I agree and I think this is, as they say around here, the $64,000 question.

Eoin wrote

If Cass's trustee in bankruptcy does have a successful claim against the Club under ss 339ff of the Insolvency Act 1986 (or equivalent), would the Firm then be able to trace into trustee's hands and make a proprietary claim against the insolvency?

As the computer in Hitchhiker's Guide to the Galaxy said when asked the meaning of life, the universe and everything: Tricky. If a debtor holds property in trust, and transfers it to a bona fide purchaser for value without notice so the trust interest is lost, then even if the trustee in bankruptcy gets it back as a preference, the trust beneficiary has no priority claim to it, ie the trust is not revived: Re First Capital Mortgage Loan Corporation, 917 F.2d 424 (10th Cir. 1990); cf Re Yagerphone [1935] Ch 392.

If however we had decided that the property in Karpnale's hands belonged all along to LG (ie they had some pre-existing interest which was not lost on transfer to Karpnale), then any recovery of it by the trustee would be unauthorized by the bankruptcy law and the trustee would have to hand it (or its traceable proceeds) over just as much as Karpnale would.

So we are back to the same mystery of what kind of interest LG had in the money paid to Karpnale.