Brazzill & Ors v Willoughby & Ors

A regulatory supervisory notice may require an authorised firm to establish a trust, but does not itself create one. A segregated account and an express declaration can create a class trust for all customers for whom payments should have been made, regardless of which payments were actually made. The term deposit takes its regulatory meaning where the notice is made under the Financial Services and Markets Act 2000, protects regulated consumers, and contains no indication that non-regulated activities are controlled. The firm's right to recoup payments is subordinate to full funding of regulated depositors' interests. Foreign-currency withdrawals use the exchange rate applied to the corresponding deposit. A statutory compensation-transfer scheme may imply assignment of depositors' related rights to the compensation scheme.

The administrators of Kaupthing Singer & Friedlander Ltd sought declarations concerning money paid into a segregated Bank of England account under an FSA First Supervisory Notice issued pursuant to the Financial Services and Markets Act 2000. The issues included the beneficiaries of the trust, the meaning of deposit, KSF's right to withdraw money, foreign-currency conversion, and the effect of the transfer of Edge Account liabilities to ING under an Order made pursuant to the Banking (Special Provisions) Act 2008.

Peter Smith J held that a class trust existed, that deposit had a wider meaning than its regulatory meaning, that KSF could withdraw sums, and that FSCS obtained assignments while HMT and FSCS had no subrogation rights: [2009] EWHC 1633 (Ch). Five appeals concerned those declarations. The central questions were the proper construction of the Notice and the legal consequences of the statutory transfer and compensation arrangements.

1. Trust. The appeal against the declaration that a trust existed for a class of beneficiaries was dismissed. The Notice itself could not create a trust. It required KSF to create one and prescribed its terms and minimum property. KSF created the trust by opening the segregated account, accepting the Bank's mandate, and declaring that all money deposited would be held on trust in accordance with the Notice. The beneficiaries were all persons for whom payments should have been made under the Notice, and their interests extended to the amounts that should have been paid, whether or not the transfers were actually made. The case was distinguishable from Moriarty v Atkinson [2008] EWCA Civ 1604.
2. Meaning of deposit. The appeals on this issue were allowed. In the statutory and regulatory context, deposit had its regulatory meaning under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. The Notice was issued under sections 43, 45 and 48 of the Financial Services and Markets Act 2000. Its reasons concerned regulated activities, regulated consumers, and the preservation of KSF's liquidity. The Notice did not refer to the power under section 43(3) to control non-regulated activities. Extending it to group-company and financial-institution deposits would also conflict with its liquidity provisions. The corresponding meaning of customer therefore applied.
3. Withdrawals and mistaken payments. KSF could in principle recoup sums paid from its own resources to honour withdrawals against relevant deposits. That right arose under the Notice and was conditional on compliance with the prior funding obligations. KSF could not withdraw from the account unless it had fully funded the interests of regulated depositors. The beneficiaries' interests would otherwise abate proportionately. The same principle applied to payments made in respect of non-regulated deposits. If those payments were needed to avoid a shortfall, KSF could not recover them merely because they had been made under a mistake; only a surplus could be returned. A payment made in a state of doubt was not necessarily a payment made under a mistake, applying Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349. The general rule in Cherry v Boultbee was not needed because the answer lay in the Notice itself.
4. Foreign currency. The existing conversion directions were upheld. Deposits made on 2, 3 or 6 October were converted at the 6 October rate, and deposits made on 7 October at the 7 October rate. A withdrawal against a foreign-currency deposit was to be converted at the same rate as the corresponding deposit. The proposed single 8 October rate was rejected.
5. Assignment and subrogation. The appeal against the assignment declaration was dismissed. Article 15 of the Order operated as a proxy for the ordinary FSCS process. In context, it implied an assignment to FSCS of protected Edge depositors' rights against KSF, including rights relating to the account, at the time of the transfer to ING. The majority did not finally determine subrogation. Lloyd LJ considered that no subrogation claim would arise if there were no assignment, while Thomas LJ and Sedley LJ reserved their views. The subrogation declaration was therefore deleted as academic.

The appeals were allowed in part and dismissed in part.

• Court of Appeal (Civil Division): Five appeals were determined on 27 May 2010. The court varied the declarations below, dismissed the appeal concerning the existence and scope of the class trust, allowed the appeals concerning the meaning of deposit and withdrawal rights, added a foreign-currency conversion direction, dismissed the appeal concerning assignment, and deleted the academic subrogation declaration.
• High Court of Justice, Chancery Division, Companies Court: Peter Smith J gave judgment on 10 July 2009 and made declarations concerning the trust account, the meaning of deposits, withdrawal rights, foreign-currency deposits, assignment and subrogation: [2009] EWHC 1633 (Ch).