Worldspreads Ltd, Re

This is an application by the directors of Worldspreads Limited, which I shall call "the Company", for a special administration order to be made under the Investment Bank Special Administration Regulations 2011 in respect of the Company, which is an “investment bank” within the special and broader statutory definition.

The business of the Company, which is a private company incorporated in England, is to provide financial services to some 15,000 clients who have opened accounts enabling them to spread bet or trade in contracts for differences via an online trading platform. In the course of its business the Company holds money belonging to its clients which is required to be segregated under rules in Chapter 7 of the Client Asset Sourcebook (known as the CASS Rules) issued by the Financial Services Authority.

The Company is regulated by the FSA and is the subject of specific permissions under Part 4 of the Financial Services and Markets Act 2000. It is these permissions which ensure that it technically falls within the definition of an “investment bank” under the Banking Act 2009.

The Company's parent company, which is called Worldspreads Group Plc is incorporated in the Republic of Ireland and publicly listed on AIM in the UK and ESM in the Republic of Ireland.

The application is made in circumstances of great urgency. Shortly after 10 o'clock in the morning last Friday, 16th March 2012, and following the recent resignations of the previous finance director and its chief executive, it came to the attention of the new management team, further to information provided by the former CFO of the group, that the Company's client money reconciliations had been "deliberately falsified". Further, it appears that clients' money may have been treated inappropriately and used by the Company and/or mixed with the Company's own house money for as long as five years.

The position is still being investigated but it is thought that the gross amount owed to clients as at the close of business on Friday was about £29.7 million and the Company, to meet that, is holding only about £5.795 million in accounts which are designated as client or client-segregated accounts.

There are cash balances of the Company in the sum of approximately £16.6 million and some of those may be properly allocated to a client or client-segregated accounts but misplaced. That will only emerge later and the effect will be arithmetical.

On any view, however, there appears to be a substantial deficit in the amount of client money which ought to be being held by the Company and that deficit may be in the order of some £13 million. The exact quantification may well also depend on the legal analysis of the status of money in other company accounts, and those questions may well track issues which have arisen in the recent decision of the Supreme Court in Lehman Brothers International Europe [2012] UKSC 6.

The matter is urgent, not only because of the revelation of this unsatisfactory state of affairs, but also because the Company's holding company is listed. There is another company within the group which is based in Malaysia.

If, as the Company anticipates, at the opening of the markets on which the relevant CFD or spread betting reference asset is traded clients can transact business with the Company, many of its clients will seek to close their positions and withdraw client money. The result will be that the continued operation of the business and distribution of money to its clients will become impossible.

The relevant currency markets in the Far East and Australasia will open at 22:30 GMT, this day, Sunday 18th March, and the relevant commencement of UK equity markets will open on Monday, 19th March at 8 o'clock in the morning GMT. It is important, therefore, that order should be brought via an administration process before either of those markets open. It is for that reason that the matter is being heard now, on a Sunday, commencing at 4 o'clock.

As indicated, the Company is regulated and authorised by the FSA and the FSA is represented by its solicitor in court in order to signify the FSA's support for the administration order which is being sought by the Company's directors.

Such is the urgency that it has not yet been possible, it being a Sunday, to issue the application in advance of the hearing. However, leading counsel on behalf of the applicant, Mr. Glen Davis QC, leading Mr. Jeremy Goldring, has given the usual undertaking to issue the relevant application as soon as it is possible tomorrow morning.

In this judgment, which is obviously given on short notice and extemporary, I will keep my reasoning relatively short, although I would like to record that Mr. Davis has greatly assisted me in taking me with some care through the statutory and regulatory architecture pursuant to which this application is brought.

The specific statutory architecture, although reminiscent of the architecture for an administration order in other contexts, nevertheless has various particular elements. Mr. Davis tells me that this is the third application of which he is aware. One application was made at some time previously, I think in October, right at the end of that month, before Morgan J, who gave a judgment, but that judgment has not yet been reported. Therefore, to that extent, I am possibly reinventing the wheel, but feel obliged to set out some short reasoning.

The particular differences between this regime and the more usual administration order regime reflect the need, I dare say demonstrated by the events of 2008 and 2009, for a more made-to-measure or bespoke administration process in the case of institutions or companies such as this. There are various differences between the two regimes, both in substance and in terms of process, but I hope it gives the flavour both of the differences and of the objectives of this particular regime if I say that three differences in particular stand out.

The first is while in the ordinary -- if I may call it that -- administration order process, secured creditors must be given notice and, if they think fit, may themselves adopt their own processes in preference, whatever might be the preference of the company itself. In this regime, secured creditors, although it may be wise as a practical matter to keep them informed, do not have formally to be notified. They, themselves, may not take any steps without themselves first notifying the FSA and their position as regards the court's approach is of less significance.

The second main difference relates to the objectives for which an administration order may be sought. In that context, the important point is that the objectives are not creditor-focussed; they are focused on the protection and distribution of client moneys as a particular and, in certain instances, primary objective.

The third difference is that the process in this regime envisages and requires co-operation with the relevant authority, in this case the FSA, by the administrators if and when appointed who, although they will also be officers of the court, are required to undertake their responsibilities in an iterative process with the FSA and keep in close contact with the FSA throughout the process of the administration. In effect, the FSA supervises the process from its inception.

In terms of the detail, the regime I am now considering was introduced pursuant to Section 233 of the Banking Act 2009 and the rules and regulations I have to consider are comprised in regulations called the Investment Bank Special Administration Regulations 2011, which came into force on 8th February of 2011. Also, there are rules made further to the regulations called the Investment Bank Special Administration England and Wales Rules 2011, which replace the ordinary Insolvency Rules of 1986.

I need to turn now to the role of the court and its powers in respect of an application for a special administration order. Regulation 7(2) gives the court a broad power to make a special administration order on the application by the directors, provided it is satisfied first of all, that the Company is an investment bank within the meaning of Section 232 of the Banking Act, and secondly, either that that investment bank is or is likely to become unable to pay its debts, or it would be fair to put the investment bank into special administration. These two criteria reflect Regulation 6(1)(a) and 6(1)(b) respectively. Both these criteria are, in my view, satisfied in this case.

As to the first (the status of the Company in terms of the statutory architecture), the Company plainly is an investment bank within the extended definition of Section 232 of the Banking Act. The definition stipulates 3 conditions for its application. First, and in respect of Condition 1, the Company had permission under Part 4 of FSMA to carry on the regulated activities of safeguarding and administrating assets and dealing in investments as principal and as agent. This is as it was deposed in the witness statement of the Company's present chairman, Mr. McNeile. As to the second Condition, the Company holds client assets, in that it holds client money. This, again, is as stated in the witness statement of Mr. McNeile. Third, and as I previously indicated, the Company is incorporated in England and Wales, as confirmed in an exhibit, again, by Mr. McNeile.

As to the grounds for the making of the order which are advanced, as described by Mr. McNeile, it appears from the deficit in client money which I have already indicated, that the Company is or is likely to become unable to pay its debts within the meaning of Section 123 of the Insolvency Act 1986, on both of the standard grounds.

Secondly, in any event it would be fair -- a word which in the statutory context bears an extended meaning to include just and equitable -- to put the bank into special administration because, as Mr. McNeile explains in his witness statement, there is a real prospect that that regime should ensure or assist the following: It should assist in the orderly resolution of client money claims; it should mitigate the ongoing risks to clients; and it may allow a sale of part or all of the business; fourthly, it will permit an investigation by independent office holders, in the person of the administrators to be appointed, into the events which have given rise to this application. Then, fifthly, it will put in place a structure under which the special administrators would be able to and be required to liaise with market infrastructure bodies and the FSA, which is clearly necessary under the circumstances.

The proposed special administrators must, under the provisions of Regulation 4(2) and 4(3) be qualified to act as insolvency practitioners and consent to act. I am satisfied that in this case those requirements are satisfied, both in reliance on the evidence given by Mr. McNeile and also by a reference to the statements which have been provided and which have been signed by the two administrators who have been selected.

They are, by name, Jane Moriarty and Samantha Bewick, each of KPMG LLP and each insolvency practitioners with, so I understand it, experience in this or related fields. In short, I am satisfied that the persons proposed are qualified and appropriate to act as administrators.

I have mentioned the question of secured creditors and I need to deal also with the issue of any other insolvency processes.

As to secured creditors, Mr. McNeile states in his witness statement that the Company has granted a debenture in favour of the Royal Bank of Scotland Plc, RBS, which is dated 10th June 2005 and was registered on 20th June. That remains outstanding.

Secondly, it appears from that witness statement that the mortgage index also shows that Anglo Irish Bank Corporation Plc, Anglo Irish, holds an outstanding debenture. However, in that context a deed of release was provided by Anglo Irish dated 20th October 2008 confirming that the charge had been satisfied, albeit that I am told that no statement of satisfaction of charge has yet been filed at Companies House. I understand from Mr. McNeile that he has since completed a form MG02, which will be filed at Companies House as soon as is reasonably practicable to regularise the situation.

I have been informed that the only secured creditor on that footing, namely RBS, has been informed of this application and the intention to move the Company into administration, but I repeat again that that is not a requirement under the Statute or the Regulations and Rules made pursuant to it.

So far as other insolvency process is concerned, Mr. McNeile states that there is no receiver or administrative receiver appointed to the Company or its assets and that he would expect to know had such an appointment been made. I also understand that searches have been made of the relevant indexes and registers which disclose no such appointment or any winding up petition having been presented.

Turning then to the objectives which are sought to be accomplished, these are, first, to ensure the return of client assets as soon as reasonably practicable; second, to ensure timely engagement with market infrastructure bodies and authorities and; third, either rescue the Company as a going concern, or to wind it up in the best interests of the creditors. These objectives track the objectives which are indicated in the relevant legislation and regulations.

I need then to deal with the question as to whether the application is regularly made in terms of its service. As to that, and as again pointed out by Mr. McNeile, service is not required on the Company because the directors of the Company are the applicant. I note, furthermore, that the resolution passed at the board meeting to sanction this application was passed by the unanimous consent of all the present directors of the Company. As to the proposed joint special administrators, and as their statements indicate, they consent to act and require no further service, and indeed Ms. Bewick, one of the proposed joint administrators, is in court to signify their consent and approval to what is going on.

Pausing there, it seems to me and I should note that the various requirements of the Regulation as regards the content of the witness statement have been expressly confirmed to me to have been satisfied by counsel on behalf of the applicant. On my relatively quick journey through the evidence they do indeed appear to have been satisfied.

It therefore seems to me that I have the requisite jurisdictional basis to make the order. It seems to me that it is plainly appropriate to do so without further delay. It is of considerable importance to me that the FSA not only support the application but, as I understand it, have indicated that if the directors themselves had not brought forward the application they would themselves have seen fit to take steps, and that therefore, an order should be made today. I shall make that order with effect from 5:30 p.m. London GMT time.

It remains only to deal with the form of the order and various specific recitals which are or may be important for reasons which I should briefly explain. 

In the ordinary course in a case of bodies different from this, the prospect of automatic recognition and assistance are enabled by the EC Regulation on Insolvency Proceedings 1346/2000, which allows for recognition in other EU member states. However, in this case Mr Davis is concerned and it does appear that, by reason of the nature of the undertaking of the Company, the EC Regulation on Insolvency Proceedings will not apply. In those circumstances, recognition would not be automatic and it is likely to be necessary to obtain recognition in other countries. Some may be subscribers to the UNCITRAL Model Law on Cross-Border Insolvency.

I am invited to facilitate obtaining recognition, and asked to include in the order recitals indicating the status of the Special Administration Order and the Joint Special Administrators under the UNCITRAL Model Law. I understand that this should assist particularly in jurisdictions such as South Africa which have implemented the Model Law, and may assist in other jurisdictions by analogy. More particularly, I am invited to include in the order recitals to the effect that "upon the special administration of Worldspreads Limited being a proceeding within the meaning of Article 2(a) and (b) and the special administrators of the Company being foreign representatives within Article 2(d), of the UNCITRAL Model Law on Cross-Border Insolvency". 

Given the assistance it is thought that this may produce, I am content that the order should include these recitals.

Therefore, having read the draft order provided and made the manuscript amendments, that is the order which will be issued and stamped in the usual way.

I am grateful to Counsel, their legal team and the FSA for their considerable assistance, both in submissions and in providing, despite the urgency over the weekend, orderly bundles which have greatly facilitated my task.