Worldspreads Ltd (in Special Administration) v The Investent Bank Special Administration Regulations 2011
| Jurisdiction | England & Wales |
| Judge | Mr Justice Birss |
| Judgment Date | 19 June 2015 |
| Neutral Citation | [2015] EWHC 1719 (Ch) |
| Date | 19 June 2015 |
| Court | Chancery Division |
| Docket Number | Case No: 2505 OF 2012 |
[2015] EWHC 1719 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mr Justice Birss
Case No: 2505 OF 2012
Mr Glen Davis QC (instructed by Reed Smith) for the Joint Special Administrators
Hearing dates: 10th June 2015
The business of Worldspreads Ltd was to provide an online trading platform to enable customers to carry out spread betting and to trade in contracts for differences. It was regulated by the FSA (now the FCA). The company is in special administration. Directions are sought to enable the joint special administrators, Jane Moriarty and Samantha Bewick, to finally distribute client money. That is a necessary step towards the completion and closure of the special administration. In this judgment I will refer to the joint special administrators as the administrators.
The legal context in which this arises is as follows. The company was an investment bank within the relevant statutory definition in s232 of the Banking Act 2009. One of the conditions which must be satisfied for that definition to apply is condition 2 which provides that the institution holds client assets (s232(3) and (4)). By s232(5A) client assets include money and there is no doubt the company held client money. Under s138 FSMA (now s137A), the FSA (now FCA) had power to make general rules governing the conduct of regulated activities, and under s 139(1) FSMA (now s137B) the FSA (now FCA) had power to make rules resulting in client money being held on trust. The applicable rules in this case are the Client Assets rules (CASS rules). The applicable CASS rules are CASS 7 relating to receiving and holding client money and CASS 7A relating to distribution. Client money is held on a statutory trust governed by the CASS rules. The relevant rule at the time was CASS 7.7.That has now been replaced by CASS 7.17.2.
Under the Banking Act regulations may be made to modify the law of insolvency as it applies to investment banks. These regulations are the Investment Bank Special Administration Regulations 2011 (IBSAR).
By an order made on Sunday 18 th March 2012 by Hildyard J the company was placed into special administration after it emerged that there was a substantial deficit in the client money which the firm ought to have held. The background is described in the judgment of Hildyard J [2012] EWHC 1263 (Ch).
Within the relevant CASS 7A rule (7A.2. 2R(1)) the appointment of the special administrators was a "failure of the firm" and so was a "primary pooling event". This triggered the requirement to treat the client money as pooled and to distribute it under CASS 7A. Under the CASS rules the trustee of the statutory trust holding the client money is the company. Moreover although the client money pool falls outside the insolvent estate, the pool is under the control of the joint special administrators.
A feature of the special administration procedure is that one of the objectives of the special administrator is to ensure the return of client assets as soon as reasonably practicable (IBSAR regulation 10). IBSAR Regulation 11 relates to this objective and provides the special administrator may set a bar date for the submissions of claims to beneficial ownership in order to expedite the return of client assets. However by regulation 11(8) this provision does not apply to client assets which are governed by rules made by the FCA under s137B FSMA. Thus regulation 11 does not apply to client money because client money is covered by the CASS rules. I accept counsel's submission that this aspect of regulation 11 does not alter the overall terms of the objective defined in regulation 10 itself. In other words the objective to return client assets is applicable just as much to client money as other assets. It is just that regulation 11 does not apply to client money.
The difficulty is that there is no other provision in either IBSAR or the IBSAR Rules or in the general FCA rules and guidance which provides a procedure governing distribution of client money in a special administration.
The administrators seek an order from the court which will in effect create a procedure to deal with this problem. In summary the proposed order would permit the joint special administrators to set a bar date for outstanding claims, to make provision for costs and expenses, to deal with claims to client money which are not agreed and to make a final distribution to those with agreed money claims notwithstanding the potential claims of others who have not responded to communications from the administrators or not pursued a court application if their claim has been rejected by the administrators.
At this stage I should mention the Financial Services Compensation Scheme ("the FSCS"). Clients with claims in respect of client money are entitled to compensation up to a maximum of £50,000 from the FSCS. In return for an assignment of their claim to the FSCS, they receive 100p/£ up to the maximum limit. The FSCS stands in their shoes to receive any dividends from the client money pool and from the firm's estate.
The position of Worldspreads today is explained fully in the fourth witness statement of Ms Bewick, one of the administrators. It is as follows. There is a significant deficit in the client money pool. To the extent that there is a shortfall in the client money pool, clients are unsecured creditors of the firm. The administrators have identified and agreed the claims against the client money pool of 4865 clients, whose claims total £28.6 million. Of those, clients with claims totalling £27.45 million have assigned their claims to the FSCS. As a result, the FSCS holds some 95.8% of the total agreed claims. To date, there are 1085 clients with claims in aggregate of £1,196,675.75 who have not assigned them.
There are a further 10,662 clients of Worldspreads of whom the administrators are aware who have not responded to correspondence asking them to agree claims over the period of more than 3 years since the special administration order. Of that group, 9,230 have a 'nil' recorded balance and 1,216 have balances of £100 or less according to the firm's records. The administrators have also identified a further 41 clients who dispute their closing balance in the firm's records; of these, 38 are believed to have nil balances and 3 have balances totalling £3,084.40 in aggregate.
The gross claims of clients against the client money pool are put by the administrators at approximately £28.8 million.
On 21 November 2012, Floyd J gave directions to facilitate and permit the administrators to make interim distributions in respect of agreed client money claims (making prudent reservation against client money claims which had not been agreed). Since then the administrators have paid out 8p/£ in respect of agreed claims against the pool.
The administrators are now holding approximately £3 million. That sum includes about £2.6 million which had been held in the house estate but was transferred into the client money pool by the administrators following legal advice and in consultation with the firm's secured creditor. The administrators are in a position to distribute the £3 million to those entitled to claim against the client money pool, subject to proper costs and expenses. They anticipate a final distribution of the order of 10.3p/£.
The prospective return from the pool to clients with client money claims is therefore likely to be about 18.3p/£. Those clients will have an unsecured claim against the estate for the balance. Closing the client money pool will therefore also quantify the unsecured claims of those clients against the estate.
Ms Bewick explains that the administrators wish to be able to reach the stage when they can properly make a final distribution and close the client money pool. Ms Bewick explains the extensive attempts the administrators have made to contact the non responsive clients. She notes that the CASS 7A rules on distribution do not envisage the existence of non-responsive clients nor do...
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