Some you win, some you lose — the hindsight principle in UK insolvency law

There is a basic principle of UK insolvency law called the ‘hindsight principle’. It is a principle of general application that where the amount of a contingent claim has been estimated for the purposes of an insolvency officeholder paying a dividend, and the amount of the claim becomes certain before the payment, the actual amount will be taken as the claim’s value, not the prior estimate. The use of the hindsight principle removes the need to make the estimate or makes the estimate more accurate and produces what may generally be regarded as fairer values for the purposes of the distribution or payment.

In the MF Global case the issue was whether the hindsight principle should apply to the valuation of client money claims for the purposes of calculating their pro rata share of the remaining client moneys in the hands of the administrators. Were such claims to be valued by reference to (i) the market value of the clients entitlements as at the primary pooling event (PPE) under the client money rules contained in Chapter 7 of the Client Assets Sourcebook section of the Financial Services Authority Handbook (CASS) or (ii) by reference to the prices at which the trades are subsequently closed-out, whether at the contractual settlement date or at an earlier date in accordance with applicable default provisions. Option (ii) involved the application of the hindsight principle which some client creditors thought was excluded by the express provisions of the CASS rules…

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