MF Global UK Ltd, Re Investment Bank Special Administration Regulations 2011

A trustee may compromise trust claims where the trust instrument or governing statute does not exclude the statutory power of compromise. On an application for the court’s blessing of a momentous decision, the court asks whether the proposed exercise is lawful, within the trustees’ powers, and one which trustees acting honestly, rationally and prudently could properly regard as benefiting the trust or its beneficiaries. It does not substitute its own commercial judgment. The court should act cautiously because approval may prevent beneficiaries from later challenging the decision. Investment-bank administrators likewise retain their own statutory power to compromise claims. Court approval or directions may nevertheless be appropriate where the administrators act on both sides of a dispute or where the interests of beneficiaries and creditors substantially overlap.

MF Global UK Ltd was in special administration under the Investment Bank Special Administration Regulations 2011. The company held client money on trust while also holding assets and liabilities for its general estate. Its administrators therefore acted both as trustee of the client money pool and for the general estate.

Breaches of the client-money segregation rules created potential proprietary and personal claims between the client money pool and the general estate. The parties negotiated a settlement covering those claims, the assignment of receivables, netting arrangements and costs. Clients and creditors were notified and no objections were made. The court had to decide whether the client-money trustee had power to compromise the claims and whether liberty should be given to the trustee and administrators to enter into the settlement.

1. Order granted. The court gave liberty to MF Global UK Ltd as trustee of the client money pool and to the administrators, acting for the general estate, to enter into the proposed settlement agreement.
2. The client money trust arose under CASS 7 and CASS 7A of the Financial Services Authority Handbook. Nothing in those provisions expressly excluded the statutory power of compromise in section 15 of the Trustee Act 1925. Given the complexity of pooled client money and the likelihood of disputes concerning client entitlements and claims between the trust and the general estate, the power was necessary for effective and economical administration. Section 69(2) imposed the relevant statutory limitation, but no contrary intention appeared.
3. The application did not involve surrendering the trustee’s discretion to the court. It was an application for the court’s blessing of a momentous decision within the trustee’s powers. The court’s function was limited to asking whether the proposed exercise was lawful, rational and honest, and whether the trustee could properly form the view that it benefited the beneficiaries or trust estate. The court did not decide whether it would have made the same commercial choice. It nevertheless acted cautiously and required disclosure of the relevant considerations and reasons.
4. The dual role of the administrators, who acted for both sides and were partners in the same accountancy firm, together with the overlap between clients and general creditors, made an application for liberty appropriate. The trustee had properly considered the legal uncertainty, litigation and administration costs, distribution effects and the position of decreased clients. Its conclusion that the settlement was in the best interests of the clients was at least reasonable and based on proper grounds.
5. The administrators had statutory powers to compromise claims under paragraph 60 of Schedule B1 and paragraph 18 of Schedule 1 to the Insolvency Act 1986, as applied by regulation 15 of the Investment Bank Special Administration Regulations 2011. Administrators ordinarily exercise their own judgment in commercial matters, but the same conflicts justified the court’s direction in this case. The proposed settlement was also at least a reasonable conclusion in the interests of the general estate and unsecured creditors.
6. The court also directed that $83,000 of uncollected client money be paid into the Insolvency Service Account at the Bank of England. The Client Money Distribution Procedure was to be amended following a direction by the Financial Conduct Authority under section 138A of the Financial Services and Markets Act 2000.