Re BBY Ltd (recs and mgrs apptd) (in liq) (No 2) - [2018] NSWSC 346

Supreme Court

New South Wales

Summary available
Amendment notes

Medium Neutral Citation: In the matter of BBY Limited (Receivers and Managers appointed) (in liquidation) (No 2) [2018] NSWSC 346
Hearing dates: 31 January, 1, 2, 3 February 2017
Date of orders: 19 March 2018
Decision date: 19 March 2018
Jurisdiction: Equity - Corporations List
Before: Brereton J
Decision:
See [400]-[410]

Catchwords:
CORPORATIONS — Winding up — Conduct of liquidation — Application for directions - Distribution of assets – Distribution of client segregated accounts – the manner in which funds should be distributed per Corporations Regulations reg 7.8.03 - whether reg 7.8.03(6) should be applied separately to each client segregated account – whether liquidators should pool all (or some) of the client segregated accounts –held pooling not directed across product lines.

CORPORATIONS — Winding up — Conduct of liquidation — Application for directions - Distribution of assets – Distribution of recoveries – Returned collateral - whether some or all of the recoveries are beneficially owned or held on trust for clients – how recoveries and returned collateral should be distributed having regard to Corporations Regulations – held recoveries and returned collateral held on trust for clients.

CORPORATIONS — Winding up — Conduct of liquidation — Application for directions -Distribution of assets – Calculation of entitlements – how entitlement to client segregated accounts and recoveries should be calculated – Set off – whether Liquidators are entitled to set off positive net account balances against negative account balances – where accounts are owned by the same client – held, justified in combining balances of individual trading accounts to calculate net position of individual clients without any need to set-off within the same group.

CORPORATIONS — Winding up — Conduct of liquidation — Application for directions - Distribution of assets – Low balances – whether the Liquidators are justified in treating clients with a low balance in a client segregated account or recovery as having no entitlement to participate – held, justified in treating as having no entitlement.
CORPORATIONS — Winding up — Conduct of liquidation — Application for directions - Distribution of assets – Interest – whether interest earned on client segregated accounts and recoveries is beneficially owned or held on trust for clients – held, interest held on trust for relevant clients
Legislation Cited: (CTH) Corporations Act 2001, s 424, s 479, s 511, s 601EE(2), s 889C(2), s 892F, s 981A, s 981B, s 981C, s 981D, s 981E, s 981F, s 981G, s 981H
(CTH) Corporations Regulations 2001, regs 7.8.01, 7.8.02, 7.8.03.
(NSW) Trustee Act 1925, s 63
(VIC) Trustee Act 1958, s 63
Cases Cited: All Class Insurance Brokers Pty Ltd (in liq), In the matter of; Vardy v Westpac Banking Corporation [2014] NSWSC 475
Australian Elizabethan Theatre Trust, Re (1991) 30 FCR 491
Australian Securities and Investments Commission v Atlantic 3-Financial (Aust) Pty Ltd [2004] 1 Qd R 591; [2003] QSC 386
Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082
Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; [1999] QSC 387
Australian Securities and Investments Commission v Giann & Giann Pty Ltd (2005) 141 FCR 278; 23 ACLC 276; [2005] FCA 81
Australian Securities and Investments Commission v Letten (No 5) [2010] FCA 1047
Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231; (2010) 190 FCR 59; (2010) 80 ACSR 401.
Australian Securities and Investments Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719
Australian Securities Commission v Buckley (1996) 7 BPR 15,024
Australian Securities Investments Commission v Tasman Investment Management Ltd (2006) 59 ACSR 113; 202 FLR 343; [2006] NSWSC 943.
Barnes v Addy (1874) LR 9 Ch App 244
BBY Limited (Receivers and Managers appointed) (in liquidation), In the matter of [2016] NSWSC 1366
Black v Freedman & Co (1910) 12 CLR 105
CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98
Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209
Diplock's Estate, Re; Diplock v Wintle [1948] Ch 465
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Fire Nymph Products Ltd v The Heating Centre Pty Ltd (1992) 7 ACSR 365
Foskett v McKeown [2001] 1 AC 102
French Caledonia Travel Service Pty Ltd, Re (2003) 59 NSWLR 361; 204 ALR 353; 48 ACSR 97; [2003] NSWSC 1008
GDK Financial Solutions Pty Ltd, Re; Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699; 60 ACSR 447; [2006] FCA 1415
Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442; [2012] FCA 75
Georges v Seaborn International Pty Ltd (2012) 206 FCR 408; [2012] FCAFC 140
Global Finance Group Pty Ltd, Re (2002) 26 WAR 385; [2002] WASC 63
Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373
Magarey Farlam Lawyers Trust Accounts (No 3), Re [2007] SASC 9; (2007) 96 SASR 337
MF Global Australia Ltd (in liq), In the matter of (2012) 267 FLR 27; [2012] NSWSC 994
Mier v FN Management Pty Ltd [2006] 1 Qd R 339; 56 ACSR 93; [2005] QCA 408
Re TVSN Ltd [2005] NSWSC 692
Russell-Cooke Trust Co v Prentis [2002] EWHC 2227; [2003] 2 All ER 478
Travel Compensation Fund v Classic International Cruises Pty Ltd (in liq) and Ors [2014] NSWSC 167
Warner, Re GTL Tradeup Pty Ltd (in liq) (2015) 104 ACSR 633; [2015] FCA 323
Windsor Mortgage Nominees Pty Ltd v Cardwell (1979) CLC 40-540
Texts Cited: Campbell JC, “Republic of Brazil v Durant and the equities justifying tracing” (2016) 42 Aust Bar Rev 32
Thomas SB, "Clayton's Case and the 'Common Pool' Exception” (2004) 15 JBFLP 177
Category: Principal judgment
Parties: Stephen Ernest Vaughan and Ian Richard Hall in their capacity as liquidators of BBY Limited (Receivers & Managers appointed) (In liquidation) ACN 007 707 777 (1P)
BBY Limited (Receivers & Managers appointed) (In liquidation) ACN 007 707 777 (2P)
J Mazzetti Pty Ltd ATF J Mazzetti Pty Limited Staff Superannuation Fund & Ors (1D)
Peter Brian Haywood and Bronwen Menai Haywood (ATF the Haywood Superannuation Fund) (2D)
Clive Riseam (3D)
Securities Exchange Guarantee Corporation Ltd (4D)
David Nadin (5D)
Representation:
Counsel:
D Healey (Ps)
DJ Williams QC w G J Parncutt (1D)
PJ Brereton SC w V Whittaker (2D)
RM Smith SC w GES Ng (3D)
J J Hutton (4D)
Solicitors:
Ashurst Australia (Ps)
Bamford Lawyers as agents for Partners Legal (1D)
Mills Oakley (2D)
Corrs Chambers Westgarth (3D)
Clayton Utz (4D)

File Number(s): 2015/237028

JUDGMENT

This judgment is arranged as follows:

INTRODUCTION - paragraph 2

The proceedings and the parties - paragraph 5
The preliminary questions - paragraph 9
The remaining issues for determination - paragraph 12

DISTRIBUTION OF CLIENT SEGREGATED ACCOUNTS - POOLING - paragraph 14

The statutory framework: Corporations Act and Regulations - paragraph 18
How the question of pooling arises - paragraph 34
The basis on which “pooling” is permitted - paragraph 38
A pragmatic remedy - paragraph 40
The relevance of equitable tracing rules - paragraph 62
Continuing proprietary interest? - paragraph 63
Lowest intermediate balance - paragraph 69
Tracing through an intermediary fund - paragraph 74
Cleansing - paragraph 78

Summary of the principles - paragraph 83

The transactions of interest - paragraph 84
The $12 million transfer - 2 December 2011 - paragraph 86
Trading on the ASX - paragraph 87
The daily business cycle for Equities/ETOs - paragraph 93
The events surrounding the 2 December transaction - paragraph 95
The source of the $12 million - paragraph 103
The Saxo Bank receipts - paragraph 110
The Account Terms - paragraph 112
The Protection Trust - paragraph 116
Product Disclosure Statement - paragraph 123
The Stonebridge Acquisition - paragraph 132
The nature of the Saxo Bank receipts - paragraph 136
Were the Saxo Bank receipts Subdivision A money (s 981A(1)(b)(iii))? - paragraph 144

The other Buffer account funds - paragraph 155
Money paid to acquire a financial product from the licensee (s 981A(2)(c))? - paragraph 157
Entitlement under the Account Terms (reg 7.08.02(1)(a) or (c))? - paragraph 162

Conclusion – all the money in the Buffer Account 0256 was Subdivision A money - paragraph 174
Was there “mixing” on 2 December 2011? - paragraph 179
The application of the $12 million - paragraph 180
Was the transfer a breach of the s 981H trust of Saxo client money (s 981D)? - paragraph 188
The Protection Trust - paragraph 196

Was there a Protection trust in existence on 2 December 2011? - paragraph 198

What are the rights of clients consequent on and after 2 December 2011? - paragraph 216

Conclusion - paragraph 226
May 2012 - was the $12 million repaid? - paragraph 228

The Aquila transaction - 11-12 June 2014 - paragraph 238
The SCMA 1:1 upload and termination - paragraph 248
From SmarTrader to BBY - paragraph 249
The transfer of funds to SCMA - paragraph 255
The Saxo termination - 1 February 2015 - paragraph 258
Conclusion - paragraph 262

Other transactions of interest - paragraph 263
Transactions relevant to Equities/ETOs
16 Dec 14 - paragraph 264
18 Dec 14 - $300,000 - paragraph 266
16 Jan 15 - $0.5 million - paragraph 273
March 2015 - paragraph 274

Non Equities/ETOs transactions - paragraph 278

“BBY Corp” transfers: Equities/ETOs funding transactions - paragraph 287
Equities/ETOs funding transactions - paragraph 290
The Adjusted BBY Funding Ledger - paragraph 299
What does the Adjusted BBY Funding Ledger mean? - paragraph 303

Should pooling be directed? - paragraph 311
The impossibility argument - paragraph 316
Is pooling appropriate? - paragraph 326
Should the Saxo, Futures and FX CSAs be pooled without Equities/ETOs? - paragraph 344

DISTRIBUTION OF RECOVERIES - paragraph 346

Futures Recoveries (ET recoveries) - paragraph 352
FX Recoveries (OTC recoveries) - paragraph 354
Saxo Recovery (OTC recovery) - paragraph 357
The Returned Collateral (ET recovery) - paragraph 362

THE OTHER QUESTIONS - paragraph 371

Calculation of entitlements - paragraph 372
Set-off - paragraph 375
Contractual right of set off - paragraph 378
ASX, APX and International Trading Terms - paragraph 379
Futures Terms - paragraph 381
Desk FX Terms - paragraph 384
Online Account Terms - paragraph 385

Single account - paragraph 386
Conclusion - paragraph 392

Low balances - paragraph 393
Interest - paragraph 398

CONCLUSION AND ORDERS - paragraph 399

INTRODUCTION

The first plaintiffs Mr Stephen Ernest Vaughan and Mr Ian Hall (“the Liquidators”) became the liquidators of the second plaintiff company (“BBY”), pursuant to (CTH) Corporations Act 2001, ss 446A and 499, on 22 June 2015, having previously been appointed, on 17 May 2015 (“the administration date”), as administrators of BBY and nine other entities in its associated financial services group (“the BBY Group”). On 18 May 2015, St George Bank, a division of Westpac Banking Corporation appointed Mr Brett Lord and Mr Stephen Parbery receivers and managers (“the Receivers”) to BBY and other companies in the BBY Group, pursuant to a fixed and floating charge granted by those companies on 2 December 2011 (“the St George Charge”).
The BBY Group provided a range of financial services and products - including asset management, broker dealer services, institutional sales, trading and financial advice, and online trading - to clients in Australia. BBY offered financial products broadly comprised in the following product lines:

Exchange-traded (ET) financial products, being equities such as listed shares and units (“Equities”) and exchange traded options (“ETOs”), and futures contracts and futures options (“Futures”); and

"Over-the-counter" (OTC) financial products, being foreign exchange contracts (“FX”); a variety of products, including FX contracts for difference, offered by Saxo Capital Markets Australia (“SCMA”) through an on-line trading platform (“Saxo”); and other miscellaneous financial products, including some offered by Interactive Brokers LLC (“IBL”), and Carbon Trading (“Other Products”). BBY had acquired the Saxo business from the Stonebridge Group during 2011, in circumstances described below (“the Stonebridge Acquisition”).

Client money deposited with BBY was required, by Corporations Act s 981B, to be held in client segregated accounts (“CSAs”). At the administration date, there were a total of 55 CSAs, holding approximately $14.6 million; an additional $3.4 million received after the appointment of the Liquidators from ASX Clear Pty Limited (ASX Clear) (“the Returned Collateral”) has been deposited by the Liquidators into a separate trust account. The Liquidators’ preliminary investigations suggested that there was likely to be a significant shortfall between client claims in relation to CSAs, and the funds held in them: client claims were in the order of $30 million, and the prospective shortfall in the order of approximately $12 million (before any recoveries from counterparties). It also seemed that BBY had not maintained records showing the client or clients who were entitled to the balance of any particular CSA (such as a trust ledger account for each client recording the contributions and withdrawals by that client into or from particular CSAs), nor individual cash balances for each client in each account. And there also appeared to have been transactions between CSAs - both within, and across different, product lines.

The proceedings and the parties

By Originating Process filed in proceedings 2015/237028 on 13 August 2015, the Liquidators - with the aspiration so far as practicable of having the issues resolved in a single proceeding, thereby avoiding incurring the additional time and cost of dealing with various separate legal challenges by clients, creditors and other interested parties – sought the Court’s guidance (by way of declarations, directions under Corporations Act, s 479 and s 511, and advice pursuant to (NSW) Trustee Act 1925, s 63), as to how the amounts in the CSAs, and amounts recovered after the administration date from BBL’s trading counterparties (“Recoveries”), should be dealt with (“the Liquidators’ Application”). The main questions raised in the Liquidators’ Application were:

whether or not CSAs should be grouped or pooled, and if so, how;

whether foreign currency held in the CSAs should be converted into Australian Dollars to facilitate distribution;

whether Recoveries are beneficially owned by BBY, or are held on trust for clients;

whether a client’s positive positions should be set-off against negative \ positions, including across different product lines;

whether small client entitlements (less than $100) can be disregarded;

whether amounts deposited by clients after 17 May 2015, when the company went into administration, should be returned to clients, or treated as a deposit to the relevant CSA;

whether interest received is owned beneficially by BBY or is held on trust for clients; and

whether the liquidators’ remuneration, costs and expenses should be paid out of trust property.

Thousands of BBY clients potentially have an interest in the CSAs and Recoveries, and for that reason representative defendants were appointed. The first defendant (“Mazzetti”) represents all BBY clients with an ETO Account with open positions as at 15 May 2015. The second defendants (“Haywoods”) represent all BBY clients with an Equities Account, and all BBY clients with an ETO Account without an open position as at 15 May 2015. The third defendant (“Riseam”) represents all BBY clients with a Futures Account, FX Account, Saxo Account or Other Products Account.
The fourth defendant is the Securities Exchanges Guarantee Corporation Limited (“SEGC”). It is the trustee of the National Guarantee Fund (NGF), a compensation fund for certain classes of claims arising from dealings with participants in financial markets operated by ASX Limited (ASX) and, in certain circumstances, participants in clearing facilities operated by ASX Clear. [1] SEGC has already paid compensation in respect of Corporations Act Part 7.5 claims arising from BBY's insolvency and is thereby subrogated, to the extent of those payments, to all of the clients' rights and remedies in relation to the losses to which their claims relate, and stands in the shoes of those clients and may exercise their rights - even without taking an assignment of the right - in the names of the clients. [2]
1. Pursuant to Corporations Act, s 889C(2), the assets of the NGF are held on trust by SEGC for the purposes of Division 4 of Part 7.5 of the Corporations Act and the corresponding regulations in Division 4 of Part 7.5 of the (CTH) Corporations Regulations 2001.
2. Corporations Act, s 892F.
The fifth defendant (“Nadin”) represents all BBY clients with an account established in connection with financial products offered by IBL. The interest of the Nadin class was essentially resolved by directions made on an uncontentious basis on 5 December 2016, and they did not participate in the final hearing.

The preliminary questions

On 7 March 2016, it was ordered that it be determined, as a separate question, whether certain funds – called the Returned Collateral and the Erroneous Withdrawals - should be paid out to the class of ETO clients who had open positions as at 15 May 2015, being the class represented by Mazzetti. The separate questions, and an Interlocutory Process filed by the Liquidators on 8 March 2016 seeking additional directions were heard on 22 and 23 March 2016. In a judgment delivered on 27 September 2016 (“the first judgment”), [3] with which this judgment should be read, I concluded (inter alia) that:
3. In the matter of BBY Limited (Receivers and Managers appointed) (in liquidation) [2016] NSWSC 1366.

it was not possible to conclude at that stage that the Returned Collateral was held exclusively on behalf of the Mazzetti class;

however, the Erroneous Withdrawals were paid in error into a particular CSA (called the 541 Account) when they ought to have been paid into a separate post-administration account, and/or having been received post-administration were not subject to the (CTH) Corporations Regulations 2001 reg 7.8.03(6) regime, and were held on a separate trust, and ought to be returned to the beneficiaries of that trust, being the Mazzetti class;

the separate question should therefore be answered in the negative in respect of the Returned Collateral, but in the affirmative in respect of the Erroneous Withdrawals;

the Liquidators would apparently be justified in returning payments made by or on behalf of clients into BBY's CSAs on or after 18 May 2015, where the purpose for which the payment was made failed (“Post-appointment Erroneous Deposits”).

On 12 October 2016, further directions were made to give effect to the first judgment, including that the Liquidators would be justified, in respect of the Erroneous Withdrawals and Post-appointment Erroneous deposits, in treating clients in respect of payments of $100 or less, as having no entitlement to receive a distribution in respect of that payment. On 9 November 2016, the Court made an order that, inter alia, the Liquidators would be justified in converting the balance of CSAs for the FX, Futures and Saxo product lines denominated in foreign currency into Australian dollars.
On 5 December 2016 the Court made orders that:

the Liquidators would be justified in treating assets held by IBL (BBY's counterparty in respect of the IBL product line), and the balance of a CSA known as the "IB Buffer account", as beneficially owned by all BBY’s IBL clients; and

the Liquidators would be justified in distributing the cash proceeds of realisation of those assets to BBY’s IBL clients, subject to those clients being afforded an opportunity to assert and prove an in specie claim to particular assets held by IBL.

The remaining issues for determination

The issues that remain for determination in the Liquidators’ Application are:

(Calculation of entitlements) how (and in particular at what date) each client's "entitlement" to CSAs and Recoveries should be calculated.

(Distribution of CSAs) the manner in which funds in the CSAs should be distributed having regard to Corporations Regulations, reg 7.8.03, and in particular whether the Liquidators should group or pool all (or some) of the CSAs and apply reg 7.8.03(6) to such groups or pools, or whether reg 7.8.03(6) should be applied separately to each CSA.

(Distribution of Recoveries) whether some or all of the Recoveries are beneficially owned by BBY or held on trust for its clients, and how the Recoveries should be distributed having regard to the Corporations Regulations (to the extent that such Recoveries are found to be held for the benefit of BBYL's clients). This includes whether the Mazzetti class is entitled to the Returned Collateral to the exclusion of other BBY clients.

(Set off) whether the Liquidators are entitled to set off positive net account balances against negative net account balances in all accounts owned by the same BBY Group client.

(Low balances) whether the Liquidators are justified in treating clients with an account balance of $100 (or some other amount) in a CSA or Recovery or less as having no entitlement to participate in the relevant CSA or Recovery.

(Interest) whether interest earned on CSAs and Recoveries is beneficially owned by BBY or held on trust for its clients.

Meanwhile, by Originating Process filed on 10 March 2016 in proceedings 2016/77316 (“the Receivers’ application”), the Receivers sought (by way of directions under Corporations Act, s 424, and the advice, opinion and direction of the Court pursuant to Trustee Act, s 63, guidance as to whether they would be justified in causing BBY to pay St George Bank an amount of $710,126.10 presently on deposit in the 541 Account, on the basis that those funds were subject to its charge. However, by their supplementary submissions dated 1 December 2016, the Receivers confirmed that they no longer claimed $710,126.10, but only $161,228.64. The Receivers relied on their written submissions and were excused from attendance at the hearing.

DISTRIBUTION OF CLIENT SEGREGATED ACCOUNTS - POOLING

The principal matter of contention is the manner in which funds in the CSAs should be distributed, having regard to Corporations Regulations, reg 7.8.03, and in particular whether the Liquidators should group or pool all (or some) of the CSAs and apply reg 7.8.03(6) to such groups or pools, or whether reg 7.8.03(6) should be applied separately to each CSA.
Excluding the IBL line, there are total funds and recoveries held for BBY clients of about $25.2 million, and claims on them of about $43 million, a shortfall of about $17.8 million. In the Equities/ETOs CSAs there are funds of $14.5 million and claims of $14.4 million, a surplus of about $100,000. In Futures, FX, Saxo and Other there are funds of $10.7 million and claims of $28.7 million, a deficiency of $18 million. (In Saxo alone, there are funds of $4.5 million and claims of $12.3 million, a deficiency of $7.8 million).
The current state of the CSAs is the result of many thousands of transactions, commencing from at least 2 December 2011 and continuing until the administration date, including transactions in which funds have moved not only between CSAs within a product line, but also across product lines. The Liquidators, having undertaken an extensive analysis of the accounts and transactions, are not able to reconstitute the accounts so as to identify where the funds contributed by individual clients were located from time to time. It is their evidence - and appears to be common ground - that it is not reasonably and economically practicable to undertake a reconstitution of the accounts from 2 December 2011 and undertake a cash tracing exercise. Mr Vaughan deposes:

it would be an extremely time consuming and expensive exercise for the Liquidators to attempt to identify and trace funds deposited by each client into each individual CSA, and this would at the very least require the retrieval from banks of all bank statements in respect of each CSA since the establishment of those CSAs, assuming this is possible.

There is no dispute that the CSAs corresponding to the same product line should be pooled for the purpose of making distributions in accordance with Corporations Regulations reg 7.8.3(6). However, whether there should be “pooling” across product lines is the subject of controversy. If (as contended by Mr Smith SC and Mr Ng for the third defendant Riseam, who represents the Futures, FX, Saxo and Other clients) the funds held in the CSAs corresponding to the Equities/ETOs product line are pooled with the funds in the CSAs corresponding to the Futures, FX, Saxo and Other lines, the result would be that the $17 million shortfall would be shared by all BBY clients (except the IBL clients). If not (as contended by Mr Williams QC and Mr Parncutt for the first defendant Mazzetti, who represents ETOs clients with open positions as at 15 May 2015, by Mr Brereton SC and Ms Whittaker for the second defendants (Haywoods) who represent Equities clients and ETOs clients without an open position as at 15 May 2015, and by Mr Hutton for the fourth defendant SEGC), the Equities/ETOs clients would be paid in full, and the $17.8 million shortfall would be met by FX, Futures, Saxo and Other clients exclusively.

The statutory framework: Corporations Act and Regulations

Although it will be necessary to discuss various of the provisions later, it is convenient first to summarise the applicable statutory regime, which is established by Corporations Act, Part 7.8, Division 2 (Dealing with Clients’ Money), Subdivision A (Money other than loans) (“Subdivision A”); and Corporations Regulations, regs 7.8.01 - 7.8.05.
Corporations Act, s 981A(1), provides that Subdivision A applies (subject to a number of exceptions) to money paid to a financial services licensee, where the money is paid 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 a client; and 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. The exceptions are in subsections (2), (3) and (4), and include where the money is paid to acquire, or acquire an increased interest in, a financial product from the licensee, whether by way of issue or sale by the licensee (s 981A(2)(c)), as set out below:

981A Money to which Subdivision applies
(1) [Application of Subdivision] This Subdivision applies (subject to subsections (2), (3) and (4)) to money paid to a financial services licensee (the licensee) in the following circumstances:
(a) the money paid in connection with:
(i) a financial service that has been provided, or that will or may be provided, to a person (the client); or
(ii) a financial product held by a person (the client); and

(b) the money is paid:
(i) by the client; or
(ii) by a person acting on behalf of the client; or
(iii) to the licensee in the licensee’s capacity as a person acting on behalf of the client.

(2) [Limitation on application of subdiv] This Subdivision does not apply to money paid as mentioned in subsection (1) to the extent that:
(a) the money is paid by way of remuneration payable to the licensee, or the licensee is entitled to deduct such remuneration from the money; or
(b) the money is paid:
(i) to reimburse the licensee for payments made to acquire, or acquire an increased interest in, a financial product; or
(ii) to discharge a liability incurred by the licensee in respect of the acquisition of a financial product or an increased interest in a financial product, or to indemnify the licensee in respect of such a liability; or

(c) the money is paid to acquire, or acquire an increased interest in, a financial product from the licensee, whether by way of issue or sale by the licensee; or
(ca) the licensee is a licensed trustee company, and the money is paid to the licensee in connection with traditional trustee company services provided by the licensee; or
(d) Subdivision B (loan money) applies to the money.

Note: Money excluded by paragraph (c) is covered by section 1017E.
(3) [Where payment does not constitute money to which subdiv applies] If a person pays money to a financial services licensee in order for it to be deposited to the credit of a deposit product held by the person or another person with the licensee, that payment does not constitute money to which this Subdivision applies.
(4) [Regulations may exempt or modify] The regulations may:
(a) exempt money paid in specified circumstances from some or all of the provisions of this Subdivision; or
(b) declare that this Subdivision applies in relation to money paid in specified circumstances as if specified provisions of this Subdivision were omitted, modified or varied as set out in the regulations.

(5) [Exemption may be subject to conditions] An exemption in regulations made for the purposes of paragraph (4)(a) may be made subject to conditions specified in, or imposed in accordance with, the regulations. The regulations may provide for consequences of a contravention of a condition.

Section 981B(1) obliges a licensee to ensure that money to which Subdivision A applies (“Subdivision A money”) is paid into a segregated account:

981B Obligation to pay money into an account
(1) [Licensee’s obligation to pay applicable money into certain account] The licensee must ensure that money to which this Subdivision applies is paid into an account that satisfies these requirements:
(a) the account is:
(i) with an Australian ADI; or
(ii) of a kind prescribed by regulations made for the purposes of this paragraph;

and is designated as an account for the purposes of this section of this Act; and
(b) the only money paid into the account is:
(i) money to which this Subdivision applies (which may be money paid by, on behalf of, or for the benefit of, several different clients); or
(ii) interest on the amount from time to time standing to the credit of the account; or
(iii) interest, or other similar payments, on an investment made in accordance with regulations referred to in section 981C, or the proceeds of the realisation of such an investment; or
(iv) other money permitted to be paid into the account by the regulations; and

(c) if regulations made for the purposes of this paragraph impose additional requirements — the requirements so imposed by the regulations; and
(d) if the licence conditions of the licensee's licence impose additional requirements — the requirements so imposed by the licence conditions.

The money must be paid into such an account on the day it is received by the licensee, or on the next business day.
(2) [Number of accounts] The licensee may, for the purposes of this section, maintain a single account or 2 or more accounts.

Section 981C provides that the Regulations may deal with various matters relating to accounts maintained for the purposes of s 981B, including (s 981C(a)) the circumstances in which payments may be made out of an account:

981C Regulations may deal with various matters relating to accounts maintained for the purposes of section 981B
The regulations may deal with all or any of the following in relation to accounts, or a class of accounts, maintained for the purposes of section 981B:
(a) the circumstances in which payments may be made out of an account (including the circumstances in which money may be withdrawn and invested, and the kinds of investment that may be made);
(b) the minimum balance to be maintained in an account;
(c) how interest on an account is to be dealt with;
(d) how interest or other earnings on an investment of money withdrawn from an account, or the proceeds of the realisation of such an investment, are to be dealt with.

In that behalf, reg 7.8.01(5) amplifies the requirements of s 981B by providing that the licensee must operate and designate the segregated account as a trust account, and hold all moneys paid into it (other than moneys paid under the licensee's obligation to call margins from clients under, inter alia, the operating rules of a licensed market) on trust for the benefit of the person entitled to the moneys:

(5) For paragraph 981B(1)(c) of the Act, a financial services licensee must:
(a) operate an account to which that paragraph applies as a trust account; and
(b) designate the account to be a trust account; and
(c) hold all moneys paid into the account (other than moneys paid to the financial services licensee under the financial services licensee's obligation to call margins from clients under the market integrity rules, the operating rules of a licensed market or the operating rules of a licensed CS facility) on trust for the benefit of the person who is entitled to the moneys

Regulation 7.8.02(1), makes provision for permissible withdrawals from accounts maintained for the purposes of s 981B:

(1) Withdrawals from account For paragraph 981C(a) of the Act, payments may be made out of an account maintained for section 981B of the Act in any of the following circumstances:
(a) making a payment to, or in accordance with the written direction of, a person entitled to the money;
(b) defraying brokerage and other proper charges;
(c) paying to the financial services licensee money to which the financial services licensee is entitled
(d) making a payment of moneys due to an insurer in connection with a contract of insurance;
(e) making a payment that is otherwise authorised by law;
(f) paying to the financial services licensee money to which the financial services licensee is entitled pursuant to the market integrity rules or the operating rules of a licensed market.

Section 981D provides for another situation in which Subdivision A money can be used (even though it is in a s 981B account), namely that if the relevant financial service is or relates to a dealing in a derivative, or the relevant financial product is a derivative, the money concerned may also be used for the purpose of meeting obligations incurred by the licensee in connection with margining, securing or settling dealings in derivatives by the licensee, including dealings on behalf of people other than the client:

981D Money related to derivatives may be used for general margining etc purposes
Despite anything in regulations made for the purposes of section 981C, if:
(a) the financial service referred to in subparagraph 981A(1)(a)(i) is or relates to a dealing in a derivative;
(b) the financial product referred to in subparagraph 981A(1)(a)(ii) is a derivative;

the money concerned may also be used for the purpose of meeting obligations incurred by the licensee in connection with margining, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives by the licensee (including dealings on behalf of people other than the client).

In the first judgment, I concluded that while this means that no breach of trust was involved in a licensee using moneys paid by one derivatives client to meet a call for cover relating to other derivatives clients, it does not mean that the licensee is entitled to treat client moneys as its own, so as to extinguish the rights of the clients to whom they initially belonged and who deposited them - the permission is to use the money for limited purposes, not to appropriate it. On the other hand, as it would be curious if, by permissibly using one client’s moneys to fund an obligation owed in respect of another, the other could unwittingly become a trustee for the first, and as there is no direct relationship between the two clients, the preferable analysis is that where a licensee permissibly uses the funds of one client to meet the margin or security obligations of another, the licensee becomes a borrower from the first and a lender to the second client. In other words, the licensee (permissibly) borrows from the trust account, and lends to another client; but the first client does not have a right to trace the money into the hands of the second. [4]
4. In the matter of BBY Limited (Receivers and Managers appointed) (in liquidation) [2016] NSWSC 1366 at [91]-[93].
Section 981E protects Subdivision A money from attachment, except at the suit of the person entitled to it:

981E Protection of money from attachment etc
(1) [Application of section] This section applies to:
(a) money to which this Subdivision applies that has been paid to the licensee, both while it is in an account maintained for the purposes of section 981B and before and after it is paid into such an account; and
(b) other money in such an account as permitted by paragraph 981B(1)(b); and
(c) investments made in accordance with regulations made for the purposes of section 981C.

(2) [Limitations on dealing with applicable money and investments] Money and investments to which this section applies are not capable:
(a) of being attached or otherwise taken in execution; or
(b) of being made subject to a set-off, security interest or charging order, or to any process of a similar nature;

except at the suit of a person who is otherwise entitled to the money or investment.

Section 981F provides that the Regulations may include provisions as to how funds held are to be dealt with “if the licensee becomes insolvent, within the meaning of the regulations”:

981F Regulations may deal with how money to be dealt with if licensee ceases to be licensed etc
The regulations may include provisions dealing with how money in an account maintained for the purposes of section 981B, or an investment of such money, is to be dealt with if:
(a) the licensee ceases to be a financial services licensee; or
(b) the licensee becomes insolvent, within the meaning of the regulations; or
(c) the licensee merges with another financial services licensee; or
(d) the licensee ceases to carry on some or all of the activities authorised by their licence.

For that purpose, reg 7.8.03 relevantly applies, inter alia, if the licensee “is the subject of … the appointment of an administrator”. It then provides that a trust attaches to the money in the account, and then prescribes the order of application of funds in a s 981B account:

(4) For each person who is entitled to be paid money from an account of the financial services licensee maintained for section 981B of the Act, the account is taken to be subject to a trust in favour of the person.
(5) If money in an account of the financial services licensee maintained for section 981B of the Act has been invested, for each person who is entitled to be paid money from the account, the investment is taken to be subject to a trust in favour of the person.
(6) Money in the account of the financial services licensee maintained for section 981B of the Act is to be paid as follows:
(a) the first payment is of money that has been paid into the account in error;
(b) if money has been received on behalf of insureds in accordance with a contract of insurance, the second payment is payment to each insured person who is entitled to be paid money from the account, in the following order:
(i) the amounts that the insured persons are entitled to receive from the moneys in the account in respect of claims that have been made;
(ii) the amounts that the insured persons are entitled to receive from the moneys in the account in respect of other matters;

(c) if:
(i) paragraph (b) has been complied with; or
(ii) paragraph (b) does not apply;

the next payment is payment to each person who is entitled to be paid money from the account;
(d) if the money in the account is not sufficient to be paid in accordance with paragraph (a), (b) or (c), the money in the account must be paid in proportion to the amount of each person's entitlement;
(e) if there is money remaining in the account after payments made in accordance with paragraphs (a), (b) and (c), the remaining money is taken to be money payable to the financial services licensee.

Section 981G provides:

981G Account provider not liable merely because of licensee's contravention
Nothing in this Subdivision, or in regulations made for the purposes of this Subdivision, makes the body (not being the licensee) that the account is with under paragraph 981B(1)(a) subject to any liability merely because of a failure by the licensee to comply with any of the provisions of this Subdivision or those regulations.

Section 981H provides that Subdivision A money that is paid to the licensee by the client, or by a person acting on behalf of the client, or in the licensee's capacity as a person acting on behalf of the client, is taken to be held in trust by the licensee for the benefit of the client:

981H Money to which Subdivision applies taken to be held in trust
(1) [Money taken to be held in trust] Subject to subsection (3), money to which this Subdivision applies that is paid to the licensee:
(a) by the client; or
(b) by a person acting on behalf of the client; or
(c) in the licensee's capacity as a person acting on behalf of the client;

is taken to be held in trust by the licensee for the benefit of the client.
(2) [Repealed]
(3) [Regulations may exempt or make provisions relating to money to be held in trust] The regulations may:
(a) provide that subsection (1) does not apply in relation to money in specified circumstances; and
(b) provide for matters relating to the taking of money to be held in trust (including, for example, terms on which the money is taken to be held in trust and circumstances in which it is no longer taken to be held in trust).

No regulations of the kind authorised by 981H(3)(a) exempting money from the s 981H trust in specified circumstances have been made.
It is important to observe that while s 981B requires that Subdivision A money be paid into a segregated account, which reg 7.8.01(5) requires be designated and operated as a trust account, s 981H has the effect that all Subdivision A money is taken to be held in trust by the licensee for the benefit of the client – and that does not depend on its being paid into, or remaining in, a s 981B segregated account.
Of the provisions of Subdivision A, in Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq), Gordon J observed:[5]

The effect of these provisions is to create one or more mixed trust funds with special characteristics: they are intended to be used specifically for the provision of financial services and for the holding of and dealing in financial products; they can be used to meet margin calls and to act as security for dealings in derivatives, including dealings on behalf of clients other than the depositing client; however, they cannot be used to satisfy the creditors of the licensee. Such money “is taken to be held on trust by the licensee for the benefit of the client”.

5. (2012) 288 ALR 240; 87 ACSR 442; [2012] FCA 75 at [77]; see also MF Global Australia Ltd (in liq), In the matter of (2012) 267 FLR 27; [2012] NSWSC 994 at [40]. Other cases which have considered Subdivision A include Georges v Seaborn International Pty Ltd (2012) 206 FCR 408; [2012] FCAFC 140 (e.g. at [62]-[72], [196]-[200]); and In the matter of All Class Insurance Brokers Pty Ltd (in liq); Vardy v Westpac Banking Corporation [2014] NSWSC 475 (“All Class Insurance Brokers”) (e.g., at [15]-[27], [39]-[52]) (White J); Warner, Re GTL Tradeup Pty Ltd (in liq) (2015) 104 ACSR 633; [2015] FCA 323.

How the question of pooling arises

As BBYL is insolvent, regulation 7.8.03 applies. In the context of the reference in reg 7.8.03(4) to “an account of the financial services licensee maintained for section 981B”, the singular word “account” in reg 7.8.03(6) is not to be read as referring to the plural. [6] By reg 7.8.03(4), each s 981B account is taken to be subject to a trust in favour of each person who is entitled to be paid money from that account. The order of distribution, provided by reg 7.8.03(6), requires that (after payment out of money paid in in error, and of insurance proceeds to the insured), “the next payment is payment to each person who is entitled to be paid money from” that account, and if the money is insufficient to pay in full, then pari passu.
6. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [45] - [47].
Thus to have a right to payment under reg 7.8.03(6)(c) and (d) out of a particular CSA, a claimant on the fund must demonstrate an “entitlement” to money in that account. Neither the Act nor the Regulations define what is meant by “who is entitled to be paid money” or its equivalents. [7] However, general principles of trust law relevant to determining entitlement will apply, insofar as they are not displaced or modified by the statutory regime. [8]
7. See In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [100] - [101].
8. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [102]; Vardy v Westpac Banking Corporation [2014] NSWSC 475 (“All Class Insurance Brokers”) at [47] and [48].
Because regulation 7.8.03(6) applies individually to each s 981B account maintained by an insolvent licensee, and does not provide for all the licensee’s 981B accounts to be pooled and dealt with collectively, it does not authorise the pooling of accounts for the purposes of distribution. However, pooling has been permitted where there has been a mixing of funds,[9] particularly if the accounts in question “can no longer practically or economically be the subject of a cash tracing exercise”. [10]
9. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240 at 262-263 [82-86]; 87 ACSR 442; [2012] FCA 75; In the matter of MF Global Australia Ltd (in liq)(2012) 267 FLR 27 at 45-48 [49]-[55]; [2012] NSWSC 994.
10. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240 at 264 [92]; 87 ACSR 442; [2012] FCA 75.
It is in that context that the Liquidators seek directions and/or declarations as to the manner in which funds in each CSA should be distributed, and in particular whether they should group (or “pool”) all or some of the CSAs and apply reg 7.8.03(6) to the pooled accounts, or whether reg 7.8.03(6) must be applied separately to each CSA.

The basis on which “pooling” is permitted

As has been foreshadowed, although the reference to an “account” in reg 7.8.06 is to a singular s 981B account not to pooled “accounts”, pooling has been held to be permissible in a number of cases. As Black J observed in MF Global,[11] the term “pooling” in this context may not be entirely apt, but includes at least the application of reg 7.8.03(6) to multiple CSAs, where the funds in those CSAs have already been mixed. As will appear, although informed by equitable principles pertaining to deficient mixed funds, pooling is directed on pragmatic grounds.
11. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [44].
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. Thus in principle it will 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.

A pragmatic remedy

Although not concerned with the pooling of multiple accounts, Re French Caledonia Travel Service Pty Ltd [12] is an important starting point, because it demonstrates that in a liquidator’s application for directions, courts often have to do “rough justice” by reason of the limitations of the available evidence, in the light of what is reasonably practical and economical, and judgments may be made on evidence much inferior to that which would be required to sustain a beneficiary’s claim in adversarial proceedings. Campbell J (as he then was) explained that while a liquidator must distribute the company’s funds – or funds under its control as a trustee - in accordance with the legal entitlements of people to those funds, findings as to what those legal entitlements are depend upon the evidence and inferences properly drawn from it, and where a liquidator seeking to administer a fund knows no more than that the fund is held on trust and that there are a number of potential claimants whose merits he cannot on any rational basis distinguish between, a liquidator may be justified in distributing the fund amongst the claimants proportionately to their claims, and it may be appropriate to direct the liquidator accordingly:

[186] As Crace-Calvert's Case and Sinclair v Brougham show, it is possible for there to be tracing which does not depend upon identifying the transmogrifications which the assets of a particular beneficiary have gone through. Sometimes, a liquidator seeking to administer a fund will know nothing more than that the fund is held on trust, and that there are a number of potential claimants to the fund, whose merits he cannot on any rational basis distinguish between. In such a situation, it may be appropriate for the court to direct a liquidator that he is justified in distributing the fund amongst the claimants proportionately to their claims. It is relevant to this that in Sinclair v Brougham the fact of monies being mixed was enough for the House to decide that there should be a pro rata distribution, and the paucity of evidence meant that there was no reason to depart from a pro rata distribution.
[187] Sometimes, however, there might be facts which show that claimants fall into particular classes, such that the amount of the charge which one class has on the assets which remain is likely to be a smaller proportion of the amount of their money which went in than is the case with another class. If, for instance, there was a time when a trust account was completely depleted, beneficiaries whose money went into that trust account before the day of depletion could not have any equitable right at all to the sum which stands in the account at the date of trial. If the account in which the mixing occurred at any time reached a particularly low level, it may be that those people whose money was paid into the account before that low level was reached ought be accorded a smaller dividend on the amount of their claim than people whose money was paid in after that low level was reached. In carrying out such calculations, estimation and inference can be appropriate if precise evidence is not available.
[188] Sometimes, likewise, there might be facts which showed that claimants fall into particular classes such that one class has a higher priority for the charge it can establish than does the other class.
[189] While a liquidator must distribute funds of the company, or under his control through the company being trustee of trusts, in accordance with legal entitlements of people to those funds, the court's findings about what legal entitlements exist depend upon the evidence which is placed before the court, and inferences properly drawn from that evidence. When distribution of a fund is made by reference to classes of claimants, the available evidence is frequently evidence about the nature of a fund and the types of contribution which have gone into it. It is because the evidence is at this level of generality that the court reaches conclusions about the beneficial ownership of the fund by saying that it is divided amongst claimants in some particular way. If ever the court is able to give a remedy founded on tracing some individual claimants, it is because evidence is available which enables the property of those individual claimants to be more specifically traced. It should not be a cause for surprise that evidence of these different types can lead to different types of conclusion.
[190] It is possible to recognise that, on the basis of evidence of a liquidator's investigations taken to a certain stage, distribution among claimants proportionately to their claims is proper, while at the same time recognising the theoretical possibility that further investigation might turn up facts which showed, in some way, inequality amongst the various claims. If ever a liquidator is in significant doubt about whether he ought conduct further investigations to see whether any such facts emerge, he can always ask the Court for directions on that topic.
12. (2003) 59 NSWLR 361 at 420-1; 204 ALR 353; 48 ACSR 97; [2003] NSWSC 1008 at [186].

Thus the liquidator – and the Court – has to do the best it can with the available evidence. One reason for that is that the fund has to be distributed, one way or another.
In Sonray,[13] in an application under Corporations Act, s 511, and (VIC) Trustee Act 1958, s 63, by the liquidators of Sonray Capital Markets Pty Ltd (who, like the present Liquidators, had become liquidators following an initial appointment as voluntary administrators) Gordon J directed, apparently under s 511, that the liquidators pool various assets, including the client segregated accounts, into a single client fund for the purpose of distribution. Having observed that “[w]here a licensee ceases to be licensed, or becomes insolvent, reg 7.8.03(6) of the regulations determines how money in “the account” of the licensee maintained for the purposes of s 981B is to be paid”,[14] her Honour proceeded to hold that in circumstances where it was not possible to work out precisely who is entitled to what moneys in particular segregated accounts, all the Court could do was to permit the moneys in the segregated accounts to be pooled with a view to their proportionate distribution:[15]

[82] In the present case, applying these provisions of the Corporations Act and the regulations is not straight forward. First, the words “entitled” and “entitlement” are not defined in the Corporations Act or the regulations. Given the statutory trust imposed by s 981H(1) of the Corporations Act, the liquidators submitted (and I accept) that these words import the principles applicable to trusts and, in particular, to deficient mixed trust accounts: compare Re Lehman Brothers at [67]–[72] and [181] .
[83] Those principles provide that all contributors to a deficient mixed fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions, subject to any dealings and costs (Sutherland Re; French Caledonia Travel Services Pty Ltd (in liq) (2003) 59 NSWLR 361; 204 ALR 353; 48 ACSR 97; [2003] NSWSC 1008 (French Caledonia) and Australian Securities and Investments Commission v Letten (No 7) (2010) 190 FCR 59; 80 ACSR 401; [2010] FCA 1231 (Letten (No 7))) or are equitable tenants in common of the mixed fund as a whole, including its traceable proceeds, and subject to such deductions: R M Goode, Goode on Legal Problems of Credit and Security, 4th ed, Sweet & Maxwell/Thomson Reuters, London, 2008, at [6-11 - 6-14].
[84] Next, the Corporations Act and the regulations do not deal with the situation where it is not possible to work out precisely who is entitled to what moneys in particular segregated accounts. It was common ground that all the court can do in such circumstances is to permit the moneys in the segregated accounts to be pooled with a view to their proportionate distribution. The basis for the rateable distribution is the mixing of the funds: French Caledonia at [127] and [187] .
[85] Such a course of action is consistent with the purpose of the statutory regime, namely the achievement of a fair outcome between clients by a pragmatic and even-handed distribution among them: see, by way of example, s 983E of the Corporations Act which provides that where the money received is insufficient to pay all proved claims, the court may “despite any rule of law or equity to the contrary, apportion the money among the claimants in proportion to their proved claims and show in the scheme how the money is so apportioned” and the second reading speeches in relation to the Financial Services Reform Bill 2001 (Cth) which indicate that the legislation was designed to produce a harmonised regulatory regime for market integrity and consumer protection across the financial services industry.
[86] Of course, rateable distribution is subject to an important qualification — it does not apply if the claimants do not have equal claims: French Caledonia at [176] and [185]. Put another way, it is necessary to determine whether there should be differential treatment of claimants. That question is determined on available evidence. Thus, if a claimant can establish a remedy founded on tracing, the court will grant relief founded on that evidence because it permits it to reach a different conclusion in respect of that claimant: French Caledonia at [178], [187] and [189].
13. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442; [2012] FCA 75
14. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442 at 464 [78]; [2012] FCA 75.
15. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442 at 464-5; [2012] FCA 75

Those opposing pooling submitted that at this point, Gordon J was speaking of the application of reg 7.8.03(6) to a particular segregated account, in the context that entitlements to the moneys in that account could not be worked out precisely, and that those observations were not addressed to the pooling of multiple accounts to be treated as one for the purposes of distribution under that regulation. However, I do not accept this. Her Honour refers (in [84]) to permitting “the moneys in the segregated accounts to be pooled with a view to their proportionate distribution”; and the reference to accounts in the plural is consistent with how her Honour then proceeded:[16]
16. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442 at 466-7; [2012] FCA 75.

a Balances in the segregated accounts
[91] As discussed at [48] above, there were at least 1049 defalcations which directly or indirectly affected the funds held in the ANZ AUD segregated account. Due to the nature, number and frequency of the defalcations and the number and frequency of legitimate deposits, withdrawals, transfers, dealings and trading by Sonray clients, officers and providers, that account cannot practically or economically be the subject of a cash tracing exercise.
[92] When Sonray client money from the ANZ AUD segregated account was transferred into other segregated accounts, or was used for trading by Sonray clients who had deposited money into another segregated account for that purpose (the tainted transactions), those segregated accounts became “tainted” with both the deficiency in the ANZ AUD segregated account and the equitable joint charge over, or the equitable tenancy in common in, the money transferred or the money deposited but not used in the trading: see [83] above. Those accounts share with the ANZ AUD segregated account the character of being irreversibly deficient and mixed and too can no longer practically or economically be the subject of a cash tracing exercise.
[93] Indeed, the liquidators’ investigations revealed that:
(1) transfers of funds to and from providers occurred predominantly through the ANZ segregated accounts listed at [8] above, notwithstanding that deposits from Sonray clients in respect of margin calls and anticipated trades were made into other segregated accounts, for example, one of the HSBC AUD segregated accounts;

(2) money from the ANZ AUD segregated account was transferred into other accounts, including the ANZ USD segregated account, which in turn was subject to transfers into the ANZ Euro segregated account and the Macquarie cash management account;
(3) according to Sonray’s cash management manual, the ANZ AUD segregated account was to be used for deposits of USD, GBP, EUR, NZD and JPY, notwithstanding that separate bank accounts denominated in those currencies were maintained;
(4) money was transferred between foreign currency segregated accounts as and when requested by a Sonray client and not necessarily in connection with trading;
(5) Sonray clients were permitted to make withdrawals of USD from the ANZ USD segregated account notwithstanding that they had not deposited USD into that account; and
(6) all margin calls by Saxo in relation to all trading through that provider were met from the ANZ AUD segregated account and, on at least one occasion, the ANZ USD segregated account, irrespective of individual Sonray clients and their trading and the currency in which trading was denominated.
[94] For those reasons, the tainted segregated accounts (see [12] above) must be pooled before Sonray client entitlements can be meaningfully calculated and entitlements distributed. The pooled tainted segregated accounts (the pool), after deductions for any set-offs, net offs and liquidators’ remuneration and expenses (as defined in Annex B), must be distributed rateably to those Sonray clients who contributed to the tainted segregated accounts, either by operation of r 7.8.03(6)(d) or by application of the relevant equitable principles: see [83] above.

Moreover, the order ultimately made by her Honour was in respect of the segregated accounts collectively:[17]

(1) The liquidators are directed to pool the following assets into the client fund:
(1.1) the segregated accounts (but excluding the funds held in the HSBC USD Singapore segregated account, being account number 260-696760-178 held at the Singapore branch of HSBC);
(1.2) the Saxo shares (but excluding shares referred to in order 6) to the extent they come within the liquidators’ control;
(1.3) the Interactive Broker balances (but excluding shares referred to in order 6);
(1.4) the recovered money.
17. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442 at 504-5 [307]; [2012] FCA 75.

Sonray proceeds on the principle that “all contributors to a deficient mixed fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions, subject to any dealings and costs … or are equitable tenants in common of the mixed fund as a whole, including its traceable proceeds, and subject to such deductions”. [18] Thus a person who deposits money in a trust account, whose money by reason of subsequent transactions becomes mixed in a deficient second trust account, thereby acquires an equitable charge over all of the moneys in the second account, and so can be said to be “entitled” to money in the second account. In Sonray, the transfers of client money from one segregated account to others “tainted” the others with both the deficiency in the first account and the equitable joint charge over, or the equitable tenancy in common in, the money transferred; and because they could no longer practically or economically be the subject of a cash tracing exercise, they could be regarded as irreversibly deficient and mixed, and treated as one fund and pooled.
18. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240 at 262 [83]; 87 ACSR 442 at 504-4 [307]; [2012] FCA 75, citing Re French Caledonia Travel Service Pty Ltd (2003) 59 NSWLR 361; 204 ALR 353; 48 ACSR 97; [2003] NSWSC 1008 and Australian Securities and Investments Commission v Letten (No 7) (2010) 190 FCR 59; 80 ACSR 401; [2010] FCA 1231.
That is not to say that once mixing is established, pooling must follow. In MF Global, Black J, having observed that reg 7.8.03(6) “does not seem to contemplate pooling of accounts in the ordinary course”,[19] and that there was “no reason to read reg 7.8.03(6) in a manner which would require pooling where more than one account had been maintained as permitted by s 981B(2), but those accounts had in fact been maintained separately so that there was no mixing of funds between them”,[20] continued:

[49] This conclusion does not, however, prevent the court directing the Liquidators that pooling is appropriate in a particular case, at least where there has been mixing of funds across the relevant accounts. In Sonray, Gordon J permitted the pooling of accounts maintained for the purpose of s 981B. Her Honour noted (at [78]) that “[w]here a licensee ceases to be licensed, or becomes insolvent, reg 7.8.03(6) of the regulations determines how money in “the account” of the licensee maintained for the purposes of s 981B is to be paid”. Her Honour also noted (at [84]–[85]) that:
Next, the Corporations Act and the regulations do not deal with the situation where it is not possible to work out precisely who is entitled to what moneys in particular segregated accounts. It was common ground that all the court can do in such circumstances is to permit the moneys in the segregated accounts to be pooled with a view to their proportionate distribution. …
Such a course of action is consistent with the purpose of the statutory regime, namely the achievement of a fair outcome between clients by a pragmatic and even-handed distribution amongst them: …
19. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [47]
20. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [48].

His Honour observed that “the case law has recognised that, where there are relatively clear property interests in particular property, this cannot "be altered by reference to some notion of common misfortune",[21] and that “accounts should only be pooled … if mixing or another proper basis for pooling is established”. [22] His Honour directed pooling in the context of findings that “it would not be possible, or at least would not be practicable in a cost-effective way, to calculate the portion of the balance of each CSA attributable to any individual client”,[23] and that “distribution by account would be impractical or inappropriate, since the balance of all of the CSA accounts as at the Appointment Date has been affected by one or more of these transactions, … [which] resulted in a mixing of the CSAs”. [24]
21. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [78]; citing Russell-Cooke Trust Co v Prentis [2002] EWHC 2227; [2003] 2 All ER 478 at [44]; Australian Securities Commission v Buckley (1996) 7 BPR 15,024; Re Magarey Farlam Lawyers Trust Accounts (No 3) [2007] SASC 9; (2007) 96 SASR 337 at [123], [145]; S B Thomas, "Clayton's Case and the 'Common Pool' Exception (2004) 15 JBFLP 177 at 183.
22. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [78]-[79].
23. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [50].
24. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [52].
While his Honour refers to “another proper basis”, all the cases appear to involve mixing. As his Honour explained,[25] in this context a “mixed fund” is one that contains funds from more than one source; [26] and while the typical case involves mixing “across accounts”,[27] there is also “mixing” where funds of one trust are applied to meet obligations of another:[28]

In Re Global Finance Group Pty Ltd (in liq) [2002] WASC 63; (2002) 26 WAR 385 at [97], McLure J observed that a "mixed fund" is "one which contains funds from more than one source". The cases in which pooling has been sanctioned typically involve the mixing of funds across accounts: Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082; Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231; (2010) 190 FCR 59; (2010) 80 ACSR 401. However, mixing may also be established where funds in one trust have been applied to meet obligations of another trust. In Australian Securities and Investments Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719 at [21], Austin J referred to mixing in that sense, although also noting that there had also been a physical mixing in bank accounts in that case. That approach was also adopted by Gordon J in Sonray at [92], when her Honour observed that one segregated account in the case was "tainted" when it was, inter alia, used for trading by clients who had deposited money into another segregated account. The corresponding situation here is where the Australian-based CSAs are used for payment of commission and fees referable to trading by MFGS (and ultimately its clients) who had deposited monies to the Singapore-based accounts, as I will note below.
25. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [79].
26. Re Global Finance Group Pty Ltd (in liq) (2002) 26 WAR 385 at [97] (McLure J).
27. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [79].
28. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC at [79], citing Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082; Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231; (2010) 190 FCR 59; (2010) 80 ACSR 401; Australian Securities and Investments Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719 at [21].

In respect of a particular sub-set of the accounts in question (the “Singapore-based accounts”), his Honour explained:[29]

These transactions do not involve the deposit of funds from the Australian based CSAs to the Singapore-based accounts. However, if too much was withdrawn from the Singapore-based accounts by way of margin, then monies subject to the statutory trust over the Singapore-based accounts were applied to meet obligations which should properly have been met from the Australian-based CSAs; and, if too little was withdrawn, monies subject to the statutory trust over the Australian-based CSAs were applied to meet obligations which should properly have been met from the Singapore-based accounts. The deposit of receipts from hedging to the Australian-based CSAs in turn gives rise to a potential diminution of the Singapore-based accounts.
29. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [84]

His Honour continued (emphasis added):[30]

On balance, I have concluded that the case for pooling the Singapore-based accounts has been established. I would not have considered that the small number and size of money transfers from the Australian-based CSAs into the Singapore-based accounts were sufficient, without more, to warrant a direction for pooling. However, it seems to me that direction is justified by the fact that commission and fees for MFGS (and its clients) who had deposited monies to the Singapore-based accounts was paid, by excess funds transfers, from the Australian-based CSAs. I do not think it is [an] answer to that fact that, as MFGS contends, the position of the trust over the Australian-based CSAs could at least partly (where MFGS is in liquidation) be restored by a claim by MFGA against MFGS for liabilities of the Singapore-based accounts which were in fact met out of the Australian based CFD CSAs.
I am reinforced in that view by the fact that payment of margins and recoveries appear to have proceeded on the basis that the Australian based CFD CSAs and the Singapore-based accounts were treated as integrated accounts, consistent with the fact that margins were paid on a nett basis across the CFD Product Lines rather than separately by reference to trading by MFGS and other CFD clients of MFGA. The amount of any overpayment or underpayment of margins from the trust over the Singapore-based accounts is unknown and probably unknowable (because margins were paid on a nett basis rather than a client basis) and the amount of any overpayment of recoveries to the Australian-based CSAs is also unknown. In the absence of pooling, it is very likely, and possibly inevitable, that the trust over one of those accounts will benefit at the expense of the other, although it is not known from the evidence which will be the winner and which the loser. This also seems to me to be a strong reason to order pooling of the Singapore-based accounts with the Australian-based CFD CSAs.
30. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [86]-[87].

The second emphasised passage was relied upon for the proposition that the fact that the trustee in fact deals with the segregated accounts on an “integrated” basis may weight in favour of pooling. I do not think that is what his Honour was saying; rather, it was an observation that this treatment of the accounts had contributed to making the calculation of any amount to be restored to the donor accounts practically impossible. There is no good reason why a trustee’s disregard of its legal obligation to keep the funds separate should favour pooling them, if they would not otherwise be pooled.
The importance of the first and emphasised passages is that they show that questions of degree are involved (so that a small number of small transfers may not have warranted pooling), and that one of the objects is to avoid a situation in which one trust benefits at the expense of another. This is consistent with the observation of Lord Millett in Foskett v McKeown: [31]

As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied …
Innocent contributors, however, must be treated equally inter se. Where the beneficiary’s claim is in competition with the claims of other innocent contributors, there is no basis upon which any of the claims can be subordinated to any of the others.
31. [2001] 1 AC 102 at 132.

Pooling does not necessarily produce such a result, particularly where there are two funds, one with a large deficiency, and one with no deficiency, and the mixing has been of a small amount (relative to the total funds). Assume there are two funds, each with 100 beneficiaries each of whom contributed $1. At the distribution date, fund A balances, but fund B is deficient by $50, one of several reasons for which is a transfer of $10 in breach of trust to fund A. The beneficiaries of fund B would have an equitable charge over fund A, for $10. However, pooling the two funds would treat fund B as entitled to 50% of fund A (and fund A to 50% of fund B). That illustrates why the yardstick must be whether 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 that it is reasonable to regard each as having a rateably equal interest in the mixed fund.
In MF Global, Black J observed that, at least in the case of a court-ordered winding-up, the pooling of CSAs could be effected by a direction under Corporations Act, s 479, permitting the liquidators to make a distribution in a manner which did not comply strictly with reg 7.8.03(6), on the basis that to do so would be ‘a wise and commercial breach of trust’:[32]

[55] I note that the same result could be reached, as Underdog points out, by the court making a direction under s 479 of the Corporations Act permitting the Liquidators to make a distribution in a manner which did not strictly comply with reg 7.8.03(6), so far as accounts were pooled on an appropriate basis and that course amounted to “a wise and commercial breach of trust”: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 213. It is not necessary for present purposes to express a view as to whether such a direction could be made under s 511 of the Corporations Act. While Young J held to the contrary in Dean-Willcocks v Soluble Solution Hydroponics above, that view was not followed by Warren CJ in Handberg (in his capacity as liquidator of S&D International Pty Ltd (in liq)) v MIG Property Services Pty Ltd above at [9]–[15].
32. In the matter of MF Global Australia Ltd (in liq) (2012) 267 FLR 27 at 48 [55]; [2012] NSWSC 994

This illustrates the pragmatic basis for the pooling remedy, which also appears from the judgment of Gordon J in Australian Securities and Investments Commission (ASIC) v Letten (No 7), [33] albeit in the context of an unregistered managed investment scheme. While acknowledging that generally, the Court’s power (under Corporations Act, s 601EE(2)) “to make any orders it considers appropriate for the winding up of the scheme” does not authorise a distribution of surplus assets of an unregistered managed investment scheme other than to those entitled to the assets in proportion to their entitlements, namely, the members,[34] this general principle yields in cases where it is not pragmatic to ascertain their proprietary rights:[35]

[332] The facts of the present case disclose circumstances which may be classified as exceptional. Circumstances in which the general principle (that there should be no distribution of surplus assets other than to those entitled to the assets in proportion to their relevant entitlements) must yield to pragmatism. Why? Because in the present case, in addition to the matters raised in [250] and [259] above, it is to no one’s advantage that a very long time and very large costs be spent in working out the entitlements and liabilities on a scheme by scheme basis (see [249]–[260] above and Re TVSN Ltd [2005] NSWSC 692 at [17] and following) where:
(1) As a result of the way in which Mr Letten and companies associated with him (including the corporate defendants) conducted the schemes, it is not possible to say now what are the net assets of any scheme and there appear to have been so many inter-scheme transactions that it is not possible to say what assets were acquired by what scheme using whose money.
(2) The receivers have been unable to trace investor contributions because receipts and payments in relation to each scheme were made through four primary LGHA bank accounts and funds frequently were moved between these accounts, the LGHA bank accounts were often in overdraft and payments were commingled.
(3) A number of the schemes were oversubscribed in that the amount of investor contributions in relation to a particular scheme exceeded the funding requirements for that scheme. These oversubscriptions were not refunded or returned to investors: see, by way of example, schemes numbered 14 (Twinview, see [135] above), 8 (Low Head — see [148] above) and 5 (Cimitiere House, see [205] above).
(4) A significant proportion (up to $38 million) of investor contributions to schemes appears to have been used to pay distributions to investors in other schemes in circumstances where there were not sufficient profits or funds in the other schemes to fund payment of distributions: see, by way of example, scheme numbered 18: Aurora Park, see [72] above.
(5) The tracing of funds is further complicated and, I consider, rendered impossible by the lack of reliable financial and accounting data and the estimated cost ($18 million). Such a cost and burden would reduce what is already a limited expected return with no guarantee of any certainty of outcome.
33. Australian Securities and Investments Commission (ASIC) v Letten (No 7) (2010) 190 FCR 59; (2010) 80 ACSR 401; [2010] FCA 1231 at [259], [268], [332] (Gordon J), citing Re TVSN Ltd [2005] NSWSC 692; Australian Securities and Investments Commission v Nelson (2003) 44 ACSR 719; [2003] NSWSC 129; Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; [1999] QSC 387; Australian Securities Investments Commission v Tasman Investment Management Ltd (2006) 59 ACSR 113; 202 FLR 343; [2006] NSWSC 943.

Subject to their entitlement to set-off the amounts owed by any such clients who are debtors, [110] the Liquidators would therefore be justified in proceeding on the footing that the Returned Collateral was received by BBY on behalf of the ETO clients whose position it secured, namely those with open positions as at 15 May 2015 – that is, the Mazzetti class.
110. A few Returned Collateral clients may have been debtors to BBY on the administration date. If they have not contributed the full amount of margin reflected in the Returned Collateral, those debtor clients could not be entitled to participate fully in it, and their debts should be set-off.

THE OTHER QUESTIONS

I turn now to the other issues raised in the Liquidators’ proceedings.

Calculation of entitlements

The question is how each client's "entitlement" to CSAs and Recoveries should be calculated, and the date at which they should be calculated.
In their initial submissions, the Liquidators appeared to propose that while generally entitlements be calculated as at 15 May 2015, being the last trading day before reg 7.8.03(6) was triggered by the appointment of administrators, for ETO positions which open at the administration date and forcibly closed out on 21 and 22 May 2015, the date of closure be the valuation date. This was advanced on grounds of practicality. The first defendants responded that this would produce an inconsistent and unjust result, and that it was not impractical to value all entitlements as at 15 May. In their reply submissions, the Liquidators expressed agreement that the methodology proposed by the first defendants would permit valuation as at 15 May 2015, and that consistency favoured a uniform calculation date. They said they were considering the implications of adopting 15 May in circumstances where settlements occurred on 18 May for the ETO business, and would confer with the First defendants.
The issue was not further addressed in oral submissions, and I infer that it may have been resolved. If it has not, I will allow the parties an opportunity to provide a short submission.

Set-off

The question is whether the Liquidators are entitled to set off positive net account balances against negative net account balances in all accounts owned by the same BBY Group client. The issue arises because some clients may have positive account balances in one product line but negative account balances in another, that is to say they owe money to BBY as a client debtor. The Liquidators submitted that if necessary there was such a right, but because the relationship between BBY and a client was on a “single account” basis, this was unnecessary. As no party contended against there being such a right of set-off, the following discussion of this issue again largely reflects Mr Healey’s submissions, which, to the extent they are reflected below, I gratefully adopt.
In MF Global, Black J said:[111]

In Sonray, the liquidators sought a direction as to whether they were entitled to set off positive cash balances against negative cash balances in all accounts owned by the same client. Gordon J held (at [115]) that the contractual terms between Sonray and each client entitled the liquidators to set off or nett off positive cash balances with negative cash balances. I do not consider that s 981E of the Corporations Act requires a different result. That section relevantly provides that money to which the Subdivision applies is not capable:
(a) of being attached or otherwise taken in execution; or
(b) of being made subject to a set off, security interest or charging order, or to any process of a similar nature;
except at the suit of a person who is otherwise entitled to the money or investment.
In my view, that section is directed to protecting clients' interests in CSAs against third parties exercising rights of set off against or taking security from the licensee over the CSAs and does not prevent an agreement between a client and a financial services licensee to set off positive and negative balances on different accounts in determining the client's nett position.
…
I am satisfied that MFGA is entitled to exercise a right of set off and I am satisfied that, on balance, it is appropriate for the Liquidators to do so although this will give the affected clients the benefit of 100 cents in the dollar in their positive balances, in the interests of the efficient distribution of the relevant client monies. I will make a direction to that effect.
111. In the matter of MF Global Australia Ltd (in liq)(2012) 267 FLR 27; [2012] NSWSC 994 at [157] and [159].

In the present case, the client agreements (Account terms) give a contractual right of set-off. Moreover, the nature of the arrangement with clients was that the client had a single account, with a sub-account for each particular product traded, and although each sub-account was separately recorded, they formed part of one account.

Contractual right of set off

Each of the following client agreements contains an express contractual right to set off positive and negative account balances.

ASX, APX and International Trading Terms

The ASX Terms contain an express right of set-off. Clause 9.2 authorises BBY to appropriate “credits, payments receipts or amounts to which you are entitled (including amounts standing to the credit of any trading or cash management trust account)” and set them off "against any amount due or owing by you to BBY”. Clause 9.3 provides that credits in respect of sales are not available until the latest of certain events including “all amounts due and payable by you to BBY have been paid.” In clause 9.5 (which relates to failure to settle), clause 9.5(j) provides that BBYL may “apply any cash held by BBY on your account to which BBY has access, or payments received for or from you, to reduce your liability to BBY”.
There are a number of schedules by which clients are also bound. Schedule 4 (Options Trading), clause 19.3 provides that BBY is “entitled to set off any monies received from the sale of financial products on your behalf against any monies due to BBY by you on any account”. Clause 19.4 deals with client default: if a client fails to pay amounts payable to BBY (clause 19.4(a)) then, without the need for prior notice, BBY may apply any cash held by BBY on the client’s account or to which they have access or payments received from the client in reduction of the client’s liability to BBY (clause 19.4(q)). Schedule 5 contains the sponsorship agreement terms and conditions. Clause 48 provides a right of set-off: “We may set off any amount we owe you against any amount you owe us or any of our related companies”.

Futures Terms

Clause 4 - which applies not only to futures trading but across the whole of the range of financial products offered by BBY - provides as follows:

If the Client trades in other products offered by BBY, then the Client may have one or more Trading Accounts with BBY. Since the method of dealing may differ significantly with little interaction among those Trading Accounts, the calculations, reporting and administration may be performed by BBY separately for each Trading Account, so that (among other things, without limitation):
(a) Margin calculations are managed and enforcement action is taken for each Trading Account separately; and
(b) BBY may at any time aggregate one or more Trading Accounts (for reporting or managing Margins or otherwise for the purposes of these Terms).

Clause 19.1 deals with events of default, including where any money owing by the client to BBY under the terms are “not fully and punctually paid to BBY or satisfied as and when they become due …”. In those circumstance, clause 19.2(j) provides that BBY may:

(j) combine, consolidate, merge or apply all or any part of any credit balance standing to any account of the Client with BBY or any amount available to BBY (including funds held in the client’s account for which BBY has authority over) by way of set-off, lien or counterclaim in or towards satisfaction of any money due and payable by the Client to BBY or by BBY to the Client under these Terms;
…
BBY will not lose any of its rights under this clause by reason of any delay in the exercise of any right under this clause and it may do so at any time and in any manner.

BBYL went into administration in March 2015; if clients have unpaid balances, they are undoubtedly in default now.

Desk FX Terms

Clauses 8 and 9.1 relate to clients who default in paying amounts owing, and have terms to a similar effect to the preceding default terms.

Online Account Terms

Clause 1.7 is similar in effect to clause 4 of the Futures Terms described above. Clauses 10.1(a) and 11.1(g) relate to clients who default in paying amounts owing, and have terms to a similar effect to the preceding default terms.

Single account

Several documents make clear that there was a single account between BBY and each client, although within it there were, or could be, multiple sub-accounts, called trading accounts, for each product in which the client traded.
The client application form allowed the client to select one or several different financial products in which to trade. Section 1 instructed that “To open an account with BBY (Account) you need to complete the Application Form … By completing this Application Form, you authorise an Account to be opened for you.” That is, one account covering one, some or all BBY financial products.
The ASX Terms refer, before clause 1, to “the terms and conditions which apply to your trading account with BBY”. The corresponding PDS, the Exchange Traded Options Product Disclosure Statement, speaks of Accounts and Trading Accounts distinctly; in the Glossary in Section 7, those terms are defined as follows:

Account means your account with BBY established under the account terms, including all Trading Accounts and all transactions recorded in them.
Trading Account means your account with BBY established under the Account Terms for a specific method of dealing, and is part of the Account. You may have several Trading Accounts.

In the Futures Terms, clause 4 provides that “If the Client trades in other products offered by BBY, then the Client may have one or more Trading Accounts with BBY”. The Desk FX & Commodities PDS also contemplate that an account can comprise several trading accounts. The definition of BBY Account means “your account with BBY established under the foreign exchange terms, including all Trading Accounts and all Open Transactions in them”.
In the Online Account Terms, clause 1.4 provides that the client has a BBY Online Trading Account, and clause 1.5 provides that within that account “the Client may have one or more Trading Accounts”. Clause 1.7 was to the same effect as clause 4 of the Futures Terms. The corresponding Online Trader PDS defines “Account” to mean “your account with BBY established under the Account Terms, including all Trading Accounts and all transactions recorded in them”.
Thus, BBY is entitled to combine the balances of product line accounts, being the individual "Trading Accounts", to calculate the net position of individual clients, without any need for set-off.

Conclusion

Accordingly, conformably with the client agreements, all the sub-accounts or trading accounts may be aggregated, to produce a single amount owing either from or to BBY; and in addition, BBY is entitled to set off and/or combine "Trading Accounts". Consistently with Sonray and with MF Global, the Liquidators are entitled to:

combine the balances of product line accounts (being individual "Trading Accounts") to calculate the net position of individual clients, without any need for set-off; and/or

set off positive net account balances against negative net account balances in all accounts owned by the same BBY Group client.

Low balances

The question is whether the Liquidators are justified in treating clients, in respect of client accounts with a balance of $100 (or some other amount) or less, as having no entitlement to participate in CSAs or Recoveries, in respect of each such account.
All affected parties agree that the Liquidators would be justified in treating clients, in respect of client accounts with a balance of $100 or less, as having no entitlement to participate in CSAs or Recoveries in respect of those amounts.
Such a direction was made on 12 October 2016, in relation to the Erroneous Withdrawals. A similar direction was made in Sonray.[112]
112. Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240 at 303 [307]; 87 ACSR 442; [2012] FCA 75.
Such a direction gives pragmatic effect to the reality that the costs to the administration (and thus creditors generally) associated with administering a claim for the amount specified are disproportionate to the benefit to the claimant.
I will give such a direction.

Interest

The question is whether interest earned on CSAs and Recoveries is beneficially owned by BBY or held on trust for its clients. All parties, including the Receivers, are in agreement that interest earned on CSAs and Recoveries should be held for the benefit of the clients entitled to the relevant principal amount. In MF Global Black J held (at [179]) that this was a consequence of reg 7.8.03(6) in circumstances of a shortfall. I will give a direction accordingly.

CONCLUSION AND ORDERS

My conclusions may be summarised as follows:
While the theoretical basis for pooling is the principle that all contributors to a deficient mixed fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions, subject to any dealings and costs, or are equitable tenants in common of the mixed fund as a whole, including its traceable proceeds, subject to such deductions, so that each contributor has an “entitlement” in each fund, the pragmatic nature of the jurisdiction to give advice and directions to a liquidator means that neither strict proof of mixing such as would entitle a beneficiary to an equitable proprietary remedy, nor absolute impossibility of tracing, is required; pooling may be directed where the identification and tracing of the interests of individual clients is not in the circumstances of the particular case reasonably and economically practical, on the basis that it is reasonable in the circumstances that the funds be regarded as irreversibly deficient and mixed. However, because the effect of pooling two or more accounts is to treat each client’s entitlement to one as identical to its entitlement to the other(s), and so to treat each client as having a rateably equal interest in each fund, it will be warranted only 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 in all the circumstances to regard each as having a rateably equal interest in the mixed fund. The combination of mixing and impracticability of tracing does not of itself mean that it will necessarily be reasonable to treat each client’s entitlement to one account as identical to its entitlement to the other(s), and to regard each as having a rateably equal interest in the mixed fund. Whether that will be so is influenced by the scale of the mixing, and the relative sizes of the funds and the deficiencies, and above all the extent of the interest of the contributing fund in the mixed fund. That requires the Court to form a view, if it can – albeit an imprecise and impressionistic one – as to what is likely to be the extent of the interest of the beneficiaries of each fund in the other(s). In doing so, the Court is informed, but not controlled, by equitable tracing principles.
The money returned by Saxo Bank to Stonebridge in respect of hedging was received by Stonebridge in its capacity as a person "acting on behalf of the [Saxo] client[s]" for the purposes of s 981A(1)(b)(iii), and so was Subdivision A money, to which the s 981H trust applied. The “Margin” paid by Saxo clients was not a purchase price for a product, but the establishment of a running account which was required to be maintained at a sufficient level to cover the risk assumed by Stonebridge. Section 981A(2)(c) is not engaged to except their margin payments from Subdivision A. Clause 4 of the Account Terms did not have the legal consequence that Stonebridge/SmarTrader became “entitled” for the purpose of reg 7.08.02(1)(a) or (c) to money paid to them which was otherwise caught by s 981A(1), and was not effective to remove, or authorise the removal of, such money from the s 981H statutory trust. It follows that all the money in the Buffer Account 0256 – whether sourced in the Saxo Bank receipts or in client deposits, was Subdivision A money, and even if it was not held in an s 981B account, was nonetheless impressed with the s 981H trust for the benefit of Saxo clients.
Notwithstanding that BBY’s obligation to pay ASX Clear $9.5 million on 2 December 2011 was primarily a “house” obligation, the use of Saxo trust money for that purpose resulted in its traceable proceeds, being the receipts from Berndale of at least $6.1 million, remaining in the Equities/ETOs CSAs - as well as in the retention of the balance of $2.5 million in the 8694 account, resulted in a mixing of Saxo trust money with Equities/ETOs CSAs. As BBY was not the relevant licensee for the purposes of s 981D, the $12 million transfer was not at that time permitted by s 981D, and was a breach of the s 981H trust.
Alternatively, as at 2 December 2011, the eBridge Buffer Account remained protection trust property, and was held by SmarTrader upon the trusts of the protection trust contained in the Stonebridge Declaration. Even if the money in the 0256 account on 2 December 2011 was not Subdivision A money, or even if clause 4.4 of the Account Terms effectively engaged reg 7.8.02, so that SmarTrader was for its purposes “entitled” to the moneys, it was impressed, in the hands of SmarTrader, with the trusts of the protection trust. Accordingly, even if the $12 million payment made on 2 December 2011 to the 8694 account was not a breach of the s 981H trust, it was a breach of the protection trust, and resulted in protection trust money from the Saxo line becoming mixed in the Equities/ETOs CSAs. Because it also constituted a trigger event, the protection trust thereupon crystallised so as to attach to the transferred money, which became mixed in the Equities/ETOs CSAs. Alternatively, even if the protection trust did not upon crystallisation attach to the transferred money, the contingent beneficiaries of the protection trust were entitled to require restitution to the protection trust of money paid out in breach, wherever it may be traced. At least where the protection trust has on any view now crystallised - so that the right to follow and have restored the misapplied funds is now the beneficial property of the Saxo clients – that right amounts to an “entitlement” in the Equities/ETOs CSAs.
While I do not accept that it is impossible that funds from other product line CSAs remained in Equities/ETOs CSAs, including in the 541 account, their other than transient use on a large scale appears unlikely, and such money would likely represent only a small proportion of the account balance at any time - including at the administration date.
While there was, in December 2011, a mixing of Saxo client money into Equities/ETOs CSAs, the number and extent of intervening transactions, including the net detriment to Equities/ETOs from the other BBY Funding transactions, and notably the Saxo 1:1 upload and SCMA Termination, mean that the funds in the Equities/ETOs CSAs as at the administration date include Saxo client money – and in particular money of current BBY Saxo clients – only to a minor extent, if at all. In those circumstances, it would be wrong to regard the current Saxo clients who have claims against the Saxo CSAs as having an entitlement that is (rateably) identical to that of the Equities/ETOs clients in the Equities/ETOs CSAs. Indeed, where the Equities/ETOs CSAs balance, but there is a great deficiency in the Saxo CSAs, and there has already been a very substantial redemption of Saxo clients consequent upon the SCMA termination, it would work a disproportionate windfall to current Saxo clients, and a considerable injustice to Equities/ETOs clients, to direct pooling on the basis that an amount of Saxo money had once been mixed into the Equities/ETOs CSAs many years ago, while the current amount in the Equities/ETOs CSAs represented almost exclusively the moneys of current Equities/ETOs clients. Accordingly, the Equities/ETOs CSAs should not be pooled with other product line CSAs.

As to pooling Saxo, FX and Futures and excluding Equities/ETOs, I incline to the view that the size of the relevant transactions relative to the quantum of the funds in issue is such that pooling would not be a proportionate response, but that given the relative recency of the transactions – all occurred within six months before the administration date – the Liquidators may be justified in simply reversing them, except insofar as the amount paid to FX does not exceed the $1 million from FX used in the SCMA 1:1 upload. Because this issue was not the subject of argument, I am content for the parties with an interest in it to make further submissions if they wish.
As to Recoveries:

The Liquidators would be justified in proceeding on the footing that the Recoveries from ADM and ABN AMRO are held, on the s 981H trust, for the clients entitled to money in the Futures CSAs.

The Liquidators would be justified in proceeding on the footing that the Recoveries from Halifax and from CMC Markets are held, on the s 981H trust, for the clients entitled to money in the FX CSAs.

The Liquidators would be justified in proceeding on the footing that any recovery from Saxo Bank or SCMA is held on trust for the clients entitled to money in the Saxo CSAs.

The Liquidators would be justified in proceeding on the footing that the Returned Collateral was received by BBY on behalf of the ETO clients whose position it secured, namely those with open positions as at 15 May 2015 – that is, the Mazzetti class - subject to their entitlement to set-off the amounts owed by any such clients who are debtors.

There should be directions that the Liquidators:

combine the balances of product line accounts (being individual "Trading Accounts") to calculate the net position of individual clients, without any need for set-off; and/or set off positive net account balances against negative net account balances in all accounts owned by the same BBY Group client;

treat clients who have an entitlement of $100 or less in respect of any account as having no entitlement in respect of each such account; and

allocate interest earned on CSAs and Recoveries for the benefit of the clients entitled to the relevant principal amount.

The issue of the date of calculation of entitlements was not further addressed in oral submissions. If it has not been resolved, I will afford a limited opportunity to provide a further submission. Nor was the Receivers’ application addressed by the Liquidators, and again I will if desired allow a limited opportunity for further submissions.
The Court directs that the plaintiffs bring in short minutes on a date to be fixed to give effect to these reasons.

Endnotes

Amendments

11 April 2018 - Amended various typographical errors.

22 June 2018 - corrected jurisdiction field in coversheet

Decision last updated: 22 June 2018

Medium Neutral Citation:	In the matter of BBY Limited (Receivers and Managers appointed) (in liquidation) (No 2) [2018] NSWSC 346
Hearing dates:	31 January, 1, 2, 3 February 2017
Date of orders:	19 March 2018
Decision date:	19 March 2018
Jurisdiction:	Equity - Corporations List
Before:	Brereton J
Decision:	See [400]-[410]
Catchwords:	CORPORATIONS — Winding up — Conduct of liquidation — Application for directions - Distribution of assets – Distribution of client segregated accounts – the manner in which funds should be distributed per Corporations Regulations reg 7.8.03 - whether reg 7.8.03(6) should be applied separately to each client segregated account – whether liquidators should pool all (or some) of the client segregated accounts –held pooling not directed across product lines. CORPORATIONS — Winding up — Conduct of liquidation — Application for directions - Distribution of assets – Distribution of recoveries – Returned collateral - whether some or all of the recoveries are beneficially owned or held on trust for clients – how recoveries and returned collateral should be distributed having regard to Corporations Regulations – held recoveries and returned collateral held on trust for clients. CORPORATIONS — Winding up — Conduct of liquidation — Application for directions -Distribution of assets – Calculation of entitlements – how entitlement to client segregated accounts and recoveries should be calculated – Set off – whether Liquidators are entitled to set off positive net account balances against negative account balances – where accounts are owned by the same client – held, justified in combining balances of individual trading accounts to calculate net position of individual clients without any need to set-off within the same group. CORPORATIONS — Winding up — Conduct of liquidation — Application for directions - Distribution of assets – Low balances – whether the Liquidators are justified in treating clients with a low balance in a client segregated account or recovery as having no entitlement to participate – held, justified in treating as having no entitlement. CORPORATIONS — Winding up — Conduct of liquidation — Application for directions - Distribution of assets – Interest – whether interest earned on client segregated accounts and recoveries is beneficially owned or held on trust for clients – held, interest held on trust for relevant clients
Legislation Cited:	(CTH) Corporations Act 2001, s 424, s 479, s 511, s 601EE(2), s 889C(2), s 892F, s 981A, s 981B, s 981C, s 981D, s 981E, s 981F, s 981G, s 981H (CTH) Corporations Regulations 2001, regs 7.8.01, 7.8.02, 7.8.03. (NSW) Trustee Act 1925, s 63 (VIC) Trustee Act 1958, s 63
Cases Cited:	All Class Insurance Brokers Pty Ltd (in liq), In the matter of; Vardy v Westpac Banking Corporation [2014] NSWSC 475 Australian Elizabethan Theatre Trust, Re (1991) 30 FCR 491 Australian Securities and Investments Commission v Atlantic 3-Financial (Aust) Pty Ltd [2004] 1 Qd R 591; [2003] QSC 386 Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082 Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; [1999] QSC 387 Australian Securities and Investments Commission v Giann & Giann Pty Ltd (2005) 141 FCR 278; 23 ACLC 276; [2005] FCA 81 Australian Securities and Investments Commission v Letten (No 5) [2010] FCA 1047 Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231; (2010) 190 FCR 59; (2010) 80 ACSR 401. Australian Securities and Investments Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719 Australian Securities Commission v Buckley (1996) 7 BPR 15,024 Australian Securities Investments Commission v Tasman Investment Management Ltd (2006) 59 ACSR 113; 202 FLR 343; [2006] NSWSC 943. Barnes v Addy (1874) LR 9 Ch App 244 BBY Limited (Receivers and Managers appointed) (in liquidation), In the matter of [2016] NSWSC 1366 Black v Freedman & Co (1910) 12 CLR 105 CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 Diplock's Estate, Re; Diplock v Wintle [1948] Ch 465 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 Fire Nymph Products Ltd v The Heating Centre Pty Ltd (1992) 7 ACSR 365 Foskett v McKeown [2001] 1 AC 102 French Caledonia Travel Service Pty Ltd, Re (2003) 59 NSWLR 361; 204 ALR 353; 48 ACSR 97; [2003] NSWSC 1008 GDK Financial Solutions Pty Ltd, Re; Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699; 60 ACSR 447; [2006] FCA 1415 Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442; [2012] FCA 75 Georges v Seaborn International Pty Ltd (2012) 206 FCR 408; [2012] FCAFC 140 Global Finance Group Pty Ltd, Re (2002) 26 WAR 385; [2002] WASC 63 Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 Magarey Farlam Lawyers Trust Accounts (No 3), Re [2007] SASC 9; (2007) 96 SASR 337 MF Global Australia Ltd (in liq), In the matter of (2012) 267 FLR 27; [2012] NSWSC 994 Mier v FN Management Pty Ltd [2006] 1 Qd R 339; 56 ACSR 93; [2005] QCA 408 Re TVSN Ltd [2005] NSWSC 692 Russell-Cooke Trust Co v Prentis [2002] EWHC 2227; [2003] 2 All ER 478 Travel Compensation Fund v Classic International Cruises Pty Ltd (in liq) and Ors [2014] NSWSC 167 Warner, Re GTL Tradeup Pty Ltd (in liq) (2015) 104 ACSR 633; [2015] FCA 323 Windsor Mortgage Nominees Pty Ltd v Cardwell (1979) CLC 40-540
Texts Cited:	Campbell JC, “Republic of Brazil v Durant and the equities justifying tracing” (2016) 42 Aust Bar Rev 32 Thomas SB, "Clayton's Case and the 'Common Pool' Exception” (2004) 15 JBFLP 177
Category:	Principal judgment
Parties:	Stephen Ernest Vaughan and Ian Richard Hall in their capacity as liquidators of BBY Limited (Receivers & Managers appointed) (In liquidation) ACN 007 707 777 (1P) BBY Limited (Receivers & Managers appointed) (In liquidation) ACN 007 707 777 (2P) J Mazzetti Pty Ltd ATF J Mazzetti Pty Limited Staff Superannuation Fund & Ors (1D) Peter Brian Haywood and Bronwen Menai Haywood (ATF the Haywood Superannuation Fund) (2D) Clive Riseam (3D) Securities Exchange Guarantee Corporation Ltd (4D) David Nadin (5D)
Representation:	Counsel: D Healey (Ps) DJ Williams QC w G J Parncutt (1D) PJ Brereton SC w V Whittaker (2D) RM Smith SC w GES Ng (3D) J J Hutton (4D) Solicitors: Ashurst Australia (Ps) Bamford Lawyers as agents for Partners Legal (1D) Mills Oakley (2D) Corrs Chambers Westgarth (3D) Clayton Utz (4D)
File Number(s):	2015/237028