Banking Bill

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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Amendment, by leave, withdrawn.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 36

Foreign 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.
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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