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In The Matter Of Lehman Brothers International (Europe) (December 2009)


The court determined issues concerning the interpretation, and application to the distribution of client money following the administration of a bank, of the client money rules in the Client Assets Sourcebook.


The applicant administrators (P) of a bank (L) applied for the determination of issues concerning the interpretation, and application to L's administration, of the client money rules in the Client Assets Sourcebook (CASS) issued by the Financial Services Authority. The CASS provided for segregation of client money. L had adopted the "alternative approach" provided for by CASS, under which client money was paid into L's house accounts, and internal reconciliations conducted each business day so as to top up or reduce the amount held in segregated accounts. L's administration had triggered a "primary pooling event" (PPE) under the rules, which was a notional pooling of all client money and an obligation on L to distribute it. In breach of the rules, L had failed to segregate large sums of client money, and there had been a significant drop in the value of the money between the last reconciliation and the PPE. As a result, there was a shortfall in the client money pool, which meant that the pool was to be distributed in accordance with the client money distribution rules. The main issues were (i) whether the statutory trust of client money created by CASS 7 took effect upon receipt, or only upon the segregation, of client money; (ii) if upon receipt, what duties or restrictions were imposed by the rules, or by the general law, on the use that a firm could make of client money while mixed with its own money pending segregation under the alternative approach; (iii) whether the pool included all identifiable client money held by a firm as at the PPE, whether or not actually segregated, and if not segregated, how it was to be identified; (iv) what provisions CASS or the general law made in relation to identifiable client money that was not part of the pool; (v) whether the rules or the general law required or permitted a shortfall in the pool as at the PPE to be topped up, either from other non-pooled identifiable client money, or from a firm's general assets; (vi) whether the basis for sharing in the pool was the amount that ought to have been segregated for each client, or the amount that was in fact segregated; (vii) the date that the clients' respective shares in the pool were to be calculated; (viii) the extent to which a firm's claims against its clients could be set-off against the clients' entitlement to share in the pool.


(1) CASS 7.7.2R imposed a statutory trust on the receipt of client money by a firm. (2) Pending segregation of client money, a firm was obliged to take reasonable steps to ensure that, in relation to client money mixed with the firm's own money in house accounts, client's rights in relation to that money were not put at risk, or the client money used for the firm's own purposes. (3) The pool was constituted at the PPE only by client money in segregated accounts. The identification of any client money outside the firm's segregated accounts depended on the established principles by which a beneficiary had to trace his property in order to pursue a proprietary claim in relation to it, which would be a difficult, time consuming and contentious process, Ministry of Health v Simpson (1948) Ch 465 CA, Bishopsgate Investment Management Ltd (In Liquidation) v Homan (1995) Ch 211 CA (Civ Div), Foskett v McKeown (2001) 1 AC 102 HL and Serious Fraud Office v Lexi Holdings Plc (In Administration) (2008) EWCA Crim 1443, (2009) QB 376 applied, the obiter comments in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd (1986) 1 WLR 1072 PC (Bah) considered. (4) CASS made no provision for the pooling or distribution of identifiable client money in a firm's non-segregated accounts, outside the client money pool. A client could pursue a proprietary claim in respect of such money. (5) CASS 7 did not impose a post PPE top-up obligation, even in relation to client money identified outside the pool. The client money rules were replaced by the distribution rules on the happening of a PPE, and no segregation obligation was to be found in the distribution rules either expressly, or by incorporation by reference. (6) The underlying objective of the pooling and distribution regime triggered by a PPE was the timely distribution back to clients of their money once no longer capable of being used for business transacted for clients, by reason of the failure of a firm. The concept of pooling a pari passu distribution was designed to both contribute to the speed and efficiency of the distribution process, and to deal fairly, as between the beneficiaries entitled to share in the pool, with any shortfall. It was no part of the distribution rules to confer on clients whose money was, in breach of the rules, not contributed to segregated accounts from which the pool was constituted, a beneficial interest in that fund which did not exist immediately prior to the PPE. The "client money entitlement" which served as the basis for a client's pari passu sharing in the pool pursuant to CASS 7.9.6R(2) was the amount shown in a firm's last internal client money reconciliation accounts to have been contributed by way of segregation to the fund that became the client money pool, subject to possible downward adjustment under CASS 7.9.7R. (7) The date for calculation of the value of clients shares in the pool was the PPE, Global Trader Europe Ltd (In Liquidation), Re (2009) EWHC 699 (Ch), (2009) Bus LR 1327 applied. (8) Set-off had no part to play in relation to the distribution of money from the pool to clients pursuant to CASS 7.9, Guinness Plc v Saunders (1987) 3 BCC 520 Ch D applied. (9) In the light of the answers on the main issues, specific questions asked by P in relation to L were answered.

Judgment accordingly

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15 Dec 2009

Chancery Division
Briggs J

‚ÄčLTL 15/12/2009 : [2009] EWHC 3228 (Ch)