Manolete Partners Plc v Smith & Ors [2022] EWHC 364 (Ch)-
In 2019, the FCA presented a winding-up petition against Allied Wallet Ltd (AWL) under s. 367 Financial Services and Markets Act 2000 and applied for the appointment of provisional liquidators. Snowden J appointed 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 [were] available for return to customers, the location of any such Funds, and if relevant, the reasons why any such Funds [were] not available.” A winding-up order was subsequently made in 2020, and the joint provisional liquidators were appointed as joint liquidators.
Re Allied Wallet Ltd [2022] EWHC 402 (Ch) deals at some length with an application by the joint liquidators, under s. 168(3) Insolvency Act 1986 and/or the court’s inherent jurisdiction, as to the interpretation and operation of the Payment Services Regulations 2017 (PSR) and the Electronic Money Regulations 2011 (EMR), both of which required AWL, in processing electronic payments and issuing electronic money in the form of pre-paid cards, to safeguard customer monies by either segregating them or putting in place insurance or guarantee arrangements to the value of the funds held. AWL purportedly adopted the first safeguard. Both the EMR and the PSR provide that on insolvency, “relevant funds” segregated in accordance with the safeguarding provisions form an “asset pool.”
The liquidators’ investigations revealed breaches of the company’s safeguarding obligations which were likely to lead to a shortfall of assets to meet customers’ and creditors’ claims. In the light of that they applied for directions on the following issues:
(a) Whether the EMR and the PSR created a trust of relevant funds on their receipt by AWL
(b) If they did, which assets were subject to the trust or formed part of the asset pool; and what obligations (if any) the liquidators had to comply with to reconstitute the asset pool.
(c) How claims against assets subject to such a trust or contained in the asset pool were to be ascertained, and how such assets should be distributed.
(d) What costs were properly considered to be “costs of distributing the asset pool” for the purposes of reg 24 of the EMR and reg 23 of the PSR.
(e) If the EMR or the PSR did not create a trust of the relevant funds, how the asset pool should be applied in the event of a shortfall.
The Financial Conduct Authority declined to be a respondent to the application but intervened to draw relevant principles to the court’s attention.
ICC Judge Burton dealt with the questions raised by the application as giving rise to four main issues.
Issue 1 was whether a statutory trust arose under the regulations.
The judge noted that the safeguarding provisions of the PSR and EMR arose out of Parliament’s intention to give effect to EU directives. Examination of the law as to the interpretation of directives led her to conclude that, in applying national law, the national court was required to interpret the product of a directive, as far as possible, in light of the wording and the purpose of the directive in order to achieve the result pursued. She relied on a dictum of Arden LJ in Re Lehman Brothers International (Europe) (No 2):
“[T]he court must bear in mind the overall scheme of the rules and keep in proportion any drafting infelicities. Since the rules are designed to protect investors (see FSMA s. 138(1)…), the court should lean against interpretations which result in legal ‘black holes.’ The court has to at least start out with the view that the drafter intended to create a coherent scheme, even if this is ultimately disproved in certain respects”.
In spite of the fact that neither the PSR nor the EMR made specific reference to the creation of a trust, ICC Judge Burton concluded, after taking into account the regulations and case law she was invited to review, that each did create a statutory trust of relevant funds: all the essential characteristics of an English law trust were present (see Ayerst (Inspector of Taxes v C& K (Construction) Ltd) and see Hunt v. Financial Conduct Authority (Re Total Debt Relief Ltd (In Liquidation)) [2019] EWHC 2018 (Ch)
Issue 2 involved answering the question, which assets were subject to the trust and formed part of the asset pool.
In approaching this question, the judge first addressed the question when the statutory trust arose. The regulations made no express provision regarding timing. The reference to “funds that have been received in exchange for electronic money that has been issued” suggested what she called a “backwards” interpretation of the term “relevant funds:
”In my judgment, it follows that where the chosen method of safeguarding is segregation, to create an effective safeguarding arrangement, the obligation to safeguard, and the creation of the statutory trust, must arise on receipt of funds. [Regulation 23(1)of the PSR] appears, more clearly than those in the EMR, to refer to monies paid to the institution for the prospective provision of services. Such relevant funds must be segregated and, in my judgment and for the same reasons set out above in relation to the PMR, the obligation to safeguard by segregation, and the creation of the statutory trust, arises concurrently and bites immediately upon the Institution’s receipt of the customer’s money.”
Having so decided, the judge turned to the scope of the pool. She noted the similarity between that issue and that before the Supreme Court in Lehman v CRC (whether the client money pool under consideration applied to money that was identifiable as client money). Just as the EMR and PSR contained no express provisions on timing, similarly, they appeared to be have been drafted with what the judge found to be “limited consideration to the very serious and complicated consequences that would be likely to flow from a failure to safeguard monies.”
She rejected a submission that the absence of any mention of a potential, proprietary claim supported a conclusion that the wording of the regulations should be interpreted “as read,” so that there was no need to construe the “asset pool” beyond those monies or assets that were, in fact, segregated:
“[S]uch a literal reading and construction would fly in the face of my decision that the EMR and PSR must be construed in a manner that promotes the purpose of the Directives. Having decided that the Regulations create a statutory trust that bites upon receipt of relevant funds, it would be wholly inconsistent, in the event of a breach of trust, to restrict the rights of beneficiaries under the statutory trust, to claims in the manner provided for at regulations 72 of the EMR and 148 of the PSR.”
She noted the approach to interpretations of Lord Dyson in Lehman v CRC: the court was to have regard to “the overriding purpose of the scheme;” so, again, when interpreting EU-derived legislation, the court could depart from a literal application of the words used and imply words necessary to comply with Community law. She said,
“In my judgment, additional words should be implied into each of regulation 24(4) of the EMR and regulation 23(18) of the PSR to enable them to be construed to include in the ‘asset pool’ all funds that should have been safeguarded upon receipt by the institution.”
Issue 3 was how the asset pool should be distributed. The judge disposed of this simply:
“Counsel referred me to Re Suco Gold Pty Ltd (1982) 33 SASR 99 [a decision of the Supreme Court of South Australia] where, at page 109, King CJ determined that whilst ultimately a matter of equity, where there proves to be a shortfall in a fund, the right of every beneficiary to participate in the fund, is fair and just so that each beneficiary claimant should take a proportion of the fund. In my judgment, and in light of the findings I have made, the only equitable method to distribute the asset pool is on a pari passu basis between all electronic money holders or all payment service users, as appropriate.”
Issue 4 was the scope and costs of the work to be undertaken by the liquidators.
The judge’s starting point was that the regulations did not impose any obligations on an office-holder to take any steps to reconstitute the asset pools. Her view was that, as officers of the court with extensive powers under the Insolvency Act to obtain information regarding the company’s business and affairs and substantial experience of chasing assets, having spent a significant time already investigating AWL’s business the liquidators themselves were best placed to determine the extent of beneficiaries’ claims to the asset pools held on statutory trust, the destination of misapplied trust assets and whether the actual and likely impediments to recovering misapplied assets would justify the costs of doing so.
“The absence of reliable information renders it inappropriate and unrealistic for this court to exercise its inherent jurisdiction by giving the Liquidators, as liquidators of AWL and qua trustee of the statutory trusts, any mandatory directions to investigate or recover assets.”
She said, however, that she would consider with counsel, when handing down judgment, the appropriate form of order authorising the liquidators to administer and seek to reconstitute the trusts, reserving discretion to them to determine what actions and steps were in the best interests of the beneficiaries of the trust, with liberty to apply to court for such directions. She also said that any in the light of her findings on issue 3 any directions should provide that AWL, acting by its liquidators, qua trustee, should distribute the asset pools rateably, or pari passu between the beneficiaries under the statutory trusts.
The case is a good example of what could go wrong where the UK legislature simply adopted EU legislation into domestic law on a “cut and paste” basis without regard to how it might dovetail with English law. ICC Judge Burton’s judgment is to be commended for the skill with which she tackled the problem in relation to the regulations she had to consider. Unfortunately, her judgment may now be of limited value. In a note at the end inserted by the judge after she had completed her draft but before she handed down, judgment was given in Re Ipagoo LLP (In Administration) [2021] EWHC 2163 (Ch), in which David Halpern QC, sitting as a deputy High Court judge, concluded that the EMR did not create a statutory trust in favour of electronic money holders in the event of insolvency. ICC Judge Burton said that she considered herself bound by Ipagoo, which meant she had to hold that a statutory trust had not arisen. Ipagoo is being considered by the Court of Appeal which will no doubt also have regard to Judge Burton’s judgment. The result is that the main question in this judgment (trust or no trust) remains very much up in the air.