Brazzill & Ors v Willoughby & Ors

A trust required by a regulatory notice was constituted when the first matching payment was made into the segregated account. The expressions “customers” and “deposits” covered all customers who made deposits during the relevant period, including non-regulated and foreign-currency depositors.

Beneficiaries were entitled to participate pro rata even where the bank had failed to make a matching payment. The bank could reimburse itself from the account for matching sums used to repay qualifying depositors. A statutory transfer of deposit liabilities extinguished the depositors’ interests in the account on completion, while their assigned rights vested in the FSCS and the Treasury. No additional subrogation remedy arose.

The joint administrators of Kaupthing Singer & Friedlander Limited sought directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986 concerning approximately £147 million held in a Bank of England account.

The account had been established pursuant to a First Supervisory Notice issued by the Financial Services Authority. The principal issues were whether the Notice created a trust, the identity of its beneficiaries, the effect of withdrawals and shortfalls, and the consequences of the transfer of Kaupthing’s Edge accounts to ING Direct under the Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008.

1. Trust. The Notice imposed an involuntary trust obligation on Kaupthing. The trust was constituted when the first deposit was paid into the segregated account. The relevant trust was the trust required by the Notice, not a separate trust created by the operational decisions of individual employees.

2. Construction of the Notice. Applying the principles in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98, as applicable to trust documents under IRC v Botnar [1999] STC 711, “customers” and “deposits” were construed in their ordinary and natural sense. The Notice was intended to cover all customers who deposited money after 2 October 2008, including non-regulated depositors and foreign-currency depositors.

3. The trust beneficiaries were all customers who made deposits between 3 and 7 October 2008, whether or not Kaupthing made the corresponding matching payment. A failure to transfer matching money into the account was a failure to comply with the Notice, but did not constitute a breach of trust because the deposit money was not trust property before the matching payment was made. Any shortfall was to be borne pro rata by the beneficiaries.

4. Reimbursement. Where Kaupthing had repaid a qualifying depositor from its general funds, it was entitled to reimbursement from the account of the corresponding matched sum. This gave effect to the repayment mechanism in the Notice and avoided an unwarranted benefit to other beneficiaries at the expense of the general creditors. The reasoning was supported by the analogy with Re Kayford [1975] 1 WLR 279 and Re Lewis’s of Leicester [1995] 1 BCLC 428.

5. Transfer Order. The transfer of Edge liabilities to ING Direct extinguished the Edge depositors’ interests in the account once the transfer formalities and compensation arrangements were completed. Their rights were assigned in equity to the FSCS and became fully effective on payment of compensation. Paragraph 16 was a residual provision preserving rights to prove in the administration; it did not exclude the assigned rights in the account.

6. Subrogation. The FSCS and Treasury had no additional proprietary or restitutionary remedy by subrogation. They had deliberately proceeded through the assignment mechanism, and subrogation would have imposed a disproportionate burden on Kaupthing’s unsecured creditors and post-Notice non-regulated depositors. The court would have dismissed the subrogation claim had it arisen.

7. The court answered the questions posed accordingly. The trust covered all money in the account; all relevant post-Notice depositors were beneficiaries; Kaupthing could recover matching sums used for repayments; the Edge depositors’ rights passed to the FSCS and Treasury; and no separate equitable or restitutionary remedy was available.