Some of the customers of Farepak, the failed Christmas hamper company that went into liquidation with BDO Stoy Hayward some three years ago, will apparently soon receive their first dividend cheques out of the insolvency. Perhaps even in time for Christmas 2009!
These dividends are being paid to customers who placed orders with Farepak in the few weeks prior to its insolvency and relates to money that was paid into a ring-fenced account. This should have meant that the funds were kept safe for the benefit of those customers. However, the ring-fencing was apparently inadequately carried out leading to doubts as to its effect.
To properly ring-fence funds (or other assets) from an impending insolvency, it is necessary to create an effective trust and to ensure that the funds and assets are properly transferred into the trust. If the trust is not effective, then the assets in question will fall to be treated as general assets of the company available for distribution to the creditors rather than specifically available for the trust beneficiaries. The laws of Scotland and England are very different as regards the creation of trusts, with English courts taking a much more relaxed attitude to the creation of trusts than is the case in Scotland. This means that in order to properly ring-fence funds from a Scottish liquidator, extreme care has to be taken in the documentation.