A key recent case in insolvency law has been the ongoing saga of Ipagoo LLP.
Background and Initial High Court Judgment
The facts of the case were as follows: Ipagoo went into administration in 2019. Ipagoo’s principal business was in electronic money, and as such it was under a duty to safeguard relevant funds, which are monies paid into the company by clients in exchange for cards holding ‘e-money’ which would then be used to facilitate payments to other entities. Ipagoo, over the course of its existence, had received some several million pounds in deposits. When the firm became insolvent and administrators were appointed, they were unable to identify whether the monies paid in had been separated and safeguarded from general funds in the way specified in the Electronic Money Regulations 2011 (“EMR”) s.20 – 22.
The administrators of Ipagoo therefore applied to the High Court for directions on the distribution of assets. This question contained two sub-matters; whether the EMR created a statutory trust over the asset pool, and whether relevant funds which should have been, but were not, dealt with in accordance with EMR s.20 – 22 formed part of the asset pool.
The High Court had ruled that, due to the effect of the European Union (Withdrawal) Act 2018, EU Directive 2009/110 remained good law and therefore the EMR had to be interpreted with this in mind as the EMR were designed to implement the directive.
Furthermore, the court decided that there was no basis on which to suggest that a statutory trust would arise in these circumstances as EMR s.20 – 22 achieved the level of client money protection required by the directive. It follows, therefore, that a statutory trust would conflict with the both the aims of the directive and the EMR as it would upset the order of precedence of the creditors.
The court further decided that the asset pool should be treated as if it contained a sum equal to the relevant funds which should have been safeguarded but were not. This means, in practice, that these relevant funds would be added to the asset pool and distributed with priority over other funds according to EMR s.24.
Recent Court of Appeal Judgment
Following this judgment, the Financial Conduct Authority (“FCA”) and the Administrators sought permission to appeal, which was granted. The appeal was on the grounds that the EU Electronic Money Directive and Payment Services Directive should have been interpreted such that the EMRs, implementing the Directives into English law, created a statutory trust over relevant funds when they were first received by an electronic money company.
The Court of Appeal gave judgment on this matter on 9 March 2022.
The appeal was dismissed for the following reasons:
- The EMRs do not give rise to a statutory trust;
- It would not be necessary to create a statutory trust to ensure that the requirements of the Electronic Money Directive and Payment Services Directive are upheld; and
- The asset pools of insolvent electronic money companies should comprise a sum which is equal to those funds which should have been safeguarded under the relevant legislation but were not.
This decision will surely have a far-reaching impact as it confirms that electronic money institutions and their customers have relationships built on contract, rather than trust – similar to those of banks and their customers, as defined in Foley v Hill [1848] 2 HLC 28.
Controversy
This judgment might be viewed as somewhat controversial due to other decisions of the courts which appear to contrast with what the Court of Appeal has said, as well as dicta from cases which have followed Ipagoo LLP’s High Court decision.
Re Supercapital [2021] EWHC 1685 (Ch) appears to support the initial position of the FCA and provides a compelling argument for this as the court held that a statutory trust was created in similar matters concerning the Payment Services Regulations 2017 (“PSR”).
Perhaps more interestingly, however, is the dicta in Re Allied Wallet Limited [2022] EWHC 402 (Ch). Judge Burton said directly at 81, “I am satisfied that the EMR and the PSR each create a statutory trust of relevant funds. All of the essential characteristics of an English law trust are present.” Despite this, Judge Burton was bound by the earlier ruling of the High Court in Re Ipagoo LLP, and latterly by the agreement of the Court of Appeal.
It would appear that there are significantly divergent views amongst the judiciary on these issues which can only be a source of further opacity when trying to resolve the question of safeguarding asset pools, causing a knock-on impact to electronic money consumers at large.
Despite the controversy, however, the decision has provided clarity to insolvency practitioners on what funds form part of the asset pool for distribution. This cannot be understated as this forms a particularly troublesome aspect in any complex insolvency process and will be incredibly important in future insolvency processes involving electronic money.
Impact on Future Safeguarding Arrangements in Insolvency Situations
Despite the Court of Appeal’s judgment it appears, on the face of it, that nothing needs immediately change in terms of safeguarding arrangements.
It can be inferred, however, that the FCA will seek to bolster safeguarding compliance arrangements in the near future to provide further protection to consumers in the event of an insolvency.
In theory, the appropriate safeguarding of relevant funds in the asset pool should mean that they are available to consumers in an insolvency.
The FCA has previously estimated that c. £18 billion has been received by electronic money companies to date in the United Kingdom. The scale of the potential issue is therefore clear, and it will only continue to grow with the continued growth of the cryptocurrency market as well as through the emergence of firms such as Monzo and Revolut.
It is evident, therefore, that the FCA must incentivise firms to higher levels of compliance and improve their safeguarding procedures as much as possible. Whether the carrot or the stick is the chosen method remains to be seen, however fines have been shown to be effective in the past. Increased monitoring visits from the FCA themselves may also be an effective tool in ensuring compliance, as one might imagine that an impromptu visit from a regulatory official would be sufficient in ensuring firms keep their affairs in order as best as possible.
Joshua Stephens (City Law School, London)
Company Insolvency Pro Bono Scheme 