Distributing co-mingled funds in insolvency: tackling the conundrum

Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) and Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117

In the world of insolvency, the task of a court in determining the most appropriate method for distribution of limited funds from the company’s account to creditors where such funds have been co-mingled over a number of years is not one to envy. Where the company has operated a Ponzi scheme — with later investors’ funds being paid out to earlier investors as part of fictitious investment returns — the task is made no easier. The decision of the New South Wales Court of Appeal in Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) and Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117 involved such a scenario, with the added complication of duped investors depositing funds into the account both before and after a freezing order was made against it — and illustrates how the Court tackled the question of the most appropriate method for distribution.

The facts

Courtenay House Pty Ltd (in liq) and Courtenay House Capital Trading Group Pty Ltd (in liq) (together the Companies) were operators of a bank account which, beginning in around 2010, took deposits from investors who believed their money was being directed towards foreign exchange trading for their individual account. Their money, as it turned out, was being directed towards a Ponzi scheme.

On 21 April 2017, ASIC obtained a freezing order over the Companies’ assets and orders restraining the Companies from engaging in financial services for a period of time. On that same day, $60,000 was withdrawn from the bank account; separately, some investors, unaware of the freezing order, continued to deposit money into the account.

A contest arose between those investors who had deposited money prior to the freezing order — constituting a significant majority — and those who had deposited money after. Of the latter group, there were those who had deposited money prior to the $60,000 withdrawal and those after.

The Companies’ liquidators applied to the New South Wales Supreme Court for directions about distribution of funds to the investors. The primary judge held that the funds in the account were held on trust for both classes of investors and applied the pari passu method for distributing funds, so that each investor received a distribution at the rate of the same cents in the dollar of their investment; the primary judge did not treat the investors differently simply because of the intervening freezing order.

Investors representing those who had deposited money after the freezing order came into force appealed. The key issue was whether the primary judge had erred in applying the simple pari passu method.

On appeal

Bell P, with whom Bathurst CJ and Macfarlan JA agreed, allowed the appeal and ordered the distribution of funds to the investors in accordance with the lowest intermediate balance rule.

In addressing what the President described as “a classic insolvency conundrum”, his Honour first discussed the history and justification behind the various approaches to distribution out of insolvent co-mingled trust funds commonly adopted in Australia, namely:

  • the approach according to the decision in ‘Claytons Case’ (Devaynes v Noble (1816) 35 ER 767), which operates on a ‘first in, first out’ basis;
  • the simple pari passu method, apportioning the distribution pro rata among all those entitled to a distribution and calculated at the time of distribution; and
  • the lowest intermediate balance rule, which factors in the impact of any depletion in the co-mingled funds over time such that each creditor’s rateable interest in the funds, vis-à-vis the rateable interest of the other creditors, is to be recalculated at the time of each depletion.

Addressing each of those approaches in turn, his Honour held as follows.

The competing methods

With respect to the rule in Clayton’s Case, Bell P held that courts in other common law jurisdictions had not applied that particular approach to the type of fact pattern at hand — that is, where an account held the co-mingled funds of investors but for which there was a shortfall of funds available for recovery.

Of the simple pari passu approach, his Honour considered that there was a “superficial though illusory fairness” to the approach ([99]) and that such an approach might be appropriate where the inquiry was not complicated by any intervening withdrawals from the co-mingled account or where “the nature of the investment involves investors knowing that their funds will be pooled with those of other investors for investment purposes”: [89].

Turning finally to the lowest intermediate balance rule, Bell P considered that resistance to the approach was typically a result of the perceived “cost and complexity of its application” ([120]) which could be all the more, the greater the size of the co-mingled account in question. Notwithstanding the practical difficulties in its application, his Honour concluded that the approach was capable of being the most equitable in the circumstances under consideration, while acknowledging that the outcome would favour the more recent investors. His Honour remarked at [145]–[146]:

Subject perhaps only to the existence of knowledge and intention on the part of investors whose funds have been co-mingled that their funds were always going to be treated as such […], the lowest intermediate balance rule recognises the continuing vitality of “clearly discernible separate property rights” […] and is a means of identifying them.

[…] Where evidence is available […] the lowest intermediate balance rule has been applied and provides what, in my opinion, is the fairest, most equitable and principled outcome for the allocation of limited funds between investors.

Although agreeing with the primary judge in finding that there was “no particular magic” ([166]) to the 21 April freezing order date and that it was no basis for discriminating between the different investors, Bell P considered that to apply any pro rata approach would see the post-freezing order investors effectively “subsidise” earlier investors who had been victims of the Ponzi scheme: [165].

Practical issues

Noting a preference for the lowest intermediate balance rule in the circumstances, his Honour observed that, as a practical matter, a liquidator may be justified in seeking a less complex basis for distribution “if he or she makes a bona fide assessment that the costs and complexity of undertaking [the lowest intermediate balance approach] are not justified and/or that the records of the company or companies in liquidation are such that the exercise may not be able to be reliably undertaken” ([174]) and that it would always be a matter for an individual claimant seeking to assert rights to part of a mixed fund to present sufficient evidence in support of their claim. Of the latter, Bell P said at [152]:

Unlike the liquidator seeking directions, such a claimant will need to be able to establish, on the balance of probabilities, the proprietary interest claimed (as well as the fact that that interest is not required to be subordinated to that of other contributors by reason of the application of the principle of hotchpot or some other disentitling equitable consideration […]).

Finally, Bell P considered a hotchpot issue which had arisen in circumstances where some investments made in the account on or after the time of the freezing order represented a rolling over or reinvestment of earlier funds. Bell P held that, wherever possible, questions of hotchpot should be dealt with at the same time as questions about distribution, if only from the point of view of minimising costs.

Bathurst CJ, in agreeing with Bell P’s decision to apply the lowest intermediate balance method, similarly considered that a liquidator faced with a complex exercise could be justified in distributing on a pari passu basis and that the lowest intermediate balance method might not be appropriate where the manager of a co-mingled fund had sustained losses while carrying out a legitimate investment business. Bathurst CJ also expressed doubt about whether the Companies held the investors’ funds on trust in the circumstances — and, indeed, whether such a trust could arise in the context of insolvency — but noted it was not necessary to determine that issue on appeal.


The New South Wales Court of Appeal’s decision provides useful guidance for liquidators and creditors alike on the various methods for distribution from a co-mingled fund held by an insolvent entity. The Court’s nomination of the lowest intermediate balance method as most appropriate in the ordinary course, subject to the possibility of adopting another method on account of potential complexities and cost, highlights the primacy of the need to do justice in the particular case and the flexibility afforded to liquidators in that regard.

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