Re Lehman Brothers International (Europe) [2012]

Lehman Brothers International (Europe) [2012] UKSC 6 is a significant legal decision that revolves around English trusts law and UK insolvency law. The key issue in the case is the certainty of subject matter required to create a trust.

Lehman Brothers International (Europe) was the UK subsidiary of Lehman Brothers Holdings Inc, the US parent company that had entered Chapter 11 bankruptcy proceedings. The Financial Services Authority had rules regarding client money, issued under the FSMA 2000 Section 138.

These rules required firms to hold client money on trust for the purpose of the client money rules. Under CASS 7, a firm could either pay money into a segregated account or put the money into its own accounts and segregate it into client accounts at the close of the preceding day's business. Lehman had used the alternative approach mentioned, leading to unsegregated client money in the firm's house accounts.

The High Court ruled that the statutory trust under CASS 7 arose as soon as a firm received client funds to achieve better protection, as required by EU directives. The term "client money account" referred to segregated accounts of a client, excluding identifiable client money in house accounts.

The Court of Appeal dismissed the appeal on the timing of the statutory trust, but allowed the appeal of Lehman's non-segregated clients and affiliates. The Court of Appeal held that trust law should not create a trust if there is no property sufficiently identified to form the subject matter of the trust.

On further appeal, the Supreme Court ruled that CASS 7 should be construed according to the purpose of MiFiD directives to achieve a high level of protection for client money. Fiduciary duties were owed by the firm in respect of all client money, not just balances in client accounts. CASS 7 should be interpreted in light of MiFID and Implementing Directive purposes, providing protection between clients and the firm.

Lord Dyson emphasised that CASS 7 should be interpreted to fulfil EU requirements, allowing departure from conventional rules of construction. He pointed out that the purpose of CASS 7 is to provide a high level of protection for clients, with all clients entitled to claim against the pool. He also noted that the exceptional nature of the assumed facts should not compel a particular conclusion on issues of construction. In addition, he explained that clients implicitly accepted the risk of discovering, on a primary pooling event, that their segregated funds might be shared with non-segregated clients.

This case reflects a nuanced interpretation of trust law and the interplay between statutory rules (CASS 7) and EU directives (MiFID) to ensure a high level of protection for client money in the event of a financial institution's insolvency. The judgments discuss the timing of the statutory trust, the interpretation of trust law, and the overarching goal of client protection in the financial services industry.
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