Inherent Sense: High Court Approves Client Money Distribution Procedure

Weil’s client MF Global UK Limited (in special administration) (‘MFG UK’) is the first investment bank to have entered into special administration proceedings under the English Investment Bank Special Administration Regulations 2011 following an urgent court order on 31st October 2011. As an investment bank, MFG UK was required to comply with the then applicable rules of the Client Asset Sourcebook Rules (‘CASS Rules’) of the FSA Handbook.  The CASS Rules had the effect of creating a statutory trust over client monies, making MFG UK a trustee of the client money held for its clients. Returning client money (with such claims exceeding US $2.223 billion) is one of the key tasks with which its special administrators (Richard Heis, Richard Fleming and Mike Pink) have had to deal, in pursuance of one of the three parallel objectives which apply to special administrations.

The CASS Rules contain client money distribution rules which apply when a primary pooling event (such as the appointment of the special administrators) occurs.  The rules provide that each client is to receive a sum which is rateable to their client money entitlement calculated by reference to other CASS Rules.  However, neither the CASS Rules nor the Special Administration Regulations or Rules governing the special administration procedure set out the mechanics to be followed by clients making claims, or the special administrators tasked with adjudicating on those claims and making distributions to clients.  That this was a glaring omission in the rules was recently acknowledged in the Interim Report on the Investment Bank Special Administration Regulations 2011 by Peter Bloxham, published by HM Treasury 23 April 2013.  The key concern about the absence of such a distribution scheme has been that, unless an innovative solution could be crafted and endorsed by the courts, it would mean that the special administrators would: (a) have to make substantial reserves for unknown claims and for rejected claims which might at a later point be appealed; and/or (b) have to bring costly applications for declarations that all rejected claims were invalid.  This would inevitably have the effect of delaying distributions of client money, reducing the sums distributable to clients and increasing costs.

Although it is anticipated that this gap in the legislation will be plugged going forward, whenever amendments to the special administration regime are put in place, it left MF Global UK’s special administrators having to formulate a solution which would provide appropriate and workable rules to deal with this aspect of a complex administration.  Accordingly, Weil together with the administrators and external counsel drafted a unique client money distribution procedure which enables the administrators and MFG UK to distribute client monies under a clear and fair procedure, without the need to reserve for unknown claims or for rejected claims which have not been appealed.

Last week the Court considered and approved the procedure formulated on behalf of the special administrators and MFGUK, paving the way for further distributions to be made to the investment firm’s clients.  Before the Court was able to make the order, it had to be satisfied that it had power to do so, given the absence of statutory provisions in the applicable statutory regulations.  The Court concluded that it could not rely on the provisions of the Trustee Act 1925 as its provisions did not appear to apply to a client money trust. In any case, those provisions would only have enabled the special administrators to disregard the possible existence of claims which were not notified following advertisement (unknown claims), and would not have provided a solution to rejected claims which had not been appealed.

After hearing argument on behalf of the special administrators, David Richards J held that the Court had an inherent jurisdiction in relation to trusts which permitted it to give directions to trustees as to the bases upon which they should distribute trust property where it considered that it was just and equitable to do so.  The Court considered that it could make an order, sometimes termed a Re Benjamin Order, which did not destroy or vary any person’s claim to trust assets, but which did enable the trust property to be distributed, without the trustees being at risk as to claims for breach of trust.  Mr Justice David Richards held that the administrators’ proposals balanced both the interests of clients to a timely return of their money and the interests of persons with serious but unresolved claims to be treated as clients, albeit that the treatment of rejected claims in the administrators’ proposals goes beyond the decision in Re Benjamin and subsequent similar cases.  The Court accordingly agreed the special administrators’ proposed Client Money Distribution Procedure, and gave a judgment which will be of considerable interest in the context of the court’s exercise of its inherent jurisdiction over trusts.  An inherently sensible decision.

View the Court’s judgment.

View the Court Order approving the Special Administrators’ Client Money Distribution Procedure and annexing this procedure.