Lehman Brothers International (Europe) v CRC Credit Fund Ltd & Ors

The statutory trust created by CASS7 arises when client money is received, or when the firm appropriates its own money to meet a client-money obligation. A firm using the alternative segregation approach must protect client money mixed with its own funds and must not use it for its own purposes.

On a primary pooling event, the client money pool comprises client money in segregated accounts only. Clients share by reference to actual contributions shown by the last reconciliation, subject to specified adjustments. The relevant date for calculation and valuation is the time of the primary pooling event. CASS7 imposes no general post-event top-up obligation, and set-off has no role in distributions from the pool.

The administrators of Lehman Brothers International (Europe), an investment firm in administration, sought directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986 concerning the interpretation and application of CASS7.

The application raised more than 70 questions concerning the constitution and distribution of the client money pool, the eligibility of under-segregated and over-segregated clients, valuation dates, post-appointment adjustments, bank failures, tracing, and set-off. The court determined the issues on agreed assumed facts and gave detailed answers to the administrators’ questions.

1. Statutory trust. CASS7.7.2R creates a trust when client money is received by the firm. Where the firm becomes obliged to appropriate its own money to meet a client-money obligation, the trust arises only on appropriation, ordinarily by segregation. A firm using the alternative approach must make adequate arrangements to protect client money mixed with its own funds and prevent its use for the firm’s purposes.
2. Client money pool. On a primary pooling event, CASS7.9.6R pools client money held in segregated client bank accounts and client transaction accounts. It does not pool identifiable client money in house accounts. Such money remains subject to the statutory trust and may be recovered under ordinary tracing principles, but the claimant bears the burden of identification. A failure to segregate money from the firm’s own resources does not itself create a proprietary interest.
3. No top-up. The client money rules are replaced by the distribution rules on the primary pooling event. CASS7 imposes no obligation to top up the pool from the firm’s general assets or from identifiable money outside it. Such an obligation would improperly prefer clients over unsecured creditors contrary to the insolvency code.
4. Basis of sharing. The pool is distributed on a contributions basis. Each client’s entitlement is the amount actually contributed for that client, shown by the last internal reconciliation, subject to the reducing mechanism in CASS7.9.7R and adjustments for relevant receipts, fails and possibly depot breaks. Partially segregated clients gain no entitlement for the unsegregated portion.
5. Timing and valuation. Entitlements are calculated and, where necessary, valued at the time of the primary pooling event. Subsequent market and currency movements are shared through the pooled fund. A client receiving securities after the event in resolution of a fail must give credit for the amount segregated against that fail.
6. Set-off and bank failure. Set-off and retainer cannot be used against a client’s proprietary entitlement to the pool. A secondary pooling event occurring after the primary event does not require the firm to make good the resulting shortfall ahead of unsecured creditors. Any personal liability depends on contract and breach of statutory duty.
7. Outcome. Directions were given answering the administrators’ questions in accordance with these conclusions. The court reserved costs and any further submissions required to formulate the order.