In re MF Global UK Ltd (No 5)

The court granted permission for a compromise between MF Global UK Limited in its capacity as trustee of the client money pool (the CMP Trustee) and the administrators acting for the general estate, permitting them to enter into a settlement which would resolve proprietary and personal claims between the CMP and the general estate. The CMP Trustee’s power to compromise was held to arise from section 15 of the Trustee Act 1925, read subject to section 69(2) of that Act and the duty of care in section 1(1) of the Trustee Act 2000. The court found nothing in CASS 7 and CASS 7A to exclude that statutory power. The administrators’ power to compromise derived from insolvency provisions (para 60 of Schedule B1 and para 18 of Schedule 1 to the Insolvency Act 1986 as applied by regulation 15 of the Investment Bank Special Administration Regulations 2011).

The court accepted the practical and commercial reasons for compromise: a significant tracing exercise and complex legal issues made proprietary claims uncertain and costly; estimated litigation and investigation costs and foreign exchange and parallel claim risks meant settlement would accelerate distributions and was in the interests of both clients and unsecured creditors. The court was satisfied trustees and administrators had acted reasonably, taken legal advice, disclosed relevant considerations and that the proposed settlement was within their powers and not irrational or improper.

This is a first instance application by MF Global UK Limited in its capacity as trustee of the client money pool (CMP Trustee) and by the joint administrators of MFGUK for liberty to enter into a comprehensive settlement resolving claims between the CMP and the general estate following the appointment of administrators under the Investment Bank Special Administration Regulations 2011.

Background and parties:

• MFGUK operated broker-dealer business and held monies both as trustee for clients under the Client Assets Sourcebook (CASS 7 and CASS 7A) and beneficially on its own account. Administrators were appointed on 31 October 2011 and a shortfall in the CMP existed.
• Potential claims against the general estate included proprietary/tracing claims to identifiable client money and personal claims for breach of trust. Estimates for personal claims ranged from approximately $9.4 million to $43.9 million plus administration costs.

Nature of application (relief sought): Liberty for the CMP Trustee and the administrators to enter into a negotiated settlement which would compromise and release all tracing and other claims between the CMP and the general estate and provide for assignment and payment arrangements to enable final distributions.

Issues framed:

• Whether the CMP Trustee had power to compromise claims under section 15 of the Trustee Act 1925 and whether the terms of CASS 7 / 7A excluded that power.
• Whether, on the principles applicable where trustees seek the court’s blessing for a momentous exercise of power, the proposed settlement was lawful, within power and not irrational or improper.
• Whether the administrators, under insolvency powers (as applied by the Investment Bank Special Administration Regulations 2011), should be given liberty to enter into the settlement, given the administrators acted on both sides.

Court’s reasoning and subsidiary findings:

• The court held that section 15 of the Trustee Act 1925 permits trustees to compromise claims and that nothing in CASS 7 or 7A shows an intention to exclude that power in the client money context. The protection in section 1(1) of the Trustee Act 2000 was noted.
• On the trustees’ application for the court’s blessing, the court applies a limited supervisory role: it must be satisfied the exercise is lawful, within power, not irrational and that trustees have properly formed the view that the transaction benefits beneficiaries. The trustees must place all relevant evidence before the court in case of doubt.
• The court accepted the practical difficulties of tracing in the face of very large volumes of account activity and attendant complex legal questions. It accepted the administrators’ and trustees’ commercial assessments that settlement would accelerate distributions, reduce costs and reduce or eliminate shortfall and parallel claims in a way beneficial to the general body of creditors and to clients, including so-called "decreased clients".
• The proposed settlement terms (payment of a little over $31 million from the general estate to the CMP; payment of approximately $29.86 million for assignment of receivables with adjustments; credit of approx. $12.84 million for netting; and agreement on costs sharing) were held to be reasonable in the circumstances and a proper exercise of the relevant powers.
• The court made two further directions: noting an FCA direction under section 138A of the Financial Services and Markets Act 2000 permitting disregard of unsubmitted client money proofs in certain circumstances and directing that $83,000 of uncollected client money be paid into the Insolvency Service Account at the Bank of England.

Outcome: the court granted the order sought, giving liberty to the CMP Trustee and the administrators to enter into the proposed settlement.

The court allowed the joint application and granted liberty to the CMP Trustee and to the administrators to enter into the negotiated settlement agreement. The court held that the CMP Trustee had power under section 15 of the Trustee Act 1925 to compromise the claims, that CASS 7 and 7A did not exclude that power, and that the administrators likewise had power under insolvency provisions as applied by regulation 15 of the Investment Bank Special Administration Regulations 2011. The order was given because the proposed settlement was within power, rational, properly considered on legal and commercial grounds and in the interests of clients and unsecured creditors.