Worldspreads Ltd, Re

This was an urgent application by the directors for a special administration order under the Investment Bank Special Administration Regulations 2011, made pursuant to section 233 of the Banking Act 2009. The court found that the company satisfied the statutory definition of an "investment bank" under section 232 of the Banking Act (permission under Part 4 of FSMA; holding client assets; incorporation in England and Wales). The court concluded that the company was or was likely to become unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 and that it would be fair to put the company into special administration to protect and distribute client money and to permit an investigation. The proposed joint special administrators (two KPMG practitioners) were held to be qualified and consenting. The Financial Services Authority supported the application and the court made the special administration order to take effect at 5:30 pm, in order to protect client money and the orderly resolution of client claims.

The directors of Worldspreads Limited applied urgently for a special administration order under the Investment Bank Special Administration Regulations 2011 after the new management discovered that client money reconciliations had been deliberately falsified and that client money may have been mixed with the company's own funds for up to five years. It was alleged that, as at the previous business day, gross client liabilities were about £29.7 million while designated client accounts held only about £5.795 million, leaving a material deficit which the court estimated might be in the order of £13 million.

The application was supported by the Financial Services Authority and was heard on an urgent basis because markets were due to open and clients might seek to close positions and withdraw funds. The court was asked to determine whether (i) the company fell within the extended statutory definition of an "investment bank" (Banking Act 2009, section 232), (ii) the statutory grounds for a special administration order were met (regulation 7(2) and regulation 6(1)(a) and (b) of the Investment Bank Special Administration Regulations 2011), and (iii) the proposed special administrators were suitably qualified and consenting.

The judge found that the three conditions of section 232 were met: the company had Part 4 permissions under the Financial Services and Markets Act 2000, held client money (CASS Chapter 7 rules), and was incorporated in England and Wales. On the insolvency test, the company was or was likely to become unable to pay its debts within section 123 of the Insolvency Act 1986. Even if that test were close, it would in any event be fair (in the statutory sense) to place the company into special administration to protect client assets, facilitate an orderly resolution of client claims, liaise with market bodies and the FSA, investigate the events leading to the crisis and preserve any prospect of sale or rescue. The proposed joint special administrators, both from KPMG LLP, were held to be qualified and to have consented to act under regulation 4(2) and 4(3). The judge also accepted recitals to assist foreign recognition, including reference to the UNCITRAL Model Law, and directed that the order be made effective at 5:30 pm on the day of the hearing.

A special administration order was granted with effect from 5:30 pm. The court held that Worldspreads Limited met the statutory definition of an investment bank under section 232 of the Banking Act 2009, that it was or was likely to become unable to pay its debts within section 123 of the Insolvency Act 1986, and that it was fair to place the company into special administration to protect client money and enable investigation. The proposed joint special administrators were qualified and had consented to act, and the Financial Services Authority supported the order.