Solving the ‘classic insolvency conundrum’ – how should insufficient, comingled funds be distributed?

21 October 2020
Scott Couper, Partner, Brisbane

In Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2),[1] the New South Wales Court of Appeal was faced with what it described as the ‘classic insolvency conundrum’: how to distribute funds to investors as equally and as fairly as possible where the funds have been mixed together and there are not sufficient funds to fully repay each investor.  The Courts have grappled with this dilemma for some time.  Here, the Court of Appeal discusses each of the predominant methods and applies an approach which aims to do justice amongst all investors.


  • From 2010, Courtenay House Capital Trading Group Pty Ltd and Courtenay House Pty Ltd (together, CH) accepted funds from investors for the ostensible purpose of investment in foreign exchange trading.  That is, CH offered ‘financial products’.
  • Notwithstanding the above, CH in fact operated a ponzi scheme. Such a scheme arises where capital deposits from newer investors are used to pay ‘returns on investment’ and ‘returns on capital’ to earlier investors.
  • Between $213 million and $248 million of funds were deposited by investors into CH’s bank accounts.
  • On 21 April 2017, the Australian Securities and Investments Commission obtained ex parte freezing orders over CH’s assets.
  • Perhaps unaware of the freezing orders, investors continued making investments on 21-26 April 2017 (inclusive).
  • At the time the liquidators were appointed, CH maintained an account with Westpac Banking Corporation (Westpac) which held approximately $21 million (the Comingled Funds).
  • On the same day the freezing orders were made, $60,000 was withdrawn from the Westpac account into another CH account with Westpac.  No funds remained in the account to which the funds had been transferred.  Argument proceeded on the basis that the $60,000 was irrecoverable.
  • Aside from 2 particular deposits, it was not known whether the other deposits, or the $60,000 withdrawal, occurred before or after the freezing orders were made.

The Liquidators applied to the Court for directions as to the distribution of the Comingled Funds.  At first instance, the Court held that the simple pari passu method (discussed below) should apply.

Issue the Court considered: how should the Comingled Funds be distributed to the investors of CH?

President Bell gave the key judgment, stating that there is ‘room for debate’ as to which approach is the fairest and most consistent with principle, or put another way, which approach is the ‘least unfair result for the investors’ bearing in mind that ‘no method of distribution will result in perfect justice for all’.[2]

His Honour considered three methods may be applied:

The Rule in Clayton's Case[3]'First in, first out' – the earliest deposit into the bank account is presumed to have been the first withdrawn. This approach favours later investors over earlier investors.
Pari passu ex post facto approachDistribute the funds rateably by reference to the amount of individual investments proportionate to the remaining limited funds in the bank account. This approach favours earlier investors over later investors.
Lowest intermediate balance rule[4]

(recognised in England, New Zealand, Singapore, Jersey and in certain cases in Australia)
The approach requires that an investor’s rateable interest in the mixed fund vis-à-vis the other investors to be recalculated after each withdrawal (whereas the pari passu approach discussed above only requires one calculation to be made when the distribution is to be made).

This approach is sometimes described as a 'refinement' of the pari passu approach. It favours later investors over earlier investors because earlier investors' deposits will have been dissipated more so than later investors' deposits.

After a detailed consideration of the authorities considering each of the approaches outlined above, ultimately the Court held that:

  • Where evidence is available, the Lowest Intermediate Balance Rule provides the fairest, most equitable and principled outcome for the allocation of limited funds between investors;
  • The “quintessentially factual approach” of this Rule was superior to:
    • The fiction upon which the rule in Clayton’s Case is based;
    • The simple pari passu approach because it was more consistent with equitable principle and the rules of tracing.
  • Application of the Lowest Intermediate Balance Rule permits the tracing of surviving proprietary interests.  If an investor can identify through tracing their equitable proprietary interest in a mixed or comingled fund, such tracing should be permitted.

In his judgment, his Honour considered that the objections to Lowest Intermediate Balance Rule were not based on principle, but rather practical concerns/realities associated with the cost and complexity of its application, the value of the fund in question and the reliability of the data available to the liquidators.

To this end, President Bell was mindful that the Lowest Intermediate Balance Rule would not always be the best approach depending upon the circumstances of the case.  His Honour noted that there were practical difficulties which might make the approach too complex, or too costly to apply.  For example:

  • If the value of the comingled funds is relatively small, the expense and complexity associated with undertaking the calculations to apply this Rule may not be justifiable.  If that was the case, his Honour considered that a liquidator may be justified and entitled to distribute on a pari passu basis; or
  • This approach requires usable, reliable data – the incomplete or inaccurate state of the company’s records may mean that the calculations to apply this Rule simply cannot be undertaken.

Accordingly, the Court allowed the appeal.  In particular, his Honour:

  • Considered that if the simple pari passu approach was applied, fresh investments on and after 21 April 2017 (being the date of the freezing order) would be used to subsidise earlier investors.
  • Agreed with the Primary Judge that the date of the freezing order did not provide a principled basis for differentiating between investors, however accepted the Appellant’s submission that the “fact that others do not press their rights is not a proper basis to deny the Post 21 April 2017 Westpac Investors the relief they seek in reliance upon their rights“.  Therefore, President Bell held that the Primary Judge erred in denying the relief sought by the Appellants.
  • In relation to the $60,000 withdrawal, it should be treated as having depleted the interest of those who made deposits on that day in the same proportion as those deposits bear to those made by other claimants on the account as at 21 April 2017.

In essence, the liquidators were directed to apply the Lowest Intermediate Balance Rule in calculating the distribution to investors.

Key takeaways

  • Generally, the Lowest Intermediate Balance Rule ought to apply to resolve the ‘classic insolvency conundrum‘ of distributing insufficient, comingled funds between investors with competing claims.
  • However, the Lowest Intermediate Balance Rule may be unworkable in practice (for example, where the calculations would be exceedingly complex and the cost of making those calculations would unjustifiably deplete the comingled funds).
  • If so, a liquidator may be justified and entitled to distribute the comingled funds on a pari passu basis.



Authored by:

Scott Couper, Partner
Tahlia O’Connor, Associate


[1] [2020] NSWCA 117.
[2] Bell P at [18] citing Re International Investment Unit Trust [2005] 1 NZLR 270 at [73].
[3] Devaynes v Noble (1816) 1 Mer 529; (1816) 35 ER 767.  As a general proposition, this case regulates the state of account as between banker and customer, not the relationship of trustee and beneficiary.  It is the starting point in England for resolving the conundrum as to the distribution of inadequate mixed funds between innocent contributors, but is readily displaced.  It has not been applied in Australia where the funds of innocent contributors have been mixed or blended in a bank account and there is a shortfall in funds available for recovery.
[4] Barlow Clowes International Ltd (in liq) v Vaughan [1991] EWCA Civ 11.

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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