Mr.
Gauke: I am grateful to the Minister for that response. In
the light of his comments, I beg to ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Question
proposed, That the clause stand part of the
Bill.
Mr.
Bone: This clause is extremely important and the
Government are right to draw it to our attention. I wonder what would
happen in the case that, although the default clause could not be
operational under law, nevertheless the company with the default clause
went ahead. Is this similar to chapter 11 protection in the USA, where
creditors cannot enforce against a company that is in chapter 11? Is it
the intention that if a company is dealing with a bank which then has a
transfer under these provisions, it is forced to continue with the
original contract in the manner in which it was first drawn up and not
allowed to stop? I assume that is what it means, but I would like the
Minister to clarify that
point.
Ian
Pearson: I am happy to provide what clarification I can.
It is important to set this clause within the overall context of what
we are trying to achieve, which is to deal with failing banks and to
find the most appropriate remedy, whether it be transfer to a private
sector purchaser, a bridge bank or taking the failing bank into
temporary public ownership. This clause sets out certain provisions in
relation to events of default. In the circumstances of a failed bank
where we want to take action in the public interest and protect
depositors, we cannot have a situation where events of
default—built into contracts under normal contractual
arrangements—can be engaged and in effect frustrate the action
that we want to take in the
public interest. Disapplying these events of default provisions, as we
seek to do in this clause, is a sensible way to ensure that we can use
the SRR for the purposes intended.
Mr.
Bone: I understand the Minister’s argument
entirely. It is right that the person who would normally enforce the
default clause is not allowed to enforce the default, which may be to
claim back the money. Does it go further to establish the principle
that parties have to continue with the contract in the previous form,
or are they allowed to stop the contract but not enforce the default
clause?
Ian
Pearson: I understand the point the hon. Gentleman is
making. The purpose is certainly to allow transfers to go ahead and
there will be a right to continue the contract. He raises an important
point about whether a counterparty might subsequently desire a change
of contract in the future; I think that that would be part of normal
commercial arrangements. The intention is to deal with situations as I
have described, in which we are trying to rescue all of or parts of a
failing bank. It would not be possible to transfer property effectively
if events of default were being exercised on a routine basis, which is
common in normal commercial contracts. That is why the termination
rights clause is in the Bill and is essential if we are to have
effective property transfers.
Question
put and agreed
to. Clause
35 ordered to stand part of the Bill.
Clause
36Foreign
property
Mr.
Gauke: I beg to move amendment No. 140, in
clause 36, page 16, line 19, after
‘means’, insert ‘property which
is’.
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 141, in
clause 36, page 16, line 20, leave
out ‘property’ and insert ‘physically
situated’. No.
142, in
clause 36, page 16, line 21, leave
out ‘rights
and liabilities under foreign
law’ and
insert ‘a right in action which exists only
under the jurisdiction outside the UK (disregarding any arbitration
provisions)’.
Mr.
Gauke: I mentioned clause 36 a moment ago in the context
of foreign property, of which the clause provides a definition.
Amendments Nos. 140 to 142 are probing amendments, which attempt to
clarify the definition of foreign property. The provision is important
in that it applies to a partial property transfer order to preserve
set-off—an issue that we shall turn to shortly. Therefore, it is
important to get the definition right. There is a drafting error in
amendment No. 142, which the Minister may
identify. I
shall give the Minister and the Committee examples of circumstances in
which it is not entirely clear what is and is not foreign property. I
will be hugely impressed if
the Minister is able to provide an immediate answer; I fear that I am
being a little unfair on him for ambushing him by providing these
examples, but any guidance that he provides will be helpful. None the
less, if there is uncertainty, it is helpful for the Committee to be
aware of it. We have
received representations giving areas where the current definition is
unclear. The examples are as follows: First, English law bearer
securities held outside of the UK, for example in Euroclear, in
Belgium, or in Clearstream, in Luxembourg; secondly, a New
York-law-governed option over UK property, for example commodities held
in a UK warehouse; thirdly, an English-law-governed right to the
delivery of US securities; and finally, a German-law-governed right to
the repayment of a loan denominated in sterling made by a UK bank
branch. 11.45
am I
do not expect the Minister to provide immediate answers, but I may be
doing him down. I highlight those cases to demonstrate that this is a
complicated area. What is foreign property and what is UK property is
not always clear, given that there are various conflicting elements,
such as the choice of law, the relevant currency and the type and
location of the property. There are all sorts of complicating factors.
It has been put to us that clause 36 is perhaps not as clear as it
might be in determining which factors are
predominant.
Ian
Pearson: We have already considered, in clause 32, that a
property transfer instrument may make provision to transfer foreign
property. In domestic law, the transfer of foreign property will be
recognised as effective because it is authorised by primary
legislation. The only exception to this is when the transfer is
contrary to European Community law, an issue that we considered in the
debate on the proposed amendment to clause 32 tabled by the hon. Member
for Wellingborough. The critical question is whether the transfer of
foreign property will be recognised as valid under foreign law legal
regimes. If foreign courts will not recognise the transfer, it might
not be practically effective.
Clause 36
makes further provision to ensure that transfers of foreign property
are recognised as effective when that is not the case simply by virtue
of the property transfer instrument. In particular, an obligation is
imposed on the transferor to take steps to ensure the effectiveness of
the transfer under the foreign law legal regime. For instance, the
transferor might have an obligation to ensure that property registered
in the United States, or in any other country, is effectively
transferred. The
hon. Member for South-West Hertfordshire raised some interesting points
on whether our definition of foreign property is adequate and on what
may or may not be covered. I do not have an answer for him immediately
available. However, I can respond to the point he made about
arbitration when we discussed clause 32. The purpose of clauses 32 and
36 is to secure the greatest possible scope for the recognition of
transfers under foreign law. International commercial documentation may
be subject to arbitration provisions, so the effect of the exercise of
stabilisation powers will depend on the context. In certain
circumstances, it might be necessary
to override provisions subject to arbitration, such as an event of
default that applies on the exercise of stabilisation powers. However,
if a later question arose on the compliance with the agreement by the
transferee, that matter would fall to be determined by arbitration in
the ordinary way. Amendments
Nos. 140 to 142 seek to change the definition of foreign property. That
provision has deliberately been drafted broadly so that it applies to
all property where questions of recognition under foreign law legal
regimes might arise, and the hon. Gentleman’s amendments are
likely to narrow the scope of the definition. Again, that relates to
our general point that we seek to future-proof legislation as far as
possible and have broad categories, rather than specific ones for
particularly narrow definitions. Were the amendments to be accepted,
the provision of clause 36 could not be used for some foreign property,
even if doing so would be beneficial for the resolution and in the
public interest. I am sure that the hon. Gentleman would not want that
to
happen.
Mr.
Bone: I am grateful for the Minister’s explanation.
Have there been discussions with the American Government about the
transfer of what would, in effect, be their assets, if an American
company were involved? Has there been an agreement with the Americans
that one would be allowed to register in America, despite that perhaps
damaging the rights of a US-based company? Has there been
intergovernmental discussion on those
issues?
Ian
Pearson: I am not aware that the UK Government have had
discussions on the Bill with foreign Governments. We have, however,
consulted extensively with the banking sector. Many banks that operate
in the UK are international and are governed by a variety of
jurisdictions. The points that have come back to us from the
consultation reflect the global nature of the banking system. In
general, if a matter is wholly governed by domestic law, the transfer
will be effective because it is authorised by primary legislation. Here
we are talking about matters governed wholly or partly by foreign law,
which will attract the additional assistance provided for in clause
36. I
shall give an example of problems that might arise if amendments Nos.
140 to 142 were accepted. The amended definition of foreign property
would not extend to liabilities under foreign law, yet liabilities
might form a key part of a contractual relationship critical to the
operation of the banking business—for example, the obligation to
pay for services provided under an IT contract. Clauses such as clause
36 have been used in other contexts, for example in paragraph 11 of
schedule 21 to the Energy Act 2004, which makes provision for energy
transfer schemes where energy companies enter special administration,
and in the Banking (Special Provisions) Act 2008
itself. Although
the provision in the clause cannot guarantee foreign law recognition in
all circumstances, it gives the authorities the greatest scope possible
under domestic law to secure such recognition, and could prove to be an
essential component of a successful resolution. I therefore invite the
hon. Member for South-West Hertfordshire to withdraw his amendment,
because it would unnecessarily and unhelpfully get in the way of a
potentially successful resolution under the
SRR.
Mr.
Gauke: We are in danger of falling into the traditional
roles of a Government Minister seeking greater flexibility and an
Opposition spokesman seeking greater clarity. It is probably right that
we perform those
roles. I
am grateful for the Minister’s comments on the arbitration
provisions. As I mentioned, I did not expect him to be able to respond
to the examples that I gave of ambiguity in the definition of foreign
property. It may be helpful to the Committee and for the general
interpretation of the clause if he could provide a written
response. I
will not press the amendments. I have made my point, which is that
there is a lack of clarity. I understand why the Government want
flexibility in the circumstances, but outside bodies have suggested
that it is not clear how the provision will work. It would be helpful
for all concerned if the Minister would address that in due course. I
beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn.
Mr.
Gauke: I beg to move amendment No. 143, in
clause 36, page 16, line 32, leave
out subsection
(6). Subsection
(6)
states: “An
obligation imposed by this section is enforceable as if created by
contract between the transferor and
transferee.” It
is not entirely clear why the deemed contractual provisions should
displace a person’s right under breach of statutory duty. I
should be grateful if the Minister could explain why the subsection is
included here. I have not noticed whether it is included
elsewhere.
Ian
Pearson: As I made clear, clause 32 is about property
transfer instruments involving transfer of foreign property. As we said
earlier, clause 36 provides a mechanism to require a transferor to take
steps to ensure that the transfer is effective. Such provisions were
used in the resolution of Bradford & Bingley. The transfer order
provided that Bradford & Bingley should take appropriate steps to
make the transfer of foreign property to Abbey Santander
successful.
The mechanism
for ensuring that a transferor takes appropriate action is that an
obligation may be placed on him. The hon. Member for South-West
Hertfordshire proposes that the obligations should not be enforceable
as if created by a contract. The Government consider that this would
reduce the likely effectiveness of a transfer of foreign property. If
an obligation were not enforceable as a contract, it would be more
difficult to compel the transferor to take steps to ensure that a
transfer was
successful. For
example, because the obligation is enforceable as a contract, any
person who is unwilling to comply with it must consider whether the
authorities would be able to bring a claim for substantial damages,
should non-compliance prejudice the resolution and give rise to
economic loss. Other contractual remedies would also potentially be
available to compel compliance with the obligation, such as an interim
injunction and an order for specific performance. The absence of such
incentives to comply would reduce the likelihood of a successful
resolution, particularly if a piece of foreign property was essential
to the operation of the bank. Further, it could put off a potential
private sector purchaser. In short, the Government do not believe it
would be in the
public interest to admit this provision, and it is for those reasons
that we think that Amendment No. 143 would be damaging and
unhelpful. Mr.
Gauke: I am grateful for that explanation. I beg to ask
leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Question
proposed, That the clause stand part of the
Bill.
Mr.
Bone: When I dealt with the United States when I was in
business, our contracts always included a clause stating that they
would be interpreted by the law of a particular jurisdiction. Sometimes
it would be UK law and sometimes it would be US law. What happens here?
If the clause states that it will be interpreted in relation to UK law,
all the damages and all the threats in this very sensible clause would
apply. However, if it is interpreted under the laws of the USA, none of
that would apply. How do the Government intend to get around that
problem unless there is some sort of mutual discussion with other
states, particularly a major trading partner like the
US?
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