Significant Irish Bank Stabilisation Law Passed

Transcription

1 Significant Irish Bank Stabilisation Law Passed (22/12/2010) This is the full article... The Irish President has signed the Credit Institutions (Stabilisation) Act 2010 (the Act) into lrish law. The Act grants far reaching and unprecedented powers to the Irish Minister for Finance to facilitate the restructuring and stabilisation of the troubled Irish banking sector. The Act contains many novel and significant restrictions on the rights of Irish bank creditors, shareholders, directors, employees and parties contracting with Irish banks. The Act reflects in many respects what has been agreed between Ireland, the EU and the IMF with respect to the stabilisation of the Irish banks. The Minister has stated that the Act is the first step in the introduction of a special resolution regime for Irish banks. The provisions of the Act will be called into play to facilitate the further recapitalisation of certain Irish banks and the further restructuring of Anglo Irish Bank and Irish Nationwide. The Act will also have broader implications for the Irish banks and their stakeholders. Background The Credit Institutions (Stabilisation) Act 2010 (the Act) has been passed into Irish law. The Act grants far reaching and unprecedented powers to the Minister for Finance (the Minister) to facilitate the restructuring and stabilisation of the troubled Irish banking sector. The Act contains many novel and significant restrictions on the rights of Irish bank creditors, shareholders, directors, employees and parties contracting with Irish banks. Following a meeting of the Irish Council of State yesterday, the Irish President, Mary McAleese, decided not to refer the new legislation to the Irish Supreme Court to assess whether its provisions are constitutional. The President then signed the Act into law. The Act reflects in many respects what has been agreed between Ireland, the EU and the IMF with respect to the stabilisation of the Irish banks. The Minister has stated that the Act is the first step in the introduction of a special resolution regime for Irish banks. Further legislation is expected by the end of February 2011 setting out a comprehensive special resolution regime in line with international practice. The provisions of the Act are to be called into play to facilitate the further recapitalisation of certain Irish banks and the further restructuring of Anglo Irish Bank and Irish Nationwide. The Act will also have broader implications for the Irish banks and their stakeholders. Given that the Act is a type of emergency legislation, its provisions are to apply only until 31 December 2012, unless extended. To which institutions will the Act apply? The Act will apply to Relevant Institutions, namely Irish registered banks that have received or will receive financial support from the Minister, Irish Building Societies, Irish Credit Unions, new entities set up to take transfers of assets or liabilities from Relevant Institutions and their respective subsidiaries and holding companies. It appears then that the legislation will not affect branches of overseas banks operating in Ireland or other Irish banks such as Ulster Bank Limited and non-retail banks which have not received financial support from the Minister. What is the purpose of the Act? The Act sets out in detail the purposes behind it to deal with the financial crisis generally, to address the threat to the stability of certain banks in Ireland and to the Irish financial system, to protect depositors and Irish tax payers, to protect the State s position under the bank guarantee scheme and to restore confidence in the Irish banking sector. It appears that these purposes are set out in some detail to enhance the constitutional arguments that the Act s exceptional provisions are necessary in the greater public interest. This is particularly important given that the Act contains a number of significant and novel restrictions on the constitutional and other rights of almost all stakeholders in Irish banks. What powers are given to the Minister? The Minister has four key powers to seek orders under the Act (the Orders) as follows: Direction Orders The Minister can issue a direction order to a Relevant Institution directing it to take specified actions. This includes issuing shares (notwithstanding any contractual, legislative or listing rules based restrictions, such

2 as pre-emption rights), de-listing from stock exchanges, altering the terms of its memorandum and articles of association (including alterations to shareholder rights), and, significantly, to dispose on specified terms of assets or liabilities or parts of a Relevant Institution s business. Special Management Orders The Minister can make a special management order appointing a suitably qualified special manager to a Relevant Institution for a period of 6 months, which period may be extended. This is one of the most significant powers under the Act. The special manager must take over the management of the business of the Relevant Institution and carry on that business as a going concern with a view to preserving and restoring the financial position of the Relevant Institution or any part of its business. Significantly, the special manager can acquire or dispose of assets and liabilities of the Relevant Institution as he sees fit. The special manager has sole authority over and direction of all officers and employees of the Relevant Institution. The special manager can with the Minister s consent substitute his own decision for any decision that would otherwise be made by the shareholders of the Relevant Institution. Shareholder remedies such as minority oppression actions and the right to call annual general meetings are suspended. While the special manager is in place, he is the sole person with authority to run the Relevant Institution, no legal proceedings (including in particular insolvency related proceedings) can be commenced without the consent of the Minister and there are restrictions on appointing receivers and taking enforcement action against the Relevant Institution. There are specific savers for the ECB and other EU national central banks which are significant holders of collateral provided by the Irish banks. The special manager with the consent of the Minister can remove any director without notice as well as any employee or consultant. There is no right to reinstatement but claims for compensation are preserved. The special manager can determine the role (if any) of the directors and officers of the Relevant Institution and their remuneration (if any). The determination of the special manager in these matters is binding. Clearly these provisions may have profound effects on board members and senior executives of the Relevant Institutions. The special manager s powers here are draconian by reference to traditional employment protection laws and limit the remedies open to dismissed senior executives to compensation for notice entitlements or unfair dismissal rather than reinstatement. The ability to secure High Court injunctive relief to restrain any removal is notably curtailed. However the risk of litigation and even constitutional challenge is likely to remain. Subordinated Liabilities Orders The Minister can make a subordinated liabilities order in relation to a Relevant Institution. Such an order can only be made with respect to subordinated liabilities, not senior liabilities. In deciding whether to make a subordinated liabilities order the Minister is obliged to consider, amongst other things, the financial position of the Relevant Institution, the extent of State support provided and to be provided, the viability of the institution in the absence of that support and the likely extent to which subordinated creditors would be repaid in a winding up in the absence of State support. A subordinated liabilities order may contain provisions altering virtually any term of a subordinated liability. For instance, an order could provide for the postponement, termination or suspension of specific rights, such as the right to payment of interest or principal or the right to declare an event of default, or for the granting of a shareholding in the Relevant Institution. Significantly, no proceedings can be initiated and no petition for winding up can be brought by a subordinated creditor against a Relevant Institution if a subordinated liabilities order has been made. This would effectively eliminate the sole remedy available to subordinated bondholders of Relevant Institutions as most subordinated bond terms provide that the only available remedy for a subordinated holder is to wind up the Relevant Institution. In addition, as a matter of Irish law, subordinated creditors cannot exercise set off rights against a Relevant Institution to which a subordinated liabilities order has been made. Transfer Orders The Minister can make a transfer order setting out the name of the transferee of assets and/or liabilities of a Relevant Institution, the terms and conditions of the transfer and the consideration or means of determining the consideration payable.

3 As anticipated, the Minister is empowered to provide financial incentives directly or indirectly to any person to become a transferee of a Relevant Institution s assets or liabilities. A financial incentive includes a payment, guarantee, exchange of assets or any other kind of financial accommodation or assistance. Any such financial incentive is recoupable as a debt owing by the Relevant Institution to the Minister. However, where any such financial incentive amounts to a State Aid, this would mean that Ireland would have to obtain prior approval from the European Commission before such aid could be granted. Such consent would involve Ireland (not the recipient) making a notification to the European Commission. A recipient of such a financial incentive would need to ensure that it is lawful, otherwise it may have to repay the value of the incentive to Ireland. The effect of a transfer order is that all assets and liabilities specified in the order whether located in Ireland or not are transferred to the transferee. The transferee becomes subject to the rights and obligations of the transferor and the transferor is no longer subject to those rights and obligations. The Act contains detailed provisions dealing with the transfer of accounts, properties, contracts, security interests and other assets of a Relevant Institution. There is a specific provision dealing with netting agreements (such as ISDA Master Agreements) which must be transferred in full, thus preserving the special status of these agreements in Irish law. Section 65 of the Act also states that nothing in the Act affects the operation of key pieces of Irish netting legislation, such as Netting of Financial Contracts Act 1995 and the Financial Collateral Regulations A transfer of assets and liabilities is expressed to take place notwithstanding any duty or obligation owed to any person, any statute, rule of law, code of practice or other agreement requiring notice to be given to any person or any consent or approval required from any person. Real estate, Companies Act and other public filings would not have to be carried out. Clearly these are significant provisions, particularly in the context of non-irish situate assets and liabilities. The local law treatment of any such transfer would have to be examined in light of the provisions of the Irish Act. This is considered further below. While the Act provides that no Irish stamp duty will be payable on any transfer order it does not address any other Irish taxes that may arise on the transfer of assets or liabilities under a transfer order. There may also be foreign tax consequences. How are these orders made? Can they be challenged? The process for the making of any Order is braodly the same. It is a two step process whereby the Minister proposes the terms of an Order and the Irish High Court is then asked to consider and approve it on an expedited basis. The Minister first makes a proposed Order to the Relevant Institution if he/she is of the opinion that making that Order is necessary to attain one of the purposes of the Act as summarised above. The proposed Order can state that it is made with the intention of preserving or restoring the financial position of the Relevant Institution and that it constitutes a reorganisation measure within the meaning of the Credit Institutions Winding Up Directive 2004 (CIWUD), as discussed below. Save in exceptional circumstances, the Minister has to notify the Relevant Institution and the institution has at most 48 hours to agree or make submissions to the Minister on the proposed Order. A Relevant Institution can consent to the making of an Order and if it does the Relevant Institution can comply with its terms before it is approved by the Court. The Minister must then apply to the Irish High Court ex parte for approval of the relevant Order. The Court can only consider or vary the Order on specific limited grounds. A report by the Irish Central Bank in relation to the financial position of the Relevant Institution is admissible in evidence. It appears that the Court approval process is included here to further bolster the arguments that these exceptional measures are constitutional. Generally an Order takes effect five working days after it is made. If the Relevant Institution challenges the proposed Order it must do so within the five day period. Such a challenge can only be made on narrow and specific grounds. There is no provision for any other party to challenge the Order in this way. Exceptionally, the Court must give an Order immediate effect where the purpose of the Order is to ensure the immediate issuance of share capital to the Minister to prevent an imminent breach of regulatory

4 capital requirements or there is an urgent financial stability need. Rights of judicial review of any decision under the Act are restricted and there are limited rights of appeal to the Supreme Court from a High Court decision. How will foreign assets and liabilities be treated? Section 41 of the Act contains specific provisions dealing with the foreign assets and liabilities of Relevant Institutions. Certain of these provisions mirror provisions set out in the National Asset Management Agency (NAMA) legislation passed in In essence, the Act provides for the transfer to the greatest extent possible of assets and liabilities in foreign jurisdictions using the range of available Irish legal techniques to achieve such transfers. The extent to which this is effective would have to be assessed in each relevant jurisdiction. Significantly, the Act uses the CIWUD reorganisation measures concept outlined above to provide for extra territorial recognition of certain Orders within the EU. This approach is similar to the approach adopted in the German Bank Restructuring Act published earlier in The CIWUD applies within the EU and provides in essence that an Irish bank must be reorganised or wound up under Irish law regardless of where in the EU its assets are located. Accordingly, if an Order under the Act constitutes a reorganisation measure within the meaning of CIWUD then on the face of it the terms of that Order would have to be recognised in each other EU State. The Act provides that certain Orders will constitute reorganisation measures for the purposes of the CIWUD. The Minister can also institute proceedings in other jurisdictions to enforce orders under the Act. The extent to which any foreign Court would permit any such enforcement would be a matter for the relevant foreign law in each case. It is interesting to note that the enactment of the Act, its publication, any Ministerial or Governmental statement relating to the Act or the making of any Order are not to cause any trigger, termination, default, enforcement or similar event under contracts to which a Relevant Institution is a party. However, if this is deemed by the Minister to be unduly onerous in any particular circumstances, these provisions can be disapplied. Again, the treatment of this provision in the context of foreign law contracts would have to be considered in each case. What additional powers will the Minister have? The Minister is given a range of additional powers, some of which overlap with the special manager s powers as outlined above. For instance: Removal and Appointment of Directors: The Minister can remove any director or officer or employee of a Relevant Institution without notice. Again, compensation claims are preserved but reinstatement is not available. The Minister can appoint directors to a Relevant Institution subject to Central Bank approval. No shareholder approval or other formalities need be observed. Exercise Shareholder Rights: Section 47 of the Act provides that the Minister can exercise any power exercisable by the shareholders of a Relevant Institution in place of the shareholders. New Directors Duties: Section 48 imposes a new duty on directors of Relevant Institutions which is owed directly to the Minister on behalf of the State and takes priority over any other duty to the extent of any inconsistency. The new duty is to have regard to the matters set out in section 4(f) of the Act, which are the purposes for which the Act was enacted. As mentioned above these include matters such as protection of depositors and Irish taxpayers, the need to provide credit to the Irish economy, to protect the State as guarantor under the bank guarantee scheme and to align the public interest with the activities of the Relevant Institution. It is notable that the Minister can publish guidelines in relation to the duty imposed under Section 48 and a director can rely on those guidelines in demonstrating compliance with this new duty. In addition, where a Relevant Institution is under special management, its directors will be required to continue to comply with all of their statutory and common law duties unless relieved of a duty or obligation by the special manager, or by a provision at the Act. However, while the Minister may publish guidelines in relation to the new statutory duty under Section 48 which directors may rely on to demonstrate compliance with that new duty, there seems to be no comparable provision where the institution is under special management. In either case, without such guidance it may be difficult for bank

5 directors to work out where their loyalties lie in a given case, especially as it would appear that they could potentially have duties and responsibilities to their company under the Companies Acts, other legislation and at common law on the one hand and to the Minister on the other. Impose new requirements: The Minister can impose significant new requirements on relevant institutions and their holding companies for the purposes of the Act. These include the obligation to suspend for up to six months any specified activity, to draw up restructuring plans, to change management and to comply with capital requirements. Similar to the NAMA legislation, the Relevant Institution must disclose in utmost good faith all matters and circumstances in relation to the institution to the Minister. The requirement to comply with any such direction overrides any other law, agreement or requirement. Make financial support conditional: Section 51 empowers the Minister to impose terms and conditions which any other provider of financial support would impose. This provision can be used to prevent the making of bonus payments by Relevant Institutions to employees or officers where the Minister states that a condition of further financial support is that such bonus payments are not made. This procedure has attracted much media attention in the case of certain AIB employee bonus payments. This is a novel solution and appears to have been included in response to a specific situation in AIB but is likely to have much broader application to Relevant Institutions. The intention is to provide a retrospective defence for a Relevant Institution, on the basis of frustration of contract or overriding public interest, to any contract law or statutory claim that a bonus is due. However, it is untested in the Courts and there may still be individual litigation claims where bonuses (and particularly deferred bonuses) otherwise earned are unpaid. Competition Law The legislation disapplies Irish competition law in connection with share issuances, the appointment of special managers, the acquisition or disposal of assets and any transfer order. However, EU and other countries competition laws are not, and could not be, disapplied. This means, for example, that EU State aid approvals would have to be obtained by Ireland for any transactions involving aid and EU merger clearances would have to be obtained for certain mergers arising as a result of the legislation. Conclusion The extensive range and scope of new powers given to the Minister under the Act will come under significant scrutiny by the Irish banks, their shareholders, directors, employees, contractual counterparties and creditors. This is significant stabilisation and restructuring legislation which in certain respects has been mandated by the EU and the IMF. Many of the provisions of the Act have been anticipated already. The interesting and challenging part will be to see how the stabilisation measures are implemented and how they will be interpreted by the Courts, both in Ireland and overseas. Note: This note comments on the general terms of the legislation. It should not be taken as a substitute for specific legal advice on any matter.