Case No: 9527 of 2011
Neutral Citation Number: [2013] EWHC 2556 (Ch) 
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

Royal Courts of Justice
Rolls Building 
7 Fetter Lane EC4A 1NL

Date: 16/08/2013

Before :

MR JUSTICE DAVID RICHARDS

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Between :

	IN THE MATTER OF MF GLOBAL UK LMITED (IN SPECIAL ADMINISTRATION) AND

IN THE MATTER OF THE INVESTMENT BANK SPECIAL ADMINISTRATION REGULATIONS 2011

RICHARD HEIS, MICHAEL ROBERT PINK and RICHARD DIXON FLEMING (joint administrators of MF GLOBAL UK LIMITED	

Applicants	
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	(1) ATTESTOR VALUE MASTER FUND LP (as a representative)
(2) SOLID FINANCIAL SERVICES LIMITED (as a representative)	Respondents	

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Antony Zacaroli QC and Adam Al-Attar (instructed by Weil, Gotshal and Manges) for the Administrators of MF Global UK Limited
Richard Snowden QC and Ben Shaw (instructed by Simmons and Simmons LLP) for Attestor Value Master Fund LP
Peter Arden QC and Ben Griffiths (instructed by Dentons UKMEA LLP) for Solid Financial Services Limited

Hearing dates: 23 and 24 July 2013
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Judgment
Mr Justice David Richards : 
Introduction
1.	A financial firm, such as an investment bank, is required to segregate client money from its own funds and to hold it on trust for the clients. The same transaction between a firm and a client may give rise to an obligation on the firm to hold client money for the client and to a personal claim on the contract. The occurrence of certain events, including the firm going into liquidation or administration, will give rise to a distribution of the client money among the clients as beneficiaries and (in a liquidation or in an administration where permission to distribute is given) to a distribution of the firm’s assets among its creditors, including its clients with personal claims.   
2.	This application raises issues concerning the relationship between the rules governing the distribution of client money to clients as beneficiaries of the trust and the rules governing the proof and payment of debts due to clients as creditors. Specifically, the issues concern, first, the extent to which a distribution of client money reduces the amount for which a client may prove or the amount which a client may be paid as a creditor and, secondly, whether a claim in respect of a shortfall in the client money trust is a provable debt and, if so, the principles governing its amount. 
3.	Although these issues would in any event arise, they are rendered more acute because a different regime applies to the valuation of claims to client money than to the estimation of creditors’ claims in a liquidation or administration. Client money claims are valued on the basis that open contracts were closed out on the date that client money distribution rules come into play, which is the date of commencement of the liquidation or administration if that is the triggering event. For the purposes of proof and payment from the general estate in an insolvency, hindsight is applied to open contracts so that, although they are notionally valued as at the date of commencement of the liquidation or administration, the price at which they in fact subsequently close out will determine the amount, if any, for which clients may prove. This was the subject of an earlier application in the present administration: see In re MF Global UK Limited [2013] EWHC 92 (Ch). The effect is that, in the case of contracts open at the relevant date, a client’s entitlement to client money may often differ in amount from its claim as a creditor. Indeed, in some cases because of price movements in the relevant asset or index, a client may have an entitlement to client money but no contractual claim or vice versa.
4.	The total amount expected to be available for distribution in the present case from the client money trust is estimated as between US$945 million and US$951 million. The total value of anticipated claims against the client money trust is estimated as between US$1.515 billion and US$1.107 billion. Accordingly the likely aggregate percentage distribution of client money is estimated to be between 62% and 86%. The causes of the shortfall, and an estimate by the administrators of the contribution of each cause to the total shortfall, are the costs attributable to the administration and distribution of the client money trust (60%), the need to admit claims from clients whose positions were not segregated but should have been (20%) and the fact that open positions forming part of the assets of the client money trust closed out after the relevant date at an aggregate value lower than the aggregate notional value attributed to them at the relevant date (20%).
5.	The total funds anticipated to be available to creditors from the general estate is estimated as being between US$2.119 billion and US$2.222 billion. Creditor claims are estimated as being between US$2.128 billion and US$2.268 billion, so that the likely aggregate percentage dividend is estimated to be between 93% and 100%. These figures are calculated on the basis that a global settlement agreement entered into between MF Global UK Limited (MFG UK) and MF Global Inc becomes unconditional. 
The application
6.	The present application is made by the joint administrators of MFG UK, appointed under The Investment Bank Special Administration Regulations 2011. The application is made under para. 63 of Schedule B1 to the Insolvency Act 1986, as applied to these proceedings by reg. 15 of the Regulations.
7.	Two representative respondents were joined by an order made on 24 May 2013. Attestor Value Master Fund LP (Attestor) represents those clients who had net open positions as at 31 October 2011, which was both the commencement of the special administration of MFG UK and hence the valuation date for claims against the client money trusts, and whose open positions later closed with a liquidation value less than their market value as at 31 October 2011 (Decreased Clients). Their total market values were approximately US$359 million and their total liquidation values were approximately US$301.4 million, resulting in a net decrease of a little over US$57.6 million. Solid Financial Services Limited (Solid) represents those clients with net open positions as at 31 October 2011 which later closed with a liquidation value greater than the market value as at that date (Increased Clients). Their total market values were approximately US$266.8 million and their total liquidation values a little over US$277 million, resulting in an increase of approximately US$10.2 million. Submissions have been made by the administrators on behalf of general unsecured creditors.
8.	The application notice seeks directions as to a number of questions. There is some common ground between the parties. In particular, they 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. They are also agreed that in principle a client may have a claim in respect of a shortfall in the client money trust only to the extent that the shortfall is the result of MFG UK’s default, but it is not agreed that such a claim is provable. 
9.	There are three issues on which the parties are divided. The first relates to the calculation of a proof for a parallel claim. The administrators contend that a client can prove only for the amount of its contractual claim less sums distributed to it from the client money trust and, where a proof is submitted prior to a final distribution of client money, the amount of any further anticipated distribution. Attestor and Solid contend that a client can prove for the whole amount of its contractual claim, although they recognise that there is a limit on the total amount which a client can receive from the general estate and from the CMP. They differ as to the precise formulation of that limit. 
10.	The second issue is whether a client may prove for a claim resulting from a shortfall in the client money trust. While the administrators accept that a client may have a personal claim for loss resulting from such a shortfall, provided that it results from a default on the part of MFG UK, they submit that a client may not prove for such a claim because it arises in respect of the same obligation as the parallel claim, namely the underlying contract between the firm and the client, and is thus barred by the rule against double proof. While the respondents agree that a claim is limited to a shortfall resulting from MFG UK’s default, Attestor contends that such a claim is provable in addition to the parallel contractual claim. Solid takes no position on this issue. 
11.	The third issue relates to the quantum of any potential shortfall claim. The administrators contend that the client’s claim, being its compensatable loss resulting from MFG UK’s breach of trust, is limited to the amount of the client’s contractual claim against MFG UK which remains unpaid as a result of its breach. Attestor contends that it is not so limited. Solid reserves its position on whether there is any limit on a shortfall claim but contends that a client’s right to receive a distribution in the administration is limited so that it may not receive any further payment from the general estate once it has received in aggregate sums equal to the full value of its contractual rights together with interest. 
12.	Before considering these issues, it is necessary to give some background and to refer to the relevant client money rules. 
MFG UK
13.	MFG UK is a subsidiary of MF Global Holdings Ltd, a company incorporated in Delaware. Companies in the MF Global group carried on business as broker-dealers in financial markets throughout the world. The group’s principal operations were in New York and London, carried on by MF Global Inc and MFG UK respectively. These and other companies entered formal insolvency proceedings in the United States and England on 31 October 2011. The administrators of MFG UK were appointed under the Investment Bank Special Administration Regulations 2011.
14.	MFG UK acted as a broker-dealer in commodities, fixed income securities, equities, foreign exchange, futures and options, and also provided customer financing and securities lending services. In particular, MFG UK acted as an intermediary broker for the European business of the MF Global group and provided, amongst other services, matched-principal execution and clearing services for exchange trades and over-the-counter (OTC) derivative products, as well as for non-derivative foreign products and securities in the cash markets.
15.	MFG UK entered into bilateral transactions with customers where the customer took a long or short interest in an asset or a derivative of a referenced asset. Normally, MFG UK would hedge its position by entering into a trade with a third party on terms as to payment and delivery which were equal and opposite to the terms of the trade with the customer. MFG UK took both exchange-traded and OTC positions. Exchange-traded positions are traded on a recognised exchange and would include, among other assets, future contracts, options and listed shares. OTC positions are bilateral contracts with a creditor or client that provide the creditor or client with exposure to an asset or derivative that is not traded on a recognised exchange. Such positions would include, among other assets, contracts for differences, foreign exchange related contracts, spread bets and forward contracts and options on referenced assets that are not listed on a recognised exchange.
CASS 7 and 7A 
16.	Before going to the detail of the rules governing the client money trust, it is helpful to summarise their principal features. The identification of the money defined as client money, and therefore required to be held on the terms of the client money trust, is particularly important in the context of the present application. Client money includes, but importantly is not restricted to, money which is provided to the firm by a client for the purpose of the client’s transactions with or through the firm. For example, money paid to the firm in order to complete the purchase of assets will, pending its application for that purpose, be client money. Similarly, the proceeds of sale of assets belonging to a client will be held as client money by the firm, pending payment to the client or further investment. But, in the context of open contracts, client money may also derive from funds provided by the firm from its own resources. All open contracts are required by the rules to be valued against prevailing market prices on a daily basis. If the valuation shows a balance in favour of the client, the firm must ensure that it holds funds in the client money trust equal to such balance and, for this purpose, is required if necessary to transfer funds from its own resources. The total amount required to be held for each client is calculated on a net basis, having regard to all the transactions then open between the firm and the client, but the positions as between different clients are not netted off. As the daily valuations fluctuate, so funds will be transferred between the client money accounts and the firm’s own accounts. The total amount of client money to be held by a firm equals the total liability for client money calculated as at the close of business on the previous business day. There is therefore always a time lag between the reference date of the calculation and the time of the actual transfer or removal of funds. In the case of MFG UK, the last calculation resulting in the movement of funds was performed on Monday 31 October 2011 referable to the close of business on Friday 28 October 2011 and involved a net transfer of US$20 million to the client money accounts. 
17.	Client money must be segregated from the firm’s own money and held in separately designated accounts. It does not form part of the firm’s own assets but is held by the firm on the trusts declared by the rules to which I shall refer. 
18.	On the occurrence of certain events, which include the appointment of an administrator of the firm, the client money distribution rules come into play. Such an occurrence is termed a “primary pooling event” (PPE). At that point, all client money held in each client money account of the firm is pooled, so as to form the client money pool (CMP). The firm is then required to distribute the CMP in accordance with the trusts declared by the rules, so that each client receives a sum which is rateable to what is called the “client money entitlement”. The Supreme Court decided, by a majority, in Lehman Brothers International (Europe) v CRC Credit Fund Ltd [2012] UKSC 6, [2012] Bus LR 667 (Lehman) that the client money entitlement of a client meant the amount of client money which the firm should have been holding for the client at the PPE, not the amount of money (if any) contributed by or for the client to the client money in fact held as such by the firm at the PPE. 
19.	The rules which define the monies which are to be treated as client money, define the trust and its beneficiaries, and govern the operation of a client money trust were made by the Financial Services Authority, whose functions in this respect are now undertaken by the Financial Conduct Authority, under authority conferred by the Financial Services and Markets Act 2000 (FSMA). The rules applicable to the present application were contained in chapters 7 and 7A (CASS 7 and 7A) of the Clients Assets Sourcebook section of the Financial Services Authority Handbook. These rules, with different numbers but in substantially the same form, were the subject of detailed scrutiny by the Supreme Court in Lehman. 
20.	CASS 7 and 7A were made for the purpose of implementing in the UK the requirements of the Markets in Financial Instruments Directive 2004/39/EC (MiFID) and the Commission Directive 2006/73/EC (the Implementing Directive). The overall purpose of the Directives is to provide a high level of protection to clients. One aspect is safeguarding client money. Recital 26 to MiFID provides:
“i. In order to protect an investor’s ownership and other similar rights in respect of securities and his rights in respect of funds entrusted to a firm, those rights should in particular be kept distinct from those of the firm”.
Article 13(8) requires an investment firm:
“when holding funds belonging to clients, to make adequate arrangements to safeguard the clients’ rights and …….. prevent the use of clients’ funds for its own accounts”.
Although recital 26 refers to “funds entrusted to a firm”, suggesting monies provided by or to the account of a client by the client or a third party, article 13(8) uses the broader expression “funds belonging to clients” which is apt to include funds provided by the firm itself but required to be held for clients. Article 16 of the Implementing Directive requires the segregation of clients’ assets and funds. 
21.	In Lehman Lord Dyson observed at [134]:
“It follows that the effect of Article 13(7) and (8) of MiFID and Article 16(2) of the Implementing Directive is that member states are under a duty to prescribe measures that firms should take to ensure that there are adequate arrangements under the domestic law relating to insolvency to safeguard the clients’ rights to funds belonging to them in order to achieve the investor protection purpose of MiFID”.
22.	The means by which this requirement of the Directives has been achieved in England and Wales is, consistently with English law, by the imposition of a trust of client money. Section 139(1) of FSMA specifically provides that rules relating to client money may:
“(a) make provision which results in that client’s money being held on trust in accordance with the rules; 
(b) treat two or more accounts as a single account for specified purposes (which may include the distribution of money held in the accounts)”.
By this means the beneficial ownership of client money is kept separate from the assets belonging beneficially to the firm and is not therefore available for distribution in an insolvency among the unsecured creditors of the firm. Clients may, but need not, also be creditors of the firm. But as regards client money held as such by the firm, their rights arise as beneficiaries, not as creditors, and they arise under CASS 7 and 7A, not under the insolvency legislation generally applicable to the firm. 
Provisions of CASS 7
23.	The relevant provisions of CASS 7 and 7A are designated with an R (rule) or a G (guidance), but account must be taken of the latter in interpreting and applying the rules. In quoting them, I have not adopted the technique used in the published provisions of identifying defined terms in italics.
24.	CASS 7, known as the client money rules, applies (as provided by CASS 7.1.1R) to:
“A firm that receives money from or holds money for, or on behalf of, a client in the course of, or in connection with:
……….
(3) its MiFID business; and/or
(4) its designated investment business, that is not MiFID business in respect of any investment agreement entered into, or to be entered into, with or for a client”.
25.	“Client money” is defined in the Glossary to the FSA Handbook as, so far as relevant, “money of any currency that a firm receives or holds for, or on behalf of, a client in the course of, or in connection with, its MiFID business”. Money is not client money “when it becomes properly due and payable to the firm for its own account” (CASS 7.2.9R) and ceases to be client money if it is paid to the firm itself when due and payable to it (CASS 7.2.15R).
26.	Client money must be segregated from the firm’s money by being paid into and held in “an account or accounts identified separately from any accounts used to hold money belonging to the firm” (CASS 7.4.11R). Such account or accounts (client bank accounts or client transaction accounts) must be held with an authorised bank or other institution falling within the categories defined in CASS 7.4.1R. CASS 7.6 makes provision for records, accounts and reconciliations. CASS 7.6.1R provides:
“A firm must keep such records and accounts as are necessary to enable it, at any time and without delay, to distinguish client money held for one client from client money held for any other client, and from its own money”.
27.	The trust of client money is created by CASS 7.7.2R which provides:
“A firm receives and holds client money as trustee (or in Scotland as agent) on the following terms:
(1) for the purposes of and on the terms of the client money rules and the client money distribution rules;
(2) subject to (4), for the clients (other than clients which are insurance undertakings when acting as such with respect of client money received in the course of insurance mediation activity and that was opted in to this chapter) for whom that money is held, according to their respective interests in it;
(3) after all valid claims in (2) have been met, for clients which are insurance undertakings with respect of client money received in the course of insurance mediation activity according to their respective interests in it;
(4) on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and 
(5) after all valid claims and costs under (2) to (4) have been met, for the firm itself.”
28.	A firm is required on the basis of a daily reconciliation to ensure that it maintains client money at least equal to “its client money requirement”. Annex 1 to CASS 7 sets out in detail the steps involved in the standard method of internal client money reconciliation, which was adopted by MFG UK. Paragraph 1 provides:
“1. Each business day, a firm that adopts the normal approach (see CASS 7.4.17G) should check whether its client money resource, being the aggregate balance on the firm’s client bank accounts, as at the close of business on the previous business day, was at least equal to the client money requirement, as defined in paragraph 6 below, as at the close of business on that day.”
29.	Paragraph 6 defines “client money requirement” by reference to two alternatives, of which paragraph (1) is most in point:
“(1) (subject to paragraph 18) the sum of, for all clients:
a)	the individual client balances calculated in accordance with paragraph 7, excluding:
i)	individual client balances which are negative (that is, debtors); and
ii)	clients’ equity balances; and
b)	the total margined transaction requirement calculated in accordance with paragraph 14.”
There are therefore two elements constituting the client money requirement and so defining the amount which the firm must hold on trust as client money. The two elements are the individual client balances calculated in accordance with paragraph 6(1)(a) and the total margined transaction requirement. Individual client balances are essentially money which the firm is holding for a client as a result of the receipt of funds from the client pending its use in a transaction, the proceeds of sales on behalf of the client and other monies received on behalf of a client. The margined transaction requirement is made up of each client’s equity balance, less the deductions to be made in accordance with paragraph 14 of Annex 1. A client’s equity balance is essentially the amount which the firm would have to pay the client if all open margined transactions were closed out at the then prevailing market prices. 
30.	The definition of “client equity balance”, which is referred to in paragraph 6, appears in the Glossary to the FSA Handbook:
“The amount which a firm will be liable (ignoring any non-cash collateral held) to pay to a client (or the client to the firm) in respect of his margined transactions if each of his open positions were liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and his account closed. This refers to cash values and does not include non-cash collateral or other designated investments held in respect of a margined transaction”.
31.	A margined transaction is defined in the Glossary so as to include:
“A transaction executed by a firm with or for a client relating to a future, option or contract for differences (or any right to or any interest in such an investment) under the terms of which the client will or may be liable to provide cash or collateral to secure performance of obligations which he may have to perform when the transaction falls to be completed or upon the earlier closing out of his position”.
32.	Paragraph 14 of Annex 1 to CASS 7 sets out the basis of the calculation of the “total margined transaction requirement” for the purposes of paragraph 6(1)(b) as:
“(1) The sum of each of the client’s equity balances which are positive;
Less
(2) The proportion of any individual negative client equity balance which is secured by approved collateral; and
(3) The net aggregate of the firm’s equity balance (negative balances being deducted from positive balances) on transaction accounts for customers with exchanges, clearing houses, intermediate brokers and OTC counterparties”.
33.	The firm’s equity balance for the purposes of paragraph 14(3) is defined in similar terms to the client equity balances by paragraph 13:
“A firm’s equity balance, whether with an exchange, intermediate broker or OTC counterparty is the amount which the firm would be liable to pay to the exchange, intermediate broker or OTC counterparty (or vice versa) in respect of the firm’s margined transactions if each of the open positions of the firm’s clients was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the firm’s account with the exchange, intermediate broker or OTC counterparty is closed”.
Provisions of CASS 7A
34.	CASS 7A contains the client money distribution rules. They apply “to a firm that holds client money which is subject to the client money rules when a primary pooling event or a secondary pooling event occurs”. A secondary pooling event occurs on the failure of a third party holding client money for a firm. The present case involves a primary pooling event which is defined in 7A.2.2R as occurring on any of the following events: 
“(1) on the failure of the firm;
(2) on the vesting of assets in a trustee in accordance with an ‘assets requirement’ imposed under section 48(1)(b) of the Act;
(3) on the coming into force of a requirement for all client money held by the firm; or
(4) when the firm notifies, or is in breach of its duty to notify the FSA, in accordance with CASS 7.6.16R (Notification requirements), that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event.”
The “failure” of a firm is defined in the Glossary as meaning “the appointment of a liquidator, receiver, administrator, or trustee in bankruptcy, or any equivalent procedure in any relevant jurisdiction”.
35.	The pooling and distribution of client money which follows a primary pooling event is set out in 7A.2.4R:
“If a primary pooling event occurs:
(1)	client money held in each client money account of the firm is treated as pooled; and
(2)	the firm must distribute that client money in accordance with CASS 7.7.2R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A.2.5R.”
CASS 7A.2.5R makes provision for set-off. The “client money entitlement” of each client was held by the majority of the Supreme Court in Lehman to mean the sum ascertained by reference to their individual client balances and client equity balances as determined in accordance with Annex 1 to CASS 7, subject to the one modification provided by CASS 7A.2.5.R that set-off between the two balances is to be mandatory, not voluntary. As I held in the Hindsight Judgment, that process requires open positions to be valued by reference to market values at the PPE, and not by reference to the prices at which the contracts finally close out. 
36.	CASS 7A.2.7R makes special provisions with respect to client money received after a primary pooling event. Such money must not be pooled with client money already held by a firm at the time of the primary pooling event but must be held in a separate client bank account and returned to the relevant client without delay. The exceptions to this rule are, first, where it is client money relating to a transaction that has not settled at the time of the primary pooling event and, secondly, where it is client money relating to a client “for whom the client money entitlement, calculated in accordance with CASS 7A.2.5R, shows that money is due from the client to the firm at the time of the primary pooling event”.
First Issue
37.	The first issue is 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.
38.	It is common ground that a client cannot recover both the full amount of its parallel claim and the full amount of its client money entitlement.
39.	The administrators contend that the amount for which a client may prove in respect of its parallel claim is reduced by the amount of any actual or anticipated distribution from the CMP. Attestor and Solid contend that a client may prove for the full amount of its parallel claim without any such reduction. Attestor argues that a client may not recover in aggregate more than the full amount of its parallel claim (together with interest) or client money entitlement, whichever is the greater. Solid argues that a client may not recover further payment from the general estate once it has received the full value of its contractual claim, together with interest, from either or both of the CMP or the general estate. 
40.	In support of the administrators’ submissions, Mr Zacaroli QC lays particular stress on the purpose of the client money trust created by CASS 7 and 7A, which is to ensure that there is a fund available in the firm’s hands to meet the claims of clients. There are a number of features of the trust to which he draws attention in the context of the claims relevant to the present application. It is the contract between the firm and the client which gives rise both to the client’s personal claims against the firm under the contract and its entitlement to have client money segregated and held on trust for it. The funds to be held on trust are not static but will vary, up or down, with each daily reconciliation. The daily reconciliation requires each open contract to be valued at market value and the amount of money to be held as client money on trust will increase or decrease according to the daily movements in value. The direct relationship between the client’s contractual claim and client money entitlement is demonstrated by the consequences of payment to the client of what is due to it on maturity of a contract, depending on whether the source of payment is the firm’s own resources or a client money account. If a firm pays the amount due from its own resources, the amount to be held as client money will accordingly reduce as at the next daily reconciliation. Money that was held on trust will be released to the firm. Equally, if the client is paid from a client money account, the firm’s contractual obligation to the client is discharged. All these are features of the client money trust arrangements while the firm is a going concern and before a PPE. 
41.	Mr Zacaroli submits that the occurrence of a PPE does not alter the fundamental purpose of the client money trust. A PPE has two very significant consequences. First, all client money is pooled and, secondly, the rights of clients to participate in a distribution of pooled client money are crystallised as at the values applicable to their contracts on that date. If those contracts are open, they are valued as if they were closed out at prevailing prices on the date of the PPE. The effect is to create the potential, in the case of an open contract, for a different value for the purposes of the distribution of the CMP and for the purposes of distribution of the general estate of the firm. In some cases, it may even produce the result that there is a positive client money entitlement, so that the client is entitled to participate in the distribution of the CMP, but no contractual claim once the contract is closed out. Mr Zacaroli submits that these features are not sufficient to deprive the client money trust arrangements of their fundamental purpose of providing protection for clients’ contractual claims and they are not enough to prevent a distribution from the CMP operating to reduce or discharge the client’s contractual claim. Mr Zacaroli illustrates the point by reference to a PPE which does not involve the insolvency of the firm. If a distribution from the CMP were made to a client before the maturity of his underlying contract, it would be absurd to suggest that it did not reduce the amount payable by the firm to the client on maturity of the contract. 
42.	Mr Snowden QC, on behalf of Attestor, submits that there should be no reduction in the amount of a client’s proof of debt for a parallel claim as a result of the actual or anticipated receipt of distributions from the CMP. He submits that a client’s parallel claim and its client money entitlement are fundamentally different claims against two separate funds. A parallel claim is a personal claim against MFG UK and distributions in respect of such claim are made out of assets forming the general estate of MFG UK, that is to say its own property. In contrast, a client’s client money entitlement is a proprietary claim against a separate and distinct fund. CASS 7 and 7A create a trust of client money received or held by a firm. Mr Snowden did not take issue with Mr Zacaroli’s analysis of how the client money rules operate before the occurrence of a PPE. He accepted, for example, that if a firm paid money due to a client from its own resources, it would result in a release of an equivalent amount from the client money funds to the firm on the next reconciliation, subject to other adjustments to be made at that reconciliation. Mr Snowden relied on what he described as the fundamental change that occurs at PPE. At that point, all client money is pooled and is held on trust to be paid to clients in accordance with their client money entitlements as at the date of the PPE and not in accordance with their contractual entitlements. If the purpose was to reduce or discharge the contractual claims of clients, it would mean that there could not be a payment from the CMP exceeding the amount of a contractual claim. As a result of the decision in the Hindsight Judgment, that is clearly not the position. Attestor and the other clients whom it represents have client money entitlements which exceed their contractual claims. Distributions from the CMP in excess of the contractual claim will have no effect on the contractual claim. The extreme case of the client with a client money entitlement at the date of the PPE but no contractual claim at all vividly illustrates the disconnection between distributions from the CMP and distributions from the general estate. 
43.	Mr Snowden submitted that there was no analogy with security provided by a firm for its liabilities. The giving of security involves the creation of a right to appropriate property belonging to the debtor in or towards discharge of the liability. The trust created by CASS 7 and 7A involves neither of these characteristics. The funds held as client money, which become the CMP on the occurrence of a PPE, represent funds paid by clients and third parties as well as funds segregated as client money from the firm’s own resources. The distribution of the CMP does not involve an appropriation of the CMP to the payment of debts but a rateable distribution in accordance with the quite separate criterion of client money entitlement. The correct analysis of two distinct funds is illustrated by the analogy with guaranteed debts. The creditor will have separate rights against the separate estates of the principal debtor and guarantor. Assuming that the guarantor has guaranteed payment of the entire debt, even if its own liability is limited to a fixed sum, the creditor is entitled to prove in a liquidation of the debtor without deduction of sums received from the guarantor, unless such sums extinguish the guaranteed debt. This is not a rule which is peculiar to guaranteed debts but applies in all cases of separate funds: see the decision of the Court of Appeal in Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] 1 AC 626. 
44.	Mr Snowden accepts that the disconnection between the distribution of the CMP and a distribution in an insolvency of the general estate of the firm is not so complete as to entitle a client to recover both the full amount of its client money entitlement and the full amount of its contractual claim. He submits that there is a limit on the amount which may be recovered from either or both funds, which is the greater of the client money entitlement and the contractual claim. He submits that this is to be achieved by an application of basic principles of unjust enrichment. 
45.	Mr Arden QC on behalf of Solid, agreed with the substance of Mr Snowden’s submissions, and developed the concept of claims against separate estates by reference to the authorities on guaranteed debts. He however contended for a different cap on the amount which a client could recover from the general estate, being the amount of the client’s contractual claim after taking into account payments from the CMP. 
46.	A fair amount of the argument on all sides was directed to identifying the similarities and differences between the client money trust constituted by CASS 7 and 7A and, on the one hand, security given by a debtor company, and, on the other hand, the provision of a guarantee by a third party. All parties sought to demonstrate that the client money trust was closer to the analogy which suited its case. But all parties agreed that the analogies could not provide the answer to the first issue. The trust created by CASS 7 and 7A is, as counsel agreed, sui generis. The answer to the first question lies in the nature and purpose of the trust and the effect of payments of client money on the contractual obligations of the firm. 
47.	There can, in my view, be no doubt that the purpose of the client money trust arrangements is to protect the clients by ensuring that the firm holds segregated funds equal to the amounts due to clients or, in the case of open contracts, taken as due at each daily reconciliation. It is not open to doubt that if the firm pays on maturity of a contract the whole or part of the amount due to the client from the funds held as client money, the contractual liability is reduced or discharged. Nor is there any obligation on the firm to reimburse the client money trust for the sum paid out of client money. Likewise, if the firm pays the sum due to the client from its own resources, the amount required to be held as client money will be correspondingly reduced, subject to other adjustments required at the next reconciliation. Or, to take another example, if the firm receives the proceeds of sale of a security to the account of a client and holds those proceeds as client money, and assuming that there is also a contractual obligation on the firm to pay the proceeds to the client, it cannot be in doubt that a payment from the client money account to the client in respect of such proceeds would reduce or discharge the corresponding contractual obligation. 
48.	While a firm is a going concern, the client money arrangements are not analogous to security for a debt or to a guarantee or fund provided by a third party as protection against default by the firm in the performance of its obligations. They are operated by the firm as an integral part of its business and provide the mechanism through which liabilities are or may be settled, while at the same time providing protection to clients against default by the firm. 
49.	The submissions on behalf of Attestor and Solid rely on the proposition that a fundamental change occurs in the client money trust at a PPE. This change is said to arise from a combination of the pooling of client money and the valuation of client money entitlements at market value as at the PPE date. 
50.	The pooling of client money to create the CMP and the requirement that it is to be distributed among clients rateably in proportion to their respective client money entitlements leads to the change in beneficial interests which the Supreme Court held occurred at a PPE. Prior to the PPE, client money was held for clients in the amounts shown in the firm’s records. From the PPE, the client money is held for all clients in proportion to their respective client money entitlements, that is to say their entitlements to have client money segregated for them, not the amounts which had been shown as segregated for them. As Lord Walker observed in Lehman at [78] this involved “on the assumed facts of this case, a cataclysmic shift of beneficial interest on the PPE”. This shift of beneficial ownership was cataclysmic on the assumed facts in Lehman because, as Lord Dyson said at [142] “there was a spectacular failure to comply with the CASS 7 rules for a very long time.” Lord Dyson continued at [144]:
“There is nothing surprising in the notion that, once a PPE occurs, the treatment of client money is subject to a different regime from that to which it was subject before. It is the exceptional nature of the assumed facts in this case which makes the consequences of a change of regime so striking. I accept that, in order to reach a conclusion on the third issue, it is necessary to examine the language of the relevant rules. But I start from the position that it is not inherently unlikely that the draftsman intended that clients with established proprietary interests in segregated funds should have those interests disturbed by the distribution rules in the event of a PPE. There is no a priori reason why the draftsman would not have intended to produce a scheme pursuant to which the protection afforded to clients is modified in the event of a PPE. There is nothing unrealistic in a scheme which provides that, in the event of the failure of a firm, the beneficial interests in the client money are adjusted so as to provide that each client receives a rateable proportion of the aggregate of all the client money; in other words that all clients share in the common misfortune of the failure.”
51.	Mr Snowden emphasised that Lord Dyson described the treatment of client money once a PPE occurs as being “subject to a different regime from that to which it was subject before.” But it should be noted that he goes on to say that the consequences of the change of regime are so striking in Lehman only because of the “exceptional nature of the assumed facts”. The consequences will not be particularly striking if, as appears to have been the case with MFG UK, there has been a far greater degree of compliance with the CASS rules. Lord Dyson refers to the effect of a PPE in this respect as being “to produce a scheme pursuant to which the protection afforded to clients is modified in the event of a PPE.”
52.	I find it difficult to see why the pooling of client money and the modification of the basis on which clients are entitled to client money following a PPE should result in payments of client money, which prior to the PPE would have reduced the clients’ contractual claims, ceasing to have that effect.
53.	But the fundamental change which Mr Snowden and Mr Arden contend occurs on a PPE does not result simply from the pooling of client money and the change in beneficial interests but also from the distribution of client money in accordance with the client money entitlements calculated as at the PPE date, and not in accordance with the clients’ contractual rights as at the maturity or close out of their contracts. This means, Mr Snowden submitted, that there is no connection between the trust for distribution that exists after a PPE and the client’s contractual claim. The CMP and the firm’s general estate constitute two separate estates which are distributed on entirely separate bases. The nature of the interests of clients in each is fundamentally different. They have a vested beneficial interest in the assets comprising the CMP while as regards the general estate they simply have a right to see the estate administered in accordance with the statutory scheme on insolvency: see Ayerst v C & K Construction Ltd [1976] AC 167. Likewise, the proportions in which they are entitled to participate in distributions of the two estates is different, as already explained.  
54.	Following a PPE, the basis on which client money is held and distributed is not therefore referable to the discharge of contractual liabilities. Mr Snowden seeks to demonstrate this by reference to the clients whom he represents. They all have client money entitlements greater than their contractual claims, and in some cases it may be that a client, while enjoying a client money entitlement, has no contractual claim and hence no provable debt at all. This, he submits, demonstrates that the purpose of the client money trust is no longer to protect or pay off the contractual claims of clients. 
55.	I am not persuaded that the changes which occur on a PPE are such as completely to change the purpose and effect of the client money arrangements. The purpose remains, as the relevant Directives and statutory provisions require, the protection of clients, which in this context means clients with contracts with the firm. The contracts in question are those which are unperformed at the PPE date, whether or not they are still open at that time. If a contract has matured by that time, the client’s entitlement to share in the CMP will be calculated by reference to the contractual sum due to it. If it is still open, CASS 7 and 7A provides for valuation as at the PPE date. It is of course correct that consequently some clients will be entitled to participate by reference to a greater sum than their actual contractual entitlement once it is established and some clients may be entitled to participate without ultimately having any contractual entitlement. Nonetheless it is still the contract which gives rise to the client’s right to participate in a distribution of the CMP, as well as to participate in the distribution of the general estate, and it is still by reference to the contract that the client’s right of participation is calculated, albeit valued on different bases for the two estates.
56.	The valuation of contractual rights as at the PPE date is not chosen in order to create a new class of beneficiaries of a new client money trust, so as to detach the trust from the contracts which gave rise to it, nor is it chosen to confer a windfall benefit on clients whose contracts may subsequently close out at a lower price. It was chosen, as I said in the Hindsight Judgment at [81] because “notional close-out prices produce consistency both with the daily reconciliation regime and across claims as at the PPE date and may assist in a timely distribution of client money.” It is for these reasons a proxy for the client’s contractual claim. 
57.	In my judgment, CASS 7 and 7A create a single trust of client money, to be held on the terms of CASS 7.7.2R. The occurrence of a PPE does not mark the start of a new trust but provides a mechanism for giving effect to the trust following a PPE. But that does not alter the underlying purpose of CASS 7 and 7A of providing protection for clients and, in the circumstances relevant to the present application, their contractual rights. The fact that Decreased Clients will be entitled to a larger distribution from the CMP than from the general estate does not, in my judgment, establish the disconnection between the CMP and clients’ contractual rights for which Mr Snowden contends. It is no more than the consequence of the choice of market values of open contracts as at the PPE date for valuing client money entitlements. 
58.	Accordingly, having regard to what I consider to be the continuing purpose of the client money trust after a PPE, I conclude that a distribution from the CMP will reduce a client’s contractual claim, and hence the amount for which it may prove, just as a payment from client money before a PPE reduced or discharged the client’s contractual claim.
59.	The logic of Mr Snowden’s submission that there were two entirely separate funds, with quite separate entitlements to participate in the distribution of each fund, would suggest that a client should be entitled to participate to the fullest extent in the distribution of each fund. Mr Snowden drew back, however, from carrying his submission that far. He submitted that a client would be unjustly enriched if it received in aggregate more than the greater of its client money entitlement or its contractual claim from the two funds. In accordance with the flexibility associated with unjust enrichment, the court would be able to fashion an appropriate remedy, either by limiting the recoveries which a client could make in the distribution of the general estate or in requiring a client to account to the administrator for any surplus received by reason of distributions from the CMP. When pressed to explain why, on his submissions, this would involve any unjust enrichment of a client, his response was that there was an obvious connection between the CMP and the client’s contractual rights. A mere connection is insufficient to engage the principles of unjust enrichment. The reason why a guarantor who discharges the principal debt is entitled to reimbursement from the principal debtor, and is subrogated to the principal creditor’s rights against the principal debtor, is that the payment by the guarantor discharges the debt of the principal debtor and, without such reimbursement or subrogation, the principal debtor would be unjustly enriched. A client who receives both its client money entitlement and its contractual entitlement is not unjustly enriched unless the former discharges or reduces the latter. 
60.	I should mention that Mr Snowden drew attention to the fact that there is nothing in the Directives or in the CASS rules or in the relevant insolvency legislation and rules which suggests or provides that payments from the CMP should reduce the amount of a client’s provable debt. I do not find this surprising. The amount for which a client may prove in a liquidation or administration is a matter of insolvency law, and not therefore a matter for which provision should be made either in the Directives or, still less, in the CASS rules. As for insolvency legislation, I do not find it surprising that the effect of payments from funds such as the CMP is left to be worked out by the courts. 
61.	I have so far considered this issue without distinguishing between payments made out of the CMP before submission by a client of a proof of debt against the general estate and payments from the CMP after submission of a proof of debt. Mr Arden QC submitted that, even if it were the case that payments prior to the submission of a proof of debt were to be deducted from the amount for which proof was made, that was not the case as regards payments made after proof. 
62.	For this submission, Mr Arden relied on the decision of Vinelott J in In re Amalgamated Investment Property Co Ltd [1985] Ch 349. The case concerned a proof of debt by a principal creditor against a guarantor of the debt. Payments were received by the creditor out of the estate of the principal debtor after the submission of its proof against the guarantor. The issue was whether it was required to deduct such payments made between the submission and the admission of the proof of debt. It was common ground that, this being a proof of debt against a guarantor and not against the principal debtor, any payments received from the principal debtor prior to the submission of proof would have fallen to be deducted from the amount for which the principal creditor could prove against the guarantor. After a full analysis of the relevant authorities and statutory background, Vinelott J held that the payments received by the creditor after submission of its proof were not to be deducted from the amount of its proof in the liquidation of the guarantor. He considered that the decision of the Divisional Court of the Chancery Division (Vaughan Williams J and Pollock B) in In re Blakeley, Ex Parte Aachener Disconto Gesellschaft (1892) 9 Morr. 173 was correct, a decision which clearly reflected the accepted practice at that time. The next edition of Williams on Bankruptcy Practice (1898) contained the following:
“From the proof on a guarantee must be deducted payments made by, or dividends declared on, the estate of the principal debtor before proof made, but such payments or dividends received after proof made need not be deducted.”
A substantially similar statement appeared in all subsequent editions of Williams on Bankruptcy. 
63.	Vinelott J said at p.385F-G:
“Lastly this is a case where it seems to me the court should not depart from the settled practice except upon the most compelling ground. As Mr Millett pointed out, under the rules…the trustee or liquidator must within 28 days after receiving a proof of debt admit or reject it or require further evidence in support of it. In a case of any complexity that period is usually extended by agreement as was done in this case. If a creditor were to be compelled to deduct payments received or dividends declared before his proof had been admitted it would be in his interest to press for an early adjudication and to refrain from taking any steps, for instance to enforce a security against the principal debtor, in the meantime. Grave injustice might therefore result in this and possibly other cases by an alteration in the practice of deducting only sums received and dividends declared, before a proof is submitted.”
64.	The issue is whether this practice, applicable in the case of guarantees, should apply in the case of payments from the CMP. On the basis that the CMP and the general estate of the firm are separate estates, Mr Arden submitted that it should apply. This is a matter of great practical significance in the present case, because clients were invited to submit a single document containing both a claim against the CMP and against the general estate. No payments out of the CMP had been made before the submission of claims against the general estate.
65.	All parties agreed that the client money rules are premised upon there being a speedy return of the CMP to clients. Subject to the sort of difficulties which have arisen in the present case and in Lehman, the hope, and perhaps the expectation, is that it should be capable of distribution before distribution of the general estate. In practice, therefore, this is an issue which in the ordinary case need not and ought not to arise. It would, however, clearly be highly undesirable if administrators of a firm were to delay unnecessarily seeking the permission of the court to make distributions to creditors and inviting creditors to submit claims against the general estate in order to ensure that the CMP has been fully distributed before such claims are submitted. 
66.	In my judgment, for the reasons for which I have already endeavoured to explain, I do not consider that the client money rules are intended to create in the CMP a separate estate analogous to those of a principal debtor and guarantor. It would be contrary to the nature and purpose of the client money trust if account were not to be taken of payments made from the CMP after the submission of claims against the general estate in arriving at the amount at which such claims could be proved. 
67.	Mr Zacaroli frankly accepted that the Insolvency Rules and the rules applicable to investment bank administrations do not make express provision for this. He suggested that either rule 160 or rule 162 of The Investment Bank Special Administration (England and Wales) Rules 2011 provided means by which this could be dealt with. Rule 162 is the rule which requires secured creditors to deduct the amount or value of their security from their proof of debt. For the reasons advanced for the respondents and largely accepted by Mr Zacaroli, I do not think that the CMP can be treated as security for these purposes. 
68.	Rule 160, which has its equivalent in the Insolvency Rules, provides:
“(1) The administrator shall estimate the value of any debt which, by reason of it being subject to any contingency or for any other reason, does not bear a certain value; and a previous estimation may be revised, if the administrator thinks fit, by reference to any change of circumstances or to information coming available to the administrator.
(2) The creditors shall be informed of the estimation and any revision of it.”
Mr Arden and Mr Snowden submitted that this familiar provision dealing with contingent or unascertained claims is not applicable to a claim on a contract, at any rate after application of the hindsight principle has fixed its value as the amount at which it matures or closes out. If, however, as I consider to be the correct position, the claim of a client against the general estate is to be taken as such amount as is due to him after deducting payments from the CMP, then the value of his debt does not bear a certain value until the distributions from the CMP are ascertained. The amount of his contractual claim, fixed with the benefit of hindsight, is only one component of the debt due to him from the firm. In cases where it is apparent that there will be or is likely to be a distribution from the CMP, it seems to me right that an estimate should be made of such distributions in arriving at the amount for which the client may prove and that the amount of such estimates should be revised in line with future developments, in particular actual distributions from the CMP.
69.	It follows, therefore, 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.
Second Issue
70.	The second issue is 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). 
71.	It is 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 administrators accept that in those circumstances a claim for equitable compensation may exist but they submit that it cannot be the subject of proof, at least to the extent that it does not exceed the client’s contractual claim. The administrators submit that in those circumstances a proof for a shortfall claim would offend against the rule applicable in insolvency against double proof. Attestor submits that the rule against double proof has no application, because the shortfall claim and the contractual claim are quite separate in their origin and character, one being a claim for breach of trust and the other being a claim for breach of contract. 
72.	The rule against double proof is a long standing and well-established feature of insolvency law. As explained by Oliver LJ in Barclays Bank v TOSG Trust Fund Ltd [1984] 1 AC 626 at 636G, it “stems from the fundamental rule of all insolvency administration that, subject to certain statutory priorities, the debtor’s available assets are to be applied pari passu in discharge of the debtor’s liabilities.” This fundamental rule is undermined if two or more proofs are admitted in respect of the same liability. 
73.	The rule is not however restricted to proofs in respect of what is strictly the same liability. At p.636D-F, Oliver LJ said:
“Secondly, it is, as I think, a fallacy to argue – and this is really the basis of Mr Millett’s argument – that because overlapping liabilities result from separate and independent contracts with the debtor, that, by itself, is determinative of whether the rule can apply. The test is in my judgment a much broader one which transcends a close jurisprudential analysis of the persons by and to whom the duties are owed. It is simply whether the two competing claims are, in substance, claims for payment of the same debt twice over.  It will be necessary to look more closely at the substance of the transactions which have given rise to the problems in the context of which claimant has the better right, but for the moment I accept Mr Stubbs’s broad general proposition that the rule against double proofs in respect of two liabilities of an insolvent debtor is going to apply wherever the existence of one liability is dependent upon and referable only to the liability to the other and where to allow both liabilities to rank independently for dividend would produce injustice to the other unsecured creditors.” 
It is a test of substance, not form. The court must look closely at the relevant transactions to determine whether the rule applies.
74.	Application of the rule may be illustrated by the facts of Barclays Bank v TOSG Trust Fund Ltd itself. Clarksons Holidays Limited, a holiday tour operator, went into liquidation. TOSG Trust Fund Limited (TOSG) was established to provide financial assistance to holidaymakers in the event that their holiday operator became insolvent. For that purpose banks provided bonds to TOSG, at the request of holiday tour operators which provided counter-indemnities to the banks. TOSG enjoyed a complete discretion as to how it applied monies for this purpose. On the collapse of Clarksons, TOSG called up the bonds, repatriated holidaymakers stranded abroad and used the remaining bond money to repay in full Clarksons’ customers who had paid for holidays which they had not taken by the date of liquidation. When settling those claims, TOSG required the customers to assign their claims against Clarksons to an agency, which was a body established to manage and administer a statutory fund to compensate persons in the position of those holidaymakers. The agency proved in respect of the assigned claims and the banks proved in respect of the counter-indemnities provided by Clarksons against the provision of the bonds. It was argued for the banks that the counter-indemnities and Clarksons’ contracts with holidaymakers were as a matter of fact distinct contracts which had no necessary connection at all. Once the bonds became payable to TOSG on the collapse of Clarksons, it became subject to a liability under the counter-indemnity which was independent of its liability to its customers. The mere fact that some part of the monies provided by the banks under the bonds might subsequently have been applied in discharging or partially discharging liabilities to customers did not make the case one to which the rule against double proof applied. 
75.	The Court of Appeal rejected the banks’ argument, on the basis that the liabilities to holidaymakers and the liabilities to the banks on the counter-indemnities were in substance the same liability. Slade LJ set out the reasons for this conclusion at p.660C-F:
“On the facts of the present case, I have come to the clear conclusion that, if T.O.S.G. had itself taken assignments of the rights of proof of the assigning holidaymakers and had then sought to prove in respect of the debts of those holidaymakers, it would have been proving for what were in substance the same debts as an equivalent part (£1.268 million) in respect of which the banks were proving. The matter may be tested this way. T.O.S.G. would unquestionably have been claiming in respect of the debts owed by Clarksons to the assigning holiday makers. Though in form the banks’ claims arise under the counter-indemnities given them by Clarksons in respect of the bonds money, in substance they are attributable to the debts owed by Clarksons to the assigning holidaymakers, because (i) it was only the actual expenditure of bond moneys by T.O.S.G. which pro tanto finally crystallised the liability of Clarksons to indemnify the banks, because it finally destroyed any possibility of the banks obtaining recoupment from T.O.S.G.; and (ii) the particular expenditure of bond moneys by T.O.S.G. which finally crystallised the liability of Clarksons to indemnify the banks in respect of the £1.268 million was expenditure in the purchase of these very same debts owed by Clarksons to the assigning holidaymakers.”
76.	The Court of Appeal nonetheless held in favour of the banks on the grounds that they, rather than the agency, had the better right to prove in the liquidation of Clarksons. On appeal to the House of Lords, it was held that payment by TOSG to holidaymakers extinguished their claims against Clarksons, so that no question of double proof arose when the banks proved in respect of their counter-indemnities. 
77.	In the present case, if consideration of this issue is restricted to those cases where the shortfall claim does not exceed the contractual claim for which a client may prove, the answer flows from the answer which I have given to the first issue. If, as I have held, a client’s contractual claim and the amount for which it may prove in respect of such claim is reduced by payments from the CMP, it must follow that the client cannot prove for both the shortfall claim and the balance of its contractual claim. A payment in respect of the shortfall claim would, to that extent, reduce the contractual claim. They are in substance, though not in form, claims in respect of the same liability. 
78.	The rule against double proof does not, however, prevent a claim by a client 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. In such circumstances the client is not seeking to prove twice in respect of the same liability, but is seeking to prove once for one liability, being the shortfall claim. The administrators seek to meet this by their submissions on the third issue. 
Third Issue
79.	The third issue is not concerned with whether a shortfall claim is provable, but with the maximum amount of such a claim. It is agreed that the character of the claim is one for equitable compensation for loss caused by a breach of trust. Relying in particular on the analysis of the principles applicable to such claims in the decision of the House of Lords in Target Holdings Ltd v Redferns [1996] 1 AC 421, the administrators submit that such a claim by a client cannot exceed the contractual claim, if any, of such client. Accordingly, 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.
80.	While assuming for these purposes that there was a breach of trust on the part of MFG UK in failing to hold sufficient funds as client money immediately before the PPE, the administrators contend that the excess shortfall does not flow from such breach. As the purpose of the client money trust rules in CASS 7 is to provide a fund available to meet the contractual claims of clients against the firm, the excess shortfall is not a loss flowing from the breach of trust. While recognising that, as a result of the Hindsight Judgment, the clients had a client money entitlement valued on market basis as at the date of the PPE, the administrators submit that the analysis in Target Holdings v Redferns shows that the non-receipt of the full amount of that entitlement does not flow from the firm’s breach of trust.
81.	In giving the only reasoned speech in Target Holdings v Redferns, Lord Browne-Wilkinson said at p.436C that “the basic equitable principle applicable to breach of trust is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach.” Save in cases where the appropriate remedy is to reconstitute the trust fund, and no one is suggesting that in this case, the loss to be compensated is assessed at the time of judgment with the full benefit of hindsight. Common law principles of remoteness and foreseeability are not applicable but causation must be established. Lord Browne-Wilkinson said at p.439A-B:
“Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and commonsense, can be seen to have been caused by the breach.”
82.	Mr Zacaroli also referred to the decision of the Court of Appeal in Swindle v Harrison [1997] PNLR 641. A firm of solicitors had made a bridging loan to a client to enable her to complete the purchase of restaurant premises. The restaurant business was not a success and as a result the client suffered significant financial losses. The solicitors were held to have been in breach of fiduciary duty to their client in failing to disclose certain matters before making the bridging loan, but it was found as a fact that, if disclosure had duly been made, the client would nonetheless have proceeded to borrow the necessary funds from the solicitors. 
83.	Mr Zacaroli relied on a passage in the judgment of Mummery LJ beginning at p.674F:
“In questions of causation it is important to focus on the relevant equitable duty. The recent decision of the House of Lords in Banque Bruxelles (supra) is in point. That was a case on the measure of damages for breach of contract and tort (negligent over-valuation). It explains the correct approach for determining whether the loss suffered is attributable to the relevant breach of duty. As appears from Lord Browne-Wilkinson’s comments in Target Holdings at 432G, the same principles ought to be adopted in cases of breach of fiduciary duty: “…the defendant is only liable for the consequences of the legal wrong he had done to the plaintiff and to make good the damage caused by such wrong. He is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong.” He added that, although equity and common law differ in their detailed rules, the underlying principles are the same.”  
He continued at p.675D-H:
“The correct starting point is to identify the relevant cause of action, i.e. the relevant wrong. That involves identifying the scope of the duty breached and the purpose of the rule imposing the duty. In Banques Bruxelle, for example, Lord Hoffmann drew a distinction, in the context of a negligent valuation, between a duty to provide information for the purposes of enabling someone else to make a decision on a course of action and, on the other hand, a duty to advise someone as to what course of action he should take. The extent of liability for loss suffered would not be the same in each case. A wrongdoer is only liable for the consequences of his being wrong and not for all the consequences of a course of action. In the present case, there was no fiduciary duty on Alsters to abstain from lending money to Mrs Harrison in all circumstances or to prevent her from completing the purchase of Aylesford Hotel in accordance with the contract to purchase. Asters’ duty was to make full disclosure on material facts relevant to the bridging loan to enable her to make a fully informed decision about it. They were in breach of that duty; but, as found by the judge, the probabilities are that Mrs Harrison would still have entered into the bridging loan, even if that breach of duty had not occurred, because she was intent on completing the purchase of the Aylesford Hotel, whatever independent legal advice she received. The loss which she suffered did not flow from that breach of fiduciary duty. It flowed from her own decision to take the risk involved in mortgaging her own home to finance her son’s restaurant business at the hotel.”
84.	Mr Zacaroli submitted that equitable compensation must be limited to the loss flowing from the trustee’s acts in relation to the interest he undertook to protect, which, as Mummery LJ said, requires analysing the scope of that duty and the purpose of the rule imposing it. Applying that approach to this case, the purpose of the duties of MFG UK as trustee under CASS 7 was to provide a fund for the protection of the clients’ contractual rights and their loss is accordingly limited to their contractual loss. If a claim for breach of trust were made before a PPE, the appropriate remedy would be to order a reconstitution of the client money trust, not as at the date when the breach of trust occurred, but as at the date of the order of the court. The relevant amount required to be paid to the client money trust at that point might well be less than the amount at the date of breach and indeed could be nothing at all. Once a PPE has intervened the purpose of the trust to ensure there is sufficient money to pay the clients’ claims is necessarily restricted to the amounts at which the relevant contracts close out. 
85.	I am unable to accept this argument. The obligation of MFG UK under CASS 7 was to ensure that as at each daily reconciliation there was held sufficient funds to meet the client money requirement, as defined. It is an integral part of the structure created by CASS 7 and 7A that on the occurrence of a PPE the client money should be pooled and distributed to the clients rateably in proportion to their respective client money entitlements as at the date of the PPE. To the extent that the firm has defaulted in its obligation to maintain the client money at the required level, resulting in clients receiving less than their client money entitlement, they as beneficiaries of the trust have suffered an actual loss caused by the firm’s breach of trust. They have to that extent been deprived of their express entitlements under the trust rules as a result of the trustees’ default and it is thus, as it seems to me, a clear case for equitable compensation. The existence and extent of the firm’s liability to pay equitable compensation is determined by its express duties under CASS 7 and the clients’ express rights under CASS 7 and 7A, not by what I have held to be the overall purpose of the regime established by CASS 7 and 7A of providing protection to clients for their contractual rights. 
86.	Accordingly, I hold that Decreased Clients can prove in respect of the excess shortfall. 
Conclusion
87.	In conclusion, I have accepted the submissions on behalf of the administrators on the first and second issues, but held on the third issue that Decreased Clients are entitled to prove in respect of what I have termed the excess shortfall. I will not set out the multiple choice questions posed by the application notice, many of which are conditional on the answers given to prior questions, nor will I attempt at this stage to formulate answers to them. Instead, I will invite the parties and their advisors to agree a form of order which includes declarations or directions giving effect to my conclusions.
88.	On this, as on earlier applications in this administration, I am grateful to all counsel and those instructing them for the high quality of the written and oral submissions made to me.