Vaughan & Ors v Barlow Clowes International Ltd & Ors

The first-in, first-out rule in Clayton's Case is prima facie available for competing equitable claims to a mixed fund, but it is a rule of convenience based on presumed intention. It is not invariable. It should be displaced where the parties’ intention, the equities, impracticability or disproportionate cost makes another method preferable. Where investors’ money forms, or has been collected into, a common pool, the fund may be distributed pari passu. A rolling-charge method may be fairer, but should be rejected where its complexity and cost are disproportionate. The appeal was allowed and the available assets were ordered to be shared rateably among unpaid investors.

BCI’s liquidators and receivers sought directions for distributing trust moneys remaining after the collapse of its investment schemes, Portfolios 28 and 68. Peter Gibson J ordered that some balances and additional assets should be distributed by tracing under Clayton's Case, while other balances were to be shared pari passu. The appeal concerned the competing claims of investors and the appropriate method of allocating the assets, including gilt investments, uninvested bank balances and the proceeds of a yacht. The central issue was whether the first-in, first-out rule applied or whether the assets constituted a common fund to be distributed rateably.

Appeal allowed. Dillon LJ and Woolf LJ reached the same operative result, although Woolf LJ gave additional reasoning.

1. Nature of the rule. Dillon LJ explained that Clayton's Case concerned appropriation of payments in a running account, rather than tracing. Woolf LJ treated the rule as prima facie available for competing equitable claims, but as a rule of convenience based on presumed intention. The rule may be displaced where the circumstances, intention, equities, practicality or cost make its application unjust or unworkable.
2. Common fund. The investment documents were ambiguous, but the better view was that Portfolios 28 and 68 were collective investment schemes. The gilts were therefore acquired as part of a common fund and were not earmarked for individual investors. Woolf LJ additionally considered that, even if separate investments had originally been intended, BCI’s continuing misapplication of the money had created an unplanned pool arising from a common misfortune. The investors were presumed to intend equality in the distribution of what could be salvaged.
3. Alternative methods. The North American rolling-charge method might be fairer in principle, but its complexity and cost were disproportionate. The appropriate alternative was distribution pari passu, rateably according to the amounts due.
4. Application. The rule in Clayton's Case was not applied to the Schedule A and B balances, the gilt proceeds or the proceeds of sale of Boukephalos. Those assets were held on trust for all unpaid investors rateably. Account Ch 52 was to be treated as part of Schedule B.
5. Orders. The judge’s order was set aside and substituted with declarations giving effect to the rateable distribution. Chiltington Ltd was appointed to represent investors who supported tracing and had not accepted the Secretary of State’s composition offer.

• Court of Appeal (Civil Division). Appeal allowed. The order of Peter Gibson J was set aside and substituted with declarations requiring rateable distribution among unpaid investors.
• High Court of Justice, Chancery Division. On 16 June 1989 Peter Gibson J directed that certain assets should be distributed by tracing under Clayton's Case, while other balances were to be distributed pari passu.