Caron v Jahani (No 2)

In *Caron v Jahani (No 2)*, the Court of Appeal of New South Wales considered an appeal concerning the distribution of limited funds held in the bank accounts of two companies that operated a Ponzi scheme. The dispute arose after liquidators were appointed to the companies and sought directions from the court regarding how to distribute the mixed and co-mingled funds in the companies' bank accounts, particularly in light of deposits made by unsuspecting investors both before and after a freezing order was imposed.

The central legal issues before the Court of Appeal were how to determine the nature of investors' interests in the blended funds within the bank accounts, and consequently, the appropriate method for distributing those limited funds. Specifically, the court had to decide whether the rule in *Clayton's Case*, a simple *pari passu* approach, or the lowest intermediate balance rule should apply. The court also considered the relevance of tracing, the principles of *hotchpot*, and whether investors who deposited funds after the freezing order should be treated differently from those who deposited funds prior to it.

The Court of Appeal allowed the appeal, setting aside the primary judge's orders. The court reasoned that the lowest intermediate balance rule, in conjunction with the principle of *hotchpot*, provided the most equitable method for distribution. This approach acknowledged that the funds in the bank accounts were not static and that withdrawals could dissipate investor funds. The court directed that the liquidators were justified in determining distributions by first deducting a specific withdrawal made after the freezing order on a pro-rata basis across all investors who deposited funds prior to that date. Subsequent distributions were to account for this deduction and any applicable costs.