INTERNATIONAL INSOLVENCY INSTITUTE Eleventh Annual International Insolvency Conference New York

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1 INTERNATIONAL INSOLVENCY INSTITUTE Eleventh Annual International Insolvency Conference New York TOO BIG TO FAIL: INSOLVENCIES OF MAJOR FINANCIAL INSTITUTIONS BANK & BUILDING SOCIETY INSOLVENCY a UK perspective By Patricia Godfrey Nabarro LLP London June 13 & 14, 2011 International Insolvency Institute All rights reserved.

2 Bank insolvency law Evolution of Bank insolvency law Banking Act 2009 Dunfermline Building Society Update on recent legislation

3 Development of Bank insolvency law Absence of bank insolvency regime in the UK Northern Rock required rapid and significant response: Rescue under Banking (Special Provisions) Act 2008 Followed by Lehman Bros., Bradford & Bingley, Heritable, Kaupthing, London Scottish and Landsbanki

4 Banking Act 2009 Overriding objective: financial market stability Timing: in force since 21 February 2009 First use: Dunfermline Building Society, 30 March 2009 Special Resolution Regime ( SRR ) introduced: Stabilising measures Bank Insolvency Bank Administration

5 SRR - Stabilisation measures 3 pre-insolvency stabilisation options: The transfer of all or part of a bank s business to a private sector third party (private sale) The transfer of all or part of a bank s business to a bridge bank owned and controlled by the Bank of England (bridge bank) The transfer of all or part of a bank s business into temporary public ownership (nationalisation)

6 SRR - Stabilisation measures Exercise of SRR: Dunfermline Building Society Nationwide transfer Bridge bank Administration Partial Property Transfers

7 SRR New Bank Insolvency and Administration procedures Stabilisation powers pre-bank failure New insolvency regimes to deal with failure: Bank Insolvency procedure Bank Administration procedure Application to building societies: The Building Society Special Administration (Scotland) Rules 2009 (29 March 2009) Subsequent legislation

8 SRR Bank Insolvency Special modified liquidation procedures: Bank Insolvency procedure Building Society Insolvency procedure Objective: Prompt payment of eligible depositor claims under FSCS Procedure of last resort Ability to appoint provisional bank liquidator Use of Insolvency Act 1986 procedures

9 SRR Bank Administration Special modified administration procedures: Bank Administration Building Society Special Administration Procedures based on normal administration procedure Provisional bank administrator

10 SRR Bank Administration and Building Society Special Administration Appointment: Court order Conditions to be met Objectives: Objective 1: support private sector purchaser or bridge bank Objective 2: rescue residual bank or achieve better realisation than would be achieved on a winding up Objective 2 is secondary to Objective 1

11 SRR Bank Administration and Building Society Special Administration Effect of Bank Administration Role of the bank administrator: Administrator s powers and duties Administrator s proposals

12 SRR - Building Society Insolvency and Special Administration Wider issues also impacting financial institutions: Basel III Rescue and Recovery Plans ( Living Wills ) Cross Border issues and EU Framework for Crisis Management in the Financial Sector - update

13 Investment Banks The Investment Bank Special Administration Regulations 2011 Need for special provision arises because nature of business and holding clients assets Special Administration Appointment of administrators by court order, on application by The bank Creditors Government Regulator

14 Investment Bank Special Administration Objectives: Objective 1 : to ensure the return of client assets as soon as reasonably practicable Objective 2 : to ensure timely engagement with market infrastructure bodies and the Authorities Objective 3 : to rescue the bank as a going concern or to wind it up in best interests of the creditors

15 Investment Bank Special Administration Distribution of client assets Bar date for claims to assets may be set by administrator Pro rata distribution of assets of a particular description where there is a shortfall of such assets Distribution plan to be prepared by administrator, subject to court approval after a hearing at which interested parties may object: This overcomes the difficulty that a scheme of arrangement can be made with persons in their capacity as creditors but not as property owners

16 Investment Bank Special Administration Administrator must work with market bodies to facilitate default rules and settlement or prompt cancellation on market contracts or settlement instructions Administrator must work with the Authorities to minimise the disruption of businesses and markets as a consequence of the special administration order Providers of computer, data, data processing, network and similar supplies must continue to provide them, subject to payment of postadministration charges

17 INTERNATIONAL INSOLVENCY INSTITUTE Eleventh Annual International Insolvency Conference New York Patricia Godfrey Nabarro LLP Lacon House 84 Theobald s Road London WC1X 8RW T: +44 (0) F: +44 (0) M: +44 (0) E: p.godfrey@nabarro.com International Insolvency Institute All rights reserved.