Case update: NSW Court of Appeal provides guidance to liquidators on distributing investment funds

By Katherine Payne and Alexandra Lane 

The recent New South Wales Court of Appeal decision in Courtenay House[1] concerned the distribution by liquidators of commingled investor funds, which were paid by investors (unwittingly) into a Ponzi scheme.

Key takeaways

  • The decision provides helpful guidance for liquidators and creditors regarding the appropriate process for distributing commingled funds, whether or not the funds were invested as part of a Ponzi scheme.
  • In assessing the best approach, the Court chose the distribution method that it considered to be ‘the least unfair result for the investors, bearing in mind that, regrettably, no method of distribution will result in perfect justice for all’ (Williams J in International Investment Unit Trust [2005] 1 NZLR 270 at [24]). Ultimately, what is equitable will depend on the facts of the case.
  • Although the Court of Appeal determined that the lowest intermediate balance method was appropriate here, it commented that the rule in Clayton’s Case or the pari passu approach may be more appropriate in other factual scenarios (including where cost or complexities make the lowest intermediate balance method prohibitive).
  • It is recommended that liquidators seek legal advice and the Court’s directions if they are unsure of the most suitable course of action, particularly given the potentially contentious nature of certain fund distributions in a liquidation.


The business model of Courtenay House Pty Ltd and Courtenay House Capital Trading Group Pty Ltd (together, Courtenay House) involved receiving investments made from the public, for the ostensible purpose of investing those funds in foreign exchange trading.

Unbeknown to the investors, the business model operated by Courtenay House was a Ponzi scheme. Under such a fraudulent scheme, deposits by newer investors are used to pay purported returns to earlier investors (as distinct from receiving profits). Ponzi schemes will ultimately collapse if, among other things, the operator of the investment vehicle is unable to pay the promised returns to investors, for example, due to market forces or if the investor pool dries up.

Over the course of this scheme, Courtenay House collected between $213 million and $248 million from investors. Of this, only a small amount was invested into foreign exchange trading.

The present case arose following ex parte freezing orders being obtained by the Australian Securities and Investments Commission on 21 April 2017, to restrain Courtenay House from dealing further with the investment funds. However, even after these orders were obtained, a number of new investors continued to make deposits into bank accounts held by Courtenay House.

Liquidators were appointed to Courtenay House on 16 May 2017. At this time there was $21 million held in Courtenay House’s bank account which was available for distribution. Following their appointment, the liquidators were required to consider two groups of investors:

  • those who made investments before the freezing orders, which totalled approximately $57 million; and
  • those who made investments after the freezing orders were made, which totalled approximately $475,000.

The liquidators sought the Court’s direction regarding the appropriate method for distributing the funds available on appointment amongst the classes of investors.

First instance decision

At first instance, Justice Black of the Supreme Court of New South Wales concluded that the remaining funds were held on separate trusts for the different classes of investors (either as express or Quistclose trusts). However, he ultimately decided that there was no reason to distinguish between or treat the classes of investors differently because of the intervening freezing order.

His Honour held that the pari passu method of distribution was the most appropriate in the circumstances. This meant that the remaining funds would be divided among all investors in accordance with the proportions of the particular investment made.

Those investors who made deposits into the scheme after the freezing orders came into force appealed the decision. The key issue for determination was whether Justice Black had erred in applying the pari passu method as the appropriate method to distribute the investment funds.

Court of Appeal

The Court of Appeal considered three different methods of distribution, and ultimately held that the primary judge had erred in applying the pari passu method. Rather, the Court of Appeal held that the lowest intermediate balance rule was most appropriate in the circumstances, as investments and withdrawals were made over a period of time.

In considering the competing methods of distribution, first the Court considered the rule in Clayton’s Case. This involves applying a presumption such that the first funds invested are presumed to be the first funds spent or withdrawn. This approach would favour later investors as there was a lower risk of their money being disbursed. The Court rejected this approach as all the investors were jointly interested in the remaining funds. The Court held that, in these circumstances, there was no reason why the withdrawals should not be borne equally. We note that Clayton’s Case has also not been followed in similar factual scenarios in other common law jurisdictions.

Secondly, the Court considered the pari passu method, held to be appropriate in the first instance decision. The Court was critical of this approach as it tends to favour the earlier investors: although the initial investment funds may have been dissipated through the course of various withdrawals, upon distribution reference is only had to the proportion of the initial investment made. Therefore this approach fails to take into account the impact of the lifespan of the scheme.

Despite this, the Court highlighted that the pari passu approach does provide for a simple and cost-effective resolution. Ultimately however the Court rejected this approach, deeming it inappropriate for a situation where investments occurred over a period of time and the investment funds had been mixed.

Finally, the Court considered (and accepted) the lowest intermediate balance rule. This approach proportionally reduces each investment when a withdrawal is made from the investment fund. Therefore each investor’s share of the distribution would depend on the timing and movement of their respective investment. Although this approach may favour later investors, the Court held that it was the most equitable in the circumstances due to the timeline of the investments.

Speaking more broadly, the Court also highlighted that the lowest intermediate balance rule may be impractical in a case where there are a large number of deposits and withdrawals. In turn, this may affect the economic practicality of this approach, where cost of determining distribution outweighs the balance available to be distributed.

Key message

This case reinforces that there is no ‘one size fits all’ approach to distributions. Rather, Liquidators should consider the best distribution method based on the particular facts of the winding up. When considering the most suitable method, Liquidators should have regard to key facts such as the nature of the investment, the timing and the subsequent treatment of the investments.

[1] 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) [2020] NSWCA 117


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