Custom House Capital Ltd ((in Liquidation))

JurisdictionIreland
JudgeMr. Justice Heslin
Judgment Date13 October 2021
Neutral Citation[2021] IEHC 842
CourtHigh Court
Docket NumberRecord No. 2011/219MCA
In the Matter of Custom House Capital Limited (In Liquidation)
And in the Matter of the Companies Acts 1963 – 2012 on the Application of the Investor Compensation Company DAC

[2021] IEHC 842

Record No. 2011/219MCA

THE HIGH COURT

Right of subrogation – Net loss – Investor Compensation Act 1998 – Applicant seeking directions as regards the scope and operation of its right of subrogation pursuant to s. 35 of the Investor Compensation Act 1998 – Whether the applicant’s right of subrogation was restricted to the assets of the company

Facts: On 21 October 2011 an order was made that Custom House Capital Ltd (CHC) be wound up, pursuant to the provisions of the Companies Acts 1963–2009. Mr Wallace, a Chartered Accountant and Insolvency Practitioner, was appointed as official liquidator and administrator within the meaning of the Investor Compensation Act 1998 (as amended). The Investor Compensation Company DAC (ICCL), an independent statutory body established under the 1998 Act to provide compensation to customers of failed investment firms in the circumstances prescribed by the 1998 Act, applied to the High Court pursuant to s. 231 of the Companies Act 1963 and/or pursuant to the inherent jurisdiction of the court, seeking directions as regards the scope and operation of the ICCL’s right of subrogation pursuant to s. 35 of the 1998 Act, in circumstances where the ICCL had paid, or would pay, compensation to the clients of CHC who had suffered a “net loss” within the meaning of s. 30(1) of the 1998 Act.

Held by Heslin J that the ICCL was not entitled to the reliefs sought in paragraphs 4 to 7 of the notice of motion dated 10 December 2019. Whereas Mr Fagan, on behalf of the ICCL, set out 6 questions (at para. 86 of his 10 December 2019 affidavit), Heslin J held that the answers to same were as follows: question (a) must be answered in the negative, i.e. the calculation of ‘net loss’ under s. 30(1) of the 1998 Act must not take into account inter alia actual recoveries and estimated future recoveries of what the ICCL described as Net Loss Client Assets between the determination date and the delivery of a final statement certifying net loss and compensatable loss; as to question (b) the ICCL’s right of subrogation pursuant to s. 35 of the 1998 Act was restricted to the assets of CHC, nor had the ICCL established any right to equitable subrogation as a consequence of alleged unjust enrichment, or otherwise; in light of the foregoing, questions (c), (d), (e) and (f) did not arise.

Heslin J held that all relief sought by the ICCL must be refused.

Relief refused.

JUDGMENT of Mr. Justice Heslin delivered on the 13 th day of October, 2021

Introduction
1

. On 21 October 2011 an order was made that Custom House Capital Limited (“CHC”) be wound up, pursuant to the provisions of the Companies Acts, 1963 – 2009. Mr. Kieran Wallace, a Chartered Accountant and Insolvency Practitioner, was appointed as official liquidator and administrator (hereinafter “the Liquidator”, or where the context requires, “the Administrator”) within the meaning of the Investor Compensation Act, 1998 (as amended) (hereinafter “the 1998 Act”).

2

. The Investor Compensation Company DAC (hereinafter “ICCL”) is an independent statutory body established under the 1998 Act to provide compensation to customers of failed investment firms in the circumstances prescribed by the 1998 Act.

3

. The present application is brought by ICCL pursuant to s. 231 of the Companies Act, 1963 and/or pursuant to the inherent jurisdiction of this court, seeking directions as regards the scope and operation of the ICCL's right of subrogation pursuant to s. 35 of the 1998 Act, in circumstances where the ICCL has paid, or will pay, compensation to the clients of CHC who have suffered a “net loss” within the meaning of s. 30(1) of the 1998 Act.

4

. The backdrop to the present application concerns a disagreement which emerged as between the ICCL and the Liquidator as to the scope of the ICCL's subrogation rights pursuant to s. 35(5) of the 1998 Act. This gave rise to correspondence in 2018 wherein the Liquidator asserted the view that s. 35(5) of the 1998 Act confers on the ICCL only a right of subrogation in respect of company assets in the liquidation. The interpretation contended for by the ICCL is that its right to subrogate to the claim of a compensated investor extends to the investor's right to maintain claims, not only as against company assets, but also as against certain client assets held by CHC. The ICCL's position was articulated as follows in a letter dated 13 March, 2018 sent by their solicitors to the Liquidator's solicitors:-

It is the nature of subrogation that a subrogated claim carries the same status as the original claim. Therefore, if a client's claim is into the client assets held by the CHC or the assets of CHC then our client's subrogated claim should logically flow against those same assets. Our client does not accept that its subrogated claim is limited by the Act in the manner outlined in your letter. The nature and extent of our client's subrogated claim has been accepted by the receiver and administrators of W&R Morrough and by the Liquidator and administrators of Money Markets International Stock Brokers Limited (in Liquidation) (“MMI”). In the case of W&R Morrough this resulted in significant payments from the client bank accounts of W&R Morrough to our client on foot of its subrogated claim. The cash held in the client account of MMI have not yet been distributed in full and our client maintains its subrogated claim against that cash.”

5

. Having regard to the differing interpretations contended for by the Liquidator and the ICCL, the latter sought an order directing the Liquidator to bring an application for directions to this court, in order to determine the scope of the right of subrogation. This gave rise to a judgment delivered by Ms. Justice Finlay Geoghegan on 31 January 2019 wherein she refused to direct the Liquidator to bring such an application but observed that if the ICCL is entitled and determines to bring such an application, it will have to identify the compensated clients (or at least a representative sample thereof) and the rights of those clients to which it claims to be entitled to be subrogated in relation to client assets not yet returned.” The court also commented on the fact that, if ICCL decided to make such an application, further information might be required from Mr. Wallace, qua Liquidator or Administrator. The court was satisfied that the infirmity in the then application was that the directions sought by ICCL did not relate to identified claims. The court indicated that the application was being refused because:

… there is not a properly identified factually-based dispute between ICCL and one or more compensated clients in relation to particular claims made by ICCL to be subrogated to specified rights of those clients to the return or transfer of their client assets remaining under the control of CHC, which would enable a court to properly consider and decide the many complex issues which will arise on any such disputed claims.”

6

. Thereafter, ICCL applied to this court, by motion dated 30 July 2019, for an order pursuant to s. 231 of the 1963 Act directing the Liquidator to provide the information sought and, by order made on 08 August 2019 (Pilkington J.), the Liquidator was directed to provide certain information and a stay was placed on distributions of client assets that form part of the statutory calculation of net loss in respect of all clients of CHC who have made a claim for compensation and are eligible investors.

7

. The present application is brought pursuant to s. 231(3) of the 1963 Act which empowers creditors to apply to the court in relation to any exercise or proposed exercise of the Liquidator's power to do all such other things as may be necessary for winding up the affairs of the company and distributing its assets.”. The ICCL asserts inter alia that, in light of its right of subrogation pursuant to s. 35(5) of the 1998 Act, it is a creditor in the liquidation.

8

. It is common case that Mr. Wallace did not take account of estimated future recoveries of misappropriated assets when calculating eligible investors' net losses to date. The stance maintained by the ICCL is that the calculation of ‘net loss’ pursuant to s. 30(1) must take into account actual recoveries and estimated future recoveries from the date of the commencement of the liquidation (hereinafter the “Determination Date”) and the delivery of a statement (or, if an interim statement is delivered, a final statement) to the ICCL specifying the relevant investor's net loss and compensatable loss. The ICCL also maintains that, to the extent an interim statement is delivered, such an interim statement must take account of estimated future recoveries. In other words, the ICCL's position is that events after the Determination Date are relevant to the proper calculation of net loss.

9

. In the manner which will be explained in more detail, the foregoing are the key issues which arise in the present application, namely, the proper approach to the calculation of ‘net loss’ pursuant to s. 30(1) of the 1998 Act; the scope of the ICCL's subrogation rights pursuant to s. 35(5) of the 1998 Act; as well as certain issues arising if it is determined that the ICCL is correct in what it contends for. This is clear from the questions posed in the ICCL's Motion to which I will shortly refer.

10

. For the purposes of the present application, Mr. Wallace, qua Liquidator, adopted the position that his role was limited to providing information. Thus, in his capacity as the Liquidator, Mr. Wallace was not represented at the hearing. Mr. Wallace, qua Administrator participated at the hearing, adopting the stance that he was not required to take into account actual...

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