W & R Murrogh, Re v Pearson and Others

• Jurisdiction: Ireland
• Judge: Mr. Justice Roderick Murphy
• Judgment Date: 06 May 2003
• Neutral Citation: [2003] IEHC 95
• Court: High Court
• Docket Number: No. 168 COS/2001
• Date: 06 May 2003

[2003] IEHC 95

The High Court

No. 168 COS/2001

W & R MURROGH, IN RE v. PEARSON & ORS

In the Matter of W & R Murrough

And In the Matter of The Stock Exchange Ace, 1995

And In the Matter of An Application By Tom Grace Receiver And

Manager Over The Assets of W & R Murrough

And In the Matter of An Application By Anglo Irish Bank Limited

And Anglo Irish Nominees Limited

Applicants

and

Stephen Pearson

Respondent

and

Tom Grace as Receiver and Manager of The Assets of W & R

Murrough

First Named Notice Party

and

The Central Bank of Ireland

Second Named Notice Party

Citations:

INVESTOR COMPENSATION ACT 1998

RSC O.15 r22

COMPANIES ACT 1990 (UNCERTIFICATED SECURITIES) REGS 1996 SI 68/1996 REG 28

COMPANIES ACT 1990 S239

COMPANIES ACT 1990 (UNCERTIFICATED SECURITIES) REGS 1996 SI 68/1996 REG 4

COMPANIES ACT 1963 S79

COMPANIES ACT 1963 S81

STOCK TRANSFER ACT 1963 S2(1)

DEVANYNEYS V NOBLE 1916 1 MER 572

HALLET'S ESTATE, RE 1880 13 CH 696

KEANE EQUITY & THE LAW OF TRUST IN THE REPUBLIC OF IRELAND 1988 PARA 20.13

BARLOW CLOWES INTERNATIONAL LTD (IN LIQUIDATION) V VAUGHAN 1992 4 AER 22

MONEY MARKETS INTERNATIONAL STOCK BROKERS LTD, RE 1999 4 IR 267

DIPLOCK'S ESTATE, RE 1948 CH 465

WALTER SCHMIDT & COMPANY EX PARTE FEUERBACH, RE 1923 298 F 314

SHANAHANS STAMP AUCTIONS LTD V FARRELLY 1962 IR 386

SINCLAIR V BROGHAM 1914 AC 398

TAYLOR V PLUMER 1815 3 MF 562

BIRCH V CROPPER 1899 14 AC 525

GOFF & JONES LAW OF RESTITUTION 6ED PAR 2–39

REGISTERED SECURITIES LTD, RE 1991 1 NZLR 545

BOSCAWEN V BAJWA 1995 4 AER 469

STOCK EXCHANGE ACT 1995 S52(5)(A)

INVESTOR COMPENSATION ACT 1998 S78

EL & ANJOU V DOLLERLAND HOLDINGS PLC 1995 2 AER 213

PETTIT EQUITY IN THE LAW OF TRUSTS 9ED 535

SNELL EQUITY 13ED 2000 PARA 13–45

INVESTOR COMPENSATION ACT 1998 S34

INVESTOR COMPENSATION ACT 1998 S29

INVESTOR COMPENSATION ACT 1998 S52

INVESTOR COMPENSATION ACT 1998 S19

INVESTOR COMPENSATION ACT 1998 S30(1)

STOCK EXCHANGE ACT 1995 S29(2)

TANGNEY V CLARENCE HOTEL LTD 1933 IR 51

HESS V KAVANAGH 1999 4 IR 267

STOCK EXCHANGE ACT 1995 S52(5)

STOCK EXCHANGE ACT 1995 S52

COMPANIES ACT 1963 S86

COMPANIES ACT 1963 S87

DOYLE THE COMPANY SECRETARY 1994 128–133

Synopsis:

COMPANY LAW

Winding up

Distribution of assets - Rule in Clayton's case - "First in, first out" - Investment fund - Money subscribed by investors for purchase of shares - Insolvency of company - Basis on which available assets and funds to be distributed amongst investors - Whether rule in Clayton's case to be applied to distribution - Whether equitable principles require distribution on pari passu basis to investors (2001/168COS - Murphy J - 6/5/2003)

In re W & R Murrogh (in liquidation) Anglo Irish Bank v Stephen Pearson

EQUITY

Tracing

Whether clients who could trace shares entitled to ownership thereof (2001/168COS - Murphy J - 6/5/2003)

In re W & R Murrogh (in liquidation) Anglo Irish Bank v Stephen Pearson

the respondent was a director of W & R Murrogh stockbrokers, which firm went into liquidation owing monies to its clients. The court was asked to determine a claim by the applicants for a declaration as to their entitlement to certain shares to satisfy the indebtedness of the respondent to them. The court was also asked to direct the receiver as to the distribution of assets of the firm under his control. The receiver identified three broad categories of assets under his control: securities held in certificated form in the name of Nominees; electronically held stock to the order of the firm, and; cash in various accounts. Claims against those assets derived from clients who sought entitlement to shares in certificated form, those who claimed electronic stock and those who claimed money from the firm. The receiver identified two broad categories of claimants in relation to funds in the accounts: those who could trace their claims into the client account by the application of the “first in, first out” rule in Clayton’s case and; those who would suffer a loss in the event that the rule in Clayton’s case was applied. It was agreed between the parties that electronic shares should be treated in the same way as certificated shares and that any client who could trace their claim into any specific category of assets of the firm should be entitled to do so.

Held by Murphy J 1. in declaring that clients who had share purchases contemporaneously appropriated to them and recorded in the books of the firm or of the Nominees were entitled to ownership and, where necessary, to the transfer of those shares to them, that there was no authority nor logic to compel clients of an insolvent stockbroker to abandon shares held by the firm or nominees on their behalf for the purpose of a pari passu distribution;

2. in declaring that shares where the number held by the firm or by Nominees on its behalf were insufficient to satisfy all the claims made by clients to that particular class of shares be distributed by way of specific pooling of that class of shares with rateable distribution and a claim against the general assets of the firm in respect of the shortfall;

3. in declaring that clients with claims to shares which were never purchased by the firm were entitled to claim rateably against the general assets of the firm;

4. in declaring that claimants whose shares which were sold without authority by the firm were also entitled to claim rateably against the general assets of the firm;

5. in making a declaration that the funds lodged to the accounts of the firm or of Nominees be distributed rateably on a pari passu basis as between the claimants thereto and to the extent of the shortfall to those claimants to shares identified above that, unlike the shares, the monies in the client accounts of the firm had not been appropriated as between one client and other and were in the nature of a mixed pool of assets. In relation thereto, the rule in Clayton’s case could be displaced in the particular circumstances of a case and those whose monies entered the account in the week prior to the appointment of the receiver did not have a greater equity than those whose monies entered the account at an earlier time.

A declaration was also made that the beneficial owners of electronically held stock were entitled to the transfer of stock identified in their names in the same manner as the beneficial owners of certificated stock.

Judgment of

Mr. Justice Roderick Murphy

1 dated the 6th day of May, 2003 .

1.Outline

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

3 The firm ceased to trade in April, 2001 and the applicant, Mr. Tom Grace, was appointed receiver and manager by orders of the Court on the 27th April, 2001 and the 21st May, 2001. Mr. Grace was also appointed as administrator for the purposes of the Investor Compensation Act,1998on the 18th June, 2001. I shall refer to Mr. Grace in all his roles as "the receiver."

4 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 clients of the firm are transferred to such clients, amounted to ???12,685,000 which exceeded its clients assets estimated at ???5,679,000.

5 The court is asked to determine the claim by the Anglo Irish parties 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 his control.

6 It would be appropriate to briefly summarise the evidence on affidavit and the submissions made by each of the parties mentioned in paragraph 3. below and the receiver's reply thereto. It is then proposed to deal with the Anglo Irish Parties 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 to orders for stock. Finally it is proposed to examine the entitlement to cash funds of the firm.

2.Notices of Motion

7 By notice of motion dated the 22nd January, 2002, Anglo Irish Bank Limited and Anglo Irish Nominees Limited ("the Anglo Irish parties") sought a declaration that the they are entitled to the proceeds of the sale by the respondent of certain shares in the London Stock Exchange Plc to such an extent as is necessary to satisfy the indebtedness of the respondent to them.

8 By notice of motion dated the 18th July, 2002 the receiver sought directions as to the distribution of the assets of the firm currently under his control. Further orders sought, pursuant to Order 15, Rule 22, relating to the parties entitled to be heard and an order appointing the appropriate parties to represent the interest of the members of each class of claimants to the said assets, were made by Peart J. on the 14th day of October, 2002 and by Kelly J. on 21st October 2002. The parties agreed the order of their submissions as detailed in the following paragraph.

3.Parties Representation and order of submission

9 2 3.1. The Receiver, represented by Mr. Denis McDonald S.C.

10 3 3.2. The Irish Stock Exchange represented by Mr. Paul Sreenan S.C.

11 4 3.3. Richard Noel Gleeson to represent the interest of those clients who argue that all of the assets of the firm should be pooled for the purpose of distributing them rateably as between all of the client claimants represented by Mr. Paul Gardiner S.C.

12 5 3.4. Mr. Donal Riordan to...