|Banking Bill - continued
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285. This clause allows the court to make a bank insolvency order on the hearing of a third partys winding up petition or an application for an administration order where representations are made by either the Bank of England or the FSA.
286. This clause is similar to provisions in existing special insolvency regimes and provides that voluntary winding up proceedings cannot commence unless approved by the court. This provision supports the notification requirements for normal insolvency procedures set out in clause 117.
287. This clause allows the court to dismiss a pending winding-up petition. This is to cover the scenario in which on receiving notice of a third party petition for winding up, the Bank of England or the FSA instead successfully apply to the court for the making of a bank insolvency order. Paragraph 42 of Schedule B1 - moratorium on insolvency proceedings - is also applied with necessary modifications.
288. This clause ensures that ordinary insolvency proceedings can only commence where appropriate notice has been given to the FSA. Subsection (7) provides that insolvency applications covered by the clause cannot be determined until the period of two weeks has elapsed or the Bank and the FSA have informed the notifier that they do not intend to apply for bank insolvency. This will allow the Authorities, in the unlikely event that they were unaware that a bank was in difficulties, to step in and trigger the Special Resolution Regime where they consider one or more of those tools an appropriate alternative, given all the circumstances, to ordinary insolvency proceedings.
289. The provisions of the Company Directors Disqualification Act 1986 are applied, with necessary modifications, to the bank insolvency procedure to ensure that, where appropriate, action can be taken in the public interest against the directors of a failed bank. As prescribed in that legislation, a wide range of matters may be considered in determining whether a directors conduct has been such that action should be taken to bar him or her from acting as a director (and holding certain other offices) for a period of between 2 and 15 years.
Clause 119: Application of insolvency law
290. This clause provides for future amendments to insolvency legislation to be applied to the bank insolvency procedure and provides a power to apply, or amend, other existing insolvency provisions. An order would be made jointly by the Secretary of State and the Treasury.
291. This clause makes provision for the funding of compensation payments to eligible depositors or a transfer of accounts, requires the bank liquidator to provide information to the FSCS and allows the FSCS to participate in court proceedings relating to a bank insolvency order.
292. Subsection (1) specifies that compensation payments may be made or arranged by the FSCS, rather than being funded from the assets of the failed bank. Alternatively, where a transfer of accounts to another financial institution is possible so that depositors have continued access to their funds and banking services generally, the FSCS can make monies available to fund that transfer.
293. Subsection (2) allows the FSCS to make provision about expenditure in respect of compensation payments or a transfer of accounts and also explains how Part 2 relates to the provisions of Part XV of the Financial Services and Markets Act 2000.
294. Subsection (4) mirrors section 215(4) of the Financial Services and Markets Act 2000 and gives the FSCS the same rights as those enjoyed by the FSA under section 371 of that Act to be heard at any court hearing concerning any matters arising during the course of the bank insolvency procedure.
295. Subsection (5) provides for a bank liquidator to be obliged to supply information to the FSCS in support of achieving objective 1 of the bank insolvency procedure.
296. Subsection (6) makes it clear that the FSCS can delegate functions to the bank liquidator under its power in section 221A of the Financial Services and Markets Act 2000.
297. Subsection (7) provides that for the purposes of section 213(9) of the Financial Services and Markets Act 2000, an eligible depositor can still collect their payment of compensation from the FSCS even if the bank in question has had its authorisation as a deposit taker withdrawn by the FSCS.
Clause 121: Transfer of accounts
298. Where the bank liquidator, acting on advice from the liquidation committee, comes to a contractual arrangement for a bulk transfer of the accounts of eligible depositors to another financial institution (that is, objective 1(a) is achieved), this clause allows such arrangements to override other contractual provisions or legislation. This will allow transfer arrangements (where feasible) to be put into place quickly for the benefit of all eligible depositors. For example, there will be no need for the bank liquidator to seek consent from all relevant customers agreeing to such a transfer. As a safeguard for depositors, in coming to an agreement for the bulk transfer of accounts the bank liquidator should seek to ensure (by agreement with the institution accepting the accounts) that depositors will be able to access their accounts within a reasonable timescale following the transfer. This will provide continuity of banking services and allow customers to switch their funds to another institution should they wish to do so.
Clause 122: Rules
299. This clause amends section 411 of the Insolvency Act 1986 to allow secondary legislation (Rules) to be made to give effect to the bank insolvency procedure. The first set of Rules will be consulted on with an appropriate panel of experts rather than the Insolvency Rules Committee.
Clauses 123-126: Miscellaneous
300. These clauses deal with miscellaneous matters such as the fixing of insolvency fees, the admissibility of statements of affairs as evidence, and co-operation between courts in different jurisdictions.
301. They are all based on existing insolvency provisions and modifications are made where necessary.
302. Clause 124 provides that as in any other compulsory liquidation in England and Wales, proceeds from the realisation of assets in the bank insolvency procedure must be paid into the Insolvency Services Account. For consistency of approach, this will also be a requirement for the bank liquidator of a Scottish bank.
Clause 127: Building societies
303. The Treasury is given a power to apply the bank insolvency procedure to building societies (with any necessary modifications) and that will be achieved by secondary legislation, subject to the affirmative procedure, or in the first instance the 28 day procedure, as provided by clause 249.
Clause 128: Credit unions
304. As with building societies, the Treasury will have the power to apply the bank insolvency procedure (with any necessary modifications) to credit unions by secondary legislation, subject to the affirmative procedure.
Clause 129: Partnerships
305. This allows the Lord Chancellor, with the agreement of the Secretary of State and Lord Chief Justice, to modify the provisions of the bank insolvency procedure for banks that are partnerships rather than limited companies. This reflects existing powers under section 420 of the Insolvency Act 1986.
Clause 130: Scottish partnerships
306. The Secretary of State may modify the bank insolvency procedure in its application to Scottish Partnerships
Clause 131 Northern Ireland
307. This clause makes specific provisions in the application of the bank insolvency procedure to banks registered in Northern Ireland.
Clause 132: Consequential provisions
286. The Treasury may, by secondary legislation, make any consequential provisions required to legislation required as a result of the creation of the bank insolvency procedure. Any order is subject to the affirmative procedure, or in the first instance the 28 day procedure, as provided by clause 249.
Clause 133: Overview
308. This clause outlines the main features of the bank administration procedure which is based largely (with modifications where required) on the existing administration provisions of the Insolvency Act 1986 as amended by the Enterprise Act 2002.
309. Where part of a failing banks business, assets or liabilities are transferred to either a bridge bank or a private sector purchaser the residual part of the bank may be left as an insolvent entity. In such circumstances, an application may be made to the court by the Bank of England for a Bank Administration Order. The bank administration procedure is designed to apply to an insolvent residual company to ensure that any essential services and facilities that cannot be immediately transferred to a bridge bank or private sector purchaser continue to be provided for a period of time.
310. Once the primary objective has been achieved, the procedure would continue in a similar way to an ordinary administration although to keep down costs, maximise returns to creditors and provide for a variety of outcomes, some of the existing powers of a liquidator have been built in to the procedure.
311. The bank administrator has specific statutory objectives. First, either to provide support to the bridge bank or private sector purchaser. Once such support is no longer required, the objective is to achieve either of the two principle aims of an ordinary administration - either to rescue the company as a going concern or to achieve a better result for creditors than in an immediate liquidation.
312. Subsection (2) establishes that, while objective 1 has priority, there are some elements of an ordinary administration that may be begun immediately where they do not conflict with the primary objective, and subsection (2) therefore obliges a bank administrator to pursue both of the objectives in parallel.
313. As outlined above, the primary objective of the bank administration procedure is to provide services and facilities where a partial transfer to either a private sector purchaser or a bridge bank has been effected. Subsection (2) provides that this obligation also includes acting as a transferor or transferee in relation to any subsequent property transfers between the residual company and either the bridge bank or the private sector purchaser.
314. In the event of a partial transfer to a private sector purchaser, subsection (3) requires that in trying to achieve objective 1 a bank administrator should act in accordance with the terms of any service agreement drawn up between the residual company and the commercial purchaser and the court will act as the arbiter in the event of any dispute or uncertainty.
315. Under subsection (4), where a partial transfer is effected to a bridge bank, the bank administrator is required to work with the Bank of England to effect appropriate service arrangements. To protect the interests of creditors, the bank administrator should ensure that, as far as reasonably practicable in light of his duty to pursue objective 1, payments for any services provided to the bridge bank are made at a fair market value.
316. Subsection (5) provides that where the bank administrator requires the prior agreement of the Bank of England to take certain actions, the Bank of England may only block actions which would be adverse to the continuing provision of services of facilities to a bridge bank.
317. Once the Bank of England informs the bank administrator, by way of an Objective 1 Achievement Notice, that the continued provision of services and facilities to the bridge bank or commercial purchaser is no longer required (or that such support was never required - see subsection (3)) the administration should continue in much the same way as an ordinary administration.
318. Subsection (2) provides that, where the bank administrator is of the opinion that objective 1 has been achieved or is no longer applicable, the administrator may seek directions from the court as to how to proceed. The court may give the Bank directions to consider whether to give the bank liquidator a notice that objective 1 no longer applies.
319. Objective 2 of the bank administration procedure is based on the existing provisions of paragraphs 3(1)(a) and 3(1)(b) of Schedule B1 to the Insolvency Act 1986.
320. In keeping with those provisions, subsection (2) obliges a bank administrator to seek to rescue the residual bank as a going concern unless he or she considers that this not a viable outcome or a better result would be achieved for the banks creditors by following some other courses of action.
321. To ensure that the bank administrator does not realise any assets that may be essential to achieving objective 1, subsection (3)(a) provides that only assets specified by agreement between the administrator and the Bank of England may be sold. Once objective 1 has been achieved, this is no longer applicable and the administrator will be free to deal with the assets of the bank to facilitate a rescue as a going concern and/ or to realise those assets for the benefit of the banks creditors.
322. To ensure compatibility with human rights legislation, a bank administration may commence only by an order of the court and the making of such an order will be subject to the satisfaction of notice requirements to be specified in secondary legislation.
323. Subsections (2) and (3) ensure that only a qualified insolvency practitioner, who is willing to accept the position, may be appointed as a bank administrator.
Clause 139: Application
324. Entry into bank administration is by virtue of an application to court. Subsection (3) provides that notice of the application must be given in accordance with the rules made under section 411 of the Insolvency Act 1986.
325. Only the Bank of England, as the authority responsible for administering the SRR, will be able to apply to the court for a bank administration order.
326. An application may be made only where a partial transfer has been effected by virtue of subsection (3), where the residual banking company is left as an insolvent entity; that is, it is unable, or is likely to become unable, to pay its debts.
327. By the application of paragraphs 44(1)(a) and 44(5) of Schedule B1 to the Insolvency Act 1986 in clause 142, as in an ordinary administration, on the making of the application an interim moratorium will take effect so that creditors will not be able to enforce their security over the residual companys property and no legal proceedings may be taken against the company (except with the leave of the court).
328. The court may grant the Banks application, adjourn it or dismiss it.
329. This clause is based largely on existing insolvency law and practice, with Table 1 drawing on the existing administration provisions of Schedule B1 to the Insolvency Act 1986. 4
330. By the application of paragraphs 44(1)(a) and 44(5) of Schedule B1 to the Insolvency Act 1986, as in an ordinary administration on the making of the application an interim moratorium will take effect so that creditors will not be able to enforce their security over the residual companys property and no legal proceedings may be taken against the company (except with the leave of the court).
331. A bank administrator will have powers and duties similar to those of an ordinary administrator, but modifications have been made where necessary to ensure that the unique statutory objectives of the bank administration procedure can be achieved. Many of these modifications also reflect the supervisory role that the Bank of England will have in the initial stages of the procedure in place of a creditors committee up until the point that the primary objective has been achieved.
332. The provisions of Schedule B1 to the Insolvency Act 1986 relating to a meeting of creditors and the functions of a creditors committee will not apply until an Objective 1 Achievement Notice has been served. Once an Objective 1 Achievement Notice has been issued by the Bank of England, the procedure will continue in much the same way as an ordinary administration; a meeting of creditors should be called to consider the administrators proposals for the progression of the administration and at this stage the creditors will be able, among other resolutions, to form a creditors committee. The need for the Bank administrator to obtain the consent of the Bank of England to take certain actions will therefore also lapse at this point.
333. Other relevant provisions of the Insolvency Act 1986 are also applied by Table 2 and these largely mirror provisions also applied to the bank insolvency procedure by Clause 100. It should be noted that clause 142(4)(f) provides that where Insolvency Act provisions have been applied with modifications to both Part 2 and Part 3 of the Banking Bill, the modifications in clause 100 in part 2 should be read across to the applied provisions in part 3, with references to bank administration rather than to bank insolvency.
334. Some of the powers that only a liquidator currently has have been applied to the bank administration procedure to create a flexible, stand-alone, procedure to maximise returns to creditors. The Bank Administrator is therefore given powers to disclaim onerous property (see subsection (6) entry in table 2 for section 178), subject to requiring consent from the Bank of England to do so until objective 1 has been achieved, and to bring action before the court in respect of fraudulent or wrongful trading (see table 2 entries for sections 213 and 214 of the Insolvency Act 1986).
335. Through the application, with modifications, of section 135 of the Insolvency Act 1986, the court will be able to appoint a provisional bank administrator in the period between the submission of an application for a bank administration order and the court hearing for the making of that order. The powers of a provisional bank administrator will be determined by the court but will be limited to functions required to achieve objective 1 as set out in clause 135.
336. Once an Objective 1 Achievement Notice has been issued by the Bank of England, the bank administrator will be able to pay dividends, where possible, to unsecured creditors without requiring permission from the court to do so.
337. A bank administration can only be commenced by an order of the court and this clause specifies that as in an ordinary administration (see paragraph 4 of Schedule B1 to the Insolvency Act 1986) the bank administrator is an officer of the court.
338. Subsections (1) to (4) provide that, prior to the achievement of objective 1, a bank administrator must agree with the Bank of England a statement of proposals for achieving the objectives of the bank administration and (under subsection (5)) any matters of disagreement on the content of that statement may be referred to the court. As in an ordinary administration, under subsection (7), those proposals may subsequently be revised.
339. Subsection (8) provides that, except for the differences specified in this clause, the proposals should generally be dealt with in the same way as in an ordinary administration and copies of the document must therefore also be circulated to creditors and members of the company and a copy filed at Companies House. Subsection (6) stipulates that the FSA should also be sent a copy of the proposals.
340. Once objective 1 has been achieved, as for a normal administration, the bank administrator will then produce a statement of proposals for the achievement of objective 2 of the bank administration which should be circulated to creditors for their consideration at a meeting of creditors and filed at Companies House in the usual way.
341. Where a partial transfer is effected to a bridge bank, this clause provides for the sharing of information between the bank administrator, the Bank of England and also the bridge bank.
342. Subsection (2) requires the Bank of England to provide the bank administrator with details of the financial situation of both the residual bank and the bridge bank. This provision ensures that the Bank of Englands acquired knowledge in effecting a partial transfer is supplied to the bank administrator so that he or she can produce an appropriate statement of proposals to the Bank of England.
343. Given the linkages between a bridge bank and the residual company, and because the resolution of the bridge bank will impact on the timing and amount of any distribution to creditors of the failed bank, subsection (3) obliges the bridge bank to supply information to the bank administrator.
344. Subsection (4) similarly obliges a bank administrator to provide information to the Bank of England and the bridge bank on the financial position of the residual company.
345. Subsections (5) and (6) require the Treasury to specify by secondary legislation what sort of information and class of record will be relevant in a particular case. The regulations are subject to the negative procedure.
346. This clause enables special provisions to be made, where necessary, in cases involving multiple property transfers from a residual bank or a bridge bank.
347. In such circumstances, the Treasury may make regulations modifying the application of the bank administration procedure. Those regulations would be subject to the affirmative procedure, or in the first instance the 28 day procedure, as provided by clause 249.
348. Where a partial transfer to a bridge bank is effected and part or all of the bridge banks business is subsequently acquired by a private sector purchaser, the continued provision of services and facilities from the residual company to the commercial purchaser may still be essential to ensure a successful resolution. In those circumstances, this clause continues to bind a bank administrator to achieving objective 1.
349. This clause applies where a property transfer instrument has been exercised to transfer property to a bridge bank and following that the Bank makes or proposes to make a further (onward) property transfer instrument from the original bridge bank.
350. Subsection (2) has the effect that both the original residual bank and the bridge bank, which will itself be a residual bank following the onward transfer, may be put into the bank administration procedure and ensure the continued provision of necessary services and/or facilities to the transferee.
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|Prepared: 5 December 2008