- Industry: Financial Services
- Type: Business and industry issue
- Date: 13/03/2013
When judgement was handed down on the Shortfall Application in August, the Administrators published simplified worked examples showing the calculation of Parallel Claims and Shortfall claims (see below). Since then, clients have asked how FX conversions will be factored into the calculations.
In response, the Administrators have prepared a modified set of worked examples (PDF 304 KB). The modified worked examples show FX conversions, the impact on the calculations of multiple distributions from the client money pool, and also include charts illustrating the calculations. See a copy of the Shortfall Order (PDF 73 KB), to which the worked examples refer.
For the purposes of these calculations, the Administrators are investigating whether clients have a 'CASS 7 Amount' and, if so, its value. The Administrators are also in the process of calculating clients' 'Estimated Total CMP Recoveries' (both terms are definied in the Shortfall Order). The Administrators aim to update clients on these issues in the first quarter of 2014.
The Court handed down judgment on the Shortfall Application on 16 August 2013. See a copy of the judgment (PDF 299 KB) and a copy of the order (PDF 73 KB).
The Judge acknowledged that the parties: “are agreed that a client with a contractual claim is in principle entitled to prove for that claim (a parallel claim), although it also has a claim to client money by reference to the relevant contract.” The Judge then divided the application into three issues.
The first issue was: “the effect of an actual or anticipated distribution from the CMP on the amount for which a client may prove in respect of its parallel claim.” The Judge held that: “the amount of a provable debt by a client falls to be reduced by the amount of any distributions from the CMP, whether made before or after the proof of debt is submitted.”
The second issue was: “whether a client may prove for a personal claim against the firm to recover the difference between its client money entitlement as against the CMP and the amount in fact recovered by the client from a distribution from the CMP (a shortfall claim).” It was common ground that: “a shortfall claim can arise only in respect of such part of the shortfall as results from a breach of trust by the firm, that is to say a failure by the firm to comply with the provisions of CASS 7.”
The Judge held that a client can make a shortfall claim insofar as the shortfall results from a breach of trust by the firm, but can only claim “in respect of a shortfall in payment of its client money entitlement to the extent that it exceeds its contractual claim or in a case where the client has no contractual claim.”
The third issue was whether a client’s shortfall claim is limited such that it: “cannot exceed the contractual claim, if any, of such client” such that “there is no claim which the clients represented by Attestor can make in respect of the amounts by which their client money entitlements exceed their contractual claims. For convenience I will call this the excess shortfall, without intending an oxymoron.” The Judge held that clients “can prove in respect of the excess shortfall” (if any).
To assist clients and creditors in understanding the practical impact of the judgment and order, the Administrators have prepared a set of worked examples (PDF 35 KB).
Neither the Administrators nor the representative parties have sought leave to appeal this decision. However, if a client or creditor 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 6 September 2013. Any appeals should be served on the Administrators. Please note that a client or creditor who appeals this decision will be at risk for costs. Further, any appeal will be likely to delay the Administrators’ ability to make further distributions to unsecured creditors.
If you have any questions regarding the judgment itself or the implications thereof, please refer to the FAQ below or direct any enquiries to the Administrators by emailing email@example.com call the Administrators on +44 20 7785 0308. Following the judgment, the respondent parties will now no longer be fielding communications in this regard.
The substantive hearing of the Shortfall Application took place on 23 and 24 July 2013. See a copy of thetranscript of the first day of the hearing (PDF 1.25 MB) and a transcript of the second day of the hearing (PDF 1 MB).
At the end of the hearing, the Judge reserved judgment. The Judge did not indicate when he would give judgment, but the Administrators hope to receive judgment in the autumn. The judgment will be published on this website when it is available.
Shortfall Application update - witness evidence
In accordance with the directions order dated 24 May 2013, on 14 June 2013 Solid served the witness statement of Oleg Konshin. See a copy of the witness statement (PDF 797 KB) and a copy of exhibit OK1 (PDF 1.82 MB). On 19 June 2013, Attestor (by a letter from its solicitors, Simmons & Simmons) requested clarification of certain parts of the 11th witness statement of Richard Heis. See a copy of the letter (PDF 237 KB). See the Administrators’ response dated 28 June 2013 (PDF 138 KB). No other witness statements have been served by the parties.
Shortfall Application update following procedural hearing
At the procedural hearing on 24 May 2013, the Court made an Order for directions which, in summary: (i) fixed the date for the substantive hearing to take place on 23and 24 July 2013, with a reading day on 22 July; (ii) appointed Attestor Value Master Fund LP to act as representative respondent for the Decreased Clients; (iii) appointed Solid Financial Services Limited to act as representative respondent for the Increased Clients; and (iv) made some changes to the substantive questions being asked in the application.
The sealed version of the Order can be found here (PDF 97 KB). The amended versions of the substantive questions are at Schedule A of the Order.
Update regarding client money Shortfall Application
On 29 January 2013, the Court handed down judgment on the Hindsight Application the Court held that the client money entitlement of a client with an open contract as at MF Global UK’s (“MFG UK”) primary pooling event (the “PPE”) is to be valued by reference to that contract’s published settlement price on 31 October 2011 (the “PPE Valuation”) and not by reference to the liquidation value on the subsequent close out of that contract (the “Hindsight Valuation").
Following that judgment, on 8 May 2013 the Administrators applied to the High Court for directions as to the basis upon which to value a client’s unsecured claim into the general estate arising from any shortfall in the client money pool (the “Shortfall Application”).
The issues behind the Shortfall Application were provided in our update dated 13 March 2013 below. The outcome of the Shortfall Application could affect the following classes of MFG UK’s creditors/clients differently: (i) clients whose open positions have a higher Hindsight Valuation than PPE Valuation (the “Increased Clients”); (ii) clients whose open positions have a lower Hindsight Valuation than PPE Valuation (“Decreased Clients”); and (iii) the creditors of MFG UK’s general estate (the “general estate”).
The Administrators will represent the interests of the general estate in the Shortfall Application, and have requested that the Court join: (a) Attester Value Master Fund LP to act as a representative respondent for the Decreased Clients; and (b) Solid Financial Services Limited to act as a representative respondent for the Increased Clients.
The Administrators will file a witness statement in support of the Shortfall Application in due course, at which point it will be uploaded to this website. A copy of the Shortfall Application can be found via the link below.
A procedural hearing is listed to take place on 24 May 2013 with a time estimate of half a day. The substantive hearing is provisionally due to take place on 23 and 24 July 2013, with a reading day on 22 July.
If you are a client of MF Global UK Limited and would like to contact your appropriate representative respondent's solicitors, please contact:
- For Attestor Value Master Fund LP: Simmons & Simmons LLP, City Point, One Ropemaker Street, London, EC2Y 9SS, FAO Gerard Heyes, firstname.lastname@example.org.
- For Solid Financial Services Limited: Dentons UKMEA LLP, One Fleet Place, London, EC4M 7WS, FAO Luci Mitchell-Fry, email@example.com.
If you have any questions concerning the Shortfall Application, or if you are a client of MFG UK and you would like to receive hard copies of the above documents, please contact the Administrators at firstname.lastname@example.org or by writing to MF Global UK Limited (in special administration), 5 Churchill Place, Canary Wharf, London, E14 5HU, England.
On 5 February 2013 the Administrators published an update on this website concerning the judgment handed down by the High Court in relation to the Hindsight Application, explaining that, for distribution purposes, clients’ client money entitlements shall be calculated with reference to 31 October 2011, which was the date of the primary pooling event (PPE) for MFGUK.
It was also explained in that update that the Administrators were discussing with their legal advisors the basis upon which any shortfall claims from the Client Money Pool (CMP) into the unsecured estate of MFGUK should be valued. Since that update the Administrators have concluded that, because of the legal uncertainty and the material impact on unsecured creditors of choosing one basis for valuation over another, it will be necessary to make an application to Court to determine this question. The Administrators intend to make this application in the near future.
There are various possible ways the Court might hold that shortfall claims into the general unsecured estate should be valued. Below are some examples which illustrate some of the key matters that will need to be determined by the Court. Please note, however, that these examples are by no means exhaustive and any judgment could well determine that shortfall claims should be valued differently from any of these examples.
Client A has a Client Money claim of $100,000 valued by reference to 31 October 2011 (the Primary Pooling Event, or PPE), in accordance with the Hindsight Judgment. Client A's position was open as at the PPE and was subsequently closed out at a value of $60,000. Had Client A's claim not had client money protection, it would have been valued at $60,000 for the purposes of a claim into the general estate (as the hindsight principle applies to contingent unsecured creditor claims in English insolvencies). If aggregate distributions of, for example, 80c in the dollar are ultimately paid to clients from the CMP, then Client A will receive $80,000 from the CMP. Client A will have received less than the full value of its claim against the CMP. Does Client A have a 'shortfall' claim into the general estate and, if so, how should it be valued?
Possible answer 1
Client A is entitled to claim for $20,000 (being the shortfall between their client money entitlement and the amount they have received from the CMP) from the unsecured estate.
Possible answer 2
Client A has no right to claim for any shortfall in the unsecured estate of MFGUK as they have received $80,000 from the CMP, which is greater than the $60,000 they would have been entitled to if they had been a general creditor in the unsecured estate.
Client B has a Client Money claim of $100,000 valued by reference to the PPE, in accordance with the Hindsight Judgment. Client B's position was open as at the PPE and was subsequently closed out at a value of $90,000. Had Client B's claim not had client money protection, it would have been valued at $90,000 for the purposes of a claim into the general estate (as the hindsight principle applies to contingent unsecured creditor claims in English insolvencies). If aggregate distributions of, for example, 80c in the dollar are ultimately paid to clients from the CMP, then Client B will receive $80,000 from the CMP. Client B will have received less than the full value of its claim against the CMP. Does Client B have a 'shortfall' claim into the general estate and, if so, how should it be valued?
Possible answer 1
Client B is entitled to claim for $20,000 (being the shortfall between their client money entitlement and the amount received from the CMP) from the unsecured estate.
Possible answer 2
Client B has a claim of $10,000 in the unsecured estate of MFGUK (being the difference between the amount they have received from the CMP and the amount they would have been entitled to as an unsecured creditor).
Client C has a Client Money claim of $100,000 valued by reference to the PPE, in accordance with the Hindsight Judgment. Client C's position was open as at the PPE and was subsequently closed out at a value of $120,000. Had Client C's claim not had client money protection, it would have been valued at $120,000 for the purposes of a claim into the general estate (as the hindsight principle applies to contingent unsecured creditor claims in English insolvencies). If aggregate distributions of, for example, 80c in the dollar are ultimately paid to clients from the CMP, then Client B will receive $80,000 from the CMP. Client C will have received less than the full value of its claim against the CMP. Does Client C have a 'shortfall' claim into the general estate and, if so, how should it be valued?
Possible answer 1
Client C is entitled to claim for $20,000 (being the shortfall between their client money entitlement and the amount received from the CMP) from the unsecured estate.
Possible answer 2
Client C has a claim of $40,000 in the unsecured estate of MFGUK (being the difference between the amount they have received from the CMP and the amount they would have been entitled to as an unsecured creditor).
It should be noted that the above examples are illustrative only. The Court will be deciding fundamental issues as to the nature and inter-relationship of client money and unsecured claims and there is a wide range of possible outcomes, not all of which are illustrated above. Until the scope of those issues is clearer, the Administrators will not be making an uplift to the distribution payable to any clients whose claim has a higher value as at the PPE than at the point at which their positions were closed out.
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