Re W. & R Morrogh

• Jurisdiction: Ireland
• Judgment Date: 06 May 2003
• Date: 06 May 2003
• Docket Number: [2001 No.
• Court: High Court

High Court

[2001 No. 168 COS]

Re W. & R. Morrogh

In the matter of W. & R. Morrogh and in the matter of the Stock Exchange Act 1995. Tom Grace, Anglo Irish Bank Ltd. and Anglo Irish Nominees Ltd.

Applicants

and

Stephen Pearson, Respondent and the Irish Stock Exchange Ltd. and others, Notice Parties

Cases mentioned in this report:-

Barlow Clowes International Ltd. (in liq.) v. Vaughan [1992] 4 All E.R. 22; [1992] B.C.L.C. 910.

Birch v. Cropper (1889) 14 App. Cas. 525.

Boscawen v. Bajwa [1996] 1 W.L.R. 328; [1995] 4 All E.R. 769.

Devaynes v. Noble (Clayton's case) [1816] 1 Mer. 572.

In re Diplock [1948] Ch. 465; [1948] 2 All E.R. 429.

El Anjou v. Doller Land Holdings (No. 2) [1995] 2 All E.R. 213.

In re Hallett's Estate (1879) 13 Ch. D. 696.

Re Money Markets International Stockbrokers Ltd. [1999] 4 I.R. 267.

In re Registered Securities Ltd. [1991] N.Z.L.R. 545.

Shanahans Stamp Auctions Ltd. v. Farrelly [1962] I.R. 386.

Sinclair v. Brougham [1914] A.C. 398; [1914] W.N. 73.

Tangney v. Clarence Hotels Co. [1933] I.R. 51; [1932] L.J. Ir. 38.

Taylor v. Plumer (1815) M. & S. 562; 2 Rose 415.

In re Walter J. Schmidt & Co., ex p. Feuerbach (1923) 298 F. 314.

Company law - Stockbrokers - Dissolution - Receivership - Distribution of assets - Funds held in trust - Whether distinction between certificated and electronic shares - Tracing - Whether entitlement to trace monies to stock purchased - Whether assets to be distributed pari passu - Whether rule in Clayton's case to be applied - Whether equitable principles to be applied - Whether receiver to purchase shares - Companies Act 1990 (Uncertificated Securities) Regulations 1996 (S.I. No. 68), regs. 3 and 4 - Companies Act 1990 (No. 33), s. 239 - Stock Exchange Act 1995 (No. 9), s. 52(5)(a).

Equity - Maxims - "Equality is equity" - Distribution of assets - Funds held in trust - Tracing - Whether assets to be distributed pari passu - Whether entitlement to trace monies to stock purchased.

Motions on notice.

The facts have been summarised in the headnote and are more fully set out in the judgment of Murphy J., infra.

The proceedings were initiated by way of petition dated the 27th April, 2001. The High Court (Carroll J.) granted a decree of dissolution and ordered the winding up of the firm, together with the appointment of the receiver thereto on the 21st May, 2001.

By motion on notice dated the 25th January, 2002, Anglo Irish Bank Ltd. sought a declaration of entitlement to certain monies from the firm. By motion on notice dated the 18th July, 2002, the receiver sought directions regarding the distribution of the firm's assets and a determination of the parties to be heard in relation to the matter. On the 14th October, 2002, the High Court (Peart J.) ordered the joinder of notice parties and appointed individuals, pursuant to O. 15, r. 22 of the Rules of the Superior Courts 1986, to represent classes of persons interested in the distribution of assets. Further such appointments were ordered by the High Court (Kelly J.) on the 21st October, 2002.

The motions were heard together before the High Court (Murphy J.) from the 28th to the 31st January and on the 3rd and 4th February, 2003.

The firm, the subject matter of the proceeding, was dissolved by order of the High Court and a receiver appointed. The firm held shares on its clients' behalf, which were either represented by share certificates or held electronically. The firm's client bank accounts contained monies representing the proceeds of share sales for clients and monies received from clients for the purchase of shares. In some cases, the firm had not sold or purchased the shares ordered, had sold or purchased fewer shares than ordered, or had sold shares without authority. However, when the receiver was appointed, the firm held sufficient shares to satisfy the clients' claims in respect of most lines of stock.

The receiver sought directions as to the distribution of the firm's assets. Creditors of the firm sought a declaration of entitlement to the proceeds of the sale of certain shares to satisfy the debt owed to each of them.

Parties were appointed to represent different categories of claimants and different possible approaches to the distribution of assets. The parties generally agreed that certificated and electronically held shares should be treated in the same manner and that any client who could trace his or her claim to any specific category of assets should be entitled to do so. However, some parties argued that the remaining assets should be pooled and distributed pari passu, while others advocated the application of the rule inClayton's case, favouring a "first in, first out" approach to monies in the firm's bank accounts. A group of stockbrokers, who contributed to a compensation fund for clients under the Investor Compensation Act 1998, submitted that the receiver should purchase shares for return to clients who had ordered stock prior to the receiver's appointment.

Held by the High Court (Murphy J.), in directing the distribution of the firm's assets, 1, that no distinction should be drawn between certificated and electronically held shares. The rights in and against a company and the mutual covenants between its members were the same in both cases. The beneficial owners of electronically held stock were entitled to that stock where it could be identified as being held in their names, in the same manner as the beneficial owners of certificated stock.

2. That the right to trace applied, so that clients who had stock purchases contemporaneously appropriated to them and recorded in the books of the firm were entitled to ownership and, where necessary, the transfer to them, of that stock.

3. That, where the number of shares in any particular class held by the firm was insufficient to satisfy all the claims made thereto, such shares should be distributed by way of specific pooling and rateable distribution, with a claim against the general assets of the firm in respect of the shortfall. This applied to those clients whose orders for shares were not matched by the number purchased by the firm.

4. That clients claiming shares which the firm never purchased and those whose shares were sold without authority were entitled to claim a rateable distribution of the general assets of the firm.

5. That the rule in Clayton's case could be displaced in the particular circumstances of a case where its application would result in injustice between investors. Its application in the instant case would cause injustice between claimants, as it would favour clients whose money entered the firm's bank accounts immediately prior to the receiver's appointment. The principle "equality is equity" should apply. The monies in the firm's bank accounts had the characteristics of a mixed pool and should be distributed rateably between those clients who could prove an entitlement to repayment of such monies.

Barlow Clowes International Ltd. (in liq.) v. Vaughan [1992] 4 All E.R. 22 approved. Devaynes v. Noble [1816] 1 Mer. 572 and Re Money Markets International Stockbrokers Ltd.[1999] 4 I.R. 267distinguished.

6. That it would not be appropriate for the receiver to purchase stock for clients who had ordered purchases prior to his appointment. This would constitute a contract separate to that originally entered into between the clients and the firm, effectively requiring clients to pay at a certain time, referable to the open market value of the shares, for stock to be delivered at some future date, when its value may have changed.

7. That s. 52(5)(a) of the Stock Exchange Act 1995 drew a clear distinction between the rights of clients and those of creditors. Pursuant to that subsection, the claim of Anglo, a creditor of the firm, was subordinate to those of the firm's clients.

Cur. adv. vult.

Murphy J. 6th May, 2003

1. Outline

W. & R. Morrogh, hereinafter called "the firm", carried on business as stockbrokers in Cork for a long number of years. At the date of its dissolution on the 21st May, 2001, the firm had two remaining partners, Mr. Alex Morrogh and the respondent. Morrogh Nominees Ltd., a company controlled by the members of the firm, hereinafter called "Nominees" was used as a vehicle for clients' stocks and shares.

The firm ceased to trade in April, 2001 and the receiver and manager (hereinafter "the receiver") was appointed by orders of the court on the 27th April and the 21st May, 2001. He was also appointed as administrator for the purposes of the Investor Compensation Act 1998 on the 18th June, 2001.

At the date of the dissolution of the firm, on the 21st May, 2001, the current liabilities, on the assumption that all of the stocks and securities which the firm regarded as being held in trust for its clients are transferred to such clients, amounted to €12,685,000, which exceeded its clients' assets, estimated at €5,679,000.

The court is asked to determine the claim by Anglo Irish Banks Ltd. and Anglo Irish Nominees Ltd. (hereinafter referred to together as "Anglo") for a declaration as to their entitlement to certain shares held by Nominees. The court is also asked to direct the receiver as to the distribution of the assets of the firm under this control.

It would be appropriate to summarise briefly the evidence on affidavit and the submissions made by each of the parties mentioned in para. 3 below and the receiver's reply thereto. It is then proposed to deal with Anglo's claim; to determine whether there is any material difference between certificated stock and electronically held stock; to deal with the entitlement to existing lines of stock held by the firm; to consider the position of stock bought but not held by the firm and of orders for stock. Finally, it is proposed to examine the entitlement to cash funds of the firm.

2. Notices of motion

By motion on notice dated the 25th January, 2002, Anglo sought a declaration that they were entitled to the...