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Re Lehman Brothers International Europe (2012) – Maybe Lehman can be trusted with client money after all

In the matter of Lehman Brothers International (Europe) (In Administration), and In the matter of the Insolvency Act 1986 [2012] UKSC 6


This article summarises the February 2012 UK Supreme Court case on Lehman Brothers. The judgment can be found here. We also have a blog on the High Court case of the same name from November 2012, which can be found here.

The case of Re Lehman Brothers International (Europe) was a UK insolvency law and trusts case which as an overview dealt with the certainty of subject matter to create a trust. By the time this case had been through the High Court and the Court of Appeal, it was up to the Supreme Court to decide on various issues concerning the interpretation and meaning of the Client Assets Sourcebook issued by the FCA. The Court upheld the previous decision.


  • As mentioned this case was appealed by the Lehman Brothers from the decision in [2010] EWCA Civ 917, [2011] BUS. L.R 277) with the main dispute being about the ownership of client funds held by themselves at the date they fell into administration.
  • As I am sure you are aware the Lehman Brothers was the United Kingdom subsidiary of a US financial services company which, through the use of Chapter eleven of the US Bankruptcy Code, had filed for protection against its creditors.
  • The Lehman Brothers were regulated by the Financial Services Authority and were allowed to hold client monies which allowed them to operate the alternative approach set out in the Clients Assets Sourcebook (CASS 7).
  • The Lehman Brothers fell into administration and therefore sought advice from the Court involving client money rules as well as the distribution rulings within CASS 7.
  • The general consensus was that firms regulated by the FSA had to segregate their own money and the money which was held on trust on behalf of their clients by placing it in a client account. The justification for this was so everyone would be protected if a insolvency was to occur.
  • Despite all the safety measures in place issues occurred due to the Lehman Brothers failing to segregate some client money and when they did segregate client monies with a bank it wasn’t successful.


The judgement was split into three issues:

  1. Whether a statutory trust had occurred by CASS 7.7.2R upon receipt of client monies or segregation of them.
  2. Based on the interpretation of 7.9.6R, 7.9.7R and 7.7.2R whether the participation in the notional client money pool was dependent on the segregation of client monies.
  3. Whether the primary pooling arrangements (PPA) under CASS 7 applied to the client monies which were held in house accounts.

Issue One

(Paras 61-61, 111-112, 185, 190-195) It was viewed by the Court that a statutory trust had arose on receipt of client monies with the justification that if money was received from a client it would be:

  • Unnatural
  • Contrary to the primary purpose of client protection
  • Contrary to 7.7.2R

for that money to not be the clients property on receipt but be their property again on segregation. If segregation without a trust was to occur then that would go against the objection of the Directive. However, under the alternative approach in CAFF 7.4.16 an immediate trust of identifiable client monies did actually provide protection. Subsequently the Court viewed that despite the absence of express restriction on the use of client monies held in a house account did not allow for the firm to use it for their own motives. This was due having a clear obligation to segregate the money, CASS 7.3 and general trust law preventing use for proprietary purpose.

Issue Two

(Paras 139, 144-145, 147, 159) The Court viewed that whether participation in the notional client money pool depended on the actual segregation of client monies which in turn was dependent on the correct interpretation of 7.9.6R, 7.9.7R and 7.7.2R. The Judge set out that it was important to note that all client monies were subject to the statutory trust and therefore the Court could adopt potential interpretations however decided with offering a high level of protection for clients who had money with the firm. The view of not needing actual segregation of monies was supported by the language and interpretation of CASS 7 which under its influence all client money was subject to statutory trust and therefore be safeguarded.

Issue Three

(Paras 162, 165-166) It was viewed by the Court that the schemes purpose was to provide a high level of protection to all clients, and it would be highly unlikely that the intention of the client monies that hadn’t been segregated yet to be treated different than the segregated money. Therefore, the PPA under CASS 7 did not apply.

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