High Court Confirms Process For Distributing Client Money Held By Firm In Special Administration

Allen & Overy LLP
Contact

In this case report, we consider the High Court judgment in Re Worldspreads Ltd v Re Investment Bank Special Administration Regulations 2011 [2015] EWHC 1719 (Ch) (19 June 2015).

In this case, the special administrators of a firm that was authorised by the FSA applied to the court for an order setting out the procedure they should follow to distribute client money, including where customers had failed to agree their claims for client money by a specific date. 

Background

Worldspreads Ltd was an online trading platform that allowed its customers to carry out spread betting and trade in contracts for differences. As Worldspreads was regulated by the FSA (as it then was), it was required to hold money belonging to its customers in accordance with the requirements set out in the FSA's Client Assets sourcebook (CASS).

Special administration

Following the resignation of certain members of Worldspreads' senior management in early 2012, it became apparent that there was a substantial deficit (of approximately GBP 13 million) in the client money that Worldspreads ought to have held. As a result, on 18 March 2012, Worldspreads was urgently placed into special administration. (For the High Court judgment relating to the special administration, see Worldspreads Ltd, Re [2012] EWHC 1263 (Ch) (18 March 2012)).

Duty to ensure the return of client assets as soon as is reasonably practicable

A feature of the special administration procedure that applies to Worldspreads is that one of the objectives of a special administrator is to ensure the return of client assets as soon as is reasonably practicable (regulation 10 of the Investment Bank Special Administration Regulations 2011 (SI 2011/245) (IBSAR Regulations)). Regulation 11 of the IBSAR Regulations relates to this objective and provides that the special administrator may set a "bar date" for the submission of claims to beneficial ownership of client money to expedite the return of client assets. However, as the CASS rules apply to Worldspreads' special administration, regulation 11 of the ISBAR Regulations does not apply in this case (Regulation 11(8), ISBAR).

In the circumstances of this case, it became apparent to the special administrators that none of the other IBSAR Regulations that applied to Worldspreads or other general FCA rules and guidance provided a procedure governing the distribution of client money of an FSA-authorised firm in special administration. This left the special administrators with some degree of uncertainty as to how they should proceed in relation to distributing Worldspreads' client money.

Amendments to CASS rule 7A

After Worldspreads was placed into special administration, its special administrators made a number of attempts to contact all of Worldspreads' customers, with a view to asking them to agree their client money claims. Three years after Worldspreads was placed in special administration, some 10,662 of Worldspreads' former customers had failed to respond to this correspondence.

The special administrators identified that CASS rule 7A (which governs the distribution of client money) does not envisage the existence of customers who failed to respond to correspondence asking them to agree their client money claims. In addition, CASS rule 7A does not provide a mechanism for dealing with funds that would otherwise be due to customers but for their failure to submit a claim. The special administrators argued that the effect of CASS rule 7A was to inhibit their ability to ensure the return of client assets as soon as reasonably practicable, as required by regulation 10 of the ISBAR Regulations (see Duty to ensure the return of client assets as soon as is reasonably practicable above). This is because, if the special administrators distributed Worldspreads' client money to customers, there was a risk that other customers who had failed to respond to correspondence asking them to agree their client money claims might subsequently emerge and claim rights over that money.

The special administrators approached the FCA in early 2015 and applied for a modification to be made to certain parts of CASS rule 7A. On 5 June 2015, the FCA agreed to make the modification proposed by the special administrators. The modification to CASS rule 7A applies only to Worldspreads (and for a limited period of time, ending on 31 December 2015). It permits the special administrators to make a final distribution of client money without regard to the client money entitlement of a customer who has not submitted a claim. However, this is provided that the special administrators take certain steps, subject to a set timetable. The steps include writing to customers, advertising what they are proposing to do in terms of distributing client money and waiting for certain periods of time before distributing client money.

Importantly, the modified CASS rule 7A means that, once a final distribution of Worldspreads' client assets has occurred, a customer would cease to have an interest in Worldspreads' client assets for the purposes of chapter 7 of CASS if they have either: 

  • Failed to respond to correspondence from the special administrators asking them to agree their client money claims.
  • A claim that would result in a distribution of less than GBP 1.

However, this modification to CASS rule 7A does not affect a customer's right (if any) as an unsecured creditor of Worldspreads, nor does it affect such customer's rights relating to the Financial Services Compensation Scheme (FSCS).

In practice, the modification to CASS rule 7A provides the special administrators with a greater degree of certainty relating to the distribution of client money. This is because the modification of CASS rule 7A means that once the special administrators have finally distributed Worldspreads' client money, a customer who did not respond to their correspondence asking them to agree their client money claims by a specific date would not have any proprietary claim against money that had already been distributed to other customers from Worldspreads' client assets.

Application to the High Court for an order

Notwithstanding the modification to CASS rule 7A, the special administrators considered that it was appropriate to ask the court for directions. They applied to the court for an order setting out the procedure that should be followed to distribute Worldspreads' client money. The draft order proposed by the special administrators permitted them to:

  • Set a "bar date" by which time any outstanding claims to beneficial ownership of client money must be received by the special administrators.
  • Make provision for the special administrators' costs and expenses.
  • Deal with claims to client money that are not agreed.
  • Make a final distribution to those with agreed claims to client money, notwithstanding the potential claims of others who have not responded to communications from the special administrators or not pursued a court application if their claim has been rejected by the special administrators.

The special administrators asserted that the court had the jurisdiction to make such an order under both:

  • The Insolvency Act 1986 (Paragraph 63 of Schedule B1).
  • The court's inherent jurisdiction relating to trusts and the power to give directions to trustees to distribute trust property on particular bases when the court is satisfied it is just and expedient to do so (as in Re MF Global UK Ltd (in special administration) [2013] EWHC 1655 (Ch) (14 June 2013).

Order granted

The court granted the draft order proposed by the special administrators. In doing so, Birss J noted that no objections had been received from the FSCS, Worldspreads' Creditors Committee or the FCA. He also noted that, unlike the position in MF Global, not all the claimants known to the administrators had been notified of the application to court. The court noted that the sums involved in the Worldspreads special administration were smaller than those in MF Global and found that the fact that all known claimants had been informed of the proposal in general terms was sufficient in this case.

Comment

As this case demonstrates, sometimes the rules relating to distribution of client money held by authorised firms do not provide for certain specific circumstances. When this situation arises, it can make it challenging for client money to be distributed as soon as is reasonably practicable, as the special administrators for Worldspreads appear to have found. However, the court's decision to grant the order requested by the special administrators for Worldspreads, and the FCA's willingness to make a one-off modification to CASS rule 7A, indicate the kinds of steps that can be taken to clarify the procedure for distributing client money in specific circumstances.

Case

Re Worldspreads Ltd v Re Investment Bank Special Administration Regulations 2011 [2015] EWHC 1719 (Ch) (19 June 2015) (Bailii).

This article first appeared on Practical Law and is published with the permission of the publishers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Allen & Overy LLP | Attorney Advertising

Written by:

Allen & Overy LLP
Contact
more
less

Allen & Overy LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide