Brazzill v Willoughby (Court of Appeal)

This Court of Appeal considered competing claims to sums placed by Kaupthing Singer & Friedlander Ltd into a segregated Bank of England account following a First Supervisory Notice issued by the Financial Services Authority under the Financial Services and Markets Act 2000. The court held that (i) the Notice required KSF to create a class trust for the benefit of those who made deposits falling within the regulatory meaning of "deposit" (as defined by the Regulated Activities Order), not for all monies paid in by any payer; (ii) the trust was declared when the Account was opened and money was credited in accordance with the Notice; and (iii) KSF could not take money from the Account to satisfy withdrawals (or recover amounts paid in by mistake) unless the Account was fully funded as regards the regulated depositors, in which case KSF could recover only any surplus.

The court interpreted key provisions of FSMA (notably sections 43, 45 and 48) and the FSA regulatory scheme (including COMP and GENPRU), and construed the Banking (Special Provisions) Act 2008 Order transferring Edge Accounts. It concluded that the Treasury Order effected, for relevant protected depositors, the same practical result as the normal FSCS compensation process and that FSCS thereby obtained the benefit of an assignment of relevant depositor rights against KSF.

The proceedings were brought by the administrators of Kaupthing Singer & Friedlander Ltd to determine who was beneficially entitled to funds standing in a segregated Bank of England account created after a First Supervisory Notice dated 3 October 2008. The Notice required KSF to open a segregated trust account and to credit it with sums "at least as great as" the aggregate value of deposits accepted during specified days, and to hold those sums on trust for customers. The sums paid into the Account on 6 and 7 October 2008 became the subject of competing claims.

Nature of the claim: A declaratory and proprietary dispute arising in the administration of KSF as to the beneficiaries of the trust account established under the FSA Notice, the proper construction of the word "deposit" in the Notice, the trustee's rights to withdraw or recoup sums, conversion of foreign currency deposits, and the legal effect of a Treasury Order transferring Edge Accounts to ING (including whether FSCS obtained assignations or otherwise acquired rights by subrogation).

Parties and procedural posture: The administrators (applicants) sought the court's guidance; appellants included a representative of certain account-holders (Willoughby), Kaupthing Singer & Friedlander (Isle of Man) Ltd, Transport for London, HM Treasury and the Financial Services Compensation Scheme. The order under appeal was that of Peter Smith J ([2009] EWHC 1633 (Ch)). The case came to the Court of Appeal by five appeals consolidated for hearing.

Issues framed:

• Whether the trust over money in the Account was limited to sums actually paid into it (client/client account model) or was a class trust declared by reference to the Notice and thus intended to benefit those whose deposits ought to have been matched;
• Whether the word "deposit" in the Notice bore the regulatory meaning in the Regulated Activities Order or a wider general meaning;
• Whether KSF was entitled to withdraw sums from the Account (including recoupment for withdrawals it had honoured and recovery of sums paid by mistake) where the Account was not fully funded;
• The appropriate exchange rates for conversion of foreign currency deposits and withdrawals;
• Whether the Treasury Order transferring Edge Accounts to ING resulted in FSCS being assigned depositors' rights (and, alternatively, whether HMT or FSCS could be subrogated to those rights).

Court’s reasoning and conclusions: The court concluded the trust was declared when the Account was opened and when KSF, by its communications and the Bank's mandate, made clear the monies were to be held on trust in accordance with the Notice. However, "deposit" in the Notice was construed to have its regulatory meaning under the Regulated Activities Order, not a wider general meaning; that construction accorded with the statutory scheme (FSMA, threshold conditions and regulatory objective of protecting regulated consumers) and was consistent with other provisions of the Notice (and with the intention to preserve KSF's liquidity). On withdrawals, the court held that KSF could only recoup amounts it had paid out to satisfy withdrawals if the Account was fully funded for the regulated depositors; the general equitable principle (Cherry v Boultbee line) requires a bringing up to the right level before claimants may participate. Payments into the Account made in respect of non‑regulated deposits were not to be treated as defeating regulated depositors' priority; a payer could not resile from such payments where retention in the Account was necessary to avoid injustice to regulated depositors. On assignment, the court held that the Treasury Order and its treatment of FSCS payments operated, by analogy to the ordinary FSCS process (and in light of contemporaneous changes to COMP), so as to transfer to FSCS the relevant rights (including rights in relation to the Account). The alternative contention that HMT/FSCS could be subrogated if there was no assignment was rejected as not providing a basis to achieve rights not conferred by the Order.

Practical points: foreign currency conversion for depositors is to be assessed by reference to the dates of payment into the Account (6/7 October) and withdrawals are to be converted at the same rate as their corresponding deposit.

Appeal allowed in part. The Court of Appeal upheld that the Notice created a declared class trust for those with deposits within the regulatory meaning and that the trust arose on opening the Account, but construed "deposit" in the Notice to bear its regulatory meaning (thus narrowing the beneficiary class). It also held KSF could not withdraw funds to meet withdrawals or reclaim payments made under mistake unless the Account was fully funded as to regulated depositors, and that the Treasury Order operated so that FSCS obtained the benefit of assignments of relevant depositors' rights.

Appeal from the High Court of Justice, Chancery Division, Companies Court (Peter Smith J) [2009] EWHC 1633 (Ch) to the Court of Appeal, neutral citation [2010] EWCA Civ 561. Five consolidated appeals heard in the Court of Appeal resulting in the present judgment.