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How should client money claims be dealt with and when can administrators distribute funds? Kathy Stones looks at the case of Re MF Global UK  All ER (D)139 (Jun),  EWHC 1655 (Ch), which approved a process to establish a bar date and deal with rejected claims.
The Chancery Division, Companies Court, made an order governing the distribution of funds as client money by the administrators. In order to proceed with a distribution of the balance of the available funds, and to ensure the timely return of client money, a process was needed to deal with rejected claims and unknown claims which could provide a degree of certainty and protection.
MF Global UK's client money (estimated at between $945m and $951m) was held in trust under the Clients Assets Sourcebook (FSA CASS) rules. However, the FSA CASS rules don't contain any provisions setting out a claims, adjudication or distribution procedure for client money. Successful client money claims are effectively proprietary claims, meaning the assets don't fall within the estate of the debtor. It's surprising that there is nothing equivalent to the bar date provisions for assets of the debtor arising under:
Even if this lengthy and expensive process was completed, it would not solve the problem of unknown claimants.
The administrators proposed a procedure based on the provisions of the Investment Bank Special Administration Regulations 2011, SI 2011/245, dealing with the submission and adjudication of claims by creditors (which are themselves based on the equivalent provisions of the Insolvency Rules 1986, SI 1986/1925).
The proposal included provisions that:
The court approved an order that:
The order didn't purport to vary the beneficial interests of any clients and was without prejudice to any claimant's right to:
The court has an inherent jurisdiction in relation to trusts. Although this inherent jurisdiction did not enable the court to vary beneficial interests in trust property, the jurisdiction to supervise and administer trusts permitted the court to give directions to the trustees to distribute trust property when just and expedient to do so. The purpose of the FSA CASS rules was to protect the position of clients and to facilitate the timely return of client money in the event of the failure of the firm. Those purposes were not well-served by long delays.
It's encouraging that the court adopted a pragmatic approach to client money drawing on normal principles of creditor claims resolution and distribution. The court was clearly impressed by the special administrators' extensive communications with clients. It was satisfied that given the publicity surrounding the insolvency and administration of the debtor, it was highly unlikely that clients were unaware of any potential entitlement to make a client money claim.
The court recognised the overriding interest of all clients is to participate in distributions of the client money as soon as practicable. The procedures proposed by the administrators gave claimants a full opportunity to lodge and pursue their claims and properly balance both the interests of established clients to a timely return of their money and the interests of persons with serious but unresolved claims to be treated as clients.
Insolvency practitioners dealing with client money will still need to apply for directions in individual cases, but this order provides a useful precedent for the directions which should be sought.
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