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.

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