CRC Credit Fund Ltd & Ors v GLG Investments Plc Sub-Fund: European Equity Fund & Ors

Under the client money rules in CASS7, the statutory trust attaches when an investment firm receives client money, rather than only when it segregates that money. Following a primary pooling event, the pool comprises all identifiable client money in segregated accounts and the firm’s house accounts.

The pool must be distributed rateably on the basis of each client’s contractual entitlement, rather than the amount actually segregated for that client. A mere debt owed by the firm does not become client money unless money has been received for the client or sufficiently appropriated and set aside for that purpose.

Lehman Brothers International (Europe) operated the alternative approach under CASS7. It received client money into house accounts and transferred the required balance to segregated client accounts after daily reconciliation. Administrators were appointed before money received after the last reconciliation had been segregated, causing a primary pooling event.

Briggs J held in [2009] EWHC 3228 (Ch) that the statutory trust arose on receipt. He nevertheless confined the pool and participation in it to money actually segregated for clients. The appeals raised four central questions: when the trust arose; which identifiable money entered the pool; whether distribution followed claims or contributions; and when a debt owed by the firm became client money.

1. The appeals were allowed on the pooling and distribution issues, but dismissed on the trust and self-generated indebtedness issues. Arden LJ delivered the principal judgment. Lord Neuberger MR agreed and gave additional reasons. Sir Mark Waller agreed with both judgments.

2. CASS7 must be interpreted holistically and practically, in light of its investor-protection purpose and the MiFID Directives. CASS7 creates a statutory trust but does not comprehensively state the incidents of that trust. Default principles of trust law may therefore fill gaps unless displaced by the rules.

3. The statutory trust under CASS7.7.2R arises when the firm receives client money. The words “receives and holds” cover both money received as client money and money already possessed by the firm which later becomes held for a client. That construction also gives effect to the requirements of article 13(8) of Directive 2004/39/EC and article 16 of Directive 2006/73/EC that clients’ rights be safeguarded and their funds protected against use for the firm’s own account.

4. On a primary pooling event, CASS7.9.6R pools all identifiable client money. The expression “client money account” is not confined to segregated client bank and transaction accounts. It includes identifiable client money held in house accounts. CASS7 establishes a single trust, and its language and protective purpose favour a unitary pool rather than materially different treatment depending on the happenstance of segregation. A final reconciliation is required as at the primary pooling event.

5. Distribution is on the claims basis. “Client money entitlement” refers to each client’s contractual entitlement, calculated with the prescribed set-off, rather than the amount actually contributed through segregation. All clients with valid claims to client money share rateably. This avoids gaps and arbitrary consequences caused by events between the last reconciliation and the pooling event.

6. A debt owed by the firm, including an unpaid manufactured dividend, is not client money merely because it is due and payable. A trust requires sufficiently identified property. The firm must have received money for the client or appropriated and set aside money for that purpose. The appeal was disposed of accordingly.

• Court of Appeal (Civil Division): In [2010] EWCA Civ 917, unanimously upheld the decision that the statutory trust arose on receipt and that an unappropriated debt was not client money. It reversed the rulings limiting the pool to segregated money and requiring distribution on a contributions basis.
• High Court, Chancery Division: Briggs J held in [2009] EWHC 3228 (Ch) that the trust arose on receipt, but that only segregated money entered the pool and only clients for whom money had been segregated participated by reference to their contributions.