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Clause 117: Building societies
281. The Treasury is given a power to apply the bank insolvency procedure to building societies (with any necessary modifications) and that will be achieved by secondary legislation, subject to the affirmative procedure.
Clause 118: Credit unions
282. As with building societies, the Treasury will have the power to apply the bank insolvency procedure (with any necessary modifications) to credit unions by secondary legislation, subject to the affirmative procedure.
Clause 119: Partnerships
283. This allows the Lord Chancellor, with the agreement of the Secretary of State and Lord Chief Justice, to modify the provisions of the bank insolvency procedure for banks that are partnerships rather than limited companies. This reflects existing powers under section 420 of the Insolvency Act 1986.
Clause 120:Scottish partnerships
284. The Secretary of State may modify the bank insolvency procedure in its application to Scottish Partnerships
Clause 121: Northern Ireland
285. This clause makes specific provisions in the application of the bank insolvency procedure to banks registered in Northern Ireland.
Clause 122: Consequential provisions
The Treasury may, by secondary legislation, make any consequential provisions required to legislation required as a result of the creation of the bank insolvency procedure. Any order is subject to the affirmative procedure.
PART 3: BANK ADMINISTRATION PROCEDURE
Introduction
Clause 123: Overview
286. This clause outlines the main features of the bank administration procedure which is based largely (with modifications where required) on the existing administration provisions of the Insolvency Act 1986 as amended by the Enterprise Act 2002.
287. Where part of a failing bank’s business, assets or liabilities are transferred to either a bridge bank or a private sector purchaser the residual part of the bank may be left as an insolvent entity. In such circumstances, an application may be made to the court by the Bank of England for a Bank Administration Order. The bank administration procedure is designed to apply to an insolvent residual company to ensure that any essential services and facilities that cannot be immediately transferred to a bridge bank or private sector purchaser continue to be provided for a period of time.
288. Once the primary objective has been achieved, the procedure would continue in a similar way to an ordinary administration although to keep down costs, maximise returns to creditors and provide for a variety of outcomes, some of the existing powers of a liquidator have been built in to the procedure.
Clause 124: Objectives
289. The bank administrator has specific statutory objectives. First, either to provide support to the bridge bank or private sector purchaser. Once such support is no longer required, the objective is to achieve either of the two principle aims of an ordinary administration; either to rescue the company as a going concern or to achieve a better result for creditors than in an immediate liquidation.
290. Subsection (2) establishes that, while objective 1 has priority, there are some elements of an ordinary administration that may be begun immediately where they do not conflict with the primary objective, and subsection (2) therefore obliges a bank administrator to pursue both of the objectives in parallel.
Clause 125: Objective 1: supporting private sector purchaser or bridge bank
291. As outlined above, the primary objective of the bank administration procedure is to provide continuing services and facilities where a partial transfer to either a private sector purchaser or a bridge bank has been effected. Subsection (2) provides that this obligation also includes acting as a transferor or transferee in relation to any subsequent property transfers between the residual company and either the bridge bank or the private sector purchaser.
292. In the event of a partial transfer to a private sector purchaser, subsection (3) requires that in trying to achieve objective 1 a bank administrator should act in accordance with the terms of any service agreement drawn up between the residual company and the commercial purchaser and the court will act as the arbiter in the event of any dispute or uncertainty.
293. Under subsection (4), where a partial transfer is effected to a bridge bank, the bank administrator is required to work with the Bank of England to effect appropriate service arrangements. To protect the interests of creditors, the bank administrator should ensure that, as far as reasonably practicable in light of his duty to pursue objective 1, payments for any services provided to the bridge bank are made at a fair market value.
294. Subsection (5) provides that where the bank administrator requires the prior agreement of the Bank of England to take certain actions, the Bank of England may only block actions which would be adverse to the continuing provision of services of facilities to a bridge bank.
Clause 126: Objective 1: duration
295. Once the Bank of England informs the bank administrator, by way of an “Objective 1 Achievement Notice”, that the continued provision of services and facilities to the bridge bank or commercial purchaser is no longer required (or that such support was never required - see subsection (3)) the administration should continue in much the same way as an ordinary administration.
296. Subsection (2) provides that, where the bank administrator is of the opinion that objective 1 has been achieved or is no longer applicable, the administrator may seek directions from the court as to how to proceed. The court may give the Bank directions to consider whether to give the bank liquidator a notice that Objective 1 no longer applies.
Clause 127: Objective 2: “normal” administration
297. As set out in the note to Clause 124, objective 2 of the bank administration procedure is based on the existing provisions of paragraphs 3(1)(a) and 3(1)(b) of Schedule B1 to the Insolvency Act 1986.
298. In keeping with those provisions, subsection (2) obliges a bank administrator to seek to rescue the residual bank as a going concern unless he or she considers that this not a viable outcome or a better result would be achieved for the bank’s creditors by following some other courses of action.
299. To ensure that the bank administrator does not realise any assets that may be essential to achieving objective 1, subsection (3)(a) provides that only assets specified by agreement between the administrator and the Bank of England may be sold. Once objective 1 has been achieved, this is no longer applicable and the administrator will be free to deal with the assets of the bank to facilitate a rescue as a going concern and/ or to realise those assets for the benefit of the bank’s creditors.
Process
Clause 128: Bank Administration Order
300. To ensure compatibility with human rights legislation, a bank administration may commence only by an order of the court and the making of such an order will be subject to the satisfaction of notice requirements to be specified in secondary legislation.
301. Subsections (2) and (3) ensure that only a qualified insolvency practitioner, who is willing to accept the position, may be appointed as a bank administrator.
Clause 129: Application
302. Entry into bank administration is by virtue of an application to court. Subsection (3) provides that notice of the application must be given in accordance with the rules made under section 411 of the Insolvency Act 1986.
Clause 130: Grounds for applying
303. Only the Bank of England, as the authority responsible for administering the SRR, will be able to apply to the court for a bank administration order.
304. An application may be made only where a partial transfer has been effected by virtue of subsection (3), where the residual banking company is left as an insolvent entity; that is, it is unable, or is likely to become unable, to pay its debts.
305. By the application of paragraphs 44(1)(a) and 44(5) of Schedule B1 to the Insolvency Act 1986 in clause 132, as in an ordinary administration on the making of the application an interim moratorium will take effect so that creditors will not be able to enforce their security over the residual company’s property and no legal proceedings may be taken against the company (except with the leave of the court).
Clause 131: Grounds for making
306. The court may grant the Bank’s application, adjourn it or dismiss it.
Clause 132: General powers, duties and effect
307. This clause is based largely on existing insolvency law and practice, with Table 1 drawing on the existing administration provisions of Schedule B1 to the Insolvency Act 1986, which was introduced by the Enterprise Act 2002.
308. By the application of paragraphs 44(1)(a) and 44(5) of Schedule B1 to the Insolvency Act 1986, as in an ordinary administration on the making of the application an interim moratorium will take effect so that creditors will not be able to enforce their security over the residual company’s property and no legal proceedings may be taken against the company (except with the leave of the court).
309. A bank administrator will have powers and duties similar to those of an ordinary administrator, but modifications have been made where necessary to ensure that the unique statutory objectives of the bank administration procedure can be achieved. Many of these modifications also reflect the supervisory role that the Bank of England will have in the initial stages of the procedure in place of a creditors’ committee up until the point that the primary objective has been achieved.
310. The provisions of Schedule B1 to the Insolvency Act 1986 relating to a meeting of creditors and the functions of a creditors’ committee will not apply until an Objective 1 Achievement Notice has been served. Once an Objective 1 Achievement Notice has been issued by the Bank of England, the procedure will continue in much the same way as an ordinary administration; a meeting of creditors should be called to consider the administrator’s proposals for the progression of the administration and at this stage the creditors will be able, among other resolutions, to form a creditors’ committee. The need for the Bank administrator to obtain the consent of the Bank of England to take certain actions will therefore also lapse at this point.
311. Other relevant provisions of the Insolvency Act 1986 are also applied by Table 2 and these largely mirror those provisions applied to the bank insolvency procedure by Clause 90. It should be noted that clause 117(4)(f) provides that where Insolvency Act provisions have been applied with modifications to both Part 2 and Part 3 of the Banking Bill, the modifications in clause 77 in part 2 should be read across to the applied provisions in part 3, with references to bank administration rather than to bank insolvency.
312. The most significant changes to the process of normal administration are that some of the powers that only a liquidator currently has have been adopted to create a flexible, stand-alone, procedure to maximise returns to creditors. The Bank Administrator is therefore given powers to disclaim onerous property (see subsection (6) entry in table 2 for section 178),subject to requiring consent from the Bank of England to do so until Objective 1 has been achieved, and to bring action before the court in respect of fraudulent or wrongful trading (see table 2 entries for sections 213 and 214 of the Insolvency Act 1986).
313. Once an Objective 1 Achievement Notice has been issued by the Bank of England, the bank administrator will also be able to pay dividends, where possible, to unsecured creditors without the limitation of needing the permission of the court to do so.
Clause 133: Status of bank administrator
314. A bank administration can only be commenced by an order of the court and this clause specifies that as in an ordinary administration (see paragraph 4 of Schedule B1 to the Insolvency Act 1986) the bank administrator is an officer of the court.
Clause 134: Administrator’s proposals
315. Subsections (1) to (4) provide that, prior to the achievement of objective 1, a bank administrator must agree with the Bank of England a statement of proposals for achieving the objectives of the bank administration and (under subsection (5)) any matters of disagreement on the content of that statement may be referred to the court. As in an ordinary administration, under subsection (7), those proposals may subsequently be revised.
316. Subsection (8) provides that, except for the differences specified in this clause, the proposals should generally be dealt with in the same was as in an ordinary administration and copies of the document must therefore also be circulated to creditors and members of the company and a copy filed at Companies House. Subsection (6) stipulates that the FSA should also be sent a copy of the proposals.
317. Once objective 1 has been achieved, as for a normal administration, the bank administrator will then produce a statement of proposals for the achievement of objective 2 of the bank administration which should be circulated to creditors for their consideration at a meeting of creditors and filed at Companies House in the usual way.
Clause 135: Sharing information
318. Where a partial transfer is effected to a bridge bank, this clause provides for the sharing of information between the bank administrator, the Bank of England and also the bridge bank.
319. Subsection (2) requires the Bank of England to provide the bank administrator with details of the financial situation of both the residual bank and the bridge bank. This provision ensures that the Bank of England’s acquired knowledge in effecting a partial transfer is supplied to the bank administrator so that he or she can produce an appropriate statement of proposals to the Bank of England.
320. Given the linkages between a bridge bank and the residual company, and because the resolution of the bridge bank will impact on the timing and amount of any distribution to creditors of the failed bank, subsection (3) obliges the bridge bank to supply information to the bank administrator.
321. Subsection (4) similarly obliges a bank administrator to provide information to the Bank of England and the bridge bank on the financial position of the residual company.
322. Subsections (5) and (6) require the Treasury to specify by secondary legislation what sort of information and class of record will be relevant in a particular case. The regulations are subject to the negative procedure.
General application of this part
Clause 136: Multiple original transfers
323. This clause enables special provisions to be made, where necessary, in cases involving multiple property transfers from a residual bank or a bridge bank.
324. In such circumstances, the Treasury may make regulations modifying the application of the bank administration procedure. Those regulations would be subject to the affirmative procedure.
Clause 137: Bridge bank to private purchaser (was Objective 1: extension)
325. Where a partial transfer to a bridge bank is effected and part or all of the bridge bank’s business is subsequently acquired by a private sector purchaser, the continued provision of services and facilities from the residual company to the commercial purchaser may still be essential to ensure a successful resolution. In those circumstances, this clause continues to bind a bank administrator to achieving objective 1.
Clause 138: Property transfer from a bridge bank
326. This clause applies where a property transfer instrument has been exercised to transfer property to a bridge bank and following that the Bank makes or proposes to make a further (onward) property transfer instrument from the original bridge bank.
327. Subsection (2) has the effect that both the original residual bank and the bridge bank, which will itself be a residual bank following the onward transfer, may be put into the bank administration procedure and ensure the continued provision of necessary services and/or facilities to the transferee.
Clause 139: Property transfer from public sector ownership
328. This clause applies in the case where the Treasury brings a bank into temporary public ownership and later makes an onwards property transfer order from the transferred bank.
329. Subsection (2) provides that the bank administration procedure applies to the residual bank left in temporary public ownership following the transfer under the property transfer order.
330. Under subsection (3) the Treasury may make regulations modifying the application of the bank administration procedure. The regulations are subject to the affirmative procedure.
Termination
Clause 140: Successful rescue
331. This clause provides a way to terminate a bank administration where Objective 1 has been achieved and the bank has also, in the opinion of the liquidator, been rescued as a going concern.
Clause 141: Winding-up or voluntary arrangement
332. This provision allows for the dissolution of the residual banking company where the objectives of the bank administration procedure have been achieved and the bank’s affairs have been fully wound up.
333. Alternatively, where it would be in the best interests of creditors, the bank administrator may make proposals to creditors for a company voluntary arrangement under Part 1 of the Insolvency Act 1986. These provisions mirror some of the current exit routes from an ordinary administration.
334. As the bank administrator is given additional powers of a liquidator (see note to clause 132), it is not necessary to provide for conversion to a creditors’ voluntary liquidation to effect a distribution to unsecured creditors.
Miscellaneous
Clause 142: Disqualification of directors
335. As with the bank insolvency procedure (see the note to clause 108) and normal administration proceedings, the provisions of the Company Directors Disqualification Act 1986 are applied to the bank administration procedure.
Clause 143: Application of other law
336. This clause provides for future amendments to insolvency legislation (including administration) to be applied, with any required modifications, to the bank administration procedure; and provides a power (to be exercised by the Secretary of State and the Treasury) to amend other existing insolvency provisions (including administration) as a consequence of the introduction of the bank administration procedure. Any such amendments may be effected by secondary legislation subject to the affirmative procedure.
Clause 144: Other processes
337. The Financial Services and Markets Act 2000 gives the Financial Services Authority powers to present an administration application to the court, or file a winding-up petition, against a bank. Given the Bank of England’s role as the authority responsible for the SRR, the FSA will only be able to make such an application or file such a petition against a residual bank where appropriate notice has been given to the Bank of England. The Bank of England will also be entitled to appear at any consequent court hearing and make representations.
Clause 145: Building Societies
338. This gives the Treasury a power to apply the bank administration procedure to building societies (with any necessary modifications) by secondary legislation subject to the affirmative procedure.
Clause 146 Credit Unions
339. This gives the Treasury a power to apply the bank administration procedure to credit unions (with any necessary modifications) by secondary legislation subject to the affirmative procedure.
Clause 147: Rules
340. This clause amends section 411 of the Insolvency Act 1986 to allow secondary legislation to be made to make the bank administration procedure work in practice.
341. This mirrors the position of the insolvency legislation that deals with administration where the primary legislation is backed-up by a set of appropriate insolvency rules, dealing mainly with issues of procedure.
Clause 148: Fees
342. Section 414 of the Insolvency Act 1986, which deals with the setting of fees to apply to insolvency proceedings, is amended to ensure that those provisions apply to the bank administration procedure.
Clause 149: Partnerships
343. This allows the Lord Chancellor, with the agreement of the Secretary of State and Lord Chief Justice, to modify the provisions of the bank administration procedure for banks that are partnerships rather than limited companies. This reflects existing powers under section 420 of the Insolvency Act 1986.
Clause 150: Scottish partnerships
344. This gives the Secretary of State the power to modify the bank administration procedure in its application to Scottish Partnerships
Clause 151: Co-operation between courts
345. Section 426 of the Insolvency Act 1986, which provides for co-operation between certain insolvency courts in different jurisdictions, is amended to ensure that these provisions apply to the bank administration procedure.
Clause 152: Interpretation: general
346. Due to the size and complexity of the UK’s banks and the nature of the partial transfer tool, subsection (1) provides that only the higher courts may make a Bank Administration Order and that they will supervise the process.
347. Subsection (3) defines “inability to pay debts” and applies existing definitions from sections 367(4) and (5) of the Financial Services and Markets Act 2000 (as applied by
subsection 4(a)) and section 123 of the Insolvency Act 1986 (as applied by subsection (4)(b)).
348. Subsections (4) to (5) provide that the expressions used generally throughout this part of the bill and also in insolvency and company legislation have the same meaning.
Clause 153: Northern Ireland
349. This clause makes specific provisions in the application of the bank administration procedure to banks registered in Northern Ireland.
Clause 154: Consequential provisions
350. The Treasury may, by secondary legislation, make any consequential provisions required to legislation required as a result of the creation of the bank administration procedure.
PART 4: FINANCIAL SERVICES COMPENSATION SCHEME
Clause 155: Overview
351. This clause introduces Part 4 of the Bill.
Clause 156: Contingency Funding
352. This clause inserts new section 214A into the Financial Services and Markets Act 2000.
353. This new section confers a power on the Treasury to make regulations to permit the Financial Services Compensation Scheme (the FSCS) to impose levies to build up contingency funds in advance of possible defaults by firms which would give rise to the payment of compensation under the scheme (“pre-funding”). It also sets out certain matters which may be covered in those regulations and allows the Financial Services Authority (the FSA) to make rules relating to contingency funds provided they are compatible with the regulations the Treasury has made.
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