Pritchard Stockbrokers Ltd, Re

In an investment-bank special administration, the statutory trust of client money continues notwithstanding the appointment of special administrators. The company remains trustee, while management powers vest in the administrators. The administrators may seek court directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986 concerning the performance of the trust.

Where client claims cannot be resolved, the court may approve either a practical distribution on the basis of known claims, preserving unascertained beneficial interests, or a regulator-authorised modification of the trust which extinguishes specified interests. The choice depends on the steps taken to identify and quantify claims, the cost and difficulty of further investigation, the size of the claims, the urgency of returning client assets, and the safeguards for excluded claimants.

Pritchard Stockbrokers Ltd was subject to investment-bank special administration after its regulator prohibited it from carrying on regulated activities. Its client money pool was held on the statutory trust created by the client money rules. Most claims had been agreed, but thousands remained unresolved after extensive tracing and notification exercises.

The FCA modified the client money distribution rules to permit a final distribution without regard to certain unagreed or below-threshold claims, with specified safeguards. The company and its special administrators applied for directions approving their participation in implementing the modified trusts and protecting them from breach-of-trust claims. The central issue was whether that distribution structure should be approved.

1. The application was granted. The court approved the draft order permitting implementation of the FCA’s modification of the client money trusts.
2. The statutory trust created by the client money rules was not ended or altered merely by the commencement of special administration. Pritchard Stockbrokers remained trustee. The special administrators controlled the company and therefore had to exercise their management powers so that the company performed the trust and pursued the return of client money as soon as reasonably practicable.
3. An application for directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986 was the appropriate procedure. It enabled the court to give guidance on how an insolvent trustee company should discharge its trustee functions and avoid generating breach-of-trust claims against its assets. In the investment-bank special administration context, directions could also address how Objective 1 should be achieved.
4. The court’s supervisory jurisdiction permitted practical administration of a trust where beneficial interests could not be ascertained with certainty. An MF Global order could preserve beneficial interests while allowing distribution on the basis of claims lodged by a specified date. Alternatively, an Alpari order could modify the statutory trusts so that specified non-claiming or minimal-value beneficiaries ceased to have an interest, subject to the regulator’s direction and its safeguards.
5. When deciding whether to approve such a course, the court should examine the scale and nature of the unresolved claims, the steps taken to identify clients and quantify entitlements, the size of the claims, the cost and difficulty of further investigation, where those costs fall, the urgency of returning client assets, the proposed distribution mechanism, and the treatment of persons excluded from distribution. If beneficial interests are to be extinguished, the evidence must explain why that course is preferable to a distribution preserving them.
6. Those requirements were satisfied. The administration had lasted more than six years; extensive tracing and notification had reduced unresolved claims to 22 per cent by number and 3 per cent by value; and the need for finality justified the modified-trust approach. The order was therefore approved.