Barlow Clowes v Vaughan [1992] 4 All ER 22

• The plaintiff investment company went into liquidation and the issue arose as to whether the investors were entitled to trace into the remaining funds of the company under the rule in Clayton’s Case - ‘first in first out’ rule.’

  • I.e. the first debt to be incurred is the first one to be paid off.

• CA held that this traditional solution would be used, except when it was unfair or impractical to do so, as here because of the shared misfortunes of these investors, and hence the fact the rule would not have been intended to be used.

• The ‘pari passu’ solution was preferable and would be used instead (see Woolf’s comments). 

Woolf LJ

• The court could use the Clayton’s Case rule but there were two alternatives:

  1. North American solution

     • Involves treating credits to a bank account made at different times and forms different sources as a blend or cocktail with the result that when a withdrawal is made from the account it is treated as a withdrawal in the same proportions as the different interests in the account; and

  2. The pari passu ex post facto solution

     • Involves establishing the total quantum of the assets available and sharing them in a proportionate basis among all the investors who could be said to have contributed to the acquisition of those assets, ignoring the dates on which they made their investment.