CR-2023-002766 - [2025] EWHC 2818 (Ch)

I turn to the regulatory regime. In the case of Re Rational Foreign Exchange Limited (in Special Administration) [2025] EWHC 1958 (Ch) Mellor J helpfully summarised the background to both the authorised payment institution regime and to the main relevant insolvency provisions at paragraphs [30] to [43] as follows:

“[30] Payment services businesses in the UK are subject to the PSR 2017 which were made to transpose the second EU Payment Services Directive (‘the Payment Services Directive II’) into domestic law. The PSR 2017 implemented the requirements of the Payment Services Directive II in England and Wales.

[31] Regulation 23 of the PSR 2017 provides that an authorised payment institution must safeguard relevant funds (relevant funds being defined in Regulation 23(1) as being funds received for the execution of a payment transaction). (In Kicks 1 (Footnote: ¹) these are referred to as ‘Safeguarded Funds’ to ensure consistency with the proposed Distribution Plan and correspondence previously sent to customers). An authorised payment institution has two different options in respect of Relevant Funds, they can either be segregated from other funds held by the Company or covered by an insurance policy. The Company chose the segregation method.

[32] Regulation 23 of the PSR 2017 creates a bespoke statutory regime in relation to Relevant Funds in the hands of the payment institution. The payment service users are granted rights over the Relevant Funds in priority to other creditors, by virtue of the express wording of Regulation 23(14) of the PSR 2017.

[33] In order to achieve the safeguarding requirements of the Payment Services Directive II, the relevant funds needed to be treated as not being limited to those that were safeguarded but instead should extend to include company funds equal to the relevant funds which ought to have been, but were not, safeguarded; Ipagoo LLP [2022] EWCA Civ 302. Regulation 13(8) put this on a statutory footing.

[34] Payment service users entitled to a Relevant Funds claim have an interest akin to a secured interest over the Relevant Funds, which takes priority over the waterfall of payments prescribed by s.175 of the Insolvency Act 1986 (‘IA 1986’): Ipagoo LLP [2022] EWCA Civ 302. Although Ipagoo was an Electronic Money Institution (EMI) and therefore the decision was under the Electronic Money Regulations 2011, the decision of the Court of Appeal applies equally to the PSRs; Re Allied Wallet [2022] EWHC 1877 (Ch) at [8]. Claims to Relevant Funds rank ahead of unsecured creditors and the costs of the liquidation, other than the costs associated with distributing the Relevant Funds; Regulation 23(15).

[35] The 2021 Regulations created a special administration regime for payment institutions and electronic money institutions: Regulation 4(2)-(3). It was modelled on the Investment Bank Special Administration Regulations 2011 (which were made in response to the problems that arose in the administration of Lehman Brothers: Re SVS Securities Plc (In Special Administration) [2020] EWHC 1501 (Ch) at [14] - the problems that arose could not be overcome by a Scheme of Arrangement under Part 26 of the CA 2006; Re Lehman Brothers International (Europe) [2010] 1 BCLC 496).

[36] The special administrators are obliged to pursue the special administration objectives set out in Regulation 12:

‘(1) The administrator has the following special administration objectives.

(2)

Objective 1 is to ensure the return of relevant funds—

(a)

as soon as is reasonably practicable in accordance with regulations 13 to 15 and 17 to 34, or

(b)

promptly, in the case of post-administration receipts, in accordance with regulation 16, subject to paragraph (10).

(3)

Objective 2 is to ensure timely engagement with payment system operators, the Payment Systems Regulator and the Authorities in accordance with regulation 35.

(4)

Objective 3 is to either—

(a)

rescue the institution as a going concern, or

(b)

wind it up in the best interests of the creditors.’

[37] The Application is concerned with Objective 1.

[38] The distribution of Relevant Funds back to customers must be by way of a distribution plan, drawn up in accordance with Rules 112(2) - (4) and approved by the Court: Rules 112 and 114.

[39] Prior to Court approval, the distribution plan must be put before the committee of customers/creditors for their approval (either with or without modification): Rule 113. If the distribution plan is not approved, the committee must have an opportunity to explain their position to the Court.

[40] If a shortfall exists between the amount of Relevant Funds held by a Company and the amount of admitted claims to Relevant Funds, then the administrators must use company monies to top-up the Relevant Funds insofar as is possible; Regulation 13(8). There is provision in Regulation 19(2) for how any remaining shortfall (after top-up) is to be dealt with in the distribution plan. Any shortfall is to be borne pro rata.

[41] The 2021 Rules prescribe specific elements that the distribution plan is required to address (detailed below). The 2021 Rules are modelled on the Investment Bank Special Administration Rules 2011.

[42] As to costs, Regulation 18(5) and Rule 99 detail how a client’s share of the expenses of the special administration will be discharged, insofar as they relate to the achievement of Objective 1. The costs and expenses of Objective 1 are to be paid out of Relevant Funds.

[43] On an application to Court pursuant to Rule 114 for approval of a distribution plan, the court has a discretion as to whether to grant the relief sought, but it must be satisfied that (i) where Rule 111 applies (as it does here) that the JSAs have made the necessary notifications in accordance with that rule; and (ii) the creditors committee has approved the distribution plan under Rule 113, or that it has been given an opportunity to explain why not. It must also be satisfied that certain prescribed notifications have been given, pursuant to Rule 114(3) and (5).”

As I shall go on to explain, in many respects the Distribution Plan considered by Mellor J was similar to that before me as were the surrounding circumstances. Thus, by way of example, this case also concerns Objective 1 and Rule 111 also applies.