Dolfin Asset Services Ltd v Adam Stephens (in His Capacity as Joint Special Administrator of Dolfin Financial (UK) Ltd)
| Jurisdiction | England & Wales |
| Judge | Briggs |
| Judgment Date | 26 January 2023 |
| Neutral Citation | [2023] EWHC 123 (Ch) |
| Docket Number | Case No: CR-2021-001111 |
| Court | Chancery Division |
[2023] EWHC 123 (Ch)
CHIEF INSOLVENCY AND COMPANIES COURT JUDGE
Case No: CR-2021-001111
IN THE HIGH COURT OF JUSTICE
THE BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST
IN THE MATTER OF DOLFIN FINANCIAL (UK) LTD
AND IN THE MATTER OF THE INVESTMENT BANK SPECIAL
ADMINISTRATION REGULATIONS 2011
The Rolls Building, London EC4A 1NL
Dan McCourt Fritz (instructed by STEWARTS LAW LLP) for the Applicant
Jamil Mustafa (instructed by DWF LLP) for the Respondents
Hearing dates: 12 January 2023
Approved Judgment
This judgment was handed down remotely with circulation to the parties' representatives by email. It will also be released to the National Archives for publication. The date and time for hand-down is deemed to be 10:00 hrs on 26 January 2023.
CHIEF INSOLVENCY AND COMPANIES COURT JUDGE Briggs
Chief ICC Judge
Introduction
Dolfin Financial (UK) Ltd (“DFL”) was incorporated on 5 November 2010 and traded as an independent wealth-management investment firm. It was regulated by the Financial Services Authority (“FSA”) and subsequently by the Financial Conduct Authority (“FCA”). The regulatory regime with which DFL had to comply included the Client Assets Sourcebook (“CASS”).
Client money balances were held by DFL in segregated accounts. Securities held were kept on a safe custody basis, with the majority held through several sub custodians in electronic form. Some asset forms held included complex bond instruments and assets subject to sanctions. In addition to client assets, DFL held its own assets (the “House Assets”).
In 2019 DFL promoted two new products, the “Vostok Fund” and “Wave Fund”. These funds were blockchain projects in which cryptocurrency was to be issued as tokens. In mid-2019 an investment company entered into a sale and purchase agreement to obtain some tokens on a purported promise that there was little or no risk. Subsequently the Wave tokens decreased in price and increased the number diluting the investment. The investment company did not receive a return and believed it was a victim of fraud. Proceedings were commenced. On 12 March 2021 the Financial Conduct Authority imposed restrictions on the Bank so that it could not conduct its regulated activities in the normal way. On 30 June 2021 it was placed into a special administration following a Court application by the directors. Adam Stephens and Kevin Ley of Smith & Williamson LLP were appointed Joint Special Administrators (“JSAs”).
Prior to their appointment and following the restrictions imposed by the Financial Conduct Authority, the Bank planned an orderly wind-down of its business. This included a sale of its clients to Britannia Global Markets Limited for an initial consideration of £600,000 and an agreed deferred consideration. Following the appointment of JSAs, negotiations continued, with a sale agreement signed on 5 July 2021. Completion took place on 12 July 2021. Britannia did not accept all clients and some clients did not want a transfer. Accordingly, some clients remained with DFL.
Proposals for the administration were provided to creditors on 17 August 2021 and approved on 2 September 2021.
Pursuant to regulation 10 of the Investment Bank Special Administration Regulations 2011 (the “Regulations”) the JSAs have three special administration objectives to fulfil:
6.1. Objective 1 — to ensure the return of client assets as soon as is reasonably practicable (“Objective 1”);
6.2. Objective 2 — to ensure timely engagement with market infrastructure bodies and the Authorities (“Objective 2”); and
6.3. Objective 3 — to either rescue the investment bank as a going concern or wind it up in the best interest of the creditors (“Objective 3”).
The first progress report for the period 30 June 2021 to 29 December 2021 was circulated to creditors on 28 January 2022. The second progress report for the period 30 December 2021 to 29 June 2022 was circulated to creditors on 27 July 2022.
Progress reports
In its capacity as client DASL has submitted two claims. The first for approximately £102,588,758 of funds and assets held for DASL's underlying clients under sub custody arrangements. The second for approximately £687,189 held by the Bank under an execution only, and custody service agreement. DASL is appointed to the creditor and client committee in the administration (the “Committee”). DASL purports to be among the largest clients.
The remuneration claimed by the JSAs is divided into two different periods. First the period before their appointment where the JSAs were assisting in the process of an orderly wind down and advising on the Special Administration Regime (“SAR”). Secondly the period after their appointment which continues.
In his first statement Mr Symes acknowledges that the pre-appointment remuneration was approved by the Committee on 15 December 2021. This case does not, therefore, concern the first period.
The first progress report provides the client/creditor with an update on how the special administration has been progressed in the first six months. It informed the client/creditors that DFL had client assets of approximately £1.453bn as at 30 June 2021 and that the focus was to gain control of the client assets and perform a CASS reconciliation to ensure there was no material shortfall. Although DFL had ceased to trade on the appointment of the JSAs 10 former employees were retained to assist with the reconciliation. The JSAs reported that returning client assets had been complicated by two factors. First the manner in which DFL conducted its “Tier 1 Visa investment business” and secondly due to the complexity of bonds it held.
The post-administration costs are set out in section 6. In particular the JSAs informed the client/creditors that:
“The basis of our remuneration may be fixed:
• as a percentage of the value of the property with which we must deal; or
• by reference to time properly spent by us (when in office) and our staff in attending to matters arising in the Special Administration, or
• as a set amount; or
• by any combination of the above.
The basis upon which we may be remunerated is a matter for the Committee to consider and approve by way of resolution in accordance with the Regulations and Rules.”
Under a sub-heading “The JSA's time costs to 29 December 2021” the report states:
“During the period from 30 June 2021 to 29 December 2021, we incurred total time costs of £1,756,446.98, which represents approximately 3,371.40 hours at an average charge out rate of £520.98 per hour.
Appendix C provides a detailed analysis of time costs incurred by reference to the grade of staff used and work done. The information is provided in accordance with SIP 9. A detailed narrative of the tasks undertaken in respect of each work activity is also set out within Appendix C.”
Clients and creditors were directed to the Smith & Williamson LLP website for further information.
The estimated outcome is expressed to be a return of client assets in full subject to deductions required to pay the associated costs. The JSAs reported that they were working with the Committee to agree the basis and methodology for allocating costs incurred in pursuing Objective 1.
On 18 February 2022 DASL, through its solicitors Stewarts Law LLP, wrote expressing concern about the level of fees. DASL stated that the fees incurred in meeting Objective 1 are particularly high and requested further information:
“our client requests a line by line breakdown of post-appointment unpaid WIP during the period 30 June 2021 to 29 December 2021 that includes the date, narrative (redacted where required), hours, amount, rate, descriptor and grade of fee earner for all WIP incurred…also highlight within the line by line breakdown those cost entries that go toward meeting Objective 1 of the special administration. Alternatively please provide separate WIP breakdowns for each of the three objectives…[and] where the WIP entries incurred under Objective 1 are in relation to the JSAs' work on any expressions of interest received then our client would be grateful if the JSAs could also highlight those entries.”
There was no immediate response. DASL wrote again on 14 March 2022:
“In accordance with Rule 201(3), our client is now entitled and intends to apply to the court to seek that the JSAs are compelled to comply with our client's request. Our client has instructed us to prepare their application immediately and issue it without further reference to you.”
The chasing letter provoked a response four days later from solicitors DWF LLP acting for the JSAs:
“For the reasons explained below, and relying on rule 201(2)(b) of IBSAR to comply with the above request for information, the JSAs do not consider that it would be proportionate to provide the information DASL seeks, as the time and cost of preparation of the information would be excessive, and not in the interest of the estate as a whole.”
It is not in issue that reasons were given by this letter, albeit it is said they were succinctly explained. The reasons for refusal were expanded upon in a follow-up letter dated 13 April 2022. The following is of note. First, attention was drawn to the rules that govern remuneration: the Investment Bank Special Administration (England and Wales) Rules 2011 (the “Rules”). Secondly, it was explained that the JSAs had not at that stage advanced to the Committee the basis upon which they wish remuneration to be fixed. Thirdly, the JSAs had not requested remuneration to be drawn. Fourthly, the pursuit of Objective 1 had been...
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