UK: The Banking Act 2009

Last Updated: 8 June 2009
Article by Andrew McKnight

Andrew McKnight, Salans' leading Banking and Finance Consultant, takes an in-depth look at the implications of the Banking Act 2009


Events over the last year or so have demonstrated the need for governmental, regulatory and central bank intervention, sometimes of a drastic nature, in the affairs of banks which find themselves in financial difficulties, usually because of a lack of liquidity but also through a deficiency in capital. Up until recently, the matter had been dealt with in the UK in an ad hoc fashion, sometimes using supervisory powers under the Financial Services and Markets Act 2000 and its legislative predecessors. Generally speaking, however, there had been no legislation in the UK peculiar to the situation of banks in financial difficulties; thus the insolvency of a bank fell within the general rules that relate to insolvency, rather than under any legislation specifically tailored for banks. For instance, in the administration of Lehman Bros International (Europe) and its associated companies, the rights of creditors and other counterparties of the insolvent companies (including those asserting proprietary claims) have been governed by the usual procedures and so subjected to the moratorium that applies in an administration against asserting and enforcing claims1,.

As a temporary measure, following upon the failure of Northern Rock PLC, the Banking (Special Provisions) Act 2008 came into force, which permitted the UK authorities to take action so that the share capital and the business, assets and liabilities of failed authorised deposit takers could be transferred, in whole or in part, to the Bank of England, the Treasury or a commercial entity. The Act specifically provided that the powers under it would cease to be exercisable on 21st February, 2009 (S. 2(8)), but without prejudice to action taken beforehand (S. 2(9)). It was pursuant to the Act that Bradford & Bingley PLC was nationalised and some of its engagements passed over to Abbey National PLC on 29th September, 20082. The Act was also used in relation to Northern Rock PLC3 and in two later instances, relating to Heritable Bank PLC4 and Kaupthing Singer & Friedlander Ltd5.

After consultation during 2008, the Government sought to deal with matters on a more permanent footing. It introduced the Banking Bill before Parliament in October, 2008. The Bill provided for the application of a "Special Resolution Regime" in relation to banks in difficulties. The Bill also contained provisions dealing with other topics, such as funding of the Financial Services Compensation Scheme, inter-bank payment schemes and financial stability within the UK, as well as various miscellaneous matters. The Bill was given initial consideration by Parliament before its session came to an end in November, 2008. It was then re-introduced in the new session of Parliament and received the Royal Assent as an Act of Parliament on 12th February, 2009 and thereby became the Banking Act 2009. The parts of the Act dealing with the Special Resolution Regime came into force shortly thereafter, on 17th and 21st February, 20096. Some of the other parts of the Act have yet to be brought into force.

In a number of places, the Act provides for secondary legislation to be made to amplify upon matters referred to in it. It also provides, in Ss 5, 6, 12 and 13 for a Code of Practice (the "Code") to be issued by the Treasury, relating to the use of the Special Resolution Regime. The Code was issued and laid before Parliament on 23rd February, 20097.

S. 10 of the Act provides for the establishment of a "Banking Liaison Panel" to advise on matters relating to the Special Resolution Regime, including the making of secondary legislation pertaining to it, the Code and certain of the powers of the Treasury under S. 75 to amend the law (but not, as the Code notes at Para. 6.23, to provide advice on the exercise of a power under S. 75 which "is carried out in connection with or to facilitate a [proposed or actual] particular use of a stabilisation power"). The Panel includes legal experts and representatives of the banks, the Financial Services Compensation Scheme, the Financial Services Authority, the Bank of England and the Treasury. Para. 2.11 of the Code states that the Treasury expects the Panel to take a particular interest in providing advice relating to partial property transfers (which are mentioned further below).

A note of caution

The Special Resolution Regime has as its principal objectives the protection of the interests of retail depositors, the continuance of the health of the financial system and the maintenance of public confidence in the banking system, whilst also seeking to protect public funds, which will no doubt be seen as laudable objectives. It also bows it head towards those property rights that are protected under the Human Rights Act 1998.

There are potential disadvantages, however, in this type of legislation, as there is the possibility that the objectives which have just been mentioned might be put forward and implemented at the expense of some of a bank's non-retail creditors and counterparties. This is because a major plank in the Special Resolution Regime is to favour retail depositors over other creditors of a bank. There is also an assumption that creditors and counter-parties whose claims and positions have been transferred would consider it a benefit to find that, without having any say in the matter, they had ended up with a completely different party on the other side of their transaction to the entity with which they had originally contracted. There might be various reasons why they would not wish to have dealings with the transferee or be cautious in doing so. For instance, there might be regulatory restrictions which prevent them from being in that position or there might be other difficulties of a commercial, legal or regulatory nature that may arise in consequence of the transfer. These types of disadvantages may deter persons from dealing with banks in the first place or, at least, have the effect of increasing capital requirements for transactions that might be affected.

The Banking Act 2009 does address one other problem which became evident in the consultation process whilst the legislation was being prepared. This problem concerned the situation where there was only a partial transfer of a failing bank's business and engagements to another commercial entity or a bridge bank owned by the Bank of England. Such a partial transfer might have the consequence that some of the persons who may have dealt with the bank could find that their outstanding claims and positions were not transferred, so that they would be left with claims against the discredited rump of the bank that remained and was not transferred, whilst the more fortunate creditors and counterparties of the bank would find that their positions have been included in the transfer. As noted below, provision is made in the legislation to address this difficulty.

It is also worth noting that the Act provides that events of default type clauses in documentation otherwise binding upon a bank might be overridden as part of the transfer of the bank's engagements or securities (or in consequence of such a transfer, even if not the direct subject thereof), so that its creditors and counterparties could not take action to protect themselves based upon the occurrence of the transfer, such as by accelerating the bank's obligations, relying upon conditions precedent to refuse to perform their own contractual obligations or closing out positions. Licensors may find that they cannot terminate their grants. The Act also contemplates that contractual clauses, such as negative pledges and anti-assignment clauses (which would prevent or restrict transfers of assets from taking place), may be overridden, notwithstanding the reasons which justified the clauses when they were originally agreed. In addition, there are some disturbing provisions as to overriding existing beneficial interests in the course of a transfer.

It follows that law firms will need to consider the possible effect of the Act when issuing legal opinions if one of the parties to a transaction might become subject to the operation of the Special Resolution Regime.

The Special Resolution Regime

As already noted, the Banking Act 2009 provides for the introduction of a "Special Resolution Regime". The regime consists of three "Stabilisation Options", which are provided for in Part 1 of the Act, as well as a "Bank Insolvency Procedure" (ie. liquidation) in Part 2 of the Act and a "Bank Administration Procedure" in Part 3 of the Act. The latter will be available to assist the Bank of England in the pursuance of two of the Stabilisation Options. The Code (Paras 5.17 to 5.25) discusses the manner in which the choice between the options will be exercised.

The regime will apply to UK banks (strictly speaking, authorised deposit takers) that find themselves in financial difficulties8, although it is also possible that some banks will be taken out of the scope of the Act (see S. 2). The Act extends the ambit of the Stabilisation Options so that they will apply, in addition, to building societies (Ss 85 to 88). The options may also be applied to credit unions by secondary legislation (S. 89). With respect to building societies, the Bank Insolvency Procedure and the Bank Administration Procedure (called, respectively, "building society insolvency" and "building society special administration") have been extended to apply to building societies (see the Building Societies (Insolvency and Special Administration) Order 20099, implemented pursuant to Ss 130 and 158 of the Act). The two procedures may also be extended to cover credit unions. For the sake of simplicity, what follows will concentrate on the application of the regime to banks.

It should also be noted that the Act contemplates that special provisions might be introduced to apply in the insolvency of investment banks. That possibility is discussed later in this note.

S. 4 of the Act states that there are five objectives, which are of equal weight, that must be considered by the Treasury, the FSA and the Bank of England in resorting to the Special Resolution Regime in relation to a bank. They are: (1) to protect and enhance the stability of the financial systems in the UK including, in particular, the continuity of banking services, (2) to protect and enhance public confidence in the stability of the financial systems in the UK, (3) to protect depositors, (4) to protect public funds, and (5) to observe property rights as a Convention Right under the Human Rights Act 1998.

As already noted, the Treasury has published the Code, which describes the considerations relevant to the use of the Special Resolution Regime. The Code states, for instance, that the reference to property rights as a Convention Right might extend to the right to a fair trial and the prohibition on discrimination under Arts 6 and 14 of the Convention (see Para. 3.15). The Code also provides (at Para. 3.20) that in exercising their powers, the authorities will have regard to the restrictions and conventions of public law, such as the requirements to act reasonably and for procedural fairness, as well as the need to observe the principle of legal certainty.

The Act lays down some general conditions as to the exercise of powers under a stabilisation option, as well as special conditions that apply with respect to each of those powers. These will be described below.

The Stabilisation Options (Part 1 of the Act)

The three stabilisation options (which, when exercised, are called "Stabilisation Powers") are as follows:

(a) a transfer, by sale, of the whole or part of a bank to a commercial purchaser, which would be arranged by the Bank of England. This would be achieved by either, or both, the transfer of shares and other securities issued by the bank (by one or more "Share Transfer Instruments") and the transfer of its assets and liabilities (by one or more "Property Transfer Instruments");

(b) a transfer of the whole or part of a bank to a subsidiary of the Bank of England (a "Bridge Bank"), which would be arranged by the Bank of England. This would be achieved by one or more property transfer instruments. There could be an onward transfer at a later date to a commercial purchaser; and

(c) a transfer of the share capital of a bank to a nominee of the Treasury or a company wholly owned by it (called "taking the bank into temporary public ownership", although the Act (and the Code) is quiet in prescribing the length of time that might be involved). This would be achieved by a statutory instrument (a "Share Transfer Order") by which shares and other securities issued by the bank would be transferred, which could also be supported by a transfer, through the means of a statutory instrument, of the bank's assets and liabilities (a "Property Transfer Order"). The Code says that a transfer of a bank to temporary public ownership is likely to occur only if the other options are considered inadequate (Paras 5.2 and 5.21). S. 82 of the Act also permits the Treasury to take the holding company of a bank into temporary public ownership by a share transfer order, but it may not use a property transfer order in this connection (see also Paras 5.35 to 5.41 of the Code).

S. 7 of the Act provides that before one of the stabilisation powers is exercised, the FSA (in consultation with the Treasury and the Bank of England) must be satisfied that (i) the bank has failed, or is likely to fail, to satisfy the threshold conditions for authorisation under S. 41(1) of and Schedule 6 to the Financial Services and Markets Act 2000 (eg. as to adequate resources to carry on its regulated activities), and (ii) that it is unlikely that this will be rectified, ignoring the use of a stabilisation power or financial assistance provided by the Treasury or the Bank of England (other than ordinary market assistance offered by the latter on its usual terms—see further Para. 5.9 of the Code).

S. 8 of the Act provides that there are specific conditions that will apply if the Bank of England is to exercise a stabilisation power, which depend upon the circumstances, as follows:

(i) If the power follows upon financial assistance provided by the Treasury to the bank so as to resolve or reduce a serious threat to the stability of the financial systems in the UK, the Bank of England must be satisfied both that the Treasury has recommended that the power should be exercised to protect the public interest and that the Bank of England considers that the exercise of the power is an appropriate way to provide that protection.

(ii) If the power is exercised in other circumstances, the Bank of England must determine (in consultation with the Treasury and the FSA) that it is necessary to do so, having regard to the public interest in (a) the stability of the financial systems in the UK, (b) the maintenance of public confidence in the stability of the banking systems in the UK, or (c) the protection of depositors.

S. 9 of the Act provides that if the Treasury is to exercise a stabilisation power, it must be satisfied (after consultation with the FSA and the Bank of England) that it is necessary to do so (a) to resolve or reduce a serious threat to the stability of the financial systems in the UK, or (b) to protect the public interest, in a case where the Treasury has provided financial assistance to the bank so as to resolve or reduce a serious threat to the stability of the financial systems in the UK.

Power to change the law

S. 75 of the Act contains what may appear to be a rather surprising power which is vested in the Treasury. The section permits the Treasury, in connection with the use of the stabilisation options, to effect changes to statutory or common law, but not the Act or secondary legislation made under it. The power may be exercised by statutory instrument, either generally or with respect to the particular use of a stabilisation option. It may be used retrospectively (but the Treasury must "have regard to the fact that it is in the public interest to avoid retrospective legislation").

Although any statutory instrument promulgated under S. 75 is subject to subsequent Parliamentary approval, S. 75(8) provides that the Treasury may exercise its prospective powers under the instrument before the approval is given if it thinks it is "necessary". The exercise of the power in such a case will not be invalidated by the failure of Parliament to give its approval.

Paras 6.18 to 6.23 of the Code address the powers of the Treasury under S. 75.

Similar powers to change the law (including fiscal statutes) are given by Ss 135 and 168 of the Act, in the context of bank insolvency and bank administration.

Transfer of Securities

Pursuant to a stabilisation power, securities issued by a bank might be transferred, in whole or in part, under one or more securities transfer instruments executed by the Bank of England under Ss 11 and 15 of the Act (where the Bank of England has exercised the power to transfer a bank to a commercial purchaser) or securities transfer orders implemented by the Treasury under Ss 13 and 16 of the Act (where the Treasury has exercised the power). Under S. 30 of the Act, the Bank of England may transfer securities issued by a bridge bank and it may reverse the same under S. 31.

The term "Securities" is widely defined in S. 14 of the Act, to include shares and stock, debentures (which includes debenture stock, loan stock, bonds, certificates of deposit and any other instrument creating or acknowledging a debt), warrants to acquire the foregoing and instruments which form part of the bank's regulatory capital. Given the width of the concept of a debenture10, a query must arise as to whether indebtedness which arises under a contract, such as a derivatives contract, might fall within the definition. This query is relevant because the qualifications that might apply to partial property transfers, as described below, do not apply in the case of partial securities transfers.

The transfer will take effect notwithstanding any restriction or condition that would otherwise affect the right for a security to be transferred, howsoever if might arise. The transfer may also provide that it will take effect free from equitable and other interests (S. 17). In addition, the transfer may provide that it will not give rise to an event of default and such like, despite any contractual or other provision which might otherwise apply (S. 22).

The transfer instrument or order may provide that the transferee should be treated as if it had always been a party to or holder of the security (S. 18).

There are also provisions dealing with the position of directors of the transferred bank (S. 20).

Under S. 28 of the Act, the Treasury may make an onward transfer of securities included within the original transfer order. Under S. 29, the Treasury may reverse the transfer of securities included within an original transfer order or such an onward transfer.

Transfer of Property

Pursuant to a stabilisation power exercised by the Bank of England, the assets and liabilities of a bank might be transferred, in whole or in part, under one or more property transfer instruments executed by the Bank of England (Ss 11, 12 and 33). In addition, the Treasury may order such assets and liabilities to be transferred in support of its exercise of a stabilisation power, under a property transfer order (S. 45). Provision is also made for supplemental and incidental matters, onward transfers and re-transfers. Ss 35 and 39 of the Act contemplate that the relevant assets or liabilities might be situated abroad, although the Act fails to deal adequately with the corresponding conflict of laws issues that might arise, mainly because the writ of the Act probably will not run in other jurisdictions.

The transfer will take effect, notwithstanding any restriction or condition that would otherwise affect the ability of assets and liabilities to be transferred (S. 34) and licences to use assets will continue to have effect (S. 37). Property and rights arising in the future relating to pre-transfer matters may also be included in the transfer (S. 35). In addition, the transfer may provide that it will not give rise to an event of default and such like, despite any contractual or other provision which might otherwise apply (S. 38). The transfer instrument or order may provide that the transferee should be treated as if it had always held the relevant assets or been obliged under the relevant liabilities (S. 36).

Protections concerning partial property Transfers

S. 47 of the Act does provide, however, that the Treasury, by statutory instrument, may limit the ability of itself or the Bank of England to make partial property transfers, that is, transfers of some, but not all, of the assets and liabilities of a bank. This is because of the adverse effect that such a transfer may have on the residual rump of the bank that is left behind and the consequential position of the creditors and other counterparties of the bank whose claims and positions have been left behind. S. 48 also provides that the Treasury may take steps, by statutory instrument, to protect security interests, title transfer collateral arrangements (eg. securities sale and repurchase transactions) and rights of set-off and netting (including close-out netting) which might be adversely affected by a partial property transfer.

The Banking Act 2009 (Restriction of Partial Property Transfers) Order 200911 gives effect to these matters. It restricts the making of partial property transfers. It also makes provision for the protection of certain interests, including security interests, title transfer collateral arrangements and set-off and netting arrangements. In summary, the restrictions and protections it confers are along the following lines:

(a) Set-off and netting arrangements and title transfer collateral arrangements: with certain specific exceptions (eg. retail deposits and liabilities), contracts covered under set-off or netting agreements or title transfer collateral arrangements will be protected from disruption by partial transfers. This may need to be revisited, as there is an argument as to the extent of the protection that has been conferred.

(b) Security interests: the protection for security interests covers both the secured liabilities and the secured assets, so that they may not be separated.

(c) Capital markets arrangements (as defined by Para. 1 of Sched. 2A to the Insolvency Act 1986) such as securitisation and covered bond transactions: the protection would ensure that the interconnected parts of such transactions would not be disrupted by a partial transfer.

(d) Default rules for clearing houses and investment exchanges: the protections reflect Part VII of the Companies Act 1989.

(e) Reverse transfers: the Treasury and the Bank of England may not transfer back certain types of financial contract from a solvent newco to an insolvent original transferor.

(f) Events of default provisions: partial property transfers may not use the powers under Ss 38(6) and 38(7) of the Act to defeat set-off and netting rights or rights under title transfer collateral arrangements.

(g) EU law: there is an express ban on action taken in contravention of Community law, particularly under the continuity powers in the Act.

(h) Continuity of intra-group services: protection is given against the use of powers providing for the continuity of such services which would contravene the spirit of the protections under the Order.

The Order also provides a procedure for an interested person, in certain instances, to challenge a partial property transfer if he believes that it contravenes the Order.

The Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 200912 provide for a compensation scheme to be established so as to compensate creditors whose claims have been left behind in the residual entity. The aim of the scheme would be to ensure that such creditors should not be in a worse position than they would have been in had no partial transfer occurred. This would be assessed in terms of the dividend that they would have received on a liquidation of the whole bank, assuming no transfer had taken place. An independent valuer would be appointed to make the assessment.

Ancillary Provisions

With respect to both securities transfers and property transfers, there are additional provisions in Ss 49 to 62 of the Act dealing with compensation for those adversely affected by them. In this regard, the decision of the Divisional Court in R (on the application of SRM Global Master Fund LP & ors) v. Treasury Commissioners13, concerning the compensation arrangements for the former shareholders of Northern Rock PLC, would be relevant.

Ss 71 to 74 of the Act provide for the consequences of such transfers with respect to taxation and pensions. Ss 63 et seq are concerned with continuity obligations upon a residual bank (ie. what has not been transferred) and companies associated with the bank prior to a transfer, to provide assistance in support of a transfer that has taken place. These provisions deserve close scrutiny to see if they might have an adverse effect on group members that are associated with the residual bank.

Bank Insolvency (Part 2 of the Act)

"Bank Insolvency" is a new insolvency procedure for banks, which may be instigated at the behest of the Bank of England, the FSA or the Secretary of State, by making an application to the court for the winding up (liquidation) of a bank (S.95). If granted, the court will make a "Bank Insolvency Order" against the bank and, pursuant thereto, appoint a "Bank Liquidator" of the bank. As previously noted, the procedure has been extended to building societies and it may also be extended to credit unions.

Part 2 of the Act also introduces limits upon a bank and its creditors, shareholders and others from taking steps for the winding up (including voluntary winding up) or administration of the bank (Ss 118 to 120). In addition, the court may make a bank insolvency order against a bank, rather than an ordinary winding up order or an administration order, on the application of the FSA or the Bank of England (S. 117).

S. 96 of the Act provides three alternative grounds upon which an application may be made to the court for a bank insolvency order, being:

(a) that the bank is unable to pay, or is likely to become unable to pay, its debts. By virtue of S. 93(4), a bank will be considered as being unable to pay its debts if (i) it meets the relevant test under S. 123 of the Insolvency Act 1986, or (ii) it is in default of an obligation (no matter how serious or otherwise!) to pay a sum that is due and payable under an agreement, the making or performance of which constitutes or is part of a regulated activity that is carried on by the bank (in essence, the term "regulated activity" has the same meaning as in S. 22 of the Financial Services and Markets Act 2000—see S. 93(6) of the Banking Act 2009 and S. 1173(1)(g) of the Companies Act 2006);

(b) it would be in the public interest for the order to be made; or

(c) the winding up of the bank would be just and equitable ("fair"—see S. 93(3)).

There are additional conditions in S. 96 that must be satisfied, which refer to the grounds for making the application and the grounds upon which a stabilisation option would be available. They also depend upon which of the Secretary of State, the FSA or the Bank of England makes the application to the court. In each case, however, an application may only be made if the bank has "Eligible Depositors" as defined in S. 93(3), that is, depositors who are eligible for compensation under the Financial Services Compensation Scheme (the "FSCS").

S. 98 of the Act provides that a bank insolvency order is treated as having taken effect as from the time when the application was made to the court for the making of the bank insolvency order, unless the application followed upon steps taken by a third party for the winding up or administration of the bank, in which case it will be treated as having had effect from the earlier date that such steps were taken. Rather obscurely, it is also provided that, "Unless the court directs otherwise on proof of fraud or mistake, proceedings taken in the bank insolvency, during the period for which it is treated as having had effect, are treated as having been taken validly."

S. 99 of the Act provides that a bank liquidator has two objectives, which he must begin to pursue from the time of his appointment. They are as follows:

The first, which takes precedence, is to "work with" (here, as elsewhere, one might weep for the lamentable misuse of the English language) the FSCS to ensure that as soon as reasonably practicable, each eligible depositor of the bank will either (a) have his relevant account transferred to another financial institution, or (b) receive payment from (or on behalf of) the FSCS. For that purpose, any restriction upon transfer may be overridden and the FSCS is given additional powers, including as to raising levies (S. 124). It is not clear what the position would be with respect to any excess amount that a depositor may hold with the bank, above the limit protected under the FSCS.

The second is that the affairs of the bank should be wound up so as to achieve the best result for the bank's creditors as a whole.

There are provisions for the appointment of a liquidation committee and the working relationship between the committee and the bank liquidator (Ss 100 to 102). The composition of the committee will depend upon whether or not the first objective of the liquidator has been achieved. The committee will also be important in determining which of the two alternatives will apply in achieving the first objective.

In addition to the usual powers of a liquidator, a bank liquidator (who must be a licensed insolvency practitioner (S. 94) and is an officer of the court in the performance of his functions (S. 105)) is given the general power to do what is necessary or expedient in pursuit of the two objectives, as well as specific powers to effect and maintain insurances, to do all that may be necessary to realise the bank's property and to do anything that may be necessary or incidental to his functions (Ss 103 and 104).

With some modifications, S. 103 of the Act provides that nearly all of the provisions of the Insolvency Act 1986 which concern liquidations will apply. That section, together with Ss 122 and 135 of the Act, also permit the adoption and modification of other enactments, including secondary legislation, so as to encapsulate the procedures for liquidation (see, for instance, the Banking Act 2009 (Parts 2 and 3 Consequential Amendments) Order 200914).

More substantively, S. 125 inserts a new S. 411(1A) into the Insolvency Act 1986.

Pursuant to the new section, rules may be made so as to give effect to Part 2 of the Banking Act 2009. This power was exercised by the Bank Insolvency (England and Wales) Rules 200915, which came into force on 25th February, 2009. In many respects, the new rules apply or modify the existing rules under the Insolvency Rules 198616. It is worth noting that Rule 72 of the new rules contains the rule as to insolvency set-off in a bank liquidation. It is along much the same lines as Rule 4.90 of the existing rules (with a couple of typographical errors, where "company" has been used, instead of "bank"), but the rule is disapplied by new Rule 73 in the case of eligible depositors.

A bank insolvency may come to an end through the effecting of a voluntary arrangement, an administration or a dissolution of the bank (Ss 113 to 115).

Bank Administration (Part 3 of the Act)

This form of insolvency procedure is designed to be used in conjunction with the exercise by the Bank of England of the first two stabilisation options, namely, where there is a transfer of part of a bank's assets and liabilities to a commercial purchaser or such a transfer to a bridge bank, or where there are multiple transfers (in the latter respect, a bank administrator might also be appointed at the instigation of the Treasury—see S. 152). It is intended to ensure that the residual rump of the bank which is not transferred provides services or facilities to enable the transferee to operate effectively with respect to what has been transferred. In other respects, the process of the administration is the same as in a normal administration (see, generally, S. 136). As previously noted, the provisions of Part 3 have been extended to building societies.

The Bank of England is entitled in defined circumstances to apply to the court for a "Bank Administration Order", pursuant to which a "Bank Administrator" is appointed. Ss 137 to 140 of the Act provide that the bank administrator has two objectives, the first having precedence over the second. The first objective is to provide support to the relevant commercial purchaser or bridge bank. The second objective is to pursue a normal administration, being to rescue the bank (that is, what has been left after the transfer) as a going concern or, if that is not reasonably practicable, to achieve a better result for the bank's remaining creditors as a whole than would be achieved in a winding up.

Generally speaking, the bank administrator (who must be a licensed insolvency practitioner (S. 141(2)) and is an officer of the court in the performance of his functions (S. 146)) has all the usual powers of an administrator and, with some modifications, the provisions of Schedule B1 to the Insolvency Act 1986, which concerns administrations, will apply (see Table 1 in S. 145). He is also given some of the powers of a liquidator (see Table 2 in S. 145), including the power to disclaim onerous property. There are also provisions for the adaptation and modification of other enactments, including secondary legislation, as they apply with respect to administrations.

Financial Services Compensation Scheme (Part 4 of the Act)

In addition to the powers conferred on the FSCS in relation to a bank insolvency, as noted above, Part 4 of the Act contains provisions specifically related to the FSCS. Those provisions relate to matters such as the contingency funding of the FSCS and its rights to raise levies to maintain funds, contributions by the FSCS towards the expenses incurred in the use of a stabilisation power and enabling the FSCS to invest in and borrow from the National Loans Fund.

Investment banks (a portion of Part 7 of the Act)

The Act makes provision for the possibility of introducing insolvency procedures that are tailored for investment banks (as opposed to banks that take retail deposits). Ss 232 to 237, which are in Part 7 of the Act, contain provisions which envisage special insolvency procedures for an investment bank that meets the following three criteria: it is incorporated in the UK, it holds client assets and it holds a permission under Part 4 of the Financial Services and Markets Act 2000 to carry on investment activities (i.e. as principal or agent or to safeguard or administer investments).

The sections provide that the Treasury may introduce secondary legislation, by which insolvency law would be amended with respect to such banks. The amendments would be aimed at protecting client assets and creditors' rights, ensuring certainty in insolvency proceedings, minimising disruption to business and the financial markets and, generally, "maximising the efficiency and effectiveness of the financial services industry" in the UK (a somewhat ambitious task, one might think).

S. 234 sets out further details of what such secondary legislation might seek to achieve, such as by introducing mechanisms to determine entitlements in client assets and for the protection of those assets17.

Interbank Payment Systems (Part 5 of the Act—not yet in force)

Part 5 of the Act contains provisions relating to oversight by the Bank of England of interbank payment systems that are recognised by a "Recognition Order" made by the Treasury. The systems that would come within these provisions are those where the relevant arrangements are designed to facilitate or control the transfer of money or credits between participating financial institutions, such as banks and building societies. Systems would still be covered if other types of entity might also participate in them and it would not matter that the system operated partly or wholly in relation to persons or places outside the UK. However, a system that was operated solely by the Bank of England would not be covered.

A recognition order may only be made with respect to a system if a deficiency in the design of the system or any disruption in its operation would be likely to threaten the stability of the UK financial system, or confidence in it, or if such a deficiency or disruption would be likely to have serious consequences for business or other interests throughout the UK. The Treasury must also have regard to other criteria, such as the number and value of transactions that are processed within the system and its relationship with other systems.

The Bank of England is to publish principles and a code of practice for operators of regulated systems and it may also require rules as to the operation of a system. The Bank of England may give directions to the operator of a system as to standards and as to things that may and may not be done. There would also be an inspection and enforcement regime for regulated systems.

Other matters

A number of other matters are also dealt with in the Act, which include the following.

Part 6 of the Act, which is not yet in force, contains provisions relating to the issuance of banknotes in Scotland and Northern Ireland, including requirements as to backing assets for notes in issue.

Ss 238 to 247 (which are not yet in force)18, which are in part 7 of the Act, concern the Bank of England. An additional objective is stated for the Bank of England, relating to the protection and enhancement of the stability of the financial systems in the UK. The Bank of England is to have a new Financial Stability Committee. There are also provisions which relate to the directors of the Bank of England and meetings of its court. The Bank of England is given immunity from suit in its capacity as a monetary authority. The Bank of England is given a right to make disclosures of certain information to the Treasury and the FSA.

S. 251, which is in Part 7 of the Act, provides that regulations may be introduced to facilitate the giving of financial assistance to building societies by the Treasury, the Bank of England, a central bank in an EEA country or the European Central Bank.

S. 252, which is in Part 7 of the Act, provides that security which is given by an entity in favour of the Bank of England, the European Central Bank or any other central bank will not need to be registered under Part 25 of the Companies Act 2006 or Part XII of the Companies Act 1985.

By Ss 255 and 256, which are in Part 7 of the Act, the Treasury is given power to make regulations concerning financial collateral arrangements, including provisions which may amplify or go beyond the requirements of the EC Directive on financial collateral arrangements19, such as in relation to choice of law and close out netting arrangements. There is also a provision which would allow the Treasury to validate, even retrospectively, the Financial Collateral Arrangements (No 2) Regs 200320 in case they, or any part of them, are found to have been lacking in vires21.

©Andrew McKnight 2009. Andrew McKnight is a solicitor and Consultant to Salans LLP, and a Visiting Professor of Law at Queen Mary, University of London. He is also the author of The Law of International Finance (OUP, 2008), a member of the Editorial Board of the two-monthly Law and Financial Markets Review (Hart Publishing) and has recently been appointed as a General Editor of The Encyclopaedia of Banking Law (LexisNexisButterworths).


1 See, for instance, Re Lehman Brothers International (Europe) [2008] EWHC 2869 (Ch).

2 See The Bradford & Bingley PLC Transfer of Securities and Property etc. Order 2008 (SI 2008/2546).

3 SI's 2008/718 and 2008/432.

4 SI 2008/2644.

5 SI 2008/2674.

6 The Banking Act 2009 (Commencement No. 1) Order 2009 (SI 2009/296).

7 A copy of the Code is available at www.hmtreasury.

8 The text of the Act requires that the bank should be incorporated or formed within the UK. This conforms with the philosophy of the EC Directive on the Reorganisation and Winding Up of Credit Institutions (EC 2001/24 OJ L125/15 05/05/2001), that a credit institution which is established in an EEA member state should only be wound up by the courts of that state. This should be contrasted with the concept of the "centre of main interests" which is pursued in the EC Council Regulation on Insolvency Proceedings (EC 1346/2000 OJ L160/1 30/6/2000) and in the UNCITRAL Model Law On Cross-Border Insolvency.

9 SI 2009/805.

10 The definition of "debenture" has never been settled at common law (see, for instance, the views expressed by Chitty J in Edmonds v. Blaina Furnaces Co. (1887) 36 ChD 215, at 219 and in Levy v. Abercorris Slate and Slab Co. (1887) 37 ChD 260, at 264 ).The possible width of the term was discussed by Lloyd J in NV Slavenburg's Bank v. Intercontinental Natural Resources Ltd [1980] 1 WLR 1076, at 1099- 1100.

11 SI 2009/322.

12 SI 2009/319.

13 [2009] EWHC 227 (Admin). It is understood that an appeal is pending against the decision.

14 SI 2009/317.

15 SI 2009/356.

16 SI 1986/1925, as amended.

17 For further discussion, see the report issued by HM Treasury in May 2009, entitled Developing effective resolution arrangements for Investment banks, available at

18 See now The Banking Act 2009 (Commencement No 2) Order 2009 [SI 2009/1296].

19 2002/47/EC OJ L168/43 17/6/2002.

20 SI 2003/3226.

21 In light of the comments in Moses LJ, sitting as a judge of the Administrative Court, in R (on the application of Cukurova Finance International Ltd) v. HM Treasury and Alfa Telecom Turkey Ltd [2008] EWHC 2567 (Admin), it may not be necessary for this power to be exercised. His Lordship doubted if the Regulations would be invalidated simply because they went further than was required by the text of Directive on financial collateral arrangements which they purported to implement.

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