16 July, 2015
In the latest instalment arising out of the insolvency of MF Global, the Singapore High Court had to decide whether certain customers of the insolvent brokerage firm had any proprietary interests in the assets of the firm, and whether these assets were held on trust for these customers.
The High Court held that, save for a specific category of funds, the firm's assets are not held on trust, and the customers would only stand as unsecured creditors in respect of those claims.
The case is MF Global Singapore Pte Ltd (in creditors' voluntary liquidation) and others v Vintage Bullion DMCC (in its own capacity and as representative of the customers of the first plaintiff) and another matter [2015] SGHC 162 ("MF Global v Vintage").
1. Background
MF Global Singapore Pte Ltd ("MFGS") was a member and clearing member of the Singapore Exchange Securities Trading Limited, the Singapore Exchange Derivatives Trading Limited, and the Singapore Exchange Derivatives Clearing Limited.
Vintage Bullion DMCC ("Vintage") opened an account with MFGS and engaged in leveraged foreign exchange ("LFX transactions") and leveraged commodity transactions ("Bullion transactions").
The daily statements of the account for each customer of the LFX and Bullion transactions reflected three financial figures:
- Unrealised Profits (or Losses): The value of the open position with reference to the market price of either the underlying currency or reference bullion.
- Forward Value: The profit, if any, as a result of the closure of a position.
- Ledger Balance C/F (i.e. "carried forward"): The customer's running account with MFGS showing liquidation profit. The sum previously reflected under Forward Value would be added to the sum reflected under Ledger Balance C/F on the "Value Date", which is defined in the Master Trading Agreement between MFGS and its customers as "the date on which the respective obligations of the parties to a foreign exchange or [over-the-counter] transaction are to be performed", and which is generally two days after closing a position. On 1 November 2011, MFGS entered into provisional liquidation. In Vintage's Daily FX Activity Statement dated 31 October 2011, the Forward Value was US$6,835,995.31 while the Ledger Balance C/F was US4,711,459.18.
Vintage contended that:
- It is a secured creditor in respect of the Unrealised Profits and Forward Value as a statutory trust arose over these monies;
- Alternatively, it is a secured creditor in respect of the Unrealised Profits and Forward Value as a result of an express trust by conduct;
- Even if only the Ledger Balance C/F was held on trust for Vintage, the relevant amount is the Ledger Balance C/F as reflected on 1 November 2011 and not 31 October 2011.
The liquidators of MFGS disagreed.
2. Issues before the High Court
The main issues before the High Court are:
- whether Vintage has a proprietary claim over the Unrealised Profits and Forward Value by way of a statutory trust;
- whether Vintage has proprietary claim over the Unrealised Profits and Forward Value by way of an express trust; and
- if (a) and (b) are answered in the negative, whether Vintage has a proprietary interest in the Ledger Balance C/F as reflected in the Daily FX Activity Statement dated 31 October 2011 or that which was dated 1 November 2011.
3. The High Court's Decision
Issue (a): Whether Vintage has proprietary claims over the Unrealised Profit and Forward Value by way of a statutory trust.
The Court first addressed the preliminary issue of determining the nature of the respective claims as follows:
- Unrealised Profits: a contingent debt obligation;
- Forward Value: a prospective liability and may be classified as certain future debt under section 327 of the Companies Act; and
- Ledger Balance C/F: a certain present debt.
(i) Unrealised Profits and Forward Value
The Court found that the provisions of the Securities and Futures Act ("SFA"), Securities and Futures (Licensing and Conduct of Business) Regulations ("SFR"), the Commodity Trading Act ("CTA"), and the Commodity Trading Regulations 2001 ("CTR") do not impose a statutory trust in respect of the Unrealised Profits or the Forward Value.
In relation to the LFX transactions, the Court held that the Unrealised Profits and Forward Value were choses in action against MFGS which vested in the customers of the LFX transactions at all times. There was no underlying money which MFGS could receive from its customer or for its customer in either instance. Before a trade was closed out, a customer only had a contingent claim, and was not entitled to receive any money. MFGS was also not obliged to pay any money, as no obligation to pay had yet arisen. Even after a trade was closed out and a Forward Value arose, MFGS' obligation to pay those moneys only materialized on the relevant "Value Date".
As to the Bullion transactions, it was not disputed that the CTA and CTR, in general, apply to these transactions. The question was whether s 30 of the CTA and regs 21 and 22 of the CTR, which require segregation of the customer's moneys apply to the Unrealised Profits and Forward Value. If they did, the provisions would impose a statutory trust over the moneys.
The Court found that the relevant regulations did not apply to impose a statutory trust. The Unrealised Profits and Forward Value are contingent and future debts owed by MFGS to a customer, and are not "money(s)…accruing to a customer as a result of [commodity] trading" and therefore do not fall within the ambit of the statutory trust under the CTR.
(ii) Ledger Balance C/F
There was no real dispute between the parties that MFGS held the Ledger Balance C/F on trust under statutory trusts created by the SFA, SFR, CTA and CTR.
Issue (b): Whether Vintage has proprietary claims over the Unrealised Profits and Forward Value by way of an express trust.
The dispute between the parties was whether there was clear and strong evidence that MFGS intended to create a trust in favour of the LFX and Bullion customers in respect of the Unrealised Profits and Forward Value.
Notwithstanding that the evidence put forth by Vintage may show that MFGS intended to hold the moneys under the mistaken belief that it was required to do so under the applicable legislation, the Court held that the evidence was insufficient to prove that MFGS intended to create an express trust for the benefit of the LFX and Bullion customers in respect of the Unrealised Profits and Forward Value.
MFGS commingled its own money with funds which Vintage alleged were held on trust for customers, and also commingled funds between customers. This militated against a finding of an intention to create an express trust, which required the maintenance of a separate account with a prohibition against mixing.
In addition, the Court found that it was not commercially sensible for MFGS to have satisfied the Forward Value, a future debt obligation, at an earlier date by creating a trust over its value.
Issue (c): Whether Vintage has a proprietary interest in the Ledger Balance C/F as reflected in the Daily FX Activity Statement dated 31 October 2011 or that which was dated 1 November 2011.
Vintage's Daily FX Activity Statement dated 31 October 2011 reflected a Ledger Balance C/F of US$4,711,459.18. The Daily FX Activity Statement dated 1 November 2011 reflected a Ledger Balance C/F amount of US$10,793,862.06. The difference arose primarily because a sum of US$6,082,324,50 reflected as Forward Value in the Daily FX Activity Statement of 31 October 2011 carried a Value Date of 1 November 2011.
The question, therefore, is whether Vintage has a proprietary interest in the sum of US$4,711,459.18 (as reflected on 31 October 2011) or US$10,793,862.06 (1 November 2011).
The Court found that for funds to be caught by the ambit of the statutory trusts imposed by the CTR and SFR, they must be paid to an LFX or Bullion customer through the crediting of the Ledger Balance C/F before the commencement of MFGS' winding up on 1 November 2011.
Therefore, the issue was when the sum of US$6,082,324,50 (which carried a Value Date of 1 November 2011) was actually paid, or should have been paid, into the customer's account, and whether that took place before or after 1 November 2011.
There was scant evidence as to the time at which a Forward Value was paid to a customer's account. Drawing from circumstantial evidence, the Court found that it was more likely than not that the Forward Value would have been credited into the Ledger Balance C/F at MFGS' close of business (which was found to be pegged to New York time).
As a result, the Forward Value with a Value Date of 1 November 2011 had not yet been paid and credited into the LFX and Bullion customers' Ledger Balance C/F before the provisional liquidators were appointed, and was not caught by the ambit of the statutory trusts imposed by the respective legislation.
The Court therefore held that Vintage was only beneficially entitled to the sum of US$4,711,459.18, the Ledger Balance C/F value of its Daily FX Activity Statement dated 31 October 2011.
4. Comments
The action was commenced by Vintage in its own capacity, as well as a representative of the other LFX and Bullion transaction customers who asserted claims for these forms of profits. Accordingly, the decision in the present action will apply to the LFX and Bullion transaction customers who assert equivalent claims against MFGS.
The case may be of particular interest to commodities and derivatives brokerage firms and their customers.
Part of the dispute (namely, issue (c)) arose partly because the contract between MFGS and its customers did not state the precise date(s) for the settlement of transactions, something which was encouraged in "The Singapore Guide to Conduct and Market Practices for Treasury Activities" (November 2010 Ed) published by the Singapore Foreign Exchange Market Committee. If such a date had been specified, it might have made a US$6 million difference to Vintage.
An issue left unanswered by the Court is what would have been the consequence if a contractual settlement date had been specified, but MFGS failed to pay or credit the Ledger Balance C/F as contractually stipulated. The Court declined to rule on it, but appeared to favour the position that in such a case, the customer would still have proprietary interest in the money that should have been paid.
For further information, please contact:
Celeste Ang, Baker & McKenzie.Wong & Leow
celeste.ang@bakermckenzie.com
