On 30 July, the High Court handed down judgment in Ipagoo LLP (in administration)  EWHC 2163 (Ch). This decision is important for insolvency practioners as it provides guidance on the status of funds deposited by customers who have contracted under the Electronic Money Regulations (EMR) should be treated and distributed on insolvency.
At first instance the Court held the EMR do not create a statutory trust over safeguarded funds held under the EMR. Interestingly, both Ipagoo LLP and the FCA appealed this judgment, although for different reasons.
The Court of Appeal is expected to hear the appeal either in late December or in early January. In the meantime, it is important for IPs to consider how the outcome of this appeal may affect them.
Current position of Ipagoo LLP
In July 2019, Ipagoo became insolvent and entered into administration. At that time, it held sums which had been paid by electronic money holders in exchange for e-money – here known as the relevant funds.
During administration, the administrators became aware that it was not possible to establish whether the relevant funds had been safeguarded as required by the EMR.
Safeguarded means that the funds should have been placed in a separate account or invested separately to sums paid by non-electronic money holders. It was important to determine whether the relevant funds were safeguarded as it affected how, and in what order, they could be distributed to creditors.
Ipagoo therefore sought directions from the court, as to the distribution of assets in the administration under the EMR, by asking two questions:
- Do the EMR create a statutory trust over the asset pool as defined in Regulation 24 of EMR for the benefit of electronic money holders?
- Do the relevant funds which should have been safeguarded but were not, form part of the asset pool?
The answers to these questions will be important because, under Regulation 24 of the EMR, where there is an insolvency event, the claims of electronic money holders must be paid from the asset pool in priority to all other creditors.
The judge held that the EMR do not create a statutory trust in favour of electronic money holders; however, electronic money holders do have a statutory right to be paid out of the relevant funds in priority to all other creditors.
The judge also held that the asset pool should be treated as holding a sum equivalent to all relevant funds which ought to have been safeguarded, even if the actual funds that should have been safeguarded do not form part of the asset pool ie the electronic money holders should have priority over other creditors regardless of whether their funds have been mixed with other company funds.
Following judgment, both Ipagoo and the FCA appealed the decision.
- The FCA appealed on the grounds that if a statutory trust is not created, creditors will lose their tracing rights.
- FRP, the administrators of Ipagoo appealed on the grounds that electronic money holders do not have a beneficial interest in client monies. Further, the administrators did not consider that the asset pool, available to the electronic money holders, should include a sum equivalent to the relevant funds which ought to have been safeguarded. This limb of the decision is particularly problematic insofar as it suggests the rights of the clients/electronic money holders will trump the rights of, for example, secured creditors.
Likely impact of the Ipagoo appeal
There are three possible outcomes which the Court of Appeal could reasonably reach:
- The EMR do create a statutory trust. Therefore, where a company mixes safeguarded funds with non-safeguarded funds, those funds are still held on trust. In these circumstances an application to Court would be needed to determine how the funds should be distributed. In each case the IP would have to make a further application for directions as to the costs and expenses which can be deducted upon distribution in respect of the costs of distributing the asset pool.
- A statutory trust is not created. If this is the decision the funds will simply fall into the insolvent estates unless it can be shown the funds were held in segregated client accounts in which case they are held on trust for the clients. In these circumstances then as is usual a Berkeley Applegate application will be required.
- The first instance decision in Ipagoo was correct insofar as it held no statutory trust is created, but wrong insofar as it decided the electronic money holders have a right to be paid from the asset pool in priority to all other creditors. This outcome would mean only the funds held in the client accounts were held for the benefit of the client creditors.
It is clear the Court of Appeal’s decision will have a profound impact on the rights of customers and other creditors to electronic money when it is held by an insolvent company and how the costs and expenses of distributing to creditors can be met.