Banking Bill

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Sir Peter Viggers: While listening to the Minister’s careful explanation of the clause, I wondered whether liquidation insolvency is a one-way street. If a liquidator were to be appointed and found that he was in a position to manage the bank out of its current difficulties, would he have the powers to do so? Would he have the powers of a manager as well as of a liquidator?
Ian Pearson: My understanding is that we are talking about a bank insolvency procedure in relation to which decisions have already been taken that the bank has failed to all intents and purposes and is not viable as a business. It is in those circumstances that a court order is made and liquidators are appointed. It has gone past the stage when there is any realistic prospect of life in the body, as I understand it, so the role of the liquidator is to—
Stewart Hosie (Dundee, East) (SNP): In that case, why do we have clause 101, which refers to a liquidator who thinks that administration would achieve a better result? That provision exists in the Bill. The Minister’s answer was clear, but I wonder how it applies to clause 101, which allows administration as a legitimate objective, not just liquidation.
Ian Pearson: I am about to stand corrected. My understanding was obviously far from perfect, because I am advised that bank liquidation can end in a number of ways. I suspect that the way I was describing is the most likely, but if rescue is possible, it is certainly possible to convert to administration to assist a rescue. I hope that answers the questions asked by the hon. Member for Gosport.
I hope that by giving a broad introduction to clause 77 and the bank insolvency procedure, I have clearly set out our thinking. I stress that the area has been widely consulted on and there is broad support from the insolvency profession for what we are doing.
Question put and agreed to.
Clause 77 ordered to stand part of the Bill.
Clauses 78 and 79 ordered to stand part of the Bill.

Clause 80

Interpretation: other expressions
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: I draw the Minister’s attention to clause 80(4)(a). As I understand it, no de minimis limit applies, so if a bank was unable to pay a sum that was due—say, £10—the insolvency procedure could be triggered, but how does that interact with the threshold conditions? We have established that the stabilisation powers will be operated only if the FSA believes that the threshold conditions have been breached. Presumably, there would have to be a material breach of the threshold condition about adequate resources to trigger some of the Bill’s processes. Is there a gap between that approach to triggering the procedures and the approach in subsection (4)(a), which I suspect is fairly standard, but which suggests that an inability to pay a trivial amount could trigger them?
1.45 pm
Ian Pearson: I admit that I do not have an answer to that question now. In general, the clause simply sets out the meanings of terms used throughout part 2. I need to seek clarification on the exact interrelationship that the hon. Gentleman is talking about, so if the hon. Gentleman agrees, I shall write to him.
Question put and agreed to.
Clause 80 ordered to stand part of the Bill.
Clauses 81 to 85 ordered to stand part of the Bill.

Clause 86

Question proposed, That the clause stand part of the Bill.
Mr. Hoban: The clause is important because it sets the two objectives for the liquidator. The first is about the depositors and ensuring that the liquidator works with the FSCS to ensue that
“as soon as is practicable each eligible depositor...has the relevant account transferred to another financial institution, or...receives payment from (or on behalf of) the FSCS.”
The second objective is
“to wind up the affairs of the bank so as to achieve the best result for the bank’s creditors as a whole.”
and subsection (4) makes it crystal clear that
“Objective 1 takes precedence over Objective 2”.
That creates a situation in which the interests of one group of creditors take precedence over the interests of other groups. A depositor preference is being built into this regime. We might find that the liquidator, to fulfil objective 1, incurs additional costs to the detriment of achieving objective 2. That particularly applies to the administration procedure in part 3, but it also applies here. For example, the liquidator might need to keep the branch network open for two or three weeks to enable payments to be made to depositors. Running a branch network is an expensive business—rent has to be paid, staff have to be employed, there are computer costs and so on. Those costs will be not be borne by the depositor group, but by the creditors, who will find that their dividend or distribution on liquidation is lower as a consequence. Will the Minister comment on that?
This is a move away from the traditional way that administration and liquidation work. The creditors would normally rank pari passu, but here there is one subset of creditors—the depositors—who are given preferential treatment over the others, to the detriment of other creditors.
Linked to that is a point that has been raised with me by some lawyers. The Minister was right in his remarks on the previous clause. There has not been a flurry of commentary on part 2 or part 3 of the Bill, but that does not mean that there is total satisfaction. There is great dissatisfaction with it. The credit institutions reorganisation and winding-up directive 2001—I am sure that we are all intimately familiar with it—enables the same legal process and procedures for winding up a credit institution to apply in all the then EU states, but now European economic area states.
The process is a formality. That directive is predicated on treating creditors collectively and applying the same treatment. The Minister referred to the special insolvency regimes for railways, water and electricity. Yes, there are special cases to ensure that there is a transfer of functions, but in those situations all creditors are treated equally, whereas in this situation one group of creditors will have preference.
Concern has been expressed that the action taken by our good friend Iceland was not deemed to be consistent with the directive because it was seen to be of a regulatory nature. The concern expressed to me is that objective 1 could suggest—and there is a stronger argument for this in part 3—that the procedure is not necessarily about insolvency, but is principally a regulatory issue. I would be grateful for the Minister’s confirmation that he believes that the bank insolvency process is entirely consistent with the directive. I hope he can satisfy the Committee on that point.
Ian Pearson: The clause gives the bank liquidator specific objectives and he or she will be expected to start working towards the achievement of both objectives as soon as the proceedings commence.
I will briefly explain the background. A bank liquidator’s first objective as specified in the clause is to work with the FSCS in the initial stages of the proceedings. The liquidator has two options: to ensure that the accounts of eligible depositors are transferred to another financial institution, thereby providing those depositors with continuity in banking services, or to work with the FSCS to ensure that those depositors receive prompt compensation payments to enable them to rearrange their financial affairs and meet day-to-day living expenses.
The authorities remain committed to a target of seven days, providing the depositors of a failed bank with at least a proportion of their deposits and the balance within the following few days, though we recognise that this is a challenging target. A bank liquidator’s second objective is to wind up a failed bank through realising its assets and distributing the proceeds to the bank’s creditors.
Although the legislation provides for objective 1 to take precedence over objective 2, as the hon. Member for Fareham suggests, it is very clear from subsection (4) that a bank liquidator is obliged by the clause to start working towards achieving both objectives as soon as he or she takes office.
In our view, only an insolvency practitioner who has sufficient resources available to make sure that both objectives can be successfully achieved would be appointed as a bank liquidator. So, while some staff are working towards achieving objective 1, others will be carrying out functions as they would in a normal liquidation, for example gathering information from directors, identifying and protecting the assets of a failed bank for the benefit of all its creditors, dealing with enquiries from creditors and so on.
Given the size and complexity of UK banks, it is likely that more than one insolvency practitioner, perhaps from different firms where necessary, will be appointed as bank liquidators. That is called a joint appointment and is provided for by the application of section 231 of the Insolvency Act 1986 in clause 90 of the Bill. This is common practice in complex or high profile insolvencies and will ensure that sufficient resources are available to protect depositors, while conducting the proceedings in the best interests of the failed bank’s creditors as a whole.
I appreciate the points raised by the hon. Gentleman. There has been some concern from stakeholders that, because the bank liquidator’s primary objective is to work with the FSCS, this may lead to depositor preference, with other creditors losing out. I will respond to those concerns directly and put it on the record that the bank insolvency procedure does not introduce depositor preference.
The statutory order of priority of creditors remains unchanged. Payment to depositors will be made by the FSCS, not from the assets of the failed bank. The FSCS will continue to rank as an unsecured creditor alongside the claims of other ordinary creditors. It is also important to note that under clause 110, any compensation payments to eligible depositors will be made by the FSCS.
Mr. Hoban: The Minister has clarified that, but in the context of clause 86(2)(a), as depositors are flipped over into another institution, they will be replaced as creditors by the FSCS.
Ian Pearson: Yes, that is my understanding. We are not introducing depositor preference. The difference is that we want to pay out fast to depositors. That is the purpose of the measure, and what the Treasury Committee wanted us to do.
As I have described, the bank liquidator is also obliged to wind up the affairs of the company from day one in the best interests of creditors as a whole. As we can discuss, if necessary, in relation to clause 87, in a normal winding-up, a liquidation committee would not even be formed until a month or two into the proceedings. Given that we are aiming for eligible depositors to be paid within seven days, and that the liquidator will be working on both objectives at once, realistically, in comparison with a normal insolvency, there will be no delay in the start of winding-up in the interests of all creditors.
These objectives and the other provisions in part 2 mean that when a bank fails, the interests of both eligible depositors and other creditors will be protected. The key purpose is to ensure fast pay-out, without disadvantaging other creditors, and certainly without introducing depositor preference. I am happy to clarify that.
Question put and agreed to.
Clause 86 ordered to stand part of the Bill.

Clause 87

Liquidation committee
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: The Minister alluded to the liquidation committee, and it is interesting that in the first instance it will consist of three individuals, one each nominated by the Bank of England, the FSA and the FSCS. Given that from the outset, the liquidator is supposed to work towards achieving both objectives 1 and 2, why are creditors not represented on the committee at that stage, and why is it that only when a full payment resolution has been made, creditors may be represented on the committee?
If the liquidator is working towards both goals, surely a representative of the creditors should be on the committee to represent their interests. The Minister said in response to clause 86 that the FSCS would not stand in the stead of depositors when their money has been paid out. That reinforces the point that the creditors rank second to, and not alongside, other depositors.
Ian Pearson: No, they do not. Creditors are excluded only from the initial liquidation committee, because of the need for quick action to ensure that depositors receive their compensation or have their accounts transferred as quickly as possible. The initial liquidation committee will be formed by the Bank of England, the FSA and the FSCS, who will work with the bank’s liquidator to ensure that appropriate arrangements are in place for a transfer of accounts, or to ensure that eligible depositors are paid quickly.
It is right that the FSCS should be part of that initial liquidation committee, because it will be a large creditor. However, when a bulk transfer of accounts has taken place, or payments have been made to eligible depositors—we want that to happen within seven days for at least a proportion of their funds, with the balance following in the subsequent few days—the liquidation will then proceed in much the same way as normal, and creditors will be able to form a liquidation committee if they wish.
In a normal insolvency, a meeting of creditors may decide on formal liquidation, but it would be a month or two before any meeting of creditors is held, so the timing in the Bill should not delay things. We are saying only that creditors other than the FSCS would be excluded from the initial liquidation committee. However, very quickly, once a bulk transfer and the arrangements that I have outlined are made, we would move towards a normal liquidation situation. In those circumstances, creditors would be expected to be part of the liquidation committee.
2 pm
Mr. Peter Bone (Wellingborough) (Con): It is very unusual to have a liquidation committee with no creditor representation. I can understand that the Minister does not want that representation initially, but he cannot argue that it is a matter of speed. If there was a formal committee with the Bank of England, the FSA and the FSCS, it could certainly include a creditor. I would have thought that general creditors would be happier to have some representation right at the beginning. I cannot see a problem with that, unless the Government have a principled objection.
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