Lomas & Ors v RAB Market Cycles (Master) Fund Ltd & Ors

Under a detailed commercial agreement, proprietary rights depend on the parties’ objective intention. Clear custody language, segregation provisions and references to assets belonging to the counterparty may establish a trust, even where equivalent securities may be delivered and a right of use exists.

A contractual provision transferring ownership of cash to a prime broker for use in its business may be subject to an implied temporal limitation. Where the broker becomes insolvent, ceases business and stops providing its services, cash subsequently derived from trust securities may remain client money, subject to the broker’s charge.

The administrators of Lehman Brothers International (Europe) applied for directions concerning cash received after the commencement of administration from securities held for clients under a standard Charge International Prime Brokerage Agreement.

The central questions were whether the securities were held on trust for the clients and whether clause 5.2, which treated cash held for a client as the prime broker’s property, applied to cash received after LBIE had entered administration and ceased providing prime brokerage services. An alternative question concerned whether equivalent payments would be administration expenses if the clause continued to apply.

1. Trust in securities. The Charge IPBA, read as a whole, created a trustee and beneficiary relationship in relation to securities held by LBIE as custodian. The words “custody”, “custodian” and “belong to the Counterparty”, together with the segregation provisions, were clear indications of an intention that the securities remained beneficially owned by the counterparty, subject to LBIE’s charge.
2. That conclusion was not displaced by the ability to hold securities in fungible accounts, deliver equivalent securities, reject dealing instructions, or exercise the right of use. The right of use was properly understood as a right to swap trust property for equivalent property. The court did not need to decide the precise effect of every exercise of that right, or the effect of clause 13.2 on termination.
3. Construction of clause 5.2. Clause 5.2 applied to all cash held for the counterparty, including cash derived from securities already subject to LBIE’s charge. Its purpose was not confined to the provision of fresh security.
4. However, clause 5.2 had a temporal limitation. Applying the objective approach to construction explained in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, the transfer of ownership ceased when LBIE went out of business, ceased providing prime brokerage services and entered administration. The purpose of allowing LBIE to use the cash in its business had then ended. Cash subsequently received from the securities was therefore client money, subject to LBIE’s charge.
5. The application was determined in favour of the counterparty position. The relevant cash could be paid to the beneficial owners, subject to questions of entitlement and any rateable sharing in the event of a shortfall.
6. Alternatively, if clause 5.2 had continued to apply, equivalent payments would have been necessary disbursements and administration expenses under rule 2.67(1)(f) of the Insolvency Rules 1986. That conclusion rested on the administrators’ retention of securities for the efficient conduct of the administration and the resulting windfall to LBIE.

Not an appeal. The judgment records no appellate history.