Vol 9 (2012) - Issue 2

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Bank Failures under the Banking Act 2009

Introduction
Following the issues encountered during the banking failures of the recent credit crisis, the Banking Act 2009 ('the Act') was introduced by the UK government with a view to creating a special resolution regime ('SRR') providing a framework for dealing with distressed UK banks and building societies.
The new regime was tested early on when, in March 2009, the Dunfermline Building Society in Scotland was placed into 'building society special administration'. However, we had to wait until 2011 for the regime to be tested south of the border in England.
On 16 June 2011, Malcolm Cohen and Mark Shaw, partners in BDO LLP’s restructuring team, were appointed Joint Bank Liquidators of Southsea Mortgage & Investment Company Limited (‘Southsea’). This followed a Court application by the Bank of England ('BofE') under the Act to place Southsea into Bank Liquidation.
The Southsea liquidation was the first time that the ‘bank insolvency’ procedure under Part 2 of the Act had been implemented. It also tested for the first time new targets given to the Financial Services Compensation Scheme ('FSCS'), the compensation fund of last resort for customers of authorised financial services firms. The new rules require that the vast majority of compensation payments should be made within seven business days of the bank insolvency, with a target for all payments being made within 20 business days of the insolvency.
Critically, the liquidation was also the first time in recent memory that the UK government decided not to 'top up' those depositors with account balances exceeding the maximum GBP 85k FSCS compensation limit – therefore a number of depositors have actually lost money as a result of the failure of Southsea, unlike in other recent bank failures when the decision to top-up compensation payments was made by the government of the time.

We look in this article to give a brief outline of the SRR as regards to the bank insolvency (liquidation) procedure contained in Part 2 of the Act. Appointments under the Act also throw up a number of practical issues and legal nuances to which insolvency practitioners must have regard, which we will also seek to identify during the course of the article.

Banking Act 2009
By way of brief background, Part 1 of the Act introduces the options and procedures available under the SRR, and the special resolution objectives which the UK tripartite authorities (the BofE, HM Treasury ('HMT') and the Financial Services Authority ('FSA')) must have regard to when using, or when considering the use of, the SRR powers and procedures. The special resolution objectives are identified below, and are focussed around the fundamental aim of protecting the integrity and stability of the UK’s financial and banking system, and confidence therein:
Objective 1: to protect and enhance the stability of the financial systems of the UK
Objective 2: to protect and enhance public confidence in the stability of the banking systems of the UK
Objective 3: to protect depositors
Objective 4: to protect public funds
Objective 5: to avoid interfering with property rights in contravention of a Convention right (within the meaning of the Human Rights Act 1998).

The SRR itself consists of:
– The three 'stabilisation options' being:
(i) Transfer (of all or part of the business of the bank) to a private sector purchaser
(ii) Transfer (of all or part of the business of the bank) to a bridge bank (a bank wholly owned by the BofE)
(iii) Transfer to temporary public ownership

Options (i) and (ii) were both used to deal with parts of the Dunfermline business referred to above.
– The bank insolvency procedure (i.e. liquidation)
– The bank administration procedure.