Re MF Global UK Ltd (in special administration) (No 5) [Ch D]
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 04 July 2014 |
| Neutral Citation | [2014] EWHC 2222 (Ch) |
| Docket Number | Case No: 9527 of 2011 |
| Court | Chancery Division |
| Date | 04 July 2014 |
[2014] EWHC 2222 (Ch)
Mr Justice David Richards
Case No: 9527 of 2011
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Rolls Building,
London, EC4A 1NL
Antony Zacaroli QC and Adam Al-Attar (instructed by Weil, Gotshal & Manges) for MF Global UK Limited as trustee of the client money trust
Martin Pascoe QC and Daniel Bayfield (instructed by Weil, Gotshal & Manges) for the Administrators
Hearing date: 3 July 2014
This is an application to enable a settlement agreement to be made which would compromise and release all tracing and other claims between MF Global UK Limited (MFGUK) as trustee of the trust of client money and the general estate of MFGUK acting by its joint administrators.
The client money trust arises under the rules applicable to investment firms which receive from or hold money for their clients, contained in chapters 7 and 7A (CASS 7 and CASS 7A) of the Client Assets Sourcebook section of the Financial Services Authority Handbook. These rules required investment firms to segregate such money and hold it on trust for their clients and, in circumstances including an administration of the firm, to distribute the money held for clients among the clients, pro rata according to their entitlements. For these purposes all client money held at the relevant date is pooled. For this reason I will refer, as the parties did, to the client money trust as the client money pool (CMP), and to MFGUK in its capacity as trustee as the CMP Trustee.
These rules, albeit in an earlier version, were analysed in Lehman Bros International (Europe) v CRC Credit Fund Ltd [2012] Bus LR 667 for the purpose of determining the basis on which clients were entitled to participate in the distribution of client money. The Supreme Court held that the distribution should be on the basis of the amount which the firm should at the relevant time have been holding for the clients respectively, not the amount of client money in fact held for them at that time.
MFGUK was part of the MF Global group which carried on business as broker-dealers in financial markets throughout the world. The group's principal operations in London were carried on by MFGUK. It and other companies in the group entered insolvency proceedings in the United States and England on 31 October 2011. Administrators of MFGUK were appointed under the Investment Bank Special Administration Regulations 2011.
MFGUK held funds in, at least, two different capacities. It held money for clients as trustee of the client money trust. It also held money beneficially on its own account. The client money trust arose out of the same business operations as resulted in its own assets and liabilities, profits and losses. Clients could be both beneficiaries under the trust and creditors or debtors of the firm. On their appointment, the administrators therefore became responsible both for the duties and rights of MFGUK as the CMP Trustee and for the due administration of the general estate of MFGUK. The potential for conflict of duty between these two capacities is one of the principal reasons for the present application.
It is common ground that at the date of administration there was a shortfall in the CMP. The shortfall arose because MFGUK was required, but failed, to treat a number of clients as being entitled to the protection of CASS 7 and was, therefore, required but failed to segregate money received from or on behalf of those clients but, instead, treated them as creditors.
These accepted breaches of trust gave rise to two possible claims by the CMP Trustee against the general estate of MFGUK.
First, there could be a proprietary claim to any client money received by MFGUK from or on behalf of clients which remains identifiable in any of the house accounts of MFGUK or in its traceable proceeds. Secondly, personal claims to compensate the CMP for the breaches of trust could be made. Estimates of the amount of the personal claim ranged between approximately $9.4 million and approximately $43.9 million plus administration costs resulting from the breach of trust, which would be no more than approximately $1–2 million.
The assets available both in the CMP and in the general estate were such that, even without resolution of these claims, by April 2014 cumulative distributions amounting to 76 pence in the £ to unsecured creditors, and amounting to 78.5 cents in the $ to clients out of the client money trust assets, had been made or announced. Further distributions were not possible without resolution of the issues between the CMP and the general estate. Those issues included not only the CMP's proprietary and personal claims against the general estate but also possible claims by the general estate against the CMP in respect of funds comprising part of the CMP which the firm would have been entitled, but for the administration, to withdraw for its own account.
The administrators formed the view that it would be beneficial both to clients and to general creditors if these claims could be compromised rather than fought out through court proceedings. There are a number of reasons for this.
First, the total level of recoveries from both the CMP and the general estate is expected to be high. Distributions from the general estate are expected to total between 94 and 100 pence in the £. It is expected that distributions from the client money trust will total between 85 and 90.5 cents in the $.
Second, the existence of clients' claims against the general estate referred to above, as well as the high level of recoveries, means that the resolution of many, perhaps all, of the outstanding issues is unlikely to make a material difference in terms of the likely outcome for clients and creditors.
Third, the proprietary or tracing claims face practical difficulties. An immense amount of work would be required to identify payments of money into MFGUK's accounts representing client money and to work out whether such money remained identifiable in those accounts as at the date of administration. By way of illustration, in the 11 days before the commencement of the administration there were approximately 10,000 receipts and payment instructions in respect of MFGUK's 259 house bank accounts with an aggregate value of over £30 billion. Once that investigatory work was complete, a number of complex legal issues would be likely to arise. These include issues such as the correct treatment where trust money is paid into an account, but the balance on that account is later reduced below the level of the payment in, and thereafter non-trust money is paid into the account. A further issue is whether for these purposes different accounts with the same credit institution should be aggregated, a question which was raised but not resolved in relation to Lehman Brothers. These issues would be likely to involve appeals.
Fourth, a resolution of these issues through a settlement agreement rather than through protracted court proceedings would significantly accelerate the final distributions from the CMP and the general estate and would involve significant cost savings.
On account of these solid grounds for attempting to seek a compromise agreement, I gave directions on 1 May 2014 to enable meaningful negotiations to take place, notwithstanding the dual capacities of the administrators. I directed that for the purposes of such negotiation, and for the purposes of the present hearing, one of the administrators, Richard Fleming, should represent MFGUK as CMP Trustee, with named leading and junior counsel and a team from the administrators' solicitors led by a named partner, and that one of the other administrators, Richard Heis, should represent the general estate, again with named leading and junior counsel and a different team from the administrators' solicitors led by a different named partner. I further directed that, if a settlement was agreed in principle pursuant to negotiations between these parties, all persons who have claims or who have asserted claims as clients or creditors should be notified in writing of the agreement, with an opportunity to be heard at any hearing to approve the compromise.
Negotiations were successful in arriving at the terms of a compromise agreement. The final negotiations were preceded by position papers provided by the parties and by discussions between the legal teams to narrow the issues.
The process of negotiation is described in evidence filed by or on behalf of Mr Fleming and Mr Heis. In view of the difficulties involved in establishing the quantum of any proprietary claims and the fact that there was likely to be a high level of distribution from the general estate, the negotiations focused on the personal claims for breach of trust. The maximum value of the claim advanced for the CMP was approximately $43 million, plus costs. The primary position on behalf of the general estate was that there should have been a final reconciliation of client money as at the date of administration, in which event the general estate would have been required to pay approximately $9.4 million to the CMP. The settlement agreement provides for a compromise of this claim by the payment of a little over $31 million from the general estate to the CMP, payable in full even if the dividend payable by the general estate to unsecured creditors is less than 100p in the £.
In order to make a final distribution of client money, the CMP will have to sell or otherwise realise all of its remaining non-cash assets and resolve all outstanding claims against it. It was agreed that the general estate would pay approximately $29.86 million...
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