Re MF Global UK Limited (No 3)

The administrators of MF Global UK applied for directions under the court's inherent jurisdiction in relation to the client money trust established by the Financial Services Authority rules (CASS 7 and 7A) so as to permit a practical and timely distribution of client money. The court held that, although there was no statutory mechanism equivalent to the Insolvency Rules or a Part 26 scheme for adjudicating and bar-dating client money claims, the court has an inherent jurisdiction to supervise trusts and to give directions enabling trustees to distribute trust property on practical assumptions where that is just and expedient. The judge treated the proposed Client Money Distribution Procedure as a proper exercise of that jurisdiction, analogous in part to Re Benjamin orders, and made the order sought. The court preserved claimants' proprietary rights and left open their remedies should they later establish entitlement, while protecting trustees and administrators from personal liability if they complied with the procedure.

This was an application by the administrators of MF Global UK Limited (also acting as trustee of the client money trust created by the FSA Handbook rules) for directions concerning the administration and distribution of client money following the appointment of administrators under the Investment Bank Special Administration Regulations 2011.

Background and parties:

• MFG UK, an FSA-authorised investment bank, held client money under the client asset rules (CASS 7 and CASS 7A) which create a trust and a client money distribution regime on a primary pooling event such as administration.
• The administrators faced a large number of submitted claims (5,345 claims totalling some US$2.223 billion) of which many were agreed, some rejected, and others undecided or from claimants not appearing on the firm’s records. Available client money for distribution was estimated between US$945–951 million.

Nature of the application: The administrators sought directions under the court's inherent jurisdiction to adopt a Client Money Distribution Procedure: requiring claimants to lodge written claims, enabling administrators to admit, reject or provide for claims within prescribed times, permitting distributions on the basis that only lodged and accepted claims (or those subject to court challenge) participate, and protecting administrators from personal liability if they follow the procedure.

Issues before the court:

1. Whether the court had jurisdiction to make the proposed order in the absence of an express statutory procedure for adjudicating and bar-dating client money claims;
2. Whether it was just and expedient to permit distributions on the basis proposed, balancing timely return of client money against protection of persons with unresolved claims.

Court's reasoning: The court analysed the CASS provisions creating the trust and the absence of procedural machinery for claims. It considered authorities on the court's supervisory jurisdiction over trusts (including Schmidt v Rosewood and Finers v Miro) and the Re Benjamin line of decisions permitting trustees to distribute on practical presumptions where proof is impossible or impracticable. The judge concluded that the inherent jurisdiction allows directions enabling trustees to distribute trust assets notwithstanding the existence of unresolved third-party or beneficial claims, provided proprietary interests are not extinguished and appropriate protections are built into the order. The proposed procedure struck a fair balance: it facilitated timely distributions to established clients, preserved proprietary remedies for successful claimants later, and protected administrators who complied with the procedure. The order was made and the Client Money Distribution Procedure adopted.

The court noted the absence in CASS of a claims adjudication framework and observed that the remedy sought, while not a neat fit with historical Re Benjamin orders, was within the inherent jurisdiction and appropriate in the circumstances.

The court granted the administrators' application and made the order adopting the proposed Client Money Distribution Procedure. The judge held that, although the inherent jurisdiction cannot vary beneficial interests, the court may give directions to trustees enabling practical distribution of trust assets where it is just and expedient; the proposed procedure appropriately balanced timely distributions to clients with protection for persons with unresolved claims and preserved proprietary remedies while protecting administrators from personal liability if they complied with the procedure.