How do you cut through complex foreign exchange contracts to deliver a cost-effective outcome for creditors?

EY Partners were appointed as Administrators of EncoreFX (Australia) Pty Ltd and successfully implemented a process to assess proprietary claims and return funds to impacted creditors.

On 30 March 2020 Adam Nikitins and Stewart McCallum were appointed joint and several Voluntary Administrators of EncoreFX (Australia) Pty Ltd (“EncoreFX”). Adam Nikitins, Stewart McCallum and Rees Logan were appointed as Administrators of EncoreFX (NZ) Limited and EY were appointed as Bankruptcy Trustees of EncoreFX Inc., a Canadian federally incorporated entity on the same day.

EncoreFX provided foreign exchange risk management and cross-border payment services, predominantly to SME clients that imported or exported products to and from foreign markets. Following the significant deterioration of number of currencies in March 2020, the EncoreFX group sought EY’s assistance via their appointment as External Administrators.

The Challenge

The structure of the EncoreFX Group resulted in a significant amount of client funds being caught in transit between Australia, New Zealand and Canada at the date of appointment. In addition, the COVID-19 situation impacted a number of clients resulted in the need for urgent investigations and assessments of funds alleged to be outstanding to various clients.

Upon appointment, EY was contacted by 33 separate clients claiming funds totalling $6.5m were held in trust or ought to be classified as “client money” pursuant to the Corporations Act, 2001. Given EncoreFX relied on EncoreFX Inc. to settle the majority of transactions in foreign currencies, it became apparent that whilst EncoreFX held some client funds (five separate bank accounts with funds totalling $5.3m at the date of appointment), the vast majority of these funds had not been held in designated trust accounts and were not held separately to other funds held by EncoreFX. In addition, the individual circumstances relating to each clients’ position differed in regard to currency, contractual terms, FX instrument entered into and a number of other factors.

In addition to these 33 clients, c. $10.2m was owed to former clients with “in-the-money” FX positions that were open at the date of the appointment of Administrators and c. $8m was outstanding to EncoreFX Inc.

EY’s Solution

In order to streamline the process whereby creditors could seek the return of the funds, EY (acting then as Liquidators) commenced proceedings in the Federal Court, which included an application for directions with respect to the appropriate classification of funds held at the date of appointment of Administrators.

EY was conscious of the risk that the complexity of the issues and the prospect of disputes would erode the funds available for distribution to creditors. In previous financial product-related insolvencies, court proceedings have taken years and involved significant costs to the estate. In this situation, the Federal Court proceeding was necessary to resolve the difficult legal issues raised by creditors’ prospective trust claims. EY proposed a court process designed to streamline the process and to minimise costs, whilst still giving creditors scope to join and make submissions if they wished, based on their own legal advice.

Three creditors sought to join the proceeding and were granted leave to do so. Over a number of months, EY provided the solicitors representing these creditors with EncoreFX documentation in order to assist them in preparing for the directions hearing. EY also issued correspondence to all other creditors inviting them to join the proceeding. The hearing was held in the Federal Court on 6 October 2020.

The Outcome

On 28 January 2021, Justice Colvin handed down his judgment, finding that funds totalling c. $778k were held on trust for two of the creditors that had joined the proceeding. Those findings were made on the basis that funds deposited by those creditors constituted “client monies” as provided in section 981A(1) of the Corporations Act 2001 (Cth), which imposed a statutory trust over those monies.

The Orders made by Justice Colvin allowed EY to return funds to other creditors with similar circumstances, notwithstanding the fact that they had not joined the proceeding. Ultimately, as a result of the Orders and EY’s investigations, funds totalling c. $2.6m were determined to have been held in trust upon the appointment of Administrators. These funds were returned to creditors. EY’s determination was on the basis that the funds:

• were paid by clients after the last sweep of EncoreFX’s bank account by EncoreFX Inc.;
• remained in EncoreFX’s bank accounts at the time of the appointment of Administrators; and
• as such, the creditors’ circumstances were sufficiently similar to the circumstances applying to the two creditors that had funds returned, that the reasoning in Justice Colvin’s judgment applied to those creditors.

As a result of the streamlined Court process, EY created a platform for creditors to join the proceeding, provided creditors with sufficient information to pursue claims, returned funds to creditors where those funds could be traced and reduced the overall costs of the liquidation, increasing the return to other unsecured creditors.