MF Global UK Ltd, Re Investment Bank Special Administration Regulations 2011
July 4, 2014
CHANCERY DIVISION
United Kingdom
CORAM
- MR JUSTICE DAVID RICHARDS
Areas of Law
- Equity and Trusts
- Corporate Law
- Banking and Finance Law
- Civil Procedure
July 4, 2014
CHANCERY DIVISION
United Kingdom
CORAM
AI Generated Summary
MF Global UK Limited (MFGUK), the London-based broker-dealer arm of the MF Global group, sought the courts permission to enter a comprehensive settlement governing all proprietary tracing and personal breach-of-trust claims between the client money pool (CMP), held under the Financial Services Authoritys CASS 7/7A statutory trust, and MFGUKs general estate in special administration. Acting in dual capacities, joint administrators Richard Fleming (for the CMP Trustee) and Richard Heis (for the general estate) negotiated terms to avoid protracted and costly litigation amid high expected recoveries for both clients and unsecured creditors. The agreement includes a payment of just over $31 million to the CMP, an approximately $29.86 million purchase of CMP receivables by the general estate, netting credits, cost-sharing, and mechanisms for adjustments. Applying section 15 of the Trustee Act 1925, Public Trustee v Cooper, and administrators powers under the Insolvency Act, the court blessed the momentous decision, approved consequential distribution procedure changes under an FCA FSMA section 138A direction, and ordered $83,000 uncollected client money to the Insolvency Service Account.
Judgment
Mr Justice David Richards :
This is an application to enable a settlement agreement to be made which would compromise and release all tracing and other claims between MF Global UK Limited (MFGUK) as trustee of the trust of client money and the general estate of MFGUK acting by its joint administrators.
The client money trust arises under the rules applicable to investment firms which receive from or hold money for their clients, contained in chapters 7 and 7A (CASS 7 and CASS 7A) of the Client Assets Sourcebook section of the Financial Services Authority Handbook. These rules required investment firms to segregate such money and hold it on trust for their clients and, in circumstances including an administration of the firm, to distribute the money held for clients among the clients, pro rata according to their entitlements. For these purposes all client money held at the relevant date is pooled. For this reason I will refer, as the parties did, to the client money trust as the client money pool (CMP), and to MFGUK in its capacity as trustee as the CMP Trustee.
These rules, albeit in an earlier version, were analysed in Lehman Bros International (Europe) v CRC Credit Fund Ltd [2012] Bus LR 667 for the purpose of determining the basis on which clients were entitled to participate in the distribution of client money. The Supreme Court held that the distribution should be on the basis of the amount which the firm should at the relevant time have been holding for the clients respectively, not the amount of client money in fact held for them at that time.
MFGUK was part of the MF Global group which carried on business as broker-dealers in financial markets throughout the world. The group’s principal operations in London were carried on by MFGUK. It and other companies in the group entered insolvency proceedings in the United States and England on 31 October 2011. Administrators of MFGUK were appointed under the Investment Bank Special Administration Regulations 2011.
MFGUK held funds in, at least, two different capacities. It held money for clients as trustee of the client money trust. It also held money beneficially on its own account. The client money trust arose out of the same business operations as resulted in its own assets and liabilities, profits and losses. Clients could be both beneficiaries under the trust and creditors or debtors of the firm. On their appointment, the administrators therefore became responsible both for the duties a