Bar Review May 2000

A PPROPRIATING T H E ASSET S OF FAILED COMPANIES: TRACING IN EQUITY INTO A DIMINISHE D FUND Micheal McGra th BL analyses the recent High Court decision In T he M atter of M oney M arkets In ternational Stoc k bro k ers Lt d. (In Liquidat io n). which considered the equitable concept of tracing. Introduction T he law on how the loss should be bor ne as between the beneficiaries of a fund from which a person in a fiduciary capacity wrongfully takes money has been helpfully clarified by Laffoy J.'s judgment in In T he Matte r of M one y M arkets International St oc kbroker s Ltd. ( In L iquidation). 1 T he qu esti on is in essence one of tracing the m oney inve sted in the fund into the diminished value of the fund, although in practice it arises as one of how the amount left in the fund should be appropriated amongst the investors. Money Markets International Stockbrokers (MMI) was suspended by the Stock Exchange on 19th February 1999. T he liquidator found that over £ 2.7 mill ion was owed to cli ents bu t the amount available to satisfy this debt was und er £ 1.5 million. On 18th February the applicant had lodged a sum of money to the client account of MMI in order to pay for shares purchased on his behalf by MM I. T he applicant sought an order directing the liquidator to complete the transaction to buy shares with the amount that he had lodged, or, in the alternative, to return to him the money that he had lodged. Background Accounts of the law to be app li ed to this is sue generall y start with Clayton's Case, 1816. 2 T his es tablis hed the p rinciple of 'first in, first out', which is best explained by an example. X contributes £ 10,000 to a fund containing no other money and the next d ay Y contributes £ 10,000 to that fund . If the followi ng d ay the tr ustee of the fund wrongfull y takes £ 10,000 from the fund the loss would be borne entirely by X. Such a result would benefit the ap plicant in M one y M arke ts as the loss would be borne by person s who had lodged mon ey i n the clie nt account before he had done. This result of the rule in Clayton's Case has been described by Goff and Jones in as 'capricious and arbitrary'. 3 In a p assage quoted in L affoy J .'s j udgm ent th e Chief Justice Keane writing extrajudicially described it as 'rough justice' and doubted whether: "the Court would now continue to apply Clayton's case (which has always been regarded as based on rather crude if convenient assumptions) to the case of competing claims of beneficiaries to money in a bank account." 4 T he disli ke of the rule in Clayton's Case is not confined to academic commentaries on the law. In Re Registered Securities Ltd. 5 the N ew Zealand Court of Appeal stated 'The automatic application of the rule in Clayton's Case as between beneficiaries will not withstand scrutiny.' 6 It held that because the rule is a fiction based on presumed intent it cannot be allowed to work an injustice. Secondly, because it is based on presumed intent it must give way 'to an express contrary conclusion or to circumstances which point to a contrary conclusion' 7 Woolf L.J.'s (as he then was) judgment in Barlow Clowes Int ernational (in liquidation) v. Vaug han 8 was a significant influence on Laffoy J.'s judgment. Woolf L.J. stated that the following obiter dictum of Judge Learned Hand accurately described the application of the rule to the case before him: "To adopt the fiction [of first in, first out] . . . is to apportion a common misfortune through a test which has no relation whatever to the justice of the case." 9 May 2000 - Page 393 BarReview

Bar Review May 2000

Documents

Transcript of Bar Review May 2000