This week’s TGIF considers the decision in Nikitins v EncoreFX (Australia) Pty Ltd (No 2)  FCA 27, where the Federal Court found that funds paid into a holding account for the provision of foreign exchange services were held on trust and were not property of the liquidation.
- Where monies are paid in connection with financial products, in circumstances where no statutory exception applies, the money will be deemed to be held on trust for the benefit of the client.
- The trust entitlement arises at the time of the payment of monies, irrespective of whether the funds were paid into a separate trust account as required under the Corporations Act 2001 (Cth).
- This can have important implications where a company enters external administration before the relevant transactions are completed. In this case, the liquidators were not entitled to treat the monies as property of the liquidation, and the clients received 100 cents in the dollar for those amounts.
Two clients entered into transactions with the company in liquidation (EFX) to exchange funds totalling AUD $804,132.91 into USD. Both clients paid the relevant sums to EFX on 27 March 2020.
EFX entered into voluntary administration on 30 March 2020, and went into liquidation in May 2020. The commencement of the administration of EFX intervened before the clients’ foreign exchange transactions were completed.
The liquidators applied to the Court for directions as to whether the monies paid to EFX but not yet exchanged for foreign currency formed part of the property of liquidation.
The clients contended that, because the money was paid in connection with a financial product, it was held on trust pursuant to the Corporations Act 2001 (Cth).
The critical issue was whether the monies were paid in connection with a financial product.
The Court held that:
- EFX provided foreign exchange contracts to the clients, which are financial products for the purposes of the Corporations Act.
- The monies were paid ‘in connection with’ those services, because the payments were made pursuant to the terms of the foreign exchange contracts and in performance of the obligations therein.
- Accordingly, the Corporations Act provided that the monies were held on trust for the clients.
- There are certain statutory exceptions to the rule requiring the monies to be held on trust. None applied here.
The Court noted that, had the monies been paid as remuneration, it would have fallen within a statutory exception and would therefore not have been held on trust. However, in the circumstances, the remuneration of EFX was deemed to come from the differential between the exchange rate that it agreed with the clients and the actual rate of exchange at which it was able to purchase the US dollar amount.
Accordingly, the Court held that the monies were held on trust for the benefit of the clients.
For insolvency practitioners and creditors, this decision clarifies the position of dealings in financial services and products that are pending at the time of entry into administration.
The Court has clearly stated that where monies are paid in connection with financial products, in circumstances where no statutory exception applies, the money will be deemed to be held on trust for the benefit of the client.
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