Allowing customers to keep derivative trading positions open when Halifax went bust did not mean they personally kept investment gains accruing after liquidation. Trading gains went into the pool to meet deficiencies owed all customers because Halifax’ records of customer holdings did not match securities supposedly held on their behalf.
Australian financial services provider Halifax Investment Services Pty Ltd went into liquidation insolvent in November 2018, followed days later by its New Zealand affiliate. Investigations found there was a $A19 million shortfall between securities supposedly held on behalf of customers and the stated value of individual customer accounts. Customer funds were supposed to have been kept separate. Instead, Halifax management used trust funds for working capital in breach of trust.
In a novel legal approach, judges in both New Zealand and Australia jointly heard evidence as part of the legal wash-up. Judges on each side of the Tasman issued separate court rulings in respect of investors in each country, but with similar legal rules operating in both countries their final rulings were not contradictory.
Evidence was given that administrators did not immediately close out customers’ open derivative positions when Halifax went into administration. Some customers at that point argued they could trace rights of ownership to specific securities held by Halifax. Others threatened to sue administrators if they did not first get a court ruling to close positions. Leaving positions open meant some investors saw their derivative holdings decline in value, others saw an increase.
A derivative contract fixes a price today for performance at a later date. Derivative values move daily as the market value of underlying assets move. A derivative contract is closed, and the profit or loss crystallised, with the purchase of a derivative contract netting off the earlier obligation to perform.
One Halifax customer holding open positions valued at $A361,500 as at November 2018 saw these same open positions worth $639,700 two years into Halifax’ liquidation. As a gain arising from his greater investment skills this gain should be paid out to him personally, he said. The investor was bearing no downside risk, Halifax liquidators pointed out. Should value of his open derivative contracts have dropped, he would still be recorded as a Halifax creditor at the higher previous November 2018 value.
Investment gains arising from open positions were not ‘owned’ by individual investors, the Court of Appeal ruled. Customer accounts as at November 2018 were book-keeping fictions that did not accurately correspond with securities Halifax held on behalf of clients. Once Halifax went into administration, unpaid investors had a shared equitable interest in the realised value of securities held by Halifax on their behalf. Investor proportionate entitlements were to be assessed on the amount each was owed as at the November 2018 date of administration, the court ruled.
Loo v. Halifax New Zealand Ltd – Court of Appeal (26.10.21)
21.175