On 18 June 2020, the Court of Appeal handed down it decision in the matter of Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) and Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2)  NSWCA 117. The Court of Appeal considered the most appropriate method for distributing funds in the winding up of two companies which had been operating a Ponzi Scheme.
By all outgoing appearances, Courtenay House Capital Trading Group Pty Ltd (in liquidation) and Courtenay House Pty Ltd (in liquidation) (collectively, Courtenay House) obtained funds from the public for the purpose of investing in foreign exchange trading. In fact, Courtenay House operated a Ponzi scheme using funds from later investors into provide returns to those who invested earlier.
To facilitate their business, Courtenay House held two bank accounts, one with National Australia Bank and the other with Westpac (Bank Accounts). On 21 April 2017, ASIC obtained ex parte freezing orders over Courtenay House’s assets including the Bank Accounts.
Despite freezing orders being made, investors continued to make deposits into the Westpac Account. On the day that the freezing orders came into effect, $60,000.00 was withdrawn from the Westpac account. This gave rise to two types of investors, investors who made deposits after the freezing order came into effect but before the $60,000 was withdrawn (the Court described this group as Category E Investors) and investors who made deposits after the freezing order came into effect and after the $60,000 was withdrawn (the Court described this group as Category F Investors).
At the time of liquidators’ appointment, there was $21 million held in the Westpac account (Westpac Funds). The liquidators applied for orders and directions as to the manner in which they were to distribute the Westpac Funds to the Category E and Category F Investors.
At the first instance, his Honour concluded that it was impractical to distinguish between the two classes of investors and ordered that the Westpac Funds be applied pari passu.
The question before the Court of Appeal was whether Black J erred in applying that simple pari passu method.
The Court of Appeal considered three possible methods of distribution:
- The “first in, first out” method established by Devaynes v Noble  35 ER 767 (Clayton’s Case);
- The pari passu basis for distribution apportioning the distribution pro rata; and
- The “lowest intermediate balance rule” which factors in the impact of any depletion in the co-mingled funds over time.
The Court of Appeal held that Black J erred in his finding that the Westpac Funds be distributed pari passu.
They found that where a bank account is mixed with the funds of multiple investors at different points in time and the bank account fluctuated, the Court should characterise the equitable charge as a “rolling charge” the value of which is proportionate to the amount of the remaining investment.
Where the individual charges are inadequate security or where the co-mingled fund has been depleted by earlier withdrawals/distributions, it will be necessary to calculate any distribution rateably by reference to the interest identified. In an insolvency context this is a common occurrence where liquidators legitimately expend part of the fund.
The Court of Appeal ordered:
- The withdrawal of $60,000 was to be deducted pro-rata across all of the Respondents and Category E Investors;
- The Category E Investors were entitled to the amount of their investment, less the pro-rata deduction in  and any contribution for costs; and
- The Category F Investors were entitled to the amount of their investment, less any contribution for costs.
This matter demonstrates the nuances of distributing co-mingled funds to creditors and that the most appropriate method for distributing funds in the winding up is closely tied to the circumstances of the matter.
**Assisted by: James d’Apice**