Re Money Markets International Ltd (No. 2)

• Jurisdiction: Ireland
• Judge: Ms Justice Carroll
• Judgment Date: 20 October 2000
• Neutral Citation: [2000] IEHC 75
• Docket Number: [1999 No. 32 Cos.],No. 32 COS/1999
• Court: High Court
• Date: 20 October 2000

[2000] IEHC 75

THE HIGH COURT

No. 32 COS/1999

MONEY MARKETS INTERNATIONAL STOCKBROKES LTD (IN LIQUIDATION), IN RE

IN THE MATTER OF MONEY MARKETS INTERNATIONAL STOCKBROKERS LIMITED (IN LIQUIDATION)

AND

IN THE MATTER OF THE COMPANIES ACTS

Citations:

STOCK EXCHANGE ACT 1995 S52

INVESTOR COMPENSATION ACT 1998 S64

STOCK EXCHANGE ACT 1995 S52(3)(b)

STOCK EXCHANGE ACT 1995 S52(1)

STOCK EXCHANGE ACT 1995 S52(7)(a)

BARCLAYS BANK LTD V QUISTCLOSE INVESTMENTS LTD 1970 AC 507

CARRERAS ROTHMAN LTD V FREEMAN MATHEUS TREASURE LTD 1985 CH 207

GENERAL COMMUNICATIONS LTD V DEVELOPMENT FINANCE CORPORATION OF NEW ZEALAND LTD 1999 3 NZLR 406

STOCK EXCHANGE ACT 1995 S52(5)

Synopsis:

- [2001] 2 IR 17

A stockbroking firm (MMI) had gone into liquidation. As a result various issues arose relating to the ownership of funds held in the client account of MMI. The applicants in these proceeding sought the repayment of monies on the basis that the monies were the subject of a trust simpliciter or a constructive trust. The applicants claimed that entries in the client accounts in respect of the monies crystallised their interest in the monies. Ms. Justice Carroll held that a debit entry in an individual client account could not be construed as a declaration of trust. As the monies in question had not been paid out it had not ceased to be client monies. Therefore it was not possible to impose a constructive trust on the grounds of unjust enrichment or any other equitable ground. The application would therefore be refused.

1 Ms Justice Carroll on the 20th October 2000

2 This is the third of five issues ordered to be tried by order of the 19th of July 1999 by Laffoy J. The first issue was the subject matter of a Judgment by Laffoy J on the 23rd of May 2000. The third issue is "should K and H Options Limited (K and H) be entitled to claim the sum of £237,030 against client funds of MMI for option premia in respect of settled stock exchange transactions". It is now calculated by the official liquidator, Tom Kavanagh, that the sum of money should be £321,620. The shortfall in the general clients account (the section 52 account) which excluded the premia monies as per the ledger, at the date of liquidation was £1.1 million. The account should have contained £2.3 million.

3 Apart from ordinary stock exchange transactions with a settlement date five days later, MMI as agent for their clients negotiated with K and H for the purchase of named shares on a settlement date three months ahead at a fixed price the ("strike price"). This was a "call option". Back to back with that was a "put option" under which K and H could call on MMI's client to buy the shares at the strike price on the settlement day. If the share price had gone up above the strike price on the settlement day, the client made a profit. If the share price had gone down below the strike price, the client suffered a loss. For these options, premia were payable regardless of whether a profit or loss was made. In the case of settled stock exchange transactions where share premia were payable by a client, the individual client account with MMI was debited with the amount of the share premia. I am told MMI made a corresponding credit entry in a book showing amounts due to K and H for the share premia. The status of this accounting practice is not clear. K and H do not claim to be creditors of MMI. What is clear that having made the debit entries in the individual client's accounts the money due to K and H was not always withdrawn from the general client account. Normally the share premia amounts would have been paid to MMI once a month by cash withdrawal from the clients account. However in the period before going into liquidation on the 15th of March 1999 (probably September to December 1998) money unpaid to K and H which should have been withdrawn from the general client account but was not, amounted to approximately to £321,620.

4 MMI had a statutory obligation under the Stock Exchange Act 1995(as amended by the Investor Compensation Act 1998) to hold client's money in what is designated a section 52 account in an institution specified by the Central Bank (section 52 (3)(b)).

5 In the requirements imposed by the Central Bank under section 52 (1) reequirement 7.1 provides that money ceases to be client money if it is paid

6 (a) to the client

7 (b) to a third party on the instructions of the client

8 (c) into any account with a credit institution in the name of the client not being an account which is also in the name of the member firm, or

9 (d) to the member firm itself where it is due and payable to the member firm

10 Requirement 7.2 provides that where a member firm draws a cheque or other payable order under 7.1 the money does not ceases to be client money until the cheque or order is presented and paid by the credit institution.

11 Requirement 8.1 provides that money may only be paid out of a client account by a member firm in the course of carrying out its activities in accordance with requirement 2.2 (i.e. it must inform a third party that the money is client money) or in circumstances where the money ceases to be client money in accordance with requirement 7.1 (mentioned above) or in accordance with requirement 19.4 (not relevant in this context as it relates to reconciliation difficulties).

12 In her Judgment on the first issue Laffoy J held that the official liquidator was not entitled to recoup out of client funds sums due to MMI. Section 52 (7)(a) as amended by section 64 of the Investor Compensation Act 1998) provides

"No liquidator, receiver, administrator, examiner official assignee or creditor of an investment business firm shall have or obtain any recourse or right against client money or client investment instruments or client documents of title relating to such investment instruments received, held, controlled or paid on behalf of a client by an investment business firm until all proper claims of the clients or of their heirs successors or assigns against client money and client investment instruments or documents of title relating to such investment instruments have been satisfied in full"

13 Laffoy J held that the clear and unambiguous meaning of paragraph (a) (is that the beneficial claims of client creditors have to be satisfied in full before anybody else, even a contributor to the ultimate balance, has a call on the funds.

14 Mr McCarthy for the official liquidator...