In re Global Trader Europe Ltd

The liquidators applied under s.112 Insolvency Act 1986 for directions about the distribution of funds following Global Trader's insolvency. The court analysed the FSA client money rules (CASS 4 and the post‑MiFID CASS 7), the distinction between money a firm receives from a client and money it is said to holds for or on behalf of a client, and the effect of the statutory trust created by CASS. The court held that absent either (a) proper segregation or (b) a valid title transfer collateral arrangement (TTC) or effective opt‑out, sums paid into Global Trader’s own bank accounts generally lost any proprietary character and the claim of the Rossib and Soukholinski classes to proprietary rights in the general recovery fund failed. The segregated fund (about £2m) remained trust property for the Crawford‑Brunt class and was not available for distribution to the other classes. The court refused to direct the liquidators to complete the bank transfer of c.£503,157.55 into the segregated account but indicated that the liquidators should top up the segregated fund to reflect net increases arising from the notional valuation of open positions at the date of appointment.

This is a first‑instance s.112 application by the liquidators of Global Trader Europe Ltd. The company carried on regulated MiFID business, including contracts for differences and spread bets. When Global Trader entered administration on 15 February 2008 and thereafter went into creditors' voluntary liquidation, competing classes of clients and creditors asserted differing entitlements to funds then held by or recoverable to the estate.

The principal factual and legal issues were:

• Classification and regulatory framework: the court described client categories (private/retail, intermediate/professional and market counterparties), the transition from CASS 4 to CASS 7 on 1 November 2007 under MiFID, and the statutory trust and segregation rules under CASS.
• Main proprietary claim: whether the Rossib and Soukholinski classes had proprietary (trust) interests in Global Trader’s general recoveries (estimated at £22–23m) rather than merely unsecured creditor claims.
• £2m plus issue: whether the Rossib and Soukholinski classes were entitled to share the segregated client bank account (approximately £2m) currently treated as held for the Crawford‑Brunt class.
• Incomplete transfer: whether the court should direct completion of a failed bank transfer of £503,157.55 into the segregated account.
• Post‑administration and further shortfalls: the status of profits or losses realised after the administration date under the notional valuation imposed by order, and whether liquidators should top up segregated funds to reflect notional increases.

On the law the judge emphasised the difference between (i) money a firm receives from a client (which may be client money) and (ii) a contractual debt arising when a client’s position is closed at a profit. CASS 4 and CASS 7 create a statutory trust for identifiable client money and require segregation and daily reconciliations; opt‑out/opt‑in mechanisms (CASS 4.1.9R previously, TTC arrangements under CASS 7.2.3R) remove such money from the client money regime if validly implemented. Where money that should have been segregated was taken into the firm’s own accounts and lost its identity, the court followed authority that that generally does not create a proprietary interest in the firm’s general funds (so the claim must be pursued, if at all, by tracing or as an unsecured claim).

The court’s reasoning and outcomes were:

• The Rossib and Soukholinski classes’ attempts to establish proprietary trust rights in the general recovery fund failed: absent effective segregation or an effective TTC/opt‑out, their rights rank as unsecured creditor claims (tracing only where possible).
• Credits arising on closing of positions create contractual debts; those debts do not automatically convert parts of the firm’s own bank balances into client money unless payment is actually placed into a client bank account.
• Post‑1 November 2007 receipts by former intermediate customers who accepted valid TTC notices would not be client money; where no valid TTC existed, post‑1 November 2007 receipts may be client money but, if not segregated and identity is lost, the proprietary remedy will be difficult.
• The segregated account of approximately £2m properly belongs to the Crawford‑Brunt class and is not shared with the Rossib or Soukholinski classes.
• The court would not direct the liquidators to effect the incomplete bank transfer of c.£503,157.55 into the segregated account; that shortfall remains an unsecured claim. However the court indicated that the liquidators should transfer from estate funds sums necessary to reflect the net increase in segregated clients’ entitlements caused by the notional valuation at the appointment date (i.e. to prevent further shortfalls attributable to the administration process itself).
• The liquidators may exercise set‑off against client entitlements for post‑appointment client losses.

The court determined the issues as follows: main proprietary claims of the Rossib and Soukholinski classes to the estate fund were rejected and those claims rank as unsecured claims unless specific sums can be traced; the segregated account of c.£2m is trust property for the Crawford‑Brunt class and not available to the Rossib or Soukholinski classes; the court declined to order completion of the incomplete bank transfer of c.£503,157.55 into the segregated account; the court directed that the liquidators should top up the segregated fund to reflect net increases arising from the notional valuation of open positions at the appointment date, rather than permitting a new proprietary claim to be created after insolvency. The rationale was that CASS governs client money and creates a statutory trust only for identifiable client money (and provides opt‑out/TTC mechanisms); where client money was not properly segregated and identity lost, no proprietary interest in the firm’s general funds arises absent successful tracing, and insolvency and insolvency policy prevent the court elevating unsecured creditors into proprietors by ordering preferential transfers.