Lehman Brothers; CRC Credit Fund Ltd and Others v GLG Investments Plc (Sub-Fund: European Equity Fund) and Others
| Jurisdiction | England & Wales |
| Judge | LORD WALKER,LORD CLARKE,LORD COLLINS,LORD DYSON,LORD HOPE |
| Judgment Date | 29 February 2012 |
| Neutral Citation | [2012] UKSC 6 |
| Date | 29 February 2012 |
| Court | Supreme Court |
[2012] UKSC 6
Lord Hope, Deputy President
Lord Walker
Lord Clarke
Lord Dyson
Lord Collins
Appellant
Antony Zacaroli QC
David Allison
Adam Al-Attar
(Instructed by Allen & Overy LLP)
Respondent—CRC Credit Fund Limited
Robert Miles QC
Richard Hill
(Instructed by Simmons & Simmons LLP)
Respondent—Lehman Brothers Finance AG
Jonathan Crow QC
Jonathan Russen QC
Richard Brent
(Instructed by Field Fisher Waterhouse LLP)
Respondent—Lehman Brothers Inc.
Jonathan Crow QC
Jonathan Russen QC Richard Brent
(Instructed by Norton Rose LLP)
Respondent—Administrators
Iain Milligan QC
Rebecca Stubbs
Richard Fisher
(Instructed by Linklaters LLP)
Intervener (by written submissions)
David Mabb QC
Stephen Horan
(Instructed by the Financial Services Authority)
Heard on 31 October, 1, 2 and 3 November 2011
This appeal is concerned with the meaning and application of the "client money rules" and "client money distribution rules" contained in Chapter 7 of the Client Assets Sourcebook ("CASS 7") issued by the Financial Services Authority for the safeguarding and distribution of client money in implementation of the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"). The central feature of the client money rules is the requirement that CASS 7 imposes on MiFID firms to segregate money that they receive from or hold for or on behalf of their clients in the course of MiFID business by placing it into a client money account so that it is kept apart from the firm's own money.
Under English law the mere segregation of money into separate bank accounts is not sufficient to establish a proprietary interest in those funds in anyone other than the account holder. A declaration of trust over the balances standing to the credit of the segregated accounts is needed to protect those funds in the event of the firm's insolvency. Segregation on its own is not enough to provide that protection. Nor is a declaration of trust, in a case where the client's money has been so mixed in with the firm's money that it cannot be traced. So segregation is a necessary part of the system. When both elements are present they work together to give the complete protection against the risk of the firm's insolvency that the client requires. That is why rule 14.1 of the Solicitors Regulation Authority Accounts Rules 2011 provides that client money must without delay be paid into a client account, except when the rules provide to the contrary. Rule 6.3.1(b) of the Law Society of Scotland Practice Rules 2011 contains a provision to the same effect. The Law Society of Scotland's guidance to rule 6.3.1(b) states that "without delay" normally means on the same day.
These elementary principles were adopted by section 139 of the Financial Services and Markets Act 2000 ("the 2000 Act") when the rule making powers conferred on the FSA relating to the handling of client money were being formulated. CASS 7 provides for the segregation of client money, and it creates a statutory trust over client money to support and reinforce the purposes of segregation. This ensures that client money is kept separate and not used for the firm's own purposes. It protects the segregated funds from the claims of the firm's creditors in the event that protection is most needed, which is the firm's insolvency. It also enables client money to be returned to the clients without delay, as it is beyond the reach of the firm's creditors. If the system works in the same way as it does under the accounts rules that regulate the activities of solicitors, the clients whose money has been segregated will be assured that their client money entitlement is not depleted by having to share the money in the clients' account with others who may have claims against the firm, such as those whose client money has not been segregated and those for whom the firm does not hold any client money at all.
The rules that CASS 7 sets out are complex, and in the present case they have given rise to many problems. This appeal raises three issues that are of fundamental importance to the way the system that CASS 7 lays down is to be worked out. The first is when does the statutory trust arise? Does it arise only when the money has been placed in a segregated client account, or is the money subject to the trust as soon as it is in the firm's hands irrespective of where it puts the money? If the latter is the case, the trust will extend to any client money that is held in the firm's house account and has not yet been segregated as well as to money that has been segregated.
The second and third issues are concerned with what happens to client money in the event of the failure of the firm (described by CASS 7 as a "primary pooling event"). The second is directed to the rules that CASS 7 lays down for the way client money is to be distributed should that event occur. It asks whether these arrangements apply to money that is identifiable as client money in the firm's house accounts or only to money that is in the segregated client accounts. The third asks whether the right to participate in the pool that is to be distributed rateably to the clients is given only to those clients for whose benefit client money is held in the segregated client accounts, or whether a client whose money ought to have been segregated but was being held in a house account when the event occurs is entitled to participate in that money too.
I have had the great advantage of reading in draft Lord Walker's judgment, in which the background to the issues that we have to consider is so fully and carefully set out. Those who are interested will find most of the provisions of CASS 7 that are relevant to those issues set out in appendix 1 to the judgment of Arden LJ in the Court of Appeal [2011] Bus LR 277, 325. There are some omissions, but they are not important. All the provisions that Lord Walker refers to in his analysis of the points that matter are to be found there.
As to the first issue, which is the time at which the statutory trust arises, I agree for the reasons Lord Walker gives that the trust arises on receipt of the money. But I have also found it helpful to consider the issue from the position of Scots law. As Lord Walker has explained in para 47, it is clear that CASS 7 was intended when transposing the Directives into national law to make use of the concept of holding money on trust. But this is expressed by section 139(1) of the 2000 Act to be the position in relation to England and Wales and Northern Ireland only. Section 139(3) provides:
"In the application of subsection (1) to Scotland, the reference to money being held on trust is to be read as a reference to its being held as agent for the person who is entitled to call for it to be paid over to him or to be paid on his direction or to have it otherwise credited to him."
This provision is carried forward into the description of the statutory trust in section 7.7 of CASS which Lord Walker has quoted in full in para 41, below.
The wording of section 139(3) might be taken as an indication that the concept of trust is unknown in Scots law. That would be a misconception. There certainly is a law of trusts in Scotland. This has been recognised from time to time by statute: see, for example, the Trusts (Scotland) Act 1961 and section 17(5) of the Trustee Investments Act 1961. There are significant differences between English and Scots law as to its nature and origin. For example, the law of Scotland does not accept that a relationship in trust can arise in equity. It has a more limited basis. Its origin can be traced back to mandate or commission, which is part of the law of obligations: Stair, Institutes of the Law of Scotland (1693), I.12.17. Various attempts have been made to explain the basis for the concept. They have not been successful, as its nature is considered to be of too anomalous a character to admit of a precise definition. But it can at least be said that the duty that the trustee owes to the beneficiary is fiduciary in character: Wilson and Duncan, Trusts, Trustees and Executors 2nd ed, (1995), para 1–63.
In Council of the Law Society of Scotland v McKinnie 1991 SC 355 a question arose as to the character of funds held by a solicitor to the credit of his client account as at the date of his sequestration under section 31(1) of the Bankruptcy (Scotland) Act 1985. Delivering the opinion of the court Lord President Hope said at pp 358–359:
"The order of priority in distribution which is prescribed by section 51 of the 1985 Act leaves no room for doubt that if sums at credit of the clients' account were to be regarded as having vested in the permanent trustee, these funds would be exposed to the claims of all those entitled to a ranking on the debtor's estate. But property held on trust by the debtor for any other person lies outside this scheme of distribution altogether.
Section 33(1)(b) of the Act provides that such property shall not vest in the permanent trustee. So if sums at credit of the clients' account are to be regarded as having been held by the solicitor on trust on his client's behalf, it must follow that these sums do not vest in the permanent trustee on the sequestration of the solicitor, and accordingly that the judicial factor was right to resist the instruction by the accountant that the sums held on clients' account in this case were to be made over to the permanent trustee.
We are in no doubt that sums held to the credit of the clients' account are fiduciary in character and that for this reason they are sums to which section 33(1)(b) of the 1985 Act applies. It is well settled that a solicitor stands in a fiduciary relation to his client in regard to all...
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