Update on E-Money and Insolvency: Re Allied Wallet Ltd (in liquidation)
The Financial Conduct Authority ("FCA") regulated Allied Wallet Ltd ("AWL") in respect of AWL's business processing electronic payments for online businesses and issuing electronic money via prepaid cards.
In April's Insolvency Bulletin, we considered the case of Re Igapoo. This further case, Re Allied Wallet Limited, builds on the findings in Re Igapoo and helps to further clarify the scope of the Electronic Money Regulations 2011 ("EMR") and Payment Services Regulations 2017 ("PSR").
In 2019 a complaint was made by the US Federal Trade Commission ("FTC") alleging that AWL had been routing payments through UK shell companies to prevent US regulatory scrutiny. Following a $110m fine from the FTC in May 2019, the FCA proceeded to suspend AWL's activities.
In 2019, a winding up petition against AWL was presented by the FCA with an application for the FCA to be appointed as joint provisional liquidator. Such application was granted, and the FCA was ultimately appointed as one of the joint liquidators of the company on 20 March 2020.
Facts of the case
Both the EMR and PSR required AWL to safeguard customer monies either by implementing insurance or guarantee arrangements to the value of the relevant funds held or by segregating such funds from company funds. AWL purported to operate the latter safeguarding method. However, investigations by the liquidators revealed breaches of AWL's safeguarding obligations with funds from merchants and card issuers being mixed with company funds.
The joint liquidators applied to the Insolvency and Companies Court for directions on whether a trust (pre-appointment of liquidators) may have arisen in respect of monies held by AWL on the date on which it was wound up. If such trust could have arisen, the liquidators also sought directions as to its terms and when would it have been created.
Similar issues arose in the case of Re Ipagoo Ltd. In Re Ipagoo, the Court of Appeal found that funds held by E-Money Institutions ("EMI's") must be safeguarded and are therefore a protected pool in an insolvency. The decision in Re Ipagoo resolved many of the issues the joint liquidators of AWL sought directions on. However, three issues remained:
- What costs should fall within the scope of 'costs of distributing the asset pool' pursuant to reg 24(2) EMR and reg 23(15) PSR (the "Costs Issue")
- When quantifying foreign currency claims against the asset pool, what date ought to be used for the exchange rate (the "Foreign Currency Issue").
- The EMR and PSR require ringfenced asset pools for e-money customers (as established in Re Igapoo), and if those pools are insufficient then non-safeguarded assets are made available to top-up the protected pools. In respect of this, it was queried how available funds will be applied between the non-protected and protected pools when topping them up (the "Pooled Funds Issue")
The asset pool was not limited to assets correctly safeguarded, but also included the assets which were supposed to be safeguarded under the EMR but were not.
1. The Costs Issue
In determining what constitutes 'costs of distributing the asset pool', costs were divided into recoverable costs of £1,560,000 and irrecoverable costs of £35,000. Recoverable costs included both the costs of administering and distributing the asset pool, and fees and liquidator expenses required for proper administration of the liquidation, including before appointment. Costs associated with the joint liquidator's compliance with their statutory and regulatory obligations for liquidation were excluded.
2. The Foreign Currency Issue
Rule 14.21 of the Insolvency (England and Wales) Rules 2016 applied where a pool creditor's claim arose in foreign currency. The joint liquidators had to convert each debt into sterling at a single rate for each currency using the exchange rate for the date of AWL's liquidation (20 March 2022).
3. The Pooled Funds Issue
The Court applied the maxim 'equality is equity' when deciding how funds should be applied from non-protected pools to top up the safeguarded pools under the EMR and PSR. AWL's assets were shared proportionately to the shortfall on each asset pool. Therefore, if the PSR protected asset pool suffered 50% deficiency and the EMR protected asset pool 25%, the non-protected assets would be shared at a 2:1 ratio to top up.
This case clarifies further the technicalities of liquidating an asset pool that includes e-money customers, building on the decision in Re Igapoo. It highlights that the costs recoverable by the liquidator under the EMR and PSR in distributing protected asset pools for e-money customers under those regulations are wide in scope. In addition, it sets out that the date for the exchange rate of foreign currency is the date of liquidation, and that where safeguarded pooled funds are insufficient, an equitable approach to topping them up is taken. As such, the case helps to clarify the mechanics of how ring-fenced protected funds of e-money customers should be dealt with.
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