UK: The Queen (On The Application Of Kaupthing Bank hf) v. HM Treasury [2009] EWHC 2542

On 7 March 2010, the Icelandic electorate delivered an almost unanimous message to the British and Dutch governments in what was Iceland's first referendum since independence in 1944: they did not agree to repayment of the moneys lent by Britain and Holland to compensate depositors in a failed Icelandic bank. That emotions are charged and that the Icelandic government now seeks to conclude negotiations with the British and Dutch governments (perhaps using the referendum result as leverage) before general elections in these countries only adds to the tension of the stand-off. Accordingly, it is perhaps an appropriate time to reflect on how the narrative began, and how the nationalisation of banks by governments – a notion considered unthinkable not so long ago – started to become entrenched in the public consciousness globally.

Challenging the legality of transfer of liabilities of UK subsidiary of Icelandic Bank immediately prior to administration

This case concerned an application for judicial review brought by Kaupthing Bank hf ("Kaupthing"), one of the three main Icelandic banks and the parent company of Kaupthing Singer & Friedlander ("KSF") in respect of a Transfer Order made by HM Treasury ("the Treasury"). The Transfer Order in question was made on 8 October 2008 and provided for the transfer of all KSF's liabilities to holders of its "Edge" deposit accounts indirectly to ING Direct NV. KSF was placed into administration shortly thereafter.


In response to the global financial crisis, the UK Government enacted the Banking (Special Provisions) Act 2008 ("the Act"). Section 6 of the Act conferred upon the Treasury the power to order (by way of statutory instrument) the transfer of property, rights and liabilities of a UK deposit-taker (such as a bank) to any other company. Pursuant to section 2 of the Act, this power is exercisable only if "it appears to the Treasury to be desirable to make the order for... [the purpose of] maintaining the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the order were not made" ("the Purpose"). Shortly after the Act came into force, the Treasury made a Transfer Order to take Northern Rock into public ownership.

In late summer 2008, the three main Icelandic banks were on the brink of collapse, and there was growing concern about their ability to fund their liabilities. One of these, Glitnir was 75% nationalised on 29 September 2008. This triggered a run on the whole Icelandic banking sector. The lack of confidence in the sector caused a shortage of liquidity which, in turn, contributed to further fears regarding the banks' ability to meet their liabilities. At the time, KSF and Kaupthing were in dialogue with each other, potential purchasers of KSF and the Financial Services Authority ("FSA") with a view to finding a solution to the problems. KSF was in breach of a FSA requirement that it maintain reserves of at least 95% of its liabilities in cash or near cash equivalents. Despite a number of warnings from the FSA and repeated attempts and reassurances that it would obtain the required cash injection from Kaupthing, KSF continued to be in breach FSA regulations.

The third major Icelandic Bank, Landsbanki, was nationalised on 7 October 2008, causing a run on its UK branch. The Treasury made a Transfer Order in respect of the current accounts of Landsbanki's UK subsidiary, which went into administration shortly afterwards. At the same time, the value of the Icelandic currency plummeted relative to the Euro. These events further worsened KSF's financial position.

The FSA issued a deadline of 7.30am on 8 October 2008, by which time KSF was required to receive a cash injection of £300million. The deadline was not met. The Treasury made the Transfer Order against KSF's "Edge" accounts at 12.05pm. Less than three hours later, KSF was put into administration by the FSA.

The Transfer Order stated that it had been made for the purpose of "maintaining the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the Order were not made". The compensation payable to KSF was valued at nil.

Kaupthing's First Ground of Challenge: Improper Purpose

Kaupthing argued that the Transfer Order had been unlawfully made because it had not been made in pursuance of the Purpose but merely to protect KSF's depositors. In rejecting this argument the court noted the backdrop of events leading up to the Transfer Order, and the factual background relating to Kaupthing, KSF and Icelandic banks in general. Further, the Court held that the Treasury's purpose (both general and specific) had been clearly set out in the Transfer Order itself. The Treasury's desire to protect depositors of KSF was merely part of the broader Purpose. Accordingly, the Court held the Transfer Order had indeed been made for the purpose set out in section 2 of the Act.

Kaupthing's Second Ground of Challenge: Absence of Specific Threat

Kaupthing also argued that the Treasury had failed to identify a specific threat posed to the stability of the UK financial system as a whole (as required by the Purpose) which resulted from the liquidity difficulties faced by KSF. Rhetorically, Kaupthing asked, "what threat would have been posed if more time had been granted for KSF to find the cash needed?". Kaupthing contended that, in failing to identify a specific threat, the Treasury was not properly informed or able to consider the latter limb of the Purpose; i.e. the consequences "...if the order were not made".

The court rejected this argument as artificial and unreal. Pointing to witness evidence and the observation that the Treasury had been receiving full advice from the FSA and the Bank of England throughout, it was held that "[there is] no doubt that it did appear to the Treasury to be desirable to make the Transfer Order for [the Purpose] and that the circumstances were such that the Treasury did consider that there would be a serious threat to the stability of the UK financial system if the order were not made".

Accordingly, the Court held that there had been no error of law in the Treasury's decision-making process.


The court declined to criticise the Treasury's decision made against the backdrop of the prevailing political and economic conditions, as well as the general market sentiment, at the time the Transfer Order was made. The Transfer Order expressly stated that it was made for the purpose stated in section 2 of the Act. The Court accepted that these terms were correct and that the Transfer Order had indeed been made for that purpose and not another.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.