Jason Daniel Baker and Geoffrey Paul Rowley (as Joint Administrators of ipagoo LLP) v The Financial Conduct Authority
| Jurisdiction | England & Wales |
| Judge | Mr David Halpern |
| Judgment Date | 30 July 2021 |
| Neutral Citation | [2021] EWHC 2163 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2019-005157 |
[2021] EWHC 2163 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
COMPANIES COURT
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mr David Halpern QC SITTING AS A DEPUTY HIGH COURT JUDGE
Case No: CR-2019-005157
In the Matter of Ipagoo LLP (In Administration)
And in the Matter of the Electronic Money Regulations 2011
And in the Matter of the Insolvency Act 1986
Mr Jack Watson (instructed by Faegre Drinker Biddle & Reath LLP) for the Applicants
Dr Riz Mokal (instructed by the Financial Conduct Authority) for the Financial Conduct Authority as Intervener
Hearing date: 16 July 2021
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.
This judgment was handed down by the Judge remotely by circulation to the parties' representatives by email and release to BAILII. The date and time for hand-down is deemed to be 30 July 2021 at 10.30am.
Mr David Halpern QC SITTING AS A DEPUTY HIGH COURT JUDGE
Mr David Halpern QC:
This is an application by the Administrators of ipagoo LLP (“ ipagoo”) seeking directions as to the distribution of assets. ipagoo is regulated by the Financial Conduct Authority (“ FCA”) as an electronic money institution (“ EMI”). It is authorised to issue electronic money (“ e-money”) and also to provide multi-country and cross-currency payment account services, designed to enable clients to open and operate non-resident payment accounts in multiple EU countries.
EU law draws a distinction between payment institutions and EMIs on the one hand and credit institutions (which include banks) on the other hand. Only the latter are permitted to take deposits of money and pay interest. EU law accords with English common law ( Foley v Hill (1848) HLC 28 at 36 and 43–44) in relation to the fundamental principle of the banker-customer relationship, i.e. money deposited at a bank becomes the bank's own money and the customer's right to repayment is merely as a creditor (save in the case of a trust account).
By contrast, payment institutions and EMIs are not permitted to take deposits and are required to take steps to safeguard “ relevant funds”, i.e. sums paid by electronic money holders (“ EMHs”) to the EMI in exchange for e-money (“ Relevant Funds”). The rules are set out in the Electronic Money Regulations 2011 (“ EMR”).
ipagoo became insolvent and was placed into administration in July 2019. It remains in administration and is prohibited from conducting any business. I was informed by Mr Jack Watson, counsel for the Administrators, that ipagoo received from EMHs Relevant Funds totalling €3,810,972, £235,854 and US$265,980, but that it has not proved possible to establish whether any of these funds were safeguarded as required by the EMR.
The Administrators' application asks:
i) Do the EMR create a statutory trust of the “ asset pool” as defined in Reg 24 of the EMR (“ Asset Pool”) for the benefit of EMHs? and
ii) Do Relevant Funds which should have been, but were not, dealt with in accordance with Regs 20–22 form part of the Asset Pool?
The application also seeks further relief, but it was agreed that I would deal with these issues first. Mr Jason Baker, one of the Administrators, has provided a detailed witness statement, but it is not necessary to set out the facts in any greater detail, since the issues which I am currently considering involve pure points of law.
The FCA has intervened in these proceedings as amicus curiae at the Administrators' invitation. Dr Riz Mokal, who appears for the FCA, submits that a statutory trust arises in relation to Relevant Funds. The Administrators are neutral in relation to the issues set out above, but have presented the case against a statutory trust arising, in order that both sides of the argument are presented. I have been very much assisted by the written and oral submissions of both counsel.
During the course of the hearing I asked counsel to consider whether the mechanism for safeguarding EMHs' funds under the EMD and the EMR was by means of a charge rather than a trust. I raised this possibility because a number of features of the relevant Directives seemed to point towards EMHs having an interest by way of security. Neither party had originally contended for this result, but they helpfully provided written submissions.
The correct approach to construing the EMR
The EMR were made in order to implement the Electronic Money Directive (2009/110/EC) (“ EMD”) and were expressed to be made pursuant to section 2(2) of the European Communities Act 1974. Accordingly the EMR constitute “EU-derived domestic legislation” and hence continue to have effect in domestic law by virtue of section 2(2) of the European Union (Withdrawal) Act 2018. By virtue of section 6(3)(a) of that Act it remains the case that they must be construed in accordance with “retained case law” and “retained principles of EU law”.
Accordingly, notwithstanding Brexit, the court must follow the approach set out in Lehman Brothers International (Europe) (In Administration) [2012] 3 All ER 1 (“ Lehman”). In that case, the Supreme Court had to construe Chapter 7 of the Client Assets Sourcebook (CASS 7). Lord Dyson said at [131]:
“It is not in issue that CASS 7 was made for the purpose of fulfilling the EU requirements contained in the Markets in Financial Instruments Directive 2004/39/EC (“MiFID”) and the Commission Directive 2006/73/EC (“the Implementing Directive”) and that CASS 7 should therefore be interpreted, as far as possible, so as to give effect to these Directives … [T]his requires a two-stage test to be applied. The first involves interpreting the Directives. The second involves interpreting CASS 7 in the light of the meaning of the Directives. … [D]omestic legislation which is made for the purposes of fulfilling the requirements of EU law contained in a Directive must 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.”
Recital (3) in the Preamble to the EMD refers to the Payment Services Directive (2007/64/EC) (“ PSD1”). PSD1 has been superseded by the Payment Services Directive (2015/2366/EU) (“ PSD2”), and Art 114 of PSD2 states that any reference to PSD1 shall be construed as a reference to PSD2. Thus before turning to the EMR I must first construe PSD2 and the EMD in the manner directed by Lord Dyson.
When looking at an EU Directive, the court may take account of the Recitals in the Preamble, which may cast light on the interpretation of the Articles ( Casa Fleischhandel v Bundesanstalt für Landwirtschaftliche Marktordnung [1989] ECR 2789 at [31], ECJ).
PSD2
PSD2 distinguishes between credit institutions and payment institutions, as outlined above. Recital 34 provides that “payment institutions should be prohibited from accepting deposits from users and should be permitted to use funds received from users only for rendering payment services”.
Recital 37 provides that: “Provision should be made for payment service user funds to be kept separate from the payment institution's funds. Safeguarding requirements are necessary when a payment institution is in possession of payment service user funds. Where the same payment institution executes a payment transaction for both the payer and the payee and a credit line is provided to the payer, it might be appropriate to safeguard the funds in favour of the payee once they represent the payee's claim towards the payment institution.”
Dr Mokal submitted that the reference in Recital 37 to “payment services user funds” suggests that payment service users (“ PSUs”) continue to have a proprietary interest in the money which they have paid in, in contrast to “the payment institution's funds”. He pointed to the need for “safeguarding” requirements “when” (which he said means “as soon as”) the payment institution is in possession of the payment users' funds; this suggests that protection is not dependent on the payment institution having taken the required steps to safeguard the funds.
He also drew my attention to several Recitals in the Preamble to PSD2, which refer to giving “a high level of protection” to consumer users of payment services. I do not think that I can derive much assistance from this, given that Recital 76 states that: “to ensure a high level of consumer protection within SEPA [the Single Euro Payments Area], the existing pan-European direct debt scheme provides for an unconditional right to a refund for authorised payments.” This is an indication that PSD2 contemplates that the requisite high level of consumer protection may fall short of any proprietary rights.
Art 10 is headed “safeguarding requirements”. So far as relevant it is in very similar terms to the equivalent Article in PSD1 and it provides as follows:
“1. The Member States or competent authorities shall require a payment institution which provides payment services as referred to in points (1) to (6) of Annex I to safeguard all funds which have been received from the payment service users or through another payment service provider for the execution of payment transactions, in...
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