Vaughan v Barlow Clowes International Ltd

Facts

The receivers of Barlow Clowes, a failed investment management firm, applied to determine in what order they should distribute assets to the creditors in Portfolios 28 and 68. Contributors to these managed investment plan accounts had advanced money, and were aware the money was to be invested as a collective fund. Specific investments were not earmarked for specific investors. In the event, the assets were misapplied and mostly dissipated.

Peter Gibson J held that the first in first out rule applied. The early investors appealed, represented by Mr Walker QC.

Judgment

The Court of Appeal held that contributors could not have intended that withdrawals from the account, and investments then purchased, could be allocated by reference to the order the contributions were made. So the first in first out rule is more of a default rule. It would not be applied if the result would be ‘impracticable or result in injustice’. It was not intended that only a small number of investors would get the most out of the fund. They would share rateably, pari passu.

Dillon LJ said the following:

Dillon LJ also noted that in The Mecca Lord Halsbury LC said, ‘the circumstances of a case may afford ground for inferring that transactions of the parties were not so intended as to come under this general rule’ of Clayton's Case.

Woolf LJ said (1) the first in first out rule would apply prima facie, but would not be applied if ‘impracticable or would result in injustice’ and (2) the rule would not be applied if contrary to the parties’ presumed intention (3) then the alternative basis for distribution would depend on which practical alternative is most satisfactory in the circumstances (4) all solutions must depend on the ability to trace money.

Leggatt LJ said that the rolling charge approach is fairer and more coherent, however it is more difficult to apply, than simple pari passu, and so this (pari) was applied.