Can e-money holders retrieve their funds after administration?

Proceedings are currently underway in the Vilnius County Court in Lithuania relating to the administration of UAB Payrnet, formerly a subsidiary of failed Railsbank Technology Ltd and host of the old EU-based Wirecard prepaid programmes. The case has significance not only for the creditors concerned, but also the funding structure of prepaid card programmes throughout Europe and the UK.

The facts of the case

The court will consider how to administer the rights of e-money holders where the asset pool for one Electronic Money Institution (EMI) is partly held in the bank account(s) of another stricken EMI. According to the Lithuanian regulator, UAB Payrnet appears to have held its customer funds with Payrnet Ltd, another former Railsbank group company that was until recently also in special measures (though not insolvent, according to recently filed accounts).

The former group parent company, Railsbank Technology Ltd, itself went into administration in early 2023. In March that year, a hastily arranged ‘pre-pack’ arrangement saw the FCA approve the change in control over Payrnet Ltd to a newly funded new parent, Embedded Finance Ltd.

That deal omitted UAB Payrnet, which was then under restrictions imposed by the Lithuanian regulator and later had its e-money authorisation revoked. The Lithuanian administrator has since uncovered a controversial inter-EMI safeguarding arrangement between UAB Payrnet and Payrnet Ltd, so at the time of the pre-pack Payrnet Ltd seems likely to have been holding UAB Payrnet’s customer funds. As the Lithuanian regulator explained: “[The agreement] contradicts the mandatory provisions of legal acts prohibiting the holding of safeguarded clients’ funds in accounts of another electronic money institution.” While there’s an exclusion for “payment services” activity among group companies under the Payment Services Directive (as implemented locally), that does not extend to EMIs’ safeguarding obligations under the E-money Directive.

The recently filed accounts of Payrnet Ltd for the period do not mention UAB Payrnet, the inter-company safeguarding arrangement or the fact that UAB is under the control of a Lithuanian administrator hunting for its assets and those of its e-money holders. The UK company’s accounts only cite “material uncertainty due to ongoing s166 ‘skilled persons’ review and restriction on taking on new clients without FCA consent” as well as a guarantee and ‘comfort letter’ from Embedded Finance Ltd.

The UK courts should regard the funds received in exchange for e-money issued by UAB Payrnet as forming part of UAB’s “asset pool” for administration purposes, regardless of where the centralised operations team actually put the funds. The Vilnius County Court should feel confident in proceeding on the same basis.

At any rate, to guard against losing access to their funds in such circumstances, any customer who keeps large balances (such as ‘float’ arrangements maintained by prepaid card programme managers) might quite rightly insist on distinct, segregated/safeguarded ‘float’ arrangements with back-up records, daily reconciliations (at least) and ‘sweeps’ of any surplus funds to their accounts at third-party institutions.

What are safeguarding obligations?

EMIs have to ‘safeguard’ the funds they receive when issuing e-money to their customers (‘e-money holders’) so that the cash is available when the customers wish to withdraw their e-money balance, which they must be able to do on demand.

An EMI can choose how to safeguard the cash that corresponds to e-money it has issued. It can either take out an insurance policy from a limited range of institutions, or keep the ‘relevant funds’ in a bank account in the EMI’s own name and designated as holding customer funds for regulatory purposes, with a specific form of acknowledgement to that effect from the bank. Another EMI does not qualify as a ‘bank’ or ‘credit institution’ for holding ‘relevant funds’. In the UK, only a bank or the Bank of England qualifies (and it’s a similar position in Lithuania, for example).

The EMI must keep adequate records of relevant funds, transactions and which customers are owed which amounts. It must also “maintain organisational arrangements sufficient to minimise the risk of the loss or diminution of relevant funds or relevant assets through fraud, misuse, negligence or poor administration”.

Nobody other than the EMI can have an interest or right over ‘relevant funds’ (except as provided in the regulations), which is another reason that the funds cannot be kept in another EMI’s bank account.

Because e-money regulation still currently operates the same way in the UK as it does in the EEA, any UK-based EMI would be familiar with these restrictions – as would a group that has EMIs in both the UK and Lithuania. And while there’s an exclusion for “payment services” activity among group companies under the Payment Services Directive (as implemented locally), that does not extend to EMIs’ safeguarding obligations under the E-money Directive.

The Lithuanian court must now rectify a situation where a failed EMI has its ‘relevant funds’ elsewhere and the Administrator cannot get them back when customers want to redeem their e-money balances.

What happens when an EMI winds up or down?

The first and second Electronic Money Directive (EMD) left the ‘resolution’ or wind-down of EMIs to national law in each EMI’s home state, although insolvency regimes tend to be generally similar. However, the intention behind the EMD was also that the e-money regime must be consistent across borders.

In the UK, an “insolvency event” includes a ‘voluntary winding up’ of the company. In such an event, an “asset pool” of ‘relevant funds’ is created to be distributed by an administrator according to a specific hierarchy. The claims of e-money holders are to be paid from the ‘asset pool’ in priority to all other creditors, with no rights of set-off or security applicable until the e-money holders have been paid.

Even so, the administration of failed EMIs is not straightforward. UK insolvency practitioners must provide a reasonable notice period before a claim’s ‘bar date’ comes into effect; there’s more clarity on the full hierarchy of expenses; and there must also be notice of a ‘bar date’ given to those with a right to assert a security interest or other entitlement over funds that were – or should have been – safeguarded.

What happens when relevant funds are not held where they should be?

If funds should have been safeguarded according to the regulations but were not, national laws come into play within the overall intention behind the EMD to achieve ‘maximum harmonisation’ of the e-money regime. In the case of a failed UK EMI (called “Ipagoo” for some reason), the UK Court of Appeal decided that the EMD did not require the UK to impose a statutory trust over the “asset pool” of customer funds under its local e-money regulations (EMRs), and the EMRs do not impose or create such any type of trust.

Instead, the court held that the EMD requires all funds received by EMIs from e-money holders to be safeguarded, not merely those that had actually been safeguarded appropriately. Therefore, the court gave the concept of “asset pool” a wider meaning than merely relevant funds that have been safeguarded in a compliant way, and held that the asset pool must also include a sum equal to relevant funds that ought to have been, but had not been, safeguarded in accordance with EMRs.

Equally, the “costs of distributing the asset pool” include the costs of ‘reconstituting’ the asset pool in circumstances where relevant funds have not been safeguarded, as administrative costs associated with the asset pool itself.

If the Lithuanian court were to apply the same reasoning, then any of a Lithuanian EMI’s ‘relevant funds’ that are held elsewhere should form part of the “asset pool” to be distributed by the Lithuanian administrator. Of course, to the extent that those funds are held in the UK, the Court of Appeal’s decision would mean that same analysis applies.

If you are an e-money holder and have questions or concerns about your funds, please contact Simon Deane-Johns.