If a Broker goes bust and takes the Client account monies with them - who loses out

[Observer]

You pay £100 000 for a boat to a Yacht Broker.
by close of business £90 000 or more has been offset against their overdraught

I'm not going to get sucked into loads of detail on this thread generally - don't have time. However a set off or offset is not possible in the usual sense with a genuine client account. The bank will not have the right to set off the client account balance against overdraft on the broker's 'own funds' account in the sense that the client account is at risk if the bank calls in the overdraft. What may well happen is that the bank takes the aggregate balance across two or more accounts in calculating interest. So the client account balance is reducing the broker's interest costs.

Whether that is a fair treatment of clients money is another issue. If clients don't insist on being paid interest on their deposits etc with the broker then why not? If the broker doesn't get the benefit and the clients haven't asked for it then the bank will get it.

 

[jonic]

I'm not going to get sucked into loads of detail on this thread generally - don't have time. However a set off or offset is not possible in the usual sense with a genuine client account. The bank will not have the right to set off the client account balance against overdraft on the broker's 'own funds' account in the sense that the client account is at risk if the bank calls in the overdraft. .

That is correct, If the account is set up properly it will contain this or similar wording when you contract with the bank.

We give you notice that:
a) all money standing to the credit of the above account
is held by us as trustee (or, in respect of investment
business carried on in Scotland, as agent);
b) you are not entitled to combine this account with
any other account or to exercise any right of set-off or
counterclaim against money in this account in respect
of any sum owed to you on any other account of ours;

 

[Observer]

Ok. But I would be surprised if non specialists are going to get involved in boat loans using the boat as collateral. Using a house maybe, but that is just a normal loan with no recourse to the boat.

The bigger risk of unregistered mortgages on boats is probably from loans made by friends or family or business acquaintances. But then the borrower/boat owner is more likely to carry and respect a moral obligation to the lender so less likely to sell without clearing the debt.

Jonic - what is the typical threshold at which a mainstream marine lender will insist on a marine mortgage? Do any such lenders use unregistered mortgages? If so is that because the boat is not Part I registered and eneconomic to so register? I know there are very few mainstream lenders in the marine market now. Lombard and [any others]? Is there a second tier of smaller lenders who use unregistered mortgages?

Sorry for all the questions. Answers may help to set the scope of the potential problem. I think it is very small but that's educated guesswork not backed up by solid facts.

 

[jonic]

The bigger risk of unregistered mortgages on boats is probably from loans made by friends or family or business acquaintances. But then the borrower/boat owner is more likely to carry and respect a moral obligation to the lender so less likely to sell without clearing the debt.

Jonic - what is the typical threshold at which a mainstream marine lender will insist on a marine mortgage? Do any such lenders use unregistered mortgages? If so is that because the boat is not Part I registered and eneconomic to so register? I know there are very few mainstream lenders in the marine market now. Lombard and [any others]? Is there a second tier of smaller lenders who use unregistered mortgages?

Sorry for all the questions. Answers may help to set the scope of the potential problem. I think it is very small but that's educated guesswork not backed up by solid facts.

I dont know, because lenders enter and leave the market place all the time and they have their own procedures.

Any potential problem would be very small relative to the number of transactions that take a place and a good broker will add further layers of comfort with due diligence checks.

I have dealt with Lombard on numerous occasions and they are always very diligent with regard to title documentation.

 

[Tranona]

I'm not going to get sucked into loads of detail on this thread generally - don't have time. However a set off or offset is not possible in the usual sense with a genuine client account. The bank will not have the right to set off the client account balance against overdraft on the broker's 'own funds' account in the sense that the client account is at risk if the bank calls in the overdraft. What may well happen is that the bank takes the aggregate balance across two or more accounts in calculating interest. So the client account balance is reducing the broker's interest costs.

Whether that is a fair treatment of clients money is another issue. If clients don't insist on being paid interest on their deposits etc with the broker then why not? If the broker doesn't get the benefit and the clients haven't asked for it then the bank will get it.

Pete gets very exercised about this particular aspect of the Peters case. It was only mentioned as background to how Peters "managed" different parts of their business. Not all their deposits for new boats (acting as a dealer) were placed in the client account. Some were paid into their trading account and then equivalent funds later transferred. The bank was offsetting the balance in the client account, presumably as you say to reduce their interest charges, but also it would have the effect of keeping the overdraft within the agreed limit.

It is not clear whether funds were actually moved from one account to the other, but there is no suggestion that anybody who had funds in the client account lost anything as a result of this - indeed the point was made that the account was always able to meet demands on it.

The failure of Peters was triggered off by first, the practice of offsetting being discontinued with the effect of reducing the overdraft limit. Then Peters tried to regularise the positions in respect of deposits where it had promised the customer that they would be in a client account, but were not. To do this they tried to transfer funds from the trading account (which was off course overdrawn) into the client account. The bank refused the transfer, so setting in train the eventual administration.

There were then of course competing claims on the balance in the client account from various parties who were either in the middle of brokerage transactions or who had placed deposits for new boats, one of which at least was in both categories. The outcome was that only those claimants that could show that a trust had been created correctly had a claim. All those who could show this had their claim met and there was still a surplus in the account.

It is the clarification of what creates the trust that resulted in the revised wording of the trust account members of the YDSA (and no doubt many other operators of client accounts) now use. A key feature of the revised wording is the bit that prevents banks from offsetting balances against other accounts.

So an interesting bit of history, but not I suggest anything that implies banks regularly take money out of client accounts - rather the opposite as no doubt banks are as aware now of the issue as anybody else involved in running client accounts.

Another feature of the Peters case (although not an issue in the court case) is financing. Their business model was to pre-order boats from abroad (particulalry Bavaria in Germany) prior to boat shows and hope to sell them in advance of delivery. Not only did that give them huge buying power (often 20 or 30 boats at a time) but they committed to paying for them by buying currency forward at a fixed rate. That enabled them to offer a fixed sterling price to customers.

They took relatively small deposits because they would receive final payment from the customer when the boat was delivered and they paid the factory. Inevitably though there would be cases where the boat did not sell before delivery so they also had arrangements with finance houses to borrow against the boats with a charge against each individual boat, which would be cleared when the boat eventually sold.

This had two effects towards the end. Firstly it increased their effective gearing as boat sales slowed and stock rose and secondly buyers needed to be aware that there might be a charge against the stock boat they were buying. Not sure whether anybody did lose out this way, but it is an ever present risk when buying a new boat from a dealer.

Getting secure title and ownership on a new boat bought from a dealer, and ensuring security of any deposits and stage payments is, perhaps , potentially far more risky than a straightforward purchase of a used boat through a broker (or even direct from the owner).

 

[Observer]

Observer is top man on contract law and might add to the above. All this is English law only. No use if you're buying a boat in France, say

Very flattering jfm and thanks for the endorsement. Not really much to add to the excellent posts you've made already.

In current climate I would be cautious as buyer or seller about large sums in broker's or dealer's client account. If a seller and seeking large deposit I would insist on money being paid to me and offer a bank guarantee to secure the buyer. That's readily available and easily collateralised by the deposit itself. The completion payment also to be paid direct and I would use your escrow mechanism for keys and documents including BoS. It's easy to set up and gives good tension to the broker as escrow agent because smooth completion is in his interest as fastest way to getting paid.

As buyer of new boat from a dealer I would look for confirmation the dealer has clear title if a stock boat. If large deposit needed I would look for bank guarantee as above or negotiate smaller non-refundable deposit. Completion money by transfer once all papers are seen and inspected.

If buying new boat not yet built, I'd insist on deposit and stage payments directly to builder and direct agreement to assure title to incomplete boat and unincorporated materials vest in me as buyer. All this is standard stuff in real property construction I believe and easily transferable to marine construction (I don't have experience in ship finance but bet its applied there).

[edit]
BTW, I should clarify that I'm not legally qualified, as jfm knows but others probably don't. I am a transaction specialist for an intermediate lender/lessor in mid-ticket to low-end large ticket (typically £100k to <£5 million) asset finance and other structured finance transactions and do substantial amounts of drafting for sometimes simple but often quite complex deals - cos that's where the money is, see, doing stuff that doesn't fit the standard model that the big players won't or don't want to or don't know how to take on because it's not economic to apply the costs of full on structured finance / project finance to middle market deals and up to a few £million and players who do operate at that ticket size don't have specialists like me who can get to grips with legal and tax and accounting issues all at the same time. It costs a fortune to get these deals done by external professionals and that blows the economics of the finance package. So we occupy a niche for deals that are big enough to be interesting, complex enough to be hard-ish to put together but too small for the big boys. Mostly we're not using our own money (although we do invest and manage funds and transactions for a US investment fund) but take head-finance from a bank or asset finance subsidiary of a bank. I have to second guess what our head funder will need contract-wise and make sure that what I produce passes scrutiny by their legal team. Really big structured finance or project finance deals (eg PFI) are too much for one person and have elements I'm not competent in so they get farmed out to external lawyers who act under joint instruction from us and the bank.

Sorry to bore you with all that but though it worth explaining my credentials.

 

[Tranona]

If buying new boat not yet built, I'd insist on deposit and stage payments directly to builder and direct agreement to assure title to incomplete boat and unincorporated materials vest in me as buyer. All this is standard stuff in real property construction I believe and easily transferable to marine construction (I don't have experience in ship finance but bet its applied there).

The BMF contract that UK builders can use does that - similar things have been in place for years, particularly in custom build, but became common practice after the various Westerly failures. I used to work for a custom builder in the early 80's and all our build contracts transferred ownership in stages against a surveyor's report confirming work done.

However, they are still problematic as the recent Sadler failure showed. The customers who end up as owners of a collection of bits that resemble a boat still have the problem of getting it finished. In this case another builder agreed to finish off some of the boats, moved them to their yard which subsequently burned down in mysterious circumstances. Others tried to get their boats finished elsewhere, but had problems with getting specialised parts and technical assistance. Inevitably the eventual cost ended up higher than the original price.

Now most sailing boats anyway are not built here, most people have no option but to buy from a dealer and the big builders are not interested in having direct contracts with owners. Many of the smaller builders, and particularly the Scandinavians do deal direct and their representative gets a commission. They also often offer bank guarantees as part of the contract.

 

[gjgm]

The bigger risk of unregistered mortgages on boats is probably from loans made by friends or family or business acquaintances. But then the borrower/boat owner is more likely to carry and respect a moral obligation to the lender so less likely to sell without clearing the debt.

QUOTE]
Well, this thread is an eye opener !
You think friends and family draw up mortgages with the boat as collateral?
I can imagine them simply lending money, but drawing it all up so that they have a claim on the boat does surprise me.
If they just lend the money, the boat itself is irrelevent to this discussion?

 

[ari]

Ok we must again stay clear of scaremongering.

Most Marine mortgages will be registered on part 1

How do you know whether a boat is registered on part 1?

 

[DAKA]

I'm not going to get sucked into loads of detail on this thread generally - don't have time. However a set off or offset is not possible in the usual sense with a genuine client account. The bank will not have the right to set off the client account balance against overdraft on the broker's 'own funds' account in the sense that the client account is at risk if the bank calls in the overdraft. What may well happen is that the bank takes the aggregate balance across two or more accounts in calculating interest. So the client account balance is reducing the broker's interest costs.

Whether that is a fair treatment of clients money is another issue. If clients don't insist on being paid interest on their deposits etc with the broker then why not? If the broker doesn't get the benefit and the clients haven't asked for it then the bank will get it.

the constant trust argument that dictates that each and every £1 should be traceable, and case history stipulates that if I take a £1 out today and replace it with another £1 tomorrow the trust status is lost as its not the same £1.

I understand your theoretical argument that if the money doesnt actually leave the account then perhaps the same £1 is still in it BUT THAT IS TOTALLY UNTESTED AS YET and it is a fair assumption that it wouldnt stand up as its obvious that if the account balance is reduced to £10 000 on Friday then the 840 000 £1 s arent the same ones back in the account on Monday .

I agree we shouldnt get sucked into and close very simply with........

Your weak argument is only applicable in any event to correctly formatted clients accounts which are neither compulsory or regulated in the Yacht Broker world.

Tranona, I realize we will never agree on this and I understand your excitement in finding an allie but please bear with me once again while I attempt to explain why the Peters case does highlight risks in this respect.

The Judge did indeed say that they were adequate funds in the clients account (for some clients)BUT the practice of sweeping the clients account had stopped 3 months before they went bust.
If they hadnt have stopped this practice when they did then there would have been £.84m short in the client account and Observer could have stood up in court and tried to argue that the 840 000 £1 coins that were paid out on Tuesday were all taken out the Chichester cash point machine on Wednesday, spent in the market that afternoon and all the market traders paid them back into Barclays on Thursday where they went back in BA Peters account.
I dont think any of us want to test that with our own pension pots , do we


I have personal experience in understanding the very real difficulties of attempting to create a client account with National Westminster , Midland banks and Nationwide Bank, all were clueless and some banks openly offered to 'loan' me money on the strength of the clients account...............
They offered this facility, I didnt ask for it or want it but had I taken the offer I believe the clients account would have been useless !

see James Roscoe (Bolton) Limited -v- Winder [1915] 1

 

[jonic]

I have personal experience in understanding the very real difficulties of attempting to create a client account with National Westminster , Midland banks and Nationwide Bank, all were clueless and some banks openly offered to 'loan' me money on the strength of the clients account...............
They offered this facility, I didnt ask for it or want it but had I taken the offer I believe the clients account would have been useless !

Which is why mine is with Lloyds

Off to shoot some video of a nice yacht now so I shall miss todays debate.

So don't forget, if the money is in a correctly managed client account and you have the correct sale and purchase contracts and the broker went bust, the money is safely in the bank and is 100% yours. And as per the OP if you have paid for the boat and been issued with a Bill of Sale the boat is yours.

Note: In brokerage the balance funds are usually only in the account for 24-48 hrs.



Have fun all

 

[DAKA]

So don't forget, if the money is in a correctly managed client account and you have the correct sale and purchase contracts and the broker went bust, the money is safely in the bank and is 100% yours. And as per the OP if you have paid for the boat and been issued with a Bill of Sale the boat is yours.

Have a nice sail Jonic,
Just for you to ponder while out.........

The buyer pays the cheque and isnt really concerned if the cash clears the Brokers overdraught , pays for a round the world cruise or pays for the boat.

The seller is the guy who wants the funds paid into a properly regulated clients account, so what exactly can he do about it apart from have a good moan on here ?

edit

I trust you with a clients account Jonic , my question is in general.

 

[Tranona]

The Judge did indeed say that they were adequate funds in the clients account (for some clients)BUT the practice of sweeping the clients account had stopped 3 months before they went bust.
If they hadnt have stopped this practice when they did then there would have been £.84m short in the client account and Observer could have stood up in court and tried to argue that the 840 000 £1 coins that were paid out on Tuesday were all taken out the Chichester cash point machine on Wednesday, spent in the market that afternoon and all the market traders paid them back into Barclays on Thursday where they went back in BA Peters account.
I dont think any of us want to test that with our own pension pots , do we :rolleyes

You do not KNOW that - you are only GUESSING that is what might have happened. With all those lawyers crawling over the case if there had been any criminal act or if it had any effect on the individuals involved they would have pursued it.

You are probably correct that if the money did actually leave the account then the trust would not exist, but again you do not know this, nor has it been tested in court, so we are left with a "might have been" rather than a fact. In all that time of the offsetting arrangement appeared to be in place, there was never any suggestion that clients funds in the account were not otherwise being correctly handled. Without going over the same ground again, the problem was with clients funds that were not correctly paid into the account as promised.

As I said, not something to be ignored, but an interesting historical event, now no longer relevant if a client account of the type recommended by YDSA is used.

 

[Tranona]

How do you know whether a boat is registered on part 1?

The registration number will be permanently attached to the boat and you can check with the Registrar that the boat is still on the register, who has the registered title and whther there are any charges regsitered against the boat. Normally the broker would do this for you as part of his due dilligence.

 

[jonic]

Have a nice sail Jonic,
Just for you to ponder while out.........

The buyer pays the cheque and isnt really concerned if the cash clears the Brokers overdraught , pays for a round the world cruise or pays for the boat.

The seller is the guy who wants the funds paid into a properly regulated clients account, so what exactly can he do about it apart from have a good moan on here ?

edit

I trust you with a clients account Jonic , my question is in general.

Flying out the door so got to go, but it's written in the contract.


Here's something for you to ponder too

If you take your expensive car into the garage for a service and leave it overnight with the keys, do you worry that the technician will steal it and drive off with it? Perhaps he'll sell it to a ringer and go on a world cruise, or use it to pay off his overdraft. What if he sells it and says he is only pawning it and he meant to get it back!? Thats all he'll have to say to avoid prosecution!

There are no specific laws against that, other than the everyday laws that are in place and you don't even have a contract! Or even a ringfenced "client" car pound. Even if it is locked up overnight the technician could creep back overnight and open it

Come to think of it the car service industry is a shambles!! Something should be done!! Anyone could set up tomorrow and keep all the cars that come in for a service. WAKE up garages, we know you could fleece us blind of our cars What if he goes bust and runs of with my £30,000 car!!.

That's it, its too dangerous. I'm doing all my servicing myself until the government puts in place a compensation scheme.


Note:

I don't subscribe to any of the above and do not have a 30K car.

Just a thought

 

[benjenbav]

You do not KNOW that - you are only GUESSING that is what might have happened. With all those lawyers crawling over the case if there had been any criminal act or if it had any effect on the individuals involved they would have pursued it.

You are probably correct that if the money did actually leave the account then the trust would not exist, but again you do not know this, nor has it been tested in court, so we are left with a "might have been" rather than a fact. In all that time of the offsetting arrangement appeared to be in place, there was never any suggestion that clients funds in the account were not otherwise being correctly handled. Without going over the same ground again, the problem was with clients funds that were not correctly paid into the account as promised.

As I said, not something to be ignored, but an interesting historical event, now no longer relevant if a client account of the type recommended by YDSA is used.

BA Peters plc (in administration); Moriarty and another v Atkinson and others isn't really about the failure of a client account. The Court of Appeal's ruling was that money which should have been paid into the client account was actually paid into a current account and the court did not feel able to allow the relevant creditors to use the breach of trust (in failing to pay the money into the right account) to put their claims ahead of other unsecured creditors.

To quote from the case report:

"The money paid by the company into its overdrawn current account never formed part of the money in the client account, which was the fund against which the appellants sought to claim. Instead, when the money in the current account was used to reduce the company's liability with the bank it effectively disappeared and there was never any fund on which a proprietary claim could operate...

Furthermore, although the appellants apparently had a good claim against the company for breach of trust for not having paid the money into the client account, that did not mean that they had a proprietary or any other equitable interest or right over that account, since that would mean creating, to the detriment of all the other unsecured creditors, a new class of preferred creditors of those whose money was taken by the company in breach of trust, which ranked behind all secured or trust or proprietary claims but before any ordinary unsecured claims."

 

[DAKA]

You do not KNOW that - you are only GUESSING ........
You are probably correct that if the money did actually leave the account then the trust would not exist, but again you do not know this, nor has it been tested in court, so we are left with a "might have been" rather than a fact.

I was of the understanding the whole concept of English law was based on case history.

After reading this case

James Roscoe (Bolton) Limited -v- Winder [1915] 1

I feel the term 'Guess' is a little unfair.

I accept that I dont know for sure the same as if I drop a glass vase from a 4th story window I dont know for sure if it will break.

On a positive note I think this is probably as close to an agreement as we have ever been and are ever likely to get.

Its a shame you and I didnt reach this same conclusion 4 years ago because I'm sure our personal argument has had an effect on the forums perceived risks of using yacht brokers, much of the detail would have remained buried but its too late now , I expect changes that are well overdue will be forthcoming.

What would the draw back be to the yacht Brokers association having a clients account which their members used.

ie
Neither The Yacht Broker nor the Yacht Brokers local bank gets the chance to mess with the trust.

Minimal cost .

 

[DAKA]

BA Peters plc (in administration); Moriarty and another v Atkinson and others isn't really about the failure of a client account. The Court of Appeal's ruling was that money which should have been paid into the client account was actually paid into a current account and the court did not feel able to allow the relevant creditors to use the breach of trust (in failing to pay the money into the right account) to put their claims ahead of other unsecured creditors.

To quote from the case report:

"The money paid by the company into its overdrawn current account never formed part of the money in the client account, which was the fund against which the appellants sought to claim. Instead, when the money in the current account was used to reduce the company's liability with the bank it effectively disappeared and there was never any fund on which a proprietary claim could operate...

Furthermore, although the appellants apparently had a good claim against the company for breach of trust for not having paid the money into the client account, that did not mean that they had a proprietary or any other equitable interest or right over that account, since that would mean creating, to the detriment of all the other unsecured creditors, a new class of preferred creditors of those whose money was taken by the company in breach of trust, which ranked behind all secured or trust or proprietary claims but before any ordinary unsecured claims."

Technically that example cant be used in a discussion on Yacht Brokers.

Where it is true that Peters were acting as a Broker when they sold the boats and the money should have been paid into a clients account which it wasnt.

At the time when Peters went bust they were actually using the clients money to fund a brand new boat so were technically acting as a dealer when they went bust.

Peters eventually attempted to protect the sale funds (collected while acting as a Broker) into the so called clients account a few weeks before they went bust but the judge wouldnt allow it as he said it was too late.

We can deduce absolute clear evidence of a Yacht Broker/dealer thinking clients money is safe in a so called clients account when it isnt.

 

[ari]

The registration number will be permanently attached to the boat and you can check with the Registrar that the boat is still on the register, who has the registered title and whther there are any charges regsitered against the boat. Normally the broker would do this for you as part of his due dilligence.

And if the number has been removed by a fraudulent owner? (After all, an honest owner is going to be up front about the mortgage in the first place anyway so no need to check, you're only checking in case he's not).

 

[Tranona]

And if the number has been removed by a fraudulent owner? (After all, an honest owner is going to be up front about the mortgage in the first place anyway so no need to check, you're only checking in case he's not).

You can never guard against a determined fraudster. However it is a requirement that the registration number is permanently attached to the boat - traditionally into the main beam on a wooden ship, but most commonly now on a plaque attached to the main bulkhead. However, for the last 10 years or so it has been optional to renew registration, and it has always been possible to remove the boat from the register, so the number is only a clue. Even if there is no sign of a number it is still worth the search as it is the entry in the register that is important. In theory it can't be on more than one register at a time but it could be possible to be on the SSR as well - even under a different name.

Guess you have to treat each case individually if you have any concerns about what yyou are being told.