Shane Crooks, Emma Sayers and Malcolm Cohen (as Joint Liquidators of Allied Wallet Ltd)
| Jurisdiction | England & Wales |
| Judge | Burton |
| Judgment Date | 24 February 2022 |
| Neutral Citation | [2022] EWHC 402 (Ch) |
| Docket Number | Case No: CR-2019-004876 |
| Court | Chancery Division |
[2022] EWHC 402 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF ALLIED WALLET LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
AND IN THE MATTER OF THE FINANCIAL SERVICES ACT 2000
AND IN THE MATTER OF THE ELECTRONIC MONEY REGULATIONS 2011
AND IN THE MATTER OF THE PAYMENT SERVICES REGULATIONS 2017
Royal Courts of Justice
The Rolls Building
London, EC4A 1NL
INSOLVENCY AND COMPANIES COURT JUDGE Burton
Case No: CR-2019-004876
Richard Fisher QC and Andrew Shaw (instructed by Eversheds Sutherlands (International) LLP) for the Applicants
Dr Riz Mokal for the Financial Conduct Authority
Hearing date:14 April 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 remotely by circulation to those parties who appeared before the court by email. It will also be released for publication on BAILII and other websites. The date and time of hand-down is deemed to be 2.30pm on 24 February 2022
INSOLVENCY AND COMPANIES COURT JUDGE Burton
| Introduction | Paragraph |
| 1 | |
| Background | 8 |
| • AWL's Merchant Business | 19 |
| • The Prepaid Card Business | 22 |
| • AWL's assets | 28 |
| Issues before the Court | 33 |
| The Court's jurisdiction | 36 |
| Relevant legislative provisions | |
| • Safeguarding provisions in the EMR | 42 |
| • Safeguarding provisions in the PSR | 48 |
| Issue 1 – Does a statutory trust arise under the Regulations? | |
| • A statutory obligation to create contractual rights? | 49 |
| 51 | |
| • The first stage – interpreting the Directives | 60 |
| • The second stage – interpreting the UK implementing legislation in the light of the meaning of the Directives | 72 |
| Issue 2 – What assets are subject to the trust and form part of the asset pool? | |
| • When does the statutory trust arise? | 86 |
| • The scope of the asset pool | 95 |
| Issue 3 – How should the asset pool be distributed? | 105 |
| Issue 4 – Scope and costs of Liquidators' work | 108 |
Introduction
Shane Crooks, Emma Sayers and Malcolm Cohen, as joint liquidators of Allied Wallet Limited (the “Liquidators” and “AWL” respectively) have sought the Court's directions pursuant to section 168(3) of the Insolvency Act 1986 and/or the Court's inherent jurisdiction, regarding the interpretation and operation of the Payment Services Regulations 2017 (“PSR”) and the Electronic Money Regulations 2011 (“EMR”) (together, the “Regulations”).
Both of the Regulations required AWL, in the conduct of its business:
i) processing electronic payments; and
ii) issuing electronic money in the form of pre-paid cards,
to safeguard customer monies either by segregating them or by putting in place insurance or guarantee arrangements to the value of the relevant funds held. The safeguarding method that AWL purported to operate was that of segregating funds.
The Liquidators' investigations have revealed significant breaches of the safeguarding obligations, missing and conflicting information regarding sums due to customers and almost certainly a shortfall of assets to meet the claims of customers and creditors, albeit currently in amounts which are impossible to calculate.
They seek directions in relation to four key issues focussing primarily on whether, and if so on what terms and when, a trust may have arisen in respect of monies held by AWL on the date on which it was wound up.
The Financial Conduct Authority (“FCA”) declined to be a respondent to the application but as it is vested with statutory functions pursuant to the PSR and EMR, and is the regulator and supervisor of authorised payment institutions, it intervened in the application in order to draw to the Court's attention, principles that it considers relevant to the questions underlying the Liquidators' application.
The Liquidators assisted the Court by setting out the competing arguments which could be raised on each of the issues which it is asked to determine.
I have been assisted by comprehensive argument from Mr Fisher QC, Mr Shaw and Dr Mokal.
Background
There was no dispute regarding the circumstances giving rise to the Liquidators' application. As the issues before the Court concern statutory interpretation, I shall summarise the background only briefly.
AWL was incorporated on 31 May 2006. Until 14 March 2018, its shareholders were Mr Khawaja and Allied Wallet Inc. (“AWI”), a company incorporated in Nevada. AWI transferred its shares in AWL to Mr Khawaja, who has been its sole shareholder since 14 March 2018 and sole director at the date of its incorporation and at the date of winding up (with two other individuals having been appointed and resigned at various times in-between).
AWL facilitated electronic payments for online businesses (the “Merchant Business”) and provided electronic money to customers in the form of pre-paid cards (the “Prepaid Card Business”). These aspects of its business were regulated by the FCA. AWL was also involved in developing and maintaining a payment processing gateway. That part of its business was not regulated.
In carrying out the Merchant Business, AWL was subject to the PSR. AWL was registered with the FCA for the purposes of the Payment Services Regulations 2009 as a “small payments institution” from 1 November 2009 until 20 September 2012 and as an “authorised payments institution” thereafter until 3 February 2014, when its registration was cancelled by the FCA.
In carrying out the Prepaid Card Business, AWL was authorised since 3 February 2014 by the FCA as an “ authorised electronic money institution” and subject to the EMR. Where appropriate or convenient I shall refer to companies engaged in such businesses as an “Institution”.
It has subsequently transpired that AWL was conducting activities outside its authorisation under the EMR.
The FCA became concerned, among other issues, that AWL was mixing monies that should be segregated pursuant to the EMR or the PSR, with its own funds. On 22 July 2019, the FCA presented a winding-up petition against AWL (the “Petition”) under s.367 of the Financial Services and Markets Act 2000 (“ FSMA 2000”). On the same date, it applied for the appointment of provisional liquidators. Its application was granted on 23 August 2019 by Snowden J (as he was), who appointed the Liquidators as joint provisional liquidators and directed them to report on a number of matters, including whether:
“all “Relevant Funds” for the purposes of each of the Electronic Money Regulations and the Payment Services Regulations are available for return to customers, the location of any such Funds, and if relevant, the reasons why any such Funds are not available”.
On 10 September 2019, the Liquidators (as joint provisional liquidators) applied for the Court's directions in relation to paragraph 5 of Snowden J's order, which provided that:
“The Provisional Liquidators shall permit the Company's director to draw on the Company's assets, which for the avoidance of doubt do not for this purpose include the Relevant Funds, to meet the reasonable costs of obtaining legal advice and legal representation in relation to [the director's application for an administration order and AWL's application for the release of funds]”.
Mr Khawaja withdrew his application for an administration order shortly before the hearing of the Petition.
The joint provisional liquidators' application for the release of funds was heard by Mr John Kimbell QC (sitting as a deputy High Court judge) on 18 December 2019. It became clear at the hearing that the FCA and Mr Khawaja had a fundamental difference of opinion regarding the effect of the Regulations. The FCA contended that monies segregated (and those which should have been segregated) pursuant to the Regulations are subject to a trust that extends to the traceable proceeds of any payments received; whereas Mr Khawaja's position was that the protection is more limited, being purely contractual or statutory in nature and as such did not give rise to any proprietary rights in favour of AWL's customers. Mr Kimbell QC was not invited to resolve this issue at the time, but he acknowledged that it was likely to require resolution in due course.
A winding-up order was made against AWL on 20 March 2020 The Applicants, then joint provisional liquidators were appointed as joint liquidators on 26 March 2020.
AWL's Merchant Business
In facilitating card payments for online businesses, AWL would stand between the card issuer (for example, Mastercard or Visa) and a merchant, and would facilitate the transfer of funds from the card issuer to the merchant. AWL had a direct relationship with some merchants (“Direct Merchants”) but also processed payments for merchants who were customers of a company incorporated in Lithuania, UAB Baltic Bill, for which AWL had agreed to provide settlement services (“Indirect Merchants”). AWL was obliged under the PSR to safeguard moneys received from merchants or card issuers.
The Liquidators provided evidence of the conflicting and confusing information they have received regarding the amounts owed to AWL's Direct and Indirect Merchants. Upon their initial appointment as joint provisional liquidators, they were provided by AWL's employees with schedules showing that £104,210 was owed to 22 Direct Merchants and £5,898,491 was owed to 77 Indirect Merchants. Subsequent information suggested that AWL had 820 merchant customers to which it owed £16,699,855. Later still, it...
To continue reading
Request your trial
-
Jason Daniel Baker and Geoffrey Paul Rowley v The Financial Conduct Authority
...we have also been provided with the decision of Insolvency and Companies Court Judge Burton in In the matter of Allied Wallet Limited [2022] EWHC 402 (Ch). That case was concerned with both the proper interpretation of the EMRs and the PSRs and was fully argued. In fact, Dr Mokal appeared ......
-
The Electronic Money Regulations 2011 And The Insolvency Act 1986: Statutory Trusts, The Asset Pool, And The Waterfall Provision
...to this issue given the first instance decision conflicted with a well-reasoned judgment of ICC Judge Burton in Re Allied Wallet Ltd [2022] EWHC 402 (Ch). Unusually, ICC Judge Burton had prepared her judgment prior to the first instance decision in Baker, but handed it down afterwards. This......
-
Insolvency Insight - Issue 9 | March 2022
...intended) to issues that had arisen from conflicting decisions by ICC Judges (including in another case called Re Allied Wallet Ltd [2022] EWHC 402 (Ch.)) upholding the Deputy Judge's decision in this case. The Court of Appeal (with Asplin LJ giving the lead judgment) held, in the context o......