Custom House Capital ((in Liquidation))

• Jurisdiction: Ireland
• Judge: Ms. Justice Finlay Geoghegan
• Judgment Date: 26 July 2017
• Neutral Citation: [2017] IEHC 484
• Court: High Court
• Docket Number: [2011 No. 219 MCA]
• Date: 26 July 2017

IN THE MATTER OF CUSTOM HOUSE CAPITAL LIMITED (IN LIQUIDATION)

AND IN THE MATTER OF REGULATIONS 157 AND 158 OF THE EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGULATIONS 2007

AND IN THE MATTER OF THE COMPANIES ACTS 1963 – 2012

AND IN THE MATTER OF THE INVESTOR COMPENSATION ACT 1998 ON THE APPLICATION OF THE OFFICIAL LIQUIDATOR

[2017] IEHC 484

Finlay Geoghegan J.

[2011 No. 219 MCA]

THE HIGH COURT

Companies – The Companies Acts 1963-2012 – Reg. 157 and reg. 158 of the European Communities (Markets in Financial Instruments) Regulations 2007 – Winding up of company by Court – Appointment of liquidator – Distribution of assets of company – Mode of distribution – Pari passu distribution – Investor Compensation Act 1998

Facts: The official liquidator sought directions of the Court in relation to the distribution of the monies that laid in the pooled bank accounts in which there was a shortfall by reason of misappropriations. The key issue arose as to whether the Court should direct the distribution in accordance with the rule in Clayton's case ( Devaynes v. Noble [1816] 1 Mer 572, or a pro rata distribution.

Ms. Justice Finlay Geoghegan held that the distribution of monies should be done on pro rata basis as the equities between the competing creditors were equal. The Court held that Clayton's rule was inapplicable as there was no evidence that a group of creditors had a greater equity than others. The Court held that after the company assets were discharged, the liquidator should have had recourse to the client assets in the form of misappropriated monies, which became available for distribution to the clients. The Court granted the declaration to the effect that if the assets of the company were exhausted without the discharge of the liquidator's reasonable expenses, the liquidator would have had recourse to the recovered misappropriated funds to discharge the said expenses provided that the liquidator would have maintained separate record of expenses incurred by him.

JUDGMENT of Ms. Justice Finlay Geoghegan delivered the 26th day of July 2017

1 This judgment is given on an application brought by Kieran Wallace, Official Liquidator of Custom House Capital Limited (in liquidation) (‘the liquidator’ and ‘CHC’ respectively) seeking directions and determination of issues arising in the winding up by the Court of CHC. The application was heard by me sitting as an additional judge of the High Court pursuant to s. 2 (5)(a)(ii) of the Courts (Establishment and Constitution) Act 1961 as amended by s. 32 of the Court of Appeal Act 2014.

2 The application, not for the first time, raises difficult and unusual issues in this complex liquidation in which I have already delivered written judgments and made rulings and orders since 2011.

3 A list of issues were prepared in advance of the hearing but by reason of matters raised during the hearing and certain factual clarifications made the issues to be decided by the Court at the end of the hearing had changed. In summary the directions sought by the liquidator and applications pursued require a decision from the Court on three sets of issues which, whilst capable of being separately identified, are interconnected such that the conclusions reached on each have a bearing on the other. They are:

1. How should the liquidator distribute monies now standing to the credit of pooled bank accounts in which there is a shortfall by reason of misappropriations?

2. How should the liquidator distribute monies he may recover from properties, funds or companies into which misappropriated monies were paid?

3. What, if any, order may or should the Court now make pursuant to Regulations 157 and 158 of the European Communities (Markets in Financial Instruments) Regulations 2007 ( S.I. 60 of 2007) as amended (MiFID Regulations) in relation to the liquidator's application to have recourse or rights against client money or financial instruments.

4 Prior to considering these issues it is necessary to set out briefly the background and position reached in the winding up of CHC at the date of the issue of this application, 1st March, 2017. A fuller background to the winding up of CHC is set out in a judgment delivered by me on 9th October, 2012 ( [2012] I.E.H.C. 382) on a prior application of the liquidator.

5 CHC was a private limited company incorporated in 1997. Since 2007 it had been authorised under Regulation 11 of the MiFID Regulations to operate as an investment firm. It was also approved pursuant to the Pensions Act 1990 (as amended) as a PRSA provider and also as a Qualifying Fund Manager in relation to the provision of Approved Retirement Funds (‘ARFs’) and Approved Minimums Retirement Funds (‘AMRFs’).

6 Since 2009 the Central Bank had engaged with CHC by reason of concerns raised in the first instance that client monies were being invested without knowledge or consent in the Mezzanine Bond Fund of CHC. As early as April, 2010 the Central Bank gave certain directions which remained in force at the date of commencement of the winding up.

7 In July, 2011 the High Court, upon the application of the Central Bank, appointed two of its executives as inspectors pursuant to Regulation 166 of the MiFID regulations. They presented interim reports and then a final report to the Court on 19th October, 2011. The version of the final report which was authorised for publication has been before the Court in the winding up. The inspectors stated at para. 23 by way of general conclusion:

‘In the introduction to the Report, the scale of the misconduct of CHC was summarised, with the body of the Report providing more detail on specific issues. The exact sums of money taken directly and indirectly from clients by CHC and placed into property investments and/or used to meet other cash needs cannot be precisely stated without a detailed reconciliation of clients' holdings. However, it is clear that this amounted to in excess of €56m. This does not include the funds owed to Mezzanine Bond holders, which amount to an additional €10.4 million (exclusive of interest). There was a systematic and deliberate misuse of assets and cash belonging directly or indirectly to clients of CHC. This misuse was deliberately disguised by CHC through the use of false accounting entries and the issue of false and misleading statements to clients.’

8 On 21st October, 2011 the High Court (Hogan J.) made an order on the application of the Central Bank pursuant to Regulation 172 of the MiFID Regulations that pursuant to the provisions of the Companies Acts 1963 – 2009, CHC be wound up by the Court and appointed Kieran Wallace as official liquidator of CHC. Mr Wallace, on the same date, was also appointed administrator of CHC for the purposes of s. 33A of the Investor Compensation Act 1998 as amended.

9 Prior to that, in early 2011 CHC had sought help from Horwath Bastow Charleton (‘HBC’) in relation to the management of its business. On 13th October, 2011 a sub-management agreement was entered into between CHC and Horwath Bastow Charleton Wealth Management (now Bastow Charleton Wealth Management Limited) (‘BCWM’) to manage the assets and business of CHC pursuant to a sub-management agreement. Following the winding up of CHC, a new sub-management agreement was entered into by the liquidator with BCWM pursuant to which BCWM as agent for CHC (in liquidation) has managed client assets previously managed by CHC. This agreement, with some amendments, remains in place.

Post winding up

10 The liquidator was and is faced with a highly complex and unusual situation in the winding up of CHC. The inspectors' report records that in 2011 CHC had under its management or control client funds with an estimated nominal value of €1.1 billion. Further, those funds were held in many different types of investments. Added to that was the very significant misappropriation of client funds which the inspectors considered was deliberately disguised by CHC through the use of false accounting entries and the issue of false and misleading statements to clients.

11 The liquidator was nominated by the Central Bank. When he accepted his appointment he did not seek an indemnity in relation to his costs and expenses of the winding up. It became apparent to him some time after the commencement of the winding up that the assets of CHC, as distinct from client funds under its management or control, were in relative terms small.

12 The work required of the liquidator in this liquidation has broadly fallen into two parts. First, the normal work of an official liquidator in a winding up by the Court in relation to the assets and liabilities of the company and regulatory matters, (‘company work’). The second is the unusual and highly complex work in relation to distribution of and disengagement of CHC from the client assets under its control or management (‘client work’).

13 In very broad terms the liquidator treated the client assets as falling into two categories; (1) those which were considered to be segregated and (2) those considered to be pooled. Within each there were again, broadly, three classes of client assets: investments in equities, in property and in cash or cash funds. Within each class there are differences in the type of asset as many are not directly held by clients but rather held through corporate entities such as companies or unit trusts or products appropriate to pension related investments including ARFs, ARMFs and PRSA products.

14 The scale of the potential fraud and misappropriation identified in the inspector's reports has both complicated and required significant reconciliation work by the liquidator prior to the distribution of client assets to or at the direction of those who appear entitled to same.

15 The liquidator in 2012 first addressed segregated client assets in equities and cash. By March...