(1) Crc Credit Fund Ltd (2) Lehman Brothers Inc. and Others v (1) Glg Investments Plc Sub-fund: European Equity Fund (2) Hong Leong Bank Berhad and Another

JurisdictionEngland & Wales
JudgeLady Justice Arden
Judgment Date02 August 2010
Neutral Citation[2010] EWCA Civ 917
Docket NumberCase No: A2/2010/0113,0114,0119,0121
CourtCourt of Appeal (Civil Division)
Date02 August 2010
(1) Crc Credit Fund Limited
(2) Lehman Brothers Inc.
(3) Lehman Brothers Finance Ag
(4) Lehman Brothers Holdings Inc.
(1) Glg Investments Plc Sub-fund: European Equity Fund
(2) Hong Leong Bank Berhad
Administrators of Lehman Brothers International (Europe)

[2010] EWCA Civ 917

[2009] EWHC 3228 (Ch)

Briggs J

Before: The Master of the Rolls

Lady Justice Arden


Sir Mark Waller

Case No: A2/2010/0113,0114,0119,0121





Mr Robert Miles QC &Mr Richard Hill (instructed by Messrs Simmons &Simmons) for the 1st Appellant

Mr John Jarvis QC, Mr James Evans &Mr Richard Brent (instructed by Messrs Norton Rose LLP) for the 2nd Appellant

Mr Jonathan Russen QC (instructed by Messrs Field Fisher Waterhouse LLP) for the 3rd Appellant

Mr Antony Zacaroli QC, Mr David Allison &Mr Adam Al-Attar (instructed by Messrs Allen &Overy LLP) for the 1 st Respondent

Mr Nicholas Peacock QC &Miss Catherine Addy (instructed by Messrs Baker McKenzie LLP) for the 2 nd Respondent

Mr Richard Snowden QC &Mr Ben Shaw (instructed by Messrs Weil, Gotshal &Manges) for the 4 th Appellant

Mr Iain Milligan QC &Miss Rebecca Stubbs (instructed by Messrs Linklaters LLP) for the Administrators

Mr David Mabb QC &Mr Stephen Horan appeared for the Financial Services Authority ( Interested Party)

Hearing dates : 21–24 June 2010

Lady Justice Arden

Lady Justice Arden:


This appeal addresses important issues concerning the ownership of client funds held by Lehman Brothers International (Europe) (“LBIE”) at the date of its entry into administration. Those funds were subject to a statutory trust imposed by Chapter 7 of the Client Asset Sourcebook, known as “CASS7”, made under section 139 of the Financial Services and Markets Act 2000 (“ FSMA”) and applying to client money obtained by an investment firm from clients for the purposes of its investment business, but it is in dispute when that trust arose. The principal issues in this appeal are therefore: (1) the exact point in time when in the conduct of its investment business LBIE became a statutory trustee of client money for its clients, and (2) the manner in which such funds are to be distributed following the entry into administration. The resolution of these questions may have important implications for the clients involved since as beneficiaries under a trust they will be entitled to exclude any other creditors of LBIE from any claim on those assets.


LBIE was the principal United Kingdom trading subsidiary of Lehman Brothers Holdings Inc. (“LBHI”), which is now in Chapter 11 proceedings in the USA. LBIE provided a wide range of investment services to clients and held considerable amounts of money on behalf of its clients. That money was held by LBIE and with third parties, such as clearing systems. LBIE's business was regulated pursuant to FSMA. At 7.56am on 15 September 2008, administrators were appointed pursuant to the Insolvency Act 1986. This meant that a “primary pooling event” (“PPE”) then occurred for the purposes of CASS7, triggering a requirement to distribute client funds in accordance with section 9 of CASS7.


Briggs J, in a masterly and comprehensive judgment handed down on 15 December 2009, supplemented by a further judgment dated 20 January 2010, essentially held that CASS7 imposed a statutory trust on the funds that LBIE received from or for its clients as soon as they were received. He further held that CASS7 provided for the pooling of client funds. The pool of monies resulting from the rules was called “a client money pool” or “CMP”, though this term does not appear in CASS7 itself. Briggs J concluded that the rules on pooling only applied to client funds in segregated accounts. The only persons entitled to share in this pooling were persons for whom funds had been placed in segregated accounts. Clients whose funds had, for example, remained in the firm's accounts had to pursue such remedies, if any, as were open to them under the general law.


The striking point about these conclusions is that, on the assumption that pooling represents a higher level of protection for client monies than that available under the general law, this higher level of protection is only achieved to the extent that the firm actually effects segregation of client monies, and that the safeguards provided by CASS7 for clients for whom monies were not segregated are materially different from those provided for clients whose monies were segregated. This is so even though the judge concluded that client monies were held on the statutory trust whether or not they had been segregated. Thus, if the firm has weak financial controls or misappropriation occurs, so that money is not duly segregated for clients, then, under the judge's ruling, clients are at risk of having no proprietary claim of substance or even no proprietary interest at all in the event of the firm's insolvency. Furthermore, if the judge is right, clients with segregated accounts will not have to share the monies in those accounts with those for whom no segregation took place; only those for whom relevant monies were segregated have claims on the CMP.


In this judgment, after describing the parties appearing on this appeal, I will summarise the factual background, the regulatory background and the principal conclusions of Briggs J, before turning to consider the issues to be decided.



Numerous parties have appeared on this appeal. Very briefly, the positions taken by Counsel were as follows. Mr Richard Snowden QC, for LBHI, argues that the judge was wrong to hold that the statutory trust was imposed with effect from receipt of client monies. His arguments thus relate mainly to Issue 1 below 1. Mr Robert Miles QC, for CRC Credit Fund Limited, as the representative of non-segregated clients, argues that the judge was right on this point but wrong to exclude clients without segregated accounts from the pooling. Any monies representing client monies were to be paid into the pool and any client with an entitlement to client monies was entitled to a share in the pool. Mr Miles' arguments thus relate to issues 1, 2 2 and 3 3 below. Mr Jonathan Russen QC, for Lehman Brothers Finance AG, takes the same position as Mr Miles. Mr Antony Zacaroli QC, for GLG Investments PLC sub-fund: European Equity Fund, submits that there is a pooling only of the monies in the segregated accounts for the benefit only of segregated creditors (Issues 2 and 3 below). Mr John Jarvis QC, for Lehman Brothers Inc. (“LBI”), adopts the arguments of Mr Miles but in addition submits that the statutory trust of client monies applies to any debt which LBIE became liable to pay to a client so that the holders of any such debt were entitled to claim in the pool (Issue 4 below 4). Mr Nicholas Peacock QC, for Hong Leong Bank Berhad, an ordinary unsecured creditor of LBIE, opposes the arguments of Mr Jarvis. Mr David Mabb QC, for the Financial Services Authority (“the FSA”), and Mr Iain Milligan QC, for the Administrators of LBIE, present submissions to assist the court.


To avoid repetition of oral submissions, Counsel sensibly divided the issues among themselves for the purposes of the hearing even though their written submissions dealt with each issue with which their client was concerned. This was very welcome as there were some 14 skeleton arguments with a certain amount of duplication. In the interests of simplicity and without intending any discourtesy to Counsel, I will not in general refer to all the written submissions of Counsel who when making their oral submissions adopted earlier oral submissions of other Counsel. However, all their submissions, whether referred to in this judgment or not, have been carefully considered, and Counsel in their oral submissions have also ably assisted us. The level of argument that we have received was exceptionally high and we are very grateful for all the assistance we have received from Counsel and those instructing them.



Both Briggs J and this court have proceeded on the basis of a statement of assumed facts, which is set out in paragraphs 46 to 49 of the judgment of Briggs J dated 15 December 2009. I do not propose to set that statement out again in this judgment. This shows that LBIE provided services for clients wishing to invest in securities and that it operated an “alternative approach”, which was permitted by CASS7, for the receipt of client funds. This meant that monies received from clients were paid into an account or accounts of LBIE and then segregated into client accounts each day according to a reconciliation of client monies conducted as at the end of the close of business on the preceding day. In other words, to the extent that the aggregate client entitlement to client monies exceeded the aggregate of the net amount which LBIE held for each client to the credit of that client's bank accounts and transaction accounts, the balance would be transferred to the segregated client bank accounts held by LBIE for its clients. If the balance was the other way, the relevant client bank accounts would be debited and the money would be transferred to the house accounts of LBIE. Client funds were not therefore paid directly into segregated client accounts.


LBIE carried out its last reconciliation of client funds on Friday morning, 12 September 2008, as at the close of business on Thursday 11 September 2008 (“the point of last segregation” or “PLS”). That means that LBIE received...

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