When a payment service provider goes into liquidation holding merchant monies, who does the money belong to? Is it (1) the company being wound up, and hence the merchants are creditors who prove in the liquidation, or (2) the merchants, and hence the company being wound up holds the money on trust only for the merchants?
The High Court has found that safeguarding provisions contained within e-money and payment services regulations, namely the Electronic Money Regulations 2011 and the Payment Services Regulations 2017, do not operate to create a statutory trust. Reading on however, one can see how the Court seeks to balance issues of fairness against a hard ruling on the law. This case is of particular interest as it forms part of an evolving body of case law and provides guidance for insolvency practitioners appointed over regulated firms.
The residual monies
Howard Kennedy acted for the office holder in the liquidation of OneStopMoneyManager Ltd, a company which provided payment services and at one stage sought to be an issuer of e-money. On liquidation the company held sums which had been paid to it by merchants who had used the company's services.
While the liquidator was able to return most of the funds, there remained residual monies which could not be returned to those merchants who had failed to engage or to provide sufficient due diligence documentation. The liquidator therefore made an application, under section 112 of the Insolvency Act 1986, for directions as to how to deal with the residual monies.
The applicable regulatory regime
Prior to liquidation, the company was authorised and regulated by the FCA as an electronic money institution for issuance of electronic money, under the Electronic Money Regulations 2011 (EMR 2011). In fact, the company never did issue any e-money. The question therefore arose: ought the company to be treated as being regulated under the Payment Services Regulations 2017 (PSR 2017) instead?
The applicable regulatory regime was a central consideration in the context of the prevailing case law and previous decisions as to whether the safeguarding provisions, contained within the relevant regulations, operate to create a statutory trust.
Regulation 20 of the EMR 2011 requires that steps be taken to safeguard "relevant funds" (being those funds paid to the institution, by electronic money holders, in exchange for e-money). In essence the safeguarding requirements are that relevant funds are kept segregated, or alternatively are covered by an insurance policy.
In the first instance decision of In re ipagoo LLP (In Administration) [2021] Bus. L. R. 1469, the Court considered whether the safeguarding mechanism (required by the EMR 2011's predecessor, the Electronic Money Directive) operated to create a trust. The Court found that there was no basis for implying that a statutory trust arose, but that electronic money holders had a statutory right to be paid out of the relevant funds in priority to all other creditors. The case proceeded to the Court of Appeal, which decided in In re ipagoo LLP [2022] Bus. L.R. 311 that the EMR 2011 did not impose a statutory trust in relation to funds received from electronic money holders.
But in circumstances where the company did not actually issue e-money, were the EMR 2011 applicable, or did the PSR 2017 apply? And if the PSR 2017 did apply, would that mean that a statutory trust then arises?
The liquidator asked the Court to determine:
- whether the company should be treated as being regulated under the Payment Services Regulations 2017 or the Electronic Money Regulations 2011;
- whether the residual monies in the company's possession were held on a statutory trust for the merchant respondents; and
- what practical steps should the liquidator take, and what should be done with the residual monies, if the merchants do not provide the required information to verify their claims?
No statutory trust
The Court found that the company was indeed regulated by the EMR 2011. However, Chief ICC Judge Briggs also held that the safeguarding provisions contained within the PSR 2017 did apply, by virtue of Regulation 20(6) of the EMR 2011.
The Judge drew attention to the decision in Re Allied Wallet Ltd [2022] EWHC 1877, summarising the appellate Court's decision in re ipagoo, which concluded that the PSR 2017 are to be treated the same as the EMR 2011. Further highlighting the similarities between the safeguarding regulations in the EMR 2011 and the PSR 2017 respectively, Briggs J added an appendix to his judgment, setting out both sets of provisions in tabular format.
The Judge considered various factors in reaching his decision, including:
- In re ipagoo it was determined that where monies had been segregated, those monies constitute a fluctuating pool such that the amount segregated on any day is not the original amount received: Briggs J had no reason to find that a fluctuating pool would not similarly operate under the PSR 2017.
- If the alternative safeguarding option is pursued and insurance is obtained, then there is no obligation to segregate funds. It follows that, in such circumstances, the safeguards do not prevent the funds being mixed with all funds.
- The safeguarding provisions in the PSR 2017 do not preclude the institution from using the funds for its own purpose.
- Although it was not decisive factor, the Judge found it notable that there is no express reference to the creation of a statutory trust in the PSR 2017.
The Judge ultimately concluded that the safeguarding provisions in the PSR 2017, which applied to the company, did not create a statutory trust. The Judge was able to apply the Court of Appeal's decision in re ipagoo, which was not concerned with the PSR 2017, in view of the marked similarities between the safeguarding regulations in the EMR 2011 and the PSR 2017.
In terms of practical next steps, the Judge ordered that the merchants be given further time to provide the necessary due diligence, failing which the residual monies would be paid into the Insolvency Service Account. Therefore, the residual monies could in theory be claimed at a later date. Although the residual monies were not held on trust for the merchants, the company would not get the residual monies, and nor would its members.
What next?
Insolvency practitioners will take a keen interest in this recent decision, which appears to further confirm that the re ipagoo analysis applies to the PSR 2017 as it does to the EMR 2011.
On 24 March 2024 the FCA published a guidance consultation on amendments to its finalised guidance for insolvency practitioners on how to approach regulated firms. The proposed amendments briefly explain the Court of Appeal decision in re ipagoo, including that the EMR 2011 do not create a statutory trust over relevant funds, but that "the asset pool includes relevant funds that have been properly safeguarded, and an amount equivalent to relevant funds that should have been safeguarded but were not". The practical guidance for IPs, as the FCA understands it, is that "where there is a shortfall in the properly safeguarded relevant funds, the asset pool should be topped-up accordingly".
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