In the Matter of Money Markets International Stockbrokers Limited (in liquidation).
And in the Matter of the Companies Acts 1963 to 1990. Company Law - Equity - Compulsory winding up - Suspension of authorised member of Irish Stock Exchange - Transfer of monies to member's bank account by client - Nature of member's obligations to client - Nature of client's rights in respect of monies vis a vis other client creditors - The rule in Clayton's case - Rights of Official Liquidator against client monies - Stock Exchange Act 1995, section 52(5) - Investor Compensation Act 1998, section 78.
The High Court (before Miss Justice Laffoy); judgment delivered 20 July 1999.
Where monies are transferred to the bank account of an authorised member company of the Irish Stock Exchange, by a client, to discharge sums due in respect of a share purchase transaction, and prior to the settlement day of the transaction, the company is suspended from the exchange and thereafter placed in compulsory liquidation, thus rendering it unable to complete the transaction on the client's behalf, then the client has a better equity than the other client creditors who have a claim against the monies represented by the balance on the company's bank account, the equities are not equal and equitable principles do not require the client to be subjected to a pari passu distribution.
Miss Justice Laffoy so held in directing the official liquidator to repay the monies in issue to the client.
John Gleeson BL for the official liquidator; Ian Finlay SC and Aoife Goodman BL for the applicant.
Miss Justice Laffoy set out the facts of the case stating that, on 15 February 1999, the applicant instructed Money Markets International Ltd, (hereinafter "the company"), a stockbroker and authorised member of the Irish Stock Exchange, to purchase 23,000 shares in AIB on his behalf. The purchase was confirmed on the same day and the applicant was advised that the settlement date was 22 February 1999 and that the total amount due by him, to complete the transaction, was £293,740.90. On 18 February, in accordance with the applicant's instructions to his bank, this sum was transferred and credited to the company's bank account.
On 19 February 1999, the Irish Stock Exchange suspended the right of the company to transact business on the exchange and by order of the High Court of 15 March 1999, the company was wound up and an official liquidator was appointed. On 19 March, on the application of Irish Stock Exchange Ltd, the Central Bank and the liquidator consenting, the court ordered that the company give access, to the Stock Exchange and its authorised officials, to the books and records of the company, and furnish to the Stock Exchange such information as might be reasonably be required, to facilitate, firstly the identification of each party on whose behalf the company had entered into any unsettled agency contracts on the Stock Exchange and, secondly the notification to each party of the identity of the other party to each such contract, thereby enabling the parties to complete the sale or purchase of the relevant securities. The purpose of this order was to enable the default rules of the Stock Exchange to take effect so as to govern dealings in relation to unsettled transactions. Thereafter the applicant was notified of the identity of the counter-party to his unsettled contract of 15 February and he was requested by this party to complete the transaction by payment to them of the full sum of £293,740.90.
Miss Justice Laffoy stated that the amount which appeared to be owing to clients, in accordance with the books and records of the company, was £2,703,374, while the clients' funds held by the liquidator amounted to £1,482 ,276. On a separate application, still pending before this court, the liquidator had sought directions on various issues which impacted on the difference between the client ledger and the monies held in the client bank account. Whether there was a deficit in client funds, and the extent of same, remained to be determined, and accordingly, the court assumed, that for the purposes of the present application, that there could be a deficit in client funds. The liquidator acknowledged that the position of the applicant was different to that of other clients of the company in that, the applicant had transferred monies to the company before the settlement or due date and the monies were identifiable in the client account of the company. Unlike other client creditors, the outcome of the liquidator's application for directions did not concern the applicant. On the basis of the apparent uniqueness of the applicant's position, and his contention that he was prejudiced by the delay, because of the fluctuations in value of the shares he contracted for since February 1999, his application was heard in advance of the determination of the issues which arose on the application of the liquidator.
It was agreed that the company stood in a fiduciary relationship to the applicant and that the funds transferred by the applicant to the company's bank account were held by the company as trust funds. When these funds were transferred into the company's bank account they were intermingled with trust funds of other client creditors and, the liquidator contended, probably also with company monies as the company had also regularly injected its own funds into client accounts to cover deficits. In broad terms, the dispute between the parties was whether the rule in Clayton's case should be applied to determine who was now entitled to the monies represented by the credit balance in the company's bank account.
On 17 February 1999 there was a credit balance on the client bank account of £107,216.84; on 18 February there were various debit and credit entries on the account, including a credit in respect of the applicant's £293,740.90, leaving a credit balance of £365,278.62 on that day; and there were various other transactions between 19 and 25 February 1999, on which latter date there was a credit balance on the account of £387,705.13.
Miss Justice Laffoy observed that the final credit balance on the frozen bank account was sufficient to cover the lodgment of the applicant's monies and all subsequent lodgments.
Miss Justice Laffoy referred to Shanahans Stamp Auctions Ltd v Farrelly [1962] IR 386, where Mr Justice Budd held that, in general, the rule in Clayton's case (Devaynes v Noble (1816) 1 Mer 572) was applicable, a trustee was deemed to draw out first the money of the cestuis que trustent that he paid first into a blended account. On the facts of the case however Mr Justice Budd concluded that a pro-rata distribution was the proper form of relief. Mr Justice Keane, in his book Equity and the Law of Trusts, had described the application of the rule as rough justice in circumstances where trust funds sourced from various beneficiaries were blended in a single bank account.
Miss Justice Laffoy then referred to Barlow Clowes International Ltd (in liquidation) v Vaughan [1992] BCLC 1910, and held that in the case of a current account such as the account in issue here, where trust funds sourced from various beneficiaries are mixed or pooled in the account, it was settled law that, as a general proposition, the rule in Clayton's case was applicable in determining to whom the balance on the account belonged, however, the application of the rule could be displaced in the particular circumstances of a case.
On this application the court was considering whether, as between the applicant and all other claimants to the funds represented by the balance on the current account, in accordance with equitable principles, the applicant should be bound by a pari passu distribution, if the rule in Clay- ton's case was not applicable. Miss Justice Laffoy stated that she was not to be taken as expressing a view as to whether, as between all of the parties who might have a claim to the balance in the current account in issue, the rule in Clayton's case was applicable to determine entitlement. The applicant had transferred the monies in issue to the current account for a specific purpose, to discharge the sums due in respect of the share purchase transaction confirmed on 15 February 1999, to enable that purchase to be completed. The monies were transferred into the company's current account prior to the settlement day and all the company did was to receive them. However, after transfer and receipt, and prior to settlement day, the company was suspended from membership of the Stock Exchange and was not in a position to use the said monies for the purpose intended, as it was not in a position to complete the transaction. Miss Justice Laffoy held that, given this combination of circumstances, the applicant had a better equity than the other client creditors who had a claim against the monies represented by the balance on the current account, the equities were not equal and equitable principles did not require the applicant to be subjected to a pari passu distribution. Miss Justice Laffoy stated, that in reaching this conclusion, she was not overlooking the fact that although the vast bulk of lodgements from clients within the last few days of trading of the company related to transactions which settled, in the case of at least two clients who made lodgments, the transactions remained unsettled or partially unsettled, however, what distinguished those transactions from the instant case was that they were for settlement before the company was suspended.
If it was the case that the rule in Clayton's case was applicable, the applicant would be entitled to repayment of the entirety of the monies transferred by him to the company's account, whereas if it was not applicable, the equity of the applicant was superior to the equity of any other client creditor with an equitable claim against the monies in the account, so that the applicant could not be bound by a rateable distribution, (assuming that it would do justice among the other client creditors inter se), because it would not do justice as between the applicant and the other client creditors.
It was submitted that the liquidator might be entitled to recourse, on a pro-rata basis, against the applicant's monies, under section 52(5)(b) of the Stock Exchange Act 1995, as amended by section 78 of the Investor Compensation Act 1998. Paragraph (b) provided that a liquidator, could have recourse or right, against a client's money, or other client assets, in respect of such reasonable expenses as were incurred in the carrying out of his functions under this Act, or under the Investor Compensation Act 1998, or incurred in the distribution of client money and investment instruments to clients of the member firm, where the assets of the member firm had been exhausted.. Without expressing any view on the scope of paragraph (b) Miss Justice Laffoy was of the opinion that the situation could be met if the order of the court preserved the right of the liquidator to make a claim against the applicant under paragraph (b).
Although the alternative relief sought by the applicant, namely an order directing the liquidator to complete the contract, did not arise, Miss Justice Laffoy stated that the liquidator was under no obligation, and had no power, to complete the purchase transaction; on the making of the winding up order the company's agency terminated. Accordingly, Miss Justice Laffoy directed the liquidator to repay the £293,740.90 to the applicant, but without prejudice to any claim the liquidator might have against that sum and against the applicant under section 52(5) of the Stock Exchange Act 1995, as amended by section 78 of the Investor Compensation Act 1998.
Solicitors: Eugene F Collins (Dublin) for the official liquidator; O'Leary Arnold & Co. (Skerries) for the applicant.
Niall O'Hanlon Barrister