Jason Daniel Baker and Geoffrey Paul Rowley v The Financial Conduct Authority
| Jurisdiction | England & Wales |
| Judge | Lady Justice Asplin,Lord Justice Popplewell,Lord Justice William Davis |
| Judgment Date | 09 March 2022 |
| Neutral Citation | [2022] EWCA Civ 302 |
| Docket Number | Case No: CA-2021-000740 (Formerly A2/2021/1578) |
| Court | Court of Appeal (Civil Division) |
In the Matter of Ipagoo LLP (In Administration)
[2022] EWCA Civ 302
Lady Justice Asplin
Lord Justice Popplewell
and
Lord Justice William Davis
Case No: CA-2021-000740 (Formerly A2/2021/1578)
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)H
Mr David Halpern QC (Sitting as a Deputy High Court Judge)
Royal Courts of Justice
Strand, London, WC2A 2LL
Felicity Toube QC (instructed by The Financial Conduct Authority) and Dr Riz Mokal for the Appellant
Jack Watson (instructed by Faegre Drinker Biddle and Reath LLP) for the Respondents
Hearing dates: 9–10 February 2022
Approved Judgment
This judgment was handed down remotely by circulation to the parties' representatives by email, and release to BAILII. The date and time for hand down is deemed to be 11.00 a.m. on Wednesday 9 March 2022 .
This appeal and cross-appeal are concerned with the proper construction of the Electronic Money Regulations 2011 (the “EMRs”) and, in particular, with the status of funds received by an electronic money institution (an “EMI”) from electronic money holders in the event of its insolvency.
In May 2018, Ipagoo LLP (“ipagoo”) was authorised by the Financial Conduct Authority (the “FCA”) pursuant to the EMRs to issue electronic money (“e-money”) and to provide multi-country and cross-currency payment account services and was regulated by the FCA accordingly. It offered a payment card and mobile telephone “app” which enabled customers to manage accounts in multiple currencies and carry out international transfers of funds in real time in multiple EU countries. It became insolvent and went into administration on 1 August 2019 and is prohibited from conducting any business.
In April 2021, Jason Baker and Geoffrey Rowley, the joint administrators (the “Administrators”) applied for directions about how certain funds held by ipagoo should be distributed and, in particular, whether those funds are held on trust pursuant to the EMRs. The FCA intervened in the application as amicus curiae at the invitation of the Administrators.
David Halpern QC, sitting as a deputy High Court judge, handed down judgment on 30 July 2021 [2021] EWHC 2163 (Ch). In summary, he held that: save in one respect, (see below) regulations 20–22 and 24 of the EMRs provide the level of protection for funds received from electronic money holders required by the European directives which the EMRs implement and that there is no basis for implying a trust of the funds ([49] –[50]); regulation 24 must override the priority rules which would otherwise apply on ipagoo's insolvency ([51]); and that in order to comply with Article 10 of EU Second Payment Services Directive (2015/2366/EU) (the “PSD2”), it is necessary to treat the “asset pool” defined in regulation 24 so as to include a sum equal to all the funds received from electronic money holders which ought to have been but had not been safeguarded under the remainder of the relevant regulations ([52] – [55]). In other words if such funds, referred to in the EMRs as “relevant funds”, or part of them, had not been safeguarded, on the insolvency of an EMI a sum equal to the shortfall must be added to the “asset pool” from ipagoo's general estate, to be distributed in accordance with regulation 24.
The FCA appeals on the grounds that the judge erred in law: in failing to conclude that “relevant funds” are subject to a statutory trust pursuant to the EMRs; in finding that the safeguarding requirements in the PSD2 and the Electronic Money Directive (2009/110/EC) (the “EMD”), as implemented in the EMRs, could be given due effect without a statutory trust; and in construing the EMRs as overriding aspects of insolvency and property law by deciding that assets which would otherwise be applied towards discharging the claims of secured creditors or those benefitting from insolvency set-off be appropriated for the benefit of electronic money holders to the extent of any shortfall in the “asset pool”.
To put the matter shortly, the FCA's position is that: the EMD and PSD2 (together referred to as the “Directives”) require the EMRs to be construed in a manner which results in “relevant funds” being subject to a statutory trust from the moment they are received by an EMI and that their proceeds are traceable, whether or not the funds were segregated in the first place or subsequently ceased to be so. They say that that is necessary in order to provide the level of protection envisaged and required by the Directives and that the same applies to any insurance policy which is purchased pursuant to the safeguarding provisions in regulation 22 of the EMRs and to the proceeds of such a policy. Otherwise, the relevant funds are unprotected if the EMI fails to take the safeguarding steps it ought to. The FCA also says that the judge was wrong to hold that the asset pool should be extended by recouping monies from the general estate. They say that such a mechanism overrides insolvency and property law and is unnecessary if a statutory trust arises in any event.
The Administrators were neutral as to the outcome of the application for directions before the judge and remain so on appeal. However, in order that all arguments should be canvassed before the court, the judge ordered that in any appeal the Administrators should represent the interests of ipagoo's creditors in so far as their claims do not relate to the issuance of electronic money and that the Administrators have permission to cross-appeal in relation to the Declarations. We are grateful to Mr Watson, who appears on behalf of the Administrators, for his submissions made on behalf of the Administrators in their representative capacity. We are happy to continue the representation order made by the judge.
In summary, the grounds of the Administrators' cross-appeal are that although the judge found correctly that the EMRs do not create a statutory trust in relation to relevant funds, he erred in holding that the “asset pool” defined in regulation 24 of the EMRs should be extended to include a sum equal to any relevant funds which should have been, but were not safeguarded in accordance with regulations 20 – 22 of the EMRs and that accordingly, electronic money holders have a statutory right to be paid out of relevant funds in priority to all other creditors.
The Administrators (in their representative capacity) contend, therefore, that the EMRs give electronic money holders a statutory right to be paid out of the “asset pool”; and if no such funds, or insufficient funds have been safeguarded, the electronic money holders rank merely as unsecured creditors and that the high level of protection required by PSD2 is satisfied by the statutory regime. Their alternative argument is that the judge was right both that no statutory trust is necessary and in relation to recouping any shortfall in the asset pool from the general estate.
Relevant background
It is not in dispute that EU law draws a distinction between payment institutions and EMIs on the one hand and credit institutions, including banks, on the other. Only credit institutions can take deposits and pay interest. EMIs are not permitted to take deposits nor are they permitted to award interest. Ipagoo did neither. It did receive a total of Euros 3,810,972, £235,854 and US$265,980 from electronic money holders, however. It has not been possible to determine whether any of these funds were safeguarded in the manner required by the EMRs. It seems that there has been serious non-compliance with the requirements of the EMRs. As a result, the Administrators sought the directions of the Court.
As Ms Toube QC, who appeared with Dr Riz Mokal on behalf of the FCA, pointed out, the issues with which we are concerned potentially have wide significance. It is estimated that a total of £18billion have been received by EMIs and payment institutions registered with the FCA.
The Regulatory Regime
I shall begin by summarising the relevant parts of the EMRs before turning to the issues to be decided.
The EMRs
“Electronic money” is defined in regulation 2 of the EMRs, as “electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which — (a) is issued on receipt of funds for the purpose of making payment transactions; (b) is accepted by a person other than the electronic money issuer; (c) is not excluded by regulation 3”. An EMI is defined in the same regulation as “an authorised electronic money institution or a small electronic money institution”.
The EMRs contain detailed provisions for the authorisation and registration of EMIs. The safeguarding requirements which are central to this appeal, are contained in regulations 20 – 22 and 24. Regulation 20, where relevant, is as follows:
“20. Safeguarding requirements
(1) Electronic money institutions must safeguard funds that have been received in exchange for electronic money that has been issued (referred to in this regulation and regulations 21 and 22 as “relevant funds”).
(2) Relevant funds must be safeguarded in accordance with either regulation 21 or regulation 22.
(2A) An electronic money institution may safeguard certain relevant funds in accordance with regulation 21 and the remaining relevant funds in accordance with regulation 22.
(3) Where—
(a) only a proportion of the funds that have been received are to be used for the execution of a payment transaction (with the remainder being used for non-payment services); and
(b) the precise portion attributable to the execution of the payment transaction is variable or unknown...
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