Client Monies: Court Directions Proceedings

Client Monies: Court Directions Proceedings

Court documents relating to the liquidation of BBY.

Court documents relating to the liquidation of BBY.

 

About BBY Limited (BBYL) holding client funds

In BBYL's business funds received from clients were initially deposited into client segregated accounts (CSAs) on trust for clients. CSAs were held by BBYL in respect of equities, exchange traded options, futures contracts and options, foreign exchange contracts, various products offered via Saxo Capital Markets and Interactive Brokers and other products.

Our investigations indicate there will likely be a significant overall shortfall between available client funds and client claims. BBYL did not maintain comprehensive records that show the client or clients who are entitled to the balance of any particular CSA. We identified transactions between CSAs within and across different product lines and between CSAs and ‘House’ accounts that we consider to be outside of the ordinary course of business and may have led to the depletion of CSAs and shortfalls against client obligations. In these circumstances the legal entitlement of each client to money in the CSAs is not currently clear and there is uncertainty about how client entitlements should be treated in the liquidation of BBYL.

Finding a resolution for returns to clients: Court proceedings and directions

Seeking Court guidance

The unusual circumstances and legal questions means the matter is extremely complex. The outcome for clients within various product pools will be heavily influenced by the manner in which the legal position is resolved. The Liquidators decided that it was necessary to seek guidance of the Court as to how the client monies in the CSAs and other client related recoveries should be dealt with and ultimately distributed. Examples of issues where we sought a determination by the Court include:

  • whether or not CSAs should be grouped or pooled, and if so, how
  • whether foreign currency held in the CSAs should be converted into Australian Dollars to facilitate distribution
  • whether amounts recovered by BBYL since 17 May 2015, when the company went into administration, and amounts that may be recovered by the Liquidators in the future, are beneficially owned by BBYL, or are held on trust for clients
  • whether positive client positions should be set-off against negative client positions, including across different product lines in respect of the same client 
  • whether approximately 1,000 small client entitlements (less than $25) can be disregarded 
  • whether amounts deposited by clients after 17 May 2015, when the company went into administration, should be returned to clients, or treated as a deposit to the relevant CSA
  • whether interest earned on the CSAs is owned beneficially by BBYL or is held on trust for clients
  • whether the liquidators' remuneration, costs and expenses should be paid out of trust property.

There are thousands of BBYL clients who potentially have an interest in the CSAs and recoveries. The aim of the Court process was to resolve these issues in one set of proceedings and avoid unnecessary time and cost of dealing with various separate legal challenges by clients, creditors or other interested parties. The rules of Court allow for a representative to be appointed to represent members of a class where it is expedient for the purpose of saving expense (having regard to all of the circumstances, including the amount at stake and the degree of difficulty of the issue or issues to be determined). The Liquidators proposed that representative defendants be appointed to represent the respective interests of the different classes of BBYL clients. This would ensure that arguments are presented for and against each position.

13 August 2015

The Liquidators commenced proceedings in the Supreme Court of New South Wales seeking the Court’s guidance as to how the amounts in the CSAs and other recoveries should be dealt with and funds ultimately distributed. The case number is 2015/00237028.

17 August 2015

There was a directions hearing and the Liquidators sought that the Court approve an explanatory notice to clients. The matter was listed for further directions on 24 August 2015.

24 August 2015

There was a further directions hearing and Justice Brereton of the Supreme Court made various orders including joining a group of former options clients, “Mazzetti & others” (who were seeking leave to take proceedings against BBYL and requiring a stay of proceedings pending a compulsory mediation with the Liquidators).

31 August 2015

The Liquidators’ draft client circular was reviewed by Justice Brereton who stood over orders in relation to the wording, to be considered further in chambers. The Court also stood the proceedings over two weeks, at the request of the Mazzetti & Ors group, until 14 September 2015 (this date was subsequently rescheduled to 18 September 2015).

18 September 2015

The Court made a number of orders around emailing the proposed explanatory notice to clients and publishing this on the KPMG BBY web site along with extensive supporting material. The Court requested some amendments to the notice before the final version was to be approved and scheduled another directions hearing for 19 October 2015.

19 October 2015

The Court adjourned the proceedings to 22 March 2016 (provisionally) for a full hearing to determine the client issues and made a number of procedural orders setting out a time table for further steps. The Court appointed three representative defendants for certain categories of clients as per the table below.

  1. J Mazzetti Pty Ltd ACN 006 705 602 as Trustee for J Mazzetti Pty Ltd Staff Superannuation Fund representing ETO clients with open positions as at 15 May 2015.
  2. Peter Brian Haywood and Bronwen Menai Haywood in Trust for the Haywood Superannuation Fund representing Equities clients and ETO clients without open positions as at 15 May 2015.
  3. Clive Riseam representing Futures, FX, Saxo and Other Products clients.

In addition the Court granted leave for a ‘non representative’ defendant to participate in the Proceedings – the Securities Exchange Guarantee Corp Ltd (the ASX fidelity fund) as trustee on behalf of the National Guarantee Fund (the fourth defendant).

Also, on 19 October 2015, the Court made orders in relation to the payment of costs and expenses to the effect that:

  • the Liquidators' remuneration, costs and expenses, and the second (Haywood) and third (Riseam) representative defendants' legal costs be paid out of certain recovered amounts and the CSAs of BBYL other than an amount of $5.8 million, made up of $2.4 million in withdrawals by BBYL relating to margin calls and the $3.4 million returned from the ASX, referrable to the ETO product line; 
  • the legal costs of the first representative defendant (Mazzetti) be paid out of the $5.8 million; and
  • the legal costs of each of the representative defendants, and the legal costs, expenses and remuneration of the Liquidators will be examined and approved by a Registrar of the Court before they are paid.

The Court ordered that the Liquidators file, serve and publish on the KPMG BBY website any affidavits on which they intend to rely by 27 November 2015. This refers to evidence that the Liquidators will put to Court to assist the Court in determination of issues in the proceedings.

6 November 2015

The Court authorised that the Liquidators circulate, in an approved form, an explanatory notice to clients and creditors of BBYL regarding the proceedings). A copy of that notice, dated 6 November 2015, can be found at Notice to Creditors – Court Directions regarding Client Monies (PDF 90KB). The primary intention of the notice was to provide clients with information regarding the nature of the Proceedings and illustrative scenarios of possible returns to assist them to consider their own legal position based on information available at that time. It was not intended to provide a definitive estimate of overall returns to clients.

26 November 2015

In response to a request by the Liquidators, and with consent of the representative defendants, the Supreme Court of New South Wales made orders extending the date for the Liquidators’ filing of evidence in the Proceedings to 21 December 2015. This extension provided time for the Liquidators to pursue additional inquiries that are integral to the Liquidators’ investigations and findings.

22 December 2015

The Liquidators filed a report dated 22 December 2015, along with supporting documents including an affidavit, detailing the findings of our investigations into the operation of the CSAs maintained by BBYL and its dealings with client monies. This report, dated 22 December 2015, can be found at BBY Client Monies Investigation Report and supporting documents.

23 February 2016

In February 2016 the Court appointed a fifth defendant, David Nadin to represent former BBY clients who utilised the online trading platform maintained by Interactive Brokers LLC (“IB”).

7 March 2016

At a directions hearing on 7 March 2016, the Court ordered that certain of the matters in the directions proceedings issues be heard on 22 March before further directions for the remainder of the proceedings. The certain matters the Court outlined it would hear on 22 March included:

  • matters in relation to $2.4 million in post appointment margin receipts by the Receivers (termed the ‘erroneous withdrawals’); and
  • matters in relation to $3.4 million in ASX surplus realisations from ETO margin collateral paid over by the ASX (termed ‘returned collateral’).

The Court ordered that the following question (the ‘Separate Question’) be considered separately on 22 March 2016 in relation to the above: “Whether the first defendants are entitled to the returned collateral and the erroneous withdrawals in priority to any other claims on those funds other than liquidator’s charge and costs”.

Sealed orders (PDF 54KB) made by the Court on 7 March 2016 are available.

22 March 2016

On 22 March 2016, the hearing of the Separate Question occurred. All parties were heard and the Court will deliver its judgement at a later date.

23 March 2016

On 23 March 2016 the Court heard two applications made by the Liquidators:

  • For directions about the Liquidators' entitlement to close out open derivative positions (warrants, equity and index options, futures, options on futures and FX products) held with Interactive Brokers LLC after terminating the Online Account Terms with the corresponding clients. The Fifth Defendant, representing IB clients of BBYL, did not oppose the direction sought by the Liquidators.
  • For directions about whether monies received on and from 18 May 2015 into BBYL's client segregated accounts from clients who paid without any obligation to pay should be returned in full to those clients in as amounts "paid into the account in error" within the meaning of the Corporations Regulations 2001 (Cth).

The Court will deliver its judgment on both applications at a later date. The directions proceedings were adjourned to 18 April 2016.

18 April 2016

On 18 April 2016, the Court made the following orders:

  • The Representative Defendants to serve any final requests for information on the Liquidators (Plaintiffs) by 26 April 2016; and
  • The Liquidators to file, serve and publish on the KPMG website any further affidavits (evidence) on which they intend to rely by 23 May 2016.

The proceedings were adjourned to 30 May 2016 for further directions. See here for a copy of the Sealed orders (PDF 55KB) made by the Court on 18 April 2016.

In relation to an application by the Receivers for payment from the Equities/ETO client segregated account of approximately $700,000 in debtor proceeds that had been deposited to that CSA the Court ordered:

  • by 2 May 2016, the Receivers file and serve a statement of facts and contentions regarding their position; and
  • by 23 May 2016, the Liquidators and any Representative Defendant who wishes to oppose the Receivers’ application file and serve a statement of facts and contentions.

The Receivers’ application was also adjourned to 30 May 2016.

27 May 2016

The Court ordered that the Liquidators file, serve and publish on the KPMG website any further affidavits on which they intend to rely by 14 June 2016 and that the proceeding be adjourned to 22 June 2016 for further directions. A copy of the orders dated 27 May 2016 can be found here: Sealed orders (PDF 54KB).

30 May 2016

On 30 May 2016, in relation to the Receivers' application, the Court ordered that the proceeding be adjourned to 22 June 2016 and that the Receivers serve any further affidavit evidence by 15 June 2016.

15 June 2016

The Liquidators’ finalised a supplementary report to the Client Monies Investigations Report (“the CSA Report”) that was published on 22 December 2015. The supplementary report provides findings from investigations conducted by the Liquidators since publishing the CSA Report in December, with a view to providing further information to the Court and for the benefit of representative defendants in the proceeding.

22 June 2016

The directions hearing scheduled for 22 June 2016, to set out a timetable for further hearings, was adjourned to 20 July 2016 at the request of a representative defendant in order for more time to consider the Liquidators supplementary investigation report. The Receivers also sought an additional 2 weeks to file and serve further affidavit evidence in relation to their application, which was also adjourned to to 20 July 2016.

20 July 2016

At the directions hearing on 20 July 2016 Justice Brereton made the following procedural orders – Sealed orders (PDF 55KB).

  1. By 3 August 2016, each party file and serve on the other a summary of its contentions setting out the basis or alternative bases upon which that party says distribution shall be made, such summary not to exceed five pages in length.
  2. By 17 August 2016, the Liquidators model to the extent that they have not already done so, and to the extent that they are able to do so, each of those scenarios and provide to the parties with the distributions under them.
  3. By 31 August 2016, each party lodge with my Associate and file and serve a consolidated response to the other parties’ summary of contentions.
  4. This proceeding 2016/77316 (Receivers’ application) and proceeding 2015/237028 (Liquidators’ directions application) be heard together, with evidence in one be evidence in the other.
  5. The defendants not be entitled to rely in the hearing without the leave of the court on any affidavit evidence, including expert evidence, which has not been served by 12 October 2016 (Note there is an error in order 5 of the attached sealed orders – date should be 12 October not 12 August).
  6. Any party who wishes to rely on evidence in reply to evidence served by 12 October 2016 not be entitled to rely on such evidence unless served by 9 November 2016.
  7. Proceedings be adjourned to 16 November 2016 for pre-trial directions before me at 9:45.
  8. Proceedings be fixed for hearing commencing 31 January 2017 with a 4 day estimate on the basis that the estimate and time reserved will be reviewed at the pre-trial directions hearing.

Justice Brereton also noted that, at the pre-trial hearing on 16 November, he would likely set a timetable for ‘submissions in chief’ around the end of November and replies by mid-December.

The key point to note from the orders on 20 July is that the substantive hearing of the client monies issues will now not be held until the end of January 2017. It is also likely, given the complexity of the issues, that a further period of time will be required for the Court to make a final determination and hand down orders in relation to how client monies in the CSAs and other client related recoveries should be dealt with and ultimately distributed.

The Court will provide guidance in relation to calculation and dealing with claims of clients however an adjudication process will still ultimately be required to confirm accuracy of records of the thousands of individual claims as correct and provide for resolution of any disputed claims prior to distribution of funds.

At a later stage in the liquidation, assuming there have been sufficient general (non-client trust related) recoveries, there could also be a wider creditor related process for submission and adjudication of claims. Clients would be entitled to participate to claim as general creditors in relation to shortfalls in return of client funds. They would not need to prove debts again in respect to shortfalls and they would participate equally with other creditors in any additional general creditor dividends.

8 August 2016

The Court orders made on 20 July 2016 required that each party file and serve on the other a summary of its contentions setting out the basis or alternative bases upon which that party says distribution shall be made. The following Summary Contentions were filed:

The First Defendant did not file any contentions.

10 August 2016

The pre-trial hearing scheduled for 16 November 2016 has been rescheduled to 9 November 2016.

27 September 2016

On 27 September 2016, Justice Brereton of the Supreme Court delivered his judgement on the following matters:

On the separate question, the Court orders:

  • the separate question be answered in the negative in respect of the Returned Collateral and in the affirmative in respect of the Erroneous Withdrawals
  • the First Defendants bring in short minutes of consequential orders on a date to be fixed.

On the First Plaintiffs’ Interlocutory Process filed 8 March 2016, the Court orders that:

  • the First Plaintiffs would be justified in closing out open derivative positions held by the Second Plaintiff through Interactive Brokers LLC (IBL) upon termination of the contracts constituted by the “Online Account Terms” with the clients to whom those positions are referable
  • the First Plaintiffs would be justified in treating securities held by the Second Plaintiff through IBL and Saxo Capital Markets (Australia) Pty Ltd as “Transactions” that are not “Open Transactions” within the meaning of the Online Account Terms.

The balance (being prayers 2, 3 and 4) of the Interlocutory Process are adjourned to the final hearing of the proceedings, this relates to the sale of securities and conversion and set off of foreign currencies.

12 October 2016

On Wednesday, 12 October 2016 further orders (PDF 65KB) were made by the Court that:

  1. Orders that the First Plaintiffs (the Liquidators) would be justified, in the case of the Erroneous Withdrawals and Post-appointment Erroneous Deposits, in treating clients, in respect of payments of $100 or less, as having no entitlement to receive a distribution in respect of that payment.
  2. Orders that the First Plaintiffs:

    (a) are justified in converting into Australian dollars (if necessary) and paying Post-appointment Erroneous Deposits from the CSAs into a separate trust account for the purpose of distributing those amounts (after deduction of a proportionate amount of the costs, expenses and remuneration);

    (b) pay Erroneous Withdrawals from the CSA into a separate trust account for the purpose of distributing those amounts (after deduction of a proportionate amount of the costs, expenses and remuneration).

  3. Orders that the liquidators' remuneration, costs and expenses, and BBYL's costs and expenses, reasonably incurred in connection with:

    (a) distributing the Post-appointment Erroneous Deposits, be paid out of the ED Distribution Account on an indemnity basis in accordance with order 4;

    (b) distributing the Erroneous Withdrawals, be paid out of the EW Distribution Account on an indemnity basis in accordance with order 4.
  4. For the purpose of order 3, the matter be referred to a Registrar for examination and approval of the liquidators' remuneration, costs and expenses and BBYL's costs and expenses, and the Registrar's decision be subject to review in the same manner as a Registrar's decision approving the remuneration of a liquidator.
  5. Orders that the plaintiffs are justified in paying the liquidators' remuneration, costs and expenses, and BBYL's costs and expenses in connection with:

    (a) distributing the Post-appointment Erroneous Deposits, as determined in accordance with order 4, from the ED Distribution Account;

    (b) distributing the Erroneous Withdrawals, as determined in accordance with order 4, from the EW Distribution Account.
  6. Orders that the First Plaintiffs:

    (a) are justified in paying Post-appointment Erroneous Deposits from the ED Distribution Account to the clients from whom the Post-appointment Erroneous Deposits were received (after deduction of a proportionate amount of the costs, expenses and remuneration);

    (b) pay Erroneous Withdrawals from the EW Distribution Account to the clients from whom the Erroneous Withdrawals were received (after deduction of a proportionate amount of the costs, expenses and remuneration).

 

This website will be updated as further information becomes available.

 

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