UK High Court Judgment in MF Global Special Administration on “Client Money Shortfall Application

Today the English High Court handed down judgment on the MF Global UK Limited “Client Money Shortfall Application.”
The MF Global UK Limited client money pool holds approximately $1 billion of funds, but is facing client money claims in excess of that amount.  The Administrators issued the Application so that the Court could determine whether clients should also be able to make unsecured claims against the firm’s general estate and, if so, how those unsecured claims should be calculated.
The parties all agreed that clients’ client money claims are generally based on underlying contractual claims against the firm.  The first issue for the Court was whether clients can claim against the general estate for the whole of those contractual claims, or whether they first have to deduct historic and expected future distributions from the client money pool.  The Court ruled that clients can only claim against the general estate for so much of their contractual claims (if any) as have not been paid, and are not expected to be paid, from the client money pool.
The second and third issues were whether clients can also claim against the general estate for the difference between: (a) the value of their claims against the client money pool, and (b) the amounts expected in fact to be recovered by the clients from the client money pool (shortfall claims).  It was common ground between the parties that, if a client could make such a claim, it could only do so in respect of such part of the shortfall as results from a failure by the firm to comply with the provisions of CASS 7 (chapter 7 of the FSA’s Client Assets Sourcebook).  The Court held that a client can make such a claim insofar as it arises from a failure by the firm to comply with CASS 7, but only if and to the extent that, when added to a client’s expected recoveries from the client money pool, that claim would exceed the value of the client’s contractual claim.
Mark Lawford in Weil’s Business Finance & Restructuring team in London commented that: “the issues in the Application arose because of the anticipated shortfall in the client money pool, but were complicated by the disparity in valuation techniques for client money claims and unsecured claims which resulted from the judgment on the Hindsight Application.  This meant that, even if certain clients were paid in full on their client money claims, they would still have an unpaid portion of their contractual claim.  Certain other clients were in the opposite position.  The outcome is a great result for the MF Global UK Limited general estate, as it prevents clients with aggregate client money claims valued at more than $1 billion from claiming in full against the general estate in addition to claiming against the client money pool (the respondents had argued that the two estates should be treated for these purposes as if one were the guarantor of the other).”
The Client Money Shortfall Application was led by London partner and head of Weil’s London Restructuring team, Adam Plainer, assisted by Mark Lawford, Tom Laidler, and Kirsten Erichsen. The Administrators were represented in Court by Antony Zacaroli QC and Adam Al-Attar of 3/4 South Square.
As part of its representation of the Administrators of MF Global UK Limited, which is the largest European collapse since Lehman, Weil is fielding a multi-disciplinary team, led by Adam Plainer. This judgment follows a series of historic landmark Court approvals, including, initially in July last year of the first distribution plan for the return of client assets under the special administration regime, and most recently in June this year, the Client Money Distribution Procedure.