In the matter of Global Trader Europe Ltd (In Liquidation) v City Facilities Management Ltd & Ors
Clients of a derivatives broker whose money had mistakenly not been paid into a segregated account to be held on trust for them were not entitled on the broker's liquidation to have the monies owed to them treated as being held on trust in the segregated account.
The applicant liquidators (L) applied for the court to determine questions as to the distribution of assets following the liquidation of a company. The company was a broker for derivatives trading. Clients paid money to the company as security for losses they might incur on trades and the company was obliged to deal with the money in accordance with the rules in the Client Assets sourcebook (CASS), which contained delegated legislation made by the Financial Services Authority. Under the rules the company held "client money" in a segregated account on trust for the client. The company considered that money from certain clients did not have to be segregated and paid it into its own account. The first respondent (B) represented clients whose money was held in the segregated account. The second and third respondents (R and S) represented clients whose money was not held in segregated account. The company first went into administration and later went into liquidation. On the day of its liquidation the company had instructed its bank to transfer a sum of money into the segregated account to correct a payment mistakenly made out of that account. The bank did not make the transfer, which created a shortfall in the segregated account. R and S submitted that both in respect of money paid to the company and where they were in profit on a closed trading position, they were trust creditors entitled to a proprietary interest in the money that L were recovering and that an amount up to the aggregate of their claims should be segregated and held on trust for them. R and S further submitted that they should at least be treated as trust beneficiaries of the segregated account. B argued that the company's unsuccessful attempt to make the bank transfer had created a trust of that money in favour of B, alternatively that the court should order L to transfer the money from the company's general funds.
(1) Money paid to the company by R and S before November 1, 2007, before which date CASS 4.1.1R applied, was "client money" and therefore held on the statutory trust imposed by CASS 4.2.3R. However, the company had mistakenly but honestly believed that it was not client money and had paid it into its own bank account and used it for its own purposes. As a result the money had lost its identity and was no longer subject to a trust. The fact that the company had failed to perform its obligation to treat the money as client money did not cause a trust to attach to the company's own money, MacJordan Construction Ltd v Brookmount Erostin Ltd (1992) BCLC 350 CA (Civ Div) and Various Customers of BA Peters Plc v Moriarty (2008) EWCA Civ 1604, Times, January 14, 2009 applied. The position was the same for money paid to the company after November 1, 2007, when CASS 7 applied. Whether or not it was client money under the different rules in CASS 7, the company had believed it was not client money and had not kept it in identifiable existence in a segregated account. Where a client's position was closed and a profit arose to the client, a contractual debt arose from the company to the client. The company credited the client's running account but it did not begin to hold money "on behalf of" a client and did not begin to hold it on trust for the client. (2) R and S were not beneficiaries entitled to share in the segregated account. Under CASS 7.9 the company's administration had caused all its client money accounts to be pooled and required the money to be distributed in accordance with CASS 7.7.2R "for the clients for whom that money is held". No part of that money had been held for R or S and it did not assist them to argue that other CASS provisions had required the company to be holding more money in client accounts. (3) If a bank was instructed by a customer to make a transfer of money to a third party and the bank declined to act on the instruction, there was no basis on which that could be regarded as the customer having made a declaration of trust of money. It would be wrong for the court to order L to transfer the shortfall to the segregated fund because it would be contrary to the mandatory system of CASS 7.9 for the shortfall to be distributed to the trust beneficiaries otherwise than as part of the pool and because B were unsecured creditors for the shortfall in the segregated fund and to order the transfer of the shortfall from the company's general funds would amount to creating a preference for one unsecured creditor over others. (4) It was appropriate to transfer a further shortfall from the company's general funds to the segregated account in respect of notional profits that arose because CASS had required the notional closing of open trading positions on administration. (5) Members of B who were entitled to profits on post-administration closings of open trading positions were unsecured creditors as there could be no segregated account into which L were required to pay the profits. There was no provision for the segregated pool to be increased after liquidation and any new accounts would not be client accounts for CASS 7 purposes.
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