Loo, in the matter of Halifax Investment Services Pty Ltd (in liquidation) v Quinlan (Liquidator) (FCAFC 2021)

Loo v Quinlan and Kelly (in their capacity as Liquidators) (NZCA 2021)

Key Takeaways

Recently, the FCFCA and NZCA engaged in historic cooperation in determining an appeal concerning the question of the entitlements of Australia and NZ investors who had invested in various global financial products (such as shares and options) through an online platform operated by Halifax Investment Services Pty Ltd (Halifax AU) and Halifax New Zealand Limited (Halifax NZ) prior to its collapse into insolvency.

The insolvency of Halifax had raised a number of questions for the administrators, who subsequently became liquidators, about how to distribute the assets and cash that they controlled to the investors. A key issue arose because some of the shares had risen dramatically in value since the date of administration and one class of investors (Category 1 Investors) (many of whom who had held those shares in their portfolio prior to the insolvency) argued that the date of entitlements should be later than the administration date to take into account this appreciation in value of their holding.

Elysium Business Systems Pty Ltd (Elysium), was appointed as a representative defendant of the other class of investors whose investments had decreased in value or had not increased at the same rate as the Halifax portfolio as a whole after the date administrators were appointed to Halifax AU and Halifax NZ (Category 2 Investors). Elysium argued that investor entitlements should be valued as at the date administrators were appointed to Halifax AU and Halifax NZ.

At first instance, the FCA and HCNZ decided in favour of Elysium and the Category 2 Investors which resulted in all investors receiving approximately 100 cents in the dollar on their entitlements as at the administration date. After securing litigation funding the representative of the Category 1 Investors lodged an appeal of this decision to the FCFCA and NZCA. The Judgments of both courts were delivered on 26 October 2021 and upheld the original decision. This means that all investors will now receive approximately 100 cents in the dollar based on their entitlements as at the date of administration.

Brief Facts

The Halifax online platform allowed investors to trade in financial products (such as shares) and enter into derivatives contracts. These investments and investors' cash deposited with Halifax by investors were held on trust by Halifax for their clients. However, Halifax used these client assets to fund its own activities and mixed client assets inconsistent with the requirements of the trusts. Subsequently, a significant deficiency arose in the assets held on trust by Halifax. This deficiency meant that investors had no proprietary right in any investments caught up in the mixed fund (subject to certain specific exceptions) and instead had an equitable charge over the fund as a whole to the value of their entitlement.

Halifax AU appointed administrators on 23 November 2018 and Halifax NZ appointed administrators on 27 November 2018. Both subsequently entered into liquidation. Crucially, the administrators 'froze' client accounts upon their appointment, but allowed investors the choice to either leave their account balances open or to close them out. Investors could not otherwise trade with their assets held by Halifax nor make any withdrawals from their entitlements.

Judgment

Elysium represented Category 2 Investors, whilst Choo Boon Loo (Loo) was appointed to represent Category 1 Investors whose investments had increased by more than the Halifax portfolio as a whole. Category 1 Investors stood to benefit more if the date to value investor entitlements was a date after the administrators were appointed and close to distribution of the funds to investors, whereas Category 2 Investors stood to benefit more if the date used to value those entitlements was the administration date. Loo also argued that investors should be allowed to choose whether to receive their entitlements in specie, which would mean a transfer of financial products rather than the assets being sold off and all distributions being made in cash.

The trial judges agreed with Elysium that the date for valuing proportionate entitlements ought to be the administration date. This was because it was a principled date contemplated by the Corporations Regulations and provided a more equitable basis for sharing in circumstances where most investors had no identifiable assets given the mixing of assets that had occurred. The trial judges also found against in specie distributions for investors whose notional assets were tied up in the mixed assets and funds.

Appeal

Loo appealed the decision to value proportionate entitlements as at the administration date, arguing that the trial judges had failed to take into account the unique circumstances of the liquidators allowing investors to maintain open positions in their accounts, arguing that investors whose investments were responsible for the gains made should benefit from those gains rather than the gains being shared equally, which would be the effect of the administration date being used to value entitlements.

Elysium argued that the trial judges were correct and that investors had no real choice to execute trading strategies beyond choosing whether or not to close out their accounts.

The appeal judges agreed with Elysium and confirmed that the administration date was the correct date at which to value investors' entitlements for the following reasons:

• the accounts of the investors were a book-keeping fiction and investors had no proprietary claim to specific investments recorded in the accounts;
• the liquidators gave no assurance that entitlements would be calculated at a date later than the administration date;
• Category 1 Investors did not individually own the assets used to make the gains so did not engage in any meaningful 'risk-taking'; and
• investors who did not close out their positions did not make any irrevocable commitment to accept valuation of their entitlement by reference to the later balance of their account.

Implications

For liquidators who take on appointments over financial services providers with active investments held on trust for clients, the FCFCA commented that the administrators' and then liquidators' decision to permit investors to keep their positions open was unusual and is rarely appropriate. The Court also stated that any application to permit investors to do so should generally be made within three months of appointment.

An important lesson for creditors is the significant role contradictors can play in arguing for rights in an insolvency. If such an invitation to participate in representative proceedings is extended to creditors in an insolvency in the future, serious consideration should be given to it and legal advice should be sought. As occurred in Halifax, an order can be made that the legal costs of the contradictor (whether they win or lose) is indemnified from funds held by the liquidator. Please reach out to the author if you are considering playing such a role in a representative proceeding.

Creditors should also note the right of a representative defendant to appeal an adverse decision. Although not successful in this instance, Mr Loo's right to appeal was not dismissed. However, it is rare for liquidators to fund appellants to appeal a decision where it has sought judicial guidance and therefore litigation funding may be necessary in order to bring the appeal. This funding should also cover any adverse costs orders in order to fully protect the appellant.

*Elysium was represented by Turks at both first instance and on appeal.