Custom House Capital LTD v Regulation 166 EC (MiFI) Regs 2007 (Approved)

Factual and Procedural Background

On 21 October 2011, a winding-up order was made against Company A pursuant to the Companies Acts 1963-2009. A Chartered Accountant was appointed as official liquidator and administrator under the Investor Compensation Act 1998 (as amended). An independent statutory body, Company B, established under the 1998 Act, seeks directions regarding its right of subrogation pursuant to section 35 of the 1998 Act, in circumstances where it has paid or will pay compensation to clients of Company A who suffered a "net loss" within the meaning of the Act.

A dispute arose between Company B and the Liquidator concerning the scope of Company B’s subrogation rights under section 35(5) of the 1998 Act. The Liquidator contended that subrogation rights relate only to company assets in the liquidation, whereas Company B contended that its subrogation rights extend to claims against certain client assets held by Company A, specifically those forming part of the statutory calculation of net loss.

Company B sought an order directing the Liquidator to bring an application for directions, which was refused by the court in January 2019 due to the absence of identified claims for determination. Subsequently, Company B applied for information and a stay on distributions of client assets was imposed pending resolution of the issues.

The present application was brought pursuant to section 231(3) of the Companies Act 1963, with Company B asserting that it is a creditor in the liquidation by virtue of its subrogation rights. The Liquidator has not taken into account actual or estimated future recoveries of misappropriated assets when calculating net loss to date. The key issues concern the proper calculation of net loss under section 30(1) of the 1998 Act, the scope of Company B’s subrogation rights under section 35(5), and related issues arising if Company B’s contentions are upheld.

Legal Issues Presented

1. Whether the calculation of net loss under section 30(1) of the 1998 Act must take into account actual recoveries and/or estimated future recoveries of client assets between the determination date and the delivery of a final statement certifying net loss and compensatable loss.
2. Whether Company B’s right of subrogation pursuant to section 35 of the 1998 Act extends to client assets or is confined to the assets of Company A.
3. If the subrogation right extends to client assets, whether it applies equally to such assets or is allocated between assets by reference to a purported allocation of compensation payments.
4. If the subrogation right extends to client assets, whether distributions of client assets to eligible investors whose claims have not yet been certified must take into account Company B’s subrogation rights.
5. Whether Company B’s subrogation rights apply to client assets of eligible investors who have been overpaid compensation due to failure to take account of recoveries or underestimation of recoveries.

Arguments of the Parties

Company B's Arguments

• The calculation of net loss must include actual and estimated future recoveries of client assets occurring after the determination date but before the delivery of the final statement.
• Its right of subrogation extends to client assets that form part of the statutory calculation of net loss ("Net Loss Client Assets"), not just company assets.
• The subrogation right applies on a pari passu basis with the eligible investor across all such client assets on an aggregate basis.
• Where an investor has been overcompensated, Company B is entitled to recover the overpayment by way of subrogation, ranking pari passu with the investor for the balance.
• Any distribution of client assets to investors with claims not yet certified must account for Company B’s subrogation rights to prevent unlawful compensation payments.
• Failure to account for recoveries risks overpayment of compensation, which Company B seeks to prevent.

Liquidator's and Legitimi Contradictores' Arguments

• The calculation of net loss is to be determined as of the date of the winding-up order (determination date) and should not take into account recoveries occurring after that date.
• Company B’s subrogation rights are limited to claims against Company A’s assets and do not extend to client assets, which remain the property of the clients and are proprietary claims outside liquidation proceedings.
• Allowing subrogation rights over client assets would be inconsistent with statutory provisions, the Directive, and fundamental principles of company and insolvency law.
• Interim statements and payments are discretionary and no investor has a right to receive such interim statements or payments.
• Company B’s interpretation would result in delay contrary to the Directive’s emphasis on prompt payment and would disadvantage smaller investors, producing arbitrary and inconsistent outcomes.
• There is no statutory or regulatory provision conferring subrogation rights on Company B over client assets.
• The concept of 'actual loss' is not defined in the 1998 Act and does not govern compensation; instead, statutory defined concepts of 'net loss' and 'compensatable loss' apply, determined at the winding-up order date.
• Company B’s assertion of an equitable right of subrogation based on alleged unjust enrichment is unsupported: no enrichment, unjustness, or transfer of value at Company B’s expense is established.
• Delay and public policy considerations bar any equitable subrogation claim.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by affirming the primacy of the literal rule of statutory interpretation, applying the ordinary and natural meaning of the words used in the 1998 Act, unless such interpretation leads to absurdity or defeats the legislative intent. The court emphasized that the 1998 Act must be interpreted in light of the Directive it implements and the Commission’s proposal (travaux préparatoires), which focus on providing a minimum level of compensation promptly upon a determination or ruling that an investment firm is unable to meet its obligations.

The court held that the statutory concepts of "net loss" and "compensatable loss" are defined with reference to the date of the determination or ruling (the winding-up order date), and that the liability of the investment firm to the client is to be assessed as of that date. The Act does not contemplate taking into account actual or estimated future recoveries occurring after that date for the purposes of calculating net loss or compensatable loss.

The court rejected Company B’s argument that the calculation of net loss should include post-determination recoveries, concluding that such an approach conflicts with the Directive’s emphasis on prompt payment and certainty, and would cause unacceptable delay, which is inconsistent with the statutory scheme.

Regarding the subrogation rights under section 35(5) of the 1998 Act, the court found that these rights are limited to claims of the eligible investor in liquidation proceedings against the investment firm, i.e., claims against company assets. The court emphasized the well-established distinction between proprietary claims (claims for the return of client-owned assets) and claims against the company’s assets in liquidation. The court concluded that the subrogation right does not extend to client assets, which remain the property of the clients and are not part of the company’s assets.

The court noted that the 2015 Regulations, made under the 1998 Act, reinforce this distinction and do not provide any subrogation rights to Company B over client assets. The court also rejected Company B’s alternative argument for an equitable right of subrogation based on unjust enrichment, finding that Company B failed to establish the necessary elements of such a claim, including enrichment at Company B’s expense and any unjust factor.

The court further considered the practical and policy implications, noting that Company B’s interpretation would disadvantage smaller investors, produce arbitrary and inconsistent outcomes, and undermine the Directive’s objectives of providing limited but prompt compensation and maintaining market confidence.

The court recognized the complexity and length of the liquidation proceedings but declined to attribute blame to the Liquidator, who acted bona fide. The court also found that Company B’s delay in raising the issues was a relevant consideration but not determinative.

Finally, the court affirmed its jurisdiction to determine the issues raised and concluded that the relief sought by Company B must be refused.

Holding and Implications

DISMISSED

The court held that:

• The calculation of net loss under section 30(1) of the Investor Compensation Act 1998 must be determined with reference solely to the date of the determination or ruling (the winding-up order date) and must not take into account actual recoveries or estimated future recoveries occurring after that date.
• Company B’s statutory right of subrogation under section 35(5) of the 1998 Act is confined to claims of eligible investors in liquidation proceedings against the investment firm’s assets and does not extend to client assets, which remain the property of the investors.
• Company B has no equitable right of subrogation to recover alleged overpayments, as it has not established the elements required for unjust enrichment and such a claim would be contrary to public policy and the statutory scheme.
• Consequently, the relief sought by Company B to extend its subrogation rights and to affect distributions of client assets is refused.

The direct effect of this decision is that Company B’s subrogation rights are limited to the company assets in liquidation, and the calculation of net loss for compensation purposes is fixed as of the winding-up order date. No new precedent altering the statutory scheme or extending subrogation rights to client assets is established.