(1) T D C VAUGHAN (2) G C ROBSON (3) BARLOW CLOWES GILT MANAGERS LTD (4) INVESTMENT AND PENSION ADVISORY SERVICE LTD (5) INVESTMENT AND PENSION ADVISORY SERVICE (a partnership) (6) HAROLD APPLETON (7) ANNE ELIZABETH PATERSON (8) IAN DOUGLAS OGILVIE (9) THE SECRETARY OF STATE FOR TRADE AND INDUSTRY And (10) CHILTINGTON LIMITED v Appellants (Defendants) [1991] EWCA Civ 11

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL

ON APPEAL FROM THE HIGH COURT OF JUSTICE

(Mr Justice Peter Gibson)

[1991] EWCA Civ 11

Case No Case No. 89/1289/B

Venue Royal Courts of Justice

Between

(1) T D C VAUGHAN (2) G C ROBSON (3) BARLOW CLOWES GILT MANAGERS LTD (4) INVESTMENT AND PENSION ADVISORY SERVICE LTD (5) INVESTMENT AND PENSION ADVISORY SERVICE (a partnership) (6) HAROLD APPLETON (7) ANNE ELIZABETH PATERSON (8) IAN DOUGLAS OGILVIE (9) THE SECRETARY OF STATE FOR TRADE AND INDUSTRY And (10) CHILTINGTON LIMITED

Appellants (Defendants)

(1) BARLOW CLOWES INTERNATIONAL LIMITED (2) NIGEL JAMES HAMILTON And (3) MICHAEL ANTHONY JORDAN

Respondents (Plaintiffs)

Before

Lord Justice Dillon

Lord Justice Woolf

Lord Justice Leggatt

MR R WALKER QC and MR D C UNWIN (instructed by Messrs Clyde &

Co., London EC3) appeared on behalf of the Second Appellant

(Defendant).

MR M C C HART QC and MR M W NIELD (instructed by Messrs Clifford Chance, London EC4) appeared on behalf of the Respondents (Plaintiffs).

MR M LUCRAFT (instructed by the Serious Fraud Office, London WC1) appeared on behalf of the Respondents (Plaintiffs).

Date 17 July 1991

LORD JUSTICE DILLON :

The

[1]appeal presently before the court is brought against an order made by Peter Gibson J on 16th June 1989 in proceedings brought in the Chancery Division by a Gibraltar company, Barlow Clowes International Limited ("BCI") acting by its liquidators and by the receivers, appointed by the Gibraltar High Court, of certain investment plans, and in particular the plans called Portfolio 28 and Portfolio 68, which were promoted and managed by BCI, in order to obtain the directions of the court as to the basis on which assets and moneys in the hands of the receivers should be distributed. The proceedings were brought in England by leave of the Gibraltar Court, since it is accepted that — except for the moneys in the two bank accounts specified in Schedule C to the order of Peter Gibson J, as to which no issue arises — the assets and moneys in question are trust moneys held on trust for all or some of the would-be investors ("the investors") who paid moneys to BCI or associated bodies for investment, and are not general assets of BCI. Some 95 per cent of the investors are UK residents and a substantial majority of them are resident within the jurisdiction of the English Court. The receivers are Mr Hamilton, a partner in Ernst & Whinney in London, and Mr Jordan, a partner in Cork Gully in London. The liquidators of BCI are Mr Jordan, and Mr Robinson, a partner in Ernst & Whinney in Gibraltar. The history of BCI and other Barlow Clowes entities with which these proceedings are not directly concerned is set out in the judgment of Peter Gibson J and I do not need to repeat it. The basic problem is that over a period some 11,000 investors paid large amounts of money — over £100m in all — to BCI or associated entities for investment, but at the end of the day when receivers were appointed and BCI went into liquidation the amount of assets available fell far short of what would be needed to satisfy all the investors' claims in full. How the shortfall or deficiency came about is the subject of criminal proceedings pending against certain individuals who are not parties to these proceedings. This court is in no way concerned with the criminal proceedings and nothing said in this judgment can have any relevance to those proceedings. We are concerned, not with how the shortfall or deficiency came about, but with how the assets and moneys which unquestionably remain should be administered. More specifically we are concerned, on the one hand, with the moneys paid by investors seeking to invest in the investment plans called Portfolios 28 and 68 (in so far as those moneys were not repaid to the investors by BCI before the liquidation and appointment of receivers) and on the other hand with the moneys to the credit of the bank accounts listed in Schedules A and B to the order of Peter Gibson J and with the net proceeds of sale of certain other assets ("the Additional Assets") mentioned in the Originating Summons, and in particular a yacht "Boukephalos" and certain gilt-edged investments. The papers show that there were other proceedings pending at first instance involving an English company, Barlow Clowes Gilt Managers Ltd., of which Mr Jordan and Mr Hamilton are the liquidators, and there were other investment plans designated Portfolio 33 and Portfolio 39; but with these we are not concerned. The substance of the order of Peter Gibson J was as follows:(i) The sums standing to the credit of the accounts specified in Schedule A to his order (excluding amounts attributable to interest credited to those accounts) are held on trust for those who upon the application of the rule in Clayton's Case (1816) 1 Mer 572 could be shown to be entitled to trace into such sums;

(ii) the sums standing to the credit of the accounts specified in Schedule B to his order (including amounts attributable to interest credited to such accounts) are held upon trust for all unpaid investors pari passu rateably in proportion to the amounts due to them and;

(iii) such of the Additional Assets into which it may hereafter be shown upon the application of the rule in Clayton's Case that any specific investors are entitled to trace are held upon trust respectively for those specific investors who upon the application of the rule can be shown to be so entitled, subject however to a proviso to the effect, briefly, that if it appeared to the receivers that the costs of attempting to trace the contributions of investors into any of the Additional Assets would exceed the value of the asset no such attempt should be made. The judge gave in July 1989 further directions of very considerable complexity on the working out of his order, but as these directions are not the subject of appeal I need not set them out here. The accounts in Schedule B to the judge's order, to which Clayton's Case was not to be applied, were accounts in relation to which the receivers and liquidators took the view, which all counsel accepted, that on the evidence no individual investor would be able to assert a tracing claim to the credit balances in the accounts. That is not challenged on this appeal. In addition it is common ground that the account Ch 52, which only contained £4,000 and was used for commission payments, ought to have been included in Schedule B, and not in Schedule A as in the order of the judge as drawn. Accordingly the judge's order must be varied in relation to that account irrespective of any other outcome of this appeal. The substance of this appeal is to challenge the applicability of the rule in Clayton's Case either to the accounts specified in Schedule A to the order or to the Additional Assets. The notice of appeal was given as long ago as 11th October 1989 by the second defendant, Mr Robson, who was appointed by the judge's order to represent all those investors who might be interested to argue that the rule in Clayton's Case should not apply. Since the notice of appeal was issued, there has been an important further development, which has occasioned the delay in the appeal coming on for hearing. After the appeal had been set down, the Secretary of State for Trade and Industry made an offer, consistently with recommendations of the Parliamentary Commissioner of Administration, of a composition payment to most investors in consideration of the investors assigning all their claims in favour of the Secretary of State. That offer was accepted by 98 per cent of the investors including the appellant Mr Robson and the first defendant Mr Vaughan, who had been appointed by the order of Peter Gibson J to represent those investors who are interested to argue in favour of tracing in accordance with the rule in Clayton's Case . The remaining 2 per cent are investors who, for one reason or another, were not included in the Secretary of State's offer, or who for whatever other reason did not accept the offer. The Secretary of State has decided to pursue the appeal, by way of subrogation to Mr Robson and in his name. But Mr Vaughan has no interest to oppose the appeal. Accordingly another investor, Chiltington Ltd., which was not eligible to accept the Secretary of State's offer, has, with its consent, been added as a defendant in the proceedings and appears as a respondent to oppose the appeal. It is, as I understand it, the view of the Secretary of State that in a case such as this where so many individual investors contributed their moneys to BCI and its Portfolios 28 and 68 on the same basis, it would be unfair and inequitable if, by the accidents of tracing, a relatively small number of the investors were to be held entitled to the vast bulk of the available assets and moneys, as might result from the application of Clayton's Case . It will be necessary in this judgment to consider both the basis and the fairness of tracing in accordance with the rule in Clayton's Case , and how far this court is bound by previous decisions of this court to adopt that method of distribution. The argument put by Mr Walker QC for the appellant is that instead of tracing or any application of Clayton's Case the available assets and moneys should be distributed pari passu among all unpaid investors rateably in proportion to the amounts due to them. This is the basis of distribution which — subject to any application which might be made by any individual depositor or shareholder with a view to tracing his own money into any particular asset — was directed by the House of Lords in Sinclair v Brougham

[1914] AC 398

as between the shareholders in a building society which was being wound up and depositors who had made deposits in an ultra vires banking business which the building society had developed and carried on for many years. It is not in doubt that that basis of distribution ought to be adopted, if distribution by tracing in accordance with Clayton's Case is not to be preferred. We were indeed referred in the course of the argument to a third possible basis of distribution which was called the "rolling charge" or "North American" method. This has been preferred by the Canadian and US courts to tracing in accordance with Clayton's Case , as more equitable. See for instance the decision of the Ontario Court of Appeal in Re Ontario Securities Commission and Greymac Credit Corporation [1986] 55 OR 2nd 673. This method goes on the basis that where funds of several depositors, or sources, have been blended in one account, each debit to the account, unless unequivocally attributable to the moneys of one depositor or source, (eg. as if an investment was purchased for one), should be attributed to all the depositors so as to reduce all their deposits pro rata, instead of being attributed, as under Clayton's Case , to the earliest deposits in point of time. The reasoning is that if there is an account which has been fed only with trust moneys deposited by a number of individuals, and the account holder misapplies a sum from the account for his own purposes, and that sum is lost, it is fair that the loss should be borne by all the depositors pro rata, rather than that the whole loss should fall first on the depositor who made the earliest deposit in point of time. The complexities of this method would, however, in a case where there are as many depositors as in the present case and even with the benefits of modern computer technology be so great, and the cost would be so high, that no one has sought to urge the court to adopt it, and I would reject it as impracticable in the present case. Clayton's Case [1816] 1 Mer 572 was not a case of tracing at all, but a case as to the appropriation of payments. Clayton had been a customer of a banking partnership with an account in credit. One of the partners, Devaynes, had died in 1809 and the remaining partners became bankrupt at the end of July 1810. Clayton had had a running account with the bank before and after the death of Devaynes. The debits and credits made after the death of Devaynes were made without specific appropriation and the account had not been broken on the death of Devaynes. Clayton claimed after the bankruptcy to set his drawings on the account after the death of Devaynes against the credits to the account after the death of Devaynes; consequently be claimed to prove against the estate of Devaynes for the balance to his credit in the account at the death of Devaynes, on the footing that the balance had never been satisfied. Those claims were rejected by Sir William Grant MR who said at pages 608 to 609:

"But this is the case of a banking account, where all the sums paid in form one blended fund, the parts of which have no longer any distinct existence. Neither banker nor customer ever thinks of saying, this draft is to be placed to the account of the £500 paid in on Monday, and this other to the account of the £500 paid in on Tuesday. There is a fund of £1,000 to draw upon, and that is enough. In such a case, there is no room for any other appropriation than that which arises from the order in which the receipts and payments take place, and are carried into the account. Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. Upon that principle, all accounts current are settled, and particularly cash accounts. When there has been a continuation of dealings, in what way can it be ascertained whether the specific balance due on a given day has, or has not, been discharged, but by examining whether payments to the amount of that balance appear by the account to have been made? You are not to take the account backwards, and strike the balance at the head, instead of the foot, of it. A man's banker breaks, owing him, on the whole account, a balance of £1,000. It would surprise one to hear the customer say, 'I have been fortunate enough to draw out all that I paid in during the last four years; but there is £l,000, which I paid in five years ago, that I hold myself never to have drawn out; and, therefore, if I can find anybody who was answerable for the debts of the banking-house, such as they stood five years ago, I have a right to say that it is that specific sum which is still due to me, and not the £1,000 that I paid in last week'. This is exactly the nature of the present claim."

That rule will apply to the appropriation of payments between any trader and his customer where there is an account current or running account. But it will not apply unless there is a running account — see per Lord Halsbury LC in The Mecca

[1897] AC 286

at page 291 — and even in relation to the appropriation of payments it is not, as Lord Halsbury said at page 290, an invariable rule, "... the circumstances of a case may afford ground for inferring that transactions of the parties were not so intended as to come under this general rule". One case in which it was held that the nature and circumstances of a fund showed that the parties could not have intended Clayton's Case to be applied when the surplus in the fund fell to be returned to the subscribers is Re British Red Cross Balkan Fund

[1914] 2 Ch 419

, a decision of Astbury J. There a fund had been collected by public subscription in 1912 for assisting the sick and wounded in the Balkan War of that time. By 1913 there remained a balance in the fund which was no longer required for the purposes of the fund and it was assumed that the surplus fell to be returned to the subscribers. Astbury J held that Clayton's Case , which would involve the attribution of the first payments out of the fund to the earlier contributions to it was not to be applied; he said at page 421, "The rule is obviously inapplicable". The actual decision is suspect, since the objects of the fund would seem to have been charitable, and if they were charitable then, as the surplus did not come about through a failure of the charitable objects ab initio , the surplus should have been applied cy-pres for other charitable purposes. If however for some reason the fund was not devoted to charity, the decision was plainly right. It was followed, in the case of a winding-up of a non-charitable fund, by Cohen J in Re Hobourn Aero Components Limited's Air Raid Distress Fund

[1946] Ch 86

at page 97; Cohen J's decision was affirmed by this court at

[1946] Ch 194

, but the only issue on the appeal was whether or not the fund was charitable. There are many other cases in the books in which the court has been concerned with the distribution of the surplus on the winding-up of a non-charitable benevolent fund and no one has suggested that Clayton's Case should be applied. Mr Walker has accordingly submitted for the appellant in the present case, by what he called his narrower submission, that all investors who contributed to the two Portfolios in question in the present case were contributing to common funds in which all investors were to participate and that by analogy with British Red Cross Balkan Fund and Hobourn Aero Components , Clayton's Case should not be applied. To support that analogy he submits that the true appreciation of the arrangements was that the payment by each investor became, on receipt in a bank account of BCI or its affiliates, part of the uninvested balances of a common or global investment fund in which all investors were to share. The alternative to a common or global investment fund for all investors is a scheme, such as that with which I was concerned at first instance in the unreported case of Norton Warburg Investment Management Limited , under which each subscriber's contribution was to be invested by the scheme managers in an investment earmarked for that subscriber and held for his account only, but retained under the control of the scheme managers who had power to sell and reinvest for the subscriber at their discretion. Mr Walker accepts that if the arrangements in relation to the Portfolios were earmarked investments to be acquired for the sole account of each investor as in Norton Warburg , his analogy to the British Red Cross Balkan Fund case would not apply and he would have to fall back on his wider submission, to which I will refer later. It is therefore necessary, in order to determine the nature of the arrangements, to consider the basis on which investors contributed to Portfolio 28 and Portfolio 68. This is to be found primarily in the forms of application which the investors signed, and in certain rather brief leaflets describing the Portfolios which were issued by or on behalf of BCI. The word "Portfolio" itself, suggests, at first glance, a common or global investment fund, but that has to be discounted for the fact that in the leaflet for each "Portfolio" the portfolio is described as "an investment service offering capital gains from the management of British Government Securities". See pages 293 and 309 of the bundle. Each of the leaflets also states:

"All monies received are held in a designated clients' account and clients are the beneficial owners of all securities purchased on their behalf. Furthermore the value of your capital will not fluctuate and is fully guaranteed and refundable at any time."

This appears to suggest that each investor will have particular securities purchased for him alone. The statement that "the value of your capital will not fluctuate" could not be correct if the investor was participating in a common fund to which more and more other gilt-edged investments would be added as more and more subscriptions from other investors come in — though it has to be said that the value of even a single investment earmarked for a single subscriber would be liable to fluctuate with changes in general interest rates and economic conditions. Another oddity is that all subscribers were told that they would receive a guaranteed minimum rate of return each month plus additional gains as indicated on the monthly statement. This is odd, if earmarked gilt-edged securities for the individual investor are envisaged, because gilt-edged securities normally pay interest half-yearly and not monthly. It is even odder, however, that under the documents the monthly statements are also to include an "expected" rate of interest which will obviously he higher than the guaranteed rate. It is said of the difference between the guaranteed and expected rate, in the document at page 301, that it is not guaranteed but can be realistically expected. In a letter at page 317 to someone who had made an inquiry with regard to Portfolio 68 it is said, "The achieved rate has always exceeded the minimum guaranteed rate". How this differential in interest rates could work if there was not a common fund and individual investments were instead earmarked for and held to the sole account of each investor, I fail to understand. Some application forms contained a statement by the investor to the effect that, "I ... authorise you to buy and sell British Government Stock on my behalf on a fully discretionary basis" and also a statement that the investor understood that he might withdraw a part or the whole of "my investment" without penalty. There were several variants on this theme. This wording on the application forms seems to me, however, to be compatible with investment in a scheme of a nature of a unit trust in gilts and not merely with investment on the basis that earmarked investments would be held for the sole account of the investor. Some investors made their investments through independent financial advisory services and signed forms devised by these services rather than direct applications to BCI on BCI forms. See eg. pages 291 to 292 where investment in authorised (and unauthorised) unit trusts is envisaged as an alternative to investment in BCI managed gilt services. I find the wording of the documents issued by or on behalf of BCI ambiguous in relation to the nature of the arrangements envisaged under the labels Portfolio 28 and 68. It matter not for present purposes whether the ambiguity was intentional, as a result of a fraudulent desire to confuse investors, or was merely the result of muddleheadedness and confusion in the mind of the draughtsman. My conclusion is, however, that what was envisaged was some form of common fund in which all investors would in some way participate. I attach particular importance to the factor of the "expected" as well as the "guaranteed" rate of interest, and therefore differ, with all respect, on this point from the conclusion of Peter Gibson J. It follows, in my judgment, that the gilt-edged investments actually acquired by BCI which are part of the Additional Assets, were lawful investments of investors' moneys as part of a common fund, and not to be allocated, under the arrangements, to individual investors. It would consequently be contrary to the intention of the original arrangements to trace through under Clayton's Case the moneys actually applied in the purchase of these gilts so as to allocate them to individual investors. The proceeds of sale of the gilts should be allocated pro rata to all investors, like the moneys to the credit of the bank accounts specified in Schedule B to the order of Peter Gibson J. The question is then, in relation to the balances in the bank accounts specified in Schedule A to the judge's order, which were moneys contributed by investors for investment which had not been invested by the time BCI went into liquidation and the receivers were appointed, whether these moneys became part of the common funds as soon as they were received into the bank accounts of BCI from the investors. There are attractions in the view that if moneys are paid for investment in a common fund of gilt-edged investments they only become part of the common fund when invested in gilts, and are in the meantime held on a resulting trust for the payers. On the other hand the terms of application, in general, expressly authorise the placing of any uninvested funds with any bank etc. on such terms as BCI thinks fit, whether bearing interest or not. What troubles me at this stage on the particular facts of the present case, is the contrast between the large amounts held in the accounts specified in Schedule A to the judge's order and the much smaller amount of the gilts, above-mentioned, which came into the control of the receivers. There is also the consideration of the very large amounts of investors' moneys which have been lost to the investors without ever having been invested as envisaged in the documents relating to the Portfolios. In one sense it is unreal to treat the moneys in the bank accounts in Schedule A as the uninvested part of a common investment fund. But the question posed by Lord Halsbury in The Mecca as cited above must, I apprehend, be answered by considering the nature of the transaction as the investors intended it to be at the outset when they paid their moneys to BCI, not the very different circumstances of the actual outcome, of which, when they contributed, they knew nothing. Therefore, after considerable hesitation, I conclude that the moneys in the bank accounts in Schedule A ought to be treated, for the purposes of distribution, as the uninvested part of the common investment fund. As for the proceeds of sale of the yacht "Boukephalos", on the material before this court the yacht was never an authorised investment for funds paid to BCI for investment in gilt-edged securities, and its purchase was a misapplication of trust moneys. None the less the moneys applied in the purchase of the yacht were part of the common investment fund — for the same reasons as the moneys in the accounts specified in Schedule A to the judge's order. Accordingly the proceeds of the yacht must also be treated as part of the common fund. I accordingly accept Mr Walker's narrower submission and would hold that Clayton's Case is not to be applied in the distribution of the available assets and moneys. Mr Walker's wider submission is to the effect that, while the rule in Clayton's Case is valid and useful, subject to the observations in The Mecca , where what is in question is the appropriation of payments as between the parties to a running account, it is illogical and unfair to the earlier contributors to apply the rule as between innocent beneficiaries, whose payments to a third party, BCI, have been paid by that third party into a bank account in which, at the end of the day, there are — for whatever reason — not enough moneys left to meet all claims. Mr Walker submits that it might be more fair to apply the North American method outlined above, but as that is not practicable in the circumstances of this case, the court should fall back on a distribution pari passu between all investors in the proportions of the amounts respectively due to them. For my part, so far as fairness is concerned, I have difficulty in seeing the fairness to a later investor whose contribution was in all likelihood still included in the uninvested moneys in the Schedule A accounts, of holding that all those moneys must be shared pari passu by all investors early or late if there was no common investment fund. In addition of course the order made by the House of Lords in Sinclair v Brougham , on which the order which Mr Walker seeks in the present case is modelled, was expressly subject to any tracing application by any individual depositor or shareholder. If the application of Clayton's Case is unfair to early investors pari passu distribution among all seems unfair to late investors. The views of the law expressed by the English courts on the position where several beneficiaries' moneys have been blended in a single bank account and there is a deficiency are, in my judgment, consistent. In Re Hallett's Estate Ch D 696, Hallett, a solicitor whose estate was being administered by the court, had, before his death, blended moneys held in a fiduciary capacity for a client and for certain trustees with his own moneys in his own general bank account which he operated for his own purposes. It was held by the majority of this court, Jessel MR and Baggallay LJ, that in the allocation of the drawings from his account against moneys paid in, the "first-in" first-out" principle of Clayton's Case was displaced, to the extent that the account holder must be deemed to have drawn on his own moneys rather than the trust moneys in paying expenses for his own purposes. The result of that was that there was at Hallett's death enough in his account to cover in full the amounts claimed by the client and the trustees. But with that qualification as to the account-holder being treated as exhausting his own moneys before he has recourse to fiduciary moneys for his own purposes, both Jessel MR and Baggallay LJ endorsed the general principle laid down by the Court of Appeal in Chancery in Pennell v Deffell [1853] 4 D M & G 372 that the principle of Clayton's Case is to be applied, even as against beneficiaries, in allocating the payments out of a bank account in which the account-holder has blended his own moneys and moneys held for different fiduciary purposes (several estates in bankruptcy of which he was official assignee). See per Knight Bruce LJ at page 384 and per Turner LJ at page 394. So in Hancock v Smith 41 Ch D 456, though the actual decision was that as the bank account in question had been fed only with trust moneys — it was a client's account of a stockbroker — a creditor of the stockbroker could have no claim against the moneys in the account, both Lord Halsbury LC and Cotton LJ stated that the rule in Clayton's Case would have been applicable if the issue had been as between the cestuis que trust . Fry LJ did not deal with that point. One can pass then to the well-known case of Re Diplock

[1948] Ch 465

. There this court considered Clayton's Case in relation to "in rem" tracing claims against certain charities. See especially at pages 553 to 554 where Lord Greene MR stated as follows:

"The above result would only follow if Clayton's case applies. It might be suggested that the corollary of treating two claimants on a mixed fund as interested rateably should be that withdrawals out of the fund ought to be attributed rateably to the interests of both claimants. But in the case of an active banking account this would lead to the greatest difficulty and complication in practice and might in many cases raise questions incapable of solution. What then is to be done? In our opinion, the same rule as that applied in Clayton's case should be applied. This is really a rule of convenience based upon so-called presumed intention. It has been applied in the case of two beneficiaries whose trust money has been paid into a mixed banking account from which drawings were subsequently made, and, so far as we know, its application has not been adversely criticised (see per Fry J in Hallett's case (2) and per North J in In Re Stenning (3)."

This appears to be a direct rejection by this court of the basis of the North American method of distribution. Mr Walker submits that in the successive decisions of the Court of Appeal from Pennell v Deffell onwards which I have just mentioned the court did not have to address its mind to the problem where there are several cestuis que trust with independent claims against the one bank account in which their moneys have been blended, with or without the personal moneys of the account holder. Therefore he submits that the cases can be distinguished on the facts and what was said can be regarded as obiter to the actual decisions, and so this court is free to make its own decision. It is indeed correct that the precise situation in the present case did not arise in the reported cases. In Hallett's Estate there were indeed two separate beneficiaries claiming, but both were paid in full when it was ruled that the account holder must be deemed to have exhausted his own moneys first. In Pennell v Deffell several beneficiaries' interests were concerned but they were represented by a single claimant, the successor trustee to the defaulter. None the less the decisions of this court, in my judgment, establish and recognise a general rule of practice that Clayton's Case is to be applied when several beneficiaries' moneys have been blended in one bank account and there is a deficiency. It is not, in my judgment, for this court to reject that long-established general practice. A fortiori it is not appropriate to reject it in the present case, when the more logical method, the North American method, which is the basis for criticising the application of Clayton's Case is accepted to be impracticable. Therefore I would not accept Mr Walker's wider submission. However as I would accept his narrower submission I would allow this appeal, and set aside the order of the judge and I would declare that the rule in Clayton's Case is not to be applied on the distribution of the moneys in the bank accounts specified in Schedules A and B to the judge's order or of the proceeds of sale of the Additional Assets. Instead these were held on trust for all unpaid investors pari passu rateably in proportion to the amounts due to them. There should consequently be a representation order appointing Chiltington to represent those investors who are interested to argue in favour of tracing in accordance with the rule in Clayton's Case , and who have not accepted the composition offered by the Secretary of State. LORD JUSTICE WOOLF: This appeal, which I emphasise relates only to part of the judgment of Peter Gibson J, raises an issue of considerable difficulty. The issue is as to the method which should be adopted to apportion the assets salvaged after the collapse of Barlow Clowes International ("BCI") among the investors who have a claim to those assets. Dillon LJ has set out the relevant facts in his judgment and therefore I am saved the task of repeating those facts. I however emphasise, as he has done, that anything I say as to the facts is of no relevance to any criminal proceedings. However, as I attach particular importance to the evidence before this court as to the way that the funds of the investors were being misapplied throughout I draw attention to the following statements on affidavit of Mr Hamilton, one of the joint receivers appointed by the Supreme Court of Gibraltar over the investment funds of BCI. In reviewing the terms upon which individual investors placed their monies with BCI he points out that:

"... whilst the precise terms of the discretionary management agreements may have differed in various respects depending upon which individual type of application form was utilised, the principle was always the same namely that the investor was 'guaranteed' a minimum monthly 'gain' on his or her investment, the percentage figure of which was determined each month in respect of the next following month. In practice, each individual investor with Portfolio 28 and 68 was entitled to receive a monthly statement which set out the 'guaranteed' rate for that particular month, the 'expected' rate (ie. as predicted by BCI at the end of the previous month) and the 'achieved' rate, being the supposed actual rate of return on the funds managed by BCI. These individual statements then went on to state the 'guaranteed' rate for the following month, together with the 'expected' rate. In practice, throughout the time in which BCI operated, the 'achieved' rate was invariably in line with the 'expected' rate and always higher than the 'guaranteed' rate ..... Each individual investor therefore presumably assumed that the 'achieved' rate for each month represented the actual return on the gilt stocks managed by BCI on their behalf. However, the investigations carried out by the staff of the Joint Liquidators and Receivers have determined that these 'gains' were entirely fictitious and were in fact figures arbitrarily decided upon by Mr Clowes (and/or others) and presumably with reference to the generally prevailing rates of interest in the market for gilt stocks ..... Investigations of BCI's records undertaken by the staff of the Joint Liquidators and Receivers show that in the period between July 1986 and May 1987 all dealings in gilts through one particular bank account were either completely fictitious or in one case actually resulted in a trading loss of £50,000. Similarly on the other major 'dealing' account in the period between June 1985 and January 1988 there were 30 genuine deals and 300 fictitious ones ..."

. A further indication of the scale of the misapplication of the investments is provided by a passage at the beginning of Peter Gibson J's judgment in which he states that, "In March 1987 BCI investors were owed £75 million pursuant to their contracts, and by the time of the liquidation of BCI that debt had increased to $140 million. But the latter figure includes some $24 million of gains on gilts which are largely, if not entirely, fictitious. Although investors were induced to entrust their monies to BCI or its predecessors on the footing that their monies would be invested on their behalf in gilts, certificates for only $1.8 million worth of gilts have been found". Mr Walker submitted that there are three possible solutions for resolving the competing claims of the investors to the assets which have been recovered. The first solution, which is the one which was adopted by the judge, depends on the rule in Clayton's Case ( Devaynes v Noble ( Clayton's Case ) (1816) 1 Her 572). That case was authority for the principle, that when sums are mixed in a bank account as a result of a series of deposits, withdrawals are treated as withdrawing the money in the same order as the money was deposited. It is accepted that normally the rule in Clayton's Case has to be applied to govern the respective interests of a banker and his customer in a bank account, but it is submitted by Mr Walker that the rule should not be applied to the different situation which he submits is at the heart of this appeal. Mr Walker contends in a case of this sort the application of the Clayton rule can and would produce results of a highly arbitrary nature. It could enable a particular group of investors to establish an entitlement to a particular asset such as the vessel Boukephalos to the exclusion of other investors just because they invested on one day of the week rather than another. He refers to the dicta of

Judge Learned Hand In re Walter J Schmidt & Co . (1923) 298 S 314 at page 316:

"When the law turns to fiction, it is, or at least it should be, for some purpose of justice. To adopt 'the fiction of first in, first out' ... is to apportion a common misfortune to a test which has no relation whatever to the justice of the case."

In my judgment this comment of Judge Learned Hand accurately describes the result of applying the rule in Clayton's Case to the "common misfortune" which was shared by the investors in BCI. However it is to be noted that the judge in that case (we are told) later felt compelled by authority to apply the rule. In this case the capricious consequences of applying the rule are underlined by the fact that the dates upon which investments were received by BCI often depended upon agents, such as the 4th and 5th defendants, combining the investments of a number of clients and then forwarding a lump sum to BCI. In addition to relying upon the arbitrary results which follow from the "mechanistic" application of the rule Mr Walker relies upon the expense and time which will be involved in having to apply the rule. With the advent of computer technology it cannot be said the task is impossible but it is clearly complex. The costs involved will result in a depletion of the assets available to the investors. In determining the appropriateness of the machinery used for resolving the claims of the investors among themselves, surely this should be a relevant consideration. The second solution for resolving the claims of the investors among themselves is the rolling charge or North American solution ("North American" because it is the solution adopted or favoured in preference to the rule in Clayton's Case in certain decisions of the courts in the United States and Canada because it is regarded as being manifestly fairer). This solution involves treating credits to a bank account made at different times and from different sources as a blend or cocktail with the result that when a withdrawal is made from the account it is treated as a withdrawal in the same proportions as the different interests in the account (here of the investors) bear to each other at the moment before the withdrawal is made. This solution should produce the most just result, but in this case, as counsel accept it is not a live contender, since while it might just be possible to perform the exercise the costs involved would be out of all proportion even to the sizeable sums which are here involved. The third solution (and the only other solution canvassed in argument) is the pari passu ex post facto solution. This involves establishing the total quantum of the assets available and sharing them on a proportionate basis among all the investors who could be said to have contributed to the acquisition of those assets, ignoring the dates on which they made their investment. Mr Walker submits this is the solution which is appropriate in this case. It has the virtue of relative simplicity and therefore relative economy and also the virtue of being in this case more just than the first solution. It would have the effect of sharing the pool of assets available proportionately among the thousands of investors in a way which reflected the fact that they were all the victims of a "common misfortune". On the evidence which is available to this court as to the circumstances of this case, I have no doubt that if, as a matter of principle, this court is in a position to adopt the third solution, then that is the solution which is the most appropriate. It is therefore necessary to turn to the authorities to see whether they prevent this court adopting what I would see as being the correct result. In doing so I bear in mind that Mr Walker advanced two arguments; the wider and narrower argument. The wider argument is that the rule in Clayton's Case is concerned with resolving the rights of a banker and his customer to the funds in a bank account and not resolving the conflicting claims of beneficial interests in an account by beneficiaries; so the rule has no application here. The narrower argument is that in the particular circumstances of this case the court is not required to apply the rule. In considering the authorities, I take the same starting point as Mr Walker and I refer to the passage in the speech of Lord Sumner in Sinclair v Brougham

[1914] AC 398

, at page 458. In that case the House of Lords was concerned with the priority between shareholders and depositors of a building society which was in liquidation after carrying on an ultra vires banking business. The House of Lords came to the conclusion, that subject to any application by any individual depositor or shareholder with a view to tracing his own money into any particular asset, the assets remaining after payment of the outside creditors ought to be distributed pari passu between the depositors and the shareholders according to the amount respectively credited to them in the books of the society at the commencement of the winding-up. Lord Sumner, having indicated that the court has the duty to direct the liquidator how to distribute all the assets went on to say:

"No one has ventured to argue before your Lordships that the shareholders take everything, to the exclusion of the depositors, and so make a huge windfall. In my opinion, if precedent fails, the most just distribution of the whole must be directed, so only that no recognised rule of law or equity be disregarded. In this case neither the shareholders nor the depositors have the better equity; the money of each has with the consent of all, been indiscriminately applied in acquiring assets beyond as well as within the society's powers, the former in much the larger measure. The claims of each class are equal, and, I think, for the present purpose identical."

From what I have said already, it will be clear that I regard the present claims of the investors as being "equal and ... for the present purpose identical". Is there however a "rule of law or equity" which cannot "be disregarded" in relation to the assets which are involved in this appeal which are admittedly subject to a trust in favour of some of the investors? Clayton's Case itself, as has already been pointed out, was not dealing with the precise issue which is here under consideration. However in Pennell v Deffell [1853] 4 D M & G 372, the rule was applied by a court of coordinate jurisdiction with this court, namely, the Court of Appeal in Chancery, to competing claims by beneficiaries who had equitable claims to funds standing in a bank account in preference to those of the general creditors. The extent of the application of the rule in that case was considered by the Court of Appeal in Re Hallett's Estate 13 Ch D 696 . At page 728 Jessel MR said of the rule, that it was "a very convenient rule" but that it was subject to there being evidence "either of agreement to the contrary or of circumstances from which a contrary intention must be presumed, and then of course that which is a mere presumption of law gives way to those other considerations". Baggallay LJ took very much the same view. At page 738 in referring to the judgment in Pennell v Deffell he said:

"In these clear and forcible terms the Lords Justices enunciated the proposition that, as a general principle, the rule in Clayton's Case must be applied to the banking accounts of trustees for the purpose of determining the proportions in which the cestuis que trust and general creditors, or the several classes of their cestuis que trust , are entitled to the debt due from the bankers in closing the account. To the general principle so enunciated I readily accede. But was it more than the enunciation of a general principle; that is to say, a principle to be applied in the absence of special circumstances, but liable to be modified in its application by reason of the necessity or propriety of applying some other general principle of equal or paramount importance?"

Later Baggallay LJ added:

"Now Clayton's Case was decided upon the principle that in the absence of any expressed intention to the contrary, or of special circumstances from which such an intention could be implied, the appropriation of drawings out to the payments in as adopted in that case represented what must be presumed to have been the intention of the parties concerned; and so viewed the decision is quite consistent with the like presumption being rebutted or modified in another case in which the circumstances were such as to negative any intention to make such an appropriation of the drawings out to the payments in."

The Lord Justice then summed up the position in the following terms (page 739):

"... the general principle enunciated by the Lords Justices in Pennell v Deffell was based, or ought to be regarded as having been based, upon the like presumption as that acted upon by Sir W Grant in Clayton's Case ; and that such presumption was liable to be rebutted, or its effects modified, by any equities affecting Mr Greenwood, and those claiming through him, unless there was sufficient reason to the contrary. The questions then did arise, did any such equities exist in Pennell v Deffell ? and if so, was there any sufficient reason for not giving effect to them? That an equity might have existed sufficient to very materially modify the application of the general rule that the drawings out should be appropriated in order of date to the payments in, I cannot doubt; ..."

. On the basis of this reasoning the majority of the Court of Appeal (Thesiger LJ dissenting) went on to exclude the application of Clayton's Case to the situation in Re Hallett's Estate . It did so because if a person who holds money as a trustee or in a fiduciary character pays it into his bank account and mixes it with his own money and afterwards draws out some from the account for his own purposes, he will be presumed to be acting honestly and drawing his own money from the account in priority to the money which he held as trustee or in a fiduciary character. This reasoning of the majority in Re Hallett's Estate was favourably commented upon by Lord Macnaghten in The Mecca

[1897] AC 286

, at page 296. In The Mecca both Lard Halsbury LC and Lord Macnaghten made it clear that they did not regard the rule in Clayton's Case as one which should be invariably applied (at page 290 and page 296). However that the rule in Clayton's Case could be used to resolve conflicting claims between beneficiaries was accepted by the Court of Appeal in Hancock v Smith 41 Ch D 456 (Lord Halsbury LC and Cotton and Fry LJJ) (though on the facts of that case it was not necessary to apply the rule because there was sufficient funds available to pay all the beneficiaries and there was therefore no conflict between them). In Re Diplock

[1948] 1 Ch 465

, this court had to resolve the conflicting equitable claims which arose in consequence of executors distributing the testator's residuary estate to some 139 charities under a bequest which was subsequently held by the House of Lords to be invalid. In relation to the payment to Dr Barnardo's Home the Court of Appeal applied the rule in Clayton's Case to the sum paid by the executors into the charity's general current account. As to the application of Clayton's Case in these circumstances, Lord Greene MR said (at page 553):

"The above result would only follow if Clayton's case applies. It might be suggested that the corollary of treating two claimants on a mixed fund as interested rateably should be that withdrawals out of the fund ought to be attributed rateably to the interests of both claimants. But in the case of an active banking account this would lead to the greatest difficulty and complication in practice and might in many cases raise questions incapable of solution. What then is to be done? In our opinion, the same rule as that applied in Clayton's case should be applied. This is really a rule of convenience based upon so-called presumed intention. It has been applied in the case of two beneficiaries whose trust money has been paid into a mixed banking account from which drawings were subsequently made, and, so far as we know, its application has not been adversely criticised ..."

. In this passage the Master of the Rolls, who did not anticipate the criticism the rule was subsequently to receive, was not suggesting that the rule has to be automatically applied. He regarded Clayton's Case as laying down no more than "a rule of convenience" based upon "presumed intention". This is confirmed by the different treatment in Re Diplock of the bequest to the National Institute for the Deaf. It was thought (wrongly as it subsequently transpired) the charity had "earmarked the Trust's money and by placing it in a different account had 'unmixed' it from its own" and this was regarded as excluding the rule (see page 552). It was critical to Mr Walker's wider argument that the reasoning of the Court of Appeal in Re Diplock in relation to Dr Barnardo's Home was not binding upon this court. However I have come to the conclusion that the reasoning is binding. Although Lord Greene MR, in a judgment with which the other members of the court agreed, was able to deal with virtually all of the issues before the court in the passages in his judgment which dealt with the claims " In personam ", without reliance on the rule, what Lord Greene said as to the claims "in rem ", which depended on the application of the rule, was a necessary part of the judgment as it was required to resolve the issue as to interest. The decision in Re Diplock must be considered together with the other judgments to which I have referred. When this is done, short of the House of Lords, it is settled law that the rule in Clayton's Case can be applied to determine the extent to which as between each other, equally innocent claimants are entitled in equity to monies which have been paid into a bank account and then subject to the movements within that account. However, it does not, having regard to the passages from the judgments in the other authorities cited, follow that the rule has always to be applied for this purpose. In a number of different circumstances the rule has not been applied. The rule need only be applied when it is convenient to do so and when its application can be said to do broad justice having regard to the nature of the competing claims. Hallett's case shows that the rule is displaced where its application would unjustly assist the trustee to the disadvantage of the beneficiaries. In Re Diplock , the rule would have been displaced by the trustee subsequently earmarking the beneficiary's funds. It is not applied if this is the intention or presumed intention of the beneficiaries. The rule is sensibly not applied when the cost of applying it is likely to exhaust the fund available for the beneficiaries. There are other situations where the rule will not be applied. It was not applied in Re British Red Cross Balkan Fund

[1914] 2 Ch 419

. In that case a special fund had been created as a result of subscriptions being collected which were intended to be expended on the sick or wounded in the Balkan War. When the war was over there were no further calls on the fund which had not been exhausted. The court came to the conclusion that the balance of the fund belonged to the subscribers rateably and the rule did not apply as the subscriptions had been given to the fund "en bloc". The approach Astbury J adopted to the rule was one which I would endorse. What he said was:

"It is a mere rule of evidence and not an irreversible rule of law and the circumstances of any particular case may or may not afford a ground for inferring that the transactions of the parties were not intended to come under the general rule. In the present case the rule is clearly inapplicable."

I note however that Peter Gibson J did not find this case convincing and regarded it as distinguishable from the present case because in this case he was "concerned with the operation of a bank account into which investors' monies, paid to BCI by each investor for his own separate purposes, were paid by BCI". However, the British Red Cross Balkan Fund decision was applied by Cohen J in Re Hobourn Aero Components Limited's Distress Fund

[1946] Ch 86

and while I recognise that the facts of these two cases are quite different from the fact under consideration here, I regard the decisions in the Balkan and Hobourn cases as relevant because they help to illustrate the range of situations where the courts have already concluded they were not required to apply the rule. Another case in which the rule was not applied when it could have been was Re Oatway

[1903] 2 Ch 356

. That action arose out of the administration of the estate of an insolvent solicitor. Shares had been purchased out of an account of the solicitor which held a mixture of clients and the solicitor's own money. The solicitor purchased an investment in his own name and then dissipated the balance. The representatives of the solicitor were held not able to maintain by the application of the rule that the investment was purchased with the solicitor's money, so that it became his property and not that of the clients. Then there is Eastern Capital Futures Limited

(1988) 5 BCLC 223

. That company was in liquidation. It had paid out sums of money in connection with transactions involving futures on behalf of its clients. Part of the reason for the company being not able to meet its commitments was that its clients did not pay all the margin calls due from them to the company and as a result debts due to the company's brokers for margin calls were paid from other clients' funds. It was not possible to identify these defaulting clients nor to attribute particular contracts entered into with the brokers to clients who could be named. This was despite the fact that the company's promotional literature indicated that each of the client's investments would be kept in a segregated bank account and not mingled with the company's funds. The first question which Morritt J had to decide was whether sums received from brokers were assets of the company and therefore divisible between the company's clients and its creditors or whether it held them on trust for the company's clients to the exclusion of the company's other creditors. This involved consideration of whether the rule in Clayton's Case was applicable. So far as the non-discretionary clients were concerned, Morritt J concluded that it was impossible to presume any intention on the clients' part that their payments into or payments out of the account which was kept by the company on their behalf should be, vis a vis other clients, treated on a first in and first out basis. Morritt J commented that:

"Were it necessary to do so, I would conclude that the rule in Clayton's Case was inapplicable to the facts of this case."

However, Morritt J also decided that because it was impossible to attribute the benefit of any particular futures contract to any particular client Clayton's Case was not applicable because:

"Obviously the court does not apply a rule which leads to substantial expense but to nowhere else. There is no suggestion that any client or class of client is more or less innocent than any other, thus the equities are equal between all clients and they are entitled to the funds pari passu , c.f. Sinclair v Brougham & Anr [1914] AC 398 ."

In Norton Warburg Investment Management Limited v Gibbons & Others (31st July 1981) (unreported) of which we have a transcript, my Lord, Dillon J, as he then was, did not apply the rule in Clayton's Case in respect of transfers from one bank account to another bank account when the object of the transfer was to earn additional interest in respect of the credit balance in the account from which the monies were transferred. He took the same view with regard to the interest earned in the high interest account. He took this view because the transfers "were never intended as investments of particular investors' money, nor was it intended the interest on any deposits should belong to particular investors only". Dillon J found support for his approach in The Mecca

[1897] AC 286

. However, with the exception of the short-term transfers which were made in order to earn interest, Dillon J, in Norton Warburg , a case which has some similarity on the facts with this case, otherwise applied the rule in Clayton's Case with full vigour. However there are distinctions between this case and Norton Warburg . In this case the accounts with which we are concerned during the relevant period were never overdrawn. In Norton Warburg there were periods when this happened. An overdrawn account complicates the situation. When the account is overdrawn investors, who are seeking to establish a claim by tracing, have to accept that their claims have been exhausted. Unless the investors can trace from the account into some other assets there is no fund left to be shared between these investors. In this case the existence of the trust fund is not in dispute. The court is solely concerned with the division of the fund. In addition from the only limited material that is available in the report of the case, it does appear that in the Norton Warburg , the company, while misappropriating money from time to time, at other times conducted the business in the manner in which the investors in that company intended. Accordingly in the Norton Warburg situation it would be more difficult to say that all the investors had been subjected to a "common misfortune" as a result of the sort of continuing scheme of misappropriation as occurred here. A theme running through many of the authorities is that the rule is inapplicable because of the presumed intention of the parties to the account in which the monies were intermingled. Mr Walker submits that a similar intention making the rule inapplicable can be established on the facts of this case. He accepts that the position is not as clear as it would be in situations where the clients were investing in a unit trust (where counsel on both sides agreed the rule would be inapplicable) but none the less he contends that it was clear that this was a situation where there was a collective investment scheme whose participators intended that their money should be mixed together and invested in or through a single pool. The judge did not accept that this was the situation. There were various documents which the investors signed, each of which provided some support for Mr Walker's argument. However, there are other features to which Mr Hart could draw attention which pointed in the other direction. With some hesitation I have come to the conclusion that while it is difficult on the documentation to decide whether the investments were to be made subject to a collective investment scheme or not the better view is that they were. If this interpretation of the documentation is correct then the fact that the fund held investments which were part of a collective investment scheme would exclude the rule. However, on the facts of this case I would not apply the rule even if the documents indicated that BCI was under an obligation to create separate funds for each investor. In default of this obligation, as part of the continuous misapplication of investors' monies (with the exception of a small quantity of gilts purchased to give verisimilitude to its activities) BCI did not create separate funds but a pool into which the investors' monies were collected. This pool is a fund into which the investors are entitled to trace. However it is a pool, the creation of which, they would not have contemplated. In these circumstances the court has to presume what would have been the intention of the investors had they contemplated the creation of this pool. So far as that intention is concerned I have no doubt that it is correct to presume that the investors would have intended that what could be salvaged, as a result of the "common misfortune" they had suffered, should be dealt with in accordance with the third solution and not in accordance with the rule. It can be presumed that they would not want to subject what was left of the pool to the vagaries of chance which would follow from the application of the first in, first out principle. I appreciate this means I have taken into account the misconduct of BCI in determining the rights inter se of the investors but I see no reason to ignore what has actually happened to the funds when in the hands of BCI. If BCI purchased other assets from the pool the new assets would be new funds on which the investors would have claims. The rule was not applied in Re Hallett's Estate and Re Oatway because of the activities of the trustees. Here what excludes the rule therefore is: (a) the pooling of the investments of a vast number of investors by BCI for its own purposes; (b) the fact this would not be contemplated by the investors when they made their investment; (c) the fact that all the monies invested have been misapplied, at lest to some extent, when part of the pool because the withdrawals from the pool continued from the pool after the last investment was credited; (d) what happened to the investments after they were credited to the pool cannot as a result of investigations which are practical be said to be affected by the date on which they were credited. There remains an argument of Mr Hart with which I should deal. Mr Hart emphasised the theoretical position of an investor who advanced a sum of money just prior to the account of BCI being frozen. In that situation he contended correctly, that in the normal way an investor must be able to trace the whole of his investment into the balance of the account; unless the investor intends his investment to be treated in the way that funds invested in a unit trust are treated (which he argues is not the position here). Mr Hart submitted that it followed that the investor must be entitled to the whole of the sum in the account which can be identified if, since the investment, there has been no movement in the account. However, as Mr Hart accepts, there is in this case no investor who is precisely in that position. If there was, I accept that the investor's situation would require special consideration. Mr Hart also submits that the position must be, proportionately, the same where the sums drawn out of the account after the last payment in of the monies of the last of the investors are less than the sum deposited by the investor. Mr Hart contends that at least the difference between the balance of the sum invested after deducting the sum withdrawn must be recoverable in full. I do not agree. The balance of the investment has by then become part of the pool and has to be treated (as it would have been by BCI) in the same way as the other funds within the pool. When this happened, there is no reason why the principle of equality is equity should not be applied. In order to obtain preference over the ordinary creditors, the investor has to rely on equity to trace his monies into the account. Where the circumstances, convenience and justice so dictate, once the monies are in the pool equity can require them to be treated as being subject to the other investors' equitable claims on the fund. There is nothing wrong in principle in treating the quantum of the latest investor's claim as either being reduced pro rata by the earlier investors' claims or enhanced by the value of other assets, purchased earlier from the monies in the pool, into which it is possible to trace. For the reasons I have expressed, the approach, in summary, which I would adopt to resolving the issues raised by this appeal are as follows: 1. While the rule in Clayton's Case is prima facie available to determine the interests of investors in a fund into which their investments have been paid, the use of the rule is a matter of convenience and if its application in particular circumstances would be impracticable or result in injustice between the investors it will not be applied if there is a preferable alternative. 2. Here the rule will not be applied because this would be contrary to either the express or inferred or presumed intention of the investors. If the investments were required by the terms of the investment contract to be paid into a common pool this indicates that the investors did not intend to apply the rule. If the investments were intended to be separately invested, as a result of the investments being collectively misapplied by BCI a common pool of the investments was created. Because of their shared misfortune, the investors will be presumed to have intended the rule not to apply. 3. As the rule is inapplicable the approach which should be adopted by the court depends on which of the possible alternative solutions is the most satisfactory in the circumstances. If the North American solution is practical this would probably have advantages over the pari passu solution. However the complications of applying the North American solution in this case make the third solution the most satisfactory. 5. It must however be remembered that any solution depends on the ability to trace and if the fund had been exhausted (ie. the account became overdrawn) the investors whose monies were in the fund prior to the fund being exhausted will not be able to claim against monies which were subsequently paid into the fund. Their claims will be limited to following, if this is possible, any of the monies paid out of the fund into other assets before it was exhausted. For these reasons I would allow the appeal and substitute the orders proposed by Dillon LJ. LORD JUSTICE DILLON : The appeal presently before the court is brought against an order made by Peter Gibson J on 16th June 1989 in proceedings brought in the Chancery Division by a Gibraltar company, Barlow Clowes International Limited ("BCI") acting by its liquidators and by the receivers, appointed by the Gibraltar High Court, of certain investment plans, and in particular the plans called Portfolio 28 and Portfolio 68, which were promoted and managed by BCI, in order to obtain the directions of the court as to the basis on which assets and moneys in the hands of the receivers should be distributed. The proceedings were brought in England by leave of the Gibraltar Court, since it is accepted that — except for the moneys in the two bank accounts specified in Schedule C to the order of Peter Gibson J, as to which no issue arises — the assets and moneys in question are trust moneys held on trust for all or some of the would-be investors ("the investors") who paid moneys to BCI or associated bodies for investment, and are not general assets of BCI. Some 95 per cent of the investors are UK residents and a substantial majority of them are resident within the jurisdiction of the English Court. The receivers are Mr Hamilton, a partner in Ernst & Whinney in London, and Mr Jordan, a partner in Cork Gully in London. The liquidators of BCI are Mr Jordan, and Mr Robinson, a partner in Ernst & Whinney in Gibraltar.

[2]The history of BCI and other Barlow Clowes entities with which these proceedings are not directly concerned is set out in the judgment of Peter Gibson J and I do not need to repeat it. The basic problem is that over a period some 11,000 investors paid large amounts of money — over £100m in all — to BCI or associated entities for investment, but at the end of the day when receivers were appointed and BCI went into liquidation the amount of assets available fell far short of what would be needed to satisfy all the investors' claims in full.

[3]How the shortfall or deficiency came about is the subject of criminal proceedings pending against certain individuals who are not parties to these proceedings. This court is in no way concerned with the criminal proceedings and nothing said in this judgment can have any relevance to those proceedings. We are concerned, not with how the shortfall or deficiency came about, but with how the assets and moneys which unquestionably remain should be administered.

[4]More specifically we are concerned, on the one hand, with the moneys paid by investors seeking to invest in the investment plans called Portfolios 28 and 68 (in so far as those moneys were not repaid to the investors by BCI before the liquidation and appointment of receivers) and on the other hand with the moneys to the credit of the bank accounts listed in Schedules A and B to the order of Peter Gibson J and with the net proceeds of sale of certain other assets ("the Additional Assets") mentioned in the Originating Summons, and in particular a yacht "Boukephalos" and certain gilt-edged investments. The papers show that there were other proceedings pending at first instance involving an English company, Barlow Clowes Gilt Managers Ltd., of which Mr Jordan and Mr Hamilton are the liquidators, and there were other investment plans designated Portfolio 33 and Portfolio 39; but with these we are not concerned.

[5]The substance of the order of Peter Gibson J was as follows:(i) The sums standing to the credit of the accounts specified in Schedule A to his order (excluding amounts attributable to interest credited to those accounts) are held on trust for those who upon the application of the rule in Clayton's Case (1816) 1 Mer 572 could be shown to be entitled to trace into such sums;

[7]The judge gave in July 1989 further directions of very considerable complexity on the working out of his order, but as these directions are not the subject of appeal I need not set them out here. The accounts in Schedule B to the judge's order, to which Clayton's Case was not to be applied, were accounts in relation to which the receivers and liquidators took the view, which all counsel accepted, that on the evidence no individual investor would be able to assert a tracing claim to the credit balances in the accounts. That is not challenged on this appeal. In addition it is common ground that the account Ch 52, which only contained £4,000 and was used for commission payments, ought to have been included in Schedule B, and not in Schedule A as in the order of the judge as drawn. Accordingly the judge's order must be varied in relation to that account irrespective of any other outcome of this appeal.

[8]The substance of this appeal is to challenge the applicability of the rule in Clayton's Case either to the accounts specified in Schedule A to the order or to the Additional Assets. The notice of appeal was given as long ago as 11th October 1989 by the second defendant, Mr Robson, who was appointed by the judge's order to represent all those investors who might be interested to argue that the rule in Clayton's Case should not apply.

[9]Since the notice of appeal was issued, there has been an important further development, which has occasioned the delay in the appeal coming on for hearing. After the appeal had been set down, the Secretary of State for Trade and Industry made an offer, consistently with recommendations of the Parliamentary Commissioner of Administration, of a composition payment to most investors in consideration of the investors assigning all their claims in favour of the Secretary of State. That offer was accepted by 98 per cent of the investors including the appellant Mr Robson and the first defendant Mr Vaughan, who had been appointed by the order of Peter Gibson J to represent those investors who are interested to argue in favour of tracing in accordance with the rule in Clayton's Case . The remaining 2 per cent are investors who, for one reason or another, were not included in the Secretary of State's offer, or who for whatever other reason did not accept the offer.

[10]The Secretary of State has decided to pursue the appeal, by way of subrogation to Mr Robson and in his name. But Mr Vaughan has no interest to oppose the appeal. Accordingly another investor, Chiltington Ltd., which was not eligible to accept the Secretary of State's offer, has, with its consent, been added as a defendant in the proceedings and appears as a respondent to oppose the appeal.

[11]It is, as I understand it, the view of the Secretary of State that in a case such as this where so many individual investors contributed their moneys to BCI and its Portfolios 28 and 68 on the same basis, it would be unfair and inequitable if, by the accidents of tracing, a relatively small number of the investors were to be held entitled to the vast bulk of the available assets and moneys, as might result from the application of Clayton's Case . It will be necessary in this judgment to consider both the basis and the fairness of tracing in accordance with the rule in Clayton's Case , and how far this court is bound by previous decisions of this court to adopt that method of distribution.

[12]The argument put by Mr Walker QC for the appellant is that instead of tracing or any application of Clayton's Case the available assets and moneys should be distributed pari passu among all unpaid investors rateably in proportion to the amounts due to them. This is the basis of distribution which — subject to any application which might be made by any individual depositor or shareholder with a view to tracing his own money into any particular asset — was directed by the House of Lords in Sinclair v Brougham

[1914] AC 398

[14]We were indeed referred in the course of the argument to a third possible basis of distribution which was called the "rolling charge" or "North American" method. This has been preferred by the Canadian and US courts to tracing in accordance with Clayton's Case , as more equitable. See for instance the decision of the Ontario Court of Appeal in Re Ontario Securities Commission and Greymac Credit Corporation [1986] 55 OR 2nd 673. This method goes on the basis that where funds of several depositors, or sources, have been blended in one account, each debit to the account, unless unequivocally attributable to the moneys of one depositor or source, (eg. as if an investment was purchased for one), should be attributed to all the depositors so as to reduce all their deposits pro rata, instead of being attributed, as under Clayton's Case , to the earliest deposits in point of time. The reasoning is that if there is an account which has been fed only with trust moneys deposited by a number of individuals, and the account holder misapplies a sum from the account for his own purposes, and that sum is lost, it is fair that the loss should be borne by all the depositors pro rata, rather than that the whole loss should fall first on the depositor who made the earliest deposit in point of time. The complexities of this method would, however, in a case where there are as many depositors as in the present case and even with the benefits of modern computer technology be so great, and the cost would be so high, that no one has sought to urge the court to adopt it, and I would reject it as impracticable in the present case. Clayton's Case [1816] 1 Mer 572 was not a case of tracing at all, but a case as to the appropriation of payments. Clayton had been a customer of a banking partnership with an account in credit. One of the partners, Devaynes, had died in 1809 and the remaining partners became bankrupt at the end of July 1810. Clayton had had a running account with the bank before and after the death of Devaynes. The debits and credits made after the death of Devaynes were made without specific appropriation and the account had not been broken on the death of Devaynes. Clayton claimed after the bankruptcy to set his drawings on the account after the death of Devaynes against the credits to the account after the death of Devaynes; consequently be claimed to prove against the estate of Devaynes for the balance to his credit in the account at the death of Devaynes, on the footing that the balance had never been satisfied. Those claims were rejected by Sir William Grant MR who said at pages 608 to 609:

"But this is the case of a banking account, where all the sums paid in form one blended fund, the parts of which have no longer any distinct existence. Neither banker nor customer ever thinks of saying, this draft is to be placed to the account of the £500 paid in on Monday, and this other to the account of the £500 paid in on Tuesday. There is a fund of £1,000 to draw upon, and that is enough. In such a case, there is no room for any other appropriation than that which arises from the order in which the receipts and payments take place, and are carried into the account. Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. Upon that principle, all accounts current are settled, and particularly cash accounts. When there has been a continuation of dealings, in what way can it be ascertained whether the specific balance due on a given day has, or has not, been discharged, but by examining whether payments to the amount of that balance appear by the account to have been made? You are not to take the account backwards, and strike the balance at the head, instead of the foot, of it. A man's banker breaks, owing him, on the whole account, a balance of £1,000. It would surprise one to hear the customer say, 'I have been fortunate enough to draw out all that I paid in during the last four years; but there is £l,000, which I paid in five years ago, that I hold myself never to have drawn out; and, therefore, if I can find anybody who was answerable for the debts of the banking-house, such as they stood five years ago, I have a right to say that it is that specific sum which is still due to me, and not the £1,000 that I paid in last week'. This is exactly the nature of the present claim."

[15]That rule will apply to the appropriation of payments between any trader and his customer where there is an account current or running account. But it will not apply unless there is a running account — see per Lord Halsbury LC in The Mecca

[1897] AC 286

[16]One case in which it was held that the nature and circumstances of a fund showed that the parties could not have intended Clayton's Case to be applied when the surplus in the fund fell to be returned to the subscribers is Re British Red Cross Balkan Fund

[1914] 2 Ch 419

[17]The actual decision is suspect, since the objects of the fund would seem to have been charitable, and if they were charitable then, as the surplus did not come about through a failure of the charitable objects ab initio , the surplus should have been applied cy-pres for other charitable purposes. If however for some reason the fund was not devoted to charity, the decision was plainly right. It was followed, in the case of a winding-up of a non-charitable fund, by Cohen J in Re Hobourn Aero Components Limited's Air Raid Distress Fund

[1946] Ch 86

at page 97; Cohen J's decision was affirmed by this court at

[1946] Ch 194

[18]Mr Walker has accordingly submitted for the appellant in the present case, by what he called his narrower submission, that all investors who contributed to the two Portfolios in question in the present case were contributing to common funds in which all investors were to participate and that by analogy with British Red Cross Balkan Fund and Hobourn Aero Components , Clayton's Case should not be applied.

[19]To support that analogy he submits that the true appreciation of the arrangements was that the payment by each investor became, on receipt in a bank account of BCI or its affiliates, part of the uninvested balances of a common or global investment fund in which all investors were to share. The alternative to a common or global investment fund for all investors is a scheme, such as that with which I was concerned at first instance in the unreported case of Norton Warburg Investment Management Limited , under which each subscriber's contribution was to be invested by the scheme managers in an investment earmarked for that subscriber and held for his account only, but retained under the control of the scheme managers who had power to sell and reinvest for the subscriber at their discretion. Mr Walker accepts that if the arrangements in relation to the Portfolios were earmarked investments to be acquired for the sole account of each investor as in Norton Warburg , his analogy to the British Red Cross Balkan Fund case would not apply and he would have to fall back on his wider submission, to which I will refer later.

[20]It is therefore necessary, in order to determine the nature of the arrangements, to consider the basis on which investors contributed to Portfolio 28 and Portfolio 68. This is to be found primarily in the forms of application which the investors signed, and in certain rather brief leaflets describing the Portfolios which were issued by or on behalf of BCI.

[21]The word "Portfolio" itself, suggests, at first glance, a common or global investment fund, but that has to be discounted for the fact that in the leaflet for each "Portfolio" the portfolio is described as "an investment service offering capital gains from the management of British Government Securities". See pages 293 and 309 of the bundle.

[22]Each of the leaflets also states:

"All monies received are held in a designated clients' account and clients are the beneficial owners of all securities purchased on their behalf. Furthermore the value of your capital will not fluctuate and is fully guaranteed and refundable at any time."

[23]This appears to suggest that each investor will have particular securities purchased for him alone. The statement that "the value of your capital will not fluctuate" could not be correct if the investor was participating in a common fund to which more and more other gilt-edged investments would be added as more and more subscriptions from other investors come in — though it has to be said that the value of even a single investment earmarked for a single subscriber would be liable to fluctuate with changes in general interest rates and economic conditions.

[24]Another oddity is that all subscribers were told that they would receive a guaranteed minimum rate of return each month plus additional gains as indicated on the monthly statement. This is odd, if earmarked gilt-edged securities for the individual investor are envisaged, because gilt-edged securities normally pay interest half-yearly and not monthly. It is even odder, however, that under the documents the monthly statements are also to include an "expected" rate of interest which will obviously he higher than the guaranteed rate. It is said of the difference between the guaranteed and expected rate, in the document at page 301, that it is not guaranteed but can be realistically expected. In a letter at page 317 to someone who had made an inquiry with regard to Portfolio 68 it is said, "The achieved rate has always exceeded the minimum guaranteed rate". How this differential in interest rates could work if there was not a common fund and individual investments were instead earmarked for and held to the sole account of each investor, I fail to understand.

[25]Some application forms contained a statement by the investor to the effect that, "I ... authorise you to buy and sell British Government Stock on my behalf on a fully discretionary basis" and also a statement that the investor understood that he might withdraw a part or the whole of "my investment" without penalty. There were several variants on this theme. This wording on the application forms seems to me, however, to be compatible with investment in a scheme of a nature of a unit trust in gilts and not merely with investment on the basis that earmarked investments would be held for the sole account of the investor.

[26]Some investors made their investments through independent financial advisory services and signed forms devised by these services rather than direct applications to BCI on BCI forms. See eg. pages 291 to 292 where investment in authorised (and unauthorised) unit trusts is envisaged as an alternative to investment in BCI managed gilt services.

[27]I find the wording of the documents issued by or on behalf of BCI ambiguous in relation to the nature of the arrangements envisaged under the labels Portfolio 28 and 68. It matter not for present purposes whether the ambiguity was intentional, as a result of a fraudulent desire to confuse investors, or was merely the result of muddleheadedness and confusion in the mind of the draughtsman. My conclusion is, however, that what was envisaged was some form of common fund in which all investors would in some way participate. I attach particular importance to the factor of the "expected" as well as the "guaranteed" rate of interest, and therefore differ, with all respect, on this point from the conclusion of Peter Gibson J.

[28]It follows, in my judgment, that the gilt-edged investments actually acquired by BCI which are part of the Additional Assets, were lawful investments of investors' moneys as part of a common fund, and not to be allocated, under the arrangements, to individual investors. It would consequently be contrary to the intention of the original arrangements to trace through under Clayton's Case the moneys actually applied in the purchase of these gilts so as to allocate them to individual investors. The proceeds of sale of the gilts should be allocated pro rata to all investors, like the moneys to the credit of the bank accounts specified in Schedule B to the order of Peter Gibson J.

[29]The question is then, in relation to the balances in the bank accounts specified in Schedule A to the judge's order, which were moneys contributed by investors for investment which had not been invested by the time BCI went into liquidation and the receivers were appointed, whether these moneys became part of the common funds as soon as they were received into the bank accounts of BCI from the investors.

[30]There are attractions in the view that if moneys are paid for investment in a common fund of gilt-edged investments they only become part of the common fund when invested in gilts, and are in the meantime held on a resulting trust for the payers. On the other hand the terms of application, in general, expressly authorise the placing of any uninvested funds with any bank etc. on such terms as BCI thinks fit, whether bearing interest or not.

[31]What troubles me at this stage on the particular facts of the present case, is the contrast between the large amounts held in the accounts specified in Schedule A to the judge's order and the much smaller amount of the gilts, above-mentioned, which came into the control of the receivers. There is also the consideration of the very large amounts of investors' moneys which have been lost to the investors without ever having been invested as envisaged in the documents relating to the Portfolios. In one sense it is unreal to treat the moneys in the bank accounts in Schedule A as the uninvested part of a common investment fund. But the question posed by Lord Halsbury in The Mecca as cited above must, I apprehend, be answered by considering the nature of the transaction as the investors intended it to be at the outset when they paid their moneys to BCI, not the very different circumstances of the actual outcome, of which, when they contributed, they knew nothing. Therefore, after considerable hesitation, I conclude that the moneys in the bank accounts in Schedule A ought to be treated, for the purposes of distribution, as the uninvested part of the common investment fund.

[32]As for the proceeds of sale of the yacht "Boukephalos", on the material before this court the yacht was never an authorised investment for funds paid to BCI for investment in gilt-edged securities, and its purchase was a misapplication of trust moneys. None the less the moneys applied in the purchase of the yacht were part of the common investment fund — for the same reasons as the moneys in the accounts specified in Schedule A to the judge's order. Accordingly the proceeds of the yacht must also be treated as part of the common fund.

[33]I accordingly accept Mr Walker's narrower submission and would hold that Clayton's Case is not to be applied in the distribution of the available assets and moneys.

[34]Mr Walker's wider submission is to the effect that, while the rule in Clayton's Case is valid and useful, subject to the observations in The Mecca , where what is in question is the appropriation of payments as between the parties to a running account, it is illogical and unfair to the earlier contributors to apply the rule as between innocent beneficiaries, whose payments to a third party, BCI, have been paid by that third party into a bank account in which, at the end of the day, there are — for whatever reason — not enough moneys left to meet all claims.

[35]Mr Walker submits that it might be more fair to apply the North American method outlined above, but as that is not practicable in the circumstances of this case, the court should fall back on a distribution pari passu between all investors in the proportions of the amounts respectively due to them.

[36]For my part, so far as fairness is concerned, I have difficulty in seeing the fairness to a later investor whose contribution was in all likelihood still included in the uninvested moneys in the Schedule A accounts, of holding that all those moneys must be shared pari passu by all investors early or late if there was no common investment fund. In addition of course the order made by the House of Lords in Sinclair v Brougham , on which the order which Mr Walker seeks in the present case is modelled, was expressly subject to any tracing application by any individual depositor or shareholder. If the application of Clayton's Case is unfair to early investors pari passu distribution among all seems unfair to late investors.

[37]The views of the law expressed by the English courts on the position where several beneficiaries' moneys have been blended in a single bank account and there is a deficiency are, in my judgment, consistent.

[38]In Re Hallett's Estate Ch D 696, Hallett, a solicitor whose estate was being administered by the court, had, before his death, blended moneys held in a fiduciary capacity for a client and for certain trustees with his own moneys in his own general bank account which he operated for his own purposes. It was held by the majority of this court, Jessel MR and Baggallay LJ, that in the allocation of the drawings from his account against moneys paid in, the "first-in" first-out" principle of Clayton's Case was displaced, to the extent that the account holder must be deemed to have drawn on his own moneys rather than the trust moneys in paying expenses for his own purposes. The result of that was that there was at Hallett's death enough in his account to cover in full the amounts claimed by the client and the trustees. But with that qualification as to the account-holder being treated as exhausting his own moneys before he has recourse to fiduciary moneys for his own purposes, both Jessel MR and Baggallay LJ endorsed the general principle laid down by the Court of Appeal in Chancery in Pennell v Deffell [1853] 4 D M & G 372 that the principle of Clayton's Case is to be applied, even as against beneficiaries, in allocating the payments out of a bank account in which the account-holder has blended his own moneys and moneys held for different fiduciary purposes (several estates in bankruptcy of which he was official assignee). See per Knight Bruce LJ at page 384 and per Turner LJ at page 394.

[39]So in Hancock v Smith 41 Ch D 456, though the actual decision was that as the bank account in question had been fed only with trust moneys — it was a client's account of a stockbroker — a creditor of the stockbroker could have no claim against the moneys in the account, both Lord Halsbury LC and Cotton LJ stated that the rule in Clayton's Case would have been applicable if the issue had been as between the cestuis que trust . Fry LJ did not deal with that point.

[40]One can pass then to the well-known case of Re Diplock

[1948] Ch 465

. There this court considered Clayton's Case in relation to "in rem" tracing claims against certain charities. See especially at pages 553 to 554 where Lord Greene MR stated as follows:

"The above result would only follow if Clayton's case applies. It might be suggested that the corollary of treating two claimants on a mixed fund as interested rateably should be that withdrawals out of the fund ought to be attributed rateably to the interests of both claimants. But in the case of an active banking account this would lead to the greatest difficulty and complication in practice and might in many cases raise questions incapable of solution. What then is to be done? In our opinion, the same rule as that applied in Clayton's case should be applied. This is really a rule of convenience based upon so-called presumed intention. It has been applied in the case of two beneficiaries whose trust money has been paid into a mixed banking account from which drawings were subsequently made, and, so far as we know, its application has not been adversely criticised (see per Fry J in Hallett's case (2) and per North J in In Re Stenning (3)."

[41]This appears to be a direct rejection by this court of the basis of the North American method of distribution.

[42]Mr Walker submits that in the successive decisions of the Court of Appeal from Pennell v Deffell onwards which I have just mentioned the court did not have to address its mind to the problem where there are several cestuis que trust with independent claims against the one bank account in which their moneys have been blended, with or without the personal moneys of the account holder. Therefore he submits that the cases can be distinguished on the facts and what was said can be regarded as obiter to the actual decisions, and so this court is free to make its own decision.

[43]It is indeed correct that the precise situation in the present case did not arise in the reported cases. In Hallett's Estate there were indeed two separate beneficiaries claiming, but both were paid in full when it was ruled that the account holder must be deemed to have exhausted his own moneys first. In Pennell v Deffell several beneficiaries' interests were concerned but they were represented by a single claimant, the successor trustee to the defaulter.

[44]None the less the decisions of this court, in my judgment, establish and recognise a general rule of practice that Clayton's Case is to be applied when several beneficiaries' moneys have been blended in one bank account and there is a deficiency. It is not, in my judgment, for this court to reject that long-established general practice. A fortiori it is not appropriate to reject it in the present case, when the more logical method, the North American method, which is the basis for criticising the application of Clayton's Case is accepted to be impracticable. Therefore I would not accept Mr Walker's wider submission.

[45]However as I would accept his narrower submission I would allow this appeal, and set aside the order of the judge and I would declare that the rule in Clayton's Case is not to be applied on the distribution of the moneys in the bank accounts specified in Schedules A and B to the judge's order or of the proceeds of sale of the Additional Assets. Instead these were held on trust for all unpaid investors pari passu rateably in proportion to the amounts due to them.

[46]There should consequently be a representation order appointing Chiltington to represent those investors who are interested to argue in favour of tracing in accordance with the rule in Clayton's Case , and who have not accepted the composition offered by the Secretary of State.

LORD JUSTICE WOOLF:

[47]This appeal, which I emphasise relates only to part of the judgment of Peter Gibson J, raises an issue of considerable difficulty. The issue is as to the method which should be adopted to apportion the assets salvaged after the collapse of Barlow Clowes International ("BCI") among the investors who have a claim to those assets. Dillon LJ has set out the relevant facts in his judgment and therefore I am saved the task of repeating those facts. I however emphasise, as he has done, that anything I say as to the facts is of no relevance to any criminal proceedings. However, as I attach particular importance to the evidence before this court as to the way that the funds of the investors were being misapplied throughout I draw attention to the following statements on affidavit of Mr Hamilton, one of the joint receivers appointed by the Supreme Court of Gibraltar over the investment funds of BCI. In reviewing the terms upon which individual investors placed their monies with BCI he points out that: "... whilst the precise terms of the discretionary management agreements may have differed in various respects depending upon which individual type of application form was utilised, the principle was always the same namely that the investor was 'guaranteed' a minimum monthly 'gain' on his or her investment, the percentage figure of which was determined each month in respect of the next following month. In practice, each individual investor with Portfolio 28 and 68 was entitled to receive a monthly statement which set out the 'guaranteed' rate for that particular month, the 'expected' rate (ie. as predicted by BCI at the end of the previous month) and the 'achieved' rate, being the supposed actual rate of return on the funds managed by BCI. These individual statements then went on to state the 'guaranteed' rate for the following month, together with the 'expected' rate. In practice, throughout the time in which BCI operated, the 'achieved' rate was invariably in line with the 'expected' rate and always higher than the 'guaranteed' rate ..... Each individual investor therefore presumably assumed that the 'achieved' rate for each month represented the actual return on the gilt stocks managed by BCI on their behalf. However, the investigations carried out by the staff of the Joint Liquidators and Receivers have determined that these 'gains' were entirely fictitious and were in fact figures arbitrarily decided upon by Mr Clowes (and/or others) and presumably with reference to the generally prevailing rates of interest in the market for gilt stocks ..... Investigations of BCI's records undertaken by the staff of the Joint Liquidators and Receivers show that in the period between July 1986 and May 1987 all dealings in gilts through one particular bank account were either completely fictitious or in one case actually resulted in a trading loss of £50,000. Similarly on the other major 'dealing' account in the period between June 1985 and January 1988 there were 30 genuine deals and 300 fictitious ones ...".

[48]A further indication of the scale of the misapplication of the investments is provided by a passage at the beginning of Peter Gibson J's judgment in which he states that, "In March 1987 BCI investors were owed £75 million pursuant to their contracts, and by the time of the liquidation of BCI that debt had increased to $140 million. But the latter figure includes some $24 million of gains on gilts which are largely, if not entirely, fictitious. Although investors were induced to entrust their monies to BCI or its predecessors on the footing that their monies would be invested on their behalf in gilts, certificates for only $1.8 million worth of gilts have been found".

[49]Mr Walker submitted that there are three possible solutions for resolving the competing claims of the investors to the assets which have been recovered. The first solution, which is the one which was adopted by the judge, depends on the rule in Clayton's Case ( Devaynes v Noble ( Clayton's Case ) (1816) 1 Her 572). That case was authority for the principle, that when sums are mixed in a bank account as a result of a series of deposits, withdrawals are treated as withdrawing the money in the same order as the money was deposited. It is accepted that normally the rule in Clayton's Case has to be applied to govern the respective interests of a banker and his customer in a bank account, but it is submitted by Mr Walker that the rule should not be applied to the different situation which he submits is at the heart of this appeal. Mr Walker contends in a case of this sort the application of the Clayton rule can and would produce results of a highly arbitrary nature. It could enable a particular group of investors to establish an entitlement to a particular asset such as the vessel Boukephalos to the exclusion of other investors just because they invested on one day of the week rather than another. He refers to the dicta of

Judge Learned Hand In re Walter J Schmidt & Co . (1923) 298 S 314 at page 316:

"When the law turns to fiction, it is, or at least it should be, for some purpose of justice. To adopt 'the fiction of first in, first out' ... is to apportion a common misfortune to a test which has no relation whatever to the justice of the case."

[50]In my judgment this comment of Judge Learned Hand accurately describes the result of applying the rule in Clayton's Case to the "common misfortune" which was shared by the investors in BCI. However it is to be noted that the judge in that case (we are told) later felt compelled by authority to apply the rule. In this case the capricious consequences of applying the rule are underlined by the fact that the dates upon which investments were received by BCI often depended upon agents, such as the 4th and 5th defendants, combining the investments of a number of clients and then forwarding a lump sum to BCI.

[51]In addition to relying upon the arbitrary results which follow from the "mechanistic" application of the rule Mr Walker relies upon the expense and time which will be involved in having to apply the rule. With the advent of computer technology it cannot be said the task is impossible but it is clearly complex. The costs involved will result in a depletion of the assets available to the investors. In determining the appropriateness of the machinery used for resolving the claims of the investors among themselves, surely this should be a relevant consideration.

[52]The second solution for resolving the claims of the investors among themselves is the rolling charge or North American solution ("North American" because it is the solution adopted or favoured in preference to the rule in Clayton's Case in certain decisions of the courts in the United States and Canada because it is regarded as being manifestly fairer). This solution involves treating credits to a bank account made at different times and from different sources as a blend or cocktail with the result that when a withdrawal is made from the account it is treated as a withdrawal in the same proportions as the different interests in the account (here of the investors) bear to each other at the moment before the withdrawal is made. This solution should produce the most just result, but in this case, as counsel accept it is not a live contender, since while it might just be possible to perform the exercise the costs involved would be out of all proportion even to the sizeable sums which are here involved.

[53]The third solution (and the only other solution canvassed in argument) is the pari passu ex post facto solution. This involves establishing the total quantum of the assets available and sharing them on a proportionate basis among all the investors who could be said to have contributed to the acquisition of those assets, ignoring the dates on which they made their investment. Mr Walker submits this is the solution which is appropriate in this case. It has the virtue of relative simplicity and therefore relative economy and also the virtue of being in this case more just than the first solution. It would have the effect of sharing the pool of assets available proportionately among the thousands of investors in a way which reflected the fact that they were all the victims of a "common misfortune".

[54]On the evidence which is available to this court as to the circumstances of this case, I have no doubt that if, as a matter of principle, this court is in a position to adopt the third solution, then that is the solution which is the most appropriate. It is therefore necessary to turn to the authorities to see whether they prevent this court adopting what I would see as being the correct result. In doing so I bear in mind that Mr Walker advanced two arguments; the wider and narrower argument. The wider argument is that the rule in Clayton's Case is concerned with resolving the rights of a banker and his customer to the funds in a bank account and not resolving the conflicting claims of beneficial interests in an account by beneficiaries; so the rule has no application here. The narrower argument is that in the particular circumstances of this case the court is not required to apply the rule.

[55]In considering the authorities, I take the same starting point as Mr Walker and I refer to the passage in the speech of Lord Sumner in Sinclair v Brougham

[1914] AC 398

"No one has ventured to argue before your Lordships that the shareholders take everything, to the exclusion of the depositors, and so make a huge windfall. In my opinion, if precedent fails, the most just distribution of the whole must be directed, so only that no recognised rule of law or equity be disregarded. In this case neither the shareholders nor the depositors have the better equity; the money of each has with the consent of all, been indiscriminately applied in acquiring assets beyond as well as within the society's powers, the former in much the larger measure. The claims of each class are equal, and, I think, for the present purpose identical."

[57]From what I have said already, it will be clear that I regard the present claims of the investors as being "equal and ... for the present purpose identical". Is there however a "rule of law or equity" which cannot "be disregarded" in relation to the assets which are involved in this appeal which are admittedly subject to a trust in favour of some of the investors? Clayton's Case itself, as has already been pointed out, was not dealing with the precise issue which is here under consideration. However in Pennell v Deffell [1853] 4 D M & G 372, the rule was applied by a court of coordinate jurisdiction with this court, namely, the Court of Appeal in Chancery, to competing claims by beneficiaries who had equitable claims to funds standing in a bank account in preference to those of the general creditors. The extent of the application of the rule in that case was considered by the Court of Appeal in Re Hallett's Estate 13 Ch D 696 . At page 728 Jessel MR said of the rule, that it was "a very convenient rule" but that it was subject to there being evidence "either of agreement to the contrary or of circumstances from which a contrary intention must be presumed, and then of course that which is a mere presumption of law gives way to those other considerations". Baggallay LJ took very much the same view. At page 738 in referring to the judgment in Pennell v Deffell he said:

"In these clear and forcible terms the Lords Justices enunciated the proposition that, as a general principle, the rule in Clayton's Case must be applied to the banking accounts of trustees for the purpose of determining the proportions in which the cestuis que trust and general creditors, or the several classes of their cestuis que trust , are entitled to the debt due from the bankers in closing the account. To the general principle so enunciated I readily accede. But was it more than the enunciation of a general principle; that is to say, a principle to be applied in the absence of special circumstances, but liable to be modified in its application by reason of the necessity or propriety of applying some other general principle of equal or paramount importance?"

[58]Later Baggallay LJ added:

"Now Clayton's Case was decided upon the principle that in the absence of any expressed intention to the contrary, or of special circumstances from which such an intention could be implied, the appropriation of drawings out to the payments in as adopted in that case represented what must be presumed to have been the intention of the parties concerned; and so viewed the decision is quite consistent with the like presumption being rebutted or modified in another case in which the circumstances were such as to negative any intention to make such an appropriation of the drawings out to the payments in."

The Lord Justice then summed up the position in the following terms (page 739):

"... the general principle enunciated by the Lords Justices in Pennell v Deffell was based, or ought to be regarded as having been based, upon the like presumption as that acted upon by Sir W Grant in Clayton's Case ; and that such presumption was liable to be rebutted, or its effects modified, by any equities affecting Mr Greenwood, and those claiming through him, unless there was sufficient reason to the contrary. The questions then did arise, did any such equities exist in Pennell v Deffell ? and if so, was there any sufficient reason for not giving effect to them? That an equity might have existed sufficient to very materially modify the application of the general rule that the drawings out should be appropriated in order of date to the payments in, I cannot doubt; ...".

[59]On the basis of this reasoning the majority of the Court of Appeal (Thesiger LJ dissenting) went on to exclude the application of Clayton's Case to the situation in Re Hallett's Estate . It did so because if a person who holds money as a trustee or in a fiduciary character pays it into his bank account and mixes it with his own money and afterwards draws out some from the account for his own purposes, he will be presumed to be acting honestly and drawing his own money from the account in priority to the money which he held as trustee or in a fiduciary character.

[60]This reasoning of the majority in Re Hallett's Estate was favourably commented upon by Lord Macnaghten in The Mecca

[1897] AC 286

[62]In Re Diplock

[1948] 1 Ch 465

"The above result would only follow if Clayton's case applies. It might be suggested that the corollary of treating two claimants on a mixed fund as interested rateably should be that withdrawals out of the fund ought to be attributed rateably to the interests of both claimants. But in the case of an active banking account this would lead to the greatest difficulty and complication in practice and might in many cases raise questions incapable of solution. What then is to be done? In our opinion, the same rule as that applied in Clayton's case should be applied. This is really a rule of convenience based upon so-called presumed intention. It has been applied in the case of two beneficiaries whose trust money has been paid into a mixed banking account from which drawings were subsequently made, and, so far as we know, its application has not been adversely criticised ..."

[63]It was critical to Mr Walker's wider argument that the reasoning of the Court of Appeal in Re Diplock in relation to Dr Barnardo's Home was not binding upon this court. However I have come to the conclusion that the reasoning is binding. Although Lord Greene MR, in a judgment with which the other members of the court agreed, was able to deal with virtually all of the issues before the court in the passages in his judgment which dealt with the claims " In personam ", without reliance on the rule, what Lord Greene said as to the claims "in rem ", which depended on the application of the rule, was a necessary part of the judgment as it was required to resolve the issue as to interest.

[64]The decision in Re Diplock must be considered together with the other judgments to which I have referred. When this is done, short of the House of Lords, it is settled law that the rule in Clayton's Case can be applied to determine the extent to which as between each other, equally innocent claimants are entitled in equity to monies which have been paid into a bank account and then subject to the movements within that account. However, it does not, having regard to the passages from the judgments in the other authorities cited, follow that the rule has always to be applied for this purpose. In a number of different circumstances the rule has not been applied. The rule need only be applied when it is convenient to do so and when its application can be said to do broad justice having regard to the nature of the competing claims. Hallett's case shows that the rule is displaced where its application would unjustly assist the trustee to the disadvantage of the beneficiaries. In Re Diplock , the rule would have been displaced by the trustee subsequently earmarking the beneficiary's funds. It is not applied if this is the intention or presumed intention of the beneficiaries. The rule is sensibly not applied when the cost of applying it is likely to exhaust the fund available for the beneficiaries.

[65]There are other situations where the rule will not be applied. It was not applied in Re British Red Cross Balkan Fund

[1914] 2 Ch 419

"It is a mere rule of evidence and not an irreversible rule of law and the circumstances of any particular case may or may not afford a ground for inferring that the transactions of the parties were not intended to come under the general rule. In the present case the rule is clearly inapplicable."

[67]I note however that Peter Gibson J did not find this case convincing and regarded it as distinguishable from the present case because in this case he was "concerned with the operation of a bank account into which investors' monies, paid to BCI by each investor for his own separate purposes, were paid by BCI". However, the British Red Cross Balkan Fund decision was applied by Cohen J in Re Hobourn Aero Components Limited's Distress Fund

[1946] Ch 86

[1903] 2 Ch 356

[69]Then there is Eastern Capital Futures Limited

(1988) 5 BCLC 223

"Were it necessary to do so, I would conclude that the rule in Clayton's Case was inapplicable to the facts of this case."

However, Morritt J also decided that because it was impossible to attribute the benefit of any particular futures contract to any particular client Clayton's Case was not applicable because:

"Obviously the court does not apply a rule which leads to substantial expense but to nowhere else. There is no suggestion that any client or class of client is more or less innocent than any other, thus the equities are equal between all clients and they are entitled to the funds pari passu , c.f. Sinclair v Brougham & Anr [1914] AC 398 ."

[71]In Norton Warburg Investment Management Limited v Gibbons & Others (31st July 1981) (unreported) of which we have a transcript, my Lord, Dillon J, as he then was, did not apply the rule in Clayton's Case in respect of transfers from one bank account to another bank account when the object of the transfer was to earn additional interest in respect of the credit balance in the account from which the monies were transferred. He took the same view with regard to the interest earned in the high interest account. He took this view because the transfers "were never intended as investments of particular investors' money, nor was it intended the interest on any deposits should belong to particular investors only". Dillon J found support for his approach in The Mecca

[1897] AC 286

[72]However, with the exception of the short-term transfers which were made in order to earn interest, Dillon J, in Norton Warburg , a case which has some similarity on the facts with this case, otherwise applied the rule in Clayton's Case with full vigour. However there are distinctions between this case and Norton Warburg . In this case the accounts with which we are concerned during the relevant period were never overdrawn. In Norton Warburg there were periods when this happened. An overdrawn account complicates the situation. When the account is overdrawn investors, who are seeking to establish a claim by tracing, have to accept that their claims have been exhausted. Unless the investors can trace from the account into some other assets there is no fund left to be shared between these investors. In this case the existence of the trust fund is not in dispute. The court is solely concerned with the division of the fund. In addition from the only limited material that is available in the report of the case, it does appear that in the Norton Warburg , the company, while misappropriating money from time to time, at other times conducted the business in the manner in which the investors in that company intended. Accordingly in the Norton Warburg situation it would be more difficult to say that all the investors had been subjected to a "common misfortune" as a result of the sort of continuing scheme of misappropriation as occurred here.

[73]A theme running through many of the authorities is that the rule is inapplicable because of the presumed intention of the parties to the account in which the monies were intermingled. Mr Walker submits that a similar intention making the rule inapplicable can be established on the facts of this case. He accepts that the position is not as clear as it would be in situations where the clients were investing in a unit trust (where counsel on both sides agreed the rule would be inapplicable) but none the less he contends that it was clear that this was a situation where there was a collective investment scheme whose participators intended that their money should be mixed together and invested in or through a single pool. The judge did not accept that this was the situation. There were various documents which the investors signed, each of which provided some support for Mr Walker's argument. However, there are other features to which Mr Hart could draw attention which pointed in the other direction. With some hesitation I have come to the conclusion that while it is difficult on the documentation to decide whether the investments were to be made subject to a collective investment scheme or not the better view is that they were. If this interpretation of the documentation is correct then the fact that the fund held investments which were part of a collective investment scheme would exclude the rule.

[74]However, on the facts of this case I would not apply the rule even if the documents indicated that BCI was under an obligation to create separate funds for each investor. In default of this obligation, as part of the continuous misapplication of investors' monies (with the exception of a small quantity of gilts purchased to give verisimilitude to its activities) BCI did not create separate funds but a pool into which the investors' monies were collected. This pool is a fund into which the investors are entitled to trace. However it is a pool, the creation of which, they would not have contemplated. In these circumstances the court has to presume what would have been the intention of the investors had they contemplated the creation of this pool. So far as that intention is concerned I have no doubt that it is correct to presume that the investors would have intended that what could be salvaged, as a result of the "common misfortune" they had suffered, should be dealt with in accordance with the third solution and not in accordance with the rule. It can be presumed that they would not want to subject what was left of the pool to the vagaries of chance which would follow from the application of the first in, first out principle. I appreciate this means I have taken into account the misconduct of BCI in determining the rights inter se of the investors but I see no reason to ignore what has actually happened to the funds when in the hands of BCI. If BCI purchased other assets from the pool the new assets would be new funds on which the investors would have claims. The rule was not applied in Re Hallett's Estate and Re Oatway because of the activities of the trustees. Here what excludes the rule therefore is:(a) the pooling of the investments of a vast number of investors by BCI for its own purposes;

(b) the fact this would not be contemplated by the investors when they made their investment;

(c) the fact that all the monies invested have been misapplied, at lest to some extent, when part of the pool because the withdrawals from the pool continued from the pool after the last investment was credited;

(d) what happened to the investments after they were credited to the pool cannot as a result of investigations which are practical be said to be affected by the date on which they were credited.

[75]There remains an argument of Mr Hart with which I should deal. Mr Hart emphasised the theoretical position of an investor who advanced a sum of money just prior to the account of BCI being frozen. In that situation he contended correctly, that in the normal way an investor must be able to trace the whole of his investment into the balance of the account; unless the investor intends his investment to be treated in the way that funds invested in a unit trust are treated (which he argues is not the position here). Mr Hart submitted that it followed that the investor must be entitled to the whole of the sum in the account which can be identified if, since the investment, there has been no movement in the account. However, as Mr Hart accepts, there is in this case no investor who is precisely in that position. If there was, I accept that the investor's situation would require special consideration. Mr Hart also submits that the position must be, proportionately, the same where the sums drawn out of the account after the last payment in of the monies of the last of the investors are less than the sum deposited by the investor. Mr Hart contends that at least the difference between the balance of the sum invested after deducting the sum withdrawn must be recoverable in full. I do not agree. The balance of the investment has by then become part of the pool and has to be treated (as it would have been by BCI) in the same way as the other funds within the pool. When this happened, there is no reason why the principle of equality is equity should not be applied. In order to obtain preference over the ordinary creditors, the investor has to rely on equity to trace his monies into the account. Where the circumstances, convenience and justice so dictate, once the monies are in the pool equity can require them to be treated as being subject to the other investors' equitable claims on the fund. There is nothing wrong in principle in treating the quantum of the latest investor's claim as either being reduced pro rata by the earlier investors' claims or enhanced by the value of other assets, purchased earlier from the monies in the pool, into which it is possible to trace.

[76]For the reasons I have expressed, the approach, in summary, which I would adopt to resolving the issues raised by this appeal are as follows: 1. While the rule in Clayton's Case is prima facie available to determine the interests of investors in a fund into which their investments have been paid, the use of the rule is a matter of convenience and if its application in particular circumstances would be impracticable or result in injustice between the investors it will not be applied if there is a preferable alternative. 2. Here the rule will not be applied because this would be contrary to either the express or inferred or presumed intention of the investors. If the investments were required by the terms of the investment contract to be paid into a common pool this indicates that the investors did not intend to apply the rule. If the investments were intended to be separately invested, as a result of the investments being collectively misapplied by BCI a common pool of the investments was created. Because of their shared misfortune, the investors will be presumed to have intended the rule not to apply. 3. As the rule is inapplicable the approach which should be adopted by the court depends on which of the possible alternative solutions is the most satisfactory in the circumstances. If the North American solution is practical this would probably have advantages over the pari passu solution. However the complications of applying the North American solution in this case make the third solution the most satisfactory. 5. It must however be remembered that any solution depends on the ability to trace and if the fund had been exhausted (ie. the account became overdrawn) the investors whose monies were in the fund prior to the fund being exhausted will not be able to claim against monies which were subsequently paid into the fund. Their claims will be limited to following, if this is possible, any of the monies paid out of the fund into other assets before it was exhausted.

[77]For these reasons I would allow the appeal and substitute the orders proposed by Dillon LJ.

Cited in 14 later judgments

and 5 more of the most senior