cm shortfall application in the high court of justice … · as at the primary pooling event ......
TRANSCRIPT
CM Shortfall Application
IN THE HIGH COURT OF JUSTICE No 9527 of2011
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF MF GLOBAL UK LIMITED (in special administration)
AND IN THE MATTER OF THE INVESTMENT BANK SPECIAL
ADMINISTRATION REGULATIONS 2011
BETWEEN
(1) RICHARD HEIS (2) MICHAEL ROBERT PINK
(3) RICHARD DIXON FLEMING (the joint special administrators ofMF Global UK Limited)
Applicants
-andshy
(1) ATTESTOR VALUE MASTER FUND LP (Representative Party A)
-andshy
(2) SOLID FINANCIAL SERVICES LIMITED (Representative Party B)
Respondents
SKELETON ARGUMENT ON BEHALF OF THE SECOND RESPONDENT (AS
REPRESENTATIVE PARTY B)
Pre-reading Iftime permits the Court is invited to pre-read
(I) this Skeleton Argument and the Skeleton Arguments on behalf of the
other parties
(2) Schedule A to the Order for Directions dated 24 May 2013 [Tab 2]
(3) the Position Statements of each ofthe parties [Tabs 7-9]
(4) the evidence (Heis 11 [Tab 3] Konshin [Tab 4])
Estimated time for pre-reading 1 day
Introduction
1 This is the Skeleton Argument on behalf of the Second Respondent Solid Financial
Services Limited (Solid) for the hearing of the Application of the Joint
Administrators (the Administrators) dated 8 May 2011 for directions pursuant
to para 63 of Schedule B 1 (Schedule B1) to the Insolvency Act 1986 (the 1986
Act) [Tab 1]
2 At its nub the fundamental issue arising in the proceedings is whether clients of
MF Global UK Limited (MFG) who have a client money entitlement (ie an
entitlement to share in a distribution of the client money pool (CMP) constituted
as at the primary pooling event (the PPE) in accordance with CASS 7 A) are
entitled to prove for a debt against the general estate in the liquidation ofMFG and
if so the circumstances in which they may do so and the basis upon which such
debt is to be quantified
3 Both Solid and the First Respondent Attestor Value Master Fund LP (Attestor)
have been directed to act as representative parties in the proceedings pursuant to
CPR Part 19 Solid represents the interests of those clients ofMFG who like Solid
had open positions as at the PPE which closed after the PPE with a net liquidation
value greater than the net marked to market values of those positions as at the PPE
(the Increased Clients) Attestor represents the interests of those clients ofMFG
who like Attestor had open positions as at the PPE which closed after the PPE
with a net liquidation value less than the marked to market value of that position as
at the PPE (the Decreased Clients)
4 The background to this Application is as follows
41 MFG entered special administration pursuant to the Investment Bank Special
Administration Regulations 2011 on 31 October 2011 (Heis 11 at [7])
42 Prior to entering special administration MFG handled the European business
of the MF Global group of companies acting as an intermediary broker
providing agency services matched-principal execution and clearing services
for exchange-traded and over-the-counter derivative products as well as for
2
non-derivative foreign exchange products and securities III the money
markets (Heis 11 at [7])
43 The Administrators previously applied to the Court on 3 May 2012 for
directions pursuant to para 63 of Schedule BIas to the basis on which a
clients entitlement to share in the CMP was to be determined (the
Hindsight Application) It was held that the client money entitlement of a
client with respect of a position which was open as at the PPE was to be
valued by reference to the published settlement price on 31 October 2011
(the PPE Valuation) rather than by reference to the liquidation value on
the subsequent close out ofthat position (the Hindsight Valuation)
44 It appears likely that the monies held on trust in the client money pool
(CMP) will not be sufficient to meet the client money claims of all clients
on the PPE Valuation and there will be a shortfall (Heis 11 at [22]) The
potential causes of the shortfall are estimated by the Administrators to be (1)
as to 60 costs attributable to the CMP (2) as to 20 the need to make a
distribution to clients whose positions were not segregated but should have
been and (3) as to 20 the fact that the open positions forming part of the
CMP closed out after the PPE at an aggregate value lower than the aggregate
notional value attributed to those positions as at the PPE (Heis 11 at [27])
5 By this Application the Administrators seek the directions of the Court as to the
circumstances in which a client may prove in the general estate and how the
amount of the proof is to be calculated The Administrators proceed on the basis
that each client had (prior to the appointment of the Administrators) two rights with
respect to an open position in relation to which there was client money protection
namely
51 a contractual right pursuant to the underlying contract which would be
capable of supporting a proof of debt against the general estate of MFG if
MFG should enter administration or liquidation (Heis 11 at [12(a)]) Such a
claim in the liquidation or administration of a firm is to be valued on the
Hindsight Valuation basis and thus on a basis which is different from the
basis on which the clients client money claim is to be valued (ie the PPE
Valuation basis) and
3
52 a client money entitlement which would entitle each client to a share of the
CMP if a primary pooling event should occur in relation to MFG (Heis 11 at
[12(b)]) This is a statutory entitlement which arises pursuant to the
provisions ofCASS7 and CASS 7A of the FSA Handbook (as it then was)
6 In addition there is a third basis on which clients may have a claim against MFG
namely a claim for damages andor equitable compensation for breach of trust
andor breach of statutory duty Such a claim could arise for example where the
shortfall between a clients client money entitlement and distribution from the CMP
arises as a result of a breach by MFG of the Client Money Rules (eg a failure
properly to segregate funds or the additional costs incurred in identifying and
distributing client money caused by a failure to comply with the Client Money
Rules)
The Client Money Rules and Client Money Distribution Rules
7 The Client Money Rules and Client Money Distribution Rules are contained in
CASS 7 and 7 A respectively Those rules are intended to give effect to the EC
Directive on the Markets in Financial Instruments 200439IEC (MiFID) and EC
Directive 2006173EC (the Implementing Directive) As is apparent from
MiFID and the Implementing Directive the underlying purpose of the client money
and client money distribution rules is to ensure a high level of protection for clients
and the protection of client money (Lehman Brothers International (Europe) v CRC
Credit Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [47] per Lord Walker at
[110] per Lord Clarke and at [132]-[133] [138] amp [164] per Lord Dyson)
8 Recital 2 ofMiFID recites that
In recent years more investors have become active in the financial markets and are offered an even more complex wide-ranging set of services and instruments In view ofthese developments the framework ofthe Community should encompass the full range ofinvestor-oriented activities To this end it is necessary to provide for the degree of harmonisation needed to offer investors a high level of protection and to allow investment firms to provide services throughout the Community being a Single Market on the basis ofhome country supervision
1 The FSA Handbook has been replaced by the FCA and PRA Handbooks with effect from 1 April 2013 The relevant provisions for the purposes of this Application are to be found in the FSA Handbook
4
(Emphasis added)
9 Recital 26 ofMiFLD recites that
In order to protect an investors ownership and other similar rights in respect of securities and his rights in respect offunds entrusted to a firm those rights should in particular be kept distinct from those ofthe firm
10 Article 13(8) of the MIFID provide for clients rights in funds held by a firm to be
safeguarded
(8) An investment firm shall when holding funds belonging to clients make adequate arrangements to safeguard the clients rights and except in the case of credit institutions prevent the use ofclient funds for its own account
11 The key provisions of the Client Money and Client Money Distribution Rules are
summarised in [16]-[35] of the judgment in the Hindsight Application (the
Hindsight Judgment)
12 As to the Client Money Rules in outline
121 MFG is a firm to which the Client Money Rules apply (CASS 7l1R)
122 Client money (ie money which is received by a firm on behalf of a client
and is not due and payable to the firm for its own account) must be
segregated from the firms money by being paid into and held in an account
identified separately from any accounts used to hold money belonging to the
firm (CASS 7411R)
123 CASS 772R provides for client money to be held by the firm on trust
A firm receives and holds client money as trustee on the following terms (1) for the purposes ofand on the terms ofthe 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 ofthe client money in accordance with (2) and
(5) after all valid claims and costs under (2) to (4) have been metfor the firm itself
5
124 The fact that beneficial ownership in client money remains in a firms clients
is reinforced by the guidance note in CASS 771G which states that
Section 139(1) ofthe Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership ofthe client
(Emphasis added)
125 In order to ensure that a firm holds sufficient client money from time to time
each business day a firm must carry out an internal client money
reconciliation Annex 1 to CASS 7 sets out the steps involved in the standard
method of internal client money reconciliation In broad terms these involve
checking whether the client money resource (ie the aggregate balance on the
client bank accounts maintained by the firm) was at the close of business on
the previous business day or alternatively is at the close of business that day
equal to the client money requirement (as defined in para 6 ofAnnex 1) as at
the close ofbusiness on that previous business day
13 As to the Client Money Distribution Rules in outline
131 The client money distribution rules apply when a primary pooling event
occurs (CASS 7A11) A primary pooling occurred in respect ofMFG upon
the appointment of the Administrators on 31 October 2011 (CASS 7A21
and the definition of failure in the Glossary)
132 CASS 7A24 sets out the consequences of a primary pooling event
occurring namely
(1) Client money held in each client money account of the firm is treated as pooled and
(2) the firm must distribute that client money in accordance with CASS 772R so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A25R
133 The guidance note at CASS 7A26G states that
A clients main claim is for the return of client money held in a client bank account A client may be able to claim for any shortfall against
6
money held in a firms own account For that claim the client will be an unsecured creditor ofthe firm
The issues on this Application
14 The questions to be determined on this application are set out in Schedule A to the
Order for Directions dated 24 May 2013 (the Questions) [Tab 2] As a result of
the Position Statements filed by the parties on 4 July 2013 it has become clear that
there are areas of common ground between the parties and the issues in dispute
have been narrowed as set out below
Questions 1-3 Is a client entitled to prove for a debt against the general estate of
MFG on the basis of its contractual rights against MFG and if so how is such debt
to be quantified for the purposes of proof
The Parties positions
15 It is common ground between the parties that a client is entitled in principle to
prove for a debt in respect of its contractual rights against MFG2 The issue is as to
how a clients proof in respect of its contractual rights is to be quantified In
summary
151 Both Solid and Attestor contend that Option 2(1) is correct ie a client is
entitled to prove for the full value of its contractual rights against MFGUK
subject to a cap on recovery (Solids PS at [5] Attestors PS at [3(2)] As to
the cap
1511 it is Solids case that a client cannot recover further payment from the
general estate once it has received from either the general estate or the
CMP sums totalling more than the full value of its contractual rights
(together with interest) Solids PS at [6]-[7]
1512 it is Attestors case that a client cannot recover by way of distribution
from the CMP and by way of dividend from the general estate sums
2 See Solids PS at [1]-[4] Administrators PS at [6] Attestors PS at [1] It appears also to be common ground that each client had as at the date ofthe PPE contractual rights against MFG which are capable of supporting a proof in the general estate subj ect to any defence (such as set -oft) which MFG may have in particular instances
7
which in aggregate exceed more than the sum of that clients client
money entitlement and its contractual rights (together with interest)
Attestors PS at [3(4)]
152 It is the Administrators case on the other hand that Option 2(2) is correct
ie a client is entitled to prove only for the value of its contractual rights less
the amount that a client receives by way of distribution from the CMP
Administrators PS at [7]-[8]
153 No party contends that if Option 2(1) is correct the appropriate cap on
recovery is as set out in Question 3 Further no party contends that Option
2(3) is correct
Claims against two estates
16 Solid relies upon the principle that where a creditor has claims against two estates
one or both of which is insolvent it is entitled to prove in full against the insolvent
estate(s) for the full debt owing at the date of liquidation or administration (subject
to the rule against double recovery3) The principle is well established by authority4
It applies for example in the case of co-debtors
17 In Re Humber Ironworks amp Ship-Building Company (1869) 5 LR Ch App 88 the
drawer of a bill agreed to transfer assets to a third party on trust for payment (in the
event that there should be default on the bills) to the payee under the bill in or
towards satisfaction of the moneys so remaining unpaid with any surplus
remaining after satisfaction of the liability to the payee to be paid to the drawer
The drawer went into liquidation shortly before the bills became payable The
payee received from the trust assets and by way of dividends in the liquidation
sums which in aggregate were more than the principal of its debt An issue arose as
to whether the payee was entitled to retain the additional sums towards interest
which was due under the agreement Giffard LJ held that it was stating at pp 92-93
that
3 See paras 29ffbelow
4 See Re Plummer and Wilson (l841) 1 PH 56 at 59 In re Joint Stock Discount Company (l869) 5 LR Ch App 86 at 88 Humber Ironworks amp Ship-Building Company (l869) 5 LR Ch App 88 at 92-93 Midland Montagu Australia Ltd v Harkness (l994) 14 ACSR 318 at 325-326 (Supreme Court ofNew South Wales) See also Keay McPhersons Law oCompany Liquidation (2nd ed 2009) at pp 800-801
8
1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
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Introduction
1 This is the Skeleton Argument on behalf of the Second Respondent Solid Financial
Services Limited (Solid) for the hearing of the Application of the Joint
Administrators (the Administrators) dated 8 May 2011 for directions pursuant
to para 63 of Schedule B 1 (Schedule B1) to the Insolvency Act 1986 (the 1986
Act) [Tab 1]
2 At its nub the fundamental issue arising in the proceedings is whether clients of
MF Global UK Limited (MFG) who have a client money entitlement (ie an
entitlement to share in a distribution of the client money pool (CMP) constituted
as at the primary pooling event (the PPE) in accordance with CASS 7 A) are
entitled to prove for a debt against the general estate in the liquidation ofMFG and
if so the circumstances in which they may do so and the basis upon which such
debt is to be quantified
3 Both Solid and the First Respondent Attestor Value Master Fund LP (Attestor)
have been directed to act as representative parties in the proceedings pursuant to
CPR Part 19 Solid represents the interests of those clients ofMFG who like Solid
had open positions as at the PPE which closed after the PPE with a net liquidation
value greater than the net marked to market values of those positions as at the PPE
(the Increased Clients) Attestor represents the interests of those clients ofMFG
who like Attestor had open positions as at the PPE which closed after the PPE
with a net liquidation value less than the marked to market value of that position as
at the PPE (the Decreased Clients)
4 The background to this Application is as follows
41 MFG entered special administration pursuant to the Investment Bank Special
Administration Regulations 2011 on 31 October 2011 (Heis 11 at [7])
42 Prior to entering special administration MFG handled the European business
of the MF Global group of companies acting as an intermediary broker
providing agency services matched-principal execution and clearing services
for exchange-traded and over-the-counter derivative products as well as for
2
non-derivative foreign exchange products and securities III the money
markets (Heis 11 at [7])
43 The Administrators previously applied to the Court on 3 May 2012 for
directions pursuant to para 63 of Schedule BIas to the basis on which a
clients entitlement to share in the CMP was to be determined (the
Hindsight Application) It was held that the client money entitlement of a
client with respect of a position which was open as at the PPE was to be
valued by reference to the published settlement price on 31 October 2011
(the PPE Valuation) rather than by reference to the liquidation value on
the subsequent close out ofthat position (the Hindsight Valuation)
44 It appears likely that the monies held on trust in the client money pool
(CMP) will not be sufficient to meet the client money claims of all clients
on the PPE Valuation and there will be a shortfall (Heis 11 at [22]) The
potential causes of the shortfall are estimated by the Administrators to be (1)
as to 60 costs attributable to the CMP (2) as to 20 the need to make a
distribution to clients whose positions were not segregated but should have
been and (3) as to 20 the fact that the open positions forming part of the
CMP closed out after the PPE at an aggregate value lower than the aggregate
notional value attributed to those positions as at the PPE (Heis 11 at [27])
5 By this Application the Administrators seek the directions of the Court as to the
circumstances in which a client may prove in the general estate and how the
amount of the proof is to be calculated The Administrators proceed on the basis
that each client had (prior to the appointment of the Administrators) two rights with
respect to an open position in relation to which there was client money protection
namely
51 a contractual right pursuant to the underlying contract which would be
capable of supporting a proof of debt against the general estate of MFG if
MFG should enter administration or liquidation (Heis 11 at [12(a)]) Such a
claim in the liquidation or administration of a firm is to be valued on the
Hindsight Valuation basis and thus on a basis which is different from the
basis on which the clients client money claim is to be valued (ie the PPE
Valuation basis) and
3
52 a client money entitlement which would entitle each client to a share of the
CMP if a primary pooling event should occur in relation to MFG (Heis 11 at
[12(b)]) This is a statutory entitlement which arises pursuant to the
provisions ofCASS7 and CASS 7A of the FSA Handbook (as it then was)
6 In addition there is a third basis on which clients may have a claim against MFG
namely a claim for damages andor equitable compensation for breach of trust
andor breach of statutory duty Such a claim could arise for example where the
shortfall between a clients client money entitlement and distribution from the CMP
arises as a result of a breach by MFG of the Client Money Rules (eg a failure
properly to segregate funds or the additional costs incurred in identifying and
distributing client money caused by a failure to comply with the Client Money
Rules)
The Client Money Rules and Client Money Distribution Rules
7 The Client Money Rules and Client Money Distribution Rules are contained in
CASS 7 and 7 A respectively Those rules are intended to give effect to the EC
Directive on the Markets in Financial Instruments 200439IEC (MiFID) and EC
Directive 2006173EC (the Implementing Directive) As is apparent from
MiFID and the Implementing Directive the underlying purpose of the client money
and client money distribution rules is to ensure a high level of protection for clients
and the protection of client money (Lehman Brothers International (Europe) v CRC
Credit Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [47] per Lord Walker at
[110] per Lord Clarke and at [132]-[133] [138] amp [164] per Lord Dyson)
8 Recital 2 ofMiFID recites that
In recent years more investors have become active in the financial markets and are offered an even more complex wide-ranging set of services and instruments In view ofthese developments the framework ofthe Community should encompass the full range ofinvestor-oriented activities To this end it is necessary to provide for the degree of harmonisation needed to offer investors a high level of protection and to allow investment firms to provide services throughout the Community being a Single Market on the basis ofhome country supervision
1 The FSA Handbook has been replaced by the FCA and PRA Handbooks with effect from 1 April 2013 The relevant provisions for the purposes of this Application are to be found in the FSA Handbook
4
(Emphasis added)
9 Recital 26 ofMiFLD recites that
In order to protect an investors ownership and other similar rights in respect of securities and his rights in respect offunds entrusted to a firm those rights should in particular be kept distinct from those ofthe firm
10 Article 13(8) of the MIFID provide for clients rights in funds held by a firm to be
safeguarded
(8) An investment firm shall when holding funds belonging to clients make adequate arrangements to safeguard the clients rights and except in the case of credit institutions prevent the use ofclient funds for its own account
11 The key provisions of the Client Money and Client Money Distribution Rules are
summarised in [16]-[35] of the judgment in the Hindsight Application (the
Hindsight Judgment)
12 As to the Client Money Rules in outline
121 MFG is a firm to which the Client Money Rules apply (CASS 7l1R)
122 Client money (ie money which is received by a firm on behalf of a client
and is not due and payable to the firm for its own account) must be
segregated from the firms money by being paid into and held in an account
identified separately from any accounts used to hold money belonging to the
firm (CASS 7411R)
123 CASS 772R provides for client money to be held by the firm on trust
A firm receives and holds client money as trustee on the following terms (1) for the purposes ofand on the terms ofthe 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 ofthe client money in accordance with (2) and
(5) after all valid claims and costs under (2) to (4) have been metfor the firm itself
5
124 The fact that beneficial ownership in client money remains in a firms clients
is reinforced by the guidance note in CASS 771G which states that
Section 139(1) ofthe Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership ofthe client
(Emphasis added)
125 In order to ensure that a firm holds sufficient client money from time to time
each business day a firm must carry out an internal client money
reconciliation Annex 1 to CASS 7 sets out the steps involved in the standard
method of internal client money reconciliation In broad terms these involve
checking whether the client money resource (ie the aggregate balance on the
client bank accounts maintained by the firm) was at the close of business on
the previous business day or alternatively is at the close of business that day
equal to the client money requirement (as defined in para 6 ofAnnex 1) as at
the close ofbusiness on that previous business day
13 As to the Client Money Distribution Rules in outline
131 The client money distribution rules apply when a primary pooling event
occurs (CASS 7A11) A primary pooling occurred in respect ofMFG upon
the appointment of the Administrators on 31 October 2011 (CASS 7A21
and the definition of failure in the Glossary)
132 CASS 7A24 sets out the consequences of a primary pooling event
occurring namely
(1) Client money held in each client money account of the firm is treated as pooled and
(2) the firm must distribute that client money in accordance with CASS 772R so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A25R
133 The guidance note at CASS 7A26G states that
A clients main claim is for the return of client money held in a client bank account A client may be able to claim for any shortfall against
6
money held in a firms own account For that claim the client will be an unsecured creditor ofthe firm
The issues on this Application
14 The questions to be determined on this application are set out in Schedule A to the
Order for Directions dated 24 May 2013 (the Questions) [Tab 2] As a result of
the Position Statements filed by the parties on 4 July 2013 it has become clear that
there are areas of common ground between the parties and the issues in dispute
have been narrowed as set out below
Questions 1-3 Is a client entitled to prove for a debt against the general estate of
MFG on the basis of its contractual rights against MFG and if so how is such debt
to be quantified for the purposes of proof
The Parties positions
15 It is common ground between the parties that a client is entitled in principle to
prove for a debt in respect of its contractual rights against MFG2 The issue is as to
how a clients proof in respect of its contractual rights is to be quantified In
summary
151 Both Solid and Attestor contend that Option 2(1) is correct ie a client is
entitled to prove for the full value of its contractual rights against MFGUK
subject to a cap on recovery (Solids PS at [5] Attestors PS at [3(2)] As to
the cap
1511 it is Solids case that a client cannot recover further payment from the
general estate once it has received from either the general estate or the
CMP sums totalling more than the full value of its contractual rights
(together with interest) Solids PS at [6]-[7]
1512 it is Attestors case that a client cannot recover by way of distribution
from the CMP and by way of dividend from the general estate sums
2 See Solids PS at [1]-[4] Administrators PS at [6] Attestors PS at [1] It appears also to be common ground that each client had as at the date ofthe PPE contractual rights against MFG which are capable of supporting a proof in the general estate subj ect to any defence (such as set -oft) which MFG may have in particular instances
7
which in aggregate exceed more than the sum of that clients client
money entitlement and its contractual rights (together with interest)
Attestors PS at [3(4)]
152 It is the Administrators case on the other hand that Option 2(2) is correct
ie a client is entitled to prove only for the value of its contractual rights less
the amount that a client receives by way of distribution from the CMP
Administrators PS at [7]-[8]
153 No party contends that if Option 2(1) is correct the appropriate cap on
recovery is as set out in Question 3 Further no party contends that Option
2(3) is correct
Claims against two estates
16 Solid relies upon the principle that where a creditor has claims against two estates
one or both of which is insolvent it is entitled to prove in full against the insolvent
estate(s) for the full debt owing at the date of liquidation or administration (subject
to the rule against double recovery3) The principle is well established by authority4
It applies for example in the case of co-debtors
17 In Re Humber Ironworks amp Ship-Building Company (1869) 5 LR Ch App 88 the
drawer of a bill agreed to transfer assets to a third party on trust for payment (in the
event that there should be default on the bills) to the payee under the bill in or
towards satisfaction of the moneys so remaining unpaid with any surplus
remaining after satisfaction of the liability to the payee to be paid to the drawer
The drawer went into liquidation shortly before the bills became payable The
payee received from the trust assets and by way of dividends in the liquidation
sums which in aggregate were more than the principal of its debt An issue arose as
to whether the payee was entitled to retain the additional sums towards interest
which was due under the agreement Giffard LJ held that it was stating at pp 92-93
that
3 See paras 29ffbelow
4 See Re Plummer and Wilson (l841) 1 PH 56 at 59 In re Joint Stock Discount Company (l869) 5 LR Ch App 86 at 88 Humber Ironworks amp Ship-Building Company (l869) 5 LR Ch App 88 at 92-93 Midland Montagu Australia Ltd v Harkness (l994) 14 ACSR 318 at 325-326 (Supreme Court ofNew South Wales) See also Keay McPhersons Law oCompany Liquidation (2nd ed 2009) at pp 800-801
8
1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
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non-derivative foreign exchange products and securities III the money
markets (Heis 11 at [7])
43 The Administrators previously applied to the Court on 3 May 2012 for
directions pursuant to para 63 of Schedule BIas to the basis on which a
clients entitlement to share in the CMP was to be determined (the
Hindsight Application) It was held that the client money entitlement of a
client with respect of a position which was open as at the PPE was to be
valued by reference to the published settlement price on 31 October 2011
(the PPE Valuation) rather than by reference to the liquidation value on
the subsequent close out ofthat position (the Hindsight Valuation)
44 It appears likely that the monies held on trust in the client money pool
(CMP) will not be sufficient to meet the client money claims of all clients
on the PPE Valuation and there will be a shortfall (Heis 11 at [22]) The
potential causes of the shortfall are estimated by the Administrators to be (1)
as to 60 costs attributable to the CMP (2) as to 20 the need to make a
distribution to clients whose positions were not segregated but should have
been and (3) as to 20 the fact that the open positions forming part of the
CMP closed out after the PPE at an aggregate value lower than the aggregate
notional value attributed to those positions as at the PPE (Heis 11 at [27])
5 By this Application the Administrators seek the directions of the Court as to the
circumstances in which a client may prove in the general estate and how the
amount of the proof is to be calculated The Administrators proceed on the basis
that each client had (prior to the appointment of the Administrators) two rights with
respect to an open position in relation to which there was client money protection
namely
51 a contractual right pursuant to the underlying contract which would be
capable of supporting a proof of debt against the general estate of MFG if
MFG should enter administration or liquidation (Heis 11 at [12(a)]) Such a
claim in the liquidation or administration of a firm is to be valued on the
Hindsight Valuation basis and thus on a basis which is different from the
basis on which the clients client money claim is to be valued (ie the PPE
Valuation basis) and
3
52 a client money entitlement which would entitle each client to a share of the
CMP if a primary pooling event should occur in relation to MFG (Heis 11 at
[12(b)]) This is a statutory entitlement which arises pursuant to the
provisions ofCASS7 and CASS 7A of the FSA Handbook (as it then was)
6 In addition there is a third basis on which clients may have a claim against MFG
namely a claim for damages andor equitable compensation for breach of trust
andor breach of statutory duty Such a claim could arise for example where the
shortfall between a clients client money entitlement and distribution from the CMP
arises as a result of a breach by MFG of the Client Money Rules (eg a failure
properly to segregate funds or the additional costs incurred in identifying and
distributing client money caused by a failure to comply with the Client Money
Rules)
The Client Money Rules and Client Money Distribution Rules
7 The Client Money Rules and Client Money Distribution Rules are contained in
CASS 7 and 7 A respectively Those rules are intended to give effect to the EC
Directive on the Markets in Financial Instruments 200439IEC (MiFID) and EC
Directive 2006173EC (the Implementing Directive) As is apparent from
MiFID and the Implementing Directive the underlying purpose of the client money
and client money distribution rules is to ensure a high level of protection for clients
and the protection of client money (Lehman Brothers International (Europe) v CRC
Credit Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [47] per Lord Walker at
[110] per Lord Clarke and at [132]-[133] [138] amp [164] per Lord Dyson)
8 Recital 2 ofMiFID recites that
In recent years more investors have become active in the financial markets and are offered an even more complex wide-ranging set of services and instruments In view ofthese developments the framework ofthe Community should encompass the full range ofinvestor-oriented activities To this end it is necessary to provide for the degree of harmonisation needed to offer investors a high level of protection and to allow investment firms to provide services throughout the Community being a Single Market on the basis ofhome country supervision
1 The FSA Handbook has been replaced by the FCA and PRA Handbooks with effect from 1 April 2013 The relevant provisions for the purposes of this Application are to be found in the FSA Handbook
4
(Emphasis added)
9 Recital 26 ofMiFLD recites that
In order to protect an investors ownership and other similar rights in respect of securities and his rights in respect offunds entrusted to a firm those rights should in particular be kept distinct from those ofthe firm
10 Article 13(8) of the MIFID provide for clients rights in funds held by a firm to be
safeguarded
(8) An investment firm shall when holding funds belonging to clients make adequate arrangements to safeguard the clients rights and except in the case of credit institutions prevent the use ofclient funds for its own account
11 The key provisions of the Client Money and Client Money Distribution Rules are
summarised in [16]-[35] of the judgment in the Hindsight Application (the
Hindsight Judgment)
12 As to the Client Money Rules in outline
121 MFG is a firm to which the Client Money Rules apply (CASS 7l1R)
122 Client money (ie money which is received by a firm on behalf of a client
and is not due and payable to the firm for its own account) must be
segregated from the firms money by being paid into and held in an account
identified separately from any accounts used to hold money belonging to the
firm (CASS 7411R)
123 CASS 772R provides for client money to be held by the firm on trust
A firm receives and holds client money as trustee on the following terms (1) for the purposes ofand on the terms ofthe 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 ofthe client money in accordance with (2) and
(5) after all valid claims and costs under (2) to (4) have been metfor the firm itself
5
124 The fact that beneficial ownership in client money remains in a firms clients
is reinforced by the guidance note in CASS 771G which states that
Section 139(1) ofthe Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership ofthe client
(Emphasis added)
125 In order to ensure that a firm holds sufficient client money from time to time
each business day a firm must carry out an internal client money
reconciliation Annex 1 to CASS 7 sets out the steps involved in the standard
method of internal client money reconciliation In broad terms these involve
checking whether the client money resource (ie the aggregate balance on the
client bank accounts maintained by the firm) was at the close of business on
the previous business day or alternatively is at the close of business that day
equal to the client money requirement (as defined in para 6 ofAnnex 1) as at
the close ofbusiness on that previous business day
13 As to the Client Money Distribution Rules in outline
131 The client money distribution rules apply when a primary pooling event
occurs (CASS 7A11) A primary pooling occurred in respect ofMFG upon
the appointment of the Administrators on 31 October 2011 (CASS 7A21
and the definition of failure in the Glossary)
132 CASS 7A24 sets out the consequences of a primary pooling event
occurring namely
(1) Client money held in each client money account of the firm is treated as pooled and
(2) the firm must distribute that client money in accordance with CASS 772R so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A25R
133 The guidance note at CASS 7A26G states that
A clients main claim is for the return of client money held in a client bank account A client may be able to claim for any shortfall against
6
money held in a firms own account For that claim the client will be an unsecured creditor ofthe firm
The issues on this Application
14 The questions to be determined on this application are set out in Schedule A to the
Order for Directions dated 24 May 2013 (the Questions) [Tab 2] As a result of
the Position Statements filed by the parties on 4 July 2013 it has become clear that
there are areas of common ground between the parties and the issues in dispute
have been narrowed as set out below
Questions 1-3 Is a client entitled to prove for a debt against the general estate of
MFG on the basis of its contractual rights against MFG and if so how is such debt
to be quantified for the purposes of proof
The Parties positions
15 It is common ground between the parties that a client is entitled in principle to
prove for a debt in respect of its contractual rights against MFG2 The issue is as to
how a clients proof in respect of its contractual rights is to be quantified In
summary
151 Both Solid and Attestor contend that Option 2(1) is correct ie a client is
entitled to prove for the full value of its contractual rights against MFGUK
subject to a cap on recovery (Solids PS at [5] Attestors PS at [3(2)] As to
the cap
1511 it is Solids case that a client cannot recover further payment from the
general estate once it has received from either the general estate or the
CMP sums totalling more than the full value of its contractual rights
(together with interest) Solids PS at [6]-[7]
1512 it is Attestors case that a client cannot recover by way of distribution
from the CMP and by way of dividend from the general estate sums
2 See Solids PS at [1]-[4] Administrators PS at [6] Attestors PS at [1] It appears also to be common ground that each client had as at the date ofthe PPE contractual rights against MFG which are capable of supporting a proof in the general estate subj ect to any defence (such as set -oft) which MFG may have in particular instances
7
which in aggregate exceed more than the sum of that clients client
money entitlement and its contractual rights (together with interest)
Attestors PS at [3(4)]
152 It is the Administrators case on the other hand that Option 2(2) is correct
ie a client is entitled to prove only for the value of its contractual rights less
the amount that a client receives by way of distribution from the CMP
Administrators PS at [7]-[8]
153 No party contends that if Option 2(1) is correct the appropriate cap on
recovery is as set out in Question 3 Further no party contends that Option
2(3) is correct
Claims against two estates
16 Solid relies upon the principle that where a creditor has claims against two estates
one or both of which is insolvent it is entitled to prove in full against the insolvent
estate(s) for the full debt owing at the date of liquidation or administration (subject
to the rule against double recovery3) The principle is well established by authority4
It applies for example in the case of co-debtors
17 In Re Humber Ironworks amp Ship-Building Company (1869) 5 LR Ch App 88 the
drawer of a bill agreed to transfer assets to a third party on trust for payment (in the
event that there should be default on the bills) to the payee under the bill in or
towards satisfaction of the moneys so remaining unpaid with any surplus
remaining after satisfaction of the liability to the payee to be paid to the drawer
The drawer went into liquidation shortly before the bills became payable The
payee received from the trust assets and by way of dividends in the liquidation
sums which in aggregate were more than the principal of its debt An issue arose as
to whether the payee was entitled to retain the additional sums towards interest
which was due under the agreement Giffard LJ held that it was stating at pp 92-93
that
3 See paras 29ffbelow
4 See Re Plummer and Wilson (l841) 1 PH 56 at 59 In re Joint Stock Discount Company (l869) 5 LR Ch App 86 at 88 Humber Ironworks amp Ship-Building Company (l869) 5 LR Ch App 88 at 92-93 Midland Montagu Australia Ltd v Harkness (l994) 14 ACSR 318 at 325-326 (Supreme Court ofNew South Wales) See also Keay McPhersons Law oCompany Liquidation (2nd ed 2009) at pp 800-801
8
1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
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52 a client money entitlement which would entitle each client to a share of the
CMP if a primary pooling event should occur in relation to MFG (Heis 11 at
[12(b)]) This is a statutory entitlement which arises pursuant to the
provisions ofCASS7 and CASS 7A of the FSA Handbook (as it then was)
6 In addition there is a third basis on which clients may have a claim against MFG
namely a claim for damages andor equitable compensation for breach of trust
andor breach of statutory duty Such a claim could arise for example where the
shortfall between a clients client money entitlement and distribution from the CMP
arises as a result of a breach by MFG of the Client Money Rules (eg a failure
properly to segregate funds or the additional costs incurred in identifying and
distributing client money caused by a failure to comply with the Client Money
Rules)
The Client Money Rules and Client Money Distribution Rules
7 The Client Money Rules and Client Money Distribution Rules are contained in
CASS 7 and 7 A respectively Those rules are intended to give effect to the EC
Directive on the Markets in Financial Instruments 200439IEC (MiFID) and EC
Directive 2006173EC (the Implementing Directive) As is apparent from
MiFID and the Implementing Directive the underlying purpose of the client money
and client money distribution rules is to ensure a high level of protection for clients
and the protection of client money (Lehman Brothers International (Europe) v CRC
Credit Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [47] per Lord Walker at
[110] per Lord Clarke and at [132]-[133] [138] amp [164] per Lord Dyson)
8 Recital 2 ofMiFID recites that
In recent years more investors have become active in the financial markets and are offered an even more complex wide-ranging set of services and instruments In view ofthese developments the framework ofthe Community should encompass the full range ofinvestor-oriented activities To this end it is necessary to provide for the degree of harmonisation needed to offer investors a high level of protection and to allow investment firms to provide services throughout the Community being a Single Market on the basis ofhome country supervision
1 The FSA Handbook has been replaced by the FCA and PRA Handbooks with effect from 1 April 2013 The relevant provisions for the purposes of this Application are to be found in the FSA Handbook
4
(Emphasis added)
9 Recital 26 ofMiFLD recites that
In order to protect an investors ownership and other similar rights in respect of securities and his rights in respect offunds entrusted to a firm those rights should in particular be kept distinct from those ofthe firm
10 Article 13(8) of the MIFID provide for clients rights in funds held by a firm to be
safeguarded
(8) An investment firm shall when holding funds belonging to clients make adequate arrangements to safeguard the clients rights and except in the case of credit institutions prevent the use ofclient funds for its own account
11 The key provisions of the Client Money and Client Money Distribution Rules are
summarised in [16]-[35] of the judgment in the Hindsight Application (the
Hindsight Judgment)
12 As to the Client Money Rules in outline
121 MFG is a firm to which the Client Money Rules apply (CASS 7l1R)
122 Client money (ie money which is received by a firm on behalf of a client
and is not due and payable to the firm for its own account) must be
segregated from the firms money by being paid into and held in an account
identified separately from any accounts used to hold money belonging to the
firm (CASS 7411R)
123 CASS 772R provides for client money to be held by the firm on trust
A firm receives and holds client money as trustee on the following terms (1) for the purposes ofand on the terms ofthe 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 ofthe client money in accordance with (2) and
(5) after all valid claims and costs under (2) to (4) have been metfor the firm itself
5
124 The fact that beneficial ownership in client money remains in a firms clients
is reinforced by the guidance note in CASS 771G which states that
Section 139(1) ofthe Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership ofthe client
(Emphasis added)
125 In order to ensure that a firm holds sufficient client money from time to time
each business day a firm must carry out an internal client money
reconciliation Annex 1 to CASS 7 sets out the steps involved in the standard
method of internal client money reconciliation In broad terms these involve
checking whether the client money resource (ie the aggregate balance on the
client bank accounts maintained by the firm) was at the close of business on
the previous business day or alternatively is at the close of business that day
equal to the client money requirement (as defined in para 6 ofAnnex 1) as at
the close ofbusiness on that previous business day
13 As to the Client Money Distribution Rules in outline
131 The client money distribution rules apply when a primary pooling event
occurs (CASS 7A11) A primary pooling occurred in respect ofMFG upon
the appointment of the Administrators on 31 October 2011 (CASS 7A21
and the definition of failure in the Glossary)
132 CASS 7A24 sets out the consequences of a primary pooling event
occurring namely
(1) Client money held in each client money account of the firm is treated as pooled and
(2) the firm must distribute that client money in accordance with CASS 772R so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A25R
133 The guidance note at CASS 7A26G states that
A clients main claim is for the return of client money held in a client bank account A client may be able to claim for any shortfall against
6
money held in a firms own account For that claim the client will be an unsecured creditor ofthe firm
The issues on this Application
14 The questions to be determined on this application are set out in Schedule A to the
Order for Directions dated 24 May 2013 (the Questions) [Tab 2] As a result of
the Position Statements filed by the parties on 4 July 2013 it has become clear that
there are areas of common ground between the parties and the issues in dispute
have been narrowed as set out below
Questions 1-3 Is a client entitled to prove for a debt against the general estate of
MFG on the basis of its contractual rights against MFG and if so how is such debt
to be quantified for the purposes of proof
The Parties positions
15 It is common ground between the parties that a client is entitled in principle to
prove for a debt in respect of its contractual rights against MFG2 The issue is as to
how a clients proof in respect of its contractual rights is to be quantified In
summary
151 Both Solid and Attestor contend that Option 2(1) is correct ie a client is
entitled to prove for the full value of its contractual rights against MFGUK
subject to a cap on recovery (Solids PS at [5] Attestors PS at [3(2)] As to
the cap
1511 it is Solids case that a client cannot recover further payment from the
general estate once it has received from either the general estate or the
CMP sums totalling more than the full value of its contractual rights
(together with interest) Solids PS at [6]-[7]
1512 it is Attestors case that a client cannot recover by way of distribution
from the CMP and by way of dividend from the general estate sums
2 See Solids PS at [1]-[4] Administrators PS at [6] Attestors PS at [1] It appears also to be common ground that each client had as at the date ofthe PPE contractual rights against MFG which are capable of supporting a proof in the general estate subj ect to any defence (such as set -oft) which MFG may have in particular instances
7
which in aggregate exceed more than the sum of that clients client
money entitlement and its contractual rights (together with interest)
Attestors PS at [3(4)]
152 It is the Administrators case on the other hand that Option 2(2) is correct
ie a client is entitled to prove only for the value of its contractual rights less
the amount that a client receives by way of distribution from the CMP
Administrators PS at [7]-[8]
153 No party contends that if Option 2(1) is correct the appropriate cap on
recovery is as set out in Question 3 Further no party contends that Option
2(3) is correct
Claims against two estates
16 Solid relies upon the principle that where a creditor has claims against two estates
one or both of which is insolvent it is entitled to prove in full against the insolvent
estate(s) for the full debt owing at the date of liquidation or administration (subject
to the rule against double recovery3) The principle is well established by authority4
It applies for example in the case of co-debtors
17 In Re Humber Ironworks amp Ship-Building Company (1869) 5 LR Ch App 88 the
drawer of a bill agreed to transfer assets to a third party on trust for payment (in the
event that there should be default on the bills) to the payee under the bill in or
towards satisfaction of the moneys so remaining unpaid with any surplus
remaining after satisfaction of the liability to the payee to be paid to the drawer
The drawer went into liquidation shortly before the bills became payable The
payee received from the trust assets and by way of dividends in the liquidation
sums which in aggregate were more than the principal of its debt An issue arose as
to whether the payee was entitled to retain the additional sums towards interest
which was due under the agreement Giffard LJ held that it was stating at pp 92-93
that
3 See paras 29ffbelow
4 See Re Plummer and Wilson (l841) 1 PH 56 at 59 In re Joint Stock Discount Company (l869) 5 LR Ch App 86 at 88 Humber Ironworks amp Ship-Building Company (l869) 5 LR Ch App 88 at 92-93 Midland Montagu Australia Ltd v Harkness (l994) 14 ACSR 318 at 325-326 (Supreme Court ofNew South Wales) See also Keay McPhersons Law oCompany Liquidation (2nd ed 2009) at pp 800-801
8
1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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(Emphasis added)
9 Recital 26 ofMiFLD recites that
In order to protect an investors ownership and other similar rights in respect of securities and his rights in respect offunds entrusted to a firm those rights should in particular be kept distinct from those ofthe firm
10 Article 13(8) of the MIFID provide for clients rights in funds held by a firm to be
safeguarded
(8) An investment firm shall when holding funds belonging to clients make adequate arrangements to safeguard the clients rights and except in the case of credit institutions prevent the use ofclient funds for its own account
11 The key provisions of the Client Money and Client Money Distribution Rules are
summarised in [16]-[35] of the judgment in the Hindsight Application (the
Hindsight Judgment)
12 As to the Client Money Rules in outline
121 MFG is a firm to which the Client Money Rules apply (CASS 7l1R)
122 Client money (ie money which is received by a firm on behalf of a client
and is not due and payable to the firm for its own account) must be
segregated from the firms money by being paid into and held in an account
identified separately from any accounts used to hold money belonging to the
firm (CASS 7411R)
123 CASS 772R provides for client money to be held by the firm on trust
A firm receives and holds client money as trustee on the following terms (1) for the purposes ofand on the terms ofthe 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 ofthe client money in accordance with (2) and
(5) after all valid claims and costs under (2) to (4) have been metfor the firm itself
5
124 The fact that beneficial ownership in client money remains in a firms clients
is reinforced by the guidance note in CASS 771G which states that
Section 139(1) ofthe Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership ofthe client
(Emphasis added)
125 In order to ensure that a firm holds sufficient client money from time to time
each business day a firm must carry out an internal client money
reconciliation Annex 1 to CASS 7 sets out the steps involved in the standard
method of internal client money reconciliation In broad terms these involve
checking whether the client money resource (ie the aggregate balance on the
client bank accounts maintained by the firm) was at the close of business on
the previous business day or alternatively is at the close of business that day
equal to the client money requirement (as defined in para 6 ofAnnex 1) as at
the close ofbusiness on that previous business day
13 As to the Client Money Distribution Rules in outline
131 The client money distribution rules apply when a primary pooling event
occurs (CASS 7A11) A primary pooling occurred in respect ofMFG upon
the appointment of the Administrators on 31 October 2011 (CASS 7A21
and the definition of failure in the Glossary)
132 CASS 7A24 sets out the consequences of a primary pooling event
occurring namely
(1) Client money held in each client money account of the firm is treated as pooled and
(2) the firm must distribute that client money in accordance with CASS 772R so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A25R
133 The guidance note at CASS 7A26G states that
A clients main claim is for the return of client money held in a client bank account A client may be able to claim for any shortfall against
6
money held in a firms own account For that claim the client will be an unsecured creditor ofthe firm
The issues on this Application
14 The questions to be determined on this application are set out in Schedule A to the
Order for Directions dated 24 May 2013 (the Questions) [Tab 2] As a result of
the Position Statements filed by the parties on 4 July 2013 it has become clear that
there are areas of common ground between the parties and the issues in dispute
have been narrowed as set out below
Questions 1-3 Is a client entitled to prove for a debt against the general estate of
MFG on the basis of its contractual rights against MFG and if so how is such debt
to be quantified for the purposes of proof
The Parties positions
15 It is common ground between the parties that a client is entitled in principle to
prove for a debt in respect of its contractual rights against MFG2 The issue is as to
how a clients proof in respect of its contractual rights is to be quantified In
summary
151 Both Solid and Attestor contend that Option 2(1) is correct ie a client is
entitled to prove for the full value of its contractual rights against MFGUK
subject to a cap on recovery (Solids PS at [5] Attestors PS at [3(2)] As to
the cap
1511 it is Solids case that a client cannot recover further payment from the
general estate once it has received from either the general estate or the
CMP sums totalling more than the full value of its contractual rights
(together with interest) Solids PS at [6]-[7]
1512 it is Attestors case that a client cannot recover by way of distribution
from the CMP and by way of dividend from the general estate sums
2 See Solids PS at [1]-[4] Administrators PS at [6] Attestors PS at [1] It appears also to be common ground that each client had as at the date ofthe PPE contractual rights against MFG which are capable of supporting a proof in the general estate subj ect to any defence (such as set -oft) which MFG may have in particular instances
7
which in aggregate exceed more than the sum of that clients client
money entitlement and its contractual rights (together with interest)
Attestors PS at [3(4)]
152 It is the Administrators case on the other hand that Option 2(2) is correct
ie a client is entitled to prove only for the value of its contractual rights less
the amount that a client receives by way of distribution from the CMP
Administrators PS at [7]-[8]
153 No party contends that if Option 2(1) is correct the appropriate cap on
recovery is as set out in Question 3 Further no party contends that Option
2(3) is correct
Claims against two estates
16 Solid relies upon the principle that where a creditor has claims against two estates
one or both of which is insolvent it is entitled to prove in full against the insolvent
estate(s) for the full debt owing at the date of liquidation or administration (subject
to the rule against double recovery3) The principle is well established by authority4
It applies for example in the case of co-debtors
17 In Re Humber Ironworks amp Ship-Building Company (1869) 5 LR Ch App 88 the
drawer of a bill agreed to transfer assets to a third party on trust for payment (in the
event that there should be default on the bills) to the payee under the bill in or
towards satisfaction of the moneys so remaining unpaid with any surplus
remaining after satisfaction of the liability to the payee to be paid to the drawer
The drawer went into liquidation shortly before the bills became payable The
payee received from the trust assets and by way of dividends in the liquidation
sums which in aggregate were more than the principal of its debt An issue arose as
to whether the payee was entitled to retain the additional sums towards interest
which was due under the agreement Giffard LJ held that it was stating at pp 92-93
that
3 See paras 29ffbelow
4 See Re Plummer and Wilson (l841) 1 PH 56 at 59 In re Joint Stock Discount Company (l869) 5 LR Ch App 86 at 88 Humber Ironworks amp Ship-Building Company (l869) 5 LR Ch App 88 at 92-93 Midland Montagu Australia Ltd v Harkness (l994) 14 ACSR 318 at 325-326 (Supreme Court ofNew South Wales) See also Keay McPhersons Law oCompany Liquidation (2nd ed 2009) at pp 800-801
8
1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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124 The fact that beneficial ownership in client money remains in a firms clients
is reinforced by the guidance note in CASS 771G which states that
Section 139(1) ofthe Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership ofthe client
(Emphasis added)
125 In order to ensure that a firm holds sufficient client money from time to time
each business day a firm must carry out an internal client money
reconciliation Annex 1 to CASS 7 sets out the steps involved in the standard
method of internal client money reconciliation In broad terms these involve
checking whether the client money resource (ie the aggregate balance on the
client bank accounts maintained by the firm) was at the close of business on
the previous business day or alternatively is at the close of business that day
equal to the client money requirement (as defined in para 6 ofAnnex 1) as at
the close ofbusiness on that previous business day
13 As to the Client Money Distribution Rules in outline
131 The client money distribution rules apply when a primary pooling event
occurs (CASS 7A11) A primary pooling occurred in respect ofMFG upon
the appointment of the Administrators on 31 October 2011 (CASS 7A21
and the definition of failure in the Glossary)
132 CASS 7A24 sets out the consequences of a primary pooling event
occurring namely
(1) Client money held in each client money account of the firm is treated as pooled and
(2) the firm must distribute that client money in accordance with CASS 772R so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A25R
133 The guidance note at CASS 7A26G states that
A clients main claim is for the return of client money held in a client bank account A client may be able to claim for any shortfall against
6
money held in a firms own account For that claim the client will be an unsecured creditor ofthe firm
The issues on this Application
14 The questions to be determined on this application are set out in Schedule A to the
Order for Directions dated 24 May 2013 (the Questions) [Tab 2] As a result of
the Position Statements filed by the parties on 4 July 2013 it has become clear that
there are areas of common ground between the parties and the issues in dispute
have been narrowed as set out below
Questions 1-3 Is a client entitled to prove for a debt against the general estate of
MFG on the basis of its contractual rights against MFG and if so how is such debt
to be quantified for the purposes of proof
The Parties positions
15 It is common ground between the parties that a client is entitled in principle to
prove for a debt in respect of its contractual rights against MFG2 The issue is as to
how a clients proof in respect of its contractual rights is to be quantified In
summary
151 Both Solid and Attestor contend that Option 2(1) is correct ie a client is
entitled to prove for the full value of its contractual rights against MFGUK
subject to a cap on recovery (Solids PS at [5] Attestors PS at [3(2)] As to
the cap
1511 it is Solids case that a client cannot recover further payment from the
general estate once it has received from either the general estate or the
CMP sums totalling more than the full value of its contractual rights
(together with interest) Solids PS at [6]-[7]
1512 it is Attestors case that a client cannot recover by way of distribution
from the CMP and by way of dividend from the general estate sums
2 See Solids PS at [1]-[4] Administrators PS at [6] Attestors PS at [1] It appears also to be common ground that each client had as at the date ofthe PPE contractual rights against MFG which are capable of supporting a proof in the general estate subj ect to any defence (such as set -oft) which MFG may have in particular instances
7
which in aggregate exceed more than the sum of that clients client
money entitlement and its contractual rights (together with interest)
Attestors PS at [3(4)]
152 It is the Administrators case on the other hand that Option 2(2) is correct
ie a client is entitled to prove only for the value of its contractual rights less
the amount that a client receives by way of distribution from the CMP
Administrators PS at [7]-[8]
153 No party contends that if Option 2(1) is correct the appropriate cap on
recovery is as set out in Question 3 Further no party contends that Option
2(3) is correct
Claims against two estates
16 Solid relies upon the principle that where a creditor has claims against two estates
one or both of which is insolvent it is entitled to prove in full against the insolvent
estate(s) for the full debt owing at the date of liquidation or administration (subject
to the rule against double recovery3) The principle is well established by authority4
It applies for example in the case of co-debtors
17 In Re Humber Ironworks amp Ship-Building Company (1869) 5 LR Ch App 88 the
drawer of a bill agreed to transfer assets to a third party on trust for payment (in the
event that there should be default on the bills) to the payee under the bill in or
towards satisfaction of the moneys so remaining unpaid with any surplus
remaining after satisfaction of the liability to the payee to be paid to the drawer
The drawer went into liquidation shortly before the bills became payable The
payee received from the trust assets and by way of dividends in the liquidation
sums which in aggregate were more than the principal of its debt An issue arose as
to whether the payee was entitled to retain the additional sums towards interest
which was due under the agreement Giffard LJ held that it was stating at pp 92-93
that
3 See paras 29ffbelow
4 See Re Plummer and Wilson (l841) 1 PH 56 at 59 In re Joint Stock Discount Company (l869) 5 LR Ch App 86 at 88 Humber Ironworks amp Ship-Building Company (l869) 5 LR Ch App 88 at 92-93 Midland Montagu Australia Ltd v Harkness (l994) 14 ACSR 318 at 325-326 (Supreme Court ofNew South Wales) See also Keay McPhersons Law oCompany Liquidation (2nd ed 2009) at pp 800-801
8
1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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money held in a firms own account For that claim the client will be an unsecured creditor ofthe firm
The issues on this Application
14 The questions to be determined on this application are set out in Schedule A to the
Order for Directions dated 24 May 2013 (the Questions) [Tab 2] As a result of
the Position Statements filed by the parties on 4 July 2013 it has become clear that
there are areas of common ground between the parties and the issues in dispute
have been narrowed as set out below
Questions 1-3 Is a client entitled to prove for a debt against the general estate of
MFG on the basis of its contractual rights against MFG and if so how is such debt
to be quantified for the purposes of proof
The Parties positions
15 It is common ground between the parties that a client is entitled in principle to
prove for a debt in respect of its contractual rights against MFG2 The issue is as to
how a clients proof in respect of its contractual rights is to be quantified In
summary
151 Both Solid and Attestor contend that Option 2(1) is correct ie a client is
entitled to prove for the full value of its contractual rights against MFGUK
subject to a cap on recovery (Solids PS at [5] Attestors PS at [3(2)] As to
the cap
1511 it is Solids case that a client cannot recover further payment from the
general estate once it has received from either the general estate or the
CMP sums totalling more than the full value of its contractual rights
(together with interest) Solids PS at [6]-[7]
1512 it is Attestors case that a client cannot recover by way of distribution
from the CMP and by way of dividend from the general estate sums
2 See Solids PS at [1]-[4] Administrators PS at [6] Attestors PS at [1] It appears also to be common ground that each client had as at the date ofthe PPE contractual rights against MFG which are capable of supporting a proof in the general estate subj ect to any defence (such as set -oft) which MFG may have in particular instances
7
which in aggregate exceed more than the sum of that clients client
money entitlement and its contractual rights (together with interest)
Attestors PS at [3(4)]
152 It is the Administrators case on the other hand that Option 2(2) is correct
ie a client is entitled to prove only for the value of its contractual rights less
the amount that a client receives by way of distribution from the CMP
Administrators PS at [7]-[8]
153 No party contends that if Option 2(1) is correct the appropriate cap on
recovery is as set out in Question 3 Further no party contends that Option
2(3) is correct
Claims against two estates
16 Solid relies upon the principle that where a creditor has claims against two estates
one or both of which is insolvent it is entitled to prove in full against the insolvent
estate(s) for the full debt owing at the date of liquidation or administration (subject
to the rule against double recovery3) The principle is well established by authority4
It applies for example in the case of co-debtors
17 In Re Humber Ironworks amp Ship-Building Company (1869) 5 LR Ch App 88 the
drawer of a bill agreed to transfer assets to a third party on trust for payment (in the
event that there should be default on the bills) to the payee under the bill in or
towards satisfaction of the moneys so remaining unpaid with any surplus
remaining after satisfaction of the liability to the payee to be paid to the drawer
The drawer went into liquidation shortly before the bills became payable The
payee received from the trust assets and by way of dividends in the liquidation
sums which in aggregate were more than the principal of its debt An issue arose as
to whether the payee was entitled to retain the additional sums towards interest
which was due under the agreement Giffard LJ held that it was stating at pp 92-93
that
3 See paras 29ffbelow
4 See Re Plummer and Wilson (l841) 1 PH 56 at 59 In re Joint Stock Discount Company (l869) 5 LR Ch App 86 at 88 Humber Ironworks amp Ship-Building Company (l869) 5 LR Ch App 88 at 92-93 Midland Montagu Australia Ltd v Harkness (l994) 14 ACSR 318 at 325-326 (Supreme Court ofNew South Wales) See also Keay McPhersons Law oCompany Liquidation (2nd ed 2009) at pp 800-801
8
1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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which in aggregate exceed more than the sum of that clients client
money entitlement and its contractual rights (together with interest)
Attestors PS at [3(4)]
152 It is the Administrators case on the other hand that Option 2(2) is correct
ie a client is entitled to prove only for the value of its contractual rights less
the amount that a client receives by way of distribution from the CMP
Administrators PS at [7]-[8]
153 No party contends that if Option 2(1) is correct the appropriate cap on
recovery is as set out in Question 3 Further no party contends that Option
2(3) is correct
Claims against two estates
16 Solid relies upon the principle that where a creditor has claims against two estates
one or both of which is insolvent it is entitled to prove in full against the insolvent
estate(s) for the full debt owing at the date of liquidation or administration (subject
to the rule against double recovery3) The principle is well established by authority4
It applies for example in the case of co-debtors
17 In Re Humber Ironworks amp Ship-Building Company (1869) 5 LR Ch App 88 the
drawer of a bill agreed to transfer assets to a third party on trust for payment (in the
event that there should be default on the bills) to the payee under the bill in or
towards satisfaction of the moneys so remaining unpaid with any surplus
remaining after satisfaction of the liability to the payee to be paid to the drawer
The drawer went into liquidation shortly before the bills became payable The
payee received from the trust assets and by way of dividends in the liquidation
sums which in aggregate were more than the principal of its debt An issue arose as
to whether the payee was entitled to retain the additional sums towards interest
which was due under the agreement Giffard LJ held that it was stating at pp 92-93
that
3 See paras 29ffbelow
4 See Re Plummer and Wilson (l841) 1 PH 56 at 59 In re Joint Stock Discount Company (l869) 5 LR Ch App 86 at 88 Humber Ironworks amp Ship-Building Company (l869) 5 LR Ch App 88 at 92-93 Midland Montagu Australia Ltd v Harkness (l994) 14 ACSR 318 at 325-326 (Supreme Court ofNew South Wales) See also Keay McPhersons Law oCompany Liquidation (2nd ed 2009) at pp 800-801
8
1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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1 think the question is concluded by the case of In re Joint Stock Discount Company which I decided a few days ago in accordance with the well-known rule in bankruptcy which has been acted on for so many years I take that rule to be very simple The creditor proves in the winding-up as in bankruptcy for whatever the amount of the principal and interest up to a particular date may be but that is for the purpose of convenience in the administration of the winding-up and does not and is not intended to affect any other rights which the creditor may have and does not amount to an appropriation in any shape or form The result is that as in many cases the creditor has a claim on two or more estates he proves against each ofthose estates for whatever is due up to the date of the bankruptcy or winding-up so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense ofthe term
(Emphasis added)
18 The principle also applies in the case of co-sureties A creditor is entitled to prove
against one surety for the full amount owing at the date of the liquidation without
giving credit for sums received from any co-surety provided that he does not
recover more than 100 pence in the pound (Re Houlder [1929] 1 Ch 205 at 215-216
per Astbury J)
19 The principle relating to proofs against multiple estates is applicable in this case
because the general estate of MFG and the CMP are distinct estates Under the
Client Money Rules client money is held by the firm as trustee on a statutory trust
for the benefit of clients (pursuant to CASS 772R) and after a PPE has occurred
to be distributed to clients pursuant to CASS 7 A24R Thus the funds comprising
the CMP are not assets of the firm (Hindsight Judgment at [30]) Further client
money which is transferred by a client to the firm never forms part of the firms
own assets as the statutory trust created by CASS 772R arises immediately upon
receipt of the client money by the firm Rather beneficial ownership in the monies
remains in the clients (See Lehman Brothers International (Europe) v CRC Credit
Fund Ltd [2012] UKSC 6 [2012] 3 All ER 1 at [7] amp [15] per Lord Hope [62]-[63]
per Lord Walker [111]-[112] per Lord Clarke [135] per Lord Dyson and [190]shy
[195] per Lord Collins)
20 Similar principles apply in the case of guaranteed debts A creditor is entitled to
prove in the liquidation of a principal debtor for the full amount of the debt and
need not give credit for any payments made by a guarantor whether itself solvent
or insolvent (Re Sass [1896] 2 QB 12 Westpac Banking Corp v Gollin amp Co Ltd
9
[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
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[1988] VR 397)5 As regards a surety a creditor is entitled to prove in the
liquidation of a surety for the amount of the principal debt owing at the date of the
liquidation but must give credit for any payments or the value of any securities or
dividends received from the principal debtor or its estate before the date on which
the creditors proof is submitted eRe Amalgamated Investment amp Property Co Ltd
[1985] 1 Ch 349 at 379-386 esp 385G)
21 There are good policy reasons for clients to be permitted to prove in full for their
contractual claims in that it ensures a high degree of protection for clients
consistently with MiFID If clients were restricted (as the Administrators propose)
to proving only for the difference between their contractual claim and their interest
in the CMP they would be entitled to statutory interest only on the amount of that
difference regardless of how well the general estate was funded This would give
rise to three anomalies where the general estate was fully funded First clients
would recover less in respect of their claims than unsecured creditors generally
Second the greater the shortfall on their client money entitlement from the CMP
the more clients would receive by way of interest from the general estate thus the
greater the failings of the company in its capacity as trustee of client money or the
greater the costs of distributing the CMP the better clients would do Third where
there was a possibility of a surplus for shareholders the shareholders would benefit
at the expense of clients In addition in the case of an administration which was not
fully funded clients would be entitled to recover more - and so would be better
protected - under Option 2(1) than they would be under Option 2(2)
22 The Administrators contend that in this case there is only one debtor ie MFG
(Administrators PS at [10(2)]) However that is to conflate the positions of the
CMP and the general estate They are legally separate estates and must be treated as
such At the time of a PPE a client has a right to receive from the CMP its
proportionate share of the CMP and separately a right in contract against MFG
itself
23 The Administrators also contend that as distributions from the CMP must be taken
to discharge pro tanto MFGs contractual obligations to a client so such sums must
5 Equally it has been held that a creditor who has a security from a co-guarantor (such as money held in a suspense account) is not required to apply it to reduce his proof in a co-guarantors insolvency (Commercial Bank of Australia v John Wilson amp Cos Estate Official Assignee [1893] AC 181 (PC) at 183-187)
10
be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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be deducted from the amount for which a client may prove in respect of his
contractual rights (Administrators PS at [4(3)] amp [10(2)]) Whether or not this
contention is correct it does not in any case provide any basis for distinguishing
this case from other cases involving claims against two estates or co-debtors A
payment by one of two co-debtors to the creditor will reduce the liability of both
whilst neither is subject to any form of insolvency process but once one enters an
insolvency process the creditor will be entitled to prove in full against the insolvent
estate for the sum due as at the date of the liquidation or administration6
24 Furthermore even if (contrary to Solids case) sums received by a client from the
CMP were to be taken to reduce pro tanto that clients contractual rights against the
general estate of a firm after the firm had entered administration that would make
no difference on the facts of this case At most it is only payments or dividends
which are received prior to submission of a clients proof which can be required to
be deducted from that proof (Re Amalgamated Property at 383D-385G where
Vinelott J concluded following a review of the authorities concerning proofs
against insolvent sureties that grave injustice might result by an alteration in
the practice ofdeducting only sums received and dividends declared before a proof
is submitted) There is no basis for reducing a clients proof by reason of monies
received after the date of submission of the proof
25 In this case clients were required to submit only one proof in respect of both their
CMP entitlement and their contractual claims against the MFG7 It follows that no
client will have received any distribution from the CMP prior to submission of their
proof in the administration even if in principle they fall to be deducted
The eMP is not security
26 In their response to Question 4 in their Position Statement the Administrators
suggest that the fund comprising the CMP operates as security for the firms
obligations to the clients and Rule 162 of the Rules applies (Administrators PS at
6 For example in Humber Ironworks a payment ofmonies from the trust would absent liquidation have reduced the sum payable by the drawer and yet in liquidation the payee was entitled to prove against both estates for the amount due as at the date of liquidation
7 This has been confIrmed by the Administrators The fmal date for the submission of claims by clients in respect of their client money entitlement and their contractual rights against the general estate is 19 July 2013
11
[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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[11]) Rule 162 which is in terms materially identical to r 488 of the IR 1986
provides that
(1) if a secured creditor realises their security the creditor may prove for the balance oftheir debt after deducting the amount realised
(2) if a secured creditor voluntarily surrenders their security for the general benefit of creditors they may prove for their whole debt as if it were unsecured
27 Whilst in their response to Question 2 the Administrators do not expressly contend
that a clients interest in the CMP is security within the scope of Rule 162 if and
to the extent that they intend do so the argument would be flawed A clients
interest in the CMP is not to be categorised as security for these purposes for the
following reasons
271 The basis for Rule 162 (and r 486 of the Insolvency Rules) is that a creditor
may not both prove against an estate and retain a security which if
surrendered would augment the estate against which he proves (Ex p West
Riding Union Banking Co (1881) 19 ChD 105 at 112 per Jessel MR The
Liverpool (No2) [1963] P 64 (CA) at 84 per Harman LJ) In this case if
clients were to surrender their interest in the CMP this would not augment the
estate ofMFG but would augment the fund available for distribution to other
clients
272 The monies comprising a CMP are not beneficially owned by the firm and
are not part of the firms general estate Indeed in the case of client money
transferred to the firm by a client the funds are at no time assets of the firm
See para 19 above A person cannot grant security for its own personal
obligations over assets which it does not beneficially hold
273 A clients interest in the CMP may be greater than the value of its contractual
rights (as is the position of the Decreased Clients in this case) Security is a
proprietary right given by an obligor to an obligee to secure the contractual or
other personal obligation of the obligor It does not therefore confer on the
grantee any right to recover more than the amount of the debt or liability
which is secured This is consistent with the fact that as a matter of general
12
law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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law upon the enforcement and realisation of security the creditor is obliged
to account for the surplus to the debtor
274 The Client Money Rules and Client Money Distribution Rules are
inconsistent with the interest being a security interest The Rules proceed on
the basis that clients have beneficial ownership of their respective interest in
the client money (see for example CASS 771 G) The position is the same
as regards the Directives (see paras 8 to 10 above) See also s 139(1)(a) of
the Financial Services and Markets Act 2000 which provides for rules to
make provision which results in clients money being held on trust in
accordance with the rules8 There is simply no reference in the Directives or
s 139 of FSMA to firms providing security in respect of or over client
money
275 In fact the client money is more akin to security provided by the clients to
the firm in that prior to the occurrence of a PPE beneficial ownership in the
monies is vested in the client but yet the firm is entitled to appropriate those
monies in payment of any liability arising on the part of the client to it and
client cannot use the funds for any purpose other than discharging any
liability to the firm This is inconsistent with the client money being treated
as security on assets of the firm in favour of the client
276 It is also consistent with the description in the guidance note to a clients
main claim being for the return of client money (see CASS 7 A26G) This
tends to suggest that a clients claim to client money is a claim separate from
any contractual claim against the general estate
28 If it were to be the case that a clients interest in the CMP is to be treated as
security for the firms contractual obligations to clients for the purposes of Rule
162 then it would follow that Rule 162(2) must also apply ie clients must be
entitled voluntarily to surrender their interest in the CMP and prove for the full
value of their contractual rights without reference to their CMP interest If the
Administrators wish to maintain their argument based on Rule 162 they must
accept that clients may elect to surrender Otherwise the fact that the
8 Section 139 has recently been re-enacted as s 137B ofFSMA 2000 see Financial Services Act 2012 s 24(1)
13
Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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Administrators appear not to accept that a client is entitled to surrender its interest
in the CMP and prove for the value of its contractual rights in full is inconsistent
with the CMP interest being security
The cap on recovery under Option 2(1)
29 It is Solids position that assuming Option 2(1) applies there is a cap on the
amounts which a client may recover from the general estate9 The cap operates in
the following way
291 There is no cap in respect of a clients entitlement to receive its rateable share
ofthe CMP Pursuant to CASS 772 and 7A24R the entitlement ofa client
to receive from the CMP a sum which is rateable to its client money
entitlement is on its face absolute and not restricted by any clients
contractual (or other personal) claim against MFG The client will receive its
rateable share from the CMP irrespective of what if any sums are received
by way of distribution in the administration The rule against double recovery
(as to which see below) has no application to a clients entitlement vis-a-vis
the CMP
292 A clients right to recover against the general estate of an insolvent firm is
however subject to the rule against double recovery (or double satisfaction)
The effect of the rule is that a creditor whilst entitled to prove in full against
two estates in respect of a several liabilities may not recover from those
estates sums totalling more than the amount of his contractual claim (Humber
Ironworks at 92-93 Midland Montagu v Harkness at 325-326)10
293 Where the creditor recovers an amount exceeding 100 of its contractual
claim from the two estates then it holds the amount of any such excess on
trust for the relevant payer or alternatively it is liable in restitution to repay
the amount of the excess to the relevant payer (Midland Montagu v Harkness
at 332)
9 Solid accepts that if contrary to its primary case Option 2(2) were to apply on the basis that any distributions received by a client from the CMP prior to the submission of its proof in the administration (which in this case will necessarily be zero) are to be deducted from the amount of the proof the same cap as under Option 2(1) would operate in order to prevent double recovery
10 See further the authorities referred to in footnote 4 above
14
30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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30 The first issue is whether the rule against double recovery applies at all to a clients
recoveries from the CMP and the general estate Solid contends that it does A
clients entitlement to a rateable proportion of the CMP in respect of its client
money entitlement on the one hand and a clients contractual rights against MFG
on the other derive as a matter of substance from the same ultimate liability
namely the liability of MFG pursuant to its contract with the client A test of
substantively similar claims mirrors that which applies in respect of the rule
against double proof (see Re Melton [1918] 1 Ch 37 at 47 per Eady LJ amp 60 per
Scrutton LJ Barclays Bank Ltd v TSOG Trust Fund Ltd [1984] 1 WLR 49 at 58
per Oliver LJ and 80 per Slade LJ)
31 A further issue is how sums anticipated to be received by a client from the CMP
but not yet distributed should be taken into account ll Solid contends that any
recovery against the general estate should be capped at the difference between the
value of the clients contractual rights and the sum of the clients actual and
estimated distributions from the CMP As set out above a clients entitlement to a
share of the CMP is absolute and so the client will ultimately receive that sum
irrespective of any other entitlement it may have A clients interest in the CMP is a
present proprietary interest and any recovery from the general estate must be
capped to reflect that present proprietary interest (Furthermore in the event that
the general estate were to pay by way of distribution to a client sums which
together with the clients CMP interest exceeded the value of that clients
contractual rights the clients interest in the CMP would be held on trust for the
general estate or the client would be liable to MFG for the excess in restitution)
Question 4 In the case of Option 2(2) is the clients provable debt to be reduced by
an amount equal to the estimated value of any remaining future distribution to the
client in respect of its client money entitlement
32 Solids primary position is that Option 2(1) is correct and therefore the issue in
Question 4 does not arise However in the event that the Court were to conclude
11 This is unlikely to be a common issue in practice The Client Money Rules contemplate and in most ifnot all cases it will be the case that distribution ofthe CMP will ordinarily precede the distribution ofthe general estate In that case the effect of the rule against double recovery would be to limit any recovery against the general estate to the difference between the clients contractual rights and any sum received from the CMP
15
(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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(as the Administrators contend) that a client is entitled to prove on the basis of
Option 2(2) rather than Option 2(1) then there is a distinction to be drawn for the
purposes of Question 4 between (i) the situation where a clients interests in the
CMP are treated as security for the purposes of Rule 162 and (ii) the situation
where a clients proof is reduced on the basis that post-liquidation receipts reduce
the debt pro tanto
33 In the case of security Solid accepts that as a general rule a secured creditor who
has neither realised nor surrendered his security is entitled to prove only for the
balance after deducting the estimated value of the security (Moor v Anglo-Italian
Bank (1879) 10 ChD 681 at 689-691 per Jessel MR and Ex p West Riding Union
Banking Co at 112 per Jessel MR)12
34 Were a clients interest in the CMP fund to be treated as security then the
estimated value of any remaining future distribution to the client in respect of its
entitlement to receive a sum from the CMP would have to be deducted for the
purposes of calculating the clients provable debt against the general estate
However for the reasons set out above the CMP in this case cannot properly be
characterised as security for MFGs contractual obligations to a client for the
purposes of Rule 162 and moreover if it was to be so characterised clients would
be entitled to elect to surrender their interest in the CMP and prove for their
contractual rights in full
35 Where on the other hand Option 2(2) applies because a clients provable debt is as
a matter of principle to be reduced by the amount of any distribution received from
the CMP between MFGs administration and the submission of a clients proof
then the amount of a clients provable debt will be reduced only upon receipt of
such sums and no further reduction in a clients provable debt can occur after
submission of its proof (see Re Amalgamated Investment above) There have been
no such receipts in this case
36 The Administrators are not assisted by their reliance upon Rule 160 (see
Administrators PS at [11]) Rule 160(1) which is substantially identical to r
486(1) ofthe Insolvency Rules 1986 provides that
12 See Administrators PS at [11] and Solids PS at [13]
16
The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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The administrator shall estimate the value ofany debt which by reason of it being subject to any contingency or for any other reason does not bear a certain value and a previous estimation may be revised if the administrator thinks fit by reference to any change ofcircumstances or to information becoming available to the administrator
37 For these purposes a contingent or uncertain debt has been described in the
following terms (In Re Dummelow ex p Ruffle (1873) LR 8 Ch App 997 at 1001
per Mellish LJ)
The question really is what is meant by an unliquidated debt in the 3rd sub-section The fair construction of the clause seems to me this a contingent debt refers to a case where there is a doubt if there will be any debt at all a debt the value of which is not ascertained means a debt the amount ofwhich cannot be estimated until the happening ofsome future event and an unliquidated debt includes not only all cases of damages to be ascertained by a jury but beyond that extends to any debt where the creditor fairly admits that he cannot state the amount In that case there must be some further inquiry before he can vote
38 In this case a clients contractual rights do have a certain value and are not subject
to a contingency The extent to which a client may receive distributions from the
CMP which is the only element of uncertainty or contingency identified by the
Administrators is simply not relevant to the value of the contractual claim for the
purposes ofRule 160(1) for the following reasons
39 First a clients contractual claim is at present neither contingent as the debt is
presently owing by MFG to the client and MFGs liability does not depend upon
the occurrence of some future event13 nor uncertain as is evident from the fact that
the Administrators have been able to quantify the amounts of those claims 14
40 It is not suggested by the Administrators that a clients contractual claim against
MFG is uncertain or subject to any contingency otherwise than by reason of the
possibility of a distribution to the client from the CMP Whilst as was noted by
David Richards J in the Hindsight Judgment (at [38]) at the time of the PPE a
clients contractual claim in respect of an open position will have been contingent
as the amount if any payable to the client was dependent upon future market
13 Winter v IRC [1963] AC 235 at 247249 per Lord Reid
14 See for example Heis 11 at [77] and [79]
17
movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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movements and the price at which the contract closes out there is no suggestion by
the Administrators that any clients contractual rights against MFG remained
contingent in this sense as at the date at which on clients submitted their proofs in
the administration or presently remains so contingent Moreover even if this were
the case so that the administrators could revise any estimate by reference to any
change of circumstances or information becoming available to them post proof
distributions from another estate remain on any analysis irrelevant to the calculation
of the proof
41 Second as set out above any sums received by a client from the CMP after MFG
entered administration are (on Solids primary case) not to be deducted from that
clients provable debt at all or (on Solids alternative case) to be deducted only to
the extent they were received prior to submission of that clients proof of debt
There is no support in the authorities concerning multiple estates for requiring a
creditor to deduct from his proof sums received by him after he has submitted his
proof On the contrary this approach was described by Vinelott J in Re
Amalgamated Property (at 385G) as potentially giving rise to grave injustice
42 Third to treat the possibility of payments or distributions being received from a
separate estate as rendering an otherwise uncertain and present debt contingent or
uncertain would be fundamentally inconsistent with the basis upon which the
authorities concerning proofs against multiple estates and guarantors and sureties
have been determined The focus of those cases was upon what credit if any was to
be given by a creditor for sums actually received from another estate yet that issue
would have been irrelevant or largely insignificant had the creditor been obliged
in any event to give credit for future estimated receipts from the other estate There
is no suggestion in those cases that the possibility of payment from another source
rendered an otherwise present liability of certain amount either uncertain or
contingent
18
Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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Questions 5 and 6 Is a client entitled to prove for a debt against the general estate of
MFG to the extent that its client money entitlement is not satisfied from the CMP
(other than on the basis of its contractual rights) and if so how is such a debt to be
calculated
43 In its Position Statement Solid reserved its position as to Questions 5 and 6 on the
basis that it appeared to be common ground that clients were entitled to prove
against MFG in respect of their contractual claims and even if they could in the
alternative prove for an unrestricted Pure Shortfall Claim Increased Clients would
necessarily be better off proving in respect of their contractual rights (Solids PS at
[14])
44 As regards clients shortfall claims it appears now to be common ground between
the parties that a client may in principle prove in respect of any difference
between the amount of its client money entitlement and the amount it actually
receives from the CMP to the extent that such difference is attributable to a failure
by MFG to comply with the Client Money Rules or other breach of trust (Solids
PS at [16] Attestors PS at [7] Administrators PS at [5(1)]) A clients claim
would be for breach of trust andor breach of statutory duty (the breach of trust
claim)
45 The Administrators contend that by reason of the rule against double proof a client
may not prove for any breach of trust claim but is restricted to proving for its
contractual claim only (Administrators PS at [5(2)]-[5(3)] amp [12]-[14]) Attestor
on the other hand contends that (I) a client is entitled to prove against the general
estate for both a breach of trust claim and a contractual claim with those claims
being not alternative but aggregate (Attestors PS at [5]-[6]) and (2) the amount of
the provable debt in respect of a clients breach of trust claim is not limited by
reference to its contractual claim (Attestors PS at [8])
46 As there are no issues concerning shortfall claims which are relevant to the position
of Increased Clients beyond those outlined above between the Administrators and
Attestor and as it is anticipated that those issues will be addressed fully by the
Administrators and Attestor in their Skeleton Arguments and oral submissions
Solid does not propose to adopt any position on those issues or to address them
further in this Skeleton Argument
19
Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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Conclusion
47 For the reasons set out above the Court is respectfully invited to direct that clients
of MFG are entitled
471 to receive from the CMP their rateable sum of the CMP without deduction or
limitation and
472 to prove against the general estate for the full value of their contractual rights
as at the date of MFGs administration without any deduction in respect of
distributions paid to them from the CMP or the estimated value of any
remaining future distributions to them trom the CMP but subject to a cap on
recovery once they have received from either the CMP or the general estate
sums totalling the full value of their contractual rights (together with
interest)
PETER ARDEN QC
BEN GRIFFITHS
(Counsel for the Second Respondent)
Erskine Chambers Lincolns Inn
18 th July 2013
20
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