The High Court decided yesterday that client creditors of Money Markets International Stockbrokers Ltd (in liquidation) who provided funds to the company may have first call on a £1.2 million (€1.52 million) fund held by the MMI liquidator.

But Ms Justice Laffoy, in a reserved judgment, gave no decision on whether the 14 creditor clients concerned with the fund could be subject to set-offs which could reduce their entitlement by £832,000.

The judge decided that, although the £1.2 million fund was supplemented by MMI foregoing commissions and by putting in its own monies, this did not mean MMI was entitled to recoup monies due to it until all proper claims by creditor clients against the client funds had been satisfied in full. The liquidator, Mr Tom Kavanagh, had told the court that, apart from having £1.2 million of client monies, he also estimated that monies due to client creditors amounted to £2.351 million.

Ms Justice Laffoy said the disparity was explained by the fact that set-offs due to clients with credit balances were not reflected in the client ledger. If they were, they would reduce the client credit balances in the ledger by £832,942.

The liquidator argued that the general body of creditors had a call on the client funds because MMI, while trading, had supplemented client monies to the tune of £3.5 to £4 million.

Dealing with whether MMI can recoup sums due to it out of clients' funds, the judge said the effect of Section 52 of the Stock Exchange Act 1995 (provisions protecting the money and investments of clients) was to "ring fence" funds in MMI's client bank account and preserve them for client creditors who provided the funds.

It was only if there was surplus after "proper claims" of those creditors had been satisfied in full that any question of a third party having recourse arose.

The fund of £1.2 million was "client money" and it was "impressed with a trust" in favour of the client creditors of MMI. The liquidator would have no right against any part of the fund except in the unlikely event of a surplus. Three categories of client creditors would benefit from the £1.2 million fund, the judge said. The overall effect of the failure to reflect the operation of set-offs in relation to the first two categories of client creditors, if they operated, was that the aggregate of the balances on client creditor accounts in issue was overstated by £832,940.

This was the sum the liquidator had characterised as the amount of potential set-offs.

Ms Justice Laffoy said she was making no finding as to whether letters of set-offs existed or were effective and, if so, to what extent.

A finding that set-offs operated in practice or, if they did not, should be allowed to operate would favour a third category of client because the set-offs would reduce by £832,940 the quantum of aggregate claims of clients against funds of £1.2 million, the judge said.

Assuming it was correct to claim that MMI implemented set-offs on a daily basis, and assuming the creditors in the first category authorised set-offs, the set-offs had been operated and the ledger accounts in respect of 14 creditor clients and 15 client debtors should be deemed to be adjusted to reflect the true position.