IN THE MATTER OF ALLIED WALLET LIMITED (IN LIQUIDATION)

The Joint Liquidators sought directions on (i) whether the Electronic Money Regulations 2011 and the Payment Services Regulations 2017 create a statutory trust over Relevant Funds and, if not, how the statutory asset pools are to be administered where there is a shortfall; (ii) which costs qualify as the "costs of distributing the asset pool" under regulation 24(2) EMR (and regulation 23(15) PSR); (iii) the date for conversion of foreign currency claims against the asset pools; and (iv) how limited non-safeguarded company assets should be allocated between the separate EMR and PSR pools.

The Court followed the Court of Appeal in Baker and Rowley v The Financial Conduct Authority, Re ipagoo LLP [2022] EWCA Civ 302, that the EMR/PSR do not create a trust but grant electronic money/payment service claimants a priority interest in a designated asset pool, which must be reconstituted from the company estate to the extent of any shortfall. Applying that analysis the court held that: (a) the "costs of distributing the asset pool" include those costs and expenses reasonably incurred in identifying, realising and reconstituting the pools and reporting to and liaising with regulators and creditors (Scenario 2), but do not extend to all general statutory liquidation costs which are not necessary for those tasks; (b) foreign currency claims of pool claimants are to be converted into sterling as at the date of the winding-up order (20 March 2020); and (c) any available non-safeguarded assets should be apportioned between the EMR and PSR pools rateably by reference to the shortfalls suffered by each pool ("equality is equity").

This was a first instance application by the Joint Liquidators of Allied Wallet Limited for directions in the company liquidation concerning the treatment and distribution of monies subject to the safeguarding regime under the Electronic Money Regulations 2011 and the Payment Services Regulations 2017.

Background and parties:

• AWL was regulated by the Financial Conduct Authority for payment processing and issuing electronic money. The FCA petitioned to wind up AWL in July 2019 and provisional liquidators were appointed in August 2019; a winding-up order was made on 20 March 2020 and the Applicants became Joint Liquidators.
• The Joint Liquidators discovered that AWL had failed to safeguard Relevant Funds, leaving significant shortfalls and claims exceeding available assets.

Nature of the application: The Applicants sought directions on the legal status of Relevant Funds, the scope of "costs of distributing the asset pool" under regulation 24(2) EMR and regulation 23(15) PSR (including whether reconstitution costs fall within them), the appropriate date for converting foreign currency pool claims, and the method for allocating limited non-safeguarded company assets between the separate EMR and PSR pools.

Issues framed by the court:

• Whether the EMR/PSR create a trust in respect of Relevant Funds, and if not, what proprietary or priority interest pool claimants have.
• Which categories of liquidators' fees and expenses qualify as "costs of distributing the asset pool" (including the costs of reconstituting the pool).
• What date should be used to convert foreign currency claims by pool claimants.
• How to divide any shortfall-reconstituting general assets between the two separate pools.

Reasoning and holdings:

• The court followed the Court of Appeal in ipagoo that the Regulations do not create a trust; instead pool claimants have a priority interest in an asset pool which is to be treated like a designated fund that may require reconstitution from the company's estate.
• Applying purposive interpretation (as in Re Lehman Brothers International (Europe)), the court held that the phrase "costs of distributing the asset pool" extends to reasonable costs and expenses necessary to identify, realise and reconstitute the pools and to distribute them, but not to all general statutory liquidation costs which are not necessary for those tasks. The court adopted an intermediate approach (Scenario 2): costs directly related to making good and distributing the pools (including liaison with the FCA and reporting to court/creditors) are payable from the pools; other statutory liquidation costs that do not bear on reconstitution or distribution are not.
• The court concluded that pool claimants' priorities are analogous to, but not identical with, secured creditors; the better analogy is to a priority claim on a designated fund (similar to the prescribed part). Therefore pool claimants must prove their claims and the Insolvency Rules conversion mechanism applies. Rule 14.21 IR2016 requires conversion into sterling at a single rate determined by the liquidators using the exchange rate prevailing on the date of the winding‑up order, 20 March 2020.
• In the absence of any regulatory prescription for allocation between the EMR and PSR pools, the court applied the equitable maxim "equality is equity" and directed that available non‑safeguarded assets be divided rateably according to the shortfall suffered by each pool (Scenario B), rather than equally or by attempting to equalise dividend percentages.

The court invited submissions on a small number of discrete fee and reporting items before sealing the order.

The court gave detailed directions. Applying the Court of Appeal's approach in ipagoo, the court held that the EMR and PSR do not create a trust but grant pool claimants a priority interest in a designated asset pool which must be reconstituted from the company estate to the extent of any shortfall. The court determined that the "costs of distributing the asset pool" include those fees and expenses reasonably incurred in identifying, realising and reconstituting the pools and in distributing them (an intermediate approach corresponding to Scenario 2), but exclude general liquidation costs not necessary for those tasks. Foreign currency claims of pool claimants are to be converted into sterling at the exchange rate prevailing on the winding‑up order date (20 March 2020). Any available non-safeguarded assets are to be apportioned between the EMR and PSR pools rateably by reference to the shortfalls suffered by each pool. The judge invited counsel to address a few discrete fee items and to provide a draft order.

The judgment records prior procedural steps: the Financial Conduct Authority presented a petition to wind up AWL on 22 July 2019; provisional liquidators were appointed on 23 August 2019 (effective 27 August 2019) and a winding-up order was made on 20 March 2020, when the Applicants became Joint Liquidators. The court relied on the Court of Appeal's decision in Baker and Rowley v The Financial Conduct Authority, Re ipagoo LLP [2022] EWCA Civ 302, which had held that the EMR do not create a trust and that electronic money holders have a priority interest in the asset pool that may require reconstitution from the company estate.