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Court of Appeal on tracing into a deficient fund

Emma Beechey recently appeared in the New South Wales Court of Appeal on a question of tracing into a deficient fund. On Friday, the Court handed down its judgment, allowing the appeal (Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq)  (No 2) [2020] NSWCA 117).

Ms Beechey appeared for the appellants, a group of investors who were the victims of a Ponzi scheme. During the life of the Ponzi scheme, between $213 million and $248 million had been deposited by innocent investors into the bank accounts of Courtenay House, the funds being held on trust for each investor. Ms Beechey represented the investors who had made deposits into an account on the day, or after the day, that ASIC obtained freezing orders against Courtenay House. The respondents, being the earlier investors, were represented by Mr Izzo SC and Brent Michael.

The case raised what Bell P (Bathurst CJ and Macfarlan J agreeing) described as “a classic insolvency conundrum”: how was the money remaining in the account to be allocated amongst the cheated investors?

The primary judge had accepted the respondents’ argument that all of the funds in the account should be distributed amongst all of the investors on a simple pari passu basis, by which the funds would be distributed rateably by reference to the amount of individual investments proportionate to the remaining funds in the account. On that approach, the late investors were placed in an identical position to the earlier investors, even though much of the earlier investors’ funds had been dissipated in a large number of withdrawals by Courtenay House over a period of 7 years.

On appeal, following a comprehensive review of the relevant Australian and overseas case law and academic commentary, the Court of Appeal unanimously held that the primary judge should have applied the so-called “lowest intermediate balance rule”. On this approach, any given investor’s share is to be rateably reduced whenever there is a withdrawal from the fund. Because there were fewer withdrawals from the account after the freezing orders, this approach favours those who invested from that date onwards.

The Court said that this approach provided “the fairest, most equitable and principled outcome for the allocation of limited funds between investors.”

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