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
80Interpretation:
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
86Objectives 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
87Liquidation
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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