Re MF Global UK Ltd (in special administration) (No 3) MF Global UK Ltd (in special administration) v Heis and Others [Ch D]
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 14 June 2013 |
| Neutral Citation | [2013] EWHC 1655 (Ch) |
| Docket Number | Case No: 9527 of 2011 |
| Court | Chancery Division |
| Date | 14 June 2013 |
In the matter of MF Global Uk Limited (in special administration)
In the matter of The Investment Bank Special Administration Regulatioans 2011
[2013] EWHC 1655 (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 Buildings
Fetter Lane
London, EC4A 1NL
Antony Zacaroli QC and Adam Al-Attar (instructed by Weil, Gotshal & Manges) for the Applicants
Hearing dates: 10 11 June 2013
This is an application by the Administrators of MF Global UK Limited (MFG UK) and by MFG UK in its capacity as trustee of a client money trust established by rules made by the Financial Services Authority (now the Financial Conduct Authority) pursuant to statute, for directions as regards the administration of the trust and the distribution of its assets.
As an investment bank authorised to carry on business by the FSA, MFG UK was required to hold client money on the terms of this trust.
MFG UK was part of a group of companies carrying 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 October 2011. The administrators of MFG UK were appointed under the Investment Bank Special Administration Regulations 2011.
The FSA was empowered by section 139 (1) of the Financial Services and Markets Act 2000 to make rules providing for clients' money to be held on trust in accordance with the rules. The relevant rules are contained in chapters 7 and 7A (CASS 7 and 7A) of the Client Assets Sourcebook section of the Financial Services Authority Handbook. These rules are intended to implement in the UK the requirements of the Market Financial Instruments Directive 2004/39/EC and the Commission Directive 2006/73/EC, the overall purpose of which is to provide a high level of protection to clients.
Client money must be segregated from an investment firm's own money by being paid into and held in "an account or accounts identified separately from any accounts used to hold money belonging to the firm" (CASS 7.4.11R). The trust of client money is created by CASS 7.7.2R which provides, so far as relevant, that:
"A firm receives and holds client money as trustee (or in Scotland as agent) on the following terms:
(1) for the purposes of and on the terms of the client money rules and the client money distribution rules;
(2) subject to (4) for the clients …. for whom that money is held, according to their respective interests in it;
(3) ….
(4) on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and
(5) after all valid claims and costs under (2) and (4) have been met, for the firm itself."
CASS 7.6 requires a firm to keep records and accounts so as to enable it to distinguish client money held for one client from client money held for any other client and from its own money.
CASS 7A contains the client money distribution rules, applicable on the occurrence of "primary pooling event", which includes the appointment of administrators or other insolvency proceedings in respect of the firm. In that event, client money held in each client money account of the firm is treated as pooled and it must be distributed by the firm in accordance with CASS 7.7.2R "so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A.5R" (CASS 7A.2.4R). It is unnecessary to refer in detail to CASS 7A.2.5R which makes provision for set-off.
The overall purpose of CASS 7A is, as explained in CASS 7.A.1.2G, to ensure the timely return of client money to clients following a primary pooling event.
By these rules, a trust is created, with identifiable trust property and, following the majority decision of the Supreme Court in Lehman Brothers International (Europe) v CRC Credit Fund Ltd [2012] Bus LR 667, identifiable beneficial interests. There are however no provisions setting out a procedure whereby claims to client money can be made and adjudicated or a process whereby client money can be distributed among those entitled to it. There is nothing, for example, equivalent to the procedure in the Insolvency Rules for the submission, adjudication of claims, and distribution in respect of proofs of debt, where distributions can safely be made on the basis of proofs submitted prior to a specific date, with late-comers being prevented from disturbing prior distributions. Nor is there anything equivalent to the bar date mechanism under the Special Administration Rules relating to the distribution of assets of investment banks. The absence of such provisions is surprising, given that an investment bank is likely to have dealt with a large number of clients who may, but equally may not, have valid claims to share in the distribution of client money. In many cases, they will have alternative or additional claims as unsecured creditors of the investment bank.
In dealing with the client money trust, the administrators of MFG UK face precisely the types of problems which liquidators and administrators habitually face when dealing with the claims of a large number of unsecured creditors. In particular, there are claims which have been submitted but rejected in whole or in part. Moreover, there may be potential claimants with good claims who are unknown to the administrators, because their claims are not disclosed by the records kept by MFG UK and they have not submitted claims.
The evidence filed in support of this application on behalf of the administrators gives a clear picture of the extent of the task and the difficulties faced by the administrators. Following a review of MFG UK's records, the administrators have issued statements to clients reflecting what they believe to be each client's entitlement to share in a distribution of the client money trust. Statements have been sent to a total of 4,637 clients, representing 99.8% of known claimants. Statements have not been sent to clients whose accounts had been closed prior to the administration or which show a nil balance. If a statement is accepted by a client, the procedure adopted by the administrators has been to invite the client to enter into a pro-forma settlement agreement. In addition, the administrators have received client money claims from claimants who did not appear, by reference to MFG UK's records, to have a claim. Following consideration of these claims and any supporting evidence, they may either be agreed and a client money settlement agreement signed or they may be withdrawn or disputed.
The total number of client money claims so for made is 5,345, with a total value of a little over US$2.223 billion. Of these, 3,275 claims with a total value of over US$895 million have been fully agreed. There are 268 claims with a total value of over US$278 million which have been rejected by the administrators, where the claimant disputes the administrators' decision. There are 1,364 claims, with a total value of over US$62 million, where a client money settlement agreement has been sent but has not yet been agreed or has been disputed. There are 350 claims, with a total value of US$49.35 million, from claimants who do not appear from MFG UK's record to have any client money entitlement or any claim against the general estate but which have not yet been formally rejected pending the completion of investigations. There is also a very substantial claim from MF Global Inc which has in principle been settled on the terms of a settlement agreement which will become effective on the satisfaction of a number of conditions.
The total funds anticipated to be available for distribution as client money is estimated to be between US$945 million and US$951 million. The administrators have felt able to make an interim distribution of a little under US$214 million, representing approximately 26% of agreed claims.
In order to proceed with a distribution of the balance of the available funds, and to ensure the timely return of client money which is stated to be the purpose of the client money distribution rules, MFG UK and the administrators need a process to deal with rejected claims and unknown claims which can provide a degree of certainty and protection. Unless some procedure is put in place, the administrators will have to provide in full for all claims which have been rejected before any further distribution can be made and will have to issue proceedings, making all the relevant claimants respondents, in order to determine the existence and extent of their individual claims. Whether or not the claimant participates in such proceedings, the administrators will have to put before the court all evidence relevant to the individual claims. These would not be proceedings in which it would be possible for the administrators to obtain judgment in default. Even this lengthy and expensive process would not solve the problem posed by the possible existence of unknown claims.
The need for some means of dealing with problems of this kind has previously been recognised. The administrators of Lehman Brothers International (Europe) sought to deal with them by proposing a scheme of arrangement with client money claimants under Part 26...
To continue reading
Request your trial
-
Worldspreads Ltd (in Special Administration) v The Investent Bank Special Administration Regulations 2011
...is satisfied it is just and expedient to do so, based on the judgment in In re MF Global UK Ltd (in special administration) (No 3) [2013] 1 WLR 3874. 20 Dealing with the first submission, in the context of conventional administration orders (i.e. not special administrations such as this one......
-
Ian Gillan and Others v Hec Enterprises Ltd and Others
...a minimum." 33 Following these remarks in Re Lehman Bros International (Europe) Ltd (No. 2), the court in Re M F Global UK Ltd (No. 3) [2013] 1 WLR 3874, acting under its inherent equitable jurisdiction, made an order giving directions to administrators in the same way as it could give dire......
-
Allanfield Property Insurance Services Ltd ((in Administration)) ("APIS") (as trustee of a trust of client money under Chapter 5 of the Client Asset Sourcebook within the FCA Handbook) and Others v Aviva Insurance Ltd and Another
...The inherent equitable jurisdiction was considered by David Richards J in In re MF Global UK Ltd (in special administration) (No. 3) [2013] EWHC 1655 (Ch), [2013] 1 WLR 3874. The company was a failed investment bank and held client moneys on statutory trusts pursuant to CASS 7 and CASS 7A.......
-
Jason Daniel Baker and Geoffrey Paul Rowley (as Joint Administrators of ipagoo LLP) v The Financial Conduct Authority
...(Europe) v CRC Credit Fund Ltd [2010] EWCA Civ 917; [2011] Bus LR 277; [2011] 2 BCLC 184, CAMF Global UK Ltd (No 3), In re [2013] EWHC 1655 (Ch); [2013] 1 WLR 3874; [2013] 2 BCLC 426Marleasing SA v La Comercial Internacional de Alimentación SA (Case C-106/89) EU:C:1990:395; [1990] ECR I-413......
-
COURT OF APPEAL SUMMARIES (JANUARY 18 – 22, 2021)
...40, McLean v. Burns Philp Trustee Co. Pty. Ltd. (1985), 2 N.S.W.L.R. 637 (S.C.), MF Global UK Ltd. (In Special Administration), Re, [2013] EWHC 1655 (Ch.), Morice v. Bishop of Durham (1804), 32 E.R. 656 (Ch.), aff’d (1805) 32 E.R. 947 (Ch.), Campisi v. Ontario (Attorney General), 2018 ONCA ......
-
Court Of Appeal Summaries (January 18 ' 22, 2021)
...40, McLean v. Burns Philp Trustee Co. Pty. Ltd. (1985), 2 N.S.W.L.R. 637 (S.C.), MF Global UK Ltd. (In Special Administration), Re, [2013] EWHC 1655 (Ch.), Morice v. Bishop of Durham (1804), 32 E.R. 656 (Ch.), aff'd (1805) 32 E.R. 947 (Ch.), Campisi v. Ontario (Attorney General), 2018 ONCA ......
-
Cayman Court Allows Interim Distributions In Saad Liquidation
...revision). 3 In re Benjamin [1902] 1 Ch 723; applied in In re Green's Will Trust [1985] 3 All ER 455, 462; Re MF Global UK Ltd (No 3) [2013] 1 WLR 3874; Finers v Miro [1991] 1 W.L.R 35 The content of this article is intended to provide a general guide to the subject matter. Specialist advic......
-
High Court Confirms Process For Distributing Client Money Held By Firm In Special Administration
...particular bases when the court is satisfied it is just and expedient to do so (as in Re MF Global UK Ltd (in special administration) [2013] EWHC 1655 (Ch) (14 June Order granted The court granted the draft order proposed by the special administrators. In doing so, Birss J noted that no obj......