Page1

Company Law Newsletter

2009

Legislative Comment
Banking Act 2009 introduces new bank insolvency/administration procedures
Subject: Insolvency. Other related subjects: Banking and finance
Keywords: Administration; Banking; Insolvency
Legislation: Banking Act 2009
*Co. L.N. 5 The Banking Act 2009, rushed through Parliament in light of the current banking crisis,
came into force on February 21 intended to strengthen the statutory framework for financial stability
and depositor protection; it introduces new insolvency and administration regimes for banking
companies. The Banking Act 2009 received the Royal Assent on February 12, 2009. The great
majority of the Act came into force on February 21, 2009, by virtue of the Banking Act 2009
(Commencement No.1) Order 2009 (SI 2009/296 (C.14)). Part 1 of the Act introduces the Special
Resolution Regime (SRR) for banks that get into financial difficulties. Part 1 describes the SRR
objectives, how it is triggered, and sets out three stabilisation options of the SRR (transfer to a private
sector purchaser, transfer to a bridge bank and transfer to temporary public sector ownership). These
options are exercised through the stabilisation powers, which are the powers to effect the transfer of
shares and other securities or property, rights and liabilities, by operation of law. Also covered in Pt 1
of the 2009 Act are arrangements for assessing any compensation payable to transferors for the
shares or other property transferred and for other (third) parties affected by a transfer. Part 1 also
includes a power to take bank holding companies into temporary public ownership if certain
conditions are met. The SRR may also apply to building societies and there is a power to apply the
SRR to credit unions. A Code of Practice supports the SRR legal framework, and provides guidance
as to how, and in what circumstances, the relevant authorities will use the special resolution tools.
Copies of Banking Act 2009 - Special resolution regime: Code of Practice are available on the
Treasury website at http://www.hm-treasury.gov.uk/d/bankingact2009_codeofpractice.pdf [Accessed
March 4, 2009].

Bank insolvency order

Part 2 of the 2009 Act establishes a new bank insolvency procedure called a bank insolvency order
based on existing liquidation provisions (but subject to necessary modifications), to provide for the
orderly winding up of a failed bank and to facilitate rapid Financial Services Compensation Scheme
(FSCS) payments to eligible claimants or a transfer of such accounts to another financial institution.
There are also powers to extend the procedure to building societies and credit unions.
According to s.90(2), the main features of bank insolvency are that:
a bank enters the process by court order;
the order appoints a bank liquidator (a qualified insolvency practitioner);
the bank liquidator aims to arrange for the bank's eligible depositors to have their accounts
transferred or to receive their compensation from the FSCS;
the bank liquidator then winds up the bank; and
for those purposes, the bank liquidator has powers and duties of liquidators, as applied and modified
by the provisions of this Part.
Application for a bank insolvency order is made to the court only by the Bank of England, the
Financial Services Authority or the Secretary of State (s.95) and then subject to certain qualifying
conditions (in *Co. L.N. 6 s.96(2)-(4)). The grounds for an application are provided in s.96(1):
Ground A: that a bank is unable, or likely to become unable, to pay its debts;
Ground B: that the winding up of a bank would be in the public interest; and

Page2

Ground C: that the winding up of a bank would be fair.

Under s.97 the court may make a bank insolvency order on the application of the Bank of England or
the FSA if satisfied that the bank has eligible depositors, and that Ground A or C applies. The court
may make a bank insolvency order on the application of the Secretary of State if satisfied that the
bank has eligible depositors, and that Grounds B and C apply. The court may grant, adjourn or
dismiss the application. Section 99 goes on to provide two statutory objectives for the bank liquidator:
(1) to work with the FSCS to ensure that either the accounts of eligible depositors are transferred to
another financial institution or payments are made to eligible depositors, and (2) to wind up the affairs
of the failed bank in the interests of creditors as a whole. To meet those objectives s.103 provides for
powers and duties of a bank liquidator and a table applies many specified provisions of the Insolvency
Act 1986 to that end, subject to modifications.

Bank administration
Part 3 of the Banking Act 2009 establishes a new bank administration procedure for use where there
has been a partial transfer of business from a failing bank.
The main features of bank administration are that (s.136):
it is used where part of the business of a bank is sold under the SRR to a commercial purchaser in
accordance with s.11 or transferred to a bridge bank in accordance with s.12 (it can also be used in
certain cases of multiple transfers under Pt 1);
the court appoints a bank administrator on the application of the Bank of England;
the bank administrator is able and required to ensure that the non-sold or non-transferred part of the
bank (the residual bank) provides services or facilities required to enable the commercial purchaser
(the private sector purchaser) or the transferee (the bridge bank) to operate effectively, and
in other respects the process is the same as for normal administration under the Insolvency Act
1986, subject to specified modifications.
A bank administrator has two objectives:
Objective 1: support for commercial purchaser or bridge bank (details are provided by ss.138 and
139); and
Objective 2: normal administration (details are provided by s.140).
Objective 1 takes priority over Objective 2 (but a bank administrator is obliged to begin working
towards both objectives immediately upon appointment). Only the Bank of England can apply for the
appointment of a bank administrator (s.142) on the following conditions (s.143):
Condition 1: the Bank of England has made or intends to make a property transfer instrument in
respect of the bank in accordance with s.11(2) or s.12(2); or
Condition 2: the Bank of England is satisfied that the residual bank is unable to pay its debts, or is
likely to become unable to pay its debts as a result of the property transfer instrument which the Bank
intends to make.
Under s.144 the court may make a bank administration order only if satisfied that the above
conditions were met. The court is empowered to grant, adjourn or dismiss the application. Similarly to
bank liquidators, bank administrators are provided with powers and duties under tables in s.145 in
relation to provisions in Sch.B1 to the Insolvency Act 1986 and other provisions of the 1986 Act,
subject to modifications.
Part 3 goes on with further specific details on bank administration. There are also powers to extend
the procedure to building societies or credit unions.
There are specific procedural rules for bank administration provided by the Bank Administration
(England and Wales) Rules 2009 (SI 2009/357). These are in force from February 25, 2009, so that:
Part 2 of the Rules sets out special provisions about applications for bank administration;
Part 3 sets out special provisions about the bank administration process;

Page3

Part 4 sets out special provisions about court procedure and practice in connection with bank
administration; and
Part 5 applies specified provisions of the Insolvency Rules 1986 (SI 1986/1925) for general
purposes in connection with bank administration, subject to a number of general and specific
modifications.

Further delegated legislation

Further secondary legislation in relation to bank administration (and bank insolvency) includes the
following.
The Banking Act 2009 (Bank Administration) (Modification for Application to Banks in Temporary *Co.
L.N. 7 Public Ownership) Regulations 2009 (SI 2009/312) modify Pt 3 of the 2009 Act on bank
administration procedure as applied by s.152 (property transfer from temporary public ownership)
which applies bank administration where the Treasury make a share transfer order in respect of the
securities issued by a bank in accordance with s.13(2) (temporary public ownership), and later make
a property transfer order from the bank (or from a bank the parent of which is the bank's holding
company) under s.45(2) of the Act (temporary public ownership: property transfer).
The Banking Act 2009 (Bank Administration) (Modification for Application to Multiple Transfers)
Regulations 2009 (SI 2009/313) also modify the provisions in Pt 3, as applied by s.149(1) of the Act
(general application of Pt 3) where more than one property transfer instrument is made by the Bank of
England or the Treasury.
The Bank Administration (Sharing Information) Regulations 2009 (SI 2009/314) prescribe the classes
of information to be provided to the bank administrator, or on request to be provided by the bank
administrator, in order to allow the bank administrator to fulfil his duties in the bank administration
effectively.
The Banking Act 2009 (Parts 2 and 3 Consequential Amendments) Order 2009 (SI 2009/317) makes
modifications (including to the Financial Services and Markets Act 2000 and the Companies Act
2006) and amendments to certain Acts and statutory instruments as a consequence of Pt 2 (bank
insolvency) and Pt 3 (bank administration) of the Banking Act 2009.
Other statutory instruments, in relation to Pt 1 of the Act include:
The Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers)
Regulations 2009 (SI 2009/319) specify provisions which must or may be included in a third-party
compensation order made in accordance with s.59 of the Act in the case of a partial property transfer,
in particular to the treatment of those who were creditors of a banking institution immediately before a
partial property transfer took effect.
The Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009 (SI 2009/322) restricts
the making of partial property transfer instruments and orders under the Act and makes provision to
protect certain interests including security interests, set-off arrangements and netting arrangements.
See P.C.L. para.14.015; B.C.L.P. 77-150, 78-000.
Co. L.N. 2009, 247, 5-7
2012 Sweet & Maxwell and its Contributors