Priority status for electronic money holders

Electronic money institutions (EMI) differ from traditional banks as they cannot retain deposits of money nor pay interest. EMIs are governed by the Electronic Money Regulations 2011 (the Regs). The Regs were made to implement the EU’s Electronic Money Directives 2009/110 and 2015/2366. An EMI must safeguard the monies that its customers, called electronic money holders (EMH), pay to it in exchange for e-currency.

Ipagoo had failed to safeguard the EMHs’ monies per the requirements in regulations 20-22 of the Regs. 

In the first instance decision, the court had held that, even if the monies had not been safeguarded, an equivalent amount should be set aside from Ipagoo’s asset pool for distribution to the EMHs. The asset pool could consist of a mixture of EMH monies and Ipagoo’s other funds. The court held this protection was not by virtue of a charge nor a statutory trust but arose due to regulation 24 of the Regs. The Regs therefore modified the priority of creditor claims as set out in the Insolvency Act 1986 (Act). The FCA appealed this decision.

The appeal was dismissed. The appeal court held that the language of regulation 24 was incompatible with the FCA’s assertion that a statutory trust had been created. Regulation 24 granted EMHs an interest over the asset pool akin to a secured creditor. The EMHs stood outside of the usual creditor priority order (insolvency waterfall) by virtue of regulation 24. Alternatively, the Act was amended as such by regulation 24 (by virtue of s.2 of the European Communities Act 1972).

Re Ipagoo LLP (In Administration) [2022] EWCA Civ 302