Allied Wallet Ltd ((in Liquidation))
| Jurisdiction | England & Wales |
| Judge | Burton |
| Judgment Date | 19 July 2022 |
| Neutral Citation | [2022] EWHC 1877 (Ch) |
| Docket Number | Case No: CR-2019-004876 |
| Court | Chancery Division |
[2022] EWHC 1877 (Ch)
INSOLVENCY AND COMPANIES COURT JUDGE Burton
Case No: CR-2019-004876
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Royal Courts of Justice
The Rolls Building,
Fetter Lane
London EC4A 1NL
Richard Fisher QC and Andrew Shaw (instructed by Enyo Law LLP for the Applicants
Hearing dates: 16 May 2022
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
INSOLVENCY AND COMPANIES COURT JUDGE Burton
The Joint Liquidators of Allied Walled Limited (“AWL”) have applied to court for directions in relation to matters arising in the liquidation.
AWL was regulated by the Financial Conduct Authority (“FCA) in respect of those parts of its business that involved processing electronic payments for online businesses and for issuing electronic money in the form of pre-paid cards. In carrying out its electronic payment processing business, AWL was subject to the Payment Services Regulations 2017 (“PSR”) and, for its prepaid card business, to the Electronic Money Regulations 2011 (“EMR”). Both Regulations required AWL to safeguard monies received from online merchants in its processing business or electronic money holders in its prepaid card business.
On 22 July 2019 the FCA presented a petition to wind up AWL and for the appointment of the Applicants as provisional liquidators. It was concerned that contrary to AWL's safeguarding obligations, it appeared to have been mixing funds received from merchants and card issuers with its own funds. The application for the appointment of provisional liquidators was granted on 23 August 2019, such appointment taking effect from noon on 27 August 2019. On 20 March 2020, a winding-up order was made and the Applicants were appointed as Joint Liquidators of the company.
The FCA's concern regarding AWL's failure to safeguard monies was well-founded. The Joint Liquidators have received claims far exceeding the assets available to meet them. It is clear that significant sums of money are missing and unaccounted for. They applied to the court for directions, whether, upon receiving “Relevant Funds” (as defined by regulation 20 of the EMR and regulation 23 of the PSR), the Regulations created a statutory trust of the funds, and (a) if so, whether there was an obligation to reconstitute the monies that should have been held upon trust; or (b) if not, how the asset pool arising under the safeguarding provisions of the Regulations should be applied in the event (which seemed inevitable) that there would be a shortfall against the claims of creditors.
Similar issues arose in the liquidation of ipagoo LLP, an electronic money institution authorised by the FCA and subject to the same safeguarding obligations under the EMR.
Regulation 24 of the EMR provides:
“24 Insolvency events …
“(1) Subject to paragraph (2), where there is an insolvency event
… — (a) the claims of electronic money holders are to be paid from the asset pool in priority to all other creditors; and (b) until all the claims of electronic money holders have been paid, no right of set-off or security right may be exercised in respect of the asset pool except to the extent that the right of set-off relates to fees and expenses in relation to operating an account held in accordance with regulation 21(2)(a) or (b) or … 22(1)(b).
“(2) The claims referred to in paragraph (1)(a) shall not be subject to the priority of expenses of an insolvency proceeding except in respect of the costs of distributing the asset pool.
“(3) An electronic money institution must maintain organisational arrangements sufficient to minimise the risk of the loss or diminution of relevant funds or relevant assets through fraud, misuse, negligence or poor administration.
“(4) In this regulation—
‘ asset pool’ means— (a) any relevant funds segregated in accordance with regulation 21(1); (b) any relevant funds held in an account accordance with regulation 21(2)(a); … (c) any relevant assets held in an account in accordance with regulation 21(2)(b); (d) any proceeds of an insurance policy or guarantee held in an account in accordance with regulation 22(1)(b) …
‘ insolvency event’ has the same meaning as in regulation 22; …
‘ security right’ means— (a) security for a debt owed by an electronic money institution and includes any charge, lien, mortgage or other security over the asset pool or any part of the asset pool …”
On 9 March 2022 in Baker and Rowley v The Financial Conduct Authority, Re ipagoo LLP [2022] EWCA Civ 302 the Court of Appeal upheld the decision of David Halpern QC sitting as a Deputy High Court Judge that the EMR do not create a trust of the Relevant Funds. The Court of Appeal held that pursuant to regulation 24 of the EMR, electronic money holders have an interest that “might best be analysed as a secured interest” over the asset pool which takes priority over the waterfall of payments prescribed by section 175 of the Insolvency Act 1986 (“IA1986”). The claims of electronic money holders rank ahead of the claims of ipagoo LLP's unsecured creditors and ahead of the costs of the liquidation, other than the costs associated with distributing the asset pool (which are expressly provided for at regulation 24(2) of the EMR). In order to achieve the safeguarding requirements of the relevant European Directive, the asset pool must be treated as not being limited to the assets which were properly safeguarded but should extend to include a sum from the company's general estate on liquidation equal to the Relevant Funds which ought to have been, but were not safeguarded.
Whilst the Court of Appeal's judgment concerned only the EMR, I concur with the Joint Liquidators' submission that due to the similarity in the provisions of the EMR and the PSR, it will apply equally to Relevant Funds under both Regulations.
Several of the issues in respect of which the Joint Liquidators sought directions in the liquidation of AWL were resolved by the Court of Appeal's decision in ipagoo. The following remain outstanding:
i) As it is now clear that there is no scope for the Joint Liquidators to trace into the hands of third parties, assets that should have been safeguarded but were not, and that the deficiency in the asset pools must be made good from the general assets of the company, what costs should properly be considered to fall within the scope of regulation 24(2) of the EMR (and regulation 23(15) of the PSR) as the “ costs of distributing the asset pool”?
ii) What date should be used to quantify foreign currency claims against the asset pools?
iii) As AWL was obliged to safeguard funds under two regulations, each requiring a separate asset pool, and as there will almost certainly not be sufficient non-safeguarded assets to be able to reconstitute those asset pools in full, how should such funds as are available, be applied between them?
The costs of distributing the asset pools
Mr Crooks' eleventh witness statement summarises the orders made for payment on account of remuneration and expenses pending determination of the status of the Relevant Funds. Those on account payments were made from one of AWL's bank accounts that was considered, in the event that the court were to find that the asset pools were subject to a trust, the least likely to contain traceable proceeds of the Relevant Funds (originating in the main from the company's unregulated software business).
At paragraph [92] of her judgment in the Court of Appeal, Asplin LJ said:
“92. I should add that given the proper interpretation of “ asset pool” includes relevant funds which have not been properly safeguarded, in order to achieve conformity with the purposes of the EMD, in my judgment, it is also necessary, as a consequence, to interpret “ costs of distributing the asset pool” in regulation 24(2) so as to include the costs of making good the asset pool in circumstances where relevant funds, or some of them, have not been safeguarded. These are administrative costs associated with the asset pool itself. Such an interpretation falls within the breadth of the approach to interpretation approved by Lord Dyson JSC in Lehman [2012] Bus LR 667, para 131.”
The broad approach to interpretation to which Asplin LJ referred, is the requirement that domestic legislation made for the purposes of fulfilling the requirements of EU law must, according to Lord Dyson JSC at paragraph [131] in Re Lehman Brothers International (Europe) [2012] Bus LR 667:
“… be interpreted in accordance with the following principles: (i) it is not constrained by conventional rules of construction; (ii) it does not require ambiguity in the legislative language; (iii) it is not an exercise in semantics or linguistics; (iv) it permits departure from the strict and literal application of the words which the legislature has elected to use; (v) it permits the implication of words necessary to comply with Community law; and (vi) the precise form of the words to be implied does not matter.”
Asplin LJ continued at paragraph [94] of her judgment in the Court of Appeal:
“94. As Mr Watson stated in the additional written submissions which we requested from the parties after the hearing, regulation 24 creates a bespoke statutory regime in relation to the asset pool. The electronic money holders are granted rights over that pool in priority to other creditors by virtue of...
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