Following the substantive hearing on 30/31 October 2012, the High Court handed down judgment in the Hindsight Application on 29 January 2013. The Court ruled that “the hindsight principle is not applicable to the determination of claims to client money for the purposes of a distribution under CASS 7A [of the FSA Client Asset Sourcebook]". Accordingly, for distribution purposes, clients’ client money entitlements shall be calculated with reference to 31 October 2011, which is the date of the primary pooling event (PPE) for MFGUK.
The order states:
“For the purposes of calculating a client's client money entitlement in accordance with CASS 7A2.4R and CASS 7A2.5R, an open position is to be valued as at the PPE by reference to the amount which MFGUK would have been liable (ignoring any non-cash collateral held) to pay to the client (or the client to MFGUK) if the open position had been liquidated and his account closed at the closing or settlement prices published by the relevant exchange or other appropriate pricing source on 31 October 2011.”
Neither the Administrators, the representative parties, nor the FSA have sought leave to appeal this decision. However, if a client who is affected by the decision wishes to appeal it, they may do so if they file their appeal notice with the Court on or before 19 February 2013. Any appeals should be served on the Administrators. Please note that a client who appeals this decision will be at risk for costs. Further, any appeal will likely delay the Administrators’ ability to make further distributions of client money.
If you have any questions regarding the judgment itself or the implications thereof, please direct any enquiries to the Administrators by emailing email@example.com or call the Administrators on +44 20 7785 0308. Following the judgment, the respondent parties will no longer be fielding communications in this regard.
What is the hindsight principle?
The Judge described the hindsight principle as “a principle of general application in UK insolvency legislation applicable to creditor claims. Where the amount of a contingent or an unascertained claim must be estimated for the purposes of a distribution or payment out of the estate, and the amount of the claim becomes certain before the distribution or payment, the latter amount will be taken as the claim's value. The process of estimation is designed to value as accurately as possible the prospect of the contingency occurring or the likely amount of the claim. The use of hindsight either removes the need to make the estimate or makes the estimate more accurate and produces what may generally be regarded as fairer values for the purposes of distribution or payment.”
Which clients are affected by the judgment in the Hindsight Application?
The judgment applies to the calculation of client money entitlements, where clients held open positions as at 31 October 2011. Therefore, it affects those clients asserting a client money entitlement in the special administration and with open positions at that date.
The Administrators have sent letters to the majority of clients (with the exception of a small number of LME clients whose positions were rolled) who they believe have a client money entitlement and are entitled to take part in any interim distribution with respect of client money. Those letters set out the Administrators’ assessment of the value of client money claims by reference to two alternative values. As stated above, for distribution purposes, the Administrators will be making distributions with reference to the 31 October 2011 value.
To date, the Administrators have been making interim client money distributions based on the lower of the two alternative values set out in the Administrators’ letter. For those clients who received an interim client money distribution based on the “close out value” (as opposed to the 31 October 2011 value), on the basis that it was the lower of the two values set out in the Administrators’ letter, those clients will be entitled to receive a “top-up” distribution to ensure that those clients receive a distribution that is both consistent with the hindsight judgment and with the first interim client money distribution. The Administrators will provide further information in due course as to the timing and method of any such “top-up”.
In order to take part in any interim distribution of client money, the Administrators would like to remind all clients that they must complete and return the Settlement Agreement and Bank Account Confirmation Form enclosed with the Administrators’ letter. If you have not yet returned the documentation to the Administrators, please do so as soon as possible. If you have not received a letter from the Administrators in relation to your client money claim or have misplaced it, please email firstname.lastname@example.org or call us on +44 20 7785 0308.
How will my shortfall claim from the client money pool into the general estate be valued?
The latest Illustrative Outcome Statement published by the Administrators indicates that there will likely be a shortfall from the client money pool. Given that unsecured creditor and client money entitlements can be valued on different bases by virtue of the Hindsight judgment, there remains an open question as to the basis upon which any shortfall claims should be valued. The Administrators are currently discussing the various possibilities with their legal advisers, and will update clients and creditors in due course. It is possible that this (and maybe other) questions may need to be answered in a subsequent application to Court.
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.