In Lehman Brothers International (Europe)(in administration) v CRC Credit Fund Limited & Ors [2010] EWCA Civ 917 the Court of Appeal considered the first instance judgment of Mr Justice Briggs on the operation of the Client Money Rules (CASS) in relation to the insolvency of Lehman Brothers International (Europe)(LBIE). We have previously reported on the judgment of Briggs J here and here.

The Court of Appeal agreed with Briggs J that the CASS rules created a trust over client money from the date it was received, rather than from the date it was segregated. It also agreed that LBIE did not hold client money for the purposes of the CASS rules simply because LBIE owed a certain sum to its client under an agreement, for example an obligation to pay a manufactured dividend under a stock lending agreement.

However, the Court of Appeal disagreed with the first instance judgment on two key issues. First, it was held that the trust imposed by CASS 7 applied to money which was identifiably client money whether or not it had actually been segregated by LBIE. It would be unfair for the trust to apply only to those clients whose money happened to have been be placed in segregated accounts. Second, the Court of Appeal held that the effect of CASS 7 was that clients would share in the client money pool according to the amount which ought to have been segregated on their behalf, rather than (as held by Briggs J) on the basis of the sum which had in fact been segregated.

This judgment is highly significant, as it will significantly increase the number of creditors who may be entitled to make claims for client money held by LBIE and possibly the amount of their claims. Creditors whose client money was not segregated by LBIE, but ought to have been, may now have a claim to the pool of client money held by LBIE. It is unlikely, however, that the decision will increase the size of the pool because it does not turn the money in LBIE’s house accounts into trust money (and therefore client money) except to the extent that tracing rights can be established over such funds. This would prima facie seem unlikely. Except to that extent, the decision will diminish the share of those whose client money was in fact segregated. Given the material impact this decision could have on the distribution of funds by the administrators of LBIE (although it should be noted that the decision depends heavily on the meaning and interpretation of CASS and should not be taken to apply to trust rights in a non-CASS context), it seems likely that there will be an appeal to the Supreme Court.”