Supercapital Ltd, Re Insolvency Act 1986

The court held that Regulation 23 of the Payment Services Regulations 2017 creates a statutory trust in respect of "relevant funds" received for or on behalf of payment service users and that those funds must be treated as segregated from the company’s own assets. The Administrators were correct to treat approximately 12.6 million as client money subject to that statutory trust (with an identified shortfall of about 585,000)). The court accepted it had jurisdiction to give directions as to distribution under paragraph 63 of Schedule B1 to the Insolvency Act 1986 and by its inherent equitable jurisdiction, and it approved the proposed distribution plan subject to modifications, directing distribution on a pari passu basis while preserving beneficiaries' proprietary and tracing rights; the application in relation to remuneration and costs was adjourned.

Background and parties: The application was made by Kevin Goldfarb, one of the Joint Administrators of Supercapital Limited, an FCA authorised payment institution regulated under the Payment Services Regulations 2017. The Financial Conduct Authority was represented at the hearing. The company had suspended trading on 12 September 2019 and the Joint Administrators were appointed on 27 September 2019. The Administrators identified approximately 12.6 million of client-related balances held with two banks and third-party payment processors, with an apparent shortfall of about 585,000.

Nature of the application: The Administrators sought directions and court approval of a proposed distribution plan for sums held by the company insofar as those sums were said to be held on a statutory trust under the PSRs, together with approval of the Administrators' remuneration, costs and expenses (the latter issue was adjourned).

Issues framed:

• The legal characterisation of the funds held by the company: whether Regulation 23 PSRs creates a statutory trust.
• The court's jurisdiction to give directions about distribution of those funds (paragraph 63 of Schedule B1 and/or the court's inherent equitable jurisdiction).
• The propriety of the proposed distribution plan, including whether distribution should be on a pari passu basis and what protective provisions should be included.
• Costs and remuneration of the Administrators (adjudicated separately and adjourned).

Reasoning and conclusions: The judge examined Regulation 23 PSRs (including subsections 23(1), 23(5), 23(8), 23(11), 23(14), 23(15) and 23(17)) and concluded that the statutory language and the statutory scheme have the hallmarks of a trust: segregation from company funds, identification and record-keeping obligations, restrictions on third-party interests and a priority on insolvency. The court relied on accepted principles from trust law and authorities concerning client money trusts (including Lehman, MF Global, Pritchard and others) to hold that general trust rules apply to fill gaps in the statutory scheme.

The court accepted that it had jurisdiction to give directions: paragraph 63 Schedule B1 provided an appropriate vehicle and the inherent equitable jurisdiction could also be invoked. The court regarded precedent (including MF Global and Worldspreads) as supporting the grant of directions and protective orders enabling distribution where practical difficulties exist in ascertaining or resolving all claims.

Disposition: The court approved the proposed distribution plan with modifications to make clear a pari passu distribution among claimants and protective measures preserving proprietary and tracing rights; the Administrators' application in relation to remuneration and costs was adjourned for separate determination.

The court made the directions sought in part: it held that the funds identified were held on a statutory trust created by Regulation 23 of the Payment Services Regulations 2017 and that the court had jurisdiction (under paragraph 63 Schedule B1 and the court's inherent equitable jurisdiction) to direct the Administrators as trustees. The proposed distribution plan was approved with modifications to provide for pari passu distribution and appropriate protective provisions; issues of remuneration and costs were adjourned.