Special administration order under the Investment Bank Special Administration Regulations 2011: Worldspreads

In Re Worldspreads Limited [2012] EWHC 1263 (Ch),  the High Court granted an urgent application for a special administration order under the Investment Bank Special Administration Regulations 2011 (the Regulations) to prevent further loss to client money.  Although the special administration order was made in March 2012, the judgment only became available recently.  The judgment provides a useful summary of the key objectives of a special administration.    

Worldspreads Limited (Worldspreads) was a UK incorporated company whose business involved the provision of financial services to some 15,000 clients who opened accounts enabling them to spread bet or trade in contracts for differences via an online trading platform.  Worldspreads held money belonging to its clients which was required to be segregated under rules in Chapter 7 of the Client Asset Sourcebook (the CASS Rules) issued by the Financial Services Authority, which regulated Worldspreads.

Shortly after 10:00 am on Friday 16th March 2012, following the recent resignations of the finance director and chief executive of Worldspreads, the new management team became aware that client money reconciliations had been "deliberately falsified", that client money had not been properly segregated for a significant period, and that there was a substantial deficit (in the order of some £13 million) in the client money which Worldspreads ought to have held.

Worldspreads' parent company was incorporated in the Republic of Ireland and publicly listed on AIM in the UK and ESM in the Republic of Ireland; another company in the group was listed in Malaysia.  Trading in Worldspreads' shares was suspended on AIM and ESM shortly after noon on the Friday and a holding announcement was then made, stating that possible financial irregularities had been identified, and that the FSA had been notified.

The application for special administration was made urgently on the Sunday as it was anticipated that at the opening of the markets in the Far East and Australasia (at 22:30 GMT), many clients would seek to close their positions and withdraw client money, which would make continued operation of the business and distribution of money to its clients impossible.   The FSA had a solicitor present at the hearing who supported the application for Worldspreads to enter into special administration (the Court noted that the FSA would have made the application had the directors not done so).

Under Regulation 7(2) the court has the power to appoint a special administration order, provided that:

(1) the company is an investment bank - Regulation 6(1)(a) - the relevant definition in section 232 of the Banking Act 2009  provides that to qualify as an investment bank, a company must:

• be incorporated in England and Wales;
• hold client assets; and
• have a permission under Part IV of the Financial Services and Markets Act 2000 to safeguard and administer client assets, or to deal as principal or as agent; and

(2) the company must be unable to pay its debts or it would be fair to put the investment bank into special administration - Regulation 6(1)(b).

These conditions were met in this case.  The court noted that granting the special administration order would mitigate further risk to clients, facilitate an independent investigation of the wrongdoing by the company and create a structure which allows liaison with the FSA.  The order was granted at 1730 on Sunday 18 March 2012.  Although the special administration order was made in March 2012, the transcript has only recently become available.  Worldspreads was the third special administration order to be given since the Regulations came into force.

The judgment summarises the key objectives of a special administration.  It highlights the primary distinction between a special administration, which protects client money, and an "ordinary" administration, which promotes the best interest of creditors.

Additionally, in a special administration, secured creditors need not be given notice and may not adopt their own administration processes in preference.  In this instance, notice was given and the Court acknowledged that this was good practice.

The judge considered that it would be fair to make the special administration order as it should:

• assist in the resolution of client money claims;
• mitigate on-going risks to clients;
• allow a sale of part or all of the business;
• permit independent investigations; and
• put in place a structure for the special administrators to liaise with market infrastructure bodies and the FSA.

The Judge was also asked to include in the order certain recitals indicating the status of the Special Administration Order and the Joint Special Administrators under the UNCITRAL Model Law on Cross-Border Insolvency to facilitate the obtaining of recognition, of the status of the order and of the special administrators in other countries.

The FSA released a statement on the Sunday evening after the grant of the order.