RE CUSTOM HOUSE CAPITAL Ltd ((in Liquidation))

• Jurisdiction: Ireland
• Judge: Ms. Justice Finlay Geoghegan
• Judgment Date: 09 October 2012
• Neutral Citation: [2012] IEHC 382
• Court: High Court
• Docket Number: [2011 No. 219 MCA]
• Date: 09 October 2012

[2012] IEHC 382

THE HIGH COURT

[No. 219 MCA/2011]

Custom House Capital Ltd (in liquidation), In re

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

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

IN THE MATTER OF THE COMPANIES ACTS 1963 TO 2009

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 11

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 166

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 172(1)(A)

INVESTOR COMPENSATION ACT 1998 S33A

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 172

TAXES CONSOLIDATION ACT 1997 S784

GREENDALE DEVELOPMENTS LTD (IN LIQUIDATION), IN RE 1997 3 IR 540 1998/20/7600

COMPANIES ACT 1963 S249

COMPANIES ACT 1963 S228(D)

COMPANIES ACT 1963 S244

KEAY & MCPHERSON MCPHERSONS LAW OF COMPANY LIQUIDATION 2ED 2009 PARA 8.034

BERKELEY APPLEGATE (INVESTMENT CONSULTANTS) LTD (NO 1), IN RE 1989 CH 32 1988 3 WLR 95 1988 3 AER 71 1988 4 BCC 274

BERKELEY APPLEGATE (INVESTMENT CONSULTANTS) LTD (NO 3), IN RE 1989 5 BCC 803

INSOLVENCY ACT 1986 S115 (UK)

GB NATHAN & CO PTY LTD (IN LIQUIDATION), IN RE 24 NSWLR 674

CORPORATIONS LAW S479(3) (NEW SOUTH WALES)

INVESTMENT INTERMEDIARIES ACT 1995 S52(7)

INVESTOR COMPENSATION ACT 1998 S64

INVESTMENT INTERMEDIARIES ACT 1995 S52(7)(B)

INVESTMENT INTERMEDIARIES ACT 1995 S52(7)(C)

INVESTMENT INTERMEDIARIES ACT 1995 S52(7)(A)

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 158

INVESTMENT INTERMEDIARIES ACT 1995 S52(7)

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 157

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 3

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 6(1)

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) (AMDT) REGS 2007 SI 663/2007 REG 6(A)

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 157(2)

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 157(2)(B)

COMPANY LAW

Liquidation

Liquidator's remuneration - Investment company - Client accounts - Liquidator carrying out reconciliation of segregated client funds - Liquidator seeking to deduct remuneration from segregated client funds - Whether reconciliation of segregated client funds appropriate task for liquidator - Whether liquidator entitled to claim remuneration from funds held in client accounts - In re Berkeley Applegate (Investment Consultants) Limited [1989] Ch 32 distinguished - European Communities (Markets in Financial Instruments) Regulations 2007 (SI 60/2007), regs 157 & 158 - Investment Intermediaries Act 1995 (No 11), s 52 - Investor Compensation Act 1998 (No 37), s 64 - Direction of no deduction from dissenting clients (2011/219MCA - Finlay Geoghegan J - 9/10/2012) [2012] IEHC 382

Re Custom House Capital Ltd (in liquidation)

Facts: The applicant was the liquidator of Custom House Capital Ltd (henceforth "CHC") who applied seeking directions as to its administration. CHC was a private limited company that provided financial services to its customers. Following a court ordered investigation into the activities of CHC, a final report was presented in 2011 which stated that a number of transactions by CHC were improper. A court order was made to wind up CHC and a liquidator was appointed.

At the commencement of the winding up, CHC held an estimated €1.1 billion of client funds. Of the various investments, some of the accounts were segregated client asset accounts which the liquidator decided should be either transferred back to the client or onto an appropriate product. The liquidator also proposed to charge a fee for his services of €225,000 inclusive of VAT which would have come from 0.5% of each of the customer's funds. A number of customers refused to pay this fee and sought to have the court determine the liquidator's entitlement.

Held by Finlay Geoghegan J that the reconciliation of customer funds was within the ambit of the liquidator in properly winding up the company as a priority of the liquidator and the early distribution of the funds was for the benefit of the customers. As such, the liquidator was entitled to remuneration for his work from the assets of the company. S. 52(7) of the Investment Intermediaries Act 1995 allowed a liquidator to apply to the court for an order allowing their expenses to be recoverable from client's assets when the assets of the company have been exhausted. However, the onus of proof to show that the company's funds had been exhausted was on the liquidator and in the instant case, this had not been demonstrated. Until this was done, the court had no jurisdiction to make an order on the applicant's behalf.

Per curiam, the provisions of the Investment Intermediaries Act 1995 may have been superseded by the European Communities (Markets in Financial Instruments) Regulations 2007 but this was of no consequence due to the similarity between reg 157(2) and s 52(7).

1 JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 9th day of October 2012

2 1. This judgment is given in an application brought by Kieran Wallace, official liquidator of Custom House Capital Limited (In Liquidation) (the "Liquidator" and "CHC" respectively) seeking certain directions and the determination of issues relating to the quantum and discharge of his remuneration, fees, costs and legal expenses associated with the administration and reconciliation of certain client accounts comprising equities and/or segregated cash accounts.

3 2. The application of the Liquidator raises difficult and unusual issues in this complex liquidation. The issues, as originally presented, have been refined in the course of the application. The issues which require determination can only be understood in the context of the business of CHC, the facts giving rise to the winding up order and the work done by the Liquidator relevant to this application.

Business of CHC

4 3. CHC was incorporated as a private limited company on 28 ^th July, 1997, and commenced trading in the same year. Its principal activity was in the provision of financial services including investment fund management, setting up and managing approved retirement funds, pension funds and personal savings accounts. It established investment vehicles for collective investment by clients, including exempt unit trusts, qualifying investor funds established under the laws of Ireland and the purchase of property through special purpose vehicles ("SPVs") established under the laws of various European countries, a Mezzanine Bond Fund and personal retirement savings account ("PRSA") products.

5 4. In March 2011, CHC had assets in excess of €1.1 billion under management on behalf of its clients and €24m in cash held in designated client accounts. It had approximately 1,500 clients, the majority of whom reside in Ireland.

6 5. Since 2007, it had been authorised under Regulation 11 of the European Communities (Markets in Financial Instruments) Regulations 2007 (the "MiFID Regulations"). It was also an approved Qualifying Fund Manager in relation to the provision of Approved Retirement Funds ("ARFs") and Approved Minimum Retirement Funds ("AMRFs"). CHC was also a PRSA provider for the purposes of the Pensions Act 1990, as amended. It had three PRSA products approved by the Pensions Board and the Revenue Commissioners.

Facts Leading to the Winding Up

7 6. In summary, the facts leading to the winding up as disclosed by the Liquidator's and inspectors' reports to the Court are as follows.

8 7. The Central Bank had been engaged with CHC since 2009. During 2009 and 2010, concerns were raised that some clients' monies were being invested without their knowledge or consent in the Mezzanine Bond Fund. Authorised officers were appointed to investigate a sample of property transactions which included the mezzanine financing. Following this investigation, directions were issued by the Central Bank under the MiFID Regulations which included a requirement for CHC to clarify the financial position of each syndicated SPV. Directions were given between April 2010 and July 2011, which remained in force at the date of commencement of the winding up. The Liquidator, at s. 3 of his first report to the Court, states that such directions required CHC, inter alia, to:

9 · "· Suspend the making of payments of any sums to any client of the Firm;

10 · Suspend the making of payments to any person where the payment includes sums received from clients or other customers of the Firm;

11 · Suspend the making of any transfer or disposal of assets to any person where the transfer or disposal includes assets of or held on behalf of a client of the Firm;

12 · Suspend transactions on any account held (a) by the Firm or (b) by any other person on behalf of the Firm or (c) by any other person under the direction or control of the Firm where such account contains assets or money of or held on behalf of a client of the Firm.

13 · Refrain from granting to any person control or security or a power of attorney over any client assets or client money.

14 · Suspend the issuing of any statements to any client describing clients' investments or holdings; and

15 · Take all steps necessary to secure and preserve the records of the Firm."

16 8. In July 2011, the Central Bank applied to the High Court pursuant to Regulation 166 of the MiFID Regulations arising out of serious concerns it had about the affairs of CHC. The Court, by order of 15 ^th July, 2011, made orders pursuant to Regulation 166 authorising an investigation into the affairs of CHC and appointing inspectors.

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