Allanfield Property Insurance Services Ltd ("Apis") & Ors v Aviva Insurance Ltd & Anor [2015] EWHC 3721 (Ch)

Cases Nos: 9707 of 2012 and 191 of 2013

[2015] EWHC 3721 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

IN THE MATTER OF ALLANFIELD PROPERTY INSURANCE SERVICES LIMITED (IN ADMINISTRATION)

AND IN THE MATTER OF INDUSTRIAL & COMMERCIAL PROPERTY INSURANCE CONSULTANTS LIMITED (IN ADMINISTRATION)

AND IN THE MATTER OF THE INSOLVENCY ACT 1986

Venue Royal Courts of Justice, Rolls Building, Fetter Lane, London, EC41 1NL

Date 17 December 2015

Before

HIS HONOUR JUDGE KEYSER Q.C.

sitting as a Judge of the High Court

Between

(1) ALLANFIELD PROPERTY INSURANCE SERVICES LIMITED (in administration) (“APIS”)Applicants

(2) INDUSTRIAL & COMMERCIAL PROPERTY INSURANCE CONSULTANTS LIMITED (in administration) (“ICP”) (as trustee of a trust of client money under Chapter 5 of the Client Asset Sourcebook within the FCA Handbook)Applicant

(3) JASON DANIEL BAKER andApplicant

(4) PHILIP LEWIS ARMSTRONGApplicant

(1) AVIVA INSURANCE LIMITEDRespondents

(2) AXA INSURANCE UK PLCRespondent

Thomas Munby (instructed by Gowlings (UK) LLP) for Applicants

Simon Davenport QC and Aidan Casey (instructed by Isadore Goldman Ltd) for Aviva

Phillip Gale (instructed by DAC Beachcroft LLP) for AXA

Hearing Hearing dates: 10, 11 and 12 November 2015

Judgment

His Honour Judge Keyser Q.C. :

Introduction

[1]Allanfield Property Insurance Services Limited (“APIS”) and Industrial & Commercial Property Insurance Consultants Limited (“ICP”) formerly operated in common ownership as insurance intermediaries regulated by the Financial Services Authority (“FSA”). On 27 December 2012 APIS went into administration, and on 16 January 2013 ICP went into administration. Mr Baker and Mr Armstrong (“the administrators”) are the joint administrators both of APIS and of ICP, having been appointed by the directors under the provisions of paragraph 22(2) of Schedule B1 to the Insolvency Act 1986.

[2]When they entered into administration, both APIS and ICP, though heavily insolvent, had significant funds in bank accounts designated as client accounts: approximately £760,000 in the case of APIS and £515,000 in the case of ICP. In broad terms, the moneys in the client accounts represent insurance premiums that had been received from customers and not yet paid on to insurers or other insurance intermediaries for the purpose of effecting insurance. Those who might have claims to an entitlement to moneys in the client accounts fall into three general categories: customers; insurers or insurance intermediaries; and the general body of unsecured creditors.

[3]The administrators consider (rightly, in my judgment) that the accounts are subject to the statutory trust regime in Chapter 5 of the Client Assets Sourcebook (“CASS 5”) in the Financial Conduct Authority (“FCA”) Handbook. (The FCA replaced the FSA shortly after the companies had gone into administration. Nothing turns on that.) The administrators also take the view that, in circumstances where neither company kept proper records of the entitlement to the moneys in its client accounts, any attempt to ascertain with certainty who is entitled to the funds would probably consume most if not all of the moneys in issue. By these two applications, issued on 16 January 2015 in materially identical terms for each company, the administrators seek directions for the distribution of the moneys in the client accounts, whether in accordance with a scheme that they propose for consideration or in any other manner the Court considers appropriate.

[4]On 10 March 2015 Mr Deputy Registrar Frith gave directions in the applications. He ordered that the application notices be deemed to incorporate Part 8 claim forms, in order to comply with the requirement in CPR r. 64.3 that a claim relating to the execution of a trust be made by that procedure, and that the applications proceed and be heard together. He joined Aviva Insurance Limited (“Aviva”) as a respondent to both applications and gave directions to enable other interested persons to participate in the proceedings or to apply to be joined as respondents. Pursuant to those directions, on 28 May 2015 AXA Insurance UK Plc (“AXA”), which like Aviva claims to be beneficially interested in the APIS client accounts, gave notice of its desire to participate in these proceedings. At the hearing of the applications I indicated that I would join AXA as a respondent to the application in Case No. 9707 of 2012.

[5]Aviva and AXA are examples, though not strictly representatives, of insurers who claim to be entitled to moneys in the APIS client account; they are the only such claimants who have sought to participate in these proceedings. No customers of the companies have sought to participate in the proceedings; indeed, only three have so far made claims to entitlement. Of the general body of creditors, only Coutts & Co has made representations, in the form of a Position Statement. The FCA has been kept informed of the progress of the proceedings but has not played any part in them.

[6]At the hearing, Mr Munby for the administrators was careful to draw attention to the potential implications of possible and proposed courses of action on persons who were not represented on the applications. Mr Davenport QC and Mr Casey for Aviva, while generally supportive of the course proposed by the administrators, made submissions on particular matters, including the question of the incidence of costs. Mr Gale for AXA attended on the second day of the hearing in order to make submissions on one particular issue. I am grateful to them all for their assistance. In view of the nature of the applications, it is only right that I should express special thanks to Mr Munby for the skill and care with which he expounded to me both the factual background and the legal framework for the issues that arose for consideration.

[7]In the remainder of this judgment, I shall proceed as follows. First, I shall explain the legislative and regulatory framework in which the client accounts fall to be considered. Then I shall set out the facts to the extent that it is necessary to do so. Then I shall give an overview of the issues. Then I shall consider briefly the Court’s jurisdiction to deal with the issues and to give directions to the administrators. Finally I shall turn to consider the specific issues and state my conclusions on them.

The legal framework

[8]Part X of the Financial Services and Markets Act 2000 (“FSMA”) conferred on the FSA powers to make rules applying to “authorised persons” under FSMA and to give guidance with respect to the operation of any such rules. Sections 138 and 139 as originally enacted (which is their relevant form for present purposes) provided in part as follows: Section 138 “(1) The Authority may make such rules applying to authorised persons—(a) with respect to the carrying on by them of regulated activities, or (b) with respect to the carrying on by them of activities which are not regulated activities, as appear to it to be necessary or expedient for the purpose of protecting the interests of consumers.” “(7) ‘Consumers’ means persons—(a) who use, have used, or are or may be contemplating using, any of the services provided by (i) authorised persons in carrying on regulated activities ...” Section 139 “(1) Rules relating to the handling of money held by an authorised person in specified circumstances (‘clients’ money’) may—(a) make provision which results in that clients’ money being held on trust in accordance with the rules; (b) treat two or more accounts as a single account for specified purposes (which may include the distribution of money held in the accounts); (c) authorise the retention by the authorised person of interest accruing on the clients’ money; and (d) make provision as to the distribution of such interest which is not to be retained by him.”

[9]Since wide-ranging amendment of FSMA in April 2013, corresponding provisions in respect of the rule-making powers of the FCA are contained in sections 137A and 137B in Part IXA.

[10]The Client Assets Sourcebook (“CASS”) was issued as part of the FSA Handbook (now the FCA Handbook). CASS 5, entitled “Client money: insurance mediation activity”, was made pursuant to the powers in Part X of FSMA, principally in order to give effect in UK law to requirements of European Parliament and Council Directive 2002/92/EC on Insurance Mediation (“the Insurance Mediation Directive”). For present purposes it suffices to refer to selected passages from the Recitals and Articles of the Insurance Mediation Directive. The Recitals contain the following provisions:

“(1) Insurance and reinsurance intermediaries play a central role in the distribution of insurance and reinsurance products in the Community.” “(8) The coordination of national provisions on professional requirements and registration of persons taking up and pursuing the activity of insurance mediation can therefore contribute both to the completion of the single market for financial services and to the enhancement of customer protection in this field.” “(18) It is essential for the customer to know whether he is dealing with an intermediary who is advising him on products from a broad range of insurance undertakings or on products provided by a specific number of insurance undertakings.”

Article 1 defines “insurance mediation” as “the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim”; and “insurance intermediary” as “any natural or legal person who, for remuneration, takes up or pursues reinsurance mediation”. “Customer” is not defined but clearly refers to the person who is looking to obtain insurance. Article 4(4) provides:

“Member States shall take all necessary measures to protect customers against the inability of the insurance intermediary to transfer the premium to the insurance undertaking or to transfer the amount of claim or return premium to the insured. Such measures shall take any one or more of the following forms: (a) provisions laid down by law or contract whereby monies paid by the customer to the intermediary are treated as having been paid to the undertaking, whereas monies paid by the undertaking to the intermediary are not treated as having been paid to the customer until the customer actually receives them; (b) a requirement for insurance intermediaries to have financial capacity amounting, on a permanent basis, to 4% of the sum of annual premiums received, subject to a minimum of EUR 15,000; (c) a requirement that customers’ monies shall be transferred via strictly segregated client accounts and that these accounts shall not be used to reimburse other creditors in the event of bankruptcy; (d) a requirement that a guarantee fund be set up.”

The measures used in CASS 5 for giving effect to Article 4(4) were forms (a) (risk transfer) and (c) (trust).

[11]Insofar as the purpose of CASS 5 is to give effect to the Insurance Mediation Directive, its interpretation is in principle subject to a two-stage process. First, it is necessary to interpret the Insurance Mediation Directive. For the purposes of this case, no particular issue arises in that regard, at least if the basic meaning of “customer” is obvious, as I think it is. Second, the provisions of CASS 5 are subject to a purposive interpretation as explained by Briggs J in Re Lehman Brothers International (Europe) (No. 2)

[2009] EWHC 3228 (Ch)

[2010] 2 BCLC 301

, in guidance approved by the Supreme Court: “57. At the second stage, the relevant domestic legislation must be interpreted in accordance with the following principles:(i) it is not constrained by conventional rules of construction;

(ii) it does not require ambiguity in the legislative language;

(iii) it is not an exercise in semantics or linguistics;

(iv) it permits departure from the strict and literal application of the words which the legislature has elected to use;

(v) it permits the implication of words necessary to comply with the Community law obligations; and

(vi) the precise form of the words to be implied does not matter. See Vodafone 2 v. HMRC

[2009] EWCA Civ 446

, at paragraph 37. 58. Nonetheless, the breadth of the obligation to construe in accordance with Community law obligations is constrained by the following requirements: (a) The ascertained meaning should ‘go with the grain of the legislation’ and be ‘compatible with the underlying thrust of the legislation being construed’. It should not be inconsistent with a fundamental or cardinal feature of the legislation since this would cross the boundary between interpretation and amendment. (b) The exercise of the interpretative obligation cannot require the court to make decisions for which it is not equipped, or give rise to important practical repercussions which the court is not equipped to evaluate. See Vodafone 2 (supra) at paragraph 38.” (i) it is not constrained by conventional rules of construction; (ii) it does not require ambiguity in the legislative language; (iii) it is not an exercise in semantics or linguistics; (iv) it permits departure from the strict and literal application of the words which the legislature has elected to use; (v) it permits the implication of words necessary to comply with the Community law obligations; and (vi) the precise form of the words to be implied does not matter. (a) The ascertained meaning should ‘go with the grain of the legislation’ and be ‘compatible with the underlying thrust of the legislation being construed’. It should not be inconsistent with a fundamental or cardinal feature of the legislation since this would cross the boundary between interpretation and amendment. (b) The exercise of the interpretative obligation cannot require the court to make decisions for which it is not equipped, or give rise to important practical repercussions which the court is not equipped to evaluate.

[12]The Handbook itself requires that each of its provisions be interpreted in the light of its purpose: GEN 2.2.1 R.

[13]In keeping with the format of the Handbook, CASS 5 comprises two kinds of provision. First, there are rules, made under the statutory rule-making powers and marked by “R” after the provision number. Second, there is guidance, made under the statutory power to give guidance as to the rules and marked by “G” after the provision number. Guidance provides a useful but not definitive aid to the interpretation of the rules.

[14]CASS 5 has undergone various amendments; I shall refer to the text as it stood when the companies went into administration. In the Lehman Brothers litigation, in the context of issues arising under broadly corresponding provisions in CASS 7, that was accepted as being the relevant date.

[15]CASS 5.1 is headed “Application”. CASS 5.1.1 R provides that, subject to certain exceptions that I need not set out, CASS 5.1 to CASS 5.6 apply to a firm that receives or holds money in the course of or in connection with its insurance mediation activity. The glossary to the Handbook defines “firm” as an authorised person under FSMA; and it brings within the scope of “insurance mediation activity” several regulated activities carried on in relation to insurance contracts: dealing in insurance contracts as agent; arranging deals in insurance contracts; making arrangements with a view to transactions in insurance contracts; assisting in the administration and performance of insurance contracts; advising on insurance contracts; agreeing to carry on any of those regulated activities. In broad terms, therefore, CASS 5.1 to 5.6 apply to authorised persons who, as insurance brokers, receive premiums from customers for onward transmission to insurers or other insurance intermediaries or receive moneys from insurers by way of returns of premiums or settlement of claims for onward transmission to customers.

[16]The following further provisions of CASS 5.1 are relevant:

“CASS 5.1.5 R Subject to CASS 5.1.5A R money is not client money when: (1) it becomes properly due and payable to the firm: (a) for its own account; or (b) in its capacity as agent of an insurance undertaking where the firm acts in accordance with CASS 5.2; or (2) it is otherwise received by the firm pursuant to an arrangement made between an insurance undertaking and another person (other than a firm) by which that other person has authority to underwrite risks, settle claims or handle refunds of premiums on behalf of that insurance undertaking outside the United Kingdom and where the money relates to that business. CASS 5.1.5A R CASS 5.1.5 R (1)(b) and CASS 5.1.5 R (2) do not apply, and hence money is client money, in any case where: (1) in relation to an activity specified in CASS 5.2.3 R (1) (a) to CASS 5.2.3 R (1) (c), the insurance undertaking has agreed that the firm may treat money which it receives and holds as agent of the undertaking, as client money and in accordance with the provisions of CASS 5.3 to CASS 5.6; and (2) the agreement in (1) is in writing and adequate to show that the insurance undertaking consents to its interests under the trusts (or in Scotland agency) in CASS 5.3.2 R or CASS 5.4.7 R being subordinated to the interests of the firm’s other clients. CASS 5.1.6 R Except where a firm and an insurance undertaking have (in accordance with CASS 5.1.5A R) agreed otherwise, for the purposes of CASS 5.1 to CASS 5.6 an insurance undertaking (when acting as such) with whom a firm conducts insurance mediation activity is not to be treated as a client of the firm. CASS 5.1.7 G (1) Principle 10 (Clients’ assets) requires a firm to arrange adequate protection for clients’ assets when the firm is responsible for them. An essential part of that protection is the proper accounting and handling of client money. The rules in CASS 5.1 to CASS 5.6 also give effect to the requirement in article 4.4 of the Insurance Mediation Directive that all necessary measures should be taken to protect clients against the inability of an insurance intermediary to transfer premiums to an insurance undertaking or to transfer the proceeds of a claim or premium refund to the insured. (2) There are two particular approaches which firms can adopt which reflect options given in article 4.4. The first is to provide by law or contract for a transfer of risk from the insurance intermediary to the insurance undertaking (CASS 5.2). The second is that client money is strictly segregated by being transferred to client accounts that cannot be used to reimburse other creditors in the event of the firm’s insolvency (CASS 5.3 and CASS 5.4 provide different means of achieving such segregation). CASS 5.1.5A R permits a firm subject to certain conditions to treat money which it collects as agent of an insurance undertaking as client money; the principle of strict segregation is, however, satisfied because such undertakings must agree to their interests being subordinated to the interests of the firm’s other clients.”

Subject to CASS 5.1.5A R money is not client money when: CASS 5.1.5A R CASS 5.1.6 R

CASS 5.1.7 G

[17]The glossary provides the meaning of certain words and expressions used in these provisions. The following provisions are relevant:• “client” is defined to mean a person to whom a firm provides, intends to provide or has provided a service in the course of carrying on a regulated activity;

• “client money” means “subject to the client money rules, money of any currency which, in the course of carrying on insurance mediation activity, a firm holds on behalf of a client or which a firm treats as client money in accordance with the client money rules”;

• “client money rules” means CASS 5.1 to 5.5;

• “insurance undertaking” may be taken, for present purposes, to refer primarily to an insurer, but its meaning is extended to include, among others, an insurance intermediary who is not acting as agent of a customer.

[18]CASS 5.2, entitled “Holding money as agent of insurance undertaking”, contains the following relevant provisions:

“CASS 5.2.1 G If a firm holds money as agent of an insurance undertaking then the firm’s clients (who are not insurance undertakings) will be adequately protected to the extent that the premiums which it receives are treated as being received by the insurance undertaking when they are received by the agent and claims money and premium refunds will only be treated as received by the client when they are actually paid over. The rules in CASS 5.2 make provision for agency agreements between firms and insurance undertakings to contain terms which make clear when money should be held by a firm as agent of an undertaking. Firms should refer to CASS 5.1.5 R to determine the circumstances in which they may treat money held on behalf of insurance undertakings as client money. CASS 5.2.2 G (1) Agency agreements between insurance intermediaries and insurance undertakings may be of a general kind and facilitate the introduction of business to the insurance undertaking. Alternatively, an agency agreement may confer on the intermediary contractual authority to commit the insurance undertaking to risk or authority to settle claims or handle premium refunds (often referred to as ‘binding authorities’). CASS 5.2.3 R requires that binding authorities of this kind must provide that the intermediary is to act as the agent of the insurance undertaking for the purpose of receiving and holding premiums (if the intermediary has authority to commit the insurance undertaking to risk), claims monies (if the intermediary has authority to settle claims on behalf of the insurance undertaking) and premium refunds (if the intermediary has authority to make refunds of premium on behalf of the insurance undertaking). Accordingly such money is not, except where a firm and an insurance undertaking have in compliance with CASS 5.1.5A R agreed otherwise, client money for the purposes of CASS 5. (2) Other introductory agency agreements may also, depending on their precise terms, satisfy some or all of the requirements of the type of written agreement described in CASS 5.2.3 R. It is desirable that an intermediary should, before informing its clients (in accordance with CASS 5.2.3 R (3)) that it will receive money as agent of an insurance undertaking, agree the terms of that notification with the relevant insurance undertakings. CASS 5.2.3 R (1) A firm must not agree to: (a) deal in investments as agent for an insurance undertaking in connection with insurance mediation; or (b) act as agent for an insurance undertaking for the purpose of settling claims or handling premium refunds; or (c) otherwise receive money as agent of an insurance undertaking; unless: (d) it has entered into a written agreement with the insurance undertaking to that effect; and (e) it is satisfied on reasonable grounds that the terms of the policies issued by the insurance undertaking to the firm's clients are likely to be compatible with such an agreement; and (f) (i) (in the case of (a)) the agreement required by (d) expressly provides for the firm to act as agent of the insurance undertaking for the purpose of receiving premiums from the firm's clients; and (ii) (in the case of (b)) the agreement required by (d) expressly provides for the firm to act as agent of the insurance undertaking for the purpose of receiving and holding claims money (or, as the case may be, premium refunds) prior to transmission to the client making the claim (or, as the case may be, entitled to the premium refund) in question. (2) A firm must retain a copy of any agreement it enters pursuant to (1) for a period of at least six years from the date on which it is terminated. (3) Where a firm holds, or is to hold, money as agent for an insurance undertaking it must ensure that it informs those of its clients which are not insurance undertakings and whose transactions may be affected by the arrangement (whether in its terms of business, client agreements or otherwise in writing) that it will hold their money as agent of the insurance undertaking and if necessary the extent of such agency and whether it includes all items of client money or is restricted, for example, to the receipt of premiums.”

CASS 5.2.2 G CASS 5.2.3 R (a) deal in investments as agent for an insurance undertaking in connection with insurance mediation; or (b) act as agent for an insurance undertaking for the purpose of settling claims or handling premium refunds; or (c) otherwise receive money as agent of an insurance undertaking; unless: (d) it has entered into a written agreement with the insurance undertaking to that effect; and (e) it is satisfied on reasonable grounds that the terms of the policies issued by the insurance undertaking to the firm's clients are likely to be compatible with such an agreement; and (f) (i) (in the case of (a)) the agreement required by (d) expressly provides for the firm to act as agent of the insurance undertaking for the purpose of receiving premiums from the firm's clients; and (ii) (in the case of (b)) the agreement required by (d) expressly provides for the firm to act as agent of the insurance undertaking for the purpose of receiving and holding claims money (or, as the case may be, premium refunds) prior to transmission to the client making the claim (or, as the case may be, entitled to the premium refund) in question. (ii) (in the case of (b)) the agreement required by (d) expressly provides for the firm to act as agent of the insurance undertaking for the purpose of receiving and holding claims money (or, as the case may be, premium refunds) prior to transmission to the client making the claim (or, as the case may be, entitled to the premium refund) in question.

CASS 5.2.3 R

[19]CASS 5.2 provides for customer protection in accordance with method (a) in Article 4(4) of the Directive. In accordance with the detailed requirements of CASS 5.2.3 R, an insurance intermediary may receive from customers insurance premiums as agent for the insurers. The consequence of this is that the customer’s payment obligations towards the insurer are satisfied upon payment to the intermediary. The risk that the intermediary will fail to transmit the moneys to the insurer is thereby transferred to the insurer; the customer is no longer concerned with what happens to the moneys.

[20]The next two sections of CASS 5 provide for alternative methods of protection of client money in accordance with method (c) in Article 4(4) of the Directive. CASS 5.3 is entitled “Statutory trust” and CASS 5.4 is entitled “Non-statutory client money trust”. It is unnecessary to consider CASS 5.4 in this judgment, but I shall set out CASS 5.3 in full. “CASS5.3.1 G Section 139(1) of [FSMA] provides that rules may make provision which results in client money being held by a firm on trust (England and Wales and Northern Ireland) or as agent (Scotland only). CASS

5.3.2 R creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. In the event of failure of the firm, costs relating to the distribution of client money may have to be borne by the trust. CASS 5.3.2 R A firm (other than a firm acting in accordance with CASS 5.4) receives and holds client money as trustee (or in Scotland as agent) on the following terms:

(1) for the purposes of and on the terms of CASS 5.3, CASS 5.5 and the client money (insurance) distribution rules [i.e. the rules in CASS 5.6];

(2) subject to (4), for the clients (other than clients which are insurance undertakings when acting as such) for whom that money is held, according to their respective interests in it;

(3) after all valid claims in (2) have been met, for clients which are insurance undertakings according to their respective interests in it;

(4) on the failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2) and (3); and

(5) after all valid claims and costs under (2) to (4) have been met, for the firm itself. CASS

5.3.3 G (1) A firm which holds client money can discharge its obligation to ensure adequate protection for its clients in respect of such money by complying with CASS 5.3 which provides for such money to be held by the firm on the terms of a trust imposed by the rules. (2) The trust imposed by CASS 5.3 is limited to a trust in respect of client money which a firm receives and holds. The consequential and supplementary requirements in CASS 5.5 are designed to secure the proper segregation and maintenance of adequate client money balances. In particular, CASS 5.5 does not permit a firm to use client money balances to provide credit for clients (or potential clients) such that, for example, their premium obligations may be met in advance of the premium being remitted to the firm. A firm wishing to provide credit for clients may however do so out of its own funds.” CASS 5.3.2 R

CASS 5.3.3 G

[21]Accordingly, except in cases where it acts under the provisions relating to non-statutory trusts in CASS 5.4, a firm holds client money on trust in accordance with CASS 5.3.2 R. That trust covers not only money held for customers but also money held for insurers; in this regard the provisions extend beyond the scope and purpose of the Directive. However, the order of distribution in the case of failure of the firm is in broad terms: first, the costs “properly attributable to the distribution of client money”; second, to the customers; third, to the insurers; fourth, to the general assets of the firm. What that means, of course, is that insurers with a claim to be entitled in the statutory trusts have an interest in maximising the size of the statutory trusts and minimising the claims of customers, and that general creditors of the companies have an interest in minimising the size of the statutory trusts.

[22]CASS 5.5, entitled “Segregation and the operation of client money accounts”, deals at considerable length with the manner in which client money is to be held. I shall set out only the most relevant provisions. “CASS5.5.1 R Unless otherwise stated each of the provisions in CASS 5.5 applies to firms which are acting in accordance with CASS 5.3 (Statutory trust) or CASS 5.4 (Non-statutory trust). CASS

5.5.2 G One purpose of CASS 5.5 is to ensure that, unless otherwise permitted, client money is kept separate from the firm’s own money. Segregation, in the event of a firm’s failure, is important for the effective operation of the trust that is created to protect client money. The aim is to clarify the difference between client money and general creditors’ entitlements in the event of the failure of the firm. CASS

5.5.3 R A firm must, except to the extent permitted by CASS 5.5, hold client money separate from the firm’s money. CASS

5.5.4 R If a firm is liable to pay money to a client, it must as soon as possible, and no later than one business day after the money is due and payable:

(1) pay it into a client bank account, in accordance with CASS

5.5.5 R; or

(2) pay it to, or to the order of, the client. CASS 5.5.5 R A firm must segregate client money by either: (1) paying it as soon as is practicable into a client bank account; or (2) paying it out in accordance with CASS 5.5.80 R. CASS

5.5.6 G The FSA expects that in most circumstances it will be practicable for a firm to pay client money into a client bank account by not later than the next business day after receipt. CASS

5.5.7 G Where an insurance transaction involves more than one firm acting in a chain such that for example money is transferred from a ‘producing’ broker who has received client money from a consumer to an intermediate broker and thereafter to an insurance undertaking, each broker firm will owe obligations to its immediate client to segregate client money which it receives (in this example the producing broker in relation to the consumer and the intermediate broker in relation to the producing broker). A firm which allows a third party broker to hold or control client money will not thereby be relieved of its fiduciary obligations (see CASS 5.5.34 R). CASS 5.5.9 R A firm must not hold money other than client money in a client bank account unless it is: (1) a minimum sum required to open the account, or to keep it open; or (2) money temporarily in the account in accordance with CASS 5.5.16 R (Withdrawal of commission and mixed remittance); or

(3) interest credited to the account which exceeds the amount due to clients as interest and has not yet been withdrawn by the firm. CASS 5.5.10 R If it is prudent to do so to ensure that client money is protected (and provided that doing so would otherwise be in accordance with CASS 5.5.63 R (1)(b)(ii)), a firm may pay into, or maintain in, a client bank account money of its own, and that money will then become client money for the purposes of CASS 5 and the client money (insurance) distribution rules. CASS 5.5.16 R (1) A firm may draw down commission from the client bank account if: (a) it has received the premium from the client (or from a third party premium finance provider on the client’s behalf); and (b) this is consistent with the firm’s terms of business which it maintains with the relevant client and the insurance undertaking to whom the premium will become payable; and the firm may draw down commission before payment of the premium to the insurance undertaking, provided that the conditions in (a) and (b) are satisfied. (2) If a firm receives a mixed remittance (that is part client money and part other money), it must: (a) pay the full sum into a client bank account in accordance with CASS 5.5.5 R; and (b) pay the money that is not client money out of the client bank account as soon as reasonably practicable and in any event by not later than twenty-five business days after the day on which the remittance is cleared (or, if earlier, when the firm performs the client money calculation in accordance with CASS 5.5.63 R (1)). CASS 5.5.17 G (1) As soon as commission becomes due to the firm (in accordance with CASS 5.5.16 R (1)) it must be treated as a remittance which must be withdrawn in accordance with CASS 5.5.16 R (2). The procedure required by CASS 5.5.16 R will also apply where money is due and payable to the firm in respect of fees due from clients (whether to the firm or other professionals). (2) Firms are reminded that money received in accordance with CASS 5.2 must not, except where a firm and an insurance undertaking have (in accordance with CASS 5.1.5A R) agreed otherwise, be kept in a client bank account. Client money received from a third-party premium finance provider should, however, be segregated into a client bank account. (3) Where a client makes payments of premium to a firm in instalments, CASS 5.5.16 R (1) applies in relation to each instalment.

(4) If a firm is unable to match a remittance with a transaction it may be unable to immediately determine whether the payment comprises a mixed remittance or is client money. In such cases the remittance should be treated as client money while the firm takes steps to match the remittance to a transaction as soon as possible. CASS 5.5.30 R (1) In relation to consumers, a firm must, subject to (2), take reasonable steps to ensure that its terms of business or other client agreements adequately explain, and where necessary obtain a client’s informed consent to, the treatment of interest and, if applicable, investment returns, derived from its holding of client money and any segregated designated investments. (2) In respect of interest earned on client bank accounts, (1) does not apply if a firm has reasonable ground to be satisfied that in relation to insurance mediation activities carried on with or for a consumer the amount of interest earned will be not more than £20 per transaction. CASS 5.5.62 G (1) In order that a firm may check that it has sufficient money segregated in its client bank account (and held by third parties) to meet its obligations to clients it is required periodically to calculate the amount which should be segregated (the client money requirement) and to compare this with the amount shown as its client money resource. This calculation is, in the first instance, based upon the firm’s accounting records and is followed by a reconciliation with its banking records. A firm is required to make a payment into the client bank account if there is a shortfall or to remove any money which is not required to meet the firm's obligations. (2) For the purpose of calculating its client money requirement two alternative calculation methods are permitted, but a firm must use the same method in relation to CASS 5.3 and CASS 5.4. The first refers to individual client cash balances; the second to aggregate amounts of client money recorded on a firm business ledgers. CASS 5.5.63 R (1) A firm must, as often as is necessary to ensure the accuracy of its records and at least at intervals of not more than 25 business days: (a) check whether its client money resource, as determined by CASS 5.5.65 R on the previous business day, was at least equal to the client money requirement, as determined by CASS 5.5.66 R or CASS 5.5.68 R, as at the close of business on that day; and (b) ensure that: (i) any shortfall is paid into a client bank account by the close of business on the day the calculation is performed; or (ii) any excess is withdrawn within the same time period unless CASS 5.5.9 R or CASS 5.5.10 R applies to the extent that the firm is satisfied on reasonable grounds that it is prudent to maintain a positive margin to ensure the calculation in (a) is satisfied having regard to any unreconciled items in its business ledgers as at the date on which the calculations are performed; and (c) include in any calculation of its client money requirement (whether calculated in accordance with CASS 5.5.66 R or CASS 5.5.68 R) any amounts attributable to client money received by its appointed representatives, field representatives or other agents and which, as at the date of calculation, it is required to segregate in accordance with CASS 5.5.19 R. (2) A firm must within ten business days of the calculation in (a) reconcile the balance on each client bank account as recorded by the firm with the balance on that account as set out in the statement or other form of confirmation used by the bank with which that account is held. (3) When any discrepancy arises as a result of the reconciliation carried out in (2), the firm must identify the reason for the discrepancy and correct it as soon as possible, unless the discrepancy arises solely as a result of timing differences between the accounting systems of the party providing the statement or confirmation and those of the firm. (4) While a firm is unable to resolve a difference arising from a reconciliation, and one record or a set of records examined by the firm during its reconciliation indicates that there is a need to have a greater amount of client money than is in fact the case, the firm must assume, until the matter is finally resolved, that the record or set of records is accurate and either pay its own money into a relevant account or make a withdrawal of any excess. CASS 5.5.65 R The client money resource, for the purposes of CASS 5.5.63 R (1)(a), is: (1) the aggregate of the balances on the firm’s client money bank accounts, as at the close of business on the previous business day ... CASS 5.5.66 R A firm’s client money (client balance) requirement is the sum of, for all clients, the individual client balances calculated in accordance with CASS 5.5.67 R but excluding any individual balances which are negative (that is, uncleared client funds). CASS 5.5.67 R The individual client balance for each client must be calculated as follows: (1) the amount paid by a client to the firm (to include all premiums); plus (2) the amount due to the client (to include all claims and premium refunds); plus (3) the amount of any interest or investment returns due to the client; (4) less the amount paid to insurance undertakings for the benefit of the client (to include all premiums and commission due to itself) (i.e. commissions that are due but have not yet been removed from the client account);

(5) less the amount paid by the firm to the client (to include all claims and premium refunds); and where the individual client balance is found by the sum ((1) + (2) + (3)) - ((4) + (5)). CASS 5.5.79 G The purpose of CASS 5.5.80 R to CASS 5.5.83 R is to set out those situations in which a firm will have fulfilled its contractual and fiduciary obligations in relation to any client money held for or on behalf of its client, or in relation to the firm’s ability to require repayment of that money from a third party. CASS 5.5.80 R Money ceases to be client money if it is paid: (1) to the client, or a duly authorised representative of the client; or (2) to a third party on the instruction of or with the specific consent of the client, but not if it is transferred to a third party in the course of effecting a transaction, in accordance with CASS 5.5.34 R; or (3) into a bank account of the client (not being an account which is also in the name of the firm); or (4) to the firm itself, when it is due and payable to the firm in accordance with CASS 5.1.5 R (1); or (5) to the firm itself, when it is an excess in the client bank account as set out in CASS 5.5.63 R (1)(b)(ii).” CASS 5.5.2 G CASS 5.5.3 R CASS 5.5.4 R CASS 5.5.5 R A firm must segregate client money by either: CASS 5.5.6 G CASS 5.5.7 G CASS 5.5.9 R CASS 5.5.10 R CASS 5.5.16 R (a) it has received the premium from the client (or from a third party premium finance provider on the client’s behalf); and (b) this is consistent with the firm’s terms of business which it maintains with the relevant client and the insurance undertaking to whom the premium will become payable; (a) pay the full sum into a client bank account in accordance with CASS 5.5.5 R; and (b) pay the money that is not client money out of the client bank account as soon as reasonably practicable and in any event by not later than twenty-five business days after the day on which the remittance is cleared (or, if earlier, when the firm performs the client money calculation in accordance with CASS 5.5.63 R (1)). CASS 5.5.30 R CASS 5.5.62 G CASS 5.5.63 R (a) check whether its client money resource, as determined by CASS 5.5.65 R on the previous business day, was at least equal to the client money requirement, as determined by CASS 5.5.66 R or CASS 5.5.68 R, as at the close of business on that day; and (b) ensure that: (i) any shortfall is paid into a client bank account by the close of business on the day the calculation is performed; or (ii) any excess is withdrawn within the same time period unless CASS 5.5.9 R or CASS 5.5.10 R applies to the extent that the firm is satisfied on reasonable grounds that it is prudent to maintain a positive margin to ensure the calculation in (a) is satisfied having regard to any unreconciled items in its business ledgers as at the date on which the calculations are performed; and (c) include in any calculation of its client money requirement (whether calculated in accordance with CASS 5.5.66 R or CASS 5.5.68 R) any amounts attributable to client money received by its appointed representatives, field representatives or other agents and which, as at the date of calculation, it is required to segregate in accordance with CASS 5.5.19 R. CASS 5.5.65 R The client money resource, for the purposes of CASS 5.5.63 R (1)(a), is: CASS 5.5.66 R CASS 5.5.67 R (1) the amount paid by a client to the firm (to include all premiums); plus (2) the amount due to the client (to include all claims and premium refunds); plus (3) the amount of any interest or investment returns due to the client; (4) less the amount paid to insurance undertakings for the benefit of the client (to include all premiums and commission due to itself) (i.e. commissions that are due but have not yet been removed from the client account); (5) less the amount paid by the firm to the client (to include all claims and premium refunds); CASS 5.5.79 G CASS 5.5.80 R

Money ceases to be client money if it is paid:

[23]The definition in the glossary of “client bank account”, for the purposes of CASS 5, includes a bank account which “(i) holds the money of one or more clients; (ii) is in the name of the firm; (iii) includes in its title an appropriate description to distinguish the money in the account from the firm’s money; and (iv) is a current or a deposit account.” (The expression “client bank account” can also refer to a money market deposition of client money which is identified as being client money. That alternative is not relevant in the present case.)

[24]In summary, therefore, in the interests of “the effective operation of the [statutory or non-statutory] trust that is created to protect client money”, a firm must hold its client money in one or more designated client bank accounts, which must not contain any of the firm’s own money except in strictly confined circumstances. The firm must carry out regular calculations to ensure that its client bank accounts contain sufficient moneys to meet its obligations to its clients in accordance with the client money requirement (in this case the “client balance” basis in CASS 5.5.66 R is relevant; neither company used the alternative “accruals” basis in CASS 5.5.67 R). If there are not sufficient moneys in the accounts, the firm must pay in sufficient moneys to make up the shortfall.

[25]CASS 5.6 is entitled “Client money distribution” and comprises the “client money (insurance) distribution rules”, the purpose of which is stated in CASS 5.6.3 G:

“to facilitate the timely return of client money to a client in the event of the failure of a firm or third party at which the firm holds client money.”

The glossary provides that for these purposes “failure” means “the appointment of a liquidator, receiver or administrator, or trustee in bankruptcy, or any equivalent procedure in any relevant jurisdiction.” The following provisions are relevant. “CASS 5.6.4 G A primary pooling event triggers a notional pooling of all the client money, in every type of client money account, and the obligation to distribute it. CASS 5.6.5 R A primary pooling event occurs: (1) on the failure of the firm; or ... CASS 5.6.7 R If a primary pooling event occurs: (1) client money held in each client money account of the firm is treated as pooled; (2) the firm must distribute that client money in accordance with CASS 5.3.2 R or, as appropriate, CASS 5.4.7 R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 5.5.66 R; and (3) the firm must, as trustee, call in and make demand in respect of any debt due to the firm as trustee, and must liquidate any designated investment, and any letter of credit or guarantee upon which it relies for meeting any shortfall in its client money resource and the proceeds shall be pooled together with other client money as in (1) and distributed in accordance with (2). CASS 5.6.8 G A client’s main claim is for the return of client money held in a client bank account. A client may claim for any shortfall against money held in a firm's own account. For that claim, the client will be an unsecured creditor of the firm. CASS 5.6.9 R Client money received by the firm (including in its capacity as trustee under CASS 5.4 (Non-statutory trust)) after a primary pooling event must not be pooled with client money held in any client money account operated by the firm at the time of the primary pooling event. It must be placed in a client bank account that has been opened after that event and must be handled in accordance with the client money rules, and returned to the relevant client without delay, except to the extent that: (1) it is client money relating to a transaction that has not completed at the time of the primary pooling event; or (2) it is money relating to a client, for whom the client money requirement, calculated in accordance with CASS 5.5.66 R or CASS 5.5.68 R, shows that money is due from the client to the firm including in its capacity as trustee under CASS 5.4 (Non-statutory trust) at the time of the primary pooling event.” CASS 5.6.5 R A primary pooling event occurs: CASS 5.6.7 R If a primary pooling event occurs: CASS 5.6.8 G CASS 5.6.9 R (1) it is client money relating to a transaction that has not completed at the time of the primary pooling event; or (2) it is money relating to a client, for whom the client money requirement, calculated in accordance with CASS 5.5.66 R or CASS 5.5.68 R, shows that money is due from the client to the firm including in its capacity as trustee under CASS 5.4 (Non-statutory trust) at the time of the primary pooling event.”

CASS 5.6.9 R

[26]The expression “client money account” is not defined in the Handbook, though several types of such account are clearly envisaged: cf. CASS 5.6.4 G. In the circumstances of this case it is only necessary to consider client money bank accounts. CASS 5.6.9 R provides for the separate treatment of client money received after a primary pooling event, and for that reason the issues in the present case are concerned only with the client money held by each company on the date when it went into administration.

Summary of the facts

[27]ICP was incorporated on 6 December 1985. It was then called Lee Baron Insurance Consultants Limited. APIS was incorporated on 2 November 2006.

[28]Immediately before 16 August 2011 APIS was a wholly owned subsidiary of Allanfield Group Plc (“AGP”) and ICP was a wholly owned subsidiary of Real Estate Property Brokers Limited (“REPB”). On 16 August 2011 AGP acquired the entire shareholding in REPB and thereby became the ultimate owner of ICP. Thereafter all but one of ICP’s directors were also directors of APIS, and the same two persons, a Mr Field and a Mr Noik, were the directors with day-to-day executive control both of APIS and of ICP. AGP entered administration on 27 December 2012. REPB, which had been a dormant company, was struck off the register of companies and was dissolved on 19 August 2014.

[29]AGP’s acquisition of REPB was financed by a facility of £3,500,000 from Coutts. On 16 August 2011 AGP, APIS and ICP entered into a Composite Guarantee, whereby they guaranteed repayment of the facility on a joint and several basis. Each company also granted a debenture to Coutts to secure its liabilities under the Composite Guarantee. On 8 October 2014 Coutts demanded payment under the Composite Guarantee from each company in the sum of £2,895,417.68 inclusive of interest.

[30]Coutts is the only secured creditor of each company; its floating charges currently secure debts of approximately £3 million. In view of the realisations and the costs of administrations to date, there are at present insufficient funds to enable a distribution to be made to Coutts, which is likely ultimately to suffer a substantial shortfall. Subject in each case to the outcome of the present applications and to possible recoveries from further litigation against third parties, in the case of APIS there are no funds to enable a distribution to preferential or secured creditors or to unsecured creditors by way of a prescribed part under section 176A of the Insolvency Act 1986, and in the case of ICP there are no funds to enable anything more than a very modest distribution to preferential or secured creditors or, by way of a prescribed part, to unsecured creditors.

[31]At all material times, both APIS and ICP were insurance intermediaries, authorised by the FSA to carry on regulated activities for the purposes of FSMA. Both companies carried on their businesses from offices in London and specialised in insurance of real property. In general terms, they would typically receive gross insurance premiums from prospective policyholders (“customers”), retain part of the premium in respect of the fees or commission payable to them or to other intermediaries pursuant to prior arrangements with the insurers, and remit the balance of the premium, including the insurance premium tax, to the insurers or sub-brokers.

[32]However, the ways in which the companies carried on business differed in material respects.

[33]APIS acted conventionally as an insurance broker, in that it dealt directly with customers or their agents and arranged cover directly with the insurers or through intermediate sub-brokers. Importantly, risk transfer was in place in respect of at least the great majority, and possibly all, of premiums received by APIS. This meant that APIS received the gross premium as agent for the insurer, with the result that cover under the relevant insurance policies was incepted when the customers paid the premium to APIS and that, until APIS remitted the balance due to the insurers, it held that balance for the benefit of the insurers and not the customers. Accordingly, by virtue of CASS 5.1.5 R (1)(b) the premiums were not received and held by APIS as client money for the benefit of the customer; however, subject to compliance with CASS 5.1.5A R, APIS would hold the money received as client money for the benefit of the insurer.

[34]By contrast, ICP acted as an intermediary between a broker, which in the great majority of cases was Lockton Companies LLP (“Lockton”), and either the customers or, more usually, the customers’ property agents. None of ICP’s business was on risk-transfer terms. There was one insurance company with which ICP did business directly rather than through Lockton, but that insurance company is not a creditor of ICP or a claimant in respect of the ICP statutory trust pool. This means that for present purposes Lockton’s records reflect what ICP’s records would have shown. As for the customer side of its business, ICP dealt mainly with one or other of two property agents: F&C Reit Property Asset Management plc (“F&C Reit”) and DTZ.

[35]As well as holding their own bank accounts, APIS and ICP each held a number of accounts designated Statutory Trust Client Account (“client accounts”). (Cf. the glossary definition of “client bank account”, above.) All of ICP’s client accounts were held with Coutts. Most of APIS’s client accounts were also held with Coutts, though some were held with another bank. The status of these accounts falls to be considered in connection with Issue 1(a), below. At this stage I record that the evidence adduced on the applications shows that the nature of the companies’ respective businesses was not such as to give rise to an exception to the application of CASS 5, as provided for in CASS 5.1.1 R (2).

[36]The administrators have experienced very considerable difficulties in establishing the entitlements to the moneys in the client accounts. These are described in detail in Mr Baker’s first witness statement, and I shall summarise the position in respect of each company.

[37]APIS did not maintain sufficient records to enable the administrators to ascertain which clients are entitled to share in the APIS statutory trust pool or what are the sizes of their entitlements. Investigations by the administrators have shown that, although the directors caused some form of periodic calculation to be carried out in respect of the amount of commission to which the company was entitled out of the funds in the client accounts, they did not carry out the regular calculations and reconciliations required by CASS 5.5 and have been unable to assist the administrators in quantifying the shortfall of client moneys.

[38]The administrators therefore attempted, in respect of APIS, to collate all available information and perform, to the extent possible, a calculation and reconciliation on the basis of the “client balance” method pursuant to CASS 5.5.67 R. For this purpose they examined the existing records held by APIS, carried out mailshots of those with whom APIS is known to have conducted business, made enquiries of the directors and, at their suggestion, sought the assistance of APIS’ financial controller, who had day-to-day responsibility for the records of the client accounts. These efforts resulted in only modest progress towards a calculation and reconciliation. Therefore in December 2013 the administrators commissioned a review of the APIS client accounts by a firm of forensic accountants. The forensic accountants identified difficulties in the way of a calculation and reconciliation, additional to those already identified by the administrators, and in February 2014 they produced a preliminary report; the tenor of the report and its implications for the administrators are summarised by Mr Baker:

“[I]t was not readily possible to produce a reconciliation of the APIS Client Account. To do so would require a root-and-branch reconciliation. The first step would be to obtain all bank statements in respect of all accounts maintained by APIS since it began trading in (the administrators understand) 2007—which the administrators do not in fact believe would be possible. Moreover, the second step—performing a reconciliation from that point—would, in practical terms, be impossible in the absence of accurate records or any previous reconciliations to work forward from: it would require full cooperation from every insurer (in the case of risk-transfer business) and also every policyholder (in the case of non-risk-transfer business) and every intermediary (in all cases), to provide the information necessary to allocate every payment ever made in and out of the relevant APIS accounts to specific policies since APIS began trading in 2007. Accordingly, whilst it is theoretically possible to carry out a root-and-branch reconciliation of the APIS client account, it is not a practical proposition (even ignoring the cost implications of carrying out such an exercise).”

The work done by the forensic accountants had been paid for by Coutts. (There is a continuing argument as to where the ultimate liability ought to rest.) Coutts refused to fund the further work and the administrators have not felt that it would be justifiable for them to do so.

[39]More recently some additional information has been received from solicitors acting for the companies’ former auditors. The administrators believe that some of the information may possibly enable them to identify some further customers of APIS, who may possibly have claims against the client moneys trust. However, although the information provided by the auditors tends to show that APIS had been making some efforts in the direction of carrying out the required reconciliations and that the auditors had certified compliance with CASS 5, the administrators do not believe that the information provided by the auditors can assist in the preparation of a meaningful calculation and reconciliation of the client accounts. This is dealt with in detail in Mr Baker’s second witness statement, dated 4 September 2015.

[40]The administrators have so far received a total of 18 claims to entitlement to APIS client account moneys. The total value of the claims is approximately £2.1 million, of which approximately £2 million is referable to twelve claims by insurers. Aviva’s claim of £1,228,969 is far the largest. Other substantial claims are for £321,879 by Allianz Insurance plc and, depending on the outcome of Issue 2(f) below, either £357,508 or £123,193 by AXA. Three claims have been intimated by intermediaries and three by policyholders; the latter are doubtfully correctly made against the statutory trust and may rather be proofs of debt against the general assets of the company. Even on the basis of the existing claims, it is clear that there will be a substantial shortfall on the APIS statutory trust pool. Further, the administrators are not confident that all potential claimants—particularly, but not only, policyholders—have submitted claims or even know that they might have claims. One possible explanation for the lack of policyholder claims is that most of APIS’ business was on risk-transfer terms. However, it appears that a small part of the business was not on risk-transfer terms. The fact that only one of four claims received in respect of the ICP client account trust is from a policyholder also casts doubt on risk transfer as an explanation of the lack of customer-claimants, as do certain anomalies in the details of the APIS claims (described by Mr Baker but unnecessary to set out here).

[41]ICP too failed to keep adequate records; in this regard its position is comparable to that of APIS. However, because ICP placed all of its business (to all intents and purposes) with Lockton, it has been possible to compile from Lockton’s records, verified against bank statements and certain other documents, a schedule of all premiums received by ICP but not paid on to Lockton. Although the complete accuracy of the schedule cannot be assumed, it is thought that it justifies a reasonable measure of confidence and that it should enable the administrators to calculate a provisional client balance for each client in accordance with CASS 5.5.67 R.

[42]In response to circulars sent out in January 2013 the administrators have received only four modest claims capable of being claims to entitlement to share in the ICP statutory trust. However, the total amount of the premiums that ought to have been but have not been paid on to Lockton, and therefore the total value of the entitlements under the statutory trust, far exceeds the total value of the trust pool.

[43]At this point I need only mention that the administrators’ examination of the records of the two companies has established that in October 2012, shortly before the companies went into administration, two unexplained payments, of £250,000 and £120,000 respectively, were made from the APIS client accounts to the ICP client accounts. I shall refer to these payments more fully in connection with Issue 5, which arises out of them.

Summary of the proposed directions and the issues

[44]The administrators seek directions as to the manner in which the funds in the client accounts of both APIS and ICP are to be distributed; to that extent their stance is one of neutrality, except on questions concerning their own remuneration and costs. However, they propose for consideration and approval a scheme of distribution, which seems to them to represent the best way forward in the circumstances. That scheme is explained in the witness evidence filed by the administrators and in outline is as follows in respect of each company: 1) The company will proceed on the basis that the entire contents of its client accounts as at the date of entry into administration and the proceeds thereof are held upon a statutory trust pursuant to sections 139 and 137B of FSMA and CASS 5.3.2 R, and that the statutory trust was subject to a “primary pooling event” pursuant to CASS 5.6.7 R when the company entered into administration. 2) The administrators will stipulate the date by which and the manner by which any person must submit a claim of entitlement to a beneficial interest in the trust pool, and they will thereafter adjudicate on any such claims on certain specified bases. There will be a procedure for appeals against the administrators’ adjudications to be decided by the Court. The administrators may proceed on the footing that no person is entitled to any beneficial interest in the trust pool unless that person’s claim has been admitted by the administrators or on appeal by the Court. 3) The administrators will then distribute the trust pool as follows:(i) they shall make provision for such remuneration and costs as are payable out of the trust pool;

(ii) to the extent that there are any remaining funds, they shall make provision pro rata to meet the claims of non-insurer clients whose claims have been admitted;

(iii) to the extent that there are any remaining funds, they shall make provision pro rata to meet the claims of insurer clients whose claims have been admitted;

(iv) to the extent that there are any remaining funds, they shall apply them as the company’s own funds. 4) There will be a mechanism for resolving any claim by the APIS trust pool against the ICP trust pool, arising from the two unexplained payments made from the APIS client accounts to the ICP client accounts in October 2012 in the sum of £370,000. At present the proposed mechanism is to permit each of the administrators to represent one company solely for the purpose of enabling them to seek to negotiate a settlement for which the approval of the Court can subsequently be sought. 5) The administrators’ remuneration and costs relating to the management and investigation of the issues, the present applications, and compliance with the directions shall be paid out of the trust pool as costs properly attributable to the distribution of the respective client money trusts within the meaning of CASS 5.3.2 R (4).

[45]The court is ultimately responsible for deciding whether the proposed or some other scheme of distribution is proper to be endorsed; where, as here, not all categories of affected parties are represented on the applications, the particular matters raised for consideration by those participating in the application do not necessarily delimit the scope of relevant concerns. In the present case, however, the thorough examination of the matter both by the administrators and by the parties’ legal representatives means that it is sufficient to consider the matter by reference to the Revised Schedule of Issues (“the Schedule of Issues”) prepared for the purposes of the hearing and in respect of which the administrators seek particular guidance.

[46]The issues in the Schedule of Issues fall into six broad categories. The first category concerns the status of the moneys in the companies’ client accounts and the question whether they are subject to the statutory trusts or are the companies’ property and as such available to the general creditors. The second category concerns the ascertainment of entitlements to moneys subject to the statutory trusts and the apportionment of those moneys among various claimants. The third and fourth categories concern problems of distribution regarding the APIS and ICP client accounts respectively. The fifth category comprises an issue relating to a possible claim on behalf of the APIS statutory trust against the ICP statutory trust pool arising out of the unexplained payments in October 2012. The sixth category concerns the administrators’ entitlement to remuneration out of the moneys in the statutory trusts. Later in this judgment I shall set out and consider the particular issues in turn.

Jurisdiction

[47]The present applications are brought, first, under paragraph 63 of Schedule B1 to the Insolvency Act 1986, which provides that an administrator of a company may apply to the court for directions in connection with his functions.

[48]In Re Worldspreads Ltd

[2015] EWHC 1719 (Ch)

, the administrators of a company in special administration applied under paragraph 63 for directions to enable them to distribute client money that was held on a statutory trust to which CASS 7 and CASS 7A applied. Birss J said at [21]:

“Whether the paragraph 63 jurisdiction would be sufficiently wide on its own to justify the final order sought is at least open to question. After all client money is not part of the insolvent estate.”

He did not, however, consider it necessary to answer that question, because he was satisfied that the alternative basis of the application, namely the court’s inherent jurisdiction, was sufficient. That alternative basis is also relied on in this case, and I shall consider it below.

[49]In my judgment, however, the court has power under paragraph 63 of Schedule B1 to give directions to the administrators in respect of moneys held by a company in administration on statutory trusts, although those moneys do not form parts of the assets of the company. Paragraph 59(1) provides:

“The administrator of a company may do anything necessary or expedient for the management of the affairs, business and property of the company.”

That provision was previously contained in section 14(1) of the 1986 Act. In Denny v Yeldon

[1995] 3 All ER 624

, the question arose whether the powers conferred on administrators by section 14(1) permitted them to amend the definitive trust deed establishing and regulating the company’s employee pension scheme. At 627J – 629A Jacob J held that they did. The objection was that the powers under section 14(1) did not extend to doing acts that related to the affairs of the pension scheme rather than the affairs of the company. Rejecting that objection, Jacob J said at 628D:

“I think the argument fallaciously assumes that that which forms part of the affairs of the pension scheme cannot also be part of the affairs of the company. The company’s pension scheme seems to me to be an intimate part of the company’s ‘affairs’. That word should be construed widely both as a matter of common sense and as a matter of language in the context of the section. ‘Affairs’ must cover things other than ‘business’ or ‘property’. I think it at least covers things which realistically touch or concern the company’s business or property.”

In Polly Peck International plc (in administration) v Henry

[1999] 1 BCLC 407

, Buckley J at 412 expressed agreement with the reasoning and conclusion of Jacob J.

[50]In the present case, the conduct by APIS and ICP of their respective businesses gave rise to statutory trusts of which they were and remain the trustees. The purpose of those trusts is the protection of customers of the businesses. The continuing administration of the trusts is in my view within the scope of the affairs of the companies for the purposes of paragraph 59. The fact that the trust moneys do not belong to the companies does not preclude the application of paragraph 63.

[51]However, although paragraph 63 defines the matters in respect of which the court may be asked to give directions, it does not specify the scope of the directions that may properly be given. That is a distinct question, which arises where, as here, the administrators seek approval for a scheme of distribution which, in circumstances of imperfect knowledge, might involve a course of conduct that would otherwise amount to a breach of trust. The question is conveniently considered in the light of the alternative basis on which the application is brought, namely the invocation of the court’s inherent equitable jurisdiction.

[52]The inherent equitable jurisdiction was considered by David Richards J in In re MF Global UK Ltd (in special administration) (No. 3)

[2013] EWHC 1655 (Ch)

[2013] 1 WLR 3874

. The company was a failed investment bank and held client moneys on statutory trusts pursuant to CASS 7 and CASS 7A. The special administrators applied for directions to enable them to distribute in circumstances where there was uncertainty as to the extent of valid claims against the trust pool. Very considerable difficulties would have attended an attempt to defer distribution until the extent of all valid individual claims was known: see in particular [9] and [13]. David Richards J referred to the comment of Lord Neuberger of Abbotsbury MR in In re Lehman Bros International (Europe) (No. 2) [2010] Bus LR 489 at [86]:

“I hope, indeed I would expect, that, if the administrators decide to make an application under the Trustee Acts or pursuant to the court’s inherent equitable jurisdiction, in relation to dealing with beneficiaries’ rights, the court will provide effective assistance, by arriving at a practical and fair outcome, while ensuring that delay and costs are kept to a minimum.”

David Richards J summarised the scheme proposed for his approval as set out in a draft order and said at [21]:

“The order does not purport to vary the beneficial interests of any clients and, accordingly, provides that the exclusion of any claimant from such a distribution is without prejudice to their right to participate in any subsequent distribution from the client money trust, if they duly establish their claim, and is also without prejudice to any tracing or similar remedy that might be available to them.”

Having indicated that the proposed scheme gave all potential claimants a proper opportunity to make their claims before distribution, the judge considered the scope of the inherent equitable jurisdiction in relation to trusts. At [26] he said:

“The inherent jurisdiction of the court does not enable the court to vary beneficial interests in trust property but, as part of the jurisdiction to supervise and administer trusts, it permits the court to give directions to trustees to distribute trust property on particular bases when the court is satisfied it is just and expedient to do so. A well established example of the exercise of the jurisdiction in this respect is the making of In re Benjamin orders: In re Benjamin [1902] 1 Ch 723. In those cases where the trustees are faced with a practical difficulty in establishing the existence of possible beneficiaries or other claimants, the court will give a direction to the trustees enabling them to distribute the trust property on an assumption of fact that there is no such beneficiary or claimant. As Nourse J explained in In re Green’s Will Trust [1985] 3 All ER 455, 462, an In re Benjamin order does not vary or destroy beneficial interests but merely enables trust property to be distributed according to the practical probabilities. It protects trustees but it equally preserves the right of any person who establishes a beneficial interest to pursue such remedies as may be available to them.”

[53]The judge held that an In re Benjamin order was appropriate on the facts of that case and observed that it would provide protection to the administrators in respect of all possible claimants of whom they were unaware. However, the cases concerning such orders were concerned with “circumstances where it is impossible or impracticable to establish the facts one way or another”; an In re Benjamin order would not therefore provide protection in respect of known claims that had been rejected but not subjected to judicial determination. Nonetheless, David Richards J held that the inherent jurisdiction was wide enough to enable the court to give directions for distribution even though there were known claims by persons claiming to be beneficiaries. In such a case distribution would not destroy any proprietary claim but would provide protection to the trustees or administrators against claims by those claiming to be entitled: see [30] – [31].

[54]In each of the present applications the administrators seek approval of a scheme of distribution on the basis that it will give a proper opportunity to all potential claimants against the statutory trust pool but will then permit distribution in circumstances of imperfect knowledge. They do not seek a determination of the interests of those who are not privy to these applications and do not purport to extinguish or modify any existing beneficial interests. In principle, what is proposed is capable of falling within the inherent jurisdiction of the court.

[55]How does paragraph 63 of Schedule B1 fit into this? As I have said, directions for the administration of the statutory trusts can be given on an application under paragraph 63. But although paragraph 63 identifies the matters to which directions may relate, it does not specify the scope of the directions that may properly be given. In my view it suffices to say that, when seised of an application under paragraph 63, the court may in a proper case exercise the inherent equitable jurisdiction. Where the applications relate to directions for the administration of statutory trusts under CASS 5 or CASS 7, there is also some attraction in the approach taken in Scotland by Lord Hodge in Joint Liquidators of Direct Sharedeal Ltd

[2013] CSOH 45

, where he held that the court could imply into the rules in the Clients Assets Sourcebook a judicial power to give directions to achieve the purposes of the rules. However, the existence of the inherent jurisdiction makes it unnecessary to express a firm view on the implication approach; it may indeed make recourse to implication inappropriate as being unnecessary. The only, very minor, practical issue that I can see is whether compliance, or the pretence of compliance (see paragraph 4 above), with CPR r. 64.3 is required on an application under paragraph 63. I should have thought not. The present applications were brought to the Companies Court in the normal way, by application notices in Form 7.1A. Nothing is gained by deeming the application notices to contain Part 8 claim forms, which in fact they did not contain. If further justification for this conclusion is required, I would say that these proceedings are properly characterised as applications for directions and not as claims for determination of a question arising in the execution of a trust or for an administration order under CPR r. 64.2.

[56]So far I have been concerned primarily with the position of those claiming to be beneficiaries of the trust pools. Further questions arise in the case of third parties with claims against one or other of the trust pools. Those questions are conveniently addressed in connection with Issue 5(b), which concerns APIS’s position as a potential claimant against the ICP trust pool.

The Issues in detail

[57]I shall set out and discuss each of the issues in turn.

Issue 1(a)

[58]This issue is: whether the contents of the relevant company’s “statutory trust” designated accounts as at the date of administration were (subject to any deductions pursuant to issues 1(b) to 1(f) below) “client money” subject to a statutory trust under CASS 5.3.2R and were pooled on that date for distribution under CASS 5.6.7 R.

[59]The statement dated 14 January 2015 of Mr Baker sets out the reasons why the administrators have concluded that the answer to Issue 1(a) is “Yes”. Aviva and AXA have strongly supported the administrators’ conclusion; that is perhaps unsurprising, as they claim to be entitled to share in the statutory trust pools. Coutts, whose claim lies against the companies’ general funds rather than the statutory trust pools, has not disagreed with the administrators’ conclusions.

[60]I agree with the administrators that the answer to Issue 1(a) is “Yes”, for the following principal reasons. 1) As CASS 5.3.2 R makes clear, a firm receives and holds client money on the statutory trust unless it is acting in accordance with CASS 5.4 (the non-statutory client money trust). The statutory trust is therefore the default position. 2) CASS 5.4.4 R stipulates five conditions, all of which must be satisfied before a firm may act under CASS 5.4. Several of these conditions relate to the maintenance of adequate resources, systems and controls for ensuring client protection; the adequacy of the systems and controls is required to be confirmed in writing by the firm’s auditor. Another condition requires the designation of a manager to oversee the firm’s compliance with the firm’s systems and controls. The administrators have found no evidence that the auditor gave the required confirmation or that the firm designated a manager. 3) CASS 5.4.6 R and CASS 5.4.7 R require a firm that acts otherwise than under CASS 5.3 to execute a trust deed containing certain specified provisions. The administrators have not seen any such deed and there is no evidence that there ever was such a deed. 4) There is no other evidence that either company intended or purported to act under CASS 5.4. 5) The client accounts operated by each company all had names designating them as “Statutory Trust Client Account”. This is positive evidence that the companies operated in accordance with CASS 5.3. 6) In respect of each company, a primary pooling event occurred when the company went into administration, and thenceforth the client money held in each client money account of the company is treated as pooled: see CASS 5.6.5 R and CASS 5.6.7 R.

[61]I ought to mention at slightly greater length a potential argument, properly raised by the administrators but only for the purpose of rebutting it, to the effect that any statutory trust of the client money has failed by reason of uncertainty of subject matter and of objects. The argument would arise from the inadequacy of the companies’ records, which means that it cannot be known with certainty either(a) that all the moneys in the client accounts are clients’ moneys rather than the companies’ moneys or

(b) who are the clients with an entitlement under the alleged statutory trusts. It may be that a concern in respect of certainty of subject matter lies behind the comment in paragraph 1.1 of the FSA’s Guide to Client Money for General Insurance Intermediaries (March 2007):

“A firm’s own money is not client money and must not be held in a client bank account because it can invalidate the trust status of the account.”

[62]I agree with the administrators and with Aviva and AXA that there is nothing in this potential argument. 1) All client moneys received by the companies were immediately impressed with a statutory trust at the point of receipt: see CASS 5.3.2 R. There is no room for any notion of invalid establishment of the trust on the ground of uncertainty of subject matter or uncertainty of beneficiaries. The segregation provisions of CASS 5.5 are designed to ensure the “effective operation” of the statutory trust (cf. CASS 5.5.2 G), but compliance with them is not a condition of the validity of the trust. 2) The moneys that give rise to the problems of distribution are all contained in the bank accounts designated as statutory trust client accounts. On the failure of each company, the balances of its client accounts are pooled and to be distributed in accordance with CASS 5.6. As there is known to be a shortfall in each company, those entitled will share rateably in accordance with the order of priority provided for. 3) This is consistent with the law as it would apply to an express trust outside the scheme of statutory trusts created by CASS 5. If a trustee mixes his own moneys with trust moneys in an identifiable fund, the presumption in the event of a shortfall is that the moneys in the fund are trust moneys; the trustee bears the burden of establishing that particular moneys are his and not the trust’s. See Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd

[2011] EWCA Civ 347

[2012] Ch 453

, per Lord Neuberger of Abbotsbury at [135] – [141] (unaffected on this point by the decision of the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC

[2014] UKSC 45

, [2015 1 AC 250). It is not suggested in this case that either company would be capable of discharging that burden. 4) Reference may also be made to the judgment of Lord Collins of Mapesbury in Lehman Brothers International (Europe) v CRC Credit Fund Ltd

[2012] UKSC 6

, [2012] Bus LR 667. In the context of a discussion of the rules relating to client money in CASS 7, which contains broadly similar provisions to those of CASS 5 for investment businesses, he said at [194]: “[S]ince the purpose of the statutory trust is to protect client money from misuse, it would be odd if client money (originally the client’s beneficial property) ceased to be the client’s property upon receipt by the firm, and it (or substitute money) then became the client’s property again upon segregation shortly thereafter. There is no doubt that money in a mixed fund may be held on trust, and that a trust of money can be created without an obligation to keep it in a separate account: In re Kayford

[1975] 1 WLR 279

, 282, per Megarry J.” 5) Again, as regards certainty of beneficiaries: “It is enough if the beneficiaries can be ascertained with the requisite certainty at the creation of the trust, and it will not later be invalidated because some of the class might have disappeared or become impossible to find or because it has been forgotten who they were”: Lewin on Trusts (19th edition), paragraph 4-040, citing Re Hain’s Settlement

[1961] 1 WLR 440

; see per Lord Evershed MR at 444 and per Upjohn LJ at 448. In the present case, at the moment of receipt of each amount of client money, there was certainty as to who was the beneficiary in respect of that money. The problems of identification arise only from the subsequent failure of the companies to keep proper records. That failure does not entitle the companies to appropriate to themselves moneys that they held on trust for their clients.

Issues 1(b) – (f)

(b) – (f)

[63]These issues, which relate to possible deductions from the moneys in the client accounts, are as follows: Assuming the answer to Issue 1(a) is “Yes”, whether: (b) the relevant company may be entitled to make deductions from those accounts (into its insolvent estate) in respect of a non-client-money element of “mixed remittances”; (c) the relevant company may be entitled to make deductions from those accounts (into its insolvent estate) in respect of commissions or other payments due to it from clients; (d) the relevant company may be entitled to make deductions from those accounts (into its insolvent estate) in respect of interest accrued on those accounts; (e) APIS may be entitled to make deductions from those accounts (into its insolvent estate) in respect of the payment of £120,000 made into those accounts from APIS’ office accounts on 14 September 2012; (f) the relevant company may be entitled to make deductions from those accounts (into its insolvent estate) in respect of premiums received as agent for insurers without an agreement in place under CASS 5.1.5A R.

[64]Issues 1(b), 1(c) and 1(d) concern the question whether some of the moneys in the client accounts are properly to be regarded not as falling within the statutory trusts but rather as the property of the companies, available to their general creditors. This question arises because some of the provisions of CASS 5 can be taken as meaning that not all moneys in a client bank account are subject to the statutory trust. I refer in particular to the general definition of “client money”, to the trust provision in CASS 5.3.2 R, to the pooling provision in CASS 5.6.7 R (1), and to CASS 5.1.5 R (1)(a), CASS 5.5.9 R and CASS 5.5.16 R.• As to Issue 1(b), CASS 5.5.16 R (2) envisages that client bank accounts may from time to time contain mixed remittances, “that is part client money and part other money”. The question is whether, to the extent that the money is “other money”, it falls outside the statutory trust.

• As to Issue 1(c), CASS 5.5.16 R (1), when read with CASS 5.1.5 R, might suggest that commission to which a firm is entitled does not fall within the statutory trust, even though it remains in a client bank account.

• As to Issue 1(d), CASS 5.5.9 R (3) says that, insofar as interest credited to and remaining in a client bank account “exceeds the amount due to clients as interest”, it is not client money; and this in turn suggests that it does not fall within the statutory trust.

[65]On each of these issues, Coutts, as a creditor with a claim against the general assets but not against the statutory trusts, contends that the relevant element ought to be removed from the client accounts and applied to the insolvent estates, because the failure of the companies to withdraw non-client money from the accounts does not alter its status or the entitlement of the companies to that money. As a matter of practicality it accepts that there are likely to be difficulties in demonstrating APIS’ entitlement to non-client moneys; therefore it seeks only a direction that the administrators of ICP proceed on the footing that ICP is entitled to make deduction from the statutory trust accounts in respect of the relevant elements.

[66]For the administrators, Mr Munby acknowledges the force of Coutts’ position on these issues. However, supported unsurprisingly by Aviva and AXA, he submits that, at least in the present case, there are strong reasons for acting on a different footing. I accept his submissions on this point, which may be summarised as follows. 1) The Client Assets Sourcebook is drafted in a rather loose, regulatory style, in which the uses of words and expressions do not at all points strictly cohere. More specifically, as Briggs J observed in Re Lehman Brothers International (Europe) (No. 2)

[2009] EWHC 3228

[2010] 2 BCLC 301

, at [93-5], the expressions “money” and “client money” are used sometimes in a strict proprietary sense and sometimes to refer to monetary obligations or entitlements. That observation was made in respect of the provisions of CASS 7, but it seems equally applicable to CASS 5. Thus CASS 5.5.80 R (4) provides that money ceases to be client money “if it is paid to the firm itself, when it is due and payable to the firm in accordance with CASS 5.1.5 R (1)”; yet CASS 5.1.5 R (1) provides that money “is” not client money when “it becomes properly due and payable to the firm”. (Cf. the corresponding provisions in CASS 7.2.9 R and CASS 7.2.15 R.) Briggs J’s comments on this point retain their force, despite the decisions of the Court of Appeal and the Supreme Court. 2) CASS 5 is intended to give effect to method (c) in Article 4(4) of the Directive, which requires “strictly segregated client accounts [that] shall not be used to reimburse other creditors in the event of bankruptcy”. It would therefore be odd if, in the event of a pooling event, other creditors were able to have recourse to the client accounts. 3) It might be said that the client-money elements of the client accounts would not be available to general creditors; only moneys representing the firm’s entitlement under CASS 5 could be made available to creditors. However, the required process of regular reconciliations of the client money resource and the client money requirement (CASS 5.5.63 R) works on the basis that the client money resource comprises “the aggregate of the balances on the firm’s client money bank accounts” (CASS 5.5.65 R). Shortfalls are then to be made good and excesses to be withdrawn. The process is misconceived if some of the moneys in the client accounts are not subject to the trust at all, but it makes sense if entitlements and obligations attach to those moneys in accordance with CASS 5. 4) Other provisions of CASS 5 make provision for the firm to top up the client account; see CASS 5.5.10 R and CASS 5.5.63 R (4). Such top-ups fall within the statutory trust. The ultimate protection for the firm is the provision that, after all other claims to the trust pool have been met, the firm is entitled to the balance; see CASS 5.3.2 R (5). There is no obvious reason why different excesses in client accounts should be treated differently. 5) The present cases involve shortfalls, not excesses; the position is a fortiori. If the companies had carried out the required reconciliations and identified the shortfalls, they would have been required to make good the shortfalls promptly from their own funds; see CASS 5.5.63 R (1)(b). If it could not then have removed commission, interest and the non-client-money elements of mixed remittances, it cannot do so now. 6) Even if the withdrawals contended for by Coutts were permissible in principle, there are evidential and practical difficulties in the way of making them in practice. These difficulties are explained in detail by Mr Baker in his two witness statements. I do not need to say anything further concerning APIS, for which the position is plain and is accepted by Coutts. As for ICP, the short points are these. First, the moneys to which ICP had some form of entitlement, according to the Lockton Schedule, appear to be commissions rather than the non-client-money element of mixed remittances. The terms of business between ICP and its clients made no provision for the deduction of commission before the premiums were forwarded to Lockton for the insurer. It is open to question whether the withdrawal of commission from the client account would be “consistent with the firm’s terms of business which it maintain[ed] with the relevant client[s]” for the purposes of CASS 5.5.16 R (1). But even if it were so consistent, the fact that there is a shortfall in the client account tends to indicate that at least some of the commission has indeed been taken. It does not seem possible to establish what if any moneys remaining in the client account after pooling would properly be referable to commission. Second, although the administrators are satisfied that it would be possible to calculate the total interest that has accrued on client moneys, the amount of such interest is likely to be small in comparison with the cost of calculating and distributing it. Thus the interest credited to the ICP client account in October 2012 was £80.53 and in November 2012 was £186.65.

[67]Accordingly I shall direct that distribution take place on the basis that the answer to Issues 1(b), (c) and (d) is No.

[68]Issue 1(e) arises because on 14 September 2012 APIS transferred £120,000 from one of its own accounts into one of its client accounts. The administrators have been unable, despite their efforts, to establish the reason for this transfer, although they consider it likely that it was for the purpose of topping up the client account after withdrawals had previously been made from it to discharge liabilities arising out of the transaction in August 2011 (paragraphs 28 and 29 above). The administrators seek a direction that they may proceed on the footing that no deduction from the APIS client money pool is to be made in respect of that payment. Coutts has not opposed such a direction. In circumstances where(a) the level of withdrawals from the client accounts have placed the client money pool in shortfall,

(b) the payment can reasonably be attributed to an intention to restore moneys to the statutory trust,

(c) reasonable enquiries by the administrators have not revealed any basis on which a claim might properly be advanced by APIS,

(d) no such basis has been suggested by any other person, and

(e) far the largest creditor has not opposed the direction sought, I consider it just and convenient to give the direction sought.

[69]Issue 1(f) addresses the possibility that APIS might be entitled to make a deduction from its client money pool on the ground that the premium has, so to speak, fallen into a gap in the provisions for the statutory trust: on the one hand, it has been received on risk-transfer terms, so that the customer is immediately insured and has no proprietary claim to the premium; on the other hand, the insurer does not qualify as a client, because there was no written agreement as required by CASS 5.1.5A R; therefore the money was placed into the client account by mistake and ought to be moved to the general assets, against which the insurer will have a claim as a creditor.

[70]I refer only to APIS, because so far as is known ICP conducted no relevant business on risk-transfer terms. Coutts has contended for a deduction, but only in respect of ICP; it recognises that the inadequacy of APIS’ records means that APIS is unlikely to be able to establish any entitlement. This unfortunately shows that the issue is more theoretical than practical: the argument for a deduction has no practical application to the company that might be able to prove its entitlement if it had one; the company to which it might apply lacks the documentation to take advantage of it. More fundamentally, the arguments summarised at paragraph 66 above in respect of Issues 1(b), (c) and (d) indicate that the argument from the strict reading of CASS 5.1.5A R, though not without force, ought ultimately to be rejected. I shall direct that distribution take place on the basis that the answer to Issue 1(f) is No.

Issue 2(a)

[71]Issue 2(a) is: In distributing, whether all clients with a client money entitlement should be regarded as entitled to participate in the relevant pool or only those whose contributions to the pool are identifiable. The administrators propose a direction that all clients with an entitlement, and not merely those whose contributions are identifiable, should be regarded as entitled to participate. That direction has not been opposed before me.

[72]In Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Ltd

[2012] UKSC 6

, [2012] Bus LR 667, the Supreme Court considered the same point as it arose under CASS 7. The foundational provision was CASS 7.7.2 R, which was in materially similar terms to CASS 5.3.2 R. All five members of the Supreme Court held that pursuant to CASS 7.7.2 R the statutory trust arose at the time of receipt of the moneys, not at the time of their segregation; see, for example, Lord Walker of Gestingthorpe JSC at [62]. However, on the specific point of the entitlement of clients to share in the statutory trust pool, the Justices were divided. The relevant provision was CASS 7.9.6 R (1), which was in materially similar terms, subject to different references to CASS 5.6.7 R (1) and (2); both rules provide that “client money held in each client money account of the firm is treated as pooled [and] the firm must distribute that client money ... so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with [the applicable rule]”. The majority of the Justices (Lord Clarke JSC, Lord Dyson JSC and Lord Collins JSC) held that this required that clients share in the pool rateably according to their contractual entitlements and not according to their contributions to the balances standing to the credit of the segregated accounts.

[73]It would be remarkable if two sets of provisions, employing closely similar schemes and drafting, produced different results on this fundamental matter of client protection. The process of construction that led to the conclusion that the statutory trust applied immediately upon receipt of moneys is in my view equally applicable under CASS 5. The specific provisions for rateable distribution in accordance with a client money entitlement are essentially the same under CASS 5 and under CASS 7. Further, under CASS 5.6.7 R, the client money entitlement is to be calculated according to CASS 5.5.66 R, which in turn requires a calculation under CASS 5.5.67 R. That calculation is purely on the basis of payments and receipts, not identifiable contributions to an extant fund. In Lehman Bros Lord Dyson JSC emphasised the importance of standing back from close reading of the provisions of the Client Assets Sourcebook and considering which construction better promoted the purpose of the provisions. One relevant factor was that all client moneys received by the firm were impressed with the trust from the moment of receipt; see [159]. That is also the case here. Another relevant factor was that CASS 7 was intended to give effect to European Directives “whose overriding purpose is to safeguard the assets of all clients and to provide all clients with a high degree of protection.” It is right to observe that the relevant Directives in the case of CASS 7 were Directive 2004/39/EC on Markets in Financial Instruments and a subsequent Implementing Directive 2006/73/EC. They are not the Insurance Mediation Directive, to which CASS 5 gives effect. Nonetheless the Insurance Mediation Directive does show a specific concern for customer protection, and I regard it as more consistent with the objective of the Insurance Mediation Directive to construe CASS 5 as extending protection to all clients whose money has been received on the statutory trust, not only those whose specific contributions to the pool can be identified. Accordingly I shall give the direction sought.

Issue 2(b)

[74]Issue 2(b) is: In distributing, whether the administrators should proceed on the basis that a client money entitlement does not exist for the benefit of the relevant insured/policyholder in circumstances where a suitable “risk transfer” agreement appears to have been in place between the relevant company and the relevant insurer (and does exist for the benefit of the insurer where a CASS 5.1.5A R agreement has also been put in place), but there is no clear evidence that the Company complied with CASS 5.2.3 R (1)(e) or CASS 5.2.3 R (3).

[75]This issue concerns APIS alone, as being the only company that conducted relevant business on risk-transfer terms.

(b) :

“where the firm acts in accordance with CASS 5.2”

. CASS 5.2.3 R is headed “Requirement for written agreement before acting as agent of insurance undertaking”. But the rule does not merely require that there be a written agreement with the insurer. It also specifies that the firm must be “satisfied on reasonable grounds that the terms of the policies issued by the insurance undertaking to the firm’s clients are likely to be compatible with such an agreement” (CASS 5.2.3 R (1)(e)) and that the firm must inform its customers that it will hold their money as agent of the insurer (CASS 5.2.3 R (3)). What is the position if APIS cannot demonstrate that it did so satisfy itself and did so inform its customers? As regards information, APIS’ standard terms of business with its customers said that money might be received as agents for insurers “in some circumstances”, but it did not say what those circumstances were or whether they existed in the transaction in question; it is not known whether any other information was given.

[76]The administrators propose that they be directed to cause the company to distribute on the basis that the policyholder has no client money entitlement, unless there is positive reason to believe that the relevant insurer failed in fact to provide risk transfer to the policyholder. They would then seek from the insurers a copy of their terms of business and confirmation that risk transfer had been effected, and upon being satisfied in that regard they would proceed pragmatically on the basis that the entitlement in the trust was that of the insurer and not the customer. A “positive reason” to the contrary might exist, for example, if the insurer had demanded payment of the premium from the policyholder or had purported to cancel the policy for non-payment of the premium; either of those courses of action might be inconsistent with effective risk transfer. Aviva and AXA support the proposal, unsurprisingly. Coutts makes no representations regarding the proposal.

[77]The logic underlying the proposal is that, where the arrangements with the insurer provide for risk transfer upon the receipt of the premium, there is no good reason of client protection to give the insured client an interest under the statutory trust of client moneys and no good reason to treat a failure of the firm in its dealings with the policyholder as depriving the insurer, which has done all that is required of it, of its own interest under the trust. Two more specific justifications of the proposal are advanced. The first is that, in the absence of contrary evidence, it is reasonable to take the existence of risk-transfer terms and the provision of risk-transfer cover as indicating that there was compliance with CASS 5.2. The second is that the words “where the firm acts in accordance with CASS 5.2” are properly to be construed not as requiring strict compliance with CASS 5.2 but as meaning something like “where the firm acts as agent for the insurer, in which regard CASS 5.2 makes provision”. I regard both of these arguments as sound, when considered in the context of what I have called the underlying logic. Thus for example, I can see no sense at all in making the operation of CASS 5.1.5R (1) dependent on the question whether the firm was “satisfied on reasonable grounds” in accordance with CASS 5.2.3 R (1)(e). And such a construction would also be entirely impractical. Accordingly, for reasons primarily of construction but also of practicality, I shall give the direction sought.

Issue 2(c)

[78]Issue 2(c) is: In distributing, whether the claims of a policyholder / insured client against the pool should be affected in circumstances where the relevant insurer may in fact have provided that client with the relevant cover gratuitously.

[79]The issue arises because the administrators have received no communications from customers saying that their insurers have either withdrawn cover for non-payment of the premium or demanded payment of a premium that had already been paid to the companies. One possible explanation for the lack of such complaints is that some insurers, who have not received their premiums and have not done business on risk-transfer terms, have maintained cover without payment, whether for commercial reasons or because of oversight. The administrators propose that they be directed to cause each company to distribute on the footing that gratuitous provision of cover should not affect the claim of the policyholder / insured client against the pool. Aviva and AXA support the proposal. Coutts opposes it: it contends that the provision of “gratuitous” cover means that the customer received all that it paid for, so that it cannot in justice have the windfall of a proprietary claim in the pool; however, as there has been no compliance with CASS 5.1.5A R, the insurer can have no entitlement of its own in the pool; no claim for the insurers to be subrogated to the customers’ rights has been advanced, and any such subrogation would be inconsistent with the scheme for distribution under CASS 5.3.2 R.

[80]Superficially attractive though Coutts’ argument is, I do not think that it justifies distribution on the basis that the customers’ claims under the trusts have been defeated. First, in the absence of some kind of express waiver, it is hard to see how the continuation of cover can be taken to release the customer from the obligation to make the payment of the premium. Second, the provisions of CASS 5 relating to money not being client money (CASS 5.1.5 R), money ceasing to be client money (CASS 5.5.80 R) and the calculation of the individual client balance (CASS 5.5.67 R) are all difficult to square with the extinguishment of the customer’s entitlement under the statutory trust in these circumstances; the payment of the premium to the firm immediately gives rise to the statutory trust, and the client money entitlement subsists until the firm duly pays the money out. Third, if it is unattractive to suppose that the insured customer has the windfall of a claim in the trust pool, it seems equally unattractive to pass that windfall to the general estate of the firm in circumstances tantamount to risk transfer. Fourth, however, it is unattractive to suppose that the claim in the trust pool has been transferred to the insurer, because that would have the effect that, within statutory schemes designed to give protection to customers and in strictly defined circumstances to insurers (CASS 5) and thereafter to creditors on normal principles of insolvency, an insurer that had not carried on business in a manner giving it a proprietary claim under the statutory trust could by its own unilateral action convert itself from being an unsecured creditor to being a beneficiary under the statutory trust.

[81]Coutts advances the further argument that the insurers’ conduct in continuing cover gives rise to the inference that there was a relationship of principal and agent between the insurers and the companies in respect of the receipt of the premiums. It draws support for this from a passage in Mr Baker’s first witness statement:

“Based on discussions between the insurers and Lockton, the administrators understand that ICP was afforded credit terms (similar to APIS); that unpaid premiums have been treated by insurers as bad debts; and that policies were put ‘on risk’ prior to insurers receiving the premiums. On that basis, and notwithstanding that insurers’ terms, conditions and exceptions might have permitted them to cancel cover, it appears that insurers continued to provide cover gratuitously in at least some instances.”

However, this argument falls upon the fact that the terms of business between ICP and the insurers did not provide for risk transfer and that ICP did not at all purport to act pursuant to CASS 5.2.

[82]Accordingly I shall give a direction as sought.

Issues 2(d) and (e)

(d) and (e)

[83]Issue 2(d) is: In distributing either the APIS or the ICP pool, whether other intermediaries, introducers or agents can maintain client-money claims in respect of commission or fees.

[84]Issue 2(e) is: In distributing either the APIS or the ICP pool, in relation to non-risk-transfer transactions, whether the administrators should proceed on the basis that any claim exists for the benefit of the policyholder / insured client (as opposed to any intermediary between that client and APIS or ICP).

[85]These issues are related though distinct. Neither the Insurance Mediation Directive nor the Client Assets Sourcebook is apparently concerned with the protection of intermediaries, and there is no specific provision for intermediaries to have entitlement under the statutory trust. Nevertheless, intermediaries are not excluded from the definition of “client”. And CASS 5.5.7 G seems to envisage the possibility that intermediaries might have claims under a statutory trust. However, an intermediary will only be capable of being a client if it is a person to whom the firm has provided a service in the course of its regulated activities. Further, the intermediary must bring itself within CASS 5.1.5A R; cf. CASS 5.1.6 R.

[86]Issue 2(d) arises because some intermediaries have indeed submitted claims in respect of commission or fees, though only in one case on the basis of a claimed entitlement under a statutory trust. The administrators propose a direction that they proceed on the footing that such claims cannot be maintained. Aviva and AXA support the proposal, and Coutts makes no representations in respect of it.

[87]I find some difficulty with the unqualified terms of the direction proposed in respect of Issue 2(d). All known customers, insurers and intermediaries relating to each company have been notified by mailshot. Three intermediaries are listed in the Schedule of Claims in respect of APIS and two in the Schedule of Claims for ICP. Of the APIS claims, two have been submitted simply as proofs of debt, and there is no information concerning them to suggest that they are claims to an entitlement to share in the client money pool. The third, for commission in the sum of £6886, has been submitted by a sub-broker on the basis that the entitlement falls within the CASS 5 statutory trust. That claim appears to relate to transactions that were not on risk-transfer terms. Prima facie, the correct position would appear to be that any claim under the trust is that of the customer (proposed insured) and that the sub-broker’s claim if any lies against the company’s general estate. The two ICP claims are by sub-brokers for commission, in the respective amounts of £1548 and for £2500. Neither claim appears to be advanced pursuant to CASS 5; both are simple proofs of debts. The transactions in question were not on risk-transfer terms. Unless some information is provided to indicate that the claims fall within CASS 5, the administrators will be entitled to deal with them as simple proofs of debt.

[88]More generally, it is not at present clear to me in what circumstances the issue could arise. If the firm has received the premium on risk-transfer terms, the normal position will be that the insurer has a claim in the trust pool and the intermediary will presumably arrange for its payment to come out of the insurer’s recovery. Conversely, if the firm has received the premium on statutory trust for the customer, it is unclear how the intermediary further down the chain would have a claim at all. In most cases the position ought to be clear. However, I do not think that I am well placed to determine conclusively that any claim against the trust pool by an intermediary in respect of fees or commission must necessarily fail. Nor has the one intermediary claim in the APIS trust pool been considered sufficiently on this application for it to be appropriate for me to purport to determine it. If a particular justification for a claim in the trust pool is advanced, it will fall to be considered in the usual way. There is nothing before me to show that this requirement will be unduly onerous. As I have said, only one relevant claim is known. As the customers to whose policies the claim relates must also be known, it ought to be possible to resolve the particular question at a cost consistent with the minimal value of the amount at stake.

[89]The direction sought in respect of Issue 2(e) is more qualified, namely that the administrators proceed on the footing that the claim exists for benefit of the customer, not the intermediary, unless prior to distribution any particular intermediary should contend to the contrary, in which case the matter be resolved by the court. In principle this seems sensible. However, given the amounts at stake it would be preferable if any relevant intermediary’s claim were dealt with in the first instance by the administrators, with provision for reference to the court if the intermediary wished to pursue a rejected claim.

Issue 2(f)

[90]Issue 2(f) is: In distributing either the APIS or the ICP pool, whether the relevant firm should regard commission as liable to be deducted in the calculation of the individual client balance of a client under CASS 5.5.67 R (4) where(i) the client is a policyholder / insured client and the commission relates to a premium which is itself liable to be returned as part of the client balance upon pooling or

(ii) the client is an insurer in a risk-transfer situation and the commission relates to a premium which is liable to be paid to the insurer upon pooling.

[91]The issue accordingly concerns the treatment of claims by APIS or ICP to commission in respect of premiums in the client pools. It arises because of the formula for the calculation of the individual client balance in CASS 5.5.67 R. Particular reference is made to paragraph (4), which requires the deduction of “the amount paid to insurance undertakings for the benefit of the client (to include all premiums and commissions due to itself) (i.e. commissions that are due but have not yet been removed from the client account)”.

[92]The administrators have proposed a direction that they proceed on the basis that such commissions(i) cannot be deducted where the client is a policyholder / insured and the commission relates to the premium which is itself liable to be returned as part of its client balance but

(ii) should be deducted where the client is an insurer and the commission relates to a premium which is liable to be paid to the insurer as part of its client balance.

[93]There is substantial agreement regarding the first part of the direction. I regard it as plainly appropriate, for reasons that will appear more fully below. A customer will have a claim only if the transaction has failed. Consistently with its representations in respect of Issue 2(c), however, Coutts has contended that any customer that received cover ought not to be permitted to claim or, if it is permitted to claim, that its claim ought not to include the commission element of the premium that it paid. My ruling on Issue 2(c) results in the rejection of this contention.

[94]The administrators’ proposal in respect of insurer claims has proved more controversial. Their proposed direction would involve a deduction of commissions across the board; that would reflect the fact that the insurers would have received not the gross premiums but only the premiums net of commission. Two alternative directions have been advanced for consideration: first, that the deduction of commission should in each case depend on whether, under the terms of the contract between the company and the insurer, the commission had become “due” to the company; second, that no deduction should be made in any case.

[95]On behalf of AXA, Mr Gale submitted that commission should not be deducted from an insurer’s client balance unless the entitlement to commission had fallen due. The significance of the argument for AXA is that its claim in the APIS client money pool is £357,508 if commission is not deducted but only £123,193 if it is deducted. The argument may be stated shortly. The primary trust provision, CASS 5.3.2 R, says that client money is held on trust for the clients for whom that money is held “according to their respective interests in it”. This requires that regard be had to the contractual position of the parties. Further, and critically, whether commissions are “due” for the purposes of CASS 5.5.67 R (4) can only be determined by reference to the contract between the firm and the insurer. Only if the commissions are already “due” to the firm can they properly be deducted in the calculation of the insurer’s client balance. Mr Gale referred to Re ILG Travel Ltd (in administration)

[1995] 2 BCLC 128

, where, in considering whether travel agents who had received moneys from customers were entitled to set off their entitlement to commission against their obligation to account to the insolvent travel operators, Jonathan Parker J said that the question “involve[d] a consideration of the nature and terms of the contractual relationship which subsisted at the material time between [the travel operator] and each of the [travel agents].”

[96]For Aviva, Mr Davenport and Mr Casey made four submissions. First, they said that AXA’s argument would also avail Aviva, having regard to the terms on which Aviva contracted with APIS; as I understood it, they supported the argument as a fall-back position. Second, but with logical priority, they submitted that no deductions at all ought to be allowed from insurer claims, because CASS 5.3.2 R (5) prohibited a firm from deducting its commission before all other claims had been paid in full in accordance with the hierarchy of payments in that rule. Third, they observed that the amount of Aviva’s claims exceeded the entire value of the APIS client money pool; therefore there was certain to be a shortfall; therefore they and all other insurer claimants would have in personam claims against APIS; and any claim that APIS might have to commission would be extinguished by set-off. Fourth, they submitted that the point was of no practical importance, in the light of Mr Baker’s acknowledgment that it had been found “impossible to quantify what amount of commission might have been due (or should have been available) to APIS and third parties out of the APIS Client Monies, leaving aside the consequences of the shortfall” (first statement, paragraph 166).

[97]The argument raises questions both of general approach and of the application of that approach to the respondents’ particular terms of business. My reasoning and conclusions on the question of general approach are as follows. 1) The issue is at bottom one of the quantification of the clients’ respective claims in the pool. The question whether a deduction falls to be made for commission is different from the question whether the firm is entitled to remove commission from the pool before distribution. For reasons already sufficiently apparent, and by reason of CASS 5.3.2 R, the firm is not entitled to take moneys from the pool before clients have been paid. Therefore I do not consider Mr Davenport’s second submission to be in point. 2) I agree with the substance of Mr Gale’s argument and conclusion, though my reasoning is not precisely the same as his. 3) CASS 5.5.67 R has been drafted on the basis that the client is the customer (policyholder). That reflects the Directive, but the grafting into CASS 5 of protection for insurers leads to some awkwardness in applying the text of the provisions to the case under consideration. 4) The way that CASS 5.5.67 R works for the customer is (with some oversimplification) that the customer is entitled to everything it has paid, subject to deductions for money applied for its benefit and money already paid back to it. Where the premium is to be returned to the client, no deduction will fall to be made for commission; that is reflected in the first part of the direction sought. 5) CASS 5.5.67 R (4) (“the amount paid to insurance undertakings for the benefit of the client”) will cover two cases: first, where the firm has received the premium as agent for the insurer; second, where it has not received the premium as agent for the insurer but has paid it over to the insurer. In both cases the premium was contractually due from the customer to the insurer, however it might have been dealt with between the insurer and intermediaries. The first is a risk-transfer case, and the customer has no claim in the client money trust, at least as regards the premium. The second is a non-risk-transfer case; I shall say a little more about it below. 6) For reasons indicated, it is hard to apply CASS 5.5.67 R to insurer claimants without the exercise of a degree of imagination. I do not think that paragraph (4) has any application to the case in point. It is clearly dealing with payments to one party for the benefit of another party; specifically, it is concerned with payments to the insurer for the benefit of the customer. Therefore the deduction to which it refers is inapt to an insurer claim. 7) I am also of the view that, even if CASS 5.5.67 R (4) could be made to apply to the case of an insurer client, it would be of no relevance to the issue before me. Take the simple case of the calculation of an individual client balance for a customer in a non-risk-transfer case. Suppose that in such a case the firm remitted only the net premium to the insurer, but retained the commission element in the client account. If it was entitled to retain the commission for its own benefit, the case is clear: the commission falls to be deducted when calculating the individual client balances. If the contractual conditions of the firm’s entitlement to commission have not yet been satisfied, the commission element that is retained in the client account will now be held for the insurer. Any attempt by the customer to assert a claim against the commission element, on the ground that the commissions were not “due”, would fail, for the reason that the entire premium was now an amount paid to an insurance undertaking for the benefit of the customer. Consideration of the case of customers (which is the case in the draftsman’s mind) shows, I think, that the reference to “commissions that are due” in paragraph (4) does not require a focus on the precise contractual position between the insurer and the firm. The two very clumsy and ill-drafted parentheses in CASS 5.5.67 R (4) are simply designed to make the point that the entire premium, including both the premium in its narrowest sense and the commission component, is to be deducted in a case where the premium has been paid. If the premium has been paid to the insurance undertaking, that is an end of the matter for the customer, so far as paragraph (4) is concerned. If it were otherwise, the customer could contend that the commissions that had not yet fallen “due” under the contract between the firm and the insurer ought not to be deducted under CASS 5.5.67 R (4). 8) In the case of insurer claimants, the relevant part of CASS 5.5.67 R seems to me to be paragraph (2)—the amount due to the insurer client—although the examples given are clearly applicable only to customers. The question is: what is the amount due to the insurer? In my view that question can only be answered by reference to the terms of business between the firm and the insurer. 9) The starting-point is the statutory trust provision in CASS 5.3.2 R (2), which provides that the firm holds client money as trustee for the clients for whom the money is held. This means that until it is entitled, vis-à-vis the insurer, to treat the commission element as its own, the firm will hold the commission element as trustee for the insurer. How this works in any given case will depend on the specific terms of business. 10) Reference was made in the course of argument to CASS 5.5.16 R, which specifies when the firm may draw down commission from the client bank account. But it is necessary to bear in mind that that rule is dealing with a different question from that of the calculation of the client balance. The latter is, as I have said, concerned with quantification of a client claim. The former is concerned with removal of moneys from the client account. The conditions in CASS 5.5.16 R require consistency with the terms of the firm’s contracts with both the customer and the insurer. It is thus possible that commission may be due to the firm pursuant to the contract with the insurer, although it cannot be withdrawn from the client account because of matters pertaining to the contract with the customer. 11) Accordingly, if the commission has become contractually due to the firm, it is to be deducted when calculating the insurer’s claim, because it is not money due to the insurer. On the other hand, if the commission has not become contractually due to the firm, it does not fall to be deducted when calculating the insurer’s individual client balance. If the firm subsequently becomes entitled to commission, it can assert its claim; questions of set-off will arise if the insurer has suffered a shortfall. 12) I agree with Mr Munby that Mr Davenport’s fourth submission is to be rejected, because it fails to distinguish between the question of the extent of APIS’ entitlement to commission and the question of how much of the insurers’ gross claims comprises commission.

[98]Having dealt with the general approach, I proceed to consider the contentions by AXA and Aviva that no deduction for commission ought to be made in respect of their claims.

[99]AXA’s Terms of Business Agreement for Intermediaries (“the AXA TOBA”), which governed the dealings between AXA and APIS, provide at clause 4.2:

“AXA will pay to the Intermediary a fee and/or commission in respect of each Policy which it concludes with a Policyholder as a result of an introduction to AXA by the Intermediary in accordance with this Agreement. Such fee and/or commission shall only become payable if: 4.2.1 the Premium to which it relates has been actually received in full by AXA; and 4.2.2 the Intermediary continues to have authority to act as the Policyholder’s agent at the time the Premium is received by AXA.”

[100]The argument for AXA is that the premiums to which Issue 2(f) relates have not been “actually received” by AXA and that they will never be received “in full” because of the shortfall in the client money trust pool.

[101]I reject that argument and direct the administrators to proceed accordingly. Clause 1.1 of the AXA TOBA defines “Premium” as:

“the gross selling price of any Policy payable by the Policyholder to AXA, including commission and/or fees payable by AXA to the intermediary, but excluding IPT [Insurance Premium Tax].” “Net Premium” is defined as “the Premium less commission and/or fees, but excluding IPT.”

Clause 5.1 provides:

“The Intermediary is authorised to, and shall on behalf of AXA: 5.1.1 collect Premiums and IPT from Policyholders from the inception date of the Policy or when the Policy is concluded, if earlier; and 5.1.2 refund Premiums (if any) to Policyholders.”

Clause 5.2 provides:

“The Intermediary shall be responsible to AXA for payment of Net Premiums and IPT, whether or not collected by the Intermediary from the Policyholder by the day following the end of the Credit Period in accordance with Schedule 3. Premiums, IPT and monies for professional experts’ costs and fees (where these are held as AXA’s agent) in the hands of the Intermediary shall be treated as having been received by AXA when they are received by the Intermediary and Premium refunds in the hands of the Intermediary shall be treated as having been paid to the relevant Policyholder only when they are paid over by the Intermediary to such Policyholder or to such Policyholder’s agent. Premiums, IPT, Premium refunds and any monies for professional expert’s costs and fees (where these are held as AXA’s agent) shall be held by the Intermediary in accordance with Schedule 3.”

Schedule 3 contained detailed provisions for the financial arrangements between AXA and the Intermediary. These included provision for the holding of Premiums in a statutory trust bank account pursuant to CASS 5. Paragraphs 1 to 5 of Schedule 3 provided for periodic statements of account from AXA to the Intermediary and for settlement by the Intermediary in accordance with the account stated within a Credit Period. Paragraph 3 provided that the statement of account should, “in the absence of obvious error, be accepted by the Intermediary as the record of Commission due to, and Net Premium and IPT due from, the Intermediary.” Paragraph 5 contained provision for the Intermediary to query entries on the statement of account, and it continued:

“No such query shall affect the commencement of the Credit Period and any Net Premium or IPT or portion of Net Premium or IPT not in query remains due and payable in accordance with this Agreement.” “The Intermediary is authorised to, and shall on behalf of AXA: 5.1.1 collect Premiums and IPT from Policyholders from the inception date of the Policy or when the Policy is concluded, if earlier; and 5.1.2 refund Premiums (if any) to Policyholders.” “The Intermediary shall be responsible to AXA for payment of Net Premiums and IPT, whether or not collected by the Intermediary from the Policyholder by the day following the end of the Credit Period in accordance with Schedule 3. Premiums, IPT and monies for professional experts’ costs and fees (where these are held as AXA’s agent) in the hands of the Intermediary shall be treated as having been received by AXA when they are received by the Intermediary and Premium refunds in the hands of the Intermediary shall be treated as having been paid to the relevant Policyholder only when they are paid over by the Intermediary to such Policyholder or to such Policyholder’s agent. Premiums, IPT, Premium refunds and any monies for professional expert’s costs and fees (where these are held as AXA’s agent) shall be held by the Intermediary in accordance with Schedule 3.” “No such query shall affect the commencement of the Credit Period and any Net Premium or IPT or portion of Net Premium or IPT not in query remains due and payable in accordance with this Agreement.”

[102]These provisions seem to me to be clear in their meaning and intent. The Intermediary was agent to receive the Premium on AXA’s behalf. It was not required to pay the Premium to AXA. It was required to pay the Net Premium and the IPT; the amount to be paid was shown in the statement of account that recorded the amount of the Intermediary’s commission. This is precisely what one would expect. The Intermediary did not pay over the full amount of the Premium and then receive part of it back; it paid the balance net of commission. This is sufficient to show that Mr Gale’s construction of clause 4.2.1 is wrong, because the Intermediary was not required to pay to AXA the Premium but only the Net Premium. The condition that the Premium should have been “actually received in full by AXA” is satisfied by the receipt by the Intermediary, which was authorised to receive the Premium as AXA’s agent. Mr Gale sought to emphasise the word “actually”, but I do not think that that assists him. It emphasises the need for actual receipt, rather than that the receipt should actually be by AXA, and for reasons already stated it would be wholly inconsistent with the way the AXA TOBA work to construe it as meaning that payment had to be made in full by the Intermediary. In my judgment, the word “actually” simply serves to emphasise that nothing short of the receipt of the Premium will generate the entitlement to commission.

[103]Aviva’s argument in reliance on its own terms came in the course of oral argument; it had not been foreshadowed in its skeleton argument, and even at the hearing the focus of the submissions lay elsewhere. Aviva’s Terms of Business Agreement (“the Aviva TOBA”), which governed its dealings with APIS, contained some definitions in paragraph 1.1.1. The “retail premium” was defined as “the premium payable by the customer, including premium taxes”. The “gross premium” was defined as “the retail premium less premium taxes”. The “net premium” was defined as “the gross premium less commission payable in accordance with this Agreement”. The definition of “premium taxes” was “Insurance Premium Tax or any replacement thereof”. “You” was the intermediary. Section 3, headed “Commission”, contained the following provisions:

“3.1 Basis of Commission Aviva will pay You commission on insurance business transacted on behalf of your customers by You with Aviva, in accordance with and subject to the provisions of this Agreement, for so long as You continue to be instructed by the customer to act.” “3.3 When Commission is Deductible from Premium For all business where Aviva has agreed in writing that You may deduct commission from retail premium, subject to Paragraph 3.4 [refunds of commission], You may not withdraw commission from the trust account until You have received the retail premium in cleared funds from the customer concerned, or from any person funding the premium on behalf of the customer.” (There does not appear to be any prior mention of “the trust account” in the Aviva TOBA.) Section 9, headed “Premium Settlement”, contained detailed provisions dealing with broadly the same matters as Schedule 3 to the AXA TOBA. Although of course construction of the part requires consideration of the whole, I shall set out only a few passages from Section 9. “9.1 Account Statement Aviva will prepare one or more statement(s) of account ... which shall be the basis of accounting transactions between Aviva and You.” “9.2 Settlement and Account Settlement Period Where the retail premium is not collected by Aviva, You will collect the retail premium and pay the net premium and premium taxes (after any permitted deduction of commission) ... within the account settlement period(s) ...” “9.3 Account reconciliation ... 9.3.3 If You have calculated a different commission for any policy than that calculated by Us, You should before expiry of the account settlement period: (i) provide a written indication of this accompanied by the relevant calculations, and (ii) (where applicable) provisionally deduct your commission on the basis You have calculated and pay the corresponding net premium and premium taxes; Following which We will investigate and advise You of the actual commission payable.”

[104]Mr Davenport’s short submission was that APIS was entitled to deduct commission only if Aviva agreed in writing and that there was no evidence of such an agreement. The latter part of the submission was properly and carefully made, because there was no evidence on the point either way. I was referred to the Aviva TOBA only briefly. So far as I can see, it does not make any provision for the payment of commission by any other method or within any other timescale than by deduction from the retail premium after receipt of a statement of account. It seems to me almost inconceivable that Aviva ever received the retail premium and then paid the commission. It must have received the net premium. And it must have issued statements of account on the basis of a calculation of commission and a requirement for settlement of the net sum. Even if there were no more general document, that would be sufficient to satisfy the requirement of paragraph 3.3 for an agreement in writing that commission be deducted.

[105]This discussion shows that, if an insurer contends that the calculation of its individual client balance ought not to include a deduction for commission, the administrators will wish to approach the contention with a healthy measure of scepticism. The first document to be considered will be the terms of business between the insurer and the company. But further documents may be relevant to establishing the basis on which the parties carried on their business.

Issues 3 and 4

[106]Issue 3 is: Whether (and if so, how) the administrators should distribute the APIS statutory trust pool in a situation of imperfect information.

[107]Issue 4 is: Whether (and if so, how) the administrators should distribute the ICP statutory trust pool in a situation of imperfect information.

[108]In each case, the administrators propose a scheme of distribution that is adapted from the schemes approved in Re MF Global UK Ltd (No. 3) and in Re Worldspreads Ltd. Claimants to client money would be required to submit claims by a bar date; the administrators would accept or reject the claims and would distribute on the footing that the only valid claims were those that had been accepted; there would be provision for claimants whose claims had been rejected to apply to the Court by way of appeal. In the case of APIS, it is proposed that claims be elicited by mailshots to all potential customers and to specific known insurers. However, in the case of ICP, it is proposed that a preliminary calculation of entitlement be made by the administrators on the basis of the Lockton Schedule and that this be notified to interested parties, who would be given an opportunity to make representations. The proposals are set out in detail in the terms of a draft order submitted by Mr Munby.

[109]The major questions concern the proposed scheme for APIS. The number of customers who might in theory have claims runs into the hundreds. All insurer and non-insurer clients of APIS have received mailshots on several occasions in 2013 and 2014. Only a tiny number of claims have been received. Either all or almost all of the company’s business was conducted on risk-transfer terms. Mr Davenport’s submission on behalf of Aviva is that no further steps to elicit claims ought to be taken, beyond an advertisement modelled on section 27 of the Trustee Act 1925.

[110]In considering that submission, I bear in mind that the principal purpose of CASS 5 is customer protection and that customers have priority in the statutory scheme of distribution. I also note the evidence of Mr Baker (second witness statement, paragraph 62) that “it appears that at least some of APIS’ business with insurers may have been transacted on a non-risk-transfer basis.” And as Mr Munby points out, the fact that a direction in respect of distribution does not extinguish a claim that has not been brought is likely to be cold comfort to those who may not have made claims because they did not know that they could do so.

[111]Nonetheless, considerations of reasonableness and proportion weigh heavily in the circumstances of this case. The lack of claims is not due to lack of contact; all known potential customer-claimants have already been contacted. Apart from some customers whose mail has been returned undelivered, all have had opportunity to make claims; although the mailshots have not expressly invited claims they have directed the recipients to the administrations’ website, where the necessary materials were to be found. Those customers whose mail has been returned undelivered were contacted at their last known addresses. To repeat the mailshot exercise will inevitably add further expense; the history of this matter suggests that the added expense will not be insignificant. Mr Baker’s evidence suggests only a possibility, not a likelihood, that a very small part of APIS’ business was conducted on non-risk-transfer terms; the potential that there exist valid claims that have not been advanced appears small. In the circumstances, I consider that the publication on two occasions, in both the Gazette and a national newspaper, of notices of the bar date, on the model of section 27(1) of the Trustee Act 1925, will suffice.

[112]A distinct question is whether the administrators ought to be the final arbiters of any claim or whether there ought to be a right of appeal. I agree with the proposal of the administrators that there be a right of appeal, modelled on the insolvency procedures.

[113]In the case of ICP, there is some possibility that there will be a surplus after distribution of client moneys. The question arises whether such a surplus ought to be retained in Court to meet any late claims or whether it ought to be made available to the general body of creditors of the company. In my judgment, it ought to be available to the creditors. The proposed method of eliciting and dealing with claims is robust and sound, and in those circumstances the small chance that some valid claims will not be made is more than offset by the known claims of creditors of the company.

[114]Any particular points of detail in the proposed schemes of distribution can be dealt with upon the handing down of this judgment.

Issue 5(a)

[115]Issue 5(a) is: Whether a CASS 5 statutory trust pool can in principle assert a tracing claim into another CASS 5 statutory trust pool in relation to a breach of trust committed prior to pooling.

[116]This issue is preliminary to Issue 5(b), which relates to a potential tracing claim by the APIS client money pool into the assets of the ICP client money pool. The question is whether a breach of the statutory trust under CASS 5.3.2 R is capable in principle of giving rise to tracing rights, when no provision is made in that regard in CASS 5. The administrators ask the question in a spirit of neutrality. AXA and Coutts make no material input on the question. Aviva strongly contend that in principle a tracing claim is available.

[117]Tracing rights were considered briefly by Arden LJ in Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Ltd

[2010] EWCA Civ 917

, [2011] Bus LR 277, at [70] – [73], but it was unnecessary to express any concluded view on the matter. Anyway, that case involved the use of the so-called “alternative approach” under CASS 7, whereby money was paid into the firm’s own accounts before being segregated. It therefore concerned different factual circumstances from those of the present case.

[118]In agreement with the submissions of Mr Davenport for Aviva, I see no good reason of law or principle why one statutory trust should not in principle be able to trace into the assets of another statutory trust where there has been a breach of trust. It is true that in the Lehman Brothers case the Supreme Court emphasised that statutory trusts under the Client Assets Sourcebook were not confined by the general law of trusts but had to be understood in terms of their own regulatory scheme. But that does not mean that victims of wrongs against the trust are deprived of the tools that equity has developed for their protection. The position is in my view correctly stated by Lewin on Trusts (19th edition), at paragraph 6-090, with reference to Arden LJ’s judgment at [64] to [74] in the Lehman Brothers case:

“Where a trust is created by statute, the statute may not create a comprehensive set of rules concerning the rights of the beneficiaries or the duties, rights and powers of the trustees. In such a case, it is inappropriate to apply the general rule of interpretation which applies to statutory provisions and non-statutory instruments that if provision is not made for some event, the most usual inference to be drawn is that nothing is to happen. Rather, the general rules of trust law and principles of equity, such as rules concerning self-dealing, the duties of a trustee to account, tracing and pooling of assets, so far as not excluded or modified by statute, are applied by default so as to fill the gap left by the terms of the statute ...”

[119]Where the breach of trust has applied prior to pooling, the effect of successful tracing in support of a claim will be to augment the pool to the benefit of those who were beneficiaries of a statutory trust before pooling occurred and whose interest now lies in the pool.

Issue 5(b)

[120]Issue 5(b) is: Whether the APIS statutory trust pool may have such a claim (i.e. a tracing claim in relation to a breach of trust committed prior to pooling) against funds held by ICP arising from the payments of £120,000 on 3 October 2012 and £250,000 on 23 October 2012 and, if so, in what amount.

[121]The two payments were made from the APIS client accounts to the ICP client accounts only a matter of weeks before the companies went into administration. They form part of a series of inter-account transfers, as follows:• On 9 August 2012 three transfers were made from an ICP Statutory Trust Client (Special Reserve) Account to the ICP Office Account in the sum of £521,870.

• Also on 9 August 2012: £521,870 was transferred from the ICP Office Account to the APIS Office Account; a further £377,605.91 was transferred into the APIS Office Account from the APIS Statutory Trust Client (Special Reserve) Account; and £1,000,000 was transferred from the APIS Office Account to Rosenblatts, the Solicitors acting for the group of companies.

• On 14 September 2012 £120,000 was transferred from an APIS Capital Resources Account to an APIS Statutory Trust Client (Current) Account. On the same day £120,617.17 was transferred from the APIS Statutory Trust Client (Current) Account to an APIS Statutory Trust Client (Special Reserve) Account.

• On 3 October 2012 £120,000 was transferred from the APIS Statutory Trust Client (Special Reserve) Account to the ICP Statutory Trust Client (Special Reserve) Account. This is the first of the payments mentioned in Issue 5(b).

• On 23 October 2012 £250,000 was transferred from the APIS Statutory Trust Client (Special Reserve) Account to the ICP Statutory Trust Client (Current) Account. This is the second of the payments mentioned in Issue 5(b). The money was immediately transferred to the ICP Statutory Trust Client (Special Reserve) Account.

[122]The administrators have investigated the inter-company transfers. The information available to them indicates that the transfers on 9 August 2012 were made for the purpose of funding the payment of deferred consideration due to the former shareholders of REPB under the transaction in August 2011 (see paragraph 28 above). They have not further ascertained the rationale of the sequence of payments. The payments on 3 October and 23 October 2012 had the effect, of course, of partially replenishing the accounts from which the transfer on 9 August 2012 had originated. After 23 October 2012 ICP continued to trade, and the receipts into and payments out of its client accounts far exceeded the £370,000 that is the sum of the payments mentioned in Issue 5(b).

[123]In these circumstances, the administrators identify three questions: first, whether the payments on 3 October and 23 October 2012 were in breach of trust on the part of APIS; second, whether ICP might have a valid defence to a tracing claim—for example, bona fide purchase for value without notice; third, whether any tracing claim on behalf of the APIS statutory trust would fail by reason of the subsequent transactions on the ICP client accounts. They propose that these questions be addressed in a practical manner by authorising the administrators to seek to negotiate a settlement between the APIS statutory trust and the ICP statutory trust, with each administrator acting for this purpose for a separate statutory trust and taking his own legal advice. The Court would be asked to approve any such settlement. The proposed manner of proceeding is based loosely on that sanctioned by David Richards J in In re MF Global UK Ltd (in special administration) (No. 5)

[2014] EWHC 2222 (Ch)

, [2014] Bus LR 1156. AXA is content with the proposal and Coutts has not commented on it.

[124]For Aviva, Mr Davenport did not positively oppose the direction sought. However, he made two points: first, if the administrators were authorised to seek to resolve the issue in the manner proposed, a cap ought to be placed on the costs they could incur in doing so; second, as both APIS and ICP are before the Court, the Court is well placed to adjudicate now on the merits of the claim, and to do so in favour of the APIS statutory trust.

[125]There is great attraction in Mr Davenport’s suggestion that I should simply grasp the nettle and either adjudicate on the breach of trust claim or at least stipulate the basis on which the administrators are to proceed for the purposes of distribution. However, I have decided that I ought to resist that tempting course. I have not heard proper argument on the breach of trust claim. Mr Davenport has submitted forcefully that there is no answer to it. Mr Munby has very properly drawn to my attention matters that might be raised in answer to the claim; however, it was not within his remit to seek to rebut the claim or to develop the opposing arguments. The Court’s position is accordingly very different from what it would be if the issue had been litigated. This is a strong reason against determining the issue, and it gives me pause before directing that the administrators must proceed on a particular footing. In the circumstances I limit myself to the following general observations.

[126]First, the payments in October 2012 from the APIS client account to the ICP client account look very much like breaches of trust. However, if the sequence of payments is viewed in the round it appears that the trustees have taken money from both statutory trusts for their own purposes and that the ICP trust pool has suffered a deficit of £151,000 from the transactions, having funded £521,000 in respect of deferred consideration but received back only £370,000. It may be that the interrelationship of the various payments requires closer consideration than it received before me.

[127]Second, it is hard to see how the defence of bona fide purchase could arise in this case, as the payer and the recipient of the moneys were controlled by the same people.

[128]Third, if the payments were made in breach of trust, the critical question is whether the APIS statutory trust can trace into the funds in the ICP statutory trust and so assert a proprietary claim. As the consequence of the payments would be that the sum standing to the credit of the ICP client accounts was attributable to payments from different trusts, there would be a so-called mixed substitution, and the starting point would be that the sum standing to the credit of the ICP client accounts was owned beneficially by the ICP statutory trust and the APIS statutory trust rateably according to their respective contributions to it. See Lewin on Trusts (19th edition) at paragraphs 41-063 and 41-064. However, as the ICP client accounts were running accounts, where there were receipts in and payments out after 23 October 2012, the attribution of the surviving balance as at the date of the primary pooling event to the respective contributions of the two trusts would, prima facie, involve the application of the rule in Clayton’s Case (1816) 1 Mer. 572, whereby payments out of a running account are attributed to payments into the account in the order in which the payments in were made (that is: first in, first out), at least where the claims are those of innocent competing beneficial claimants. See Lewin on Trusts at paragraphs 41-066ff. It appears to be common ground that the application of the rule in the present case would defeat a proprietary claim by the APIS statutory trust pool against the ICP statutory trust pool.

[129]Mr Davenport submitted that the rule in Clayton’s Case is easily displaced and ought to be displaced in the present case. He relied on the following passage in Lewin on Trusts at paragraph 41-071 (references omitted):

“The rule can, however, be displaced by even a slight counterweight. The rule will be displaced if its application is impracticable on account of the costs involved; if it is contrary to the presumed intention of the contributors, as where contributions have been made into the account with a view to investment in a common investment fund; if contributors could not have expected their payments into the fund to have been paid out in the same sequence; and if its application would be an unjust or unfair method of apportioning loss among beneficiaries who have suffered a shared misfortune.”

Mr Davenport said that, as against the good claim of the APIS statutory trust, which faced a substantial shortfall, there were either no or very few policyholder claims against the ICP statutory trust, which faced no more than a modest shortfall and might produce a surplus for the general body of creditors. The presumed intentions of the insurers and the customers did nothing to support the application of the rule in Clayton’s Case in the circumstances, and rateable apportionment would be both just and straightforward.

[130]Those contentions are attractive but they will require some rigorous scrutiny. In Barlow Clowes International Ltd v Vaughan

[1992] 4 All ER 22

, the Court of Appeal (Dillon, Woolf and Leggatt LJJ) accepted, with varying degrees of reluctance, that the rule in Clayton’s Case applied not only as between the parties to a running account (typically, banker and customer) but also as between innocent beneficiaries whose payments to a third party had been paid by that third party into a running account. However, the Court did not apply the rule to the facts of that case, because the investors must be taken to have intended that their investments stand as contributions to a common fund. Dillon LJ, who was relatively sympathetic to the rule, said that it was necessary to consider “the nature of the transaction as the investors intended it to be at the outset when they paid their moneys” and not “the very different circumstances of the actual outcome, of which, when they contributed, they knew nothing” (see 31g). By contrast, Woolf LJ said at 42f:

“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”; and although his conclusion as to the actual intention of the investors was the same as that of Dillon LJ (see 41d), he would anyway have disapplied the rule on the basis of the intentions that it could be presumed the investors would have had if they had foreseen the events which had happened and the injustice that the operation of the rule would cause (see 41e-j). Leggatt LJ’s reasoning does not so clearly extend to this latter point, but, although he grounded his decision on the intention of the investors to contribute to a common fund (see 45h and 46c-h), he regarded the rule as one of convenience and inapposite for “the amelioration of a common misfortune”

. Despite some differences in the three judgments, it seems to me that the main point to be drawn from the case is in what Woolf LJ said at 39b:

“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. ... 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.”

See also the discussion by Lawrence Collins J in Commerzbank Aktiengesellschaft v IMB Morgan plc [2004] EWEHC 2771 (Ch), [2005] 2 All ER (Comm) 564, at [44] to [50]: the rule in Clayton’s Case was not applied “because it would be both impracticable and unjust to apply it.” The passage from Lewin on Trusts, cited above, which refers to several other authorities, seems to me accurately to represent the current state of the law.

[131]In the present case, the application of the rule in Clayton’s Case gives rise to no significant practical difficulties; nor does the rateable method of apportionment. It is not at present obvious, at least to me, that the justice of the matter, if viewed without reference to the intention of the relevant contributors, dictates that the rule ought not to be applied. The different views apparent in Barlow Clowes as to the justice of the application of the rule to a case of common misfortune (compare in particular Dillon LJ at 32c-d and Leggatt LJ at 46g-j) show the need to focus on specific matters that justify disapplying the rule, as does the fact that the Court of Appeal’s acceptance that authority establishes the rule as the starting point would be undermined if the rule were disapplied on purely general grounds. It is accordingly likely that the administrators will wish to have particular regard to the intentions of the clients whose money was being held by APIS and by ICP, as they can be inferred from the relevant documentation, and, possibly, to the significance of the sequence of payments set out above.

[132]Accordingly, I consider that a reasonably quick and proportionate method of addressing this issue, though a rather unusual one, is along the lines proposed by the administrators: that, for the purposes of negotiation only, one of them should represent the APIS statutory trust and the other the ICP statutory trust; that each should take advice on this particular issue from a separate solicitor within the firm that currently acts for them; and that they should seek to negotiate a settlement for approval by the Court in due course. It will be important that an anxious eye is kept on costs, because the sums at stake are not great; I have it in mind to impose a fairly tight limit on the costs that can be incurred in this exercise. The details of the order can be worked out when this judgment has been handed down.

Issue 6

[133]Issue 6 comprises a single issue giving rise to, or comprising, five sub-issues. The issue is: Whether (and if so, to what extent) costs associated with the ascertainment and distribution of a statutory trust pool should be paid from that pool. The sub-issues are:(a) What is the meaning and scope of “the costs properly attributable to the distribution of the client money” in CASS 5.3.2 R (4)?

(b) Is the court’s Re Berkeley Applegate jurisdiction excluded by CASS 5.3.2 R (4)?

(c) (Consequent upon the determination of sub-issues (a) and (b)) are the administrators’ costs and expenses incurred hitherto in undertaking the categories of work identified by the administrators in relation to the client money recoverable, in principle, from the statutory trust pools either under CASS 5.3.2 R (4) or on the basis of the Re Berkeley Applegate jurisdiction?

(d) Are the administrators’ costs and expenses of undertaking the further work which they anticipate in relation to the client money recoverable, in principle, from the statutory trust pools either under CASS 5.3.2 R (4) or on the basis of the Re Berkeley Applegate jurisdiction?

(e) In respect of each category of costs which the court determines are recoverable from the statutory trust pools in principle, ought the amount of those costs be reduced from the amounts identified by the administrators?

[134]Issue 6 was the major adversarial part of the applications. The administrators contend that they are entitled to payment for the work done and remaining to be done in respect of the ascertainment of entitlements to the statutory trust pools as well as the actual process of distribution. For Aviva, Mr Davenport gave strong expression to concern over the administrators’ handling of the matter and the apparent erosion of the trust pools in costs and expenses. Although he raised some legal objections to the recovery of any costs other than in respect of the process of distribution itself, the gravamen of his submissions was that the administrators had not acted promptly and proportionately and that any costs to be recovered ought to be drastically pruned.

[135]A convenient starting point is a Total Costs Schedule (“TCS”) prepared by the administrators, which shows the categories of work done and the total costs incurred in respect of each of those categories(a) up to 11 January 2015 and

(b) thereafter until 2 August 2015. The TCS relates only to work done on, and costs incurred in respect of, the client-money issues: it does not include the general costs of administration; it does not include the costs incurred since 2 August 2015; it does not include the costs yet to be incurred pursuant to such directions as I shall give. The following are some of the main points shown on the TCS:

• The total costs and disbursements to 2 August 2015 are shown as £587,115.96 inclusive of VAT (£489,263.30 net). The costs attributable to the ICP trust pool are shown as £249,088.25 (£207,573.54 net). The costs attributable to the APIS trust pool are shown as £338,027.71 (£281,689.76 net). As at 2 August 2015 the total costs therefore represented 46% of the combined value of the statutory trust pools (paragraph 2 above).

• When the present applications were issued and served in January 2015, the total costs and expenses were £450,560.56 (£375,467.13 net of VAT). That equates to roughly 35% of the combined value of the statutory trust pools.

• The work done up to January 2015 included the following categories of work: meeting and communicating with the companies’ directors and staff and attempting to perform a reconciliation of the client accounts; liaising with Lockton in respect of the Lockton Schedule; reviewing documentation in an attempt to calculate client balances; coordinating the funding and production of the forensic accountants’ report (paragraph 38 above); mailshots to clients of the companies; correspondence and communications with third parties in respect of client moneys; work in respect of the applications.

[136]A shorter, summary document, produced at the hearing, updates some of the figures to 6 November 2015. It shows that the total costs and disbursements as at that date, inclusive of VAT, were £735,757, of which £404,505 was referable to the APIS statutory trust and £331,252 to the ICP statutory trust. This is rather more than 57% of the combined values of the statutory trust pools. Of course, more work remains to be done before distribution is completed.

[137]It is convenient to address Issue 6 by reference to the sub-issues set out above.

[138]I shall set out again the text of CASS 5.3.2 R:

“A firm (other than a firm acting in accordance with CASS 5.4) receives and holds client money as trustee (or in Scotland as agent) on the following terms: (1) for the purposes of and on the terms of CASS 5.3, CASS 5.5 and the client money (insurance) distribution rules [i.e. the rules in CASS 5.6]; (2) subject to (4), for the clients (other than clients which are insurance undertakings when acting as such) for whom that money is held, according to their respective interests in it; (3) after all valid claims in (2) have been met, for clients which are insurance undertakings according to their respective interests in it; (4) on the failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2) and (3); and (5) after all valid claims and costs under (2) to (4) have been met, for the firm itself.”

[139]Issue 6(a) is as to the meaning and scope of the words “the costs properly attributable to the distribution of the client money” in paragraph (4). Mr Davenport submitted that the words are “unambiguous” and mean “precisely what they say”: “costs incurred in effecting ‘the’ distribution. “Thus the sorts of costs comprehended by the CASS 5.3.2 R formula are limited and extend to categories such as corresponding with beneficiaries to alert them to the impending distribution and to obtain their instructions as to recipient accounts, and bank charges payable upon effecting the payments” (skeleton argument). It would, he submitted, strain the language of the rule to suggest that the costs of such activities as dealing with and rejecting unfounded claims were attributable to ‘a’ or ‘the’ distribution; on the contrary, they could not be, because they led to no distribution. Similarly, costs incurred in seeking to ascertain whether people wished to claim in the first place could not be brought within the language of the rule without straining it to breaking point. The rule itself was based on the assumption that the identification of beneficiaries would not be a matter of difficulty and therefore it made no allowance for activities in that regard. Accordingly, if it became clear that paucity of records created a need for significant work to be done to identify claimants, an application ought to be made to the Court for directions and for prior sanction of remuneration.

[140]Mr Davenport’s submission was therefore based primarily on the words of the rule itself. However, in oral argument he sought to bolster it by reference to the decision of the Court of Appeal in Rayner v Lord Chancellor

[2015] EWCA Civ 1124

, in which judgment was handed down on 9 November 2015. The case concerned the qualified right of a non-funded party in whose favour an order for costs had been made against a funded party to recover costs against the Legal Services Commission pursuant to regulation 5 of the Community Legal Service (Cost Protection) Regulations 2000. Regulation 5(4) provided that the costs for which recovery could be made were “so much of those costs as is attributable to the part of the proceedings which are funded proceedings.” The Lord Chancellor contended that the test of whether the costs were “attributable to the part of the proceedings which are funded proceedings” was whether they were incurred during the period that the proceedings were funded. Mr Rayner contended that as a matter of ordinary English the word “attributable” connoted a relationship of causation and that it was inappropriate to import a temporal test. The Court of Appeal agreed with the Lord Chancellor. Mr Davenport submitted that this indicated that only costs incurred during the period of the actual distribution process were within CASS 5.3.2 R.

[141]I do not consider Rayner v Lord Chancellor to be of any assistance whatsoever. 1) One of the cases referred to in argument and in the judgment of Underhill LJ was S v S

[1978] 1 WLR 11

, which concerned the meaning of the word “attributable” in section 14(5) of the Legal Aid Act 1974. Giving the judgment of the Court of Appeal, Stamp LJ said at 20:

“The word is one which takes its colour by reference to the context in which you find it.”

With respect, that is plainly right. The meaning of the word in the Legal Aid Act 1974 or in the Community Legal Service (Cost Protection) Regulations 2000 tells us nothing about its meaning in CASS 5.3.2 R. 2) In Rayner v Lord Chancellor, Underhill LJ, with whose judgment Gloster LJ expressed entire agreement, acknowledged that the phrase “attributable to”, taken in isolation, was capable of bearing either the temporal or the causal construction contended for. He therefore considered at length the two competing constructions in the context of the statutory scheme before him. It was through that exercise that he arrived at an answer to the issue of construction. It is not profitable to explore his reasoning here. 3) Interestingly, I was not referred to section 14(1)(b) or section 14A(8) of the Limitation Act 1980, in which “attributable” has been held to mean “capable of being attributed to”, though with reference to causation rather than responsibility: Dobbie v Medway Health Authority [1994] EWCA Civ 13,

[1994] 1 WLR 1234

. Those provisions and that authority are just as irrelevant to this case as is Rayner v Lord Chancellor, though probably not more so.

[142]For the administrators, Mr Munby submitted that the words of CASS 5.3.2 R ought not to be given such a restricted meaning. Rather they should be read as referring to all the costs incurred for the purpose of bringing about the distribution of the client moneys. He submitted that this was the more natural reading of the rule, which did not say “the costs of distribution” but “the costs properly attributable to the distribution”. It was also consistent with the similarly broad language used in the guidance at CASS 5.3.1 G, which refers to “costs relating to the distribution” (see paragraph 20 above). Mr Munby also suggested that, if the restrictive construction were adopted, it would be difficult or impossible to find an insolvency practitioner willing to take an appointment in the case of an insolvent firm with substantial client moneys for distribution but few assets of its own. Finally, he observed that the orders made in the cases concerning CASS 7, where the corresponding provision is CASS 7.7.2 R (4), had been drawn on the basis that costs were not limited in the manner contended for by Aviva.

[143]In my judgment, Mr Munby’s submissions are substantially correct. 1) Taken in isolation, the words in CASS 5.3.2 R are capable of bearing either the narrow meaning contended for by Mr Davenport or the broader meaning contended for by Mr Munby. 2) The phrase “costs properly attributable to the distribution” is perhaps slightly more suggestive of the broader meaning. This impression gains support from the guidance in CASS5.3.1 G, where “costs relating to the distribution” is presumably meant to mean the same thing. Costs that are incurred for the purpose of enabling a distribution to take place would seem to be “attributable” to that distribution, as a matter of normal parlance. If a restrictive provision had been intended, it would have been easy to make that clear. 3) Mr Davenport may well be correct to say that the drafting of the provisions proceeded on the assumption that moneys have been properly segregated and that adequate records have been kept. The fact remains that this will not be so in all cases. I see no necessity to construe the rules in such a manner that they are limited in their application to the case of good practice by the firm, if such a construction is not compelled by the wording of the provisions. 4) In this regard it is relevant to have regard to the nature and purpose of the statutory trust and the duties of the office-holders after a primary pooling event. On behalf of the firm, the office-holders are required to get in assets properly belonging to the trust in accordance with CASS 5.6.7 R (3). Subject to that, their only substantive duties are to distribute in accordance with the client money (insurance) distribution rules; see paragraph 25 above. That is to say, the office-holders have no function in terms of investment or other utilisation of the trust moneys; they are simply required to pay them to the persons entitled to them. Work done for the purpose of ascertaining how that primary obligation is to be performed cannot be regarded as a breach of trust or fiduciary obligation but must be regarded as ancillary to the performance of the trust. This supports the view that it should be regarded as attributable to the distribution of the trust moneys. 5) In most cases the office-holders will not need to investigate the proper claims on the fund. Sometimes, however, they will; this is recognised by the reference to meeting “valid claims”: see CASS

5.3.2 R (3) and (5). This again tends to support the view that work done for the purpose of identifying valid claims is “attributable to the distribution of the client money in accordance with (2) and (3)”. 6) It is, in my view, quite impossible to suppose that, where it is indeed necessary to carry out work for the purpose of identifying the claimants and the extent of their valid claims, remuneration is unavailable for such work. Some such work will always be required, because even the best records need to be analysed, interpreted and applied. In some cases, a great deal of work might be required. It cannot be right to suppose that remuneration is excluded: the provisions dealing with distribution after the failure of a firm would be self-defeating. Mr Davenport implicitly recognised this, because he submitted that the proper course was for office-holders to make advance application to the Court to sanction their remuneration; he said that there would be no prospect of sanction being given for incurring the level of costs sought by the administrators in the present case. However, the Court can only sanction costs in advance if the costs are in principle recoverable. The point of prior sanction is that a trustee or other fiduciary knows in advance the basis on which the work is done; without it, he takes the chance that he will not be remunerated. The substantive basis of recovery of costs for such work as the identification of valid claims can only be CASS 5.3.2 R or the Re Berkeley Applegate jurisdiction (discussed briefly below). I agree with Mr Davenport that, to the extent that CASS 5 permits recovery of costs in a proper case, it is unnecessary and therefore inappropriate to invoke the Re Berkeley Applegate jurisdiction.

[144]Accordingly I consider that the words “the costs properly attributable to the distribution of the client money” mean the costs incurred for the purpose of enabling such distribution to be made and the costs of making such distribution.

[145]As I have indicated, this conclusion makes it strictly unnecessary to consider the Re Berkeley Applegate jurisdiction. I shall however discuss it briefly. For present purposes it suffices to refer to the dictum of Edward Nugee Q.C. sitting as a deputy High Court

judge in In re Berkeley Applegate (Investment Consultants) Ltd [1989] 1 Ch. 32, at 50:

“The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest ... or by a receiver appointed by the court whose fees would have been borne by the trust property ...; and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity ...”

[146]Mr Davenport’s basic objection to the use of the jurisdiction in the present case was that provision for costs was made by CASS 5 itself. I agree with that objection. But, as already explained, I take a broader view of CASS 5.3.2 R than was urged upon me by Mr Davenport. In my view, any work that might properly be done in order to enable the administrators to distribute the trust moneys is capable of being remunerated under that rule; therefore there is no justification for recourse to a general equitable jurisdiction. However, if I had agreed with Mr Davenport that the rule related only to the costs of making the distribution, I would have held the Re Berkeley Applegate jurisdiction to be available in respect of costs relating to preliminary work not covered by the rule. The jurisdiction is not excluded by any provision of CASS 5. The regulatory scheme does not exclude the operation of general principles of equity and trusts; this very point was made strongly on behalf of Aviva in support of the ability of the APIS trust to trace into assets held in the ICP client accounts. I see no sound policy reason for excluding the equitable jurisdiction, which is of course discretionary and to be exercised only if the facts of the case justify it. On the contrary: if there may be cases where significant work is required to enable a distribution to take place in accordance with the statutory trust but there is no mechanism in the rules by which the office-holders may be remunerated for that work, there is a strong policy reason for exercising the general equitable jurisdiction. The fact that the jurisdiction is to be sparingly used is not itself an objection to its use in the present case or in similar cases.

[147]It follows that in principle the areas of work summarised by the administrators in the TCS and the work that remains to be done pursuant to the directions that I shall give are capable of being remunerated under CASS 5.3.2 R or (if I am wrong in my construction of that rule) under the Re Berkeley Applegate jurisdiction.

[148]At the heart of Mr Davenport’s concerns was the amount of costs incurred and sought to be recouped by the administrators. Issue 6(e) relates to this point. In my judgment, the proper way of dealing with questions of the amount of costs that ought to be allowed is by referring the matter to a Registrar of the Companies Court, who will have expertise in assessing office-holders’ remuneration. In those circumstances, it is unlikely to be helpful if I make observations on specific matters of concern. I shall, however, observe that the costs sought by the administrators appear disconcertingly high, having regard to the modest size of the funds, and will require close scrutiny. In a case such as the present, when it is apparent at an early stage that there are necessary enquiries before distribution can be commenced, the office-holders can reasonably be expected to devise at the outset a strategy for carrying out the work efficiently and with regard to the size of the trust fund, so that expenditure is planned and controlled. Although an early application to the Court for directions is not itself a condition of the recovery of costs and disbursements, without such an application the office-holders run the risk that the work they have done will be regarded as unreasonable or disproportionate and of being unremunerated for significant parts of it. Of course, that is not to say that this will necessarily be the outcome in the present case.