THE HIGH COURT
									1999 No. 32 COS

IN THE MATTER OF MONEY MARKETS INTERNATIONAL STOCKBROKERS LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF THE COMPANIES ACTS, 1963-1990

Judgment of Miss Justice Laffoy delivered on the 20th day of July, 1999.

THE APPLICATION

	On this application the Applicant, Gill Hess, seeks an Order directing the Official Liquidator of Money Markets International Stockbrokers Limited (the Company) to complete a contract entered into on the Applicant's behalf, or, in the alternative, to repay the sum of £293,740.90 to the Applicant to enable him to complete the contract in person. 
	
THE FACTS

	The facts which give rise to the application are not in dispute.  
	The Company carried on business in the State as a stockbroker and was an authorised a member of the Irish Stock Exchange.  The Applicant was a client of the Company and prior to 15th February, 1999 the Company carried out a number of purchase and sale transactions for the Applicant but no sums were due by the Applicant to the Company or by the Company to the Applicant in respect of those transactions at that date.
	On 15th February, 1999 the Applicant instructed the Company to purchase 23,000 shares in Allied Irish Banks Plc. on his behalf.  On the same day the purchase was confirmed and the Applicant was advised that the settlement date was 22nd February, 1999 and that the total amount due by him to complete the transaction, including stamp duty and commission, was £293,740.90.  On 18th February, 1999 the Applicant directed his bank, the branch of Bank of Ireland in Skerries, Co. Dublin, to transfer £293,740.90 to the Company's account.  On 18th February, 1999 the sum in question was transferred and was credited to the Company's current account number 72164080 with Ulster Bank Limited.  
	On 19th February, 1999 the Irish Stock Exchange suspended the right of the Company to transact business on the Exchange.  By Order of this Court dated 15th March, 1999 the Company was wound up and Tom Kavanagh was appointed Official Liquidator for the purpose of the winding-up.  By further Order of this Court made on 19th March, 1999, on the application of Irish Stock Exchange Limited and with the consent of the Central Bank and the Official Liquidator, it was ordered that the Company give the Stock Exchange and its authorised officials access to the books and records of the Company and furnish to the Stock Exchange such information as might reasonably be required to facilitate the identification of each party on whose behalf the Company had entered into any unsettled agency contracts on the Stock Exchange and the notification to each party of the identity of the other party to each such contract, thereby enabling the parties to complete the sale or purchase of the relevant securities.  The purpose of the Order of 19th March, 1999 was to enable the default rules of the Stock Exchange to take effect so as to govern dealings in relation to unsettled transactions.
	By letter dated 25th March, 1999 from the Irish Stock Exchange, the Applicant was notified that Bloxham Stockbrokers were the counter-party on the unsettled contract of 15th February, 1999.  By letter dated 29th March, 1999 Bloxham Stockbrokers requested the Applicant to complete the unsettled transaction by payment of the full sum of £293,740.90 to them.

CLIENT ACCOUNTS: GENERAL POSITION

	From his investigation of the various client accounts held by the Company, the Official Liquidator has estimated the overall position in broad terms.  The amount which appears to be due and owing in accordance with the books and records of the Company to clients is £2,703,374.  As against this, clients' funds held by the Official Liquidator amount to £1,482,276.  On a separate application which is pending before this Court the Liquidator has sought directions on various issues which impact on the difference between the opening balance in accordance with the client ledger (£2,703,374) and the monies held in the client bank account (£1,482,276).  Whether there is a deficit in client funds and the extent of that deficit turns on the resolution of those issues which remain to be determined.  It is against that background that this application is being considered.  Accordingly, it must be considered on the assumption that ultimately there may be a deficit in client funds.  
	In his first Affidavit sworn on 11th June, 1999 in response to the Applicant's application, the Official Liquidator acknowledged that the Applicant's situation is different to that of other clients of the Company in that the Applicant transferred monies to the Company before the settlement or due date and the monies are identifiable in the client account of the Company.  Unlike other client creditors, the outcome of the Official Liquidator's application for directions does not concern the Applicant.  It was on the basis of the apparent uniqueness of the position of the Applicant as a client creditor and the Applicant's contention that he was being prejudiced by the delay because of fluctuations in value of the shares he contracted for since February 1999 that the Applicant's application was heard in advance of the determination of the issues which arise on the application of the Official Liquidator.  

THE SUBMISSIONS

	It is agreed that the Company stood in a fiduciary relationship to the Applicant and that the funds transferred by the Applicant to the Company's account were held by the Company as trust funds.  When these funds were transferred into the Company's account they were intermingled with trust funds of other client creditors and, the Official Liquidator contends, probably also with Company monies because the Company had regularly injected its own funds into client accounts to cover deficits.  In broad terms, the dispute between the parties is whether the rule in Clayton's case should be applied to determine who is now entitled to the monies represented by the credit balance on the Company's account in Ulster Bank Limited.  
	Mr. Finlay submitted on behalf of the Applicant that it is settled law that where funds belonging to various beneficiaries have been mixed in a single bank account, priority as between the beneficiaries is generally determined by the rule in Clayton's case (Devaynes -v- Noble, Clayton's case, (1816) 1 Mer. 572), that is to say on a "first in, first out" principle.  While the rule is not invariably applicable, the instant case is not one of the situations in which it should not be applied it was submitted.  For instance, the situation in the instant case is not analogous to the situation which arose in Barlow Clowes International Limited (In Liquidation) -v- Vaughan, [1992] B.C.L.C. 1910, where the Court of Appeal refused to apply the rule because the investors were found to have a common purpose as participants in a common investment plan and decided that the distribution should be on a pari passu basis.  The instant case, it was submitted, is distinguishable from the Barlow Clowes case because in the instant case there was no common purpose among the investors.  The Applicant and, it would appear, each other client creditor of the Company was investing on his own behalf in specified stocks.  Moreover, it was submitted that the position of the Applicant was one that was recognised in the judgment of Woolf L.J. in the Barlow Clowes case as requiring special consideration.  In his judgment Woolf L.J. stated as follows (at page 931):-

	"Mr. Hart [Counsel arguing for the application of the rule in Clayton's case] emphasised the theoretical position of an investor who advanced a sum of money just prior to the account of BCI being frozen.  In that situation he contended correctly that in the normal way an investor must be able to trace the whole of his investment into the balance of the account; unless the investor intends his investment to be treated in the way that funds invested in a unit trust are treated (which he argues is not the position here).  Mr. Hart submitted that it followed that the investor must be entitled to the whole of the sum in the account which can be identified if, since the investment, there has been no movement in the account.  However, as Mr. Hart accepts, there is in this case no investor who is precisely in that position.  If there was, I accept that the investors' situation would require special consideration."

	On behalf of the Official Liquidator Mr. Gleeson submitted that the rule in Clayton's case should not be followed, it being merely a rule of convenience, and not an invariable rule of law.  It was submitted that it is open to the Court to exclude the application of the rule where it would be impracticable or where it would result in an injustice as between client creditors.  As regards the liquidation of the Company, it was submitted that the general application of the rule in Clayton's case would be difficult if not impossible.  Although the Applicant's lodgement can be identified, it was submitted that subsequent movement in and out of the account makes it impossible to say that all of his monies are included in the final credit balance,  Moreover, it was submitted that the application of the rule would produce an arbitrary result.  It was submitted that the equities are equal as far as all of the client creditors are concerned and therefore, in the event of a deficit, they should be all treated equally.  Pari passu distribution is the fairest and most equitable mode of distribution of client funds.  In support of this submission Mr. Gleeson relied on the decision of the Court of Appeal in the Barlow Clowes case and the decision of the New Zealand Court of Appeal in Re Registered Securities Limited, [1991] 1 N.Z.L.R. 545.  He also referred to Goff & Jones on Restitution, 5th Edition, 1998 at page 109 and Keane on Equity and The Law of Trusts at paragraph 20.13.  Finally, he submitted that although part of the ratio of the Court of Appeal's decision in the Barlow Clowes case was that the investors were paying into a common fund, the fact that it might have been presumed by individual clients that their monies were being kept in segregated accounts or in a segregated manner did not trigger the automatic application of the rule in Clayton's case.  

THE ACCOUNT

	Before considering the legal principles applicable to the issue between the parties I think it would be useful to consider the account to which the Applicant's monies were transferred in some detail.  As I have stated, the account was a current account and at all material times it was in credit.  The Official Liquidator has averred in his Affidavit sworn on 9th July, 1999 that, although the Company operated several client bank accounts, account number 72164080 was the principal account through which the clients' dealings with CREST were settled.  
	An analysis of the account reveals the following:-

(a)	At the close of business on 17th February, 1999 there was a credit balance of £107,216.84 on the account.

(b)	The transfer of the Applicant's money was the first item recorded on the account on 18th February, 1999.  It was one of two credit items or lodgements to the account on that day.  It was recorded as follows on the account statement:

		"Gill Hess
		Service Link
		MMI Stockbrokers					£293,740.90"

	The other credit item on that day was in the sum of £16,456.91 and represented a payment from CREST.  There were three withdrawals or debit items on that day.  The first was a payment to CREST in the sum of £31,835.88.  The other two represented payments by the Company to clients in the sums of £17,639.18 and £2,661.97 respectively.  The net effect of the transactions in the account on 18th February, 1999 was to leave a credit balance of £365,278.62 on the account.  
(c)	On 19th February, 1999 there was one credit item, namely, a payment from CREST in the sum of £15,123.24.  There were three debit items which were reversed on 22nd February, 1999 and, accordingly, need not be particularised.  There was one further debit item in the sum of £16,843.79, which represented a payment to a client.  

(d)	The final lodgement to the account, which was recorded on 22nd February, 1999, was in the sum of £32,944.94.  That lodgement had been made on 18th February, 1999 but had taken some days to be cleared.  A portion of the credit (£8,797.88) was reversed by a corresponding debit on 25th February, 1999, so that of this lodgement £24,147.06 only is relevant to the final balance on the account.

(e)	The final credit balance on the account as of 25th February, 1999 was £387,705.13.  

(f)	The final credit balance is more than adequate to satisfy the lodgement which represented the transfer from the Applicant and the three subsequent lodgements, two of which were from CREST.  The payments from CREST represented the total settlement for trading of all of the Company's clients on 18th February, 1999 and 19th February, 1999 and monies of various clients were intermingled in those payments.  

While the unravelling of the payments by and to CREST in the last two days of trading by the Company and the credit balance as of 17th February, 1999 to identify whose money is represented by those sums may well be impossible or, at least, impracticable, as the foregoing analysis illustrates, when one works back from the final credit balance on the frozen account that balance was sufficient to cover the lodgement of the Applicant's monies and all subsequent lodgements.

THE LEGAL PRINCIPLES APPLICABLE

	In identifying the legal principles applicable to the issues which arise on this application, I consider that the starting point can be the decision of Budd J. in Shanahans Stamp Auctions Limited -v- Farrelly, [1962] I.R. 386.  In that case, Budd J. held, on the facts, that investors' money was entrusted to the company for a specific purpose, namely, purchase of stamps and their resale, the proceeds and profits to be then remitted to the investor and on that basis he held that a fiduciary relationship was created between the investor and the company.  He then went on to consider the authorities which had been cited in argument before him to determine what were the general principles applicable in cases of the type before him and what resultant rights, if any, accrued to the investors either at law or in equity.  On the basis of his analysis of the authorities, Budd J. stated as follows (at page 442):-

	"In general the rule in Clayton's case is applicable as between cestuis que trustent; that is, that first drawings out are to be attributed to the first payments in.  In other words, the trustee is deemed to draw out first the money of the cestuis que trustent that he paid first into the blended account.  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."
In the Shanahans Stamp case, the investors' money had been mixed twice: first, in the original banking account, and, secondly, in the property in the shape of stamps in which the investors' money lay latent at the time of the proceedings, again in the a mixed fashion.  On the facts Budd J. concluded that, 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 his particular property was used before others in the purchase of the property in the shape of stamps.  Accordingly, tracing, in the exact sense of the term, was not possible or practicable.  Therefore, Budd J. held that the rule in Clayton's case did not apply as between the unsyndicated investors and that a pro-rata distribution was the proper form of relief so far as they were concerned. 
	Even in its application to trust funds sourced from various beneficiaries blended in a single bank account, the application of the rule in Clayton's case has been criticised.  In Equity and The Law of Trust, at paragraph 20.13, Mr. Justice Keane has described the application of the rule in such circumstances as "rough justice" and has further commented as follows:-

	"It would appear, however, that the rule in Clayton's case should not apply where the money is no longer in the bank account; and it may even be doubtful whether the Court would now continue to apply Clayton's case (which has always been regarded as based on rather crude if convenient assumptions) to the case of competing claims of beneficiaries to money in a bank account."

	In the Barlow Clowes case the issue which was before the Court of Appeal was as to the method which should be adopted to apportion the assets salvaged after the collapse of Barlow Clowes International Limited among the investors who had a claim to those assets.  The assets were represented by monies paid by investors seeking to invest in investment plans, monies to the credit of bank accounts and the net proceeds of other assets including a yacht and certain gilt edged investments.  Two methods of apportionment were in contention; first, the "first in, first out" basis under the rule in Clayton's case; secondly, what Woolf L.J. called "the pari passu ex post facto solution", that is to say, establishing the total quantum of the assets available and 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.  Woolf L.J., having stated that in the circumstances of that case he had no doubt that, if, as matter of principle, the Court of Appeal was in a position to adopt the latter solution, it was the solution which was most appropriate, went on to consider the relevant authorities, which largely coincided with the authorities considered by Budd J. in the Shanahans Stamp case.  On the basis of his analysis of the authorities, Woolf L.J. concluded (at page 928):-

	"The decision in Re. Diplock's Estate must be considered together with the other judgments to which I have referred.  When this is done, short of the House of Lords, it is settled law that the rule in Clayton's case can be applied to determine the extent to which, as between each other, equally innocent claimants are entitled in equity to monies which have been paid into a bank account and then subject to the movements within that account.  However, it does not, having regard to the passage from the judgments in the other authorities cited, follow that the rule has always to be applied for this purpose.  In a number of different circumstances the rule has not been applied.  The rule need only be applied when it is convenient to do so and when its application can be said to do broad justice having regard to the nature of the competing claims.  Re Hallett's Estate shows that the rule is displaced where its application would unjustly assist the trustee to the disadvantage of the beneficiaries.  In Re Diplock's Estate the rule would have been displaced by the trustee subsequently earmarking the beneficiaries' funds.  It is not applied if this is the intention or presumed intention of the beneficiaries.  The rule is sensibly not applied when the cost of applying it is likely to exhaust the fund available for the beneficiaries."

Woolf L.J. referred to two other cases in which the rule in Clayton's case had not been applied which, although quite different from the facts under consideration by the Court of Appeal, he regarded as relevant because they helped to illustrate "the range of situations where the Courts have already concluded they were not required to apply the rule".  The rationale of favouring a rateable distribution over the application of the "first in, first out" rule where investors' funds are mixed in a pool discernible from the judgment of Woolf L.J. is the principle that equality is equity.  In his judgment (at page 932) he stated as follows:-

	"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' claims on the fund.  There is nothing wrong in principle in treating the quantum of the latest investors' claim as either being reduced pro-rata by the earlier investors' claims or enhanced by the value of other assets, purchased earlier from the monies in the pool, into which it is possible to trace."
	The conclusions I draw from the authorities are that, as far as this Court is concerned, in the case of a current account such as the account in issue here where trust funds sourced from various beneficiaries are mixed or pooled in the account, it is settled law that as a general proposition the rule in Clayton's 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 circumstance 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.  

APPLICATION OF THE LEGAL PRINCIPLES TO THE FACTS

	On this application, I do not propose to determine, and I am not to be taken as expressing any view as to whether, as between all of the parties who may have a claim to the balance in the current account in issue, the rule in Clayton's case is applicable to determine entitlement, because I am not satisfied that all relevant interests were represented on this application and, in any event, I consider that it is not necessary to do so.  What I propose to consider is whether, as between the Applicant, on the one hand, and all other claimants to the funds represented by the balance on the current account, on the other hand, in accordance with equitable principles the Applicant should be bound by a pari passu distribution, if the rule in Clayton's case is not applicable.  It is not to be inferred, however, that I am of the view that a pari passu distribution is the appropriate method of distribution as between all other claimants to the monies represented by the credit balance on the account: on the evidence before the Court the principles to be deduced from the decision in Re Hallett's Estate may come into play. 
	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.  The Applicant transferred the monies in issue to the current account for a specific purpose, to discharge the sums due in respect of the share purchase transaction confirmed on 15th February, 1999 to enable that purchase to be completed.  The Applicant transferred the monies into the Company's current account prior to the settlement day and all the Company did was to receive them.  However, after the transfer and receipt of the monies and before the settlement day the suspension of the Company as a member of the Stock Exchange supervened, so that the Company was not in a position to use the monies transferred and received for the purpose for which they were intended because the Company was not in a position to complete the purchase transaction.  It seems to me that, given this combination of circumstances, the Applicant must have a better equity than the other client creditors who have a claim against the monies 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.  
	In reaching this conclusion I am not overlooking the fact that, while the Affidavit sworn by the Official Liquidator on 9th July, 1999 discloses that the vast bulk of the lodgements from clients within the last few days of trading of the Company relate to transactions which settled, that is to say, the client received delivery of the stocks, in the case of at least two clients who made lodgements the transactions remain unsettled or partially unsettled.  However, what distinguishes those transactions, in my view, from the instant case is that they were for settlement before the Company was suspended.  
	If it is the case that the rule in Clayton's case is applicable in determining entitlement to the monies represented by the balance on the current account, it is clear from the details of the account which I have summarised above that, on the application of that rule, the Applicant would be entitled to repayment of the entirety of the monies transferred by him to the Company's account.  On the other hand, if the rule in Clayton's case is not applicable, in my view, the equity of the Applicant is superior to the equity of any other client creditor with an equitable claim against the monies in the account, so that the Applicant cannot be bound by a rateable distribution, assuming such distribution would do justice among the other client creditors inter se, because such a rateable distribution would not do justice as between the Applicant and the other client creditors.  

SECTION 52 OF THE STOCK EXCHANGE ACT, 1995

	Sub-section (5) of Section 52 of the Stock Exchange Act, 1995 was amended by Section 78 of the Investor Compensation Act, 1998.  Paragraph (a) of Sub-section (5) precludes a liquidator from having or obtaining any recourse or right against a client's money and other client assets until all proper claims of the client against the client money or other client assets have been satisfied in full.  However, paragraph (b) now provides for an exception to paragraph (a) and is in the following terms:-

	"Notwithstanding paragraph (a) of Section 52(5) of this Act, a liquidator.... may have 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 instruments received, held, controlled or paid on behalf of a client by a member firm in respect of such reasonable expenses as are incurred in the carrying out of their functions under this Act or under the Investor Compensation Act, 1998 or incurred in the distribution of client money and investment instruments to clients of the member firm where the assets of the member firm have been exhausted."

While it was not contended on behalf of the Liquidator that the existence of paragraph (b) precludes the Court from making an Order in relation to the Applicant's monies, it was submitted that the Liquidator might ultimately be entitled to recourse on a pro-rata basis against those monies under paragraph (b).  Mr. Finlay, on behalf of the Applicant, suggested that the Liquidator might be allowed to retain a small sum to reflect such a potential claim.  Without expressing any view on the scope of paragraph (b), I think the situation can be met if the Order of this Court preserves the right of the Liquidator to make a claim against the Applicant under paragraph (b).  

THE FIRST RELIEF

	Thus far in this judgment I have addressed the entitlement of the Applicant to the alternative relief claimed by him, namely, an Order directing the Liquidator to repay the monies transferred to the company to him to enable him to complete the contract for the purchase of the shares.  As I have come to the conclusion that he is entitled to return of the monies, the first relief claimed, namely, an Order directing the Official Liquidator to complete the contract, does not arise.  Nonetheless, for completeness, I propose setting out my views on this aspect of the claim.  In my view, the Liquidator is under no obligation to and, indeed, has no power to complete the purchase transaction.  On the making of the winding-up Order the Company's agency terminated.  The Order of 19th March, 1993 permitted and facilitated the coming into effect of the Stock Exchange default rules.  Under the umbrella of the Order and the default rules former clients of the Company are enabled to complete transactions which were unsettled at the date of the winding-up Order outside the winding-up.

DECISION

	There will be an Order directing the Official Liquidator to repay to the Applicant the sum of £293,740.90 transferred to the Company on 18th February, 1999 but without prejudice to any claim the Liquidator may have against that sum and against the Applicant under Sub-section (5) of Section 52 of the Stock Exchange Act, 1995, as amended by Section 78 of the Investor Compensation Act, 1998.