Analysis
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 were appointed under the Investment Bank Special Administration Regulations 2011. MFGUM held funds in two different capacities – money for clients as trustee of the client money trust, and money beneficially on its own account. On their appointment, the administrators took responsibility for the due administration of the general estate of MFGUK as well as the duties and rights of MFGUK as the CMP trustee.
At the date of administration there was a shortfall in the CMP. The shortfall arose because MFGUK was required, but failed, to treat a number of clients as being entitled to the protection of the rules contained in chapters 7 and 7A (CASS 7 and CASS 7A) of the Client Assets Sourcebook section of the Financial Services Authority Handbook. It was also required to segregate money received from or on behalf of those clients but, instead, treated them as creditors. These accepted breaches of trust gave rise to two possible claims by the CMP Trustee against the general estate of MFGUK: (1) a claim to any client money received by MFGUK from or on behalf of clients, or its traceable proceeds (2) personal claims to compensate the CMP for breaches of trust.
The assets available both in the CMP and in the general estate were such that, even without resolution of these claims, by April 2014 cumulative distributions amounting to 76 pence in the £ to unsecured creditors, and amounting to 78.5 cents in the $ to clients out of the client money trust assets, had been made or announced. It was thought to be beneficial if the claims could be compromised rather than fought out.
A settlement was reached on the following basis. The maximum value of the claim advanced for the CMP was approximately $43m, plus costs. The primary position on behalf of the general estate was that there should have been a final reconciliation of client money as at the date of administration, in which event the general estate would have been required to pay approximately $9.4m to the CMP.
The settlement agreement therefore provided for a compromise of this claim by the payment of a little over $31m from the general estate to the CMP, payable in full even if the dividend payable by the general estate to unsecured creditors is less than 100p in the £. In order to make a final distribution of client money, the CMP would have to sell or otherwise realise its non-cash assets and resolve outstanding claims. The general estate would pay $29.86m for assignment of outstanding receivables due to the CMP. This amount incorporated a discount on the book value of the assets (approximately $32.55m) which took into account the risk of non-recovery, the costs of recovery and the time value of money. It was further agreed that the general estate should be given credit of approximately $12.84m for the netting of a liability of the CMP against a general estate asset in a proposed settlement with a third party.
The amount payable for the assignment of receivables was to be subject to adjustment, to reflect any receipt of receivables by the CMP prior to payment of the settlement amount and to take account of any movements in the US dollar value of the receivables as a result of exchange rate changes. Adjustments would also be made if the proposed settlements with third parties were not achieved. Finally, agreement was also reached as to the sharing of costs of the two estates down to the closure of the CMP. There were no objections to the proposed settlement. The administrators and the trustee of the CMP applied to enable the settlement to be made.
Held:
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- 1) Although the application was made jointly by the CMP Trustee and by the administrators, the legal basis of the application differed as between MFGUK in its capacity as trustee of the client money trust and the administrators of MFGUK acting in the interests of the general estate.
- 2) As trustee of the client money trust MFGUK relied upon the statutory powers of compromise conferred by s15 of the Trustee Act 1925. In order to enable the client money trust to be administered as effectively and as economically as possible, it was essential that the trustee should have a power to compromise claims. Nothing in CASS 7 or CASS 7A, suggested any intention to the contrary. MFGUK in its capacity as trustee of the CMP therefore had the power to compromise the claims between it and the general estate on the terms which had been negotiated.
- 3) The CMP trustee was not surrendering the exercise of its discretion to enter into the compromise agreement; rather it was a Public Trustee v Cooper [2001] WTLR 901type application where the trustees wished to obtain the blessing of the court for the action which they had resolved, and which was within their powers.
- 4) Whilst the application was not a perfect fit within Public Trustee v Cooper, it was appropriate for the CMP trustee to apply for liberty to enter into the settlement agreement, given that there were conflicts of interest between the CMP trustee and those acting on behalf of the general estate.
- 5) The CMP trustee had properly formed the view that the proposed compromise was for the benefit of clients as beneficiaries of the trust and there was no reason why the court should not give liberty to the CMP trustee to enter into the proposed compromise. Indeed there was every reason why it should do so. First, the CMP had taken and relied on legal advice. Second, the CMP would continue in existence at considerable for a period of two to three years, involving substantial further costs. Third, for all clients, the size of the likely payments from the general estate were such that the proposed compromise made little if any material difference to their position.
- 6) The basis of the application by the administrators in their capacity as such arose under the provisions of para 60 of sch B1, and para 18 of sch 1, to the Insolvency Act 1986, as applied by reg. 15 of the Investment Bank Special Administration Regulations 2011.
- 7) Many of the reasons which made the proposed compromise a good outcome for the CMP trustee applied equally to the general estate. In addition, the early closure of CMP would crystallise the value of parallel claims. Second, the settlement would reduce the value of parallel claims against the general estate. Third, the settlement would eliminate all shortfall claims against the general estate. Shortfall claims and the reduction of parallel claims substantially offset the reduction in the assets available to the general estate resulting from the payment of the proposed settlement amount. Fifthly, the effect of additional costs resulting from a full tracing exercise and full litigation of the issues would, even if the general estate were to be wholly successful and obtain an order for recovery of its costs, leave the general estate worse off than its position following the proposed settlement.
8) The court was therefore satisfied that it was appropriate to make the order sought.
JUDGMENT RICHARDS J: [1] 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. [2] The client money …Continue reading "MF Global UK [2014] EWHC 2222 (Ch)"