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Clause 79: Public funds: bridge bank
212. This clause describes the role of the Treasury with regard to public funds when controlling a bridge bank
213. Subsection (2) states that the Bank of England may not take any action in respect of the bridge bank without the Treasury’s consent if the action would be likely to have implications for public funds.
214. Subsection (3) applies clause 78(2) and (3) for the purpose of this clause.
Clause 80: Bridge bank: report
215. This clause sets out requirements for the Bank of England to report to the Treasury on the activities of a bridge bank.
216. Subsections (2) and (3) requires the first report to be made as soon as is reasonably practicable after the end of one year and each subsequent year.
217. Subsection (4) requires the Chancellor of the Exchequer to lay a copy of the reports mentioned in subsections (2) and (3) before Parliament.
218. Subsection (5) requires the Bank of England to comply with any request of the Treasury for a report dealing with specified matters in relation to the bridge bank. The request may include the content or timing (subsection (6)).
Building societies
Clause 81: Application of Part I: general
219. This clause applies the SRR clauses (with modifications) to building societies. The table sets out these provisions where modifications are made, namely that for a private sector purchaser of a building society a share transfer instrument cannot be made, that there is a separate provision for the temporary public sector ownership tool and that a property instrument for building societies may cancel shares in the building society may confer rights and impose liabilities in place of the cancelled shares and deemed shares, and also confer rights and impose liabilities through actual or deemed shares in a building society.
220. It also provides that a property transfer instrument may have effect without causing parts of the Building Societies Act 1986 to apply (see paragraph 82). A compensation scheme order or a third party compensation order may be made to compensate a building society and its creditors. However, a resolution fund order may not be made for temporary public sector ownership of building societies.
Clause 82: Temporary public ownership
221. This clause provides the powers to take a building society into temporary public ownership.
222. Subsection (1) sets out the procedure and provides that the Treasury may make an order to arrange for deferred shares of a building society to be publicly owned, to cancel private membership rights in the building society, to allow the building society to continue business while in public ownership and for the eventual winding up or dissolution of the building society.
223. Subsection (2) allows the Treasury by order to arrange for the transfer of existing deferred shares or provide for the issue of new deferred shares.
224. Subsection (3) sets out the specific powers for the arranging for the transfer of existing deferred shares, and subsection (4) does the same for the purpose of providing for the issue of new deferred shares by the Treasury on behalf of the building society for a specified recipient.
225. Subsection (5) provides powers to cancel private membership rights in the building society and to allow the rights and liabilities attached to those cancelled shares to be conferred in place of cancelled shares. This would allow, for example, rights attached to shares to be cancelled and replaced with rights to deposits of the same value.
226. Subsection (5) prevents any further issue or acquisition of shares in the building society otherwise than under the Treasury’s order.
227. Subsection (6) allows the Treasury to make any provision that it thinks desirable to allow the building society to continue in business while it is in public ownership.
228. Subsection (7) allows the order to disapply or modify the memorandum or rules of a building society in respect of the transfer into public ownership and to make any consequential changes to building society legislation.
229. Subsection (8) applies most provisions relating to the making of share transfer orders to orders made under this clause.
Clause 83: Distribution of assets on dissolution or winding up
230. This clause allows the Treasury to make provision by order for the distribution of surplus assets of a building society that is subject to a property transfer and then later wound up or dissolved. The order may, for example, also alter priorities on a building society’s dissolution or winding up.
231. Subsection (4)(c) makes an order under this clause subject to the affirmative procedure.
Clause 84: Interpretation
232. This clause states that expressions used in this group of clauses (81 to 85) have the same meaning as in the Building Societies Act 1986. It further states that an order under section 119(1) of the Building Societies Act may make special provision for the meaning of deferred shares with regard to this group of clauses.
Clause 85: Consequential provision
The Treasury may, by order, make any consequential provisions to primary and secondary legislation (but not Acts of the Scottish Parliament or secondary legislation made under those acts) required as a result of the application of the special resolution regime to building societies. Any order made under this clause is subject to the affirmative procedure.
Clause 86: Credit Unions
233. This clause allows the Treasury, by secondary legislation, to apply the SRR clauses to credit unions. An order for this purpose may disapply, modify or apply any enactment, which relates to credit unions in respect of this Part. The order is made by affirmative resolution procedure.
PART 2: BANK INSOLVENCY
Introduction
Clause 87: Overview
234. This clause outlines the main features of the bank insolvency procedure which is based largely on the existing liquidation provisions of the Insolvency Act 1986, with modifications where required. The Government’s principle reason for seeking to introduce a new insolvency procedure for banks (as an alternative to existing insolvency processes) is to ensure that, where a bank fails, depositors who are eligible claimants under the terms of the Financial Services Compensation Scheme are paid out promptly 2.
235. The equitable treatment of creditors as a whole is a key feature of the UK’s insolvency regime, and the bank insolvency procedure has therefore been designed to enable rapid compensation payments to depositors without creating a regime in which those depositors receive preference over other creditors.
Clause 88: Interpretation: “bank”
236. This clause limits the application of the bank insolvency procedure to UK institutions with permission to accept deposits under the provisions of the Financial Services and Markets Act 2000. The procedure may be extended by secondary legislation to building societies and credit unions (clauses 127 and 128). The Treasury may, by order, add to the exclusions from this definition of bank
Clause 89: Interpretation: “the court”
237. The bank insolvency procedure can only commence by an order of the court and the process is subject to the general supervision of the court. Due to the size and complexity of the UK’s banks, the higher courts will supervise the process.
Clause 90: Interpretation: other expressions
This clause defines some terms used in this part of the bill, including the meaning of the Financial Services Authority (FSA), the Financial Services Compensation Scheme (FSCS) and “eligible depositors” (which means those persons eligible under the FSCS. The persons so eligible for compensation are set out in the FSA Handbook, which is available online. 3).
238. Subsection (4) 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)).
239. Subsections (5)-(6) provide that the expressions used generally throughout this part of the bill and also in insolvency and company legislation have the same meaning, except that subsection (8) provides that “fair” is used in this part instead of the somewhat antiquated term “just and equitable” (used in the Insolvency Act 1986).
Bank insolvency order
Clause 91: The order
240. Where the court makes a bank insolvency order a qualified insolvency practitioner, who has formally agreed to accept the position, will be appointed as the bank liquidator. This post is restricted to insolvency practitioners because the Government considers that their resource capabilities and practical experience of dealing with assets in complex insolvencies will be vital to ensure that the objectives of the bank insolvency procedure can be achieved and returns to creditors maximised.
Clause 92: Application
241. The Bank of England, the FSA (with the Bank of England’s consent) or the Secretary of State may make an application to the court for a bank insolvency order and that application must nominate a qualified insolvency practitioner to be appointed as the bank liquidator.
242. To ensure compatibility with Human Rights legislation, such an application must be served on the directors of the company prior to a court hearing for a bank insolvency order and those service requirements will be specified in secondary legislation (Rules) to support the bank insolvency procedure.
Clause 93: Grounds for applying
243. Subsection (1) sets out the three grounds on which an application for a bank insolvency order may be based. The first of these is on the grounds of insolvency - that is, a bank is unable or is likely to become unable to pay its debts. An application may also be made where winding up the affairs of the bank would be in the public interest or fair (for the meaning of “fair” see the note to clause 90(8)).
244. In addition to these grounds, as the bank insolvency procedure has been designed to ensure rapid compensation payments to depositors under the terms of the FSCS, an application for a bank insolvency order may be made only where a bank has eligible depositors, as per subsections (2)(b)(i), (3)(b)(ii) and (4)(a).
245. Subsection (2) provides that where the FSA notifies the Bank of England that the appropriate conditions for entry to the Special Resolution Regime have been met (see the note to clause 7 on the general conditions for triggering the special resolution regime tools) and the Bank of England may make an application to the court for a bank insolvency order on the grounds either that the bank is insolvent or that winding up would be fair.
246. Given the role of the Bank of England in the Special Resolution Regime, subsection (3) provides that the FSA may apply for a bank insolvency order only where the Bank of England consents. The grounds for an application for a bank insolvency order by the FSA are otherwise the same as those on which the Bank of England may present an application.
247. It may be that a bank is not technically insolvent, but to protect a bank’s customers and the public generally, subsection (4) allows the Secretary of State to apply for a bank insolvency order where he or she considers that winding up the affairs of a bank is in the public interest. This provision reflects the Secretary of State’s existing powers under section 124A of the Insolvency Act 1986 to present a winding-up petition against a company where that is considered to be in the public interest.
Clause 94: Grounds for making
248. In keeping with existing insolvency provisions, on the hearing of an application for a bank insolvency order the court may make such an order, adjourn the application or dismiss it.
249. To make the order, the court must be satisfied that the bank against which the application has been presented has eligible depositors. In addition, where the application has been brought by the Bank of England or the FSA, the court must be satisfied either that the bank is either insolvent or that the winding up of the bank would be fair; where an application is made by the Secretary of State, the court must be satisfied that the winding up of a bank would be in the public interest and fair.
Clause 95: Commencement
250. Under the provisions of section 129 the Insolvency Act 1986, where a winding-up order is made the proceedings are deemed to have commenced at the time of the presentation of the winding-up petition.
251. This clause therefore provides that where a bank insolvency order is made on an application by the Bank of England or the FSA following the presentation of a petition for a winding-up order or application for an administration order by a third party, the proceedings are deemed to have commenced at the time that petition or application was submitted.
252. Where the Bank of England, the FSA or the Secretary of State makes an application for a bank insolvency order without any notice of intended insolvency proceedings being received under the provisions of clause 117, a bank insolvency order is treated as commencing at the time that application was made.
Process of bank liquidation
Clause 96: Objectives
253. A bank liquidator has two statutory objectives. The first is to work with the FSCS to ensure that either the accounts of eligible depositors are transferred to another financial institution or payments are made to eligible depositors. The second objective provides that the bank liquidator is also obliged to wind up the affairs of the failed bank in the interests of creditors as a whole.
254. Subsection (4) provides that while objective 1 takes precedence, the bank liquidator should also take all the immediate steps that he or she would in an ordinary liquidation to protect the interests of creditors generally, for example identifying and collecting in the assets of the failed bank.
255. To ensure that the objectives of the bank insolvency procedure may be met, as in an ordinary liquidation, joint bank liquidators may be appointed - see clause 100 which (among other provisions) applies section 231 of the Insolvency Act 1986.
256. Once objective 1 has been achieved, or has been substantially completed, the process of liquidation will continue in much the same way as a normal winding up with the liquidator calling a meeting of creditors, realising the assets of the failed bank and distributing the proceeds to creditors.
Clause 97: Liquidation committee
257. During the course of ordinary winding up proceedings creditors may resolve at a meeting to form a liquidation committee. That committee can require the liquidator to report to them on matters relating generally to the winding up of a company and the liquidator may take certain actions only with the committee’s approval.
258. In this modified procedure, to facilitate a bulk transfer of accounts or prompt payments to eligible depositors, the bank insolvency procedure provides for a two-stage committee process. In the first stage of the procedure, representatives from the Bank of England, the FSA and the FSCS are obliged to form a liquidation committee.
259. Once the initial liquidation committee has passed a “full payment resolution” - that is, it resolves that objective 1 has been achieved (or that process is substantially complete) the bank liquidator is obliged to call a meeting of creditors. At that meeting the creditors may resolve to elect new members to the liquidation committee. At this stage, the representatives from the Bank of England and the FSA will be obliged to stand down from the committee, although the FSCS (as it will be a significant creditor in the insolvency having taken over the claims of the eligible depositors) will have the option to retain its presence.
Clause 98: Liquidation Committee: supplemental
260. Subsection (1) provides that a meeting of the liquidation committee may be called by any of the members of the committee or the bank liquidator.
261. Subsection (2) specifies that a meeting of the initial liquidation committee (formed by representatives from the Bank of England, the FSA and the FSCS) is able to conduct its business only when all of the members are present.
262. To protect the interests of creditors and other stakeholders generally, subsection (3) enables the actions of the initial liquidation committee to be challenged in court. In addition, subsection (4) allows the bank liquidator to apply to the court for an order to deem that the committee has passed a full payment resolution option and subsection (5) provides further scope for the liquidator to apply to the court for an or order or directions where he believes that objective 1 has been achieved but the liquidation committee is failing to act accordingly.
263. Subsection (6) provides that the Bank of England, the FSA or the FSCS may replace their representative on the liquidation committee at any time.
264. Subsection (7) provides certain ongoing entitlements to the FSA and the Bank of England, for instance they will be able to attend future meetings of the liquidation committee and may participate in legal proceedings relating to the bank insolvency.
Clause 99: Objective 1: (a) or (b)?
265. This clause provides that the initial liquidation committee (made up of the Bank of England, the FSA and the FSCS) must advise the bank liquidator as to whether to pursue a bulk transfer of accounts or to work with the FSCS to enable prompt payments to eligible depositors. The committee may also recommend that certain accounts be transferred while others paid out. In reaching that decision, the liquidation committee must balance the need for quick action to achieve objective 1 with the general interests of creditors of the bank as a whole.
266. Subsection (3) establishes that, if the liquidation committee thinks the bank liquidator is failing to comply with their recommendations it must apply to court for directions. The bank liquidator may also apply to the court for directions if the liquidation committee fails to make a recommendation as to how he should proceed to achieve objective 1.
Clause 100: General powers, duties and effect
267. Subsection (1) empowers the bank liquidator to do anything necessary or expedient for the pursuit of the objectives in clause 96.
268. Subsections (2)-(5) provide that the powers and duties of a bank liquidator and the general process of winding up is in keeping with existing provisions of Part IV of the Insolvency Act 1986 by applying the general provisions relating to liquidators and winding up to bank liquidators and bank insolvency (subsection(2))
269. In order to adhere to general insolvency law and practice, subsection (6) sets out an extensive table of applied provisions. Many of the existing sections of Part IV and other relevant sections of the Insolvency Act 1986 are applied directly to the bank insolvency procedure with minor modifications where necessary. Those modifications have been kept to a minimum, reflecting that the bank insolvency procedure has much in common with the process of an ordinary liquidation.
270. Changes have been made in order to support the unique objectives of the bank insolvency procedure and to reflect the roles of the Authorities and the FSCS in the early stages of the bank insolvency procedure up to the point that a full payment resolution has been passed.
271. As the bank liquidator can only be an insolvency practitioner, references to the Official Receiver have been removed or replaced throughout. The application, with modification, of section 135 of the Insolvency Act 1986 allows for the appointment of a provisional bank liquidator by the court in the period between the submission of an application for a bank insolvency order and the court hearing for the making of such an order.
272. An ordinary liquidator is able to bring action before the court to pursue certain antecedent recoveries such as transactions at an undervalue and preferences given in specified periods prior to the commencement of the winding up proceedings. In order to support the high-level objectives of the special resolution regime, provisions have been made to prevent such actions being brought before the court by a bank liquidator where those relate to the prior exercise of any of the pre-insolvency stabilisation tools under Part 1 of the Bill. This also applies to actions in respect of transactions defrauding creditors under section 423 of the Insolvency Act 1986.
Clause 101: Additional general powers
273. A bank liquidator has the same general powers as a liquidator under Schedule 4 to the Insolvency Act 1986 (powers of a liquidator in a winding up) and for completeness and clarity this clause sets out some additional specific powers drawn from Schedule 1 to that Act (powers of administrator or administrative receiver).
274. Subsection (2) adds the power to effect and maintain insurances.
275. Subsection (3) adds a power to do all things necessary for the realisation of property.
276. Subsection (4) adds a power to make certain payments.
Clause 102: Status of bank liquidator
277. This provision makes it clear that a bank liquidator, like any liquidator in a compulsory liquidation, is an officer of the court.
Tenure of bank liquidator
Clauses 103-109: Tenure of bank liquidator
278. These clauses reflect existing provisions of the Insolvency Act 1986 and deal with matters such as the death, replacement, resignation or removal of the bank liquidator, what happens where the bank liquidator ceases to be qualified to act as an insolvency practitioner, and the effect of release.
279. Modifications have been made to ensure that the unique objectives of the bank insolvency procedure can be achieved, for example a meeting of creditors may resolve to remove or replace a liquidator only after a full payment resolution has been passed.
Termination of process etc.
Clauses 110 - 113: Termination of process, etc.
280. On the completion of ordinary liquidation proceedings, that is where all the assets of the company have been realised and the proceeds distributed to creditors and all the necessary formalities have been completed as regards to reporting to creditors and obtaining release, the company is normally dissolved and ceases to have legal existence. In exceptional circumstances, however, it may be possible to rescue a company in liquidation where that would be in the best interests of its creditors as a whole through administration or a company voluntary arrangement.
281. Clauses 110 and 111 provide for alternative exit routes from the bank insolvency procedure via a company voluntary arrangement under Part 1 of the Insolvency Act 1986 (for example, such an arrangement might be appropriate to maximise returns to creditors) or administration where a rescue is considered viable and in the best interests of creditors.
282. A bank liquidator may therefore submit proposals to creditors for a company voluntary arrangement or apply to the court for the making of an administration order but both of these steps are made subject to certain conditions; a key provision being that either all eligible depositors have received their compensation or that arrangements have been made with the FSCS with regard to any outstanding payments.
283. These provisions ensure that alternative insolvency procedures may only be exercised once the primary objective of the bank insolvency procedure has been achieved and prevent the possibility of alternative courses of action being taken which might lead to delays in payments being made to eligible depositors.
284. Clauses 112 and 113 allow for the dissolution of the company where the bank insolvency procedure has been completed and set out the conditions that must be met prior to dissolution.
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