Re MF Global UK Ltd (in special administration) (No 4)
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 16 August 2013 |
| Neutral Citation | [2013] EWHC 2556 (Ch) |
| Docket Number | Case No: 9527 of 2011 |
| Court | Chancery Division |
| Date | 16 August 2013 |
[2013] EWHC 2556 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Rolls Building
7 Fetter Lane EC4A 1NL
Mr Justice David Richards
Case No: 9527 of 2011
In the Matter of MF Global UK Lmited (in Special Administration)
In the Matter of the Investment Bank Special Administration Regulations 2011
Antony Zacaroli QC and Adam Al-Attar (instructed by Weil, Gotshal and Manges) for the Administrators of MF Global UK Limited
Richard Snowden QC and Ben Shaw (instructed by Simmons and Simmons LLP) for Attestor Value Master Fund LP
Peter Arden QC and Ben Griffiths (instructed by Dentons UKMEA LLP) for Solid Financial Services Limited
Hearing dates: 23 and 24 July 2013
Introduction
A financial firm, such as an investment bank, is required to segregate client money from its own funds and to hold it on trust for the clients. The same transaction between a firm and a client may give rise to an obligation on the firm to hold client money for the client and to a personal claim on the contract. The occurrence of certain events, including the firm going into liquidation or administration, will give rise to a distribution of the client money among the clients as beneficiaries and (in a liquidation or in an administration where permission to distribute is given) to a distribution of the firm's assets among its creditors, including its clients with personal claims.
This application raises issues concerning the relationship between the rules governing the distribution of client money to clients as beneficiaries of the trust and the rules governing the proof and payment of debts due to clients as creditors. Specifically, the issues concern, first, the extent to which a distribution of client money reduces the amount for which a client may prove or the amount which a client may be paid as a creditor and, secondly, whether a claim in respect of a shortfall in the client money trust is a provable debt and, if so, the principles governing its amount.
Although these issues would in any event arise, they are rendered more acute because a different regime applies to the valuation of claims to client money than to the estimation of creditors' claims in a liquidation or administration. Client money claims are valued on the basis that open contracts were closed out on the date that client money distribution rules come into play, which is the date of commencement of the liquidation or administration if that is the triggering event. For the purposes of proof and payment from the general estate in an insolvency, hindsight is applied to open contracts so that, although they are notionally valued as at the date of commencement of the liquidation or administration, the price at which they in fact subsequently close out will determine the amount, if any, for which clients may prove. This was the subject of an earlier application in the present administration: see In re MF Global UK Limited [2013] EWHC 92 (Ch). The effect is that, in the case of contracts open at the relevant date, a client's entitlement to client money may often differ in amount from its claim as a creditor. Indeed, in some cases because of price movements in the relevant asset or index, a client may have an entitlement to client money but no contractual claim or vice versa.
The total amount expected to be available for distribution in the present case from the client money trust is estimated as between US$945 million and US$951 million. The total value of anticipated claims against the client money trust is estimated as between US$1.515 billion and US$1.107 billion. Accordingly the likely aggregate percentage distribution of client money is estimated to be between 62% and 86%. The causes of the shortfall, and an estimate by the administrators of the contribution of each cause to the total shortfall, are the costs attributable to the administration and distribution of the client money trust (60%), the need to admit claims from clients whose positions were not segregated but should have been (20%) and the fact that open positions forming part of the assets of the client money trust closed out after the relevant date at an aggregate value lower than the aggregate notional value attributed to them at the relevant date (20%).
The total funds anticipated to be available to creditors from the general estate is estimated as being between US$2.119 billion and US$2.222 billion. Creditor claims are estimated as being between US$2.128 billion and US$2.268 billion, so that the likely aggregate percentage dividend is estimated to be between 93% and 100%. These figures are calculated on the basis that a global settlement agreement entered into between MF Global UK Limited (MFG UK) and MF Global Inc becomes unconditional.
The application
The present application is made by the joint administrators of MFG UK, appointed under The Investment Bank Special Administration Regulations 2011. The application is made under para. 63 of Schedule B1 to the Insolvency Act 1986, as applied to these proceedings by reg. 15 of the Regulations.
Two representative respondents were joined by an order made on 24 May 2013. Attestor Value Master Fund LP (Attestor) represents those clients who had net open positions as at 31 October 2011, which was both the commencement of the special administration of MFG UK and hence the valuation date for claims against the client money trusts, and whose open positions later closed with a liquidation value less than their market value as at 31 October 2011 (Decreased Clients). Their total market values were approximately US$359 million and their total liquidation values were approximately US$301.4 million, resulting in a net decrease of a little over US$57.6 million. Solid Financial Services Limited (Solid) represents those clients with net open positions as at 31 October 2011 which later closed with a liquidation value greater than the market value as at that date (Increased Clients). Their total market values were approximately US$266.8 million and their total liquidation values a little over US$277 million, resulting in an increase of approximately US$10.2 million. Submissions have been made by the administrators on behalf of general unsecured creditors.
The application notice seeks directions as to a number of questions. There is some common ground between the parties. In particular, they are agreed that a client with a contractual claim is in principle entitled to prove for that claim (a parallel claim), although it also has a claim to client money by reference to the relevant contract. They are also agreed that in principle a client may have a claim in respect of a shortfall in the client money trust only to the extent that the shortfall is the result of MFG UK's default, but it is not agreed that such a claim is provable.
There are three issues on which the parties are divided. The first relates to the calculation of a proof for a parallel claim. The administrators contend that a client can prove only for the amount of its contractual claim less sums distributed to it from the client money trust and, where a proof is submitted prior to a final distribution of client money, the amount of any further anticipated distribution. Attestor and Solid contend that a client can prove for the whole amount of its contractual claim, although they recognise that there is a limit on the total amount which a client can receive from the general estate and from the CMP. They differ as to the precise formulation of that limit.
The second issue is whether a client may prove for a claim resulting from a shortfall in the client money trust. While the administrators accept that a client may have a personal claim for loss resulting from such a shortfall, provided that it results from a default on the part of MFG UK, they submit that a client may not prove for such a claim because it arises in respect of the same obligation as the parallel claim, namely the underlying contract between the firm and the client, and is thus barred by the rule against double proof. While the respondents agree that a claim is limited to a shortfall resulting from MFG UK's default, Attestor contends that such a claim is provable in addition to the parallel contractual claim. Solid takes no position on this issue.
The third issue relates to the quantum of any potential shortfall claim. The administrators contend that the client's claim, being its compensatable loss resulting from MFG UK's breach of trust, is limited to the amount of the client's contractual claim against MFG UK which remains unpaid as a result of its breach. Attestor contends that it is not so limited. Solid reserves its position on whether there is any limit on a shortfall claim but contends that a client's right to receive a distribution in the administration is limited so that it may not receive any further payment from the general estate once it has received in aggregate sums equal to the full value of its contractual rights together with interest.
Before considering these issues, it is necessary to give some background and to refer to the relevant client money rules.
MFG UK
MFG UK is a subsidiary of MF Global Holdings Ltd, a company incorporated in Delaware. Companies in the MF Global group carried on business as broker-dealers in financial markets throughout the world. The group's principal operations were in New York and London, carried on by MF Global Inc and MFG UK respectively. These and other companies entered formal insolvency proceedings in the United States and England on 31...
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