Guidance on client money claims resolution and distribution process

Guidance on client money claims resolution and distribution process

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 [2013] All ER (D)139 (Jun), [2013] 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.

Why did the problem arise?

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:

  • the Insolvency Rules 1986, SI 1986/1925, relating to proofs of debt, with late-comers being prevented from disturbing prior distributions, or
  • the Investment Bank Special Administration Regulations 2011, SI 2011/245, relating to the distribution of assets of investment banks
  • In order to distribute available funds, and 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 for the administrators and the debtor. Without it, the administrators would have to:
  • provide in full (ie make a reservation) for all rejected claims (268 claims totalling over $278m)
  • issue proceedings, making all the relevant claimants respondents (roughly 268 respondents) to determine the existence and extent of their individual claims

Even if this lengthy and expensive process was completed, it would not solve the problem of unknown claimants.

What did the court decide?

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:

  • Any client money claimant must submit a written claim to the administrators. The administrators may request any evidence which they consider necessary to adjudicate on the claim. The administrators may admit a claim in whole or in part. If rejected, the administrators must send a written statement of reasons to the claimant. For claims already rejected, the administrators must send a notice to the claimant confirming the rejection. Any claimant dissatisfied with the administrators' decision may apply to the court (within 21 days of receipt of the notice of rejection) for the decision to be reversed or varied.
  • A full reservation be made in respect of undecided claims, pending further information (1,393 claims totalling $71.3m) (this was also a requirement from the Financial Conduct Authority).
  • When the first distribution of client money is imminent, the administrators should give notice of it (i) directly to claimants whose email addresses or other contact details are known and (ii) by advertisement on the website for the administration and in certain newspapers. Subsequent distributions should be notified only by advertisement on the website. The notice must specify a bar date (not less than 21 days after the notice) by which claims must be lodged.
  • The administrators must admit, reject or provide for the claims that have been submitted within 14 days after the specified date. If the claimant applies to court to reverse or vary the rejection, the administrators must provide in full for the rejected claim.

The court approved an order that:

  • if the administrators gave notice of intention to make a distribution, they could proceed on the basis that:
  • the only persons with a claim to client money were those who had lodged a claim by the bar date, and
  • any claim which had been rejected was not to be treated as a claim to client money, unless the claimant had given notice of application to the court to vary or reverse the rejection
  • if the administrators acted in accordance with those provisions, neither the company nor the administrators would have any liability to any subsequently successful claimants

The order didn't purport to vary the beneficial interests of any clients and was without prejudice to any claimant's right to:

  • participate in any subsequent distribution from the client money trust, if they duly established their claim, and
  • any tracing or similar remedy

What was the basis for the court's jurisdiction to give directions?

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.

What does this mean in practice?

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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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.