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High Court of Ireland Decisions
You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Re W. & R. Murrogh [2003] IEHC 95 (6 May 2003)
URL: http://www.bailii.org/ie/cases/IEHC/2003/95.html
Cite as: [2007] 4 IR 1, [2003] IEHC 95
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- 3.1 Certificated Stock: The receiver
identifies four categories of claims against the
shares held in certificated form:
(a) Those clients who can identify their shares as resulting from
transactions affected latest in time prior to the 27th April, 2001, the date of the receivership;
(b) Those clients who can show that a purchase of shares was made for them in the market but no shares certificate was drawn down in their name;
(c) Those clients who can show that they delivered a share certificate to the firm and a share certificate was lodged into Crest but no sale was affected on their behalf so that they are due the return of their investment instrument;
(d) Those clients whose share certificates were delivered by them to the firm and lodged into Crest, where a sale of a corresponding number of shares was affected on the market but the proceeds of sale were credited to another client ledger account of the firm. In many such instances the monies standing to the credit of that account were subsequently diverted to another account to meet unauthorised losses or to compensate for monies misappropriated from particular clients.
The receiver identifies a further category of claimant namely those who, because of the extent of their losses, would wish to claim that all of the assets should be pooled and distributed on a pro rata basis between all of the claimants.
- 3.2 Electronically held stock
Insofar as the electronically held stocks are concerned, the relevant categories of claimant are as follows:-
(a) Clients who placed orders with the firm for the purchase of electronically held stock and were issued with a contract and where either a market purchase or a contra purchase took place in accordance with the contract issued to the client;
(b) Clients who ordered electronically held stock and were issued with a contract but where no market purchase took place or no contra purchase took place;
(c) Clients whose electronically held stock was sold without authority by the respondent, Mr. Pearson;
(d) Clients who transferred shares electronically into the pool of shares held electronically to the order of the firm and clients who handed in share certificates for U.S. traded shares where the certificate was lodged into the pool of electronically held stock. In neither case can it be said that these shares now held electronically were purchased out of client bank accounts of the firm.
In order to determine how these shares are to be distributed the receiver believes that there are essentially two categories of claimant:-
(a) Those clients who can trace their ownership of stock currently held electronically to the order of the firm or the proceeds of sale thereof; and
(b) Those clients who cannot trace their claim to any identifiable shares.
As in the case of certificated shares, a further category arises comprising those who claim that all assets should be pooled and distributed on a pro rata basis between all the claimants.
5.3.3 Monies held in current and deposit accounts
With regard to the monies held in the client current and deposit accounts of the firm, the following categories of claimant arise:-
(a) Clients who are due monies by the firm in respect of cash given to the firm for investment purposes or who are due monies resulting from sale of investments effected by the firm on their behalf;
(b) Monies due to clients in respect of sales of shares effected by Mr. Pearson, the respondent herein, without the knowledge or consent of such clients; and
(c) Clients or other parties who may attempt to trace their funds to funds held to the credit of client bank accounts at the date of the appointment of the receiver and manager. One example of such a party is Anglo Irish Bank Limited and Anglo Irish Nominees Limited, the second named applicants herein, which commenced proceedings seeking to trace monies which were the proceeds of the alleged unauthorised sale of shares by the respondent. There the original share certificates were held by Anglo Irish Bank Limited as security for loans advanced to the respondent, Mr. Pearson personally.
(d) In addition, the receiver says that there may also be parties whose assets never passed through the client accounts but who may seek to argue nonetheless that all of the client assets should be pooled together and distributed rateably.
5.4. The receiver believes that for the purpose of determining how the monies in the client account should be distributed there are essentially two categories of claimant:-
(a) Those parties (where clients or third parties) who can trace their claims into the client accounts by the application of the rule in Clayton's case; and
(b) Those clients or other parties who would suffer a substantial loss in the event that the rule in Clayton's case is applied.
5.5. Receiver's Report
Central to the determination of the principles governing the entitlement of client and other claimants is the receiver's report exhibited in his affidavit. The report provides information relating to the procedures for dealings of the ownership of the shares and securities whether electronically or in certificated form.
Many of the clients' claims are to US traded stock. In common with clients having claims to other electronically held shares, these clients have not been in a position to trade their stocks throughout the period from the 27th April, 2001 to date. In that period the value of their stocks has, in many instances, reduced significantly.
5.5.1. The firm was an agent broker and was not empowered to trade on it's own behalf. The firm had 5 dealers including the two partners. On receipt of an order a dealer would note the particulars in his order book as from the first half of the year 2000. Before that the firm had a single order book.
On receipt of an order the dealer would ring or deal through an electronic system with a market counterparty. In relation to European Stocks these were settled through CREST, the equity settlement system, introduced in Ireland in 1996. In the case of US and Canadian stocks and euro stocks through the relevant agent in England, Merrill Lynch up to 1998 and Sharelink (now Charles Schwab) thereafter, if there were an instant execution of the trade, the market counterparty or the agent would report the particulars of the trade to the firms dealer and the order book would be updated accordingly.
In late September, 2000 all purchases of US traded stocks were put into the agency of USB to whom the major portion of the five top traded stocks were the subject of an electronic transfer from Charles Schwab who transferred the balance in December, 2000. On the morning following trades in US, Canadian and other electronically traded stocks, agents would send a deal confirmation to the firm by fax. This would be vouched to the daily bargain report of the firm. Any discrepancies between them would be investigated and resolved and a detailed verification process undertaken.
5.5.2 At the end of the trading day each deal was in putted into the firm's back office data base and accounting system known as BrokerFocus which was described in some detail by the receiver. The bargain book was marked to record the fact that the bargain had been duly accounted for and the bargain was crossed off in the order book.
Before the settlement date for the sale, Nominees, acting on behalf of the firm, endeavoured to have the stock lodged into Crest to be held in dematerialised form pending settlement of the sale. On settlement of a purchase the firm would send an electronic message to the registrar of the particular stock instructing that the stock be transferred from the stock held in the name of Murrogh Nominees Limited in Crest in the name of the client for whom the purchase was made and requesting a physical share certificates for the holding of the clients name be sent directly to the firm.
5.5.3 The BrokerFocus portfolio module is described by the receiver as a database that records all stock movements for all clients, and the dates of such movements. This database can be queried in many ways to isolate particular data. Such data can include all holdings of a particular client or all clients holding of a particular line of stock. The portfolio module was queried by the brokers in advance of accepting an order from a client for a sale of stock held electronically to the order of the firm to ascertain that the stock was in fact held on behalf of the particular client and to establish with which particular agent the stock was held. In addition to recording all purchases and sales, the portfolio module was meant to account for all other movements in stock held electronically for the client to include deliveries of stock in an electronic and certificate form, bonus issues, stock splits and consolidations, takeovers and mergers. The stocks held electronically to the order of the firm for clients ought to agree with the firm's records maintained on the BrokerFocus system. At the date of the appointment of the receiver there was a backlog in the inputing of the movements of stock held other than by purchase or sale. These movements have now been reflected in BrokerFocus.
5.5.4 The receiver noted that certain of the stocks held on the 27th April, 2001 in electronic form by agents to the order of the firm did not result from purchases made on behalf of clients of the firm through the agency of the firm but resulted from stock certificates delivered by clients of the firm or dematerialised stock transferred by other brokers into the accounts contained by the firm with its agents. Accordingly, the receiver reported, such transfers ought to be unaffected by a new deficiency in client funds.
An annual circularisation of clients occurred in August, 2000 in relation to US and Canadian traded stocks held by or to the order of the firm. The circulars sent to clients noted the quantity and type of stock held. Queries raised as a result of the circularisation exercise were investigated by the firm and such correcting entries as were necessary were then made. However, the response was poor amounting to no more than one quarter of the clients circularised. The staff of the firm inferred that the details with which the clients were circularised were correct.
The receiver reported on the reconciliation process undertaken by his staff. Schedules prepared which represented the electronically held stock (non US) as on the 30th April, 2002 held with Merrill Lynch shows where some, all or none of the shares are available.
5.6. Assets held by or to the order of the firm
The Receiver reported that the following fourteen client-related assets were held by the firm at his time of the appointment. They are further detailed in the seven appendices to his report:
1. Balances on current Bank accounts, both deposit and current, in the name of the firm and Nominees and now held by the receiver. These include monies received from the receipt of a settlement amount from Crest ST£1,150,846 on the 25th April, 2001 which represents the net amount of purchases and sales settled on that date including the sale of 40,000 shares on the London Stock Exchange Plc which is the subject of the Anglo Irish Bank Corporation application before this Court.
2. UK and Irish quoted securities registered in the name of Nominees without specific designation appearing on the shares certificates.
3. UK and Irish quoted securities registered in the name of Nominees with specific designation appearing on the share certificates.
4. UK and Irish quoted security is held in dematerialised form in the account of Nominees in Crest.
5. Funds held by agents of the firm including UBS Warberg, Merrill Lynch, BMO Nesbitt Burns;
6. UK quoted security is held by a Fortis Clearing London Limited;
7. Anglo Irish 7.75% Euro preference shares held by Merrill Lynch to the order of the firm with a market value of 1.376 million at 30th June, 2001. Contract notes were issued to certain investors for the purchase of these shares but no shares were purchased. Others were misled into believing that purchasers had been made on their behalf. In one case IR£300,000 had been paid to Mr. Pearson, the respondent herein, for investment in these shares. The monies paid by the investors solicitor was credited to a client ledger opened in the name of another person without that person's knowledge. There is no trace of any contract note. Other discrepancies were noted;
8. British Airways 6.75% Euro bond.
BrokerFocus records the issue of 3 contract notes on the 11th September, 2000 for the purchase of 29,600 shares. 10,000 shares were bought and sold through Merrill Lynch.
9. Other Euro stocks held at Merrill Lynch had been identified to purchasers made on behalf of particular clients, with the exception of each shares in AXA representing a rights issue where the client had not been charged with the cost of the same (appendix 2).
10. Euro holdings in Crest (appendix 3).
11. Canadian quoted securities held at BMO Nesbitt Burns (appendix 4).
12. Shares held at Fiske and Company Limited (appendix 5).
13. Deutsche Telckom AG shares held at NCB Stock Brokers in its Euroclear account (appendix 6).
14. US traded stock held by Merrill Lynch and UBS (appendix 7).
6. Submission of the Receiver
6.1. The receiver, in acknowledging the conflicting modes of distribution, submitted that a stark choice had to be made as to how the assets of the firm were to be distributed. While regretting that there was no prospect that all of the clients would ever be paid in full he contrasted the position if classical tracing principles were applied or if a more radical approach were adopted. In his submissions he did not propose to deal with any specific case but to consider the different modes of distribution as mattes of principle.
6.2. Mr Denis McDonald SC, Counsel for the receiver stated that the classical approach would be to apply the rule in Clayton's case under which the "first in/first out" principle applies. That rule will ordinarily be modified where a trustee has mingled his or her own funds with those of beneficiaries. In such a case the rule in re: Hallet's Estate applies: a trustee is presumed to withdraw his own monies first and leave the beneficiaries money behind. The application of that rule was described as "rough justice" and " It may even be doubtful whether the Courts would now continue to apply Clayton' case to the case of competing claims of beneficiaries to money in a Bank account" (Keane: Equity and the Law of Trust in the Republic of Ireland, paragraph 20.13). Similar criticisms were made in Barlow Clowes International Limited (in liquidation) v. Vaughan (1992) 4 All ER 22 where the Court of Appeal held that the rule need only be applied when it is convenient to do so and when its application can be said to broad justice having regard to the nature of the competing claims.
Notwithstanding the criticisms which were made of the rule in re: Money Markets International Stock Brokers Limited (1999) 4 IR 267 at 276-277 Laffoy J. expressed the view that, in the case of current account in which the trust funds of various beneficiaries were mixed or pooled, the general proposition is that the rule is applicable. However, the application of the rule may be displaced in particular circumstances. In that case the monies were still readily identifiable in the account and Laffoy J. permitted a client to trace the monies entrusted by it to the firm for the purpose of purchasing shares on the day immediately prior to the appointment of a provisional liquidator to the firm. In relation to shares ordinary tracing principles would apply. Any shares purchased by the firm which matched orders made by individual clients could be said to be traceable.
The receiver submitted that an argument could be made, on the other hand, that the rule in Clayton's case should apply on the basis that all of the monies for the purchase of shares together with all monies representing the proceeds of sales of shares, whether authorised or not, would have passed through the client Bank account.
The rule has been much criticised. It is a rule of convenience based upon the presumed intention of those who have contributed to a mingled fund (see Baggallay L.J. in re: Hallet's Estate, 738-739 and Lord Greene M.R. in re: Diplock's Estate (1948) Ch. 465 at 553/554).
In the Barlow Clowes case, Woolf L.J. doubted whether it could have been the presumed intentions of the investors that the rule should apply. Lord Woolf said, at 41 that:
"I have no doubt that it is correct to presume that the investors would have intended that what could be salvaged, as a result of the common misfortune that they had suffered, should be dealt with in accordance with the third solution and not in accordance with the rule. It can be presumed that they would not want to subject what was left of the pool to the vagaries of chance which would follow from the application of the "first in/first out" principle "
Woolf L.J. at 42, took the view that the rule should not be applied "if there is a preferable alternative".
Indeed in the present case, the receiver points out, there are real practical difficulties in applying the rules in relation to certain of the accounts operated by the firm.
Woolf L.J. referred to the well known dictum of Judge Learned Hand in re: Walter Schmidt & Company, Ex P Feuerbach (1923) 298 F 314 at 316 where it was stated:
"When the law adopts a fiction, it is or at least it should be, for some purpose of justice, to adopt (the rule in Clayton's case, the fiction of 'first in/first out') is to apportion a common misfortune through a test which has no relation whatsoever to the justice of the case."
Woolf L.J. at 36 suggested that the more equitable solution was what he called the "pari passu ex post facto" solution which involved:
" Establishing the total quantum of the assets available in sharing them on a proportionate basis among all the investors who could be said to have contributed to the acquisition of those assets, ignoring the dates on which they made their investment. (Counsel) submits that this is the solution which is most appropriate in this case. It has the virtue of relative simplicity and therefore relative economy and also the virtue of being in this case more just than (the application of the rule)."
Having reviewed the authorities, Woolf L.J. came to the conclusion (at page 42) that:
" there is no reason why the principle of equality is equity should not be applied. In order to obtain preference over the ordinary creditors the investor has to rely on equity to trace his monies into the account. Where the circumstances, convenience and justice so dictate, once the monies are in the pool, equity can require them to be treated as being subject to the other investors 'equitable claims on the fund'. There is nothing wrong in principle in treating the quantum of the latest investor's claim as either being reduced pro rata by the earlier investor's claim or enhanced by the value of other assets, purchased earlier from the monies in the pool, into which it is possible to trace."
The receiver submits that a similar conclusion was arrived at by Budd J. in Shanahans Stamp Auctions Limited v. Farrelly (1962) I.R. 386 at 442 where Budd J. said:
"A difficult question arises as to whether this rule is applicable in the complex circumstances of the present case. It may be that the rule in Clayton's case does not apply beyond tracing in a Bank account and the principle may have no application to property acquired by means of a mixed fund. But I prefer to deal with the situation, for safety sake, as if the principle can properly be applied to the case of property acquired with such a mixed fund. The practical position is that, in fact, the investors money has been mixed twice; first, in the original Banking account, and secondly in the property in the shape of stamps in which the investors money lies latent, again in a mixed fashion. It is, I gather, possible to trace to some extent through the companies books the order in which investors money was lodged to the Bank account). The position is that after this stage it is impossible to say what monies were used for in the purchase in any particular lot of stamps or to whom the monies were paid. in other words, there having been a second mixing of the investors funds into a second mixed amalgam of property, it would not be possible for any particular investor to say that this particular money was used before others in the purchase of the property in the shape of stamps. Tracing, in the exact sense of the term, is therefore not possible or practicable."
Budd J. referred to a similar state of affairs arising in Sinclair v. Brogham (1914) AC 398 and indicated that the house of Lords took the view that a pro rata distribution was the practical and equitable solution, leaving it to any particular depositor or shareholder to apply with a view to tracing his own money into any particular asset.
6.3. The receiver refers to a number of intermediate approaches which could also be adopted.
One of the representative parties, Mr. Shorten says:
(a) Those whose claims to shares are matched in the records of the firm should be entitled to retain those shares absolutely as against the firm;
(b) Any shares which cannot be "matched" to any individual client should be realised for the benefit of any unsatisfied claimants to that particular class of shares;
(c) The monies standing to the credit of the firms accounts should be distributed rateably between all those parties who have suffered a loss.
A second representative party (Hugh and Barbara Hall) rely on the decision of Laffoy J. in re: Money Markets International Stock Brokers Limited (1999) 4 IR 267. They argue that because there monies were paid over to the firm for the purchases of purchasing specific shares in the days immediately prior to the appointment of the receiver, and since those monies were never used for the purchase of shares, they should be entitled to the return of their monies in full. In that case, Laffoy J. held that the applicant was unique among the client creditors of the stock broking firm in that he had transferred monies to the firms client account for the purposes of a specific share purchased transaction just days before the cessation of business. Laffoy J. held that whether the rule was applicable or not in determining who was entitled to the monies represented by the balance on the account, the applicant was entitled to the repayment of the entirety of his monies since the details of the account show the whole of his monies to be still in the account.
6.4. The receiver's submissions in relation to the Anglo Irish parties application is dealt with below in the context of the submissions of the latter's submissions.
7. Submissions of the Irish Stock Exchange.
7.1. The Stock Exchange, represented by Mr Paul Sreenan SC, expressed its concern at the apparent distinction drawn by the receiver between certificated stock and electronically held stock. It believes that the receiver is considering drawing a distinction between the two kinds of stock which the stock exchange believe to be unwarranted. It would operate to the disadvantage of holders of electronically held stock.
To this end the stock exchange applied, by notice of motion, dated 9th October, 2002 for an order to be joined as a notice party. The grounding affidavit of Brian Healy, Director of Trading and Regulation, set out the concerns of the Stock Exchange. In his affidavit of 9th October, 2002 he avers that the undermining of the integrity of transactions undertaking in dematerialised form would severely disadvantage the competitive position of the Irish securities market. It members would suffer prejudice and detriment if the integrity and creditability of an electronically held securities, or of the electronic transfer system generally, were undermined. It is a vital importance to invest your confidence and is the predominant means of concluding transactions in securities both in Ireland and internationally.
It was submitted that the manner in which stocks were traded or held (whether in certificated or dematerialised form) can effect no change in the property rights of the investors concerned.
It was also submitted that on the basis of the receiver's grounding affidavit there is sufficient amount of electronically held stock held to the order of the firm to satisfy the claims of clients to such stock in respect of the majority of the lines of stock. In this light it is submitted that the receiver ought to attempt to identify the class of lawful claimants thereto and ascertain whether there are any moneys due to the firm by such clients. On the discharge of any moneys owing this stock ought to be assigned to the relevant beneficial owners where the particular line of stock held to the order of the firm equals the amount of stock required to meet the claims. Where the amount of stock held exceeds the amount of stock required the stock should be assigned with any excess to form part of general assets available for distribution, along with any cash balances and the various client accounts and deposit accounts and any securities which cannot be traced to particular clients and any other non client assets for the firm such as the proceeds of the sale of the premises.
Where the amount of electronically held stock held to the order of the firm is not sufficient to meet the claims of lawful claimants thereto, it is submitted that, in the absence of a particular claimant having a better equity then any other claimant, rateable distribution ought to be adopted over the application of the "first in, first out" rule. The submission notes that this may be academic as there is no evidence that any such shortfall will occur.
The submission refers to the common law principle that the legal owner of property is entitled to follow that property into the hands of another, even where it has changed in form, provided there is some means of identifying the assets in its original or converted form. Reference is made to the judgment of Lord Ellenborough in Taylor v. Plumer [1815] 3 MF 562 at 575 that it makes no difference in reason or law into what other form, different from the original, the change may have been made and, later in the judgment, that "the product of what substitute for the original thing still followed the nature of the thing itself, as long as it can be ascertained as such".
Reference was made to the elemental assumption of equality as between shareholders as laid down by Lord McNaughton in Birch v. Cropper [1899] 14 A.C. 525 at 543. There can be no differentiation unless provided for in the regulation of the relevant companies to which the stocks relates.
It was further submitted that Laffoy J. had considered the claim of a purchaser of certain uncertified stock in Money Markets International Stock Brokers Limited [1999] 4 I.R. 266. It was agreed that between the parties that the stockbrokers were in a relationship to the applicant and that the funds were held as trust funds. The relevant account was a principal account through which the stockbroker client dealings with Crest were settled. Laffoy J. placed no emphasis whatsoever on the applicant's use of the Crest system or upon the fact that the shares which the applicant had intended to purchase where in dematerialised form.
Laffoy J. concluded that having regard to the uniqueness of the applicant's position she did not think that, applying equitable principles, that the applicant should be bound by a pari passu distributions, as moneys had been transferred to the stockbroker's current account prior to the settlement day for a specific purpose that it is to enable the purchase to be completed. This gave the applicant a better equity then that of other client creditors as the equities were not equal.
In the present case, it was submitted, the beneficial owners of electronically held stock transferred moneys to the firm for a particular purpose, that is, to purchase shares in electronic form. The beneficial owners of such stock are entitled to the transfer of such stock.
7.2. Counsel noted that both Mr. Liam Shorten and Mr. James Sheehan joined with the Central Bank in seeking to establish that there is no distinction between electronically held stock and certificated shares.
Ms. Clohessy, for Mr Sheehan, had concluded that the application of the rule in Clayton's case should be displaced in the particular circumstances submits that in equity and injustice it would be wrong for those who were to have their stock held electronically to be treated differently from clients who received or were to receive certificated shares.
Mr. McCann, for Mr. Shorten, had argued that by their very nature electronically held shares differ from traditionally certificated securities. In that only members of the relevant stock exchange can deal with the former. However the shares continued to be held in the name of the nominee company owned by a member firm. All that can be done to perfect a client's title to electronically held shares in terms of documentation and payment has be done. To deprive the clients of shares which the receiver has identified as being referable to purchases would be to place these clients in a materially worse position than their counterparts who were dealing in the certificated securities.
8. Submissions on behalf of Noel Gleeson
Mr. Gleeson was an investor in the stock market through the agency of the firm.
Mr Gardiner SC on his behalf, refers to the receiver's report and to the court orders whereby he was appointed to represent the interest of clients with claims against the client account of the firm who would suffer loss in the event of the rule in Clayton's case being applied. He submits that the funds held in the said client account should be distributed rateably as between all claimants to the funds.
Mr. Gardiner S.C. submitted that Clayton's case can not apply to deposit accounts and referred to Goff and Jones on the Law of Restitution (6th ed.) paragraph 2 039. The rule in Clayton's case is an evidential rule based on so called presumed intention and is controversial. Reference was made to Shanahan's Stamp Auctions v. Farrelly [1962] I.R. 386 were Budd J; Barlow and Clowes International Limited (Liquidation) v. Vaughan [1992] 4 All ER 22 and to Re Money Markets International per Laffoy J.
He distinguished between the claims of Mr. Gleeson and that of the other clients. It is submitted that unless a claimant could trace directly to an asset, there would be no basis for an argument that the pool of assets should be ring-fenced, depending on the nature of the asset. Assets not attached by a direct tracing claim will then be distributed pro rata to the creditors of the company.
Mr Gardiner submitted that in the instant case the factual situation is not entirely clear. The accounts of a company are so confused that the receiver is not in a position to say whose money is whose nor whether the books and records of the company accurately record the date or times of the lodging of moneys or the payment out of moneys. Given this, the onus of proof should be on any creditor who seeks to assert an interest over and above a pari passu distribution.
It was submitted that the court should declare that the rule in Clayton's case does not apply to insolvency such as the present one. The cost of consideration of whether the rule applies or does not apply, is disproportionate to the benefit to be achieved.
9. Submissions on behalf of Donal Riordan
9.1. Mr. Riordan is also a client of the firm and was appointed to represent the category of clients who have a claim to shares held in certificated form held in the name of Nominees but who are not in a position to trace their claim to ownership of a specific number of shares. They argued that the shares should be treated as a pool to be distributed rateably between all claimants to shares held in certificated form in the name of Nominees.
9.2. Mr. Riordan's affidavit of the 4th December 2002 identifies the relevant shares he holds he believes that these were purchased by Murrogh Nominees on the 21st March 2001. He did not receive a share certificate but was given a "bargain reference".
9.3. Ms Catherine Burke, solicitor for Mr Riordan, in her affidavit of 24th January 2003, exhibited a letter from the receiver's solicitors regarding the nature of the CREST settlement system which stated;.
When (Mr Riordan's) shares were purchased on the market they were electronically delivered by the Crest settlement system in a dematerialised account held in the name of Nominees. The fungible pool of shares comprises the holdings of a number of clients for whom individual shares may eventually be drawn down. The difficulty in this case lies in the fact that there are more shares being claimed than are available for distribution.
9.4. Mr Eoin McCullough SC, on Mr Riordan's behalf submitted that the "ordinary tracing principles" referred to by the receiver in paragraph 19 (a) (i) of his affidavit does not apply where B purchasers assets that he intends to hold to the order of A, using for that purpose moneys that cannot be established to be those of A. There is no principle that B holds the asset and trust for A. In the instant case it cannot be established that any particular payment at any particular time was actually applied to the purchase of any particular block of shares. Unless clients can show that their money purchased particular assets, then those assets cannot be said to be held on trust for them. The fact that orders given by particular clients can be linked to particular purchases of such shares is, it is submitted, deceptably simple. It establishes a linkage not a position of trust. It is a difference in the quality of detective work that the receiver has been able to carry out.
The evidence established that the firm maintained a number of accounts into which clients paid money. This resulted in a mixed fund containing at least payments made by clients and payments made to the firm on account of sale of shares by clients. In this regard reference was made to Keane: "Equity and the Law of Trusts in the Republic of Ireland" [1888] at paragraph 20.13:-
"Where there is more then one person claiming to trace into the same property, and it is not sufficient to meet all their claims in full, because the assets have shrunk in some manner, they will share rateably in the property to the extent of the amounts which erode. But this will not apply in the case of a banking account: here Clayton's case will apply and the right of the various beneficiaries will depend on whether their moneys were lodged to the account. This is certainly rough justice: where one beneficiary's money is lodged one day and another the next, it seems inequitable that the first claim may be wiped out and the second survive."
The normal rule, it is submitted, is that the claimants should share rateably in the pool of certificated shares to the extent of the amounts which they are owed. The rule in Clayton's case has no application to the facts of the present case. Reference is made to Shanahan's Stamp Auctions Limited v. Farrelly [1962] I.R. 368, to Re Diplock [1948] Ch. 465, to Sinclair v. Brougham [1914] AC 398 to Barlow Clowes International Limited (in liquidation) v. Vaughan [1992] 24 All E.R. 22 and to Re Registered Securities Limited [1991] 1 N.Z.L.R. 545 and to Re Walter J. Schmidt and Co. , Ex P Feuerbach [1923] 298 F 314 at 316. Clayton's case should have no application even if it were a convenient assumption to a complicated assessment of the movement of funds as in this case.
10. Submissions on behalf of James Sheehan
Ms. Clohessy Barrister at Law on behalf of Mr. Sheehan raised an issue whether clients that he represents, whose investments were to be represented by electronically held stock held to the order of the firm should be subject to the rule in Clayton's case or whether there should be a rateable distribution.
Reference was made to a number of passages in the cases referred to above. The submission concludes that the application of the rule in Clayton's case may be displaced in the particular circumstances of a case, for instance, if it is shown or to be inferred that it does not accord with the intention or the presumed intention of the beneficiaries of the trust funds.
In the present case the investors whose stock is hold electronically to the order of the firm are all in a similar situation. In equity and in justice it were wrong for those who were last in as investors to be favoured in preference to all others. They should all be treated equally with regard to recovery.
Ms. Clohessy concludes that, in insolvency, the general principle that all creditors should rank pari passu in the absence of a right in rem or a statutory preference should commend itself to the court as guidance. The rule in Clayton's case should not apply because this application would be unjust and against any presumed intention.
All of the investors in this case are victims of a common misfortune and it would be inequitable, arbitrary and capricious for one to be treated differently to the other where all contracted on the same basis that is that their stock would be held in either electronic form or otherwise in the name of the firm.
11. Margaret Frances Condon
11.1 Mr Hugh O'Neill SC, on behalf of Dr. Condon, argued that the entire assets should not be pooled and rateably distributed. He submitted that she is the potential holder of 2000 Anglo Irish Capital Funding Preference Shares identified as being held for her with Merrill Lynch and referred to in the first appendix to the receiver's report. It is in her interest that she be entitled to trace her claim into the shares in question which, it is submitted, are held in trust for her. Insofar as she is appointed in a representative capacity her submissions are that there should not be a general pool of assets. To do so would be to ignore the entitlement of a particular claimant to assert that securities which had been purchased on a claimant's behalf by the firm are held in trust by the firm for that claimant. Moreover, the claimant has a right to assert that he or she is entitled under the doctrine of tracing to follow the moneys into property represented by those moneys.
Reference was made to the claim of Liam Joseph Shorten. The 160 Aventis shares were held by or on behalf of the firm in respect of that one person only. The firm received an instruction to purchase certain securities, complied with that instruction and holds those shares in his behalf.
11.2. Mr. O'Neill referred to Keane: Equity and the Law of Trusts at paragraph 20.06 with regard to the right of a person with an equitable interest in any property to trace that property.
He referred to Boscawen v. Bajwa [1995] 4 All E.R. 469 at 476-7 where Millett L.J. described tracing as a process rather than a claim or a remedy. The process is based on the retention by the claimant of a beneficial interest in the property which the defendant handled or received. Millet L.J. continued:-
"Unless he can prove this, he cannot (in the traditional language of equity) raise an equity against the defendant or (in the modern language of restitution) show that the defendant's unjust enrichment was at his expense. "
If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant and overcomes any defences which are put forward on the defendant's behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this, the court will treat the defendant as holding the property on constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff. This is one of the proprietary remedies which are available to a court of equity.
Extensive reliance was made on Barlow Clowes, to which reference had already been made. .
In that case Woolf L.J distinguished between the applicability or non-applicability of the rule in Clayton's case. Where the rule is inapplicable the approach which should be adopted by the court depends on which of the possible alternative solutions is the most satisfactory in the circumstances.
The North American solution had been described by Dillon J. Where funds of several depositors, or sources, have been blended in one account, each debit to the account, unless unequivocally attributable to the moneys of one depositor or source (e.g. as if an investment were purchased for one) should be attributed to all the depositors so as to reduce all the deposits pro rata, instead of being attributed, as under Clayton's case, to the earliest deposits in point of time.
Lord Woolf commented that if that solution were practical it would probably have advantages over the pari passu solution. However, given the complications of applying that solution to the Barlow Clowes case he believed that the distribution pari passu among all the investors in the fund to be the most satisfactory.
Mr O'Neill submits that pari passu distribution can only take place where the equities are equal and referred to the conclusions of Laffoy J. in Money Markets International Stockbrokers, referred to above:-
" The applicant must have a better equity than the other client creditors who have a claim against the moneys represented by the balance on the current account. The equities are not equal and equitable principles do not require that the applicant be subjected to a pari passu distribution under which he would be treated in the same way as other clients who have equitable claims against the funds."
11.3. He referred (as did the previous submission) to the Adventis shares purchased for Mr. Shorten. He also refers to the possible equity which exists where an instruction was given to purchase certain securities, such as that given by Mary Christina Leader to purchase 750 BASF shares which were never implemented. He further referred to situations where an instruction were partly complied with (such as the instruction by Gerard F. Cummings to purchase 435 conduit GDR shares where only 430 of those shares are held).
11.4. It was submitted that the provisions of section 52 (5) (a) of the Stock Exchange Act, 1995 (as amended) by section 78 of the Investor Compensation Act, 1998 render the pooling of assets of the firm for pro rata distribution among the claimants would be contrary to the provisions of the section. That section reads:-
"No liquidator, receiver, administrator, examiner or creditor of a member firm shall have or obtain any recourse or right against a client's money or a client's investment instruments or a client's documents of title relating to such investment instrument, received, held, controlled or paid on behalf of the client until all proper claims of the client or of the client's heirs, successors or assigns against the client's money or the client's investment instruments or documents of title have been satisfied in full."
In the present case the equities of the claimants are not equal. The necessary prerequisite to pari passu distribution (if it is otherwise appropriate) is absent in the present case.
12. Submissions on behalf of Liam Shorten
12.1. Mr. Shorten's affidavit of 1st October 2002 described how he had retained the firm to make various share purchases on his behalf. In the case of certificated securities, he was issued with all relevant share certificates and, accordingly, no issue arises in relation to those transactions. Mr. Shorten's difficulties related to his dealing in electronically held securities in various European companies which are referred to in the receiver's report as "Eurostock".
In the case of these Eurostocks, the relevant agents were Merrill Lynch and the Crest system was used. In the former case the shares are held to the order of the firm. In the case of Crest they are held to the order of the Nominee.
Mr. Shorten was issued with a contract note by the firm for the purchase of 100 Seamen AG NPV shares but no such purchase was made for him on the market. He was also issued with a contract note for the purchase of Commerz Bank AG shares but no purchase of these shares were made by the firm or held by or to the order of the firm.
Mary Christina Leader, referred to in previous submissions, had ordered certain shares and appeared to be the only client with a claim to shares in those companies. However no such stock would appear to have been required by the firm.
With the exception of the above five transactions, the receiver's appendix shows that all purchasers of Eurostock held by Merrill Lynch can be traced through the firm's own records to specific purchasers by identified clients including Mr. Shorten and of the larger part whose claim relates to traced shares.
Other than Mr. Cummings five missing shares, referred to in previous submissions, all other shares held by Crest can be traced through the firms own records to specific purchases by identified clients including Mr. Shorten.
12.2. Mr Lyndon McCann, on his behalf submitted that different considerations apply to those shares which can be traced and those who were never purchased.
With regard to the former Mr. McCann argued that, by their very nature, electronically held shares differ from traditionally certificated securities. Only members of the relevant stock exchange can deal in uncertificated/electronically held shares in their own names. There is no share certificate. The shares continue to be held in the name of the nominee company owned by a member firm of the relevant stock exchange.
The firm, it is submitted, had done all they could to perfect their client's title to the respective shares in terms of documentation and payment. To deprive the clients of the electronically held shares which the receiver has identified as being referable to purchases made on their behalf would be to place those clients in a materially worse position then their counterparts who were dealing in certificated securities.
Mr McCann referred to Shanahan Stamps, Clayton's case, re Hallet's Estate, Barlow Clowes and to in re Money Markets International Stockbrokers Limited.
12.3. Applying the principles derived therefrom, clients must be entitled to trace into their respective shares, to the exclusion of all the other clients and creditors of the firm.
In relation to shares paid for but never purchased, and the claim for Mr. Cummings in respect of the five missing conduit GDR shares it is submitted that these claims lie as against any cash balances as standing to the credit of the various accounts of the firm. He distinguished between a claim in rem to identifiable and available shares and to a claim in personam in relation to the other non-client assets of the firm.
Mr. McCann submitted that the New Zealand Court of Appeal in re Registered Securities Limited [1991] 1 N.Z.L.R. 545, the rule in Clayton's case was rejected outright. While the rule may still form part of Irish Law it is capable of being displaced in appropriate circumstances such as El and Anjou v. Dollerland Holdings Plc. [1995] 2 All E.R. 213 and Barlow Clowes [1992] B.C.L.C. 910. In his submission this is not a case where the rule in Clayton's case should apply. There should be rateable distribution between the competing claimants to the mixed funds. In addition this would be less involved and less time consuming and a benefit to all concerned in the application of the rule in Clayton's case.
13. Submissions of Stephen Guinane
Mr. Guinane was appointed to represent a certain category of investors, namely those in a position to trace their claim to ownership of certificated shares to a specific number of identifiable shares held in the name of the firm. It is submitted by Mr. Horgan S.C. on their behalf that the rule in Clayton's case has no direct applicability as the issue of tracing of the shared certificate as certificates apply. The case is a simple one where identifiable and unchanged assets, namely the shared certificates in their various forms, can be traced at law and at equity.
Moreover there is no distinction between share certificates and electronic stock. In this regard the notice party joins with the submissions made on behalf of the stock broking firms and the Irish Stock Exchange.
In his submission, Mr. Horgan says that to liquidate the assets of those who had otherwise been in a position to have their assets returned in order to pay those persons the proceeds of sale of a pari passu basis would be pointless. The sharing of losses will not affect the amount of the loss or the amount which will be claimed by way of compensation from the investors compensation fund.
14. Submissions of Hugh Hall and Barbara Hall
14.1. Mr. and Mrs. Hall were appointed to represent the interests of those clients of the firm who wish to trace their claims into the client bank account of the firm by the application of the role in Clayton's case (without prejudice to any other claim that they may have). They seek the return of monies paid to the firm immediately prior to the appointment of the receiver.
The affidavit of Hugh Hall sworn the 10th October, 2002 avers to the salient facts. On the 20th April, 2001 Mr. Hall instructed his Bank to transfer the consideration to the client account of the firm. On the following working day the Central Bank was called in to investigate the firm and within a week of his instructions to transfer monies, the receiver was appointed. On the day the monies were transferred there was a credit balance in the account of more than twice the consideration paid. At the close of business on the 26th April, 2001, immediately prior to the appointment of the receiver, there was a credit balance in the client deposit account of £1,204,316.50 and, the following day, there was a credit balance on the client current account of £188,306.90.
The Halls claimed that under Clayton's case they were entitled to the return of the monies paid or, alternatively, that they had a better equity to the monies represented by the balance on the client's account.
14.2. Mr. Maurice Collins (with Brian O'Moore S.C.), on their behalf, submitted that the rule should apply in respect of a client account of the firm or alternatively that these clients are entitled to repayment of those funds regardless of whether or not the rule applies.
Mr Collins referred to Clayton's case (Devanyneys v. Noble, [1916] 1 MER. 572 and All E.R. REP (1814 23)) and to the commentaries in Pettit: Equity in the Law of Trusts) (9th ed.) at 535 and Snells Equity (13th ed, 2000) para 13 45 which, it was submitted, suggests that the primary rule to apply is that of Clayton's case. The onus is on the party seeking to avoid the application of that rule. He further referred to the Shanahan Stamp case and to the conclusion by Laffoy J. in re Money Markets International Stockbrokers (MMI).
The applicant, in the MMI case, had instructed the company to buy a specific number of shares which the company confirmed and advised the date of settlement. Four days before that the applicant paid the amount due. The following day the company's membership of the stock exchange was suspended and the purchase was not completed. The company was wound up by the Court three weeks later.
14.3. Mr. Collins submitted that the position of his clients were identical. He referred to the observation made by Laffoy J. in that case
"The conclusions I draw from the authorities are that, as far as this court is concerned, in a case of a current account such as the account in issue here where trust funds or various beneficiaries are mixed or pooled in the account, it is settled law that as a general proposition the rule in Claytons' case is applicable in determining to whom the balance on the account belongs. However, the application of the rule may be displaced in the particular circumstances of a case, for instance, if it is shown or to be inferred that it does not accord with the intention or the presumed intention of the beneficiaries of the trust fund."
It is submitted that the conclusions are applicable to the present case.
14.4. The alternative claim of the Hall's is also based on the decision of Laffoy J.
at 277, where she made certain findings:-
"Having regard to the uniqueness of the applicant's position, I do not think that, applying equitable principles, the applicant should be bound by a pari passu distribution. ...It seems to me that, given (the) combination of circumstances the applicant must have a better equity than other client creditors who have a claim against the moneys represented by the balance in the current account. The equities are not equal and equitable principles do not require that the applicant be subject to a pari passu distribution under which it would be treated in the same way as other clients who have equitable claims against the funds ."
It is submitted that the position of the applicant in that case was identical to that of a Mr. and Mrs. Hall.
15. Submissions on behalf of Stockbrokers
15.1. Certain members of the Irish Stock Exchange representing those who contribute to the compensation fund made submissions. These were Goodbody, Davy, Bloxam and Dolman Butler Briscoe.
Mr Nesbitt SC referred to a notice published on the 13th December, 2001 advertising for creditors. At the closing date 2500 claims had been made. It was not possible to complete the adjudication on almost 2000 as the determination of the compensatable loss was dependent in whole or in part on the decision of the receiver who must consider his role as receiver and manager and not as administrator of the compensation fund.
15.2. The Stockbrokers Contentions
The stockbrokers contend that property that belongs to identified investors should be given back to those investors. Where property can be linked to a group of investors, that property should be pooled to be held to the benefit of the group by way of localised pooling. In respect of other property to which there is not a proprietary claim, a general pool for the benefit of investors who have sustained losses should be provided. Finally the stockbrokers distinguish the purchase of "stock" for return. Where no stock is available, it is contended that the receiver has a power to manage the firm in a manner that can benefit all and that is equitable to all. In particular, having ascertained what the claimant is entitled to claim for and having worked out what a rateable distribution of liquidated assets would be it is contended that stock could be purchased and returned to the general pool. In this way it would increase the returns to those who would otherwise not receive stock. This purchase of "stock for return" could only occur where it was possible to buy that stock at a lesser price. Furthermore it is contended that this can only occur where no other claimant is treated in equitably.
It is acknowledged that this proposal may be considered novel though within the powers of the receiver and manager. In essence, the stockbrokers contend, the return of such stock constitutes no more than fulfilling the contract by the receiver and manager.
15. 2.1 Further Submissions
The stockbrokers, as the parties with the most substantial obligation to contribute to the compensation fund, have an interest that need to be taken into account in directing the orderly administration of the winding up of the firm.
They say it is implicit that the absence of funds to assist the discharge of the cost of the receivership has, perhaps, reduced the ability of the receiver and manager to examine the affairs of the firm in the detail he would wish, in those circumstances, they say, an argument exists that the party who applied for the appointment of the receiver and manager should be required to meet the costs of the receivership if the assets available are insufficient.
The stockbrokers further point out that there interest in the matter is limited to their liability as contributors to the compensation fund. They ask the Court to enquire in respect of whether bone fide and sustainable claims can be advanced out of time as provided for in section 34 of the Investors Compensation Act, 1998.
I have considered these contentions at 20.8 below
16. Submission on behalf of the Central Bank
Mr. David Barniville Barrister at Law said that the Central Bank was joined as a notice party on the 22nd July, 2002 which was so confirmed by Peart J. in October. The function of the Bank is to protect investors.
The weekly return due by the firm as of the 22nd April, 2001 was not made. Pursuant to section 29 the Central Bank directed, inter alia, that the funds of the London Stock Exchange (the subject of Anglo Irish Bank claim) had been held in a section 52 account. It was the understanding on the Central Bank that such funds were owned by the firm.
The attitude of the Central Bank as its function is to protect investors. Where there are conflicting claims it is not appropriate for the Bank to favour one group over another. If fully supports the receivers approach.
17. The Investor Compensation Company Limited
Mr. Barry Cahir of Fry Solicitors said that his client oversee a scheme whereby compensation claims are paid out of a "net compensateable fund". The principle of subrogation into the general assets of receivership applies.
The object of the scheme is the establishing and the maintaining of arrangements for making payments to clients of investments firms in accordance with the Investor Compensation Act, 1998. Section 19 of that Act provides for the establishment of a fund from contributions of authorised investment firms.
The scheme allows for the payment of "net loss" to investors resulting from the liability of the investment firm in respect of monies owed to or belonging to a client held on behalf of the client by the investment firm in connection with the provision of investment businesses services and investment instruments as defined by the Investment Intermediaries Act, 1995.
Certain value is excluded from the calculation of "net loss" under section 30 (1) of the Investor Compensation Act, 1998, in particular, the right to set off. The debt must be proved.
18. Anglo Irish Bank Claim
18.1. The affidavit of Pearse O'Donovan sworn on the 22nd January, 2002 set out the facts in relation to the separate claim of the Anglo Irish parties.
Mr. O'Donovan says that the bank advanced monies to the respondent's and in return obtained security over 40,000 shares in the London Stock Exchange Plc. which were held by Nominees on the respondent's behalf. Mr Pearson not alone deposited the share certificate but also executed a share transfer form in the name of the second named applicant. Without the knowledge of the applicants Mr. O'Donovan says that either the respondent and/or his associates fraudulently obtained a duplicate share certificate and sold on the shares on the 20th April, 2001. On the 24th April, 2001, the Central Bank wrote and directed his partner Mr Alex Murrogh, pursuant to section 29 (2) of the Stock Exchange Act, 1995, to lodge the total proceeds of sale of the London Stock Exchange shares to a designated section 52 account. The proceeds were lodged on the 26th April, 2001 to a certain account. On the 27th April, 2001 a petition was presented to the High Court by the receiver as a result of which he was appointed as receiver and manager over the assets of the firm.
The proceeds of the sale of Mr Murrogh and Mr Pearson's shares in the London Stock Exchange Plc was Stg£1,139,999.75.
18.2. Mr John Cotter, banker and associate director of the applicant bank, averred that as from the 30th January 2003, the date of his affidavit, the respondent was indebted to the bank in the sum of Euro 1,016,698.82.
18.3. Mr. Pearse Sreenan Barrister at Law submits that his client has an equitable mortgage of the shares. He concedes that, as there had been no registration of the transfer in the books of the company that there was no legal mortgage and he referred to Tangney v. The Clarence Hotel Company Limited (1933) I.R. 51 at 61.
Prior to the alleged act of fraud, the Bank as equitable mortgagee of the shares, was entitled to look to the respondent, who remained the registered owner of the shares, as trustee for the Bank. Counsel further states that the Bank, having an equitable interest in the property, has a right in rem and, accordingly, is entitled to trace those monies into the bank account .
In relation to the banks position vis-ΰ-vis investors, Counsel says that the rule in Clayton's case should apply as the funds belonging to various beneficiaries had been mixed in a single bank account. He referred to Hess v. Kavanagh (1999) 4 IR 267 (the MMI case). It is submitted that the decision of the Court, that the applicant was unique among all of the clients creditors and had a better equity, that the applicant was not subject to pari passu distribution and whether the rule in Clayton's case was applicable or not was entitled to the repayment of the entirety of the monies transferred by him to the company account since the details of that account show the whole of the monies to be still in that account.
Counsel says that his client was not an investor and that the monies were clearly identifiable unlike many of the other client/investor monies which had been mixed. The clients took some element of risk whereas, in his submission, the bank was not in this position. The act of fraud forced the Banks security. Justice would require that the proceeds of that act of fraud ought to be returned to the Bank.
It was further submitted that the monies were "tagged" by the receiver as he specifically directed the proceeds of the shares be lodged to a particular designated account in accordance with the direction of the Central Bank. The monies were clearly identifiable in that account. Accordingly the rule in Clayton's case should apply in the alternative if proceeds of the sale of the London Stock Exchange shares were not to be considered to be part of the assets of Mr. Pearson.
18.4. Receivers submissions re Anglo Irish Bank claim
In relation to the position of the Bank, the receiver says that he is a stranger to that claim. He does not accept the Bank is entitled to proceed in a summary way against the firm. Its claim needs to be tested through plenary proceedings.
Moreover, the Bank claims to be entitled to trace into the clients account of the firm. The receiver submits that the evidence does not prove that the proceeds of sale of any of the shares in the London Stock Exchange Plc, over which the Banks had security, were ever credited to any Bank account to the firm.
Section 52 (5) of the Stock Exchange Act, 1995 provide that claims of creditors against client monies are postponed until all claims of clients have been satisfied.
The receiver submits that, what the Bank wishes to do is to trace in to the client Bank accounts of the firm.
The receiver further submits, the Bank's claim arises from the indebtedness of Mr. Pearson. Affectively, the Bank stands in the shoes of Mr. Pearson. If Mr. Pearson personally were to seek to make this claim against the monies in issue, could it be reasonably said that his claim could prevail over those of the clients? It is submitted that his claim clearly could not prevail against the claims of the clients who will suffer an even greater shortfall in the event that the Bank's claim is allowed.
The receiver finally draws attention to correspondence passing between his solicitors and the solicitors for the Bank from which it appears that the security sought to be relied upon by the Banks is not the only security held by them. It may be, the receiver submits, that the doctrine of marshalling might apply.
Counsel on behalf of the Bank parties urges the Court not to consider the proceeds of the sale of the London Stock Exchange shares to be part of the assets of Mr. Pearson save and so far as the same may exceed the liabilities (including interest and costs) of Mr. Pearson to the Bank. Alternatively if the proceeds are to be considered to be part of the fund which is to be distributed amongst his creditors (including investors) then the rule in Claytons should apply.
The Anglo Irish Bank's analysis of exhibits 2 to 5 to the affidavit of the receiver leads to its submission that either:
(a) that the Bank is entitled to trace into the sum of £1,224,769.48 sterling on the basis that not less than £1,055,339.73 sterling of that balance must represent the proceeds of sale of the London Stock Exchange shares;
or
(b) that the Bank is entitled to trace into the lodgement to that account of £1,138,746.06 sterling as not less than £1,055,339.73 sterling of that lodgement must represent the proceeds (as above).
18.5. Decision of the Court in relation to the Anglo Irish Bank claim
The application is for a declaration that the applicants are entitled to the proceeds of the sale of the shares to such an extent as is necessary to satisfy the indebtedness of the first named applicant. It does not seem appropriate to proceed in the summary way against the firm. It may be necessary to prove the indebtedness and to prove that the proceeds of sale were credited to the firm. The doctrine of marshalling may apply.
In any event, the application before the Court is primarily in the matter of the Stock Exchange Act, 1995 and secondarily in the matter of the Bank's application.
Section 52 of that Act deals specifically with client money and investment instruments. It provides that the Central Bank may impose requirements with regard to clients money and clients investment instruments and may include conditions under which member firms may hold money or investment instruments.
Sub section 5 of that section provides as follows:
"No liquidator, receiver, administrator, examiner or creditor of a member firm shall have or obtain any recourse or right against a clients money or a clients investment instruments or a clients documents of title relating to such investment instruments received, held, controlled or paid on behalf of the client until all proper claims of the client or of the clients heirs, successors or assigns against the clients money or the investment instruments or documents of title have been satisfied in full."
It is an offence for a director, officer or employee of a member firm to misappropriate fraudulently any money or investment instruments held, controlled or paid on behalf of a client by that member firm.
There is a clear distinction between the rights of clients and the rights of creditors. The sub-section provides that there can be no recourse or right against client's money, investment instruments or documents of title until the clients claims have been satisfied in full. It would appear that the phrase "held, controlled or paid on behalf of the client" extends to all the categories of claimants in the present case.
It would seem to follow that, whatever the status of the Banks claim, it must necessarily be postponed to that of the clients.
It seems unnecessary, in the circumstances to deal with the further submissions of the receiver with regard to the claim by Anglo Irish Bank.
19. Response on behalf of the receiver to the submissions of the representative parties
19.1. Mr McDonald S.C., on behalf of the receiver. In his comprehensive final submission distinguished between issues which are no longer in dispute and the issues which were required to resolve by the Court.
There were two issues which appeared to him to be no longer in dispute:
(a) that electronic shares should be treated in the same way as certificated shares; and
(b) that any client who can trace their claim into any specific category of assets of the firm should be entitled to do so.
19.2. The issue requiring determination by the court is that asked in the notice of motion is in general terms: on what basis should the client assets of the firm be distributed. A number of sub-issues require to be considered. Having heard all of the arguments of the representative parties, the receiver suggests that those issues now are as follows:
(a) should there, subject to proof of any individual claim by tracing, be a general pooling of assets and thereafter, a pari passu distribution?;
(b) if not, how are the assets of the firm to be distributed?;
(c) in considering both questions (a) and (b), the Court will also need to consider the parameters of the tracing principles to be applied.
19.3. In relation to the monies in the accounts of the firm the receiver poses the question as to how are the monies standing to the credit of the accounts are to be appropriately distributed? A large number of the parties who have been heard by the court all support the proposition that the funds in this account should be distributed rateably as between claimants. Mr. O'Neill S.C. advanced contrary arguments to the court. In addition, Mr. Collins advanced arguments to the court as to why, particularly in the case of clients such as Mr. and Mrs. Hall, they should be allowed to trace their monies into the account in accordance with the rule in Clayton's case.
20. Judgment of the Court
20.0. Each client of the firm has a unique contractual relationship with the firm. Certain securities were or were agreed to be bought or sold on behalf of the individual client by the firm. Some were held on the client's behalf by the firm or by Nominees. Some were sold without the client's instructions. Problems arise in relation to some 80 out of the 2500 claimants. Circumstances in relation to timing, payment and investment intermediaries differ from case to case. The parties to this application have agreed to a number of clients acting in a representative capacity for the purpose of resolving the receiver's application to the Court. It is noted that, while the respondent was represented, no submissions were made on his behalf. Other parties were represented for the purpose of determining what material distinction, if any, adhered to whether the securities were been dealt with in certificated or non certificated form.
The response on behalf of the receiver to the submissions of the representative parties reflected fruitful resolution between the parties during the course of the hearing which resulted in a netting of issues for the determination of the Court.
Two issues appear to be no longer in dispute as a result of that discussion and agreement:
(a) that electronic shares should be treated in the same way as certificated shares; and
(b) that any client who can trace their claim into any specific category of assets of the firm should be entitled to do so.
20.1. Electronic shares treated as certificated shares
All of the representative parties accept that there doesn't appear to be any basis in law or in logic for making a distinction between the electronic shares and the certificated shares. The receiver doesn't take issue with the position adopted by the representative parties. However, he draws attention to the fact that the existence of a share certificate provides tangible evidence of a person's claim to specific shares. Upon the receiver's appointment, his task in dealing with certificated shares was therefore considerably easier than his task in dealing with electronic shares. As explained on page 4 of his report, he discovered, following his appointment on 27th April, 2001, that there was a backlog in the inputting of movements in electronic stock on the firm's "Brokerfocus" database. However, after considerable work by the receiver, he was able to identify very largely the persons whom the firm regarded as the owners of the electronic shares. The receiver observed that as the appendices to his report make clear there are not many deficiencies in the numbers of purchases of electronic shares recorded by the firm when compared against the claims of clients to those shares. The numbers of electronic shares held very nearly match the claims against those shares. As the appendices show, there are relatively few cases where the clients' claims in respect of electronic shares are recorded as either wholly unsatisfied or partially unsatisfied.
Having carried out the exercise of updating the BrokerFocus database and analysing the claims of clients, it is therefore possible to say that there doesn't appear to be any reason to differentiate between these two classes of share (namely certificated shares and electronic shares). The persons claiming the electronic shares may not hold a paper certificate, but the recording of the appropriation of their shares has nonetheless been accomplished (save in relatively few cases where clients are shown to have received "none" or "part" of the shares the electronic shares they sought to purchase).
The case made by the Stock Exchange had not been contradicted. It was an issue properly raised by the receiver. The Court agrees that there is no material distinction to be made between electronic shares and certified shares in the context of the respective claims of the clients.
It is clear that there are differences, as referred to by the receiver and by Mr. McCann. In the case of the latter there is no share certificate which has, traditionally been regarded as the evidence of the share register.
Moreover, dealing with electronically held shares or uncertificated shares can only be done by members of the relevant stock exchanges in their own name.
Certificated stock is that evidenced by a share certificate. Section 86 of the Companies Act, 1963 outlines the duty of companies in relation to the issue of certificates on allotment and on transfer and transmission. The certificate is a document of title (section 87). It certifies the entry in the share register which is the primary record. The share certificate is the documentary evidence of a member's entitlement to hold the shares registered in that member's name. The share transfer form is the member's instruction to transfer title as indicated. When accompanied with the share certificate in the manner required by the Articles of Association the company secretary, as registrar, must, in the case of a public company effect the transfer. (see: Doyle: The Company Secretary, (1994) 128 133).
It is clear from the provisions of the 1996 Uncertified Securities Regulation (see 3 above) that both for the purpose of evidence of title and of transfer uncertificated securities do not differ from certificated securities.
The recognition of electronic evidence to title and to transfer of securities equates the so called electronic or dematerialised with the certificated shares. Both are registered in the Register of Shares of the company whether this itself is electronic or not. There can be no difference in terms of the bundle of equitable rights that is conferred by membership of a company, represented by shares registered in the company. The rights in and against the company and the series of mutual covenants as between members is clearly the same irrespective of whether a shareholder has a share which is certificated or non-certificated.
A share certificate is a document under seal evidencing the title of a member in a company. The dematerialised stock, by virtue of regulation 4 also evidences such title. It does not seem relevant or desirable to examine the position of share warrants or bearer securities generally in the present case.
The recording of transactions, detailed at some length in the receiver's report through the order book or order books through Crest or through Merrill Lynch and Sharelink and its successor Charles Schwab allow clients claiming as against the receiver the same opportunity to identify each type.
Moreover, where each deal was in putted into the firms back office database and BrokerFocus accounting system no distinction was made between certificated and uncertificated stock.
The receiver's report details the Brokerfocus database which could be queried with regard to all purchases and sales. The stocks held electronically to the order of the firm for clients ought to agree with the firms records maintained on the Brokerfocus system.
Mr. Paul Sreenan S.C. on behalf of the Irish Stock Exchange had submitted that the manner in which stocks were traded or held (whether in certificated, dematerialised or electronically held form) can affect no change in the property rights of the investors concerned. I agree.
It is also submitted on the basis of the receiver's grounding affidavit that there is sufficient amounts of electronically held stock held to the order of the firm to satisfy the claims of clients to such stock in respect of the majority of the lines of stock. He submits that the receiver ought to identify the class of claimants thereto and ascertain whether there are any monies due to the firm by such clients on the discharge of which the stock ought to be assigned. Where there is an excess of stock held then such excess should form part of the general assets available for distribution. In the event of a shortfall it is submitted that rateable distribution should be adopted in the absence of any particular claimant having a better equity.
It seems to me that the beneficial owners of electronically held stock are entitled to the transfer of stock identified in their names in the same manner as the beneficial holders of certificated stock.
In the circumstances the Court will make a declaration to that effect.
20.2. Tracing
The second matter of agreement by the parties relates to the rights of the clients to trace. Everyone (including Mr. Gardiner S.C. on behalf of Mr. Gleeson who argues that all the assets of the firm should be pooled) appear to accept that there is a right to trace and that, even in the event that the Court was minded to direct a pooling of all assets on a pari passu distribution, this would be subject to any individual client's right to trace.
However, there is a dispute as to whether the right to trace is properly available here as the bank accounts of the firm are unreliable. Mr. Gardiner has specifically made the case that it is impossible to follow the route or flow of money from any particular client through the firm's Bank account to the acquisition of specific shares.
The receiver while accepting that the records of the company are not sufficient to always accurately record the make-up of the monies in those accounts states that they are not the only records of the firm. The firm maintained records of share purchases. Mr. McCann in his submission has already drawn attention to the extents of contemporaneous records of share purchasers. As pp 9-11 of the receiver's report makes clear, the purchase records of the firm have been sufficient to match most purchases of shares with particular client purchasers. Mr. Gardiner's argument appears to proceed largely on the basis that it was a matter of happenstance as to whether any particular client's fund found their way into the acquisition of shares. The receiver submits that it would be wrong to suggest that it was always a matter of happenstance as to whether any particular client's funds found their way into the acquisition of any particular shares. On the contrary, there are, in fact, relatively few cases where there are insufficient purchases of shares recorded to satisfy the claims of all claimants to such shares. Save for approximately 80 of the 2500 claims the purchase records of the firm coincide with the claims of clients. Appendix 3 and appendix 4 to the receiver's report provide specific examples of share purchases of specific shares on behalf of clients which, for the most part, correspond precisely with the clients' instructions. The purchase records do, for the most part, correspond with the claims of clients. For the most part, therefore, the purchase records of the firm appear to be reliable.
The fact that the auditors did not uncover any such unreliability reinforces the view that, for the most part, the purchase records of the firm were reliable.
According to the receiver's analysis the main source of the shortfall facing clients did not arise from a failure to purchase shares (or a failure to records the purchase of shares) but from subsequent unauthorised sales of shares after their purchase (and after their purchase had been recorded). These sales were not undertaken on a wide scale. Particular clients appear, in the analysis of the receiver, to have been particularly targeted by the respondent.
The records, in relation to share purchases, are, for the most part, easily reconciled with the claims of clients save in the case of approximately 80 clients of the firm. Purchasers of shares who have had purchases contemporaneously appropriated to them and recorded in the books of the firm should be entitled to ownership of those shares whether they be held in certificated or in electronic form. The receiver believes it to be fair to say that persons recorded as purchasers of shares in the firm's books had an enforceable right of ownership of those shares. Any such person could have immediately demanded the return of the shares from the firm.
It appears to the court that there is no authority nor logic to compel clients of an insolvent stockbroker firm to abandon shares held by the firm on their behalf for the purpose of a pari passu distribution.
I agree with the submissions of the receiver that similar principles must apply where shares were held by the nominee as holder of company shares on behalf of a designated client of the firm. In this context, it should be noted that there was a practice of longstanding in the firm whereby clients of the firm could, instead of holding shares in companies in their own name, appoint a nominee for that purpose. In such cases, the records of the firm show that individual clients were appropriately designated in the records of the firm as the beneficial owners of such shares.
I will, accordingly, make a declaration that clients who had purchases contemporaneously appropriated to them and recorded in books of the firm or of the Nominee are entitled to ownership and, where necessary to the transfer of those shares to them.
20.3. Bank Accounts of the Firm
Different considerations apply in relation to the bank accounts of the firm. Where the Court has rejected the argument that all of the assets of the firm should be pooled generally for the purposes of a pari passu distribution this can not apply to claims against the monies in the bank accounts of the firm which may form a separate pool.
The rule in Clayton's case would favour those whose monies were paid into the account in the days immediately prior to the appointment of the receiver. As appears from exhibit "C" to the affidavit of Richard Noel Gleeson sworn on 2nd December, 2002, it is unlikely that monies will be capable of being recovered by persons in respect of transactions (either monies paid to the firm or sales settled by the firm on their behalf) which took place prior to 20th April, 2001 (just one week before the appointment of the receiver). If the rule in Clayton's case were to be applied to the monies standing to the credit of the firm's accounts, the application of the rule would greatly benefit those whose monies passed through the firm's accounts in a relatively brief period prior to the appointment of the receiver; all other claimants against the funds in the accounts would lose out.
The Court agrees with the submission of the majority of the parties that the rule is not appropriate in the instant case. The approach (such as that proposed in the Barlow Clowes case) seems more appropriate. The monies in the client accounts of the firm share at least some of the characteristics of a "pool." Unlike the shares, the monies in the client accounts have not been appropriated as between one client and other. It seems to me that the reasoning of Woolf L.J. in the Barlow Clowes case, at 42, is apposite:
" There is no reason why the principle of equality is equity should not be applied The investor has to rely on equity to trace his monies into the account. Where the circumstances, convenience and justice so dictate, once the monies are in the pool, equity can require them to be treated as being subject to the other investors' equitable claims on the fund."
The court is satisfied that the approach adopted by Barlow Clowes should apply in relation to the client and other accounts of the firm. The court will make a declaration that the monies in the client account should be distributed rateably to those claimants who can prove their entitlement to repayment of money lodged to the client and/or other accounts of the firm or of Nominees.
20.4. Issues not agreed
The receiver having heard all of the arguments of the representative parties, identifies certain issues within the parameters of the tracing principle which have not been subject to agreement of the parties and which require the determination by the court.
The following two questions are posed:
(1) should there, subject to proof of any individual claim by tracing, be a general pooling of assets and thereafter, a pari passu distribution?;
(2) if not, how are the assets of the firm to be distributed?;
Some of the representative parties argued that where there is a common misfortune that the most fair and equitable means of distributing the common fund is by means of a pari passu distribution. This is not a case where the firm accepted monies on behalf of clients which were all to be invested in a common fund such as in a unit trust. The firm received specific orders from clients to purchase specific shares. In the vast majority of cases, those shares were actually purchased on behalf of clients. The purchase records of the firm match the claims made by clients (save in the case of approximately 80 clients).
The Receiver has acknowledged that some clients have suffered particular misfortunes; purchases of shares have not been made on their behalf or alternatively, where made, part or all of their shares have been sold without their authority. If pari passu distribution were to be permitted a large number of other clients would suffer, namely those whose claims to purchases were properly recorded in the firm's books and whose shares were not sold without authority. If the court were to direct a pari passu distribution, those shares will have to be given back and those clients will have to suffer in the same way as those whose shares were sold without authority or those whose shares were never purchased by the firm. It appears that no authority as been cited to the court in which a similar order has been made. Presumably, if a pari passu distribution of this kind were permitted, the only clients who would escape are those who can show that their share certificates were simply lodged for safekeeping or those who can show by reference to the designation on the records of the firm that the shares were held by Nominees not merely for the purposes of the purchase of the shares but as their designated nominee for the purpose of holding shares in the underlying company in which the shares were issued.
In view of the radical nature of such an order, it is submitted that the court should be slow to make such an order. The firm's records in relation to purchases of shares are, to a large extent, reliable and can resolve much of the claims. In the circumstance, and having regard to the authorities cited, the court does not favour a general pooling of assets.
20.5. It is therefore necessary to consider the individual classes of asset to determine how each individual class should be distributed. It has already been held that no distinction should be made between electronic and certificated shares. Accordingly, there appear to be no more than two classes of asset, namely shares (held in certificated or electronic form); and monies in the firm's accounts.
The entitlement to the four different categories of claims to shares can be
decided as follows:
20.5.1 Shares purchased by the firm on their behalf which have been duly recorded in the books and records of the firm are identifiable and the claimants are entitled to a declaration of such entitlement.
20.5.2 Shares where the number held by the firm or by Nominees on its behalf are insufficient to satisfy all of the claims made by clients of the firm to that particular class of shares are best 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. Included in this category are those clients in respect of which the purchase of shares of a particular class by the firm did not match the number of orders placed by them.
20.5.3 Clients with claims to shares which were never purchased by the firm the claimants are entitled to claim rateably against the general assets of the firm. In this case each client gave his own individual order to the firm to purchase particular shares on his or her behalf. There was never any "pooling" of shares in very limited circumstances where insufficient share were purchased on behalf of clients to meet the orders made and paid for by those clients.
20.5.4 Shares which were sold without authority by the firm would also be rateably against the general assets of the firm.
20.6. Monies in the accounts of the firm
A large number of the parties who have been heard by the court all support the proposition that the funds in this account should be distributed rateably as between claimants. Mr. Gardiner S.C. clearly favoured this approach. So too did Mr. McCann and Mr. Sreenan S.C. While Mr. McCullough S.C. and Ms. Clohessy did not express any view on this aspect of the case, it would appear to follow form their arguments that they would have no difficult with such an approach either. However, Mr. O'Neill S.C. has advanced contrary arguments to the court. In addition, Mr. Collins has advanced arguments to the court as to why, particularly in the case of clients such as Mr. and Mrs. Hall, they should be allowed to trace their monies into the account in accordance with the rule in Clayton's case.
As indicated in the receivers final submissions the court is faced with a stark choice as to whether or not to permit a rateable distribution on the one hand or to direct that the rule in Clayton's case should apply on the other. Obviously, if the rule in Clayton's case applies, those whose monies were lodged to these accounts in the days prior to the appointment of the Receiver will benefit at the expense of those whose funds passed through the accounts at an earlier time.
I have considered the detailed arguments of the parties as to whether or not the rule in Clayton's case can be regarded as "settled law". Reference has been made to Keane: Equity and the Law of Trusts in the Republic of Ireland at paragraph 20.13; Re: Money Markets International Stockbrokers Limited [1999] 4 IR 267 at pp 276-277 per Laffoy J. It is clear that the rule can be displaced in the particular circumstances of a case. The monies standing to the credit of the client bank accounts are very much in the nature of a mixed pool. In the Barlow Clowes case, Woolf L.J. took the view that the application of the rule in Clayton's case should not be applied if it would result in injustice between investors or "if there is a preferable alternative".
In the view of the court a compelling argument has been made by all of these appointed to argue against the application of the rule in Clayton's case. They stressed that its application would result in injustice between clients because it would favour those clients whose monies entered the accounts in the days immediately prior to the appointment of the Receiver.
Mr Collins, on the other hand, argued strongly that persons in the position of Mr. and Mrs. Hall have a greater equity than those whose monies entered the pool at an earlier time.
I agree with the receiver that for those whose monies entered the account in the days immediately prior to the appointment of the receiver to argue that they have a stronger or greater equity than those whose mines entered the account at an earlier time would be a difficult task. All of the unpaid clients whose monies have entered the account all suffer the same misfortune; the misfortune that there is insufficient money to pay them all in full. There appears to be no reason in logic why those whose monies enter the account at a later time should be said to have a greater equity than those whose monies entered the account at an earlier time. All of them have equitable or trust claims against the account.
Before the court can consider an appropriate declaration it is necessary to examine the position of the Halls.
20.7. Mr. and Mrs. Hall have also sought to make the case personally that they should be entitled to recoup their monies on the basis of the decision of Laffoy J. in Money Markets International Stockbrokers Limited [1999] 4 IR 267 at 277. They argue that they should not be bound by a pari passu distribution as the money in issue was transferred to the firm for a specific purpose, that is, to discharge the sums due in respect of a certain share purchase in the days immediately prior to the appointment of the Receiver, they should be entitled to the return of their monies in full.
In the Money Markets case, Laffoy J. held that the applicant there was unique among the client creditors of the stock broking firm. It does not seem that Mr and Mrs Hall are in the same unique position. According to the detailed analysis of the receiver they are in the same position as several other clients, all of whom paid money to the firm in similar circumstances immediately prior to the appointment of the Receiver. It does not seem that there is any reason that they can say that they have a greater equity than those whose monies were paid into the account at an earlier time.
It does not seem to me, on the evidence adduced, that those whose monies entered the account in the week prior to the appointment of the receiver have a greater equity than those whose monies entered the account at an earlier time. The equities between the competing claimants to the account would seem to be equal. Having regard to the view adopted by the Court of Appeal in the Barlow Clowes case that the principle "equality is equity" should apply.
Whether Mr. and Mrs. Hall (and/or those in similar positions) are entailed to individually trace their monies into the client accounts of the firm is a different matter. There are two client accounts. Payment was made by Mr Hall into the current account in relation to which there were movements to the deposit account. When the claims of all such parties are taken into account, it may well transpire that there will be insufficient that monies available to repay Mr. and Mrs. Hall in full.
Tracing is neither a right nor a remedy and, in any event, there is no application before the court for a declaration in that regard.
The court will make a declaration that the funds in the client and other account of the firm be distributed rateably as between the claimants thereto and, to the extent of the shortfall to those claimants at 20.5 above.
20.8. The stockbrokers contentions
I carefully considered the final contention put forward by the stockbrokers. This is that the receiver purchase lines of stock to return to the clients who have ordered such stock before the appointment of the receiver.
The receiver has power as receiver and manager to continue the business of the firm. However, it is not clear that the contractual arrangement before the receiver was appointed remains. Of its very nature, purchase of securities is strictly time bound. The contention, as I understand it, would effectively force on clients the purchase of shares at a future date. This would amount to a separate contractual arrangement. It would be imposing on a client an obligation to pay at a certain time referable to the open market value of the security but would be delivering that security (and indeed impeding the transfer thereof), at a future date when it might have fallen in value). If the receiver were permitted to do this, the receiver should also be obliged to purchase securities that had risen in the market. It may only be to the benefit of the compensation fund to accede to this contention. It would be more likely to disadvantage claimants.
It was also submitted that an argument exists in relation to costs which would be more appropriately dealt with together with all other submissions with regard to costs.
THE HIGH COURT
2001 No. 168 COS
IN THE MATTER OF W & R MURROGH
AND IN THE MATTER OF THE STOCK EXCHANGE ACT, 1995
AND IN THE MATTER OF AN APPLICATION BY TOM GRACE RECEIVER AND MANAGER OVER THE ASSETS OF W & R MURROGH
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 MURROGH
FIRST NAMED NOTICE PARTY
AND
THE CENTRAL BANK OF IRELAND
SECOND NAMED NOTICE PARTY
Judgment of Mr. Justice Roderick Murphy dated the 6th day of May, 2003.
1. Outline
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.
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, 1998 on the 18th June, 2001. I shall refer to Mr. Grace in all his roles as "the receiver."
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.
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.
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
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.
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
3.1. The Receiver, represented by Mr. Denis McDonald S.C.
3.2. The Irish Stock Exchange represented by Mr. Paul Sreenan S.C.
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.
3.4. Mr. Donal Riordan to represent the interest of those clients who are not in a position to trace their claims to shares and a specific number of identifiable shares who argue that the shares held in that way should be treated as a pool to be distributed rateably between all claimants to shares held in certificated form on a pro rata basis represented by Mr. Eoin McCullough S.C.
3.5. Mr. James Sheehan to represent the interest of those clients of the firm who claim ownership of electronically held stock who are not in a position to trace their claim to any identifiable stock, represented by Ms. Grainne Clohessy Barrister at Law.
3.6. Dr. Margaret Frances Condon to oppose the argument that all of the client assets of the firm should be pooled for the purpose of distributing them rateably as between all of the client claimants, represented by Mr. Hugh O'Neill S.C.
3.7. Mr. Liam Shorten to represent the interest of those clients who can trace their ownership of electronically held stock to identifiable stock currently held electronically to the order of the firm, represented by Mr. Lyndon McCann Barrister at Law.
3.8. Mr. Stephen Guinane to represent the interests of those clients of the firm who can trace their claim to ownership of certificated shares to specified number of identifiable shares held by the firm, represented by Mr. Patrick Horgan S.C.
3.9. Mr. Hugh and Mrs. Barbara Hall to represent the interests of those clients of the firm who can trace their claims into the client account of the firm by application of the rule in Clayton's case and on their own behalf, represented by Mr. Brian O'Moore S.C. and Mr. Maurice Collins Barrister at Law.
3.10. Goodbody Stockbrokers, NCB Stock Brokers Limited, Davy Stock Brokers, Bloxham Stock Brokers and Dolmen Butler Briscoe Limited representing the stock brokers who contribute to the compensation fund, by Mr. Richard Nesbitt S.C.
3.11. The Central Bank, represented by Mr. David Barniville Barrister at Law.
3.12. The Investor Compensation Company Limited, represented by Mr. Barry Cahir of William Fry, Solicitors.
3.13. In respect of the second motion, Anglo Irish Bank Limited and Anglo Irish Nominees Limited (the Anglo Irish Parties) represented by Mr. Michael Cush S.C.
3.14 Finally Mr. Denis McDonald S.C. was given leave to reply on behalf of the receiver.
4. Preliminary matter
Many of the references by the receiver and the parties are best understood in the context of the definitions in the Uncertificated Securities Regulation, 1996.
The reference to certificated and uncertificated or electronically held stock derives from the legal framework governing the transfer of shares without the need for certificates. Section 239 of the Companies Act, 1990 enables the Minister to make provision by regulations to enable title to securities to be evidenced and transferred without a written instrument.
The Minister made such provision in the Company Act 1990 (Uncertificated Securities) Regulations 1996 which enable securities to be evidenced and transferred without a written instrument. These Regulations are complemented by a wide range of contracts in relation to the Stock Exchanges and by CREST rules and manuals.
Crest is an equity settlement system which was introduced to Ireland in 1996 once the Regulations came into force. Crest allows electronic settlement for the first time. It enables shareholders to hold shares in electronic form.
Dematerialised and non certificated shares are terms that the parties have employed in the submissions below to mean electronically held shares or securities
Certificated unit of a security is defined unhelpfully as "a unit of a security other than an uncertificated unit of a security as defined in this regulation."
Uncertificated unit of a security means a unit of a security, title to which is recorded on the relevant register of securities as being held in uncertificated form, and title to which, by virtue of these regulations, may be transferred by means of a relevant system. The relevant system means a computer based system and procedures which enable title to units of a security to be evidenced and transferred without a written instrument.
Uncertificated stock is, accordingly, electronically held stock which is legislated for in the above referred to Regulations.
"Dematerialised instruction" is defined in the Regulations as an instruction sent or received by means of (the computer based and procedures of) a relevant system.
"System entry" means any entry or record made, supplied or stored in legible or non-legible form by and operator (specified in regulation 28) or any system-participant (including, it would seem, a member of the Stock Exchange) in any register of securities in connection with the operation of a relevant system and any dematerialised instruction issued by any such persons.
Regulations 4 of the Company Act 1990 (Uncertificated Securities) Regulations 1996, provides that notwithstanding section 79 and 81 of the 1963 Act or section 2(1) of the Stock Transfer Act, 1963, title to securities may be evidenced and transferred without a written instrument provided that title is evidenced and transferred in accordance with the regulations.
While the parties on the last day of the hearing had agreed that there was no material difference between certificated and uncertificated shares, the Stock Exchange was anxious to have this matter considered by the court. (see 7.1 and 19.2 below).
5. Receiver's Affidavit and Report
5.1 Within 15 months from the date of his appointment, the receiver avers that he was in a position to assess some 2,500 claims which had been received by him. A report was prepared setting out in some detail the manner in which the firm traded in its purchase and sale of securities on behalf of clients. The report also sets out details of certain of the assets held by or to the order of the firm at the time of the receiver's appointment.
A number of difficulties arise in relation to the distribution of the assets of the firm and ownership of certain of the stocks and shares held by or to the order of the firm.
At the time of the swearing of the affidavit grounding the application before the Court (18th July, 2002) the liabilities of the firm were approximately 12,685,000 approximately and the client assets were 6,215,967.71. (At the date of dissolution 21st May 2001 these assets were estimated at 5,679.000.)
The receiver believes that the manner in which the assets are to be distributed among the claimants is, accordingly, of crucial importance. If a "first in/first out" approach is adopted, consistent with the rule in Clayton's case, this would result in some claims been satisfied in full while other claimants were left with substantial losses. If, on the other hand, a rateable distribution approach is adopted, all claimants would suffer proportionate loss.
5.2. Assets available
The receiver identifies three broad categories of assets:
(a) UK and Irish quoted securities held in certificated form in the name of Nominees;
(b) Electronically held stock held to the order of the firm together with the proceeds of compulsory orders of such stock, and net dividends earned in such stock;
(c) Cash in current and deposit accounts in both euro and sterling.
These are more particularly detailed at 5.6 below.
The claims to all of the above categories exceed the stock and cash available.
5.3. Liabilities
Claims against these assets derive from those clients who seek entitlement to shares in certificated form, those who claim electronic stocks and those who claim money from the firm. These three categories are detailed hereunder.