Summary

On an application under the Insolvency Act 1986 Sch.B1 para.63 by the administrators of two insolvent insurance intermediaries, the court gave directions for the distribution of funds held in the companies' client accounts which were subject to the statutory trust regime in Chapter 5 of the Client Assets Sourcebook in the Financial Conduct Authority Handbook.

Facts

The administrators of two insolvent insurance intermediaries applied, under the Insolvency Act 1986 Sch.B1 para.63 or alternatively pursuant to the court's inherent equitable jurisdiction, for directions for the distribution of moneys held in client accounts.

Before they went into administration, the companies operated in common ownership. Although insolvent, they had significant funds in client accounts representing insurance premiums that had been received from customers and not yet paid on to insurers. Those accounts were subject to the statutory trust regime in Chapter 5 of the Client Assets Sourcebook (CASS 5) in the Financial Conduct Authority Handbook. CASS 5.6.7R provided that, in the event of insolvency, client money had to be treated as pooled and then distributed so that each client received a sum calculated in accordance with a specific method set out in CASS 5.5.67R. The administrators took the view that, since neither company had kept proper records of the entitlement to client account funds, it would be impracticable to attempt to ascertain that entitlement with certainty. Accordingly, they proposed a scheme of distribution and identified a schedule of issues in respect of which they sought particular guidance.

The issues concerned (1) the question whether the funds in the client accounts were subject to the statutory trusts or belonged to the companies; (2) the ascertainment of entitlement to moneys subject to the statutory trusts and their apportionment among various claimants; (3) a possible claim on behalf of the first company against the statutory trust pool of the second; (4) the administrators' entitlement to remuneration out of the funds in the statutory trusts.

Held

(1) The trusts' purpose was to protect the customers of the business and their continuing administration was within the scope of the companies' affairs for the purposes of Sch.B1 para.59 of the Act. Thus, the court had power under Sch.B1 para.63 to give directions to the administrators in respect of those funds even though they did not form part of the company's assets, Denny v Yeldon [1995] 3 All E.R. 624 applied. Although para.63 did not specify the scope of the directions that might properly be given, the court was entitled to exercise its inherent equitable jurisdiction when seised of an application under that provision, MF Global UK Ltd (In Special Administration), Re [2013] EWHC 1655 (Ch) applied (see paras 49-55 of judgment).

(2) Client money was received and held on the statutory trusts unless the firm was acting in accordance with CASS 5.4, the conditions for which were not fulfilled in the instant case. Moreover, there was nothing to suggest that deductions for commission, interest or any other matters should be made (paras 60, 64, 67). All clients with a client money entitlement were to be regarded as entitled to participate in the relevant pool, not merely those whose contributions were identifiable. Claims against the pool were not affected where the cover had been provided gratuitously, and any claims by intermediaries for fees or commission would be considered (paras 71, 73, 78).

(3) There was no reason why one statutory trust should not in principle be able to trace into the assets of another statutory trust where there had been a breach of trust. Although CASS statutory trusts had to be understood in terms of their own regulatory scheme and were not confined by the general law of trusts, that did not mean that victims of wrongs against the trust were deprived of an equitable remedy. Where the breach of trust had applied prior to pooling, the effect of successful tracing in support of a claim would be to augment the pool to the benefit of those who were beneficiaries of a statutory trust before pooling occurred (paras 118-119).

(4) If it became clear that poor record-keeping created a need for significant work to be done by the administrators to identify claimants, an application ought to be made to the court for directions and for prior sanction of remuneration. The words "costs properly attributable to the distribution of the client money" in CASS 5.3.2R meant the costs incurred for the purpose of enabling such distribution to be made and the costs of making such a distribution. Any work that might properly be done to enable the administrators to distribute the trust moneys was capable of being remunerated under that rule; therefore, there was no reason to have recourse to a general equitable jurisdiction. However, if it had been held that the rule related only to the costs of making the distribution, the jurisdiction under Berkeley Applegate (Investment Consultants) Ltd (No.1), Re [1989] Ch. 32 would have been available in respect of costs relating to preliminary work not covered by the rule. According to that jurisdiction, where the court was considering the enforcement of a claim to an equitable interest in property, it had a discretion to require that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of that property, Berkeley Applegate considered (paras 139, 144-147).