Brazzill v Willoughby

The court authorised directions under paragraph 63 of Schedule B1 Insolvency Act 1986 concerning £147,436,226.05 placed by Kaupthing Singer & Friedlander Limited (KSF) in a Bank of England account pursuant to an FSA Supervisory Notice. Applying standard principles of contractual and statutory construction (Investors Compensation Scheme v West Bromwich Building Society), the judge held that the Notice created a valid trust over the monies in the account. The terms of the Notice were construed to include all customers who made deposits after the Notice was served (including foreign currency deposits) so that beneficiaries comprised the class of post-Notice depositors, not only regulated depositors.

The court also held that KSF was entitled to be reimbursed from the trust fund for sums it had paid out to depositors during the relevant period to the extent those payments corresponded to matched deposits in the trust account, and that any shortfall caused by KSF’s failure to match all deposits would be borne pro rata by the beneficiary class (i.e. a rateable abatement). The Kaupthing Transfer Order (SI 2008/2674) operated to transfer Edge depositors’ rights to ING Direct, with repayment obligations carried by the FSCS and Her Majesty’s Treasury under the Order; the court construed the Transfer Order as effecting deemed claims/assignments in equity so that FSCS/HMT acquired the transferred depositors’ interests as against KSF, but rejected a restitutionary/subrogation claim by FSCS/HMT over the trust fund where that would unjustly enrich them at the expense of other creditors.

This was a first-instance trial of an ordinary application by KSF’s joint administrators for directions under paragraph 63 of Schedule B1, Insolvency Act 1986, concerning £147,436,226.05 credited to a Bank of England account after an FSA Supervisory Notice dated 3 October 2008 required KSF to open a segregated trust account and credit it with sums matching deposits accepted from customers on and after 2–3 October 2008.

Background and parties: KSF (a bank) experienced acute liquidity problems in early October 2008. The FSA served a confidential Supervisory Notice requiring a segregated trust account at the Bank of England to match deposits received from customers from 2–3 October 2008 onwards. KSF transferred sums to the account on 6–7 October 2008 but did not match every deposit that had been taken. On 8 October 2008 the Treasury made a Transfer Order (SI 2008/2674) transferring KSF’s Edge accounts to a Bank of England special purpose vehicle and thence to ING Direct, with payments by FSCS and Treasury to ING. KSF was placed into administration on 8 October 2008 and the administrators sought directions about the legal character and distributive consequences of the sums standing to the credit of the Bank of England account.

Relief sought / issues framed: The administrators asked the court to determine, inter alia, whether the Notice created a valid trust over the account monies; who were the beneficiaries; whether deposits in foreign currency were covered; how the trust was to operate on withdrawals; the effect (if any) of the Transfer Order and of FSCS payments; and whether FSCS/HMT had restitutionary or equitable remedies in respect of the account.

Court’s reasoning and findings:

• The court applied established principles of construction (Investors Compensation) and rejected reliance on KSF staff impressions as determinative. The Notice itself and the contemporaneous communications (KSF’s email to the Bank of England) established that a trust was intended and was constituted upon the first matching payments into the account.
• On construction the words "customers" and "deposits" in the Notice were to be given a wide effect so as to cover all customers who made deposits after the Notice, including foreign currency depositors. The purpose and context (extraordinary systemic risk, and an intention to provide broad protection during an attempt to sell KSF) supported a broad class of beneficiaries rather than limiting the trust to regulated depositors only.
• KSF’s internal exercise (the IT script and manual deletions supervised by an operations manager) did not fix the class of beneficiaries; where KSF failed to make matching payments for some depositors that failure did not prevent those depositors from being beneficiaries in principle, but any shortfall in the trust fund would be shared rateably by the beneficiary class.
• Where KSF had repaid depositors during the period, the court held KSF was entitled to reimbursement from the trust in respect of sums matching those repaid deposits — preventing an unfair enrichment of other beneficiaries or third parties and preserving pari passu treatment of unsecured creditors.
• The Transfer Order effected an involuntary novation of Edge depositors’ rights to ING Direct, and the Order’s provisions (especially articles 14–16) produced deemed payments and, in equity, assignments/claims vesting in FSCS/HMT so that FSCS/HMT obtained the benefit of transferred depositors’ claims; the court rejected arguments that this left FSCS/HMT limited to proving in the administration.
• The court rejected any proprietary subrogation remedy for FSCS/HMT over the trust monies where that would give them a better position than the underlying depositors or unjustly shift losses onto KSF’s unsecured and non-regulated depositors; the deliberate decision by FSCS/HMT not to obtain conventional assignments was a significant factor.

Context and implications: the judgment recognises the exceptional statutory powers used (Banking (Special Provisions) Act 2008) and the confidential, urgent nature of the regulatory interventions. The court emphasised fairness between creditor classes, held broadly in favour of a wide beneficiary class, and limited restitutionary remedies that would distort ordinary insolvency pari passu principles.

This was a first-instance determination. The court answered the administrators’ questions by holding that: (1) a valid trust was created over the monies in the Bank of England account under the FSA Supervisory Notice; (2) beneficiaries comprised all customers who made deposits in the relevant post-Notice period (the court answered the question as framed: between 3 October and 7 October 2008 inclusive); (3) foreign currency deposits fell within the Notice; (4) KSF was entitled to reimbursement from the trust for repayments it made that corresponded to matched deposits and any shortfall arising from KSF’s failure to match all deposits would abate pro rata among beneficiaries; (5) the Transfer Order transferred Edge depositors’ rights to ING Direct and, by virtue of the Order (articles 14–16), FSCS and HMT acquired the transferred depositors’ interests in equity and could recover as provided by the Order; and (6) FSCS/HMT had no independent equitable subrogation remedy to override the distributional consequences determined above. The court’s reasoning rested on statutory and contractual construction, consideration of background and purpose, and established trusts and restitution principles.