UK: Banking eBulletin - April 2009

Last Updated: 14 February 2011
Article by Gwen Godfrey

Originally published April 2009

This edition of our Banking E-Bulletin is being issued at a time when there are a wide variety of economic, legal and other developments affecting banks, asset based lenders, and their customers. Our own work reflects this and we are dealing with a wide variety of situations for, variously, lenders and borrowers.

Many of the developments are receiving widespread coverage in the press – for example the Government's Enterprise Finance Guarantee Scheme which aims to help viable businesses with turnovers of up to £25 million to source funding and which can be accessed by them through our High Street banks.

Another example is the new Banking Act and its related regulations, which amongst other things makes improvements to the insolvency regime applicable to banks. Its provisions have been extended to building societies and these have now been used for the first time in relation to the Dunfermline Building Society.

Other developments take the form of legislation which will be implemented in the coming months, for example the remaining provisions of the Companies Act 2006 will be implemented on 1 October 2009 and the Payment Services Directive will be implemented by the Payment Services Regulations on 1 November 2009.

Finally there are consultations and proposals looking at areas such as consumer lending, which seem likely to result in new legislation in the foreseeable future.

Against this background this edition looks at some recent legislation dealing with dormant bank accounts; a case on waivers (which is important for those waiving breaches under facility letters and loan agreements); and the increasing use of pre-pack sales in administrations. I hope that you find them of interest.

If you have any comments of queries please do not hesitate to contact me.

Kind regards

Gwen Godfrey
Partner and Head of Banking and Finance Group

THE DORMANT BANK AND BUILDING SOCIETY ACCOUNTS ACT 2008

Article by Lucy Hall

Originally published 6 Apr 2009

Communities To Benefit From Forgotten Millions

Figures suggest that there may be as much as £20bn in bank and building society accounts in the UK that are lying dormant and unclaimed, often because people have forgotten about them. The purpose of this new Act is to set up the framework for a scheme under which some of the money in dormant bank and building society accounts will be reinvested in society, whilst ensuring that the right of owners to reclaim their money is protected. The Act was fully brought into force on 12 March 2009.

A "dormant account" (for the purposes of the Act) is an account on which there have been no customer-initiated transactions for 15 years. Banks and building societies are free to make use of money received from customers (subject to prudential rules which aim to ensure the institution always retains an adequate capital base). However, the deposits in bank or building society accounts constitute a debt owed by the bank or building society to its customer which the institution is liable to repay to its customer indefinitely.

The purpose of the Act is to enable banks and building societies to cancel their liability to repay a customer where the money in a dormant account is transferred to a reclaim fund. The customer's right to repayment will be exercisable against the reclaim fund instead. This cancellation of liability is required in order to ensure banks and building societies can participate in the scheme without suffering an adverse impact on their balance sheets - this is useful in the current economic climate.

The Act provides that a bank or building society's liability to pay the balance owed to a customer in relation to a dormant account is extinguished where that balance is transferred to an authorised reclaim fund which consents to the transfer. This section will allow a bank or building society's liability to a customer in relation to a transferred balance to be de-recognised under International Accounting Standards (IAS 39) and UK Generally Accepted Accounting Practice "GAAP" (FRS 26).

In practice, institutions will have the flexibility to take into account other indications as to whether an account is genuinely dormant, in addition to meeting the requirements of the Act. For example, correspondence from the customer or activity in relation to other accounts held with the same institution may be regarded as evidence that the customer is still active and that their account, which would otherwise meet the definition of "dormant", should not be transferred to the scheme.

A holder of a dormant account is entitled to repayment of the balance (plus interest due and less charges that would have been payable) in full from the reclaim fund, even if the liability that the customer's bank or building society would have had if their balance had not been transferred is reduced or cancelled (for example if the bank is wound up and dissolved after the balance has been transferred).

The British Bankers' Association (BBA) can help trace lost bank accounts. The BBA offers a free tracing service on completion of an online form. The form can be found at www.mylostaccount.org.uk.

PRE-PACK SALES IN ADMINISTRATIONS - BEST VALUE FOR CREDITORS?

Article by Patrick Gilmour

Originally published 6 Apr 2009

A "pre-packaged sale", or "pre-pack", is an arrangement under which the sale of all or part of a company's business or assets is negotiated with a purchaser prior to the appointment of an administrator, and effected shortly (perhaps immediately) after appointment. The administrator effects the sale without the business being offered to the open market. Administration has numerous benefits for the business in question, primarily the fact that creditors' rights are confined to the selling company and do not continue against the business transferred, the retention of employees and the continuation of the business.

Recent high profile pre-packs have involved retailer USC and coffee seller Whittard. In the case of USC the West Coast Capital Group immediately repurchased the retailer when it went into administration. Media attention has focused on the fact that the purchaser in a pre-pack will sometimes be formed of previous owners who buy back the business free of many onerous liabilities. Some commentators have characterised the pre-pack regime as a "fraudster's charter", suggesting that some businesses have been operated irresponsibly in the run-up to administration, with the owners being confident that they can take it back, debt-free. It has been suggested that pre-packs are a 'stitch up' that seek to avoid the obligations to creditors. However, it is arguable that the former owners may have the requisite experience and background knowledge to continue trading to the benefit of all concerned, and there need not be any impropriety, or suggestion of misconduct, just because the previous owners happen to be involved in the business going forward.

Statements of Insolvency Practice (SIPs) are issued following agreement between the insolvency regulatory authorities. Their purpose is to set out basic principles and essential procedures with which licensed insolvency practitioners must comply. SIP 16 governs pre-packs.

Prior to any appointment of administrators, companies should consider the duties which they owe to parties who might be affected by the arrangement and should have regard to the associated risks. A detailed record of the reasoning behind the decision to undertake a pre-pack sale should explain and justify why the decision was taken. This preparation will also assist the directors of a business in relation to the inevitable examination of their conduct, and should help deal with any suggestion of wrongful or fraudulent trading.

The Insolvency Service has recently stated that the use of pre-pack sales from administrations will face much closer scrutiny. The deputy chief executive of the service declared that the Insolvency Service should look to ensure the administrator has followed "the spirit" of legislation that governs pre-pack administrations.

With much closer scrutiny of pre-pack administrations envisaged in the future it is essential for the company, directors and administrators to conduct relevant preparatory work, whilst considering the manner of disposal of the business.

DMH Stallard LLP has experience in acting for both administrators, and purchasers on pre-pack administrations, focusing on areas such as negotiation of documents and the sale of specific assets and we are more than happy to answer any queries.

WAIVERS AND PRESERVATION OF RIGHTS TO TERMINATE

Article by Gwen Godfrey

Originally published 6 Apr 2009

In these difficult economic times, there are bound to be occasions when borrowers breach the terms of facility letters or loan agreements causing the occurrence of events of default. Under their terms, amongst other things, the banks may then be able to demand immediate repayment of the loans.

Depending on the circumstances, a bank may conclude that the best course of action is to allow a particular borrower more time to resolve the relevant problem, rather than to demand immediate repayment. The bank may think that it can rely on a clause in the letter or agreement preserving its rights, so that it can demand repayment in the future, on the basis of the same breach.

However, a recent case, Tele2 International Card Co SA and others v Post Office Limited (2009), shows that such a clause will not necessarily protect a bank in such a situation.

In that case the Tele2 companies had entered into a commercial contract with the Post Office Limited. Under its terms the Tele2 companies had to provide parent company guarantees for each calendar year 7 days before the beginning of that year.

Failure to do this gave the Post Office a right to terminate under the terms of the contract. By 24 December 2003 the parent company guarantees for 2004 had not been produced and were never produced for that year. However the Post Office did not give notice to terminate until 1 December 2004, nearly a year later.

The Post Office tried to rely on a waiver clause in the contract which said that: "In no event shall any delay, neglect or forbearance on the part of any party in enforcing..... any provision of this Agreement be or be deemed to be a waiver thereof or..... shall in any way prejudice any right of that party under this Agreement". It is common to find similar "waiver" clauses in facility letters and loan agreements.

The Court held that the fact that the Post Office continued to perform the contract without any protest or reserve of any kind in relation to the failure to provide the parent company guarantees meant that it elected to affirm the Agreement and to abandon its right to terminate it because of that breach.

As a result it is now more important than ever to ensure that appropriately drafted letters or notices of waiver are used in situations where events of default arise, but are not to be acted upon immediately.

INTERNATIONAL BAR ASSOCIATION APPOINTS PARTNER GWEN GODFREY AS CO-CHAIR OF THE INTERNATIONAL BAR ASSOCIATION'S BANKING COMMITTEE

Article by Angela Rook

Originally published 26 Jan 2009

DMH Stallard LLP is delighted to announce that Gwen Godfrey, Partner, has been appointed as Co-Chair of the International Bar Association's Banking Committee.

The International Bar Association (IBA), established in 1947, has a membership of 30,000 lawyers and 195 bar associations and law societies. The IBA has considerable expertise in providing assistance to the global legal community. The IBA's Banking Committee provides a worldwide forum for banking lawyers and other legal professionals within the banking community to share information and experience.

Gwen heads the Banking and Finance Group of DMH Stallard LLP and specialises in debt finance including acquisition finance, asset based lending, property finance, trade finance and syndications as well as refinancings and restructurings. The independent directory, Chambers 2009, based on client feedback, says that she impresses clients with "her practical and commercial advice - she knows everything there is to know about the banking and finance game." Gwen is general editor and author of the English chapters of Bank Confidentiality (Tottel Publishing 2006) and International Acquisition Finance: Law and Practice (OUP 2006). She is also a Member of ICC UK Committee on Banking Technique & Practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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