In the matter of Lehman Brothers International (Europe) (In Administration) and In the matter of the Insolvency Act 1986

Client money is held on the statutory trust created by CASS 7 from the firm’s receipt of it, not only upon segregation. On a primary pooling event, however, the distribution regime applies to all identifiable client money in accounts of the firm into which client money has been received, including house accounts.

Distribution is on a claims basis. Each client’s rateable share depends on its client money entitlement, calculated under CASS 7.9.7R, and does not depend upon actual segregation. CASS 7 must be construed purposively and consistently with the investor-protection aims of the MiFID Directives.

LBIE, an FSA-regulated investment firm, entered administration after extensive assumed failures to identify and segregate money received for clients. It operated the alternative approach under CASS 7, under which client money could initially pass through house accounts before daily segregation and reconciliation.

Briggs J held that the statutory trust arose on receipt, but confined the client money pool and participation in it principally to actually segregated money. The Court of Appeal allowed an appeal on the latter two issues: [2010] EWCA Civ 917. GLG, representing fully segregated clients, appealed to the Supreme Court.

The central questions were when the statutory trust arose, whether primary pooling included identifiable client money in house accounts, and whether participation depended on actual segregation.

1. Appeal dismissed by a 3–2 majority. All members of the court agreed that the statutory trust under CASS 7.7.2R arises when the firm receives client money. The wording of the rule, the definition of client money, and the protective purpose of the regulatory scheme did not permit a period in which received client money became the firm’s beneficial property pending segregation.
2. By the majority of Lord Dyson, Lord Clarke and Lord Collins, CASS 7 is a regulatory code which must be construed purposively in the light of the investor-protection objectives of MiFID and its Implementing Directive. Those objectives favour protection for all clients whose money the firm received, rather than protection determined by the firm’s compliance or non-compliance with segregation obligations.
3. Under CASS 7.9.6R(1), a client money account of the firm includes an account of the firm into which client money has been paid. On a primary pooling event, all identifiable client money in such accounts is treated as pooled. The pool is therefore not confined to segregated client accounts; it includes identifiable client money in house accounts.
4. Under CASS 7.9.6R(2), read with CASS 7.9.7R, each client receives a rateable sum based on its client money entitlement. That is a claims basis, reflecting the client’s contractual entitlement to have money protected, rather than a contributions basis limited to money actually segregated. The required calculation is not displaced by the last reconciliation or by the point of last segregation.
5. Lord Walker and Lord Hope dissented on the second and third issues. They would have confined the distributable pool, subject to a limited final reconciliation for the gap period, to segregated funds and distributed it according to actual contributions. Their approach did not prevail.

• United Kingdom Supreme Court: Appeal dismissed by a 3–2 majority. The court upheld the Court of Appeal’s answers on pooling and participation, while unanimously affirming that the statutory trust arose on receipt.
• Court of Appeal: Allowed the appeal on two of four issues, holding that the pool included client money in house accounts and that participation was on a claims basis: [2010] EWCA Civ 917; [2011] Bus LR 277.
• High Court (Chancery Division): Briggs J gave directions on the client-money issues in the administration: [2009] EWHC 3228 (Ch); [2010] 2 BCLC 301.