combined.
You might have a couple of thoughts about the money in the client account. Firstly ‘Can I use it to pay my fee?’ And secondly, ‘Somebody has to sort this out. But if I do, will I be paid for it?’.
Berkeley Applegate gives a complicated answer to the second question. But first, the question of paying fees…
Can I use the money in the client account to pay my fees?
As liquidator, you control the company’s property. It’s your job to realise the company’s property and distribute it to the creditors. You are entitled to take your expenses, including your fees, from the company’s property.
In cases where Berkeley Applegate is relevant, there will be a trust account. Here’s the question. Although the account is in the company’s name and therefore under your control as liquidator, is the company the beneficial owner of the money in the account?
Legal or beneficial ownership
The ‘legal owner’ is the official owner of that property. It’s the person who is shown in the formal records as owning the property.
The beneficial owner, on the other hand, is the economic owner. They are the person who is entitled to get the money when the property is sold.
When the legal and beneficial owners of the property are different (or two or more people own a freehold or leasehold), there is a trust. The legal owner is the trustee, the beneficial owner is the beneficiary.
Customer deposits
Suppose a customer pays a £5000 deposit to a dealer, when they order their new car. And suppose now the dealer has closed down, and cannot sell the car to the customer. The customer will, of course, want their money back.
Imagine they had handed over the money, in cash, in a sealed envelope, with their name on it. And suppose that the envelope was still in the dealer’s safe. It’s quite likely that the money would be regarded as beneficially owned by the customer and would have to be given back to them.
Of course, that never happens.
Instead, what if the money had gone into the dealer’s bank account? Then it is more complicated. There are two questions you would need to look at, to see if the customer gets their money back.
Firstly, what did the contract say? You’ll be looking for guidance about whether the money was supposed to change ownership when the dealer got it. Or whether it continued to be the customer’s property, until the car was delivered to them. Quite possibly the contract might not be much help.
Secondly, is the money still there? The dealer probably had an overdrawn bank account. In that case, the money would have disappeared into the overdraft as soon as it was banked. In cases where the account stayed in credit, it might be possible to trace the deposit to see if it is still in the current account. That is a complex subject. I won’t say any more about that now in any detail.
To protect customers, and reassure them that their money will be safe, businesses often use client accounts. These are bank accounts that ring fence client money. Only client money should go into those accounts. If the business closes, the balance in a properly run client account will be exactly enough to repay all clients the money that the business has received from them, and which remains unused.
A client account is a trust account. The business is the legal owner of it. The client or customer is the beneficial owner of some of the money in the client account. In a properly run client account, their share of the client account will be the ‘right’ figure.
Businesses using client accounts.
Businesses that operate client accounts include:
- Some businesses taking customer deposits.
- Accountants
- Insolvency practitioners
- Solicitors
- Estate agents
- Financial services businesses
Conclusion: Can you use the money to pay your fees?
The short answer is no. The client account is a trust account. So, although the legal owner of the account is the company; the beneficial owner is the client. The client account is not a part of the assets you are entitled to deal with.
Will I be paid for sorting out the money in the client account?
The complicated answer from Berkeley Applegate is, yes, sometimes. But not always. Before I delve into that further, let’s look at the case of Berkeley Applegate itself.
What was Berkeley Applegate? And what are Berkely Applegate Orders?
Berkeley Applegate was an investment company. It lent money, usually secured by a second mortgage, to small business owners, to buy or finance their property.
It got its money from individual investors. The money from a number of investors would be pooled and used to finance one loan. Those investors would receive interest on their deposits, as the borrower made their loan repayments. Interest rates were good.
When interest rates went up considerably, businesses (and individuals) found it difficult to pay their loan repayments and the value of property slumped. Many borrowers found that they could not keep up the repayments on their loan, nor could they repay the loan by selling their property.
Many of Berkeley Applegate’s clients started to default. The owners of Berkeley Applegate couldn’t face their investors (many of which were nuns, priests, and charity trustees) to tell that the money was no longer coming in to pay the interest due to them.
So, they started to bridge it, by ‘borrowing’ from other accounts. They hoped things would soon get better, and they would be able to sort it all out. Unfortunately, things got worse and even more of their customers defaulted. Eventually, they ran out of cash and had to call in the liquidators.
The liquidators’ dilemma
By the time the liquidators were appointed, there was not enough money in the various client accounts to pay back all the money that was due to investors.
The client accounts were in a mess, as funds had been wrongly transferred between accounts, to make up missing money. Someone would have to reconcile them to understand what had happened.
The money in the client accounts was trust money, so it did not belong to Berkeley Applegate but the individual investors. It could not be used to pay a dividend to Berkeley Applegate’s creditors.
Berkeley Applegate was trustee of the client accounts, this meant that the liquidators, as agents of Berkeley Applegate, had the standing to administer the accounts, and do the work to reconcile them.
However, as liquidators, they were entitled only to be paid for the work they did, as liquidators, and only from the company’s funds. Therefore, if they reconciled the client accounts, and returned the investors’ money to them, they could not claim to be paid for that from the funds in the liquidation.
It was going to be an expensive job.
There was a further complication. Once the accounts were reconciled, how should they share the money between the investors? They had two options:
- Aggregate the funds, and claims, and pay the same dividend to all investors.
- Trace the misappropriated funds, and, where possible, replace them from client accounts to which they had been transferred wrongly. This would result in some investors getting very much more back than others.
The Court hearing
Because the liquidators did not have authority to draw a fee for doing the work that needed to be done, they applied to court for directions. In effect, they asked the court for permission to take their expenses from the investor’s funds.
The investors were represented at court and presented their views. The court ruled that the liquidators could take their fees from the client account funds, where the fees were for work that needed to be done to reconcile the accounts and pay the investors.
Berkeley Applegate has turned out to be an important and useful precedent and insolvency practitioners have relied on it on many occasions since then, to seek authority for charging a fee to unscramble and distribute client money.
Berkeley Applegate – Key points
- Berkeley Applegate does not give automatic rights to a liquidator.
- You have to ask the court to make an order, in every case where you might need authority to be paid to unscramble client accounts.
- The court will not always grant a Berkeley Applegate order.
- You have to show that the work you are going to do is necessary, to protect the interests of the beneficial owners of the trust property.
- There is more than one way to deal with the funds. So, ask the court for authority for one method.
- Also, there is more than one way to trace funds. Again, it may be wise to ask the court for authority.
- If there are a small number of beneficiaries, it may be easier to get an agreement from them about charging for the work you need to do. The agreement needs to be in writing, and carefully prepared.
Upcoming events
Thanks for reading this summary…
Our Third Annual all-day in-person Insolvency Conference will be taking place in 2024. Date and venue to be confirmed. Make sure you’re subscribed to our email list to receive event information straight to your inbox.
My next Coffee Break Briefing will be on the topic of ‘Centrebinding – liquidators with limited powers.’ It is scheduled for Monday 11th December 2023.
Again, more information will be available via the email list.
Specialist Insolvency Solicitors
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