Global Trader Europe Ltd, Re

Client-money protection depends on the existence and ascertainability of trust property. A statutory client-money trust may arise when money is received, even if it is not immediately segregated, but failure to segregate identifiable money does not make the firm’s subsequently fluctuating general funds trust property. A contractual debt owed to a client does not itself create client money or a trust unless money is paid into a client account or to the client. On a firm’s administration, the mandatory pooling and distribution rules determine the beneficiaries and amount of the client-money pool. The court should not use its supervisory jurisdiction to improve an unsecured creditor’s status by directing a pre-existing shortfall into the client account. It may, however, direct a transfer needed to reflect liabilities created by the administration’s notional valuation process.

The liquidators of Global Trader Europe Ltd, an insolvent derivatives business, sought directions under the Insolvency Act 1986 concerning the distribution of client money and general assets. The respondents represented different classes of clients and trade creditors.

The main disputes concerned whether former intermediate customers, later classified as professional clients, had proprietary claims over general funds; whether they shared in a segregated fund held for retail clients; whether an uncompleted transfer should be made good; whether profits on post-administration closings retained client-money protection; and how notional closings affected a later shortfall.

1. Main proprietary claim. Money paid by intermediate customers before 1 November 2007 was client money on receipt under CASS 4 because the opt-out procedure had not been properly completed. However, once the money was mixed with the company’s own funds and lost its identity, no trust attached to equivalent fluctuating balances. The statutory origin of the segregation obligation made no material difference.
2. A profit arising when a client’s position was closed created only a contractual debt. It did not cause the company to hold its own money for the client. Client money arose only when an amount was paid into a client account or otherwise dealt with in accordance with the rules. The same analysis applied under CASS 7.
3. Post-1 November 2007 payments from former intermediate customers who received and accepted the correct email were excluded from client money by a title-transfer collateral arrangement under CASS 7.2.3R. Payments from customers who did not receive that communication were client money on receipt, but any proprietary claim depended on tracing identifiable money.
4. The former intermediate customers were not entitled to share in the segregated fund. Under CASS 7.7.2R and CASS 7.9.6R, the pooled money was distributed to the clients for whom it was held at the primary pooling event. That was the Crawford-Brunt class.
5. The attempted transfer of £503,157.55 did not declare a trust and could not be ordered after insolvency. The sum was a pre-existing shortfall, leaving the Crawford-Brunt class unsecured for that amount. The court could not create a preference by directing payment from general assets.
6. By contrast, the net increase in segregated-client liabilities produced by the court-ordered notional closing of positions at the administration date was directly caused by the administration. The liquidators should transfer the corresponding amount from general funds to the segregated fund, subject to any further submissions on the form of order.
7. Profits realised on post-administration closings were unsecured contractual claims. The client-money regime and pooling rules did not permit new segregated accounts to be created for those profits after the primary pooling event.
8. The liquidators could set off post-administration losses against distributions from the segregated fund where the contractual terms and Re ILG Travel Ltd supported that result.

First-instance directions decision. The judgment refers to an earlier interlocutory order by David Richards J and to an order of Blackburne J, but gives no citation for either order.