Exploring the relationship between client money claims and creditor claims

Exploring the relationship between client money claims and creditor claims
Restructuring & Insolvency analysis: Does a distribution of client money reduce the amount a creditor can claim? Can a shortfall in a client money claim constitute a provable debt?       

Original news: Heis (as joint administrators) of MF Global UK Ltd v Attestor Value Master Fund LP (as representatives) Re MF Global UK Ltd (in special administration) [2013] EWHC 2556 (Ch), [2013] All ER (D) 152 (Aug)

The Companies Court decided that, among other things, following the insolvency of an investment firm, distribution from the client money pool would reduce a client’s contractual claim, and hence the amount for which it might prove, just as a payment from client money before a primary pooling event (PPE) reduced or discharged the client’s contractual claim.

What are the key points of this case?

This latest case arising from the special administration of MF Global looks at the relationship between a client’s claim to client money and its claim as creditor. The main issues were:

• does a distribution of client money reduce the amount a creditor can claim?

• can a shortfall in a client money claim constitute a provable debt?

• if so, what principles govern the amount and does the rule against double proof apply?

Richards J decided that:

• in principle, one client can have parallel claims (ie a client money claim and a claim as creditor), but distributions from a client money pool (CMP) will reduce the contractual claim

• the claimant can claim for a shortfall in client money, but only if that shortfall was due to the debtor’s fault (as here)

• the rule against double proof doesn’t apply here

Why is the difference between client money and creditor claims important?

The same transaction may create both a:

• proprietary claim (as beneficiaries of a trust) to client money, and

• personal claim (as a creditor) to a firm’s assets after filing a proof of debt

Clients were invited by the administrators to submit a single document containing a claim against the CMP and against the general estate. A successful proprietary claim means the assets in question never form part of the assets of the debtor (see Proprietary claims). Usually this is preferable to a personal claim as creditor (which just ranks as an unsecured claim fairly low down in the waterfall of payments). However, in this case, the anticipated recoveries (or dividends) for unsecured creditors was unusually high:

• unsecured creditors: 93%–100% expected dividend

• client money claimants: 62%–86% expected dividend

The different classification of claims was also important as different valuation rules applied for open contracts de

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.