In the matter of Direct FX Trading Pty Ltd

[2020] NSWSC 1338

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Direct FX Trading Pty Ltd [2020] NSWSC 1338

Hearing dates:

24 September 2020

Date of orders:

1 October 2020

Decision date:

01 October 2020

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Directions given that Liquidators are justified in pooling certain client monies accounts and other monies. Liquidators’ costs are properly incurred in winding up and may be paid out first from recoveries.

Catchwords:

CORPORATIONS – Winding up – Application for directions under s 90-15 of IPSC in relation to matters arising under winding up – Pooling – Whether liquidators can pool certain client segregated accounts and other monies – Where client accounts have been intermingled – Where impracticable and uneconomical to trace to individual client interests – Where impracticable and uneconomical to apply lowest intermediate balance rule.

Legislation Cited:

- Corporations Act 2001 (Cth), s 981A, Pt 7.8A

- Corporations Regulations 2001 (Cth), Reg 7.8.03

- Insolvency Practice Schedule (Corporations), ss 90-15, 90-20

- Trustee Act 1925 (NSW), ss 81 and 85

Cases Cited:

- Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231

- Australian Securities and Investments Commission v Nelson (2003) 44 ACSR 719

- Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567

- Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117

- Equititrust Ltd (in liq) (recs apptd) (recs and mgrs apptd) v Equititrust Ltd (in liq) (recs apptd) (recs and mgrs apptd) (No 4) [2017] FCA 1133

- Georges (in his capacity as joint and several liquidator of Sonray Capital Markets Pty Ltd (in liq)) v Seaborn International (as trustee for the Seaborn Family Trust) (2012) 288 ALR 240; 87 ACSR 442; [2012] FCA 75

- Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 54 SASR 285

- Re BBY Ltd (recs and mgrsappt) (in liq) (No 2) (2018) 363 ALR 492; [2018] NSWSC 346

- Re Courtenay House Capital Trading Group Pty Limited (in liq) and Courtenay House Pty Limited (in liq) (2018) 125 ACSR 149; [2018] NSWSC 404

- Re Go Energy Group Ltd [2019] NSWSC 558

- Re Metal Storm Ltd (subject to deed of company arrangement) (2014) 100 ACSR 637; [2014] NSWSC 813

- Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994

- Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556

- Russell-Cooke Trust Co v Prentis [2002] EWHC 2227; [2003] 2 All ER 478

- Walley; Re Poles & Underground Pty Ltd (admins apptd) [2017] FCA 486

- Warner (liquidator), Re Sakr Bros Pty Ltd (in liq) [2019] FCA 547

Category:

Principal judgment

Parties:

Jason Tracy and Vaughan Strawbridge in their capacity as liquidators of Direct FX Trading Pty Ltd (in liq) (First Plaintiff)
Direct FX Trading Pty Ltd (in liq) Second Plaintiff)

Representation:

Counsel:
J Hutton (Plaintiffs)

Solicitors:
Ashurst (Plaintiffs)

File Number(s):

2020/152668

Judgment

Nature of the application

1. By Originating Process filed on 22 May 2020 the Plaintiffs apply for directions to be given to the liquidators (“Liquidators”) of Direct FX Trading Pty Ltd (in liq) (“Direct FX”) under s 90-15 of the Insolvency Practice Schedule (Corporations) (“IPSC”), being Sch 2 to the Corporations Act 2001 (Cth), and for further or alternative orders under ss 81 and 85 the Trustee Act 1925 (NSW) (“Trustee Act”) or in the Court’s inherent jurisdiction, concerning monies and recoveries totalling $269,014 which the Liquidators suspect are client monies within the definition in s 981A of the Corporations Act (“Client Monies”). The Client Monies include funds held in several accounts maintained by Direct FX, as well as funds recovered by the Liquidators from third parties with whom Direct FX had business dealings. The directions and orders sought would allow the Liquidators to “pool” the Client Monies by treating them as a single fund for the purpose of distribution among all clients rateably to their contributions. I will deal with the provisions on which the Liquidators rely and the applicable principles below.

Factual background and affidavit evidence

2. It will be convenient to set out the affidavit evidence and factual background before turning to the relevant statutory provisions and the applicable principles. The Liquidators primarily rely on Mr Tracy’s affidavit dated 21 May 2020. That affidavit describes the nature of Direct FX’s business, as an online financial services and currency exchange business which, at one time, held an Australian Financial Services Licence (“AFSL”). Messrs Tracy and Strawbridge were appointed as liquidators of Direct FX by the Court in October 2018, on the application of a client of Direct FX.

3. Mr Tracy also outlines the extensive investigations which have been undertaken by the liquidators since their appointment to Direct FX, and I will address matters which emerged from those investigations below. Mr Tracy identifies the bank accounts of Direct FX at the time of the Liquidators’ appointment, three of which have been identified as potentially client money accounts, although one of those accounts held a minimal amount and is not the subject of this application. Pooling orders are sought in respect of two of those accounts. Mr Tracy also referred to recoveries made, in the course of the liquidation, including an amount recovered from an associated company, AFX Capital Markets Ltd in the amount of AUD$175,984.34. Mr Tracy also referred to inquiries made to identify monies held by “International Money Processors” for Direct FX and to the recoveries made in that way.

4. Mr Tracy identified the four sources of funds which he suspected were client monies within the definition provided in s 981A of the Corporations Act (to which I refer below), namely AUD$80,549 deposited in the three client segregated accounts; the amount of AUD$175,984 recovered from AFX Capital Markets; and AUD$12,481.13 recovered from the international money processors who held it for Direct FX and held in several different accounts. Mr Tracy in turn outlines the evidence as to transactions in respect of the two accounts which include material funds by way of client monies. Mr Tracy notes that one of those accounts appears to reflect a deposit described as made by “Vitorio de Souza Ajala Bregolin” although he notes that it is not apparent whether that reference is to one or more persons; that the information available to him does not identify any contact details for that person or persons; and a client account record held on a database used by Direct FX, which he considers the most reliable source of client information, records a nil balance for a person known as “Vitorio de Souza Ajala Bregolin”. Mr Tracy’s evidence also expands on the position in respect of the AFX recoveries and the recoveries from international money processes.

5. By a second affidavit of Mr Tracy dated 18 September 2020, Mr Tracy referred to the giving of notice to interested persons of this application. I note that attempts were made to identify persons who might be joined as representative defendants in the proceedings, but it was ultimately not practicable to join such persons, particularly given the relatively small amount in issue in the application and the extent to which they would have been eroded if the costs of such representative defendants were paid from the fund. Notice of the application was provided to the Australian Securities and Investments Commission (“ASIC”), the Australian Financial Complaints Authority, AusIndustry (Department of Industry, Science, Energy and Resources) and the Australian Taxation Office.

6. I turn now to the factual background, which I have drawn from Mr Tracy’s first affidavit and Mr Hutton’s helpful submissions on behalf of the Plaintiffs. Direct FX operated an online financial services and currency exchange business through a website and held an AFSL. A majority of the ordinary shares in Direct FX were owned by Mr Persichino who, since 7 March 2018, was its only director (Tracy 21.5.20 [14]). Three other directors resigned in October and November 2017 and Mr Jones, who was then appointed an Australian resident director on 24 October 2017, resigned on 7 March 2018 (Tracy 21.5.20 [14]). Mr Persichino is recorded by ASIC as having resided, variously, in Italy, Cyprus and Dubai and has not resided in Australia (Tracy 21.5.20 [19j]). As I noted above, Direct FX’s business was primarily focussed on facilitating retail clients’ entry into foreign exchange contracts and other contracts for difference with Direct FX over an electronic trading platform (Tracy 21.5.20 [18g], [19a]).

7. Direct FX’s Australian operations were conducted from the offices of its accountants in Sydney. Until 2017 it had an Australian director and two employees who were responsible managers for compliance purposes (Tracy 21.5.20 [19c]). Apart from plant and equipment valued at less than AU$5,000, all recorded assets of Direct FX over the 2016, 2017 and 2018 financial years consisted of current assets, being funds held by banks, money processors or hedging counterparties of Direct FX, and all liabilities were classified as current liabilities, with the majority being owed to clients (Tracy 21.5.20 [19d.ii-iii]). Between December 2016 and February 2018 Direct FX entered into a number of loan and revenue sharing agreements with a third party financial services and foreign currency trading company (“CLM”) (Tracy 21.5.20 [18c]; Ex P1, 163–189).

8. Direct FX’s website stated that it was part of the “AFX Group” and the Liquidators’ inquiries indicate that the parent company of the AFX Group is a company incorporated in Cyprus, AFX Capital Markets Ltd (“AFX Capital Markets”) which had subsidiary or related companies in several other jurisdictions, and that companies within the AFX Group appear to have entered into transactions with one another, including informal hedging arrangements. The AFX Group was largely operated by staff based in Cyprus under Mr Persichino’s direction (Tracy 21.5.20 [23]).

9. Direct FX had operating losses of AU$188,960 and AU$854,822 in the 2017 and 2018 financial years and its cash balances and current ratio significantly declined between February 2016 and 11 October 2018 (Tracy 21.5.20 [19d]), On 10 October 2017, Direct FX’s then lawyers notified ASIC that Direct FX was in breach of the Net Tangible Assets (“NTA”) requirements under its AFSL. ASIC sought further information and documentation and, in October and November 2017, the then directors of Direct FX resigned. Mr Persichino and Mr Jones were then appointed as directors and Mr Persichino arranged for a company related to him to deposit €503,000 into an operating account opened in the name of Direct FX at an Australian bank (Tracy 21.5.20 [19e-19h]).

10. On 7 December 2017, Direct FX was directed by ASIC to retain KPMG to report on its client segregated account balances, its NTA calculations and its solvency over the second half of 2017. KPMG reported on 6 April 2018, and found extensive noncompliance with the client monies requirements in Part 7.8 of the Act and the Corporations Regulations 2001 (“Regulations”). The KPMG report also identified other potential issues relating to the operation of client trust accounts and other regulatory requirements and noted that the absence of an operational function in Australia had contributed to that position (Tracy 21.5.20 [19l]. On 17 April 2018, ASIC suspended Direct FX’s AFSL (Tracy 21.5.20 [19i-19n]; Ex P1, 304-306).

11. Various clients of Direct FX subsequently served creditor’s statutory demands on it. On 8 October 2018, ASIC cancelled Direct FX’s AFSL. On 11 October 2018, Messrs Tracy and Strawbridge were appointed as joint and several liquidators of Direct FX by an order of this Court on the application of a client of Direct FX.

12. Following their appointment, the Liquidators identified thirteen bank accounts in the name of Direct FX holding AUD$792,078 (Tracy 21.5.20 [20]). Three of those bank accounts had an account name in Direct FX’s accounting records indicative of being a client monies account, namely, the “CBA Trust – 6768 (AUD)”, “DFXT EUR Trust (EUR)”, and the “DFXT USD Trust 5086 (USD)”. Mr Tracy’s evidence is that the monies in these accounts, AU$80,549, appear to have been sourced from clients of Direct FX, and he has treated these accounts as Client Segregated Accounts or CSAs, and seeks directions from the two accounts that have material amounts in them (Tracy 21.5.20 [21b.iii]). Four accounts held funds sourced from CLM, pursuant to the loan and revenue sharing agreements with CLM and the Liquidators have formed the view these are not client funds and now do not seek directions concerning them (Tracy 21.5.20 [21b.i]). The remaining six bank accounts maintained by Direct FX have been identified by the Liquidators as operating accounts.

13. In response to their investigations to which I referred above, the Liquidators were informed by AFX Capital Markets that it held, as at 12 October 2018, USD$912,281.62 on behalf of Direct FX and had open trading positions for Direct FX as principal (Tracy 21.5.20 [25]). Those open positions were closed on the Liquidators’ direction and the Liquidators were then informed that AFX Capital Markets held USD$914,489.67 on behalf of Direct FX (Tracy 21.5.20 [26]-[27]; Ex P1, 631). Regrettably, AFX Capital markets subsequently paid, on 30 October 2018, only USD$125,000 (AUD$175,984.34) of this amount to Direct FX. The Liquidators’ and their legal representatives’ attempts to recover the balance have been unsuccessful and the Liquidators have formed the view that further attempts to recover the balance are unlikely to be productive and should not be undertaken (Tracy 21.5.20 [26]-[34]). It seems to me that view is reasonably formed where Mr Tracy’s evidence is that AFX Capital Markets has failed to respond to repeated attempts to contact it, both by the Liquidators and their legal representatives; any enforcement efforts would have required action in Cyprus and would have been costly; and action has been taken against the AFX Group by the securities regulator in Cyprus, creating a real risk that it would not be able to meet any judgment against it in any event.

14. As I noted above, the Liquidators also contacted international money processors with whom there were records of transactions with Direct FX and $12,481.13 was ultimately recovered (Tracy 21.5.20 [35]-[36]).

15. The Liquidators’ investigations have identified 530 client accounts held on Direct FX’s trading database with trade balances greater than AU$25, the amount of Direct FX’s usual processing fee for a money payment (Tracy 21.5.20 [39]-[42]). Proofs of debt have been submitted by 39 clients, amounting to AUD$5,539,279, which the Liquidators have found are in amounts largely consistent with the amounts recorded in trading records. The Liquidators estimate that total client claims (including proprietary claims) will be in the range of AUD$4.5 million to AUD$8.5 million (Tracy 21.5.20 [39]-[42]). The Liquidators propose to call for further proofs of debt as part of the dividend process if orders are made by the Court for distribution of the Client Monies and once the Liquidators have advertised their intention to declare a dividend to creditors.

The relevant statutory provisions and principles

16. As I noted above, the Plaintiffs seek orders that they be justified in pooling funds held in separate client segregated accounts (“CSA Balances”) together with funds recovered from third parties (the “AFX Recoveries” and “International Money Processors Recoveries”) which would appear either to be client monies subject to the statutory trust or monies held on trust for clients at general law. They rely on 90-15 of the IPSC and further or alternatively seek orders under ss 81 and 85 the Trustee Act. I now turn to the relevant statutory provisions and the applicable principles.

17. The Liquidators seek a direction under s 90-15 of the IPSC which is the same as, or is likely wider than, its powers under ss 479(3) and 511 of the Act: Walley; Re Poles & Underground Pty Ltd (admins apptd) [2017] FCA 486 at [41]; Warner (liquidator), Re Sakr Bros Pty Ltd (in liq) [2019] FCA 547 at [18]. In Warner above at [18], Griffiths J referred to my summary of the applicable principles in Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]-[9] as follows:

I summarised the scope of the Court’s power to give directions under s 479(3) of the Corporations Act in Re MF Global Australia Ltd (in liq)[2012] NSWSC 994; (2012) 267 FLR 27 at [7] as follows:

Section 479(3) of the Corporations Act allows a liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator’s application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation … The court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision …

I also referred to the scope of the Court’s powers under s 511 of the Corporations Act in that decision and observed (at [8]) that:

Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. … Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be ‘just and beneficial’ to give the relevant direction. The court may give such a direction where it will be ‘of advantage in the liquidation’: … The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty …” [citations omitted].

I also recognise that the Court’s powers to give judicial advice and give directions under these sections are intended to facilitate the performance of a liquidator’s functions and should be interpreted widely to give effect to that intention, and the Court may give such advice or give such a direction where it is advantageous to the liquidation to do so …”

18. In Warner above, the Court gave a direction under s 90–15 of the IPSC to a liquidator of two companies who faced a conflict of duty or interest, where one company was creditor of the other and the Court was satisfied that the appointment of a special purpose liquidator to address that conflict would have been an unwarranted additional burden on creditors. I have here drawn on my summary of the applicable principles in Re Go Energy Group Ltd [2019] NSWSC 558 at [16]ff.

19. The Liquidators also rely on ss 81 and 85 of the Trustee Act. Section 81 of the Trustee Act provides, inter alia, that:

“Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by law, the Court:

(a)   may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, including adjustment of the respective rights of the beneficiaries, as the Court may think fit, and

(b)   may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.”

20. Section 85 of the Trustee Act relevantly provides that:

1. Where a trustee is or may be personally liable for any breach of trust, the Court may relieve the trustee either wholly or partly from personal liability for the breach.

2. The relief may not be given unless it appears to the Court that the trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the direction of the Court in the matter in which the trustee committed the breach.”

   21. The question whether the Liquidators should be relieved from liability under s 85 of the Trustee Act depends on whether it will act honestly and reasonably in respect of the distribution of the funds, and “honesty” would be established if the Liquidators act “honourably, fairly, in good faith and in a commonsense manner as judged by the standards of others of a similar professional background”: Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 54 SASR 285 at 295; Re Metal Storm Ltd (subject to deed of company arrangement) (2014) 100 ACSR 637; [2014] NSWSC 813 at [159].

   22. As I noted above, these proceedings concern the pooling of funds for the purposes of Part 7.8 Div 2 of the Corporations Act, which deals with Australian Financial Services Licensees’ obligations in dealing with client money. Subject to the specified exceptions in s 981A(2)–(4), the Subdivision applies to (1)(a) money paid to a financial services licensee in connection with a financial service that has been provided, or that will or may be provided, to a client or a financial product held by the client; where (1)(b) the money is paid by the client; or by a person acting on behalf of the client; or to the licensee in the licensee’s capacity as a person acting on behalf of the client. Section 981B requires a financial services licensee to pay money to which Div 2, Subdiv A applies into an account which satisfies specified requirements.

   23. Section 981F of the Act provides that the Regulations may include provisions dealing with how money in a client account maintained for the purposes of s 981B, or an investment of such money, is to be dealt with if, inter alia, the licensee ceases to be licensed or becomes insolvent within the meaning of the Regulations, as has occurred here. As Mr Hutton points out, reg 7.8.03 of the Regulations relevantly provides that, for each person who is entitled to be paid money from a client segregated account, the account is taken to be subject to a trust in favour of the person (reg 7.8.03(4)); and (b) monies held in client segregated accounts are to be distributed to each person who is entitled to be paid money from the account unless there is a deficiency in which case it is to be paid “in proportion to the amount of each person's entitlement” (reg 7.8.03(6)); see Georges (in his capacity as joint and several liquidator of Sonray Capital Markets Pty Ltd (in liq)) v Seaborn International (as trustee for the Seaborn Family Trust) (2012) 288 ALR 240; 87 ACSR 442; [2012] FCA 75; Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [89]–[91] . Regulation 7.8.03 applies “despite anything to the contrary in the Bankruptcy Act 1966 or a law relating to companies”: reg 7.8.03(7). As Mr Hutton recognises, monies deposited with a financial service provider may also be held on trust for a client or clients based on ordinary trust principles: Re Courtenay House Capital Trading Group Pty Limited (in liq) and Courtenay House Pty Limited (in liq) (2018) 125 ACSR 149; [2018] NSWSC 404 at [33]-[34] referred to with approval by the Court of Appeal in Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117 at [27], [133] and [150].

   24. The case law, on which the Liquidators rely, indicates that the Court may order pooling of such accounts where there is evidence that it would not be practical to make distributions by reference to the particular accounts, for example because of lack of records of individual client deposits, withdrawals from individual accounts and transfers of funds between client accounts: Sonray above at [91]–[92]. Mr Hutton draws attention to my observations in Re MF Global Australia Ltd (in liq) above at [78]-[79], in relation to pooling between client segregated accounts, that the amounts should only be pooled “if mixing or another proper basis for pooling is established” and, “where there are relatively clear property interests in particular property, this cannot be altered by reference to some notion of common misfortune”: Russell-Cooke Trust Co v Prentis [2002] EWHC 2227; [2003] 2 All ER 478 at [44]; that a “mixed fund” is one which contains funds from more than one source; and that cases in which pooling has been sanctioned typically involved the mixing of funds across accounts, but mixing may also be established where funds in one trust have been applied to meet obligations of another trust: Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231; Australian Securities and Investments Commission v Nelson (2003) 44 ACSR 719 at [21].

   25. Mr Hutton also refers to Re BBY Ltd (recs and mgrs apptd) (in liq) (No 2) (2018) 363 ALR 492; [2018] NSWSC 346 at [40]-[61] (“Re BBY”), where Brereton J noted that the cases where such an order has been made have each involved mixing of funds between different accounts. As Mr Hutton points out, his Honour there observed (at [38]-[39])) that pooling is directed on pragmatic grounds, although informed by equitable principles pertaining to deficient mixed funds; the effect of “pooling” two or more accounts is to treat each client’s entitlement to one account as identical to its entitlement to the other account(s), and so to treat each client as having a rateably equal interest in each fund; pooling will in principle be warranted when the funds have become so intertwined that each client’s entitlement to one account may reasonably be regarded as identical to its entitlement to the other(s), and this will be so when it is reasonable to regard each as having a rateably equal interest in the mixed fund. His Honour also observed (at [42]) that, where it is not possible to work out precisely who is entitled to what monies in particular segregated accounts, all the Court can do is to permit the monies in the segregated accounts to be pooled with a view to their proportionate distribution; (at 57]) references in the authorities to the “impossibility” of tracing entitlements are not to absolute impossibility, but to whether tracing is reasonably and economically practical, so that the accounts should not be regarded as irretrievably commingled; that question will be influenced by the size of the estate, the number of claimants, and the degree of difficulty; and (at [65]) the pooling remedy proceeds on the basis of a tracing exercise being not reasonable or economically practicable.

   26. Mr Hutton points out that these observations were generally approved by the Court of Appeal in Caron, dealing with the general law rather than statutory trusts. I recognise that the Court there found that, where tracing was impossible, distribution in accordance with the lowest intermediate balance rule was generally to be preferred to distribution on a pari passu basis, but also noted that “the economic feasibility of conducting such an exercise may also be affected by the size of the comingled fund” which “may be too small to justify the cost that may be involved in applying the lowest intermediate balance rule, even if that were theoretically capable of taking place” (at [120]).

Determination

27. The Liquidators submit that it is not possible, or alternatively would be impracticable and uneconomical, for them to carry out further investigations to identify whether any of the Client Monies, or any of the funds or accounts in which Client Monies were deposited, are or contain the traceable proceeds of monies held on trust for individual clients of Direct FX, or apply the “lowest intermediate balance” approach identified by the Court of Appeal in Caron.

28. I have referred above to Mr Tracy’s evidence that he suspects that the CSA Balances, AFX Capital Markets Recoveries and International Money Processors Recoveries are “client monies within the definition provided for” in s 981A of the Act (Tracy 21.5.20 [47]). Mr Hutton submits, and I accept, that there is a sufficient basis for that suspicion, where the CSA Balances are funds identified in accounts that were designated (by name) to hold funds on trust for clients, and monies appear to have been paid into those accounts by clients; the AFX Recoveries are the result of closing out transactions apparently entered into on behalf of clients, were identified as “client monies” in Mr Tracy’s communications with AFX Capital Markets, and appear to have been received by Direct FX from AFX Capital Markets from a person acting on behalf of the client or in its capacity as a person acting on behalf of the client within the meaning of s 981A(1); and the International Money Processors Recoveries are recoveries from persons who were identified by KPMG and others, as part of Direct FX’s business practices, as holding client funds (Ex P1, 305), and those funds also seem to have been received by Direct FX from a person acting on behalf of the client or in its capacity as a person acting on behalf of the client. It is not necessary to determine whether the amounts paid by clients, because they were paid for the purposes of trading on the foreign exchange market at the client’s direction, were paid either on an express trust or on a trust arising in accordance with the principles in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. I accept Mr Hutton’s submission that the Court can be satisfied that the Client Monies are held on trust for clients, although it is not possible to identify any particular client (or at least, any particular client who the Liquidators have been able to make contact with) with a beneficial interest in any of the Client Monies.

29. Mr Hutton submits, and I also accept, that the evidence indicates that there has been mixing between the various client segregated accounts maintained by Direct FX and between Direct FX’s operating accounts, as shown by transfers between Direct FX‘s operating and trust accounts (Ex P1, 91). As Mr Hutton points out, it also appears that the US$56,338.76 held in account number 086 was sourced from clients of Direct FX whose funds were used to effect a transaction or transactions through RJ O'Brien & Associates, an international financial services and currency trader with which Direct FX had hedging arrangements, but there are no account statements, narrations or other records that would allow the Liquidators to identify who those clients were (Tracy 21.5.20 [52]). In the case of account number 051, the balance was reduced to nil on 15 May 2018, after which €2,440.31 was deposited with the description “Vitoria De Souza Ajala Bregolin”. I have referred above to Mr Tracy’s evidence that the Liqudators do not have information that would enable them to return any funds to that person(s) (Tracy 21.5.20 [56]).

30. I also accept Mr Hutton’s submission that, in respect of the AFX Recoveries, the information available to the Liquidators does not indicate which clients of Direct FX were the source or were otherwise entitled to the amount of USD 914,489.67 which AFX Capital Markets indicated it held on behalf of Direct FX on 19 October 2019, as to which a lesser amount was repaid to Direct FX (Tracy 21.5.20 [57]-[59]). As to the International Money Processors Recoveries, I also accept that the information available to the Liquidators does not allow determination of the clients as to which the amount of $12,481.13 held by the International Money Processors on behalf of Direct FX were sourced, and those funds also cannot be specifically traced to any clients of Direct FX (Tracy 21.5.20 [60]-[62]). The evidence also established that, even if it were possible that further inquiries might allow some client interests to be traced, the amount of funds available for distribution does not justify the additional costs which would be incurred and there is a real risk that undertaking the exercise would mean that no dividend would be paid to clients and creditors (Tracy 21.5.20 [65]).

31. For these reasons, I accept Mr Hutton’s submission that the limited records available to the Liquidators and the limited funds available for distribution have the result that it is not possible, and would not be reasonable, practicable or economical, to trace individual client interests into the Client Monies or apply the lowest intermediate balance rule noted in Caron above. I am also satisfied that directions should be given in respect of clients with minimal balances, on the same basis that such a direction was given in MF Global above.

Orders

32. I make the following orders in the form now proposed by the Liquidators:

1.   The Liquidators are justified in:

a.   pooling all of the following monies:

i.   the AFX Recoveries;

ii.   the International Money Processors Recoveries;

iii.   the balances deposited in Acc No. 086 and Acc No. 051

(together, the “Recoveries”); and

b. applying regulation 7.8.03 of the Corporations Regulations 2001 (Cth) as if the Recoveries constitute the one account; and

c.    distributing the Recoveries rateably amongst those Clients who lodge proofs of debt in the winding up of Direct FX which are adjudicated upon and accepted by the Liquidators to be greater than AU$25.

2.   The Plaintiffs be wholly relieved from personal liability for any breaches of trust arising as a consequence of them following Order 1.

3.    The Plaintiffs' costs of and incidental to this application are costs properly incurred by the Liquidators in the winding up of Direct FX and may be paid first out of the Recoveries.

Definitions

Acc No. 051 means the account held by Direct FX with Commonwealth Bank of Australia with account name 'DIRECT FX TRADING PTY LTD' and account number 200015725051.

Acc No. 086 means the account held by Direct FX with Commonwealth Bank of Australia with account name 'DIRECT FX TRADING PTY LTD' and account number 200015725086.

AFX Recoveries means the funds defined in paragraph 29 of the First Tracy Affidavit.

Clients means clients of Direct FX.

Direct FX means the Second Plaintiff.

International Money Processors Recoveries means the funds described at paragraph 36(c) of the First Tracy Affidavit.

First Tracy Affidavit means the affidavit of Jason Tracy sworn 21 May 2020.

Liquidators means the First Plaintiffs.

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Decision last updated: 20 October 2020