Baker and Rowley v The Financial Conduct Authority, Re ipagoo LLP

The Court of Appeal determined the correct construction of the Electronic Money Regulations 2011 (the EMRs) in light of the Electronic Money Directive (2009/110/EC) (the EMD) and PSD2. The court held that the Directives and the EMRs do not require the imposition of a statutory trust over all funds received from electronic money holders. Instead, the EMRs’ safeguarding regime (regulations 20–22) provides the protection required by the Directives and permits either segregation or an insurance/guarantee solution.

Nevertheless, to give effect to the EMD, regulation 24’s definition of the "asset pool" must be read to include an amount equal to any relevant funds which ought to have been, but were not, safeguarded; that extended asset pool ranks in priority to other creditors on insolvency. The appeal and cross-appeal were dismissed.

Background and parties: ipagoo LLP, an authorised electronic money institution, entered administration. The joint administrators applied for directions about distribution of funds received from electronic money holders and whether those funds were held on trust under the EMRs. The Financial Conduct Authority intervened and appealed the High Court’s directions decision.

Procedural posture: Appeal from Deputy High Court Judge David Halpern QC (Business and Property Courts, Insolvency and Companies List) ([2021] EWHC 2163 (Ch)). The Administrators were permitted to represent creditor interests and cross-appeal.

Nature of the application (i): directions concerning the status and distribution of funds received by an electronic money institution (EMI) and whether those funds ("relevant funds") are subject to a statutory trust under the EMRs.

Issues framed by the court (ii):

• whether the EMD and PSD2 require that relevant funds are immediately subject to a statutory trust in English law;
• whether the EMRs themselves create a statutory trust;
• if no statutory trust arises, whether regulation 24 should be construed to include a sum equal to any unsafeguarded relevant funds (thereby giving electronic money holders priority on insolvency); and
• whether regulation 24 could and did displace ordinary insolvency priority rules.

Court’s reasoning and decision (iii): the court interpreted the Directives purposively but found that Article 10 PSD2 (incorporated by Article 7 EMD) contemplates insulation of relevant funds from the claims of other creditors on insolvency rather than the creation of a proprietary interest in the funds for the world at large. The Directive contemplates alternative safeguarding methods (segregation or insurance/guarantee), and the latter option is inconsistent with a continued equitable interest in particular assets. The EMRs were therefore construed as not imposing a statutory trust. However, to achieve the result required by the EMD, regulation 24 must be read to treat the "asset pool" as including an amount equal to any relevant funds that ought to have been safeguarded but were not, and the costs of distributing the asset pool include the costs of making good such shortfalls. The court also held that regulation 24 can operate to alter insolvency priorities to give effect to the Directive implementation. Both the FCA’s appeal and the Administrators’ cross-appeal were dismissed.

Other points: the judgment emphasised (i) the need to interpret domestic implementing measures in light of EU Directives and retained EU law, (ii) the practical significance of the safeguarding regime and (iii) that secondary legislation made under the European Communities Act 1972 may, in implementing directives, have the effect of modifying the domestic insolvency regime where necessary to give effect to EU obligations.

The FCA's appeal and the Administrators' cross-appeal were dismissed. The court held that neither the EMD/PSD2 nor the EMRs impose a statutory trust over relevant funds, but regulation 24 must be construed to include a sum equal to any relevant funds that ought to have been but were not safeguarded so as to give electronic money holders priority on insolvency; regulation 24 can operate to displace ordinary insolvency priorities to the extent necessary to implement the Directive.

Appeal from the High Court of Justice, Business and Property Courts (Insolvency and Companies List (ChD)), Deputy High Court Judge David Halpern QC, [2021] EWHC 2163 (Ch).