Peter Smith J :
INTRODUCTION
- This is a trial of an Ordinary Application issued on the 13th February 2009 by the Applicants the Joint Administrators of Kaupthing Singer & Friedlander Limited ("the Administrators" and "KSF" respectively) for directions under paragraph 63 of Schedule B1 of the Insolvency Act 1986.
- The purpose of the Ordinary Application is to seek the Court's determinations of questions relating to sums totalling £147,436,226.05 deposited in an account (number GB92BKEN10000050002236) in the name of KSF at the Bank of England ("the Account" and "BoE" respectively) by KSF on 6th and 7th October 2008. KSF was placed into administration on 8th October 2008.
- Procedural orders were made by Blackburne J (13th February 2009 and 12th March 2009) and by David Richards J on 29th April 2009.
- Paragraph 4 of the Ordinary Application raised 10 substantive issues as follows:-
CREATION AND OPERATION OF A TRUST
4.1. Was a valid trust created over some or all of the monies standing to the credit of the Account?
4.2. If the answer to question 4.1 is that a valid trust was created over some but not all of the monies standing to the credit of the Account, over which monies was a valid trust created?
4.3. If a valid trust was created over monies standing to the credit of the Account, who were the beneficiaries of the trust?
4.4. If a valid trust was created over monies standing to the credit of the Account, what were the terms of the trust, and how was the trust to operate in relation to withdrawals made by persons holding accounts with KSF ("KSF Account Holders")? In particular:-
4.4.1. If a KSF Account Holder had a nil balance on his account with KSF on 1 October 2008 and KSF paid monies into the Account in respect of deposits made by the KSF Account Holder into his account after 1 October 2008, how was the trust to operate in relation to subsequent withdrawals made by the KSF Account Holder from his account?
4.4.2. If a KSF Account Holder had a credit balance on his account with KSF on 1 October 2008 and KSF paid monies into the Account in respect of further deposits made by the KSF Account Holder into his account after 1 October 2008, how was the trust to operate in relation to subsequent withdrawals made by the KSF Account Holder from his account?
4.5. If the answer to question 4.4 is that under the terms of the trust, KSF would become absolutely entitled to the respective proportion of the monies standing to the credit of the Account when KSF Account Holders withdrew money from their accounts after 1 October 2008, what was the consequence (if any) if KSF did not, in fact, withdraw any sums from the Account in accordance with its entitlement?
4.6. If KSF accepted "deposits" from "customers" within the meaning of paragraph 2 of the First Supervisory Notice dated 3 October 2008 which was served by the Financial Services Authority on KSF, but then failed to make corresponding payments into the Account in respect of such "deposits", did those "customers" nevertheless obtain any (and if so what) interest in the monies standing to the credit of the Account? In particular how would such interests affect or rank as regards the interests of any other persons (including KSF) in the monies standing to the credit of the Account?
The ING Transfer Order
4.7. If a valid trust was created over monies standing to the credit of the Account for the benefit of KSF Account Holders, how (if at all), were the interests of KSF Account Holders in such monies affected by the transfer of KSF's rights and liabilities in respect of Kaupthing Edge fixed term deposit accounts and savings accounts to Deposits Management (Edge) Limited and thereafter to ING Direct NV ("ING Direct") pursuant to the Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008 (SI 2008 No. 2674) (the "Transfer Order") on 8 October 2008?
4.8. If the answer to 4.7 above is that the interest of any KSF Account Holder in the monies standing to the credit of the Account was extinguished if the rights and liabilities in respect of his account were transferred to ING Direct pursuant to the Transfer Order, did KSF or some other person(s) become entitled to the respective proportions of the monies standing to the credit of the Account?
4.9. In any case found to result under 4.7 and 4.8 above, does any person(s) who provided finance in connection with the Transfer Order have any (and if so, what) equitable or restitutionary remedy in respect of monies standing to the credit of the Account?
FSCS payments
4.10. If a valid trust was created over monies standing to the credit of the Account for the benefit of KSF Account Holders, how (if at all), were the interests of KSF Account Holders in such monies affected by any compensation paid to such KSF Account Holders by the Financial Services Compensation Scheme, and in particular, did the FSCS become entitled to the interests of such payees?
DIRECTIONS
- In her first witness statement dated 12th February 2009 Margaret Elizabeth Mills ("Ms Mills"), one of the Administrators identified (paragraph 71) 8 separate categories of persons who might be potentially interested in the determination of the legal issues relating to the Account as follows:-
"Category 1: Trade creditors of KSF and any KSF Account Holders who did not make deposits during the period 2-8 October 2008 (the "Relevant Period") and in respect of whom KSF did not transfer monies to the Account;
Category 2: KSF Account Holders in respect of whom monies were transferred to the Account corresponding to the deposits made by those KSF Account Holders and whose accounts were not transferred to ING Direct pursuant to the Transfer Order and who are not eligible to make a claim for compensation from the FSCS;
Category 3: KSF Account Holders in respect of whom monies were transferred to the Account corresponding to the deposits made by those KSF Account Holders during the Relevant Period and whose accounts were not transferred to ING Direct but who are eligible to make a claim for compensation from the FSCS (regardless of whether or not, at the date of the Application, such KSF Account Holders have, in fact, exercised their right to claim compensation and have assigned claims to the FSCS);
Category 4: KSF Account Holders with Edge Savings Accounts in respect of whom monies were transferred to the Account corresponding to the deposits made by those KSF Account Holders into their Edge Savings Accounts during the Relevant Period and whose Edge Savings Accounts were then transferred to ING Direct;
Category 5: KSF Account Holders with Edge Deposit Accounts in respect of whom monies were transferred to the Account corresponding to the deposits made by those KSF Account Holders into their Edge Deposit Accounts during the Relevant Period and whose Edge Deposit Accounts were then transferred to ING Direct;
Category 6: KSF Account Holders in respect of whom monies were transferred to the Account corresponding to the deposits made by those KSF Account Holders during the Relevant Period, although on an alternative interpretation of the Notice, it may be arguable that the accounts held by those KSF Account Holders should not have been treated as "customer" accounts or, alternatively, the deposits to those accounts should not have been treated as "deposits" under the terms of the Notice[1];
Category 7: KSF Account Holders with overdrawn accounts who deposited monies with KSF during the Relevant Period for the purposes of reducing or eliminating such overdrafts or discharging obligations under linked loan accounts but in respect of whom KSF transferred monies to the Account corresponding to the deposits made by those KSF Account Holders;
Category 8: KSF Account Holders in respect of whom KSF ought, on a true construction of paragraph 2 of the Notice, to have transferred monies to the Account corresponding to deposits made by such KSF Account Holders in the Relevant Period but in respect of whom KSF did not in fact transfer monies to the Account corresponding to deposits made by such KSF Account Holders in the Relevant Period."
- At the adjourned hearing before Blackburne J on 12th March 2009 the following orders were made as to representation:-
a) Bruce McNess (a representative of the Trustees of the Singer &Friedlander Limited Pensions Assurance Scheme), Kaupthing Singer Friedlander (Isle of Man) Limited ("KSFIoM"), Transport for London ("TFL"), Her Majesty's Treasury ("HMT"), and the Financial Services Compensation Scheme ("FSCS") as Respondents.
b) That Bruce McNess be appointed as a representative of creditors in categories 2, 3 and 6.
c) That KSFIoM be appointed as a representative of the creditors in category 8.
d) That TFL be appointed as a representative of the creditors in category 1.
e) In addition Blackburne J made orders as to costs and directions as to evidence.
- A PTR was subsequently heard on 29th April 2009 by David Richards J. Shortly before the PTR the Administrators discovered that Bernadette Willoughby rather than Bruce McNess was one of the Trustees. She was accordingly appointed First Respondent in place of Mr McNess.
- Further by the time of the hearing before David Richards J concerns had arisen as to the ability of KSFIoM to represent all of the creditors falling within category 8 in relation to the issues listed at paragraph 4.1 to 4.3 of the Ordinary Application. Therefore the Administrators sought and obtained from David Richards J permission to advance arguments at trial on behalf of creditors in category 8 other than KSF group companies, banks and financial institutions ("Sub-Category 8 Creditors"). Pursuant to that a separate team in the Administrators' solicitors (Freshfields Bruckhaus Derringer LLP) were appointed to advance the arguments on behalf of that sub category. This team also instructed separate Counsel (Ms Mary Stokes).
- On 8th May 2009 each Respondent served "position papers" setting out their contentions on the matters in issue, in accordance with the order of David Richards J.
- Previously it had been determined that it was not necessary to seek a representation order in respect persons falling within the fourth, fifth or seventh categories identified by Ms Mills at paragraph 71 of her first witness statement on the grounds that such persons could not on any conceivable basis have an interest in the Account.
BRIEF INITIAL BACKGROUND SUMMARY
- This can be distilled from paragraphs 6-45 of Ms Mills' first witness statement dated 12th February 2009.
- KSF was authorised under Part IV of the Financial Services and Markets Act 2000 ("FSMA 2000") to carry on banking business in the UK. In 2006 KSF was acquired by an Icelandic bank Kaupthing Bank HF ("Kaupthing HF"). KSF offered bank accounts to various corporate and retail customers. As at the time of the administration the total physical cash receipts of KSF amounted to £3.9 billion.
- Among the bank accounts offered by KSF were "Edge Accounts". These were internet accounts which offered higher rates of interest compared to similar accounts offered by other financial institutions. KSF offered two kinds of Edge Accounts namely Kaupthing Edge Savings Accounts and Kaupthing Edge Fixed Term Deposit Accounts. The former offered instant access without penalty and the Deposit Accounts were fixed term accounts, the terms and conditions of which imposed penalties on depositors who made withdrawals before the end of the fixed term.
- In 2008 KSF and its parent Kaupthing HF were severely affected by the turbulent international financial markets. As a result KSF in late September 2008 suffered a sudden deterioration in its liquidity position and a collapse in public confidence. As a result of this collapse in confidence in KSF the Financial Services Authority ("FSA") decided in early October 2008 that it was necessary to take measures to protect the interests of persons depositing funds with KSF in the event that KSF was unable to avoid insolvency proceedings.
- It is important to appreciate that the measures taken were not to assist KSF but rather to protect certain depositors in the event that KSF failed and became insolvent.
- Accordingly on 3rd October 2008 the FSA issued a First Supervisory Notice to KSF ("the Notice"). Paragraph 2 of the Notice required KSF to open a segregated Trust Account with the BoE. On opening this Account KSF was required to credit it with a cash amount which was at least equal to "deposits" received from "customers" on 2nd and 3rd October 2008. Further KSF was required to credit the Trust Account with a cash amount at least equal to the value of subsequent "deposits" received from "customers". The Notice however did not define "deposits" or "customers" for the purpose of paragraph 2 of the Notice.
- KSF opened the Account. On Monday 6th October 2008 KSF credited sums to the Account in respect of deposits it had received on 2nd and 3rd October 2008 from certain KSF Account Holders. The relevant amounts credited were £39,509,801.11 (2/10/08) and £40,730,365.49 (3/10/08). Later, on the same day KSF credited £33,360,415.83 to the Account in respect of deposits received on that date. On 7th October 2008 KSF credited the sum of £35,000,000 to the Account in respect of deposits received on that date. However, KSF subsequently concluded that this involved an overpayment of £1,164,356.38. Accordingly, on 8th October 2008, KSF withdrew this sum from the Account. The net sum credited by KSF to the Account in respect of deposits received on 7th October 2008 was £33,835,643.62.
- On 8th October 2008 HMT made the Transfer Order in the exercise of its powers under the Banking (Special Provisions) Act 2008.
- Copies of the Notice and the Transfer Order are annexed to this Judgment.
- Pursuant to the Transfer Order all Edge Savings Accounts and Edge Deposit Accounts with KSF were transferred to a special purpose vehicle known as "Deposits Management (Edge) Limited" ("DMEL"). It was owned by the BoE. The Edge Accounts were then transferred on to ING Direct. This transfer was funded by the payment to ING Direct of an amount equal to the liabilities assumed less £5,000,000 by HMT and the FSCS.
- On 8th October 2008 after the Edge Accounts had been transferred to ING Direct KSF was placed in administration by an order of the Court on an application made by the FSA under section 359 FSMA 2000(the "Administration Order"). The Administrators were appointed on that date.
- The Notice was made privately between the FSA and KSF in the sense that it was not made with public knowledge. In particular any person or institution that made a deposit after 2nd October 2008 but before the Administration Order would have been unaware of the terms of the Notice or even its existence. The same applied to the Transfer Order. Shortly before the Transfer Order the FSA emailed the General Counsel to the FSCS notifying him that at 11.15 that day a decision had been made by the Executive Committee of the FSA to declare KSF in default under the provisions of COMP 6.3.2 R of the FSA Compensation Sourcebook. This followed a determination by the Executive Committee that KSF no longer met the threshold conditions. A decision by the Chairman of the Regulatory Decisions Committee was made to vary the permission of KSF with effect from 1.30 pm on 8th October 2008 to prevent it accepting deposits from any new customers.
- The amount payable to ING Direct by HMT/FSCS has not been finally determined. Various payments that will feature in the judgment are summarised in a note in appendix 2. As the note says the figures are approximate. The amount payable to ING Direct was approximately £2.995bn. The split between HMT/FSCS is the difference between the limits of statutory compensation payable by the FSCS which on 8 October 2008 was £50,000 per customer and the balance of the sums being paid by HMT.
- I will deal with the effect of the Transfer Order further in this judgment. In effect it operated as a statutory novation whereby ING Direct assumed the former obligations of KSF to the Edge depositors and in exchange the FSCS and HMT provided ING Direct with enough funds to meet those obligations. It was involuntary as regards the depositors in question.
- This occurred in extraordinary times and was carried out pursuant to an extraordinary power under section 12 of the Banking (Special Provisions) Act 2008 ("BSPA 2008") which provides as follows:-
"12 Consequential and supplementary provision"
(1) The Treasury may by order make—
(a) such supplementary, incidental or consequential provision, or
(b) such transitory, transitional or saving provision, as they consider appropriate for the general purposes, or any particular purposes, of this Act or in consequence of any provision made by or under this Act, or for giving full effect to this Act or any such provision.
(2) An order under this section may in particular—
(a) disapply (to such extent as is specified) any specified statutory provision or rule of law;
(b) provide for any specified statutory provision to apply (whether or not it would otherwise apply) with specified modifications;
(c) make provision for or in connection with any of the matters mentioned in subsection (3).
(3) Those matters are—
(a) imposing a moratorium on the commencement or continuation of proceedings or other legal processes of any specified description in relation to any body or property of any such description;
(b) providing exceptions from any provision made in pursuance of paragraph (a), whether framed by reference to—
(i) the leave of the court or the consent of the Treasury or the Bank of England, or
(ii) instruments or transactions of specified descriptions,
or otherwise;
(c) the dissolution of any relevant deposit-taker or of any UK undertaking which is a subsidiary undertaking of any relevant deposit-taker;
(d) exempting directors of any relevant deposit-taker, or of any group undertaking of any relevant deposit-taker, from liability in connection with acts or omissions in relation to the deposit-taker or undertaking;
(e) the payment of any compensation by the Treasury to persons affected by an order under this section."
- I set out some figures which are significant to the issues which arise in the Ordinary Application. Many people will be surprised to learn that the regulatory system does not cover all banking operations. It only protects certain types of depositors and has compensation limits. It regulates the ability of an institution to accept deposits from these protected depositors ("Regulated Depositors") but does not restrict the ability of an institution to take deposits from other depositors ("Non Regulated Depositors"). The category of Non Regulated Depositors is very wide. The thinking behind this lack of protection is as I understand it that Non Regulated Depositors are largely institutions who ought to be able to look after themselves. Some of the issues draw out this different approach quite markedly when examined.
- As at 2nd October 2008 KSF was understood to hold approximately £3.2 bn as representing deposits of 170,000 individual UK depositors of which £2.8 bn represented 169,000 Edge depositors with a balance of £420,000,000 representing 1,300 other depositors.
- KSF's liquidity position deteriorated sharply so that:-
a) On 30th September 2008 Moody's placed its credit rating for Kaupthing HF on review for possible downgrade and Fitches downgraded KSF's long term Issuer Default Rating from A- to BBB.
b) In the period from the launch of the Edge product in February 2008 down to 30th September 2008 KSF had received substantial net inflows from depositors. On that date there was a £37,000,000 net outflow.
c) On 30th September 2008 the FSA required KSF to draw down on a £1.1 bn deposit placed on rolling next day basis with its parent Kaupthing HF. However, Kaupthing HF was unable to make the payment resulting in a significant breach of KSF's liquidity requirements.
- In paragraph 21 and following of the Notice the FSA set out reasons for giving the Notice. These relate largely to the difficult state the Icelandic economy had reached at that stage. Although it was submitted to me by Mr Dicker QC who appears for HMT and FSCS that the purpose of the Notice was to try and save KSF the reality is that the purpose of the Notice was to set in place a regime to provide a short term measure of protection by requiring KSF to match relevant deposits made by relevant customers after the Notice pound for pound in the Trust Account which was subsequently set up with the Bank of England. It must be appreciated as I have said that the general public were not aware of the existence of the Notice. It will be appreciated that the general relationship between banker and customer is that of debtor and creditor. All depositors therefore were creditors at 3rd October 2008. It is plain given the factual matters summarised above (which are taken from paragraph 16 of Mr Maxwell's witness statement on behalf of HMT dated 20th April 2009) that KSF was insolvent or virtually so. Nobody disagreed with Mr Tamlyn's statement in his submissions (on behalf of creditors in category 8) that as at that date KSF was "a busted flush". KSF was not aware of the Notice being on its way and had no discussions with the FSA or HMT about it. The Chief Executive Officer of KSF Mr Armann Thorvaldsson was called to a meeting at the FSA's offices on 3rd October 2008. He was handed the Notice at that meeting.
- Subsequent to the service of the Notice KSF attempted to comply. There will be more on this later in the judgment.
- The only other option as at 3rd October 2008 it seems to me would have been to do what was done on 8th October 2008 namely give notice that KSF was in default and revoke its license to take regulated deposits and put it into administration.
- It is clearly appreciated that when a company becomes insolvent the broad intention of the insolvency legislation (subject to the statutory exceptions) is to gather in the company's assets and distribute them equally between the unsecured creditors so that as far as possible they pro rata suffer the consequences of the insolvency. The intent of the insolvency legislation therefore is for unsecured creditors to be treated pari passu. Had KSF gone into insolvency on 3rd October 2008, all existing depositors at that time (both Edge and non Edge) would have been treated equally under the insolvency regime. However Edge depositors ("Edge Depositors") would have the additional benefits of the FSCS subject to the limits (£50,000 by then) applicable to that scheme. All depositors would be required therefore to prove in the insolvency.
- During the period from 3rd October to KSF's demise on 8th October huge transactions occurred. It is difficult to imagine the pressure that everybody was under at that time but I have no doubt it was substantial. As Ms Bonnie Mendelsohn, (a solicitor employed by Freshfields Bruckhaus Deringer LLP and a member of the separate team which was appointed to represent the interests of Sub-Category 8 Creditors) points out in her witness statement dated 11th May 2009 (paragraph 5 (ii) (c) KSF was deluged with requests for withdrawals from KSF Account Holders. In the ordinary course of business about 300 payments would be made out in a day but on 7th October 2008 KSF was instructed by the Account Holders to process and pay out more than 5,800 payments in Sterling alone. This put KSF under great pressure.
- Equally it is not possible to imagine at this stage the pressures on the Regulatory Authorities both at the FSA and HMT when attempting to deal with the situation in early October which clearly was unique to everybody's memory who had to deal with it. As appears from the approximate summary set out in appendix 3 the total physical cash receipts of KSF in the period between 2nd and 8th October 2008 were approximately £3.9 bn. Of that sum £946,000,000 was initially identified as possible "customer" "deposits". Of these possible "customer" "deposits" the sum of £652,000,000 was removed on the basis that it represented proceeds of transactions carried out by KSF itself, such as money market transactions. A further sum £141,000,000 was removed on the basis that it was received from financial institutions or group companies. That left approximately £153,000,000, of which £147,000,000 was transferred to the Account and £6,000,000 equivalent of foreign currency which was not transferred (because it was apparently perceived in KSF that the Notice only applied to Sterling deposits).
- All of the Edge Accounts were transferred to ING Direct under the Transfer Order. Thus the amount in the Account of £147,000,000 represents a significant amount in figures terms but amount to a little under four percent of the total amount of Edge deposits transferred to ING Direct.
- As the outside world knew nothing of the Notice KSF continued to receive deposits and make repayments. The withdrawals accelerated over the period. In rough terms it will be seen that £141,000,000 apparently was received from financial institutions or KSF group companies. Those monies were not transferred to the Account but went into KSF's general funds. That category is not entitled to any statutory compensation. During the period 3rd – 8th October approximately £41.300,000 was paid out in respect of depositors with accounts which were not Edge Accounts ("Non Edge Depositors") and £500,000,000 was paid out in respect of Edge Depositors. In addition KSF received funds representing the £147,000,000 that were placed in the Account from depositors identified as falling within the terms of the Notice.
- The general body of creditors (category 1) given the large amount of repayments during the period as against the credits, in effect funded those repayments. Creditors in category 1 also funded the repayment of Edge deposits received by KSF after the Notice was issued which were matched in the Account and repaid before 8th October. Such persons have been included in the Transfer Order but will ultimately have no entitlement thereunder because at the time they were not depositors with KSF having been repaid. It was not possible at the time given the large number of Accounts to identify how many persons were in that position.
- Equally creditors in category 8 (£141,000,000) have funded the cashflow exercise to a certain extent to cover the repayments (both to Edge Depositors and Non Edge Depositors) and the funds transferred to the Account.
- It follows therefore that a number of the categories of the creditors are worse off as a result of the operation of the Notice. First creditors in category 1 funded the Account, although there will have been corresponding deposits. Nevertheless, category 1 creditors in addition funded the repayment of any Edge Depositors whose funds were matched in the Account and who were repaid before 8th October 2008. Their position of these category 1 creditors is also worsened because £41,300,000 (repaid to Non Edge Depositors) and 500,000,000 (repaid to Edge Depositors) have been paid out of the general funds of KSF.
- The sum in the Account now exceeds £147,000,000 because of interest having been credited. Approximately £127,000,000 of that was in respect of identified Edge Depositors. The balance of approximately £20,800,000 is the total amount paid in to the Account by KSF following deposits made by Non Edge Depositors. Of those a sum of £3,000,000 represented a single deposit by a local authority which was included by KSF although on reflection it was considered by KSF that the local authority ought not to have been so included. That figure falls possibly within category 6 and is represented by the First Respondent who also represents categories 2 and 3.
- It follows from that analysis of the payments in and out after the date of the Notice and the funding of the Account that unless the other categories of creditors, beyond the claims of HMT and FSCS participate in some way beneficially in the Account, FSCS and HMT will have accrued benefits at the expense of the general creditors as at 3rd October 2008 and more significantly in my view, at the expense of the Non Regulated Depositors who made deposits in good faith without any knowledge of the existence of the Notice after 3rd October 2008.
THE NOTICE
- As can be seen from the Notice it was split in to a number of parts. The first part sets out the actions required. The serving of the Notice was stated to be pursuant to sections 43, 45 and 48 of FSMA 2000.
- Section 43 enables a permission to engage in a regulated activity under FSMA 2000 to include such requirements as the FSA considers appropriate. Under sub-section 2 the requirement in particular might be imposed (a) so as to require a person concerned to take specified action or (b) so as to require him to refrain from taking specified action. Under sub-section 3 a requirement may extend to activities which are not regulated activities. There was a significant argument on this power between the parties as appears further. A "regulated activity" is defined in section 22 as being an activity for the purpose of FSMA 2000 if it is an activity of a specified kind which is carried on by way of the business and (a) relates to an investment of a specified kind or (b) in the case of an activity of a kind which is also specified for the purpose of that paragraph is carried on in relation to property of any kind. A regulated activity may only be carried out by "an authorised person" (section 19). The issue here involves accepting deposits which is a regulated activity (schedule 2 paragraph 4).
- "Deposits" are defined for this purpose by paragraph 5 (2) of the Financial Services and Markets Act 2000 (Regulated Activities Order 2001 ("RAO"). That defines "deposit" to mean "a sum of money, other than one excluded by any of article 6 to 9A paid on terms: (a) under which it will be repaid, with or without interest or premium, and either on demand or at a time in circumstances agreed by or on behalf of the person making the payment and the person receiving it; and (b) which are not referable to the provision of property (other than currency) or services or the giving of security".
- Under section 59 FSMA 2000 "customer" is defined to mean "in relation to an authorised person, ……a person who is using, or who is or maybe contemplating using, any of the services provided by the authorised person"(section 59 (11)).
- The expressions "customers" and "deposits" are not defined in the Notice. There is a major issue between the various contenders as to whether the statutory definitions of customers and deposits apply to the Notice or different meanings more commonly understood in banking law apply.
- The list of exclusions in paragraphs 6 to 9A of RAO is lengthy. It includes "an authorised person who has permission to accept deposits or to effect or carry out contracts of insurance" (paragraph 6 (1) (a) (ii)), the National Savings Bank (ibid sub-paragraph (iv), a Local Authority (ibid sub-paragraph (viii), monies paid by a person other than one mentioned in sub-paragraph (a) in the course of carrying on a business consisting solely or to a significant extent of lending money (paragraph 6 (1) (d)) and inter company payments between members of the same group (ibid paragraph (c)).
- It is not disputed that if these statutory provisions apply to the Notice that the following principal sorts of "deposit" are precluded from being comprised in the Notice:-
1 In categories 6-7:-
a) Monies paid to KSF to service interest or repay principal in respect of a loan
2 Monies paid in reduction of an overdraft with KSF
3 Monies paid in by Singer & Friedlander Leasing Limited
4 In category 8:-
a) Monies paid in by other banks and financial institutions
b) Monies paid in by other KSF group companies
- The Notice sets out in paragraph 2 what KSF was required to do pursuant to it. The requirements are as follows:-
a) immediately open a segregated trust account (the 'account') with the Bank of England, or another account provider in the United Kingdom which has been approved in writing and for this purpose by the FSA, on the terms set out in (d) and (e) below;
b) upon opening the account, credit it with a cash amount which is at least as great as the aggregate value of the deposits accepted by the Firm from its customers during the course of 2 and 3 October 2008 (the 'initial deposits');
c) thereafter credit the account with a cash amount which is at least as great as the value of any subsequent deposits accepted by the Firm from its customers from time to lime (the 'subsequent deposits');
d) hold money standing to the credit of the account on trust for the benefit of the customers referred to in (b) and (e) above according to their respective interests in it (which shall be the amount of their deposit(s) less any sum withdrawn on their account); and
e) apply the money standing to the credit of the account solely to repay the initial deposits and the subsequent deposits lo those customers.
- Crucially the words deposits and customers are not defined as I have said. The intent appears to be to require KSF to open the relevant Trust Account and put cash in it at least as great as the value of deposits accepted by it from customers from 2nd and 3rd October 2008 and thereafter credit the account with a cash sum which was at least as great as the value of any subsequent deposits accepted by it from customers from time to time.
- Under sub paragraph (d) it was required to hold the money to the credit of the Account on trust for the benefit of the customers "less any sum withdrawn on their account". Finally under sub paragraph (e) it was required to apply the money standing the credit account solely to repay the initial deposits and the subsequent deposits to those customers.
- It will be seen that the obligation on KSF was to provide a matching payment as regards deposits received. The deposits would of course have been paid into its general accounts pursuant to the normal banker/customer relationship. The matching payments into the Account will have been drawn also from the general accounts of KSF. It should be noted as a matter of detail that when sub-paragraph (d) is talking about sums withdrawn from "their account" it does not mean the Account in KSF's name at the BoE. It means money withdrawn out of the KSF Account Holder's own account with KSF. In fact no monies have yet been repaid out of the Account although as I have said at least £500,000,000 was repaid to Edge Depositors and £41,300,000 was repaid to Non-Edge Depositors in the period. It is not yet possible to identify which Edge Depositors whose payments were matched in the Account have actually been repaid despite having the benefit of the Transfer Order in their favour to ING Direct. It follows that any repayments that have been made pursuant to sub-paragraph (d) have been funded out of the general body of the assets of KSF.
- If the statutory definition of the words deposits and customers is applicable to the Notice only the Edge Depositors and possibly the Non-Edge Depositors where HMT and/or FSCS has agreed or will agree compensation on the basis that the FSCS takes an assignment of those depositors' rights will be beneficiaries under the trust if properly created pursuant to the Notice.
COMPETING DEFINITION FOR DEPOSITS AND CUSTOMERS
- Bernadette Willoughby for categories 2, 3, and 6, KSFIoM (representing banks, other financial institutions and KSF group companies in category 8) and TFL have different contentions as to the meaning of the word "deposit" in particular.
- By contrast the sub-category 8 depositors and HMT and FSCS argue for the statutory definitions being applicable to the Notice.
- Mr Isaacs QC who with Marcus Haywood appears for Bernadette Willoughby, opened the arguments for the first alternative meaning. He submitted that the ordinary natural meaning of the word "customer" would mean someone with "some sort of account" with a bank. This was based on the meaning given to that word under section 82 of the Bills Exchange Act 1882: see Great Western Railway Co v London and County Banking Co Ltd [1901] AC 414 at paragraph 420-421.
- In the case of "deposit" his contention is that it is to be given its ordinary natural meaning namely "a sum of money paid on terms that it would be repayable". Mr Tamlyn who appeared for the KDFIoM supported Mr Isaacs QC's analysis but disagreed with the suggestion that it extended to foreign currency deposits. By way of contrast Ms Stokes who appeared for the sub- category 8 creditors argued that the statutory definition of "customers" and "depositors" should apply and that to give the word "depositors" its ordinary natural meaning "depositors" included foreign currency depositors.
- Mr Gillis QC who with Sam O'Leary appeared for TFL on behalf of creditors in category argued for the wider definitions of "customer" and "deposit" but submitted it only extended to those categories who had actually had funds matched in the Account. He had some primary arguments that no effective trust was actually created. However his primary submission regarding the identity of beneficiaries of the trust is as I have set out above (paragraph 52 of his skeleton argument). TFL's arguments flow from an analysis of the way in which KSF responded to the Notice.
KSF'S RESPONSE TO THE NOTICE
- Somewhat surprisingly I have not had any direct evidence from anybody within KSF who had responsibility for implementing the Notice. I have indirect evidence via the first witness statement of Ms Mills. Upon receipt of the Notice the staff at KSF developed a specific IT script designed to select all transactions from customers who had "customer" in the account description or account type field. The transaction listing was then manually adjusted for transactions that KSF deemed to be outside the scope of the Notice. Accordingly various transaction types were excluded namely (i) money market deposits, (ii) KSF investment management, (iii) KSF group companies and (iv) all banks and financial institutions. This was under the supervision of Ian Carrigan the Manager of Operations at KSF. Ms Mills in paragraph 20 of her first witness statement deposed that the transfers were directed by Mr Carrigan in the belief that in transferring money to the Account he was carrying out the obligations of KSF under the Notice. Whether he believed it or not does not in my view have any relevance in construing the effect of the Notice. Sums equivalent to payments identified by the IT script, subject to the ones that were manually stripped out were transferred on 6th October 2008 to the Account.
- The Account had been set up as a result of emails exchanged between Jim Young the Company Secretary of KSF and Joanna Place of the BoE in an exchange of emails that passed between them on Sunday 5th and Monday 6th October 2008. In relation to deposits into Edge Accounts KSF did not rely on the programme to identify the customer deposits but instead relied upon the latest figures available on KSF's computer system shortly prior to transfer into the Account. I have set out above the amounts so identified. Foreign currencies were excluded. A similar exercise took place in relation to deposits made on Monday 6th and Tuesday 7th October 2008. No deposits were made into the Account after 7th October 2008.
- A withdrawal of £1,164,356.38 was permitted from the Account on 8th October 2008. This was because KSF had made an overpayment into the Account on 7th October 2008 and the BoE permitted the withdrawal of the monies back to the KSF account.
LACK OF EVIDENCE
- Not only has the FSA the giver of the Notice not provided any evidence it is not a party to these proceedings. I accept (see below) that the FSA's evidence as to the meaning and effect of the Notice is not admissible in the construction of its meaning and effect. However as I have set out above the FSA had a power under section 43 (3) FSMA 2000 to make a requirement that extended to activities which were not regulated activities. I do not see evidence as to what powers the FSA decided to exercise is inadmissible in relation to the construction of the subsequent exercise. To be deprived of evidence of the organisation which gave the Notice is not helpful. The same is the position concerning the Transfer Order. Whilst it is true I have evidence from Mr Maxwell a director in the International and Finance Directorate at HMT his evidence is limited (see paragraphs 15-30) I will examine this evidence in more detail when I come to the Transfer Order in the next section.
THE TRANSFER ORDER
- As can be seen from paragraph 18 of Mr Maxwell's witness statement following the service of the Notice KSF's liquidity position was monitored. It is clear that it was hoped that in the short period after the service of the Notice a measure of comfort would be provided so as to enable KSF to continue receiving deposits. This created a short breathing space within which to find a buyer of KSF as a going concern. Such efforts failed and shortly after midnight on 8th October 2008 the FSA was informed by Kaupthing HF that its efforts to sell KSF had been unsuccessful.
- The intervention of HMT arose from a larger concern as to the risks posed by the Icelandic banking crisis. These concerns are set out generally in paragraph 20 of Mr Maxwell's witness statement. HMT was clearly concerned that the Icelandic crisis of which KSF's liquidity difficulties were part posed a serious threat to the stability of the UK financial system within the meaning of section 2 (2) BSPA 2008 so that it concluded that its powers under that enactment were exercisable. I have set out above the wide ranging powers found in section 12 of that Act.
- According to paragraph 21 of Mr Maxwell's witness statement HMT's desire was to protect the retail depositors without regard to the limitation of the compensation scheme to maintain stability of the system but to achieve that purpose it was considered unnecessary that KFS's wholesale depositors needed to be similarly protected. A number of options were considered the third of which was transferring KSF's retail deposit book only to a bank or special purpose vehicle controlled by HMT. This is the option which was fastened upon and it was effected by means of the Transfer Order. Before making the Transfer Order, HMT consulted with the FSA and the BoE and it was arranged with the FSA that its decision to debar KSF from accepting new deposits would be exercised so as to take effect after the exercise of the Treasury's power under BSPA 2008. This was because the powers conferred under that Act were exercisable only in respect of an "authorised UK deposit-taker" so that arguably it could not exercise those powers after the FSA had taken action to debar KSF from accepting new deposits.
- Negotiations ensued with ING Direct in relation to the transfer of Edge Accounts starting late on 7th October 2008 and lasting until about 7am on 8th October 2008. The discussions centred on an assumption that ING Direct of liabilities in respect of Edge Depositors in return for a payment from FSCS matching the amount of compensation it would otherwise have to pay under the statutory compensation scheme plus a top up payment from HMT equalling the balance of the liabilities to be assumed by ING Direct in aggregate minus an amount (ultimately £5,000,000) representing the consideration payable by ING Direct.
- The effect of the Transfer Order was that the amount of liabilities in respect of the Edge Depositors was transferred to ING Direct and assumed by it (estimated at the time to be approximately £3 bn). Payments were to be made to ING Direct to cover that amount less the agreed consideration.
- This therefore applied to the totality of the Edge Depositors with KSF (over 170,000 in total).
- In respect of the Non-Edge Depositors who comprised a complicated mix of wholesale depositors and wealthy private individuals with high minimum balances. HMT was apparently advised that it would take the FSCS a number of weeks to establish which of those individuals were eligible for compensation under the statutory scheme. Since they constituted a relatively restricted class it was decided apparently that it was unnecessary for the achievement of BSPA 2008 section 2 (2) purposes that these Non-Edge Depositors should be transferred under the terms of the Transfer Order. Instead their claims would be dealt with separately in the ordinary course subject to HMT making a top-up payment to the fund compensation beyond the limits of the FSCS's compensation amount. This treatment has some significance in construing the Transfer Order. The figures are approximately £20,000,000.
TERMS OF TRANSFER ORDER
- The entirety of the Transfer Order is annexed to this judgment. The Transfer Order was made by statutory instrument on 12.05 pm on 8th October 2008 and came into force 10 minutes later and was subsequently laid before Parliament at 4pm on the same day. It was made (inter alia) pursuant to HMT's powers pursuant to section 12 of BSPA 2008. The first transfer was a transfer to DMEL. DMEL was then named "Frontpedal Limited" but was in the process of changing its name to Deposits Management (Edge) Limited. Pursuant to paragraph 3 (1) the liabilities of KSF to the Edge Depositors were transferred to DMEL. From the effective time it was provided that DMEL should have the same rights in relation to each holder of an Edge Account as it would have if KSF's relevant terms of business applied. Any requirement for consent was overridden and clause 6 prevented the arising of any interest or right of any third party relating to any of the transferred rights and liabilities or any such right becoming exercisable by virtue of or in connection with the Transfer Order.
- A second transfer took place immediately after the first transfer whereby DMEL transferred the rights and liabilities in relation to the Edge Accounts onward to ING Direct. Paragraph 12 had a similar prohibition in respect of third party rights.
- Part 4 of the Transfer Order contained provisions applicable to the FSCS compensation scheme as follows:-
"Application of Part 3"
13. This Part applies where, before the effective time, Kaupthing is in default for the purposes of rule 6.3.1 of the COMP Sourcebook. Sums to be paid to ING following the second transfer
14.—(1) The following liabilities arise at the second transfer time—
(a) the FSCS is liable to pay (as soon as practicable) to ING an amount equal to the amount that eligible claimants would, immediately before the effective time, have been entitled to
claim from the FSCS in respect of claims against Kaupthing in relation to relevant protected deposits; and
(b) the Treasury are liable to pay (as soon as practicable) to ING an amount equal to the aggregate amount of the liabilities transferred to ING under the second transfer less the amount specified in sub-paragraph (a) and less £5,000,000, and the Treasury shall subsequently make the necessary adjustment such that Kaupthing obtains
the benefit (net of all costs and liabilities incurred by Deposits Management (Edge)) in connection with the first or second transfer or its obligations under this Order of the reduction of £5,000,000 referred to in sub-paragraph (b).
(2) For the purposes of paragraph (1)(a), if the quantification date for a claim would have been a date other than the date on which Kaupthing was determined to be in default for the purposes of section 6.3 of the COMP Sourcebook, the amount that an eligible claimant would have been entitled to claim from the FSCS is the lesser of—
(a) the amount which the FSCS quantifies as being the value of that claim as at immediately before the effective time; and
(b) the amount which would have been payable at the quantification date, if different, for that claim.
(3) In paragraph (2), "quantification date" has the meaning given in rule 12.3.1 of the COMP Sourcebook.
(4) As soon as practicable after the second transfer time—
(a) Kaupthing shall estimate the aggregate amount of the transferred liabilities;
(b) the FSCS shall pay to ING the amount it is liable to pay under paragraph (1)(a) as estimated by the Authority; and
(c) the Treasury shall pay to ING an amount equal to the amount estimated by Kaupthing in accordance with sub-paragraph (a) less the amount estimated by the Authority in
accordance with sub-paragraph (b) and less £5,000,000.
(5) From time to time—
(a) the FSCS may revise the estimate of its liability under paragraph (1)(a); and
(b) Kaupthing may revise the estimate of the aggregate amount of the transferred liabilities.
(6) In consequence of paragraph (5), the FSCS, the Treasury and ING shall make such corresponding payments to each other as are necessary to ensure that the FSCS and the Treasury have each paid to ING the amount required (and no more than the required amount) to meet their liability under paragraph (1).
(7) If at any time after the effective time Kaupthing is placed into administration, the references to Kaupthing in paragraphs (4) and (5) are to be treated as references to the administrator.
(8) The liability referred to in paragraph (1)(a) shall be assessed by the FSCS and, in doing so, the FSCS may calculate, by any methodology or approach it considers appropriate, the total amounts of compensation that would have been paid to all eligible claimants if (and to the extent
that) it considers that the costs of ascertaining the entitlement to and the amount of compensation by reference to each eligible claimant would exceed or be disproportionate to the benefit of doing so.
Payment to ING to constitute payment of compensation for the purposes of the Financial Services Compensation Scheme
15. For the purposes of Part 15 of the 2000 Act (the financial services compensation scheme), the COMP Sourcebook and the FEES 6 Chapter (including, without limitation, the power of the FSCS to impose levies)—
(a) all payments by the FSCS to ING under article 14 shall constitute the payment of compensation to each eligible claimant under the Financial Services Compensation
Scheme in accordance with their respective entitlements in respect of claims against Kaupthing for relevant protected deposits;
(b) in relation to a relevant protected deposit, each eligible claimant—
(i) is deemed to have made an application for compensation for the purposes of rule 3.2.1(1) of the COMP Sourcebook; and
(ii) is deemed to have accepted an offer of compensation made by the FSCS and to have received payment of such compensation for the purposes of rule 11.2.1 of the COMP
Sourcebook, and, accordingly, an eligible claimant has no right to claim, and the FSCS has no obligation to pay, for a relevant protected deposit any further compensation under the Financial Services Compensation Scheme in respect of the default of Kaupthing determined by the Authority under
section 6.3 of the COMP Sourcebook. Liability of Kaupthing to the FSCS and the Treasury
16.—(1) Kaupthing is liable to the FSCS in respect of an amount equal to the amount which would have been provable in the administration of Kaupthing in respect of the transferred liabilities had this Order not been made and had Kaupthing been placed in administration immediately before the effective time.
(2) The FSCS shall pursue recoveries from Kaupthing in respect of the liability under paragraph (1) to the extent reasonably practicable.
(3) Subject to paragraph (4), if an eligible claimant had, in relation to a relevant protected deposit, a liability to Kaupthing which would have been capable of being set-off against a liability of Kaupthing to that claimant in an administration or liquidation of Kaupthing (if that liability had not been transferred), the amount which the FSCS is entitled to recover in the administration or liquidation shall be taken to be the sum of—
(a) the amount of the reduction in the depositor's liability to Kaupthing as a result of the application of the set-off; and
(b) the amount which would have been recovered in respect of the balance of the claim (if any) provable in the administration or liquidation of Kaupthing.
(4) Paragraph (3) applies only to the extent that its application does not have the effect that the other creditors of Kaupthing are in a worse position than they would have been had the set-off been applied.
(5) The FSCS shall determine the proportion of any amount which it receives or recovers from Kaupthing which is properly attributable to each type of liability described below and shall promptly, on receipt, account for that receipt or recovery as follows—
(a) in full to the Treasury, to the extent that—
(i) the receipt is attributable to a transferred liability; and
(ii) the person to whom such a transferred liability is owed would not have been entitled to make a claim for compensation from the FSCS immediately before the effective time;
(b) by reference to the relevant proportion, to the extent that—
(i) the receipt is attributable to a transferred liability;
(ii) the person to whom such a transferred liability is an eligible claimant; and
(iii) the amount of such liability exceeds the maximum compensation that the eligible claimant would have been entitled to claim from the FSCS immediately before the
effective time;
and where the receipt is attributable to a transferred liability owed to an eligible claimant in relation to a relevant qualifying deposit and the amount of such liability is equal to or less than the maximum compensation that the eligible claimant would have been entitled to claim from the FSCS immediately before the effective time that amount shall be for the account of the FSCS.
(6) In paragraph (5), the "relevant proportion" is the proportion of the total liabilities which arise under article 14(1) for which the Treasury are liable.
(7) If Kaupthing is in administration, the liability incurred under paragraph (1) shall not be treated as an expense of the administration under paragraph 99(3) of Schedule B1 of the 1986 Act or rule 2.67 of the Insolvency Rules.
(8) Nothing in this Part shall have the effect that the FSCS recovers less than it would have recovered if this Order had not been made".
- The effect of the Transfer Order is to provide for an involuntary (as regards Edge Depositors) novation of their rights as against KSF concerning their deposits to ING Direct. Given its terms it is difficult to see how those Edge Depositors can have achieved any better protection (otherwise than repayment in full I suppose before the event happened).
- The effect of paragraph 14 is that HMT tops up the statutory compensation for each transferred depositor above the £50,000 limit. It must be appreciated that the FSCS compensation scheme is funded by levies raised on regulated deposit takers. The payment made by HMT is of course funded out of the Government's resources. The liabilities transferred pursuant to the Transfer Order are in excess of £3 bn.
- As I have said above there may be some adjustments for those figures. As a result of the large number of accounts that were transferred it was not possible to ascertain the final position. There maybe some instances where post 2nd October 2008 depositors were repaid in full or part up until 8th October 2008 but were transferred to ING.
- The vast bulk of the balance standing to the credit of the Edge Accounts transferred was not of course covered by the Notice, as the Notice only covered fresh deposits made in the period from 2nd October 2008. The amount transferred into the Account (approximately £126,000,000 as regards the holders of Edge Accounts) remains as yet undistributed save the overpayment which was made.
- Paragraph 15 was much debated before me. In effect the clause treats all payments made by FSCS to ING Direct to be deemed to have been made on the basis that the Edge Depositors who were eligible for compensation were deemed to have made an application for compensation, to have accepted the offer of compensation made by FSCS and to have received payment of such compensation by virtue of the payments made by FSCS to ING Direct under paragraph 14. Accordingly it provided that an eligible claimant would have no further right to claim and FSCS had no obligation to pay in respect of a relevant protected deposit any further compensation under the statutory compensation scheme arising out of KSF's default as determined by the FSA.
- The Transfer Order does not expressly deal with the sums in the Account.
- Under paragraph 16 KSF remains liable to FSCS in respect of an amount equal to the amount which would have been provable in its administration in respect of the transferred liabilities if the Transfer Order had not been made and KSF had been placed into administration immediately before the effective time.
- Under paragraph 16 (5) the FSCS is required to determine the proportion of any amount which it receives or recovers from KSF which is properly attributable to each type of liability referred to in that sub-paragraph. It then has to account in effect to HMT in respect of any sum that is received in excess of any compensation that was payable by the FSCS.
- The position of HMT and FSCS is that paragraph 15 is to be construed as an assignment by each Edge Depositor of all rights of recovery it had against KSF for the full amount of its deposits. That clearly means that in relation to the monies in the Account FSCS might well obtain a sum in respect of certain deposits into Edge Accounts which had been matched in the Account that exceeds the statutory limit for compensation. HMT and FSCS's stance is that that excess has been assigned to FSCS by paragraph 15 and under paragraph 16 (5) the excess is payable to HMT to reimburse it for the payment it made to ING Direct in respect of such transferred Edge Depositors.
- It must be appreciated this only applies to the £126,000,000 covered in the Account; by far the largest amount of monies standing to the credit of Edge Accounts held by Edge Depositors are not covered by the protection afforded by the Account; these Edge Depositors would have been general unsecured creditors but their position has been saved by the FSCS and HMT by virtue of the Transfer Order so that they have not suffered any loss because their rights against KSF have been transferred to ING Direct which is solvent. FSCS and HMT therefore subject to any rights to prove in the insolvency of KSF under paragraph 16 of the Transfer Order with all the other creditors have laid out a substantial amount of money to ensure the Edge Depositors as a group do not suffer any loss arising out of the insolvency of KSF.
- However as I set out above if HMT and FSCS's claim to the funds in the Account representing Edge Depositors is in their favour to the exclusion of all other potential claimants to an interest in such funds that will have been partly funded at the expense of the general creditors (as regards at least any repayments in the period 2-8 October) and generally by other Non-Regulated Depositors who deposited funds with KSF after 2nd October 2008 (£141,000,000 approximately). Those potential claimants will also have refunded the repayments to Edge Depositors and Non-Edge Depositors (£500,000,000 and £41,300,000 respectively) in the same period.
- To the extent that those potential claimant's funds are used indirectly to fund the monies put in the Account and are successfully claimed by HMT/FSCS they will reduce FSCS's requirement to make levies for its funding from all other regulated deposit-takers and will reduce the drain on HMT's general resources. I remind myself that both the Notice and the Transfer Order took place without any of the other parties affected by it being aware of their existence let alone their provisions.
WAS A TRUST CREATED BY THE NOTICE?
- Despite the unpromising platform posed to it by the wording of clause 2 of the Notice TFL argues that no effective trust was created. No other party takes this stance. TFL represents trade creditors of KSF and KSF Account Holders who did not make deposits in the relevant period and in respect of whom KSF did not credit monies to the Account (category 1).
- The other parties accept a trust was created but disagree as to the beneficiaries.
TFL'S CONTENTIONS
- TFL contends no valid trust was created as KSF manifested concurrent contradictory intentions as to who were to be the beneficiaries of the trust. As a result it contends that the requirement for certainty as to the objects of a trust was not satisfied. It submitted that the conduct of Mr Carrigan acting on behalf of KSF evidenced an intention to create a trust for a different class of objects from that suggested by what might be said to have been an express declaration of trust on the terms of the Notice.
- As an alternative TFL contends that it is Mr Carrigan's conduct that determines the objects of the trust and that the only beneficiaries are those who have had funds matched in the Account. TFL focused on the conduct of Mr Carrigan and Mr Young another officer of KSF. Mr Carrigan's conduct in question is his decision as to what accounts were covered or not covered by the Notice and as transferred under his direction.
- These submissions involve analysing the email traffic that passed between KSF and the BoE.
- I have set out above how the Notice was given to KSF. The Notice required KSF to create a trust on the terms as set out in that Notice. It is important to appreciate that this is not a usual method for the creation of a trust. It is entirely involuntary in the hands of the settlor; KSF as settlor is being required to set up a trust in the terms of the Notice.
- The Notice was apparently discussed between Mr Young KSF's company secretary and Joanna Place of the BoE. Mr Young sent an email at 23.09 on 5th October 2008 to (inter alia) Ms Place. In that email he said "….in compliance with the Supervisory Notice issued by the Financial Services Authority on 3rd October 2008 this email constitutes notice to the Bank of England that all monies deposited in the Trust Account are to be held on trust for the customers of [KSF] in accordance with the terms of a Supervisory Notice. I should be grateful if you would acknowledge receipt of this email by return by way of acknowledgment of the trust status of the account.
- She replied at 6.54 am on 6th October 2008 "Jim Thank you. The monies deposited will be held on trust as set out in your email". Mr Young then forwarded the email to Andrew Honey at the FSA and he acknowledged it at 7.09 am on 6th October 2008.
- In her witness statement Ms Mendhelson set out the various categories of deposits that were considered by Mr Carrigan. As I have said Ms Mills has stated (insofar as it was relevant) that Mr Carrigan believed that he was acting in accordance with the terms of the Notice.
- The third witness statement of Ms Mills (paragraphs 10-17) provided more information as to how the Account was actually set up by KSF. An initial meeting was held on 4th October 2008 at KSF's offices to determine what needed to be done to comply with the Notice. That meeting was attended by Mr Young, Steve Waldron Director of Operations, John Deighton Assistant Director of Operations, Pablo Vergara the Head of Treasury and Mr Carrigan. Despite the clear importance of that meeting no notes were taken apparently. Mr Young took over the responsibility for communications with the BoE on 5th October 2008 and he sought legal advice first concerning the terms and conditions provided by the BoE and following that advice sent an email to Mr Cole at the BoE outlining concerns in relation to the terms and conditions. Having received a response from Mr Cole he reported to Mr Thorvaldsson and Bernadette Willoughby (the First Respondent) (the Chief Operating Officer at KSF) who then both signed the BoE account mandate. Mr Young provided a copy of the mandate letter to the FSA.
- Mr Young' concerns were somewhat limited. His first concern was to require an acknowledgment by BoE that the Account was a trust account and because of this trust status there could be no set off as between the account and any other obligations that KSF might have to the BoE. Mr Cole replied referring to paragraph iv of the BOE letter dated 5th October 2008 which said that the Account and monies must be operated in accordance with any requirements imposed by the FSMA 2000 or by the FSA and in particular the requirements imposed on KSF by the FSA in the Notice. Mr Young raised this with the FSA by sending the email to Julia Dunne at the FSA. That email was sent at 15.13. She passed it on to somebody called Chris Finney at the FSA and he emailed Mr Young at 18.24. In his email Mr Finney stated that he understood Mr Young's concern and asked for copies of the documents. These were sent four minutes later to him. I cannot see a reply or subsequent communications but it will be recalled that Mr Young had received Mr Cole's email at 15.07 referring to paragraph iv and he sent back the relevant signed documentation to Mr Cole at 18.14 on 5th October 2008.
- The position is not entirely clear but it seems to me that KSF were satisfied as to the two issues which concerned them about the Account.
- The second area raised by TFL is the way in which Mr Carrigan decided the status of customers or deposits for the purpose of compliance with the Notice. As I have set out above a significant number of categories were excluded by Mr Carrigan. These included banks and financial institutions and KSF group companies (although he included KSF Leasing Ltd). He also credited on 2nd October 2008 £3,000,000 to the Account in respect of a deposit received from a local authority. Later he decided that was a mistake but the money is still there. He also excluded foreign currency deposits. This appears to have not been done as a matter of principle but because the Account was denominated in Sterling.
- It is difficult to imagine the pressure that Mr Carrigan and his team were under at this time. He apparently did not seek any advice as to the meaning of the words "customer" or "deposit" and he appears to have made his own decisions as to inclusion or exclusion.
- TFL's position is that Mr Carrigan by his conduct declared a trust in respect of certain deposits only thereby identifying those customers (not others) as beneficiaries of the trust. Mr Young by the exchange of emails declared the Account would be held on trust for the customers of KSF in accordance with the Notice. TFL submits these are not identical so there are contrary indications.
- This in my view is to misinterpret matters. First this is an unusual trust as I have said because it is an involuntary trust imposed on KSF by the FSA. Mr Carrigan has no power to create any other trust. I cannot believe for one minute that he did anything that he believed was outside the terms of the Notice. That is indeed the evidence of Ms Mills on this point. Mr Carrigan had no power therefore to create a trust at variance with the Notice and did not intend to do so.
- The only trust that KSF was obliged to create and the one which it was purporting to create is the one that was enforced on it by the Notice. This it did by the exchange of emails and the emails in my view make it quite clear that the Account was a trust in accordance with the Notice and nothing more.
- Whether Mr Carrigan's decisions fell within the Notice involves a matter of construction and analysis of the competing submissions of the various parties to this action. I therefore do not accept TFL's submission that there was no effective trust created. KSF constituted the trust when the first payments were made into it following its setting up.
CLIENT ACCOUNT OR CLASS BENEFICIARIES?
- Once the trust was constituted by the first deposits into the Account the question arises as to who were the beneficiaries. TFL's secondary submission is that the trust is established by reference to Mr Carrigan's conduct and operated as a trust in favour of those customers in respect of whom transfers into the Account were made. The question of the extent of the beneficiaries will particularly impact on creditors in category 8. Creditors in that category are KSF Account Holders in respect of whom KSF ought to have transferred money to the Account corresponding to deposits made by such Account Holders (if they were supposed to be covered) but in respect of whom KSF did not in fact transfer monies to the Account. The figure is at least £141,000,000 and maybe there will be further sums in respect of foreign currency if it is determined that foreign currency depositors fell within the class of beneficiaries identified in the Notice upon its true construction.
- Two possible analyses of the nature of the Account were debated in argument. One is to draw an analogy with a solicitor's client account. A solicitor's client account is not a series of accounts but is one account in respect of which all clients' monies are deposited but each client's share is determined according to the amount set out in his ledger. The accounts are credited and withdrawn by reference to each individual client and there is no question (for example) of any part of the client account deposits being used for anything other than distribution as that client might nominate or decide. On that basis of course no client obtains an interest in the client account until he has sums credited in respect of it. On that analysis if Mr Carrigan omits (wrongly) to make matching payments for some depositors (i.e. the category 8 creditors in respect of foreign currency deposits for example) none of those classes will obtain an interest despite the fact that they ought to have had such an interest because no matching monies in respect of their deposits were paid into the Account.
- The other countervailing argument (put forward most vigorously by Mr Tamlyn) is that if the trust extends to all those people whether or not KSF made a matching payment into the Account in respect of their deposits; they share in all of the sums standing to the credit of the Account pro rata to their deposit whether or not their deposit has specifically been matched. If that did not happen then the failure of Mr Carrigan (if established) to make payments would simply leave such depositors with an unsecured claim against KSF for damages for breach of trust for failure to make a matching payment into the Account in respect of their deposits. As they will already be proving in the insolvency as general creditors that will not actually give them any greater comfort.
PRIMARY ISSUES
- There are two primary issues to be resolved before the questions can be answered. First it is necessary to construe the Notice and second it is necessary to construe the Transfer Order.
- In neither case does any party assert that the wording of the Notice or the Transfer Order is mistaken so as to give rise (for example) to a claim for rectification.
PRINCIPLES OF CONSTRUCTION
- The principles of construction are set out in the well known judgment of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 as follows:-
"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (see Mannai Investments Co. Eagle Star Life Assurance Co Ltd [1997]http://www.bailii.org/uk/cases/UKHL/1997/19.html 2 WLR 945.
(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera S.A. Salen Rederierna A.B. 19851 A.C. 191, 201:
. . . if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."
- These principles apply to trust documents also see IRC v Botnar [1999] STC 711 per Mance LJ as he then was.
- These principles are now well known and all parties accept that they apply to the construction of the Notice (and the construction of the Transfer Order).
- There are a number of factors which in my judgment are relevant and some which are irrelevant.
- First the trust to be construed is set out in clause 2 of the Notice as referred to in the email sent by Mr Young to the BoE at 23.09 on 5th October 2008. Any other contention in my view is unsustainable.
- One then comes to the meaning of the words "customers" and "deposits". I disregard Mr Carrigan's decision as to what he thought were within those definitions. I can only infer his belief by reference to the accounts he excluded. His evidence as to his belief that he was complying with the Notice is not admissible to construe it. He is in no better position than the draftsman of a document (see Rabin & Ors v Geron Berger Association Limited [1986] 1 WLR 526 C.A.)
- Mr Tamlyn on behalf of banks, financial institutions and KSF group companies in category 8 submits that the ordinary meaning should be given to the words "customer" and "deposits". However he excludes from the ordinary meaning any foreign deposits. Ms Stokes who appears for the other sub-category 8 creditors submits that the meaning of the words "customer" and "deposits" are to be derived from the statutory provisions as I have set out above thereby excluding Non Regulated Depositors. She however submits that there is no basis for excluding Regulated Depositors whose accounts are in a foreign currency.
- Mr Tamlyn struggled to maintain his argument that the meaning of the word "customer" and "deposit" did not extend to foreign currency depositors when arguing for the ordinary natural meaning of those two words to be applied to the Notice. As Ms Stokes persuasively set out in her skeleton argument and reinforced in her oral submissions if the expression "deposit" is given its ordinary natural meaning namely a sum of money paid on terms that it would be repayable an ordinary and natural meaning as interpreted by the Courts of the word money will include money in a foreign currency see The Halcyon The Great [1975] 1 WLR 515 at page 520 and Miliangos v Frank (Textiles) Ltd [1976] AC 443 at pp 464 G to H. Although her submission was in respect of including foreign deposits for the purpose of Regulated Depositors in my judgment her submissions are correct if one is applying the ordinary and natural meaning of the word "deposit".
- I accept her submission and reject Mr Tamlyn's submission and the like submissions made by Mr Isaacs QC in respect of creditors in categories 2, 3 and 6. Accordingly I determine that depositors for the purpose of the Notice include foreign currency depositors. The amount of foreign currency deposits received by KSF between 2nd and 7th October 2008 inclusive was approximately £7.5 million Sterling equivalent. I do not believe that there are any difficulties about this merely because the Account was a Sterling account. In reality just as in the papers produced before me the exercise merely involves converting the currency at the date of the transfer into the Account. It must be appreciated that the monies in the Account are not the monies deposited with KSF; rather they match monies deposited and are designed to provide a measure of protection. It is true that the amount in the Account will fluctuate with currency fluctuations but nobody can predict precisely which way this will go and the reality is that the foreign currency depositors (regulated or not) would prefer to have a corresponding sum at a fixed rate in the Account than no such sum at all.
- In my view the foreign currency deposits ought to have received a Sterling equivalent payment into the Account as at the date that ought to have occurred.
- There will need to be further submissions I suspect in relation to how the foreign currency deposits are calculated for the purpose of determining their interest in the trust.
- I am reinforced in this in my view by the fact that the evidence such as it is of Ms Mendhelson in paragraph 8 of her witness statement suggests that Mr Carrigan did not exclude foreign investors as a matter of principle but rather because of logistical difficulty and intended transferring the requisite matching sums on 10th October 2008. That of course was overtaken by events. By the evidence of Ms Mendhelson (paragraph 8) although I reject that evidence which purports to set up difficulties in respect of the foreign deposit holders it is clear that Mr Carrigan did not as a matter of principle exclude foreign deposits. This reinforces my view although I of course accept that Mr Carrigan's evidence as to what he believed the trust was is firstly not admissible and second for the reasons I have already set out cannot in effect constitute the trust merely to the deposits which he has directed to be matched in the Account. Equally for example the £3,000,000 deposit into the Account if it was not within the categories specified in the Notice it does not become money for the purposes for the trust created by the Notice merely because Mr Carrigan mistakenly put it into the Account. That is not seriously disputed by anybody in the light of the decision of Lewison J in Re Griffiths (deceased) [2009] Ch 162. In fact as appears further in this judgment I have determined that the local authority deposits are covered by the Notice so that any further consideration of the destination of the £3,000,000 does not arise. In case I am wrong and that it is determined elsewhere that local authority deposits are not within the ambit of the trust constited by the Notice then in my view that sum would be recoverable by the Administrators for the benefit of KSF generally as money paid under a mistake.
- It seems to me important to set out the background that applied at the time of the giving of the Notice. KSF's difficulties were not a one off difficulty which affected one institution at that time. If it were such a case I can well understand the Notice might well be limited to the Regulated Depositors that affected KSF. However it is plain in my view from the wording of the Notice that the FSA (in concert with BoE) and HMT were not merely concerned with the immediate impact on Regulated Depositors of KSF but were concerned generally about the impact on the financial system if KSF was allowed to collapse as part of the collapse of the Icelandic banks. Thus whilst the reasons for the decision contained in the Notice refer to the regulatory powers paragraph 10 for example, refers to the need to maintain confidence in the financial system operating in the United Kingdom. This also appears to be supported by the evidence of Mr Maxwell (section (C)) where he discussed the collapse of KSF in the context of the Icelandic bank crisis and the potential impact of a collapse of KSF on the market confidence in the UK financial system.
- The evidence shows (such as it is) that KSF was plainly insolvent or virtually so by 2nd October 2008. Given that scenario if KSF had gone into insolvency on that date then all the existing depositors would have become unsecured creditors but those who were regulated would be protected by the FSCS up to its compensatory limits. There is no evidence to show that given the overall financial picture HMT would have not acted as at 2nd October 2008 in the same way that it acted when it created the Transfer Order on 8th October 2008. Equally there is no evidence to show that ING Direct would not have acquired the Edge Accounts on 2nd October 2008 on the same terms as those on which it acquired such Edge Accounts on 8th October 2008.
WHY DID KSF NOT GO INTO INSOLVENCY ON 3RD OCTOBER 2008?
- The reasons are obvious in my view. First it received the Notice which did not immediately withdraw its status as an authorised deposit-taker. Second that Notice was given confidentially so that the general public (regulated or not) did not know what the state of KSF was although I accept some people might have been shrewd enough to know that given the parlous state of the parent companies KSF might have had a little difficulty in surviving much longer. Third there was plainly an attempt to sell the KSF business out of the wreckage of the group difficulties as a going concern.
- If such a sale would have been successful then presumably everybody including the general creditors would have lost nothing. It seems to me therefore that what was contemplated was a short breathing space to enable an attempt to be made to sell KSF as a going concern.
- There would then however be a difficulty posed by the fact that while this exercise is going on inevitably in order to preserve the goodwill of KSF the outward appearance is going to be business as normal. Thus it would be contemplated that KSF would continue to receive deposits and pay out deposits. If the business was sold as a going concern successfully there would be no concern by anybody.
- The question that then would arise is what would be the impact on the various categories of creditors if after a period (as happened) KSF went into insolvency. The point that is foremost in my mind in my view is that generally the statutory regime on insolvency (subject to the exceptions of priority conferred by the statutes by the Insolvency Act 1986) is that general creditors suffer a loss in the insolvency on a pari passu basis.
- If the trust constituted by the Notice was intended to cover all depositors of whatever capacity then one would not expect the general creditors to be any worse off if deposits are made after the Notice and matched in the Account. It would in effect be neutral because either the assets of the general creditors would be swollen by the amount of deposits or the deposits would in effect be utilised to put the money into the Account.
- I accept that there is a potential difficulty as regards depositors (of any amount) who are paid out in the intervening period. These will fall into 4 categories so far as I can see. There will be first Regulated Depositers who made no fresh deposits. Second there would be Non-Regulated Depositors who made deposits in the period and were also repaid. Fourth there may be Non-Regulated Depositors who paid in and were also paid out in that period.
- If all deposits are required to be matched then people who made deposits on or after 2nd October 2008 are covered by the Account. It will require adjustment to deal with the people who were paid out in the intervening period. For understandable reasons no figures are currently available which analyse the payments out that occurred in that period.
- It is true that on this analysis the general creditors will suffer a reduction because Non-Regulated Depositors and Regulated Depositors in categories 1 and 2 above will have been repaid out of the general assets of KSF. That seems to me to be a risk worth taking in order to try and save all depositors and other creditors by an attempt to sell the company as a going concern.
- All of this seems to me to be logical and the correct analysis in the context of the Notice. That in my view is why the Notice is not expressly stated to apply to Regulated Depositors. It would have been the easiest thing possible when drafting the Notice to have specified which particular categories of depositor KSF was required to protect by making matching payments into the Account.
- The rival contentions limiting the Account to Regulated Depositors also produced some odd results. It protects one category of post Notice depositors at the expense of others. I have already analysed how the payments would have been treated. It is clear that Non-Regulated Depositors who deposited monies after the Notice was issued lose out because their funds go into the general body and are then available to KSF to repay Edge Depositors and Non-Edge Depositors after the Notice. The general creditors are also worsened because their funds could have been similarly used partially to fund those repayments.
- This would therefore create a distortion as between Regulated Depositors and Non Regulated Depositors. Whilst I accept that prima facie the regulatory regime is intended not to cover all depositors it seems to me that if KSF was allowed to demise the FSA and HMT would clearly be concerned about the impact that would have on the UK financial system as regards Non-Regulated Depositors. These sums are not insignificant. As appears above the sums deposited by Non-Regulated Depositors on or after 2nd October 2008 are approximately £141,000,000 nearly the same as the amount deposited by Regulated Edge Depositors.
- The setting up of the Account of course if correctly set up according to the true meaning of the Notice would have protected every depositor who lodged money after the Notice. The logic of that is compelling; it means that none of those depositors for example can be said to have been the victim of a concealed insolvency.
- Further if that had occurred and the sale as a going concern was not successful there would be at least a measure of protection in respect of these depositors which would correspondingly reduce any claims on the FSCS and any sums required to paid by HMT if it decided to pay compensation above the statutory levels applicable to FSCS liabilities. There would thus be a reduction on the call on the levies from the regulated deposit takers and a reduction in the amount that HMT would be required to contribute.
- For all of those reasons looking at the background to the Notice I am of the opinion that the Notice was deliberately drafted so that the words "customers" and "deposits" were designed to cover all customers of whatever species who made deposits after the date of the Notice.
- This means that Mr Carrigan failed when he set up his operation in my view to transfer by matching deposits all of the categories that he should have. It was said in the course of submissions that such a widening of the class of beneficiaries would make the system unworkable because of the large size. I do not accept that. All it would have required KSF to do would have been to match deposits with payments into the Account. It could have done that easily by having recourse to the deposits as they were paid in to fund the matching payment required in the Account. There is therefore no increased burden and no unworkability because of the size.
- I should say that whilst my conclusion shows that the full amounts were not paid into the Account by reason of Mr Carrigan's decision I am not intending in any way to express any criticism of him. I have not heard any direct evidence from him and it is impossible in the relatively relaxed atmosphere of the court room even to begin to contemplate the pressures that were put on his team and the attendant pressures that were on the FSA and HMT at the time of these uniquely catastrophic events. Hindsight is a wonderful thing. I have no doubt that all the parties concerned tried their very best to achieve a result that would be for the benefit of KSF's depositors and creditors and thus the reputation of the financial market in the UK at that time.
- It accordingly follows that in my view the trust was constituted by Mr Young's reference to the Notice in his email to the BoE and the trust became constituted when the first deposit was paid in. It accordingly seems to me that all post-Notice depositors became beneficiaries in the trust because it was contemplated that immediately upon a post Notice depositor making a deposit there would be a corresponding matching payment into the Account.
- It is clear from this decision as I have said that there is a shortfall in the Account because not all funds to match relevant deposits made by potential beneficiaries have been transferred into it. The conclusion I would draw on that is that any such losses as regards that class of beneficiaries would be born pari passu and they may have a claim to prove in the insolvency of KSF for damages for breach of trust in failing to match their deposits in the Account. I suspect that will not enhance their overall position as regards a general proving unsecured creditor anyway.
- I should also add that at the time of the Notice the FSA would know that KSF would continue to take deposits and pay out and thus operate normally. It would therefore know that both Regulated Depositors and Unregulated Depositors would make deposits in that period (and also be repaid). It is inconceivable in my view that the FSA would serve a Notice which would be designed in effect to conceal from Non-Regulated Depositors that KSF was in great financial difficulties and either insolvent or virtually insolvent but yet permit it to continue to take their deposits on the basis that their monies would be inevitably lost save for that which they could recover in the general liquidation. I cannot attribute such an intention on the part of the FSA so to act. Common sense requires the Notice in my view to have the wider effect. The narrow effect would upset the general principle of pari passu loss on insolvency which also I cannot believe the FSA was attempting to achieve at the expense of the Non Regulated Depositors who deposited monies with KSF after the issue of the Notice.
- Thus the FSA in my view extended the Notice under s 43 (3) FSMA 2000 to non-regulatory matters.
OPERATION OF THE TRUST
- The trust constituted by the Notice clearly contemplated a regime whereby the amount of protection would be reduced if a post-Notice depositor whose deposits were matched in the Account was repaid.
- Clause 2(d) provided:-
"[KSF is required to] (d) hold money standing to the credit of the account on trust for the benefit of the customers referred to in (b) and (c) according to their respective interests in it (which shall be the amount of their deposit(s) less any sum withdrawn on their account;……."
- There have been some such repayments but the amount has not yet been quantified. Such repayments will of course have been funded from KSF's general fund. If KSF is not entitled to recoup a corresponding amount from the Account the general creditors of KSF will suffer a loss which will benefit the Account and those beneficially interested in it.
- The question therefore is what was intended to happen to matching monies which represented funds which had been repaid post the Notice. Once again given the surrounding circumstances as summarised above I find it impossible to believe that it was intended that this repayment provision would operate at the expense of the KSF general creditors and confer an uncovenanted bonus on the other beneficiaries of the Account. The reason for this once again in my judgment is self-evident. If the Account had operated as I determined above that is should have operated every post-Notice deposit would have been matched in the Account with corresponding funds available for repayment. If they are fully matched they will be fully repaid. In that eventuality had that happened (and that was the way in which the Account in my view was intended to operate) the repayments would have created a surplus. There is only an argument because the Account does not have sufficient funds to cover all the beneficiaries as determined by me. That shortfall arises out of a failure to match the relevant funds; it should not be used as a justification for depriving KSF of reimbursement for the funds which it has used from its own resources to repay such a depositor.
HOW DOES KSF CLAIM REIMBURSEMENT?
- I found the submissions of Mr Gillis QC and Mr O'Leary on behalf of TFL under this head extremely persuasive and I adopt them.
- It seems to me that justice is only done as regards KSF, if, when it received the Notice and made repayments accordance with the Notice it is able to recoup such repayments out of the monies standing in the Account. I can see that there is no loss to other beneficiaries under the trust of the monies in the Account. I say that because a repayment to a depositor would ultimately be capable of being matched by a corresponding credit to the Account. To do otherwise would once again in my view infringe the concept of pari passu payment for creditors when a company becomes insolvent. I agree that the position is analogous to that of Re Kayford [1975] 1 WLR 279. In that case Megarry J held that the company created a trust account for the benefit of customers who had paid for goods which had not been delivered. When the company went into liquidation he determined that the funds standing in that account were not available to the liquidator for distribution to the general creditors. It was contemplated that the company would withdraw money from the account only when goods had been delivered. That is plainly analogous to the present situation although that point was not argued in that case. A similar result ensued in the case of Re: Lewis's of Leicester [1995] 1 BCLC 428 at pages 437-8.
DEPOSITORS WHO WERE OVERPAID
- This makes sense when applied to the facts and produces a fair result as between the parties. It is well illustrated by some examples. All the Edge Accounts were transferred to ING Direct by the Transfer Order. There was no analysis as I understand it at the time as to whether any of those Edge Accounts might have been repaid in part or in full between 2nd and 8th October 2008. There is therefore a possibility that some of those accounts were repaid bearing in mind that approximately £500,000,000 worth of Edge Depositors' money was repaid in that period. Further the possibility cannot be excluded that post 2nd October 2008 depositors may have been repaid in full or in part before 8th October 2008. Those repayments were funded by KSF. If such deposit holders were also transferred to ING they will have been doubly reimbursed. In addition of course there will be a matching fund for their deposit in the Account. If KSF has no interest in the Account for reimbursement of its monies it will be out of pocket. It will not be able to claim the monies back from the relevant depositor merely because that deposit holder has been transferred to ING Direct. The reason for that is that at the time it repaid a depositor the Transfer Order had not been made and the ING Direct transfer did not exist. A customer demanded its money and KSF repaid it. It follows therefore that if HMT/FSCS can claim the amounts standing in the Account they will be reimbursed the monies that represent that depositors interest in the Account. They will also (presumably) be able to recover the excess payment made by virtue of the Transfer Order to that depositor as money paid under a mistake of fact namely the mistaken belief that the account in question was still live. Thus on that example the double recovery will be transferred to HMT/FSCS.
- By way of contrast if the monies in the Account are repaid to KSF in order to reimburse it for the monies it repaid then that will cover it. The depositor will still be protected by virtue of his interest in the ING Direct transfer. HMT/FSCS can then claim the monies in the benefit of the Transfer Order back from the depositor. KSF is paid the amount standing in the matched Account and that covers the monies it had previously paid out. Thus nobody loses out.
- Another example is shown by the following. If a depositor is repaid between 2nd and 8th October 2008 and is not transferred to ING Direct there will be an excess in the Account attributable to its matched deposit. That was funded by KSF yet on the arguments of HMT/FSCS they are entitled to it even though they paid no compensation for the matched deposit. That does not seem to me to be correct and demonstrates the falsity of their submissions.
- Thus on those examples the purpose of the Account is achieved. Post-Notice depositors are protected and KSF creditors are not worse off because they are reimbursed the monies that were paid out to the Edge Depositors who deposited after 2nd October 2008 and who were also repaid before 8th October 2008.
- Such a trust as the type envisaged by me is not new. In OTC Computers v First National Tricity Finance Ltd & Ors [2003] EWHC 1010 (Ch) [6] ITELR 117 Pumfrey J was faced with claims concerning trusts purportedly set up by the company which went into liquidation for customers and suppliers. The object was to set up trust accounts for the holding of a small number of customers' deposits that were paid by cheques and cash as opposed to credit cards and of monies due to urgent suppliers. Pumfrey J determined that the trust for the customers was effective but the one for urgent suppliers failed through lack of certainty. He did have to consider the question of repayment to the company when the goods were delivered and what would happen if there was a shortfall of the deposits finding their way into the trust account. Like the present case deposit monies were not paid directly into the trust account; they passed through the company's general current account first.
- It followed therefore in the OTC case that there were some deposit monies which never found their way into the account.
- A similar position appertains here on the basis that I have found that the trust extended to all customers who lodged deposits in the relevant period.
- In that eventuality Pumfrey J expressed the view that if there was a shortfall entitlements to the funds would abate pro rata. Equally he considered it was implicit in the scheme as a whole that the company had power to withdraw from the fund the sum in the trust account that represented the purchase price of a computer despatched to a customer see paragraphs [18] and [19]. It seems to me that this has sense for the reasons I have set out above. There is nothing in Pumfrey J's judgment which suggests that the company could not withdraw if it had failed to pay monies into the trust account. That plainly was something that happened because he addressed it in paragraph [18] of his judgment.
- I think the answer to the question lies in the fact that when KSF fails to pay a matched sum into the Account its failure is not a breach of trust. In failing so to transfer it is not using the deposits expressly and when those funds are deposited with it they are not at that stage trust monies. Therefore the failure to transfer (as a result of Mr Carrigan's operations) is a failure to comply with the Notice but it is not a breach of trust. As regards depositors specifically their deposits are matched when funds are transferred into the Account. It is true that they are beneficiaries because they fall in the definitions of customers who lodged deposits but there is no trust failure at that time because the monies do not become subject to a trust until they have been paid into the Account.
- At best the failure to effect the transfer can only sound in damages. As I have said above this is an illusory claim because the disappointed beneficiaries would have to prove in KSF's insolvency which they can already do by virtue of their deposits.
- TFL pressed me with a decision of the Court of Appeal in Moriarty & Anr v Atkinson & Anr [2008] EWCA Civ 1604 [2009] All ER (D) 154 (Feb). The facts are not of assistance to me but the observations of Lord Neuberger who delivered the main judgment are relevant when considering this issue (paragraphs 13-21) as follows:-
"It is against that conclusion that the Atkinsons and Clarkes now appeal. The arguments raised in support of their appeal rely on two facts. The first is that, even once all the other trust or proprietary claims against money in the client account are fully satisfied, there would be a substantial balance in that account which would, subject to any other claims, be beneficially owned by the company. The second fact relied on is that the company was a defaulting trustee as against (a) the Atkinsons and (b) the Clarkes, and its default can fairly be characterised as failing to pay (a) the £88,750-odd and (b) the £27,732 into the client account.
In those circumstances, Mr Aylwin contends on behalf of the appellants that it is not open to the company to claim that it is beneficially entitled to any of the money in the client account until it has made good its default, or, to put the same point another way, he says the company must accept that any money remaining in the client account, after all other equitable and proprietary claims have been satisfied, is subject to the appellants' respective claims before it can be treated as beneficially the company's property. In relation to money, such as the £17,500 received on behalf of the Atkinsons, paid into the client account which was always in credit, there was, says Mr Aylwin, a classic case for mounting a claim for a proprietary interest in a mixed fund as the client account was always well in credit.
The problem which the appellants' case has to confront is that, because the money in issue was paid by the company into the current account (which was always in debit), it was effectively used to reduce the company's liability with the bank and it effectively disappeared so that there was never any fund on which a proprietary claim could operate -- see in this connection Re Bishopsgate Investment Management Ltd Holman [1995] 1 Ch. 211, 218-219B and in Re Goldcorp Exchange Ltd [1995] 1 AC 74, 104-5. In these circumstances the argument in support of the appeal has to be rather more sophisticated.
The appellants' case primarily relies on the reasoning of in Re Whitaker v Dacre [1916] 1 Ch 344. At 346-347 Lord Cozens-Hardy MR said that there was a well-established principle:
"…that a defaulting trustee cannot claim a share in the estate unless and until he has made good his default."
He went on to refer to what Parker J had said during argument in Re Towndrow Gratton Machen [1911] 1 Ch 662 at 666, namely:
"…that where there is an aggregate fund in which the trustee is beneficially interested and to which he owes something, he must be taken to have paid himself that amount on account of his share."
In Doering Doering (1889) 42 (ChD) 203, Stirling J explained the theory on which the principle is based as being that the court treated the trustee as having received his share by anticipation.
In Dacre, an executor under a will, who was also a beneficiary under the will, had misappropriated some money from the estate; however, I accept that the principle is of general application and could apply in the present more commercial type of circumstances if justified by the facts. Unfortunately for the appellants, I do not consider that the principle can apply here unless it is to be significantly extended. The problem they face, as the deputy judge said, is that there is no trust fund for the beneficiaries to impound. Applying the formulation of Lord Cozens-Hardy, the "estate" is the client account, and the money in question never formed part of that "estate" because it was paid into the current account. Similarly, to use Parker J's language, if there was "aggregate fund" it was the balance in the client account, and the money in question never formed part of it. It is true that, as between the appellants and the company, the money in question should have formed part of the balance in the client account, and the fact that it did not do so was attributable to the company's breach of trust.
It is also true that equity treats as done that which ought to have been done. Accordingly, there is some attraction in the notion that, as between the company and the appellants, the client account should be treated as having received the money in question, at least to the extent that this would not prejudice any other equitable or proprietary claim to the monies in the account. However, again in agreement with the deputy judge, that seems to me to be a counter-factual assumption too far. The appellants appear to have a good claim against the company for breach of trust for not having paid the money in question into the client account, but that does not mean that they have a proprietary or any other sort of equitable interest or right over that account.
If the appellants' argument were correct, they would plainly not be ordinary unsecured creditors, but they would not have a normal trust or proprietary claim either. That is because, as Mr Aylwin for the appellants accepts, if the client account was not sufficiently in credit to meet all trust and proprietary claims -- or only just sufficient to meet such claims -- the appellants' alleged claim would not avail them. The alleged claim would only arise if there was more than enough in the account to meet all proprietary and trust claims. So, on their case, the appellants' claim is one which ranks behind all secured or trust or proprietary claims but before any ordinary unsecured claims. On that basis, the appellants' argument would seem effectively to involve the creation of a new class of preferred creditors, namely those whose money was taken by the company in breach of trust.
While I accept that Bishopsgate was concerned with a tracing claim, and that it is said that this is not a tracing claim but an impounding claim, it does seem to me that there is some force in the point that such a conclusion would appear to conflict with what Dillon LJ said in that case at 2.20 G-H.
To extend the circumstances, in which a trust or proprietary or similar claim can be justified in circumstances such as those raised by the appellants on this appeal, would seem therefore to conflict, or at least to be unsupported by, principle and authority. In my view, the court should not be too ready to extend the circumstances in which proprietary or other equitable claims can be made in insolvent situations, bearing in mind the consequences to unsecured creditors. To raise those in the commercial world, it must sometimes seem almost a matter of happenstance as to whether or not a particular creditor, with no formal security, has a proprietary or equitable claim. However, that fact is that every time such a claim is held to exist in the case of an insolvent debtor, the consequence is that one commercial creditor gets paid in full to the detriment of all the other commercial creditors, who also have no formal security, but are found to have no proprietary claim".
- The OTC case does not appear to have been referred to. In that case as I have said there appears to have been no debate before Pumfrey J as to the breach of trust consequences of the creation of the shortfall. All relevant customers who paid deposits were held to be beneficiaries in the trust fund even if not all the monies had been transferred over. In the Moriarty case whilst Lord Neuberger accepted that the failure to pay was a breach of trust it sounded in damages only, the shortfall beneficiaries did not obtain any tracing remedy into the funds in the Account.
- There are two reasons why the decision is to be distinguished. First the account the subject matter of the claim was a client account. By that I mean it was a single account into which monies were paid or supposed to be paid on behalf of individual clients like a solicitors client account. In other words the Company held the monies upon trust in the client account in the normal way for each individual client whose funds had been put in the account. Given that if the monies are not actually paid into the client account Lord Neuberger's judgment is inevitable. It is stretching a trust too far when the only remedy is a remedy against the trustee in damages in breach of trust. That is the second difference. When the company sold a client's boat and received the purchase price it already held those monies upon trust. In the present case there is no suggestion that the deposit monies were paid in to the company were received by KSF as trustee.
- By way of contrast the requirement of the Notice was to create a fresh source of funds by putting money into the Account. Lord Neuberger determined that the principle of no reimbursement by trustee in default did not apply because the individual client account trusts were only in favour of the relevant clients whose funds were thus represented. Given that the surplus was repayable to the Company as trustee. That did not help the Claimant however because his monies never found their way into that account. There was therefore no beneficial interest as regards the Company which could be impounded at his behest. The Company was taking monies that were beneficially belonging to somebody else and not the Claimant.
- Whilst the failure in that case to put clients' monies into the client account was a breach of trust that did not enable any particular client to trace into the client account generally because he had no interest in that account until his monies are transferred into it. Thus Lord Neuberger described the failure on the part of the company to pay the money into the client account as a breach of trust but it is a breach of trust involving the misappropriation of that client's monies by paying them into the current account instead of the client account. It was a "a bridge too far" to stretch that Claimant's losses into the client account generally to be able to participate in them.
- By way of contrast in the present case I have determined that the trust extends to all customers who have made deposits whether or not they had a corresponding matching payment into the Account. However KSF's failure in my view does not amount to a breach of trust for the reasons that I have said. It is not dealing with trust monies when it receives money for deposit. It is perfectly entitled to treat those deposits as an accretion to its general funds. Its failure is in not complying with the Notice and transferring further funds to match into the Account.
- That is a failure to comply with the Notice which might have sanctions under the legislation. However when KSF seeks repayment out of the Account for depositors' monies that it has repaid it is not in my judgment to be prevented from doing so because of the other breach or failure to comply with the Notice. There are a number of reasons for this.
- First clause 2 (e) of the Notice plainly contemplated that KSF should be so repaid. It was clearly not contemplated that it would do it immediately because the Account could not be operated in such a way so as to provide for immediate payment to KSF when it made a payment out of its own funds in favour of a customer seeking return of its deposits.
- Second as TFL submits there is nothing in the Notice to suggest that KSF's right of withdrawal was conditional in any way on the Account being fully funded.
- I reject Mr Tamlyn's submission that any right of withdrawal is postponed where there is a deficiency so far as in where he relies on paragraph [23] of the OTC decision. I do not read that paragraph as support for that proposition. It is plain that Pumpfrey J in paragraph [18] contemplated allowing the company to withdraw from the fund the sum in the trust account that represented the purchase price of a computer dispatched. It seems to me that Pumfrey J in paragraph [23] was talking about any surplus in the account over and above the sums in fact paid by or on behalf of customers during the relevant period. There he was referring to the company withdrawing monies and in effect paying itself and treating those monies as payment of the purchase price for the purpose of paragraph [18].
- Accordingly if KSF has made a repayment in respect of a depositor whose sums are matched in the Account it is entitled to be reimbursed in full as against the sums that have been thereby matched into that Account. Once again this is an operation of fairness in my view. Not to allow it to be repaid would cause a detriment to the general creditors and confer a bonus on other Non-Edge Depositors whose funds ought to have been in the Account, possibly HMT/FSCS or possibly one of the beneficiaries for the reasons I have set out earlier in this judgment. Such a result would not make commercial sense and would make a nonsense of giving KSF a power of reimbursement under clause 2 (e).
- Thus clause 2 (e) simply reflected the normal right of a trustee to recoup himself out of the trust assets when he makes a payment on behalf of the beneficiary. Whether this is called right of indemnity or whether it is asserting a lien over the trust fund or whether it is simply exercising the rights expressly granted under clause 2 (e) does not matter in my view. Either way it seems to me to be straightforward that when KSF repaid an Edge Depositor whose funds were matched in the Account out of its own funds it should as a matter of principle and fairness be entitled to have paid back to it the corresponding amount which it paid into the Account out of its own funds in compliance with the Notice. None of this should be affected by its failure to comply with the Notice.
- I therefore conclude that KSF upon taking the appropriate enquiry ought to be entitled to repayment of such funds in the Account as representing repayments which it made to depositors in respect of deposits made by such depositors between 2nd and 8th October 2008.
THE TRANSFER ORDER
- The Transfer Order could not have been effected without the powers of HMT pursuant to the BSPA 2008 to override any law or statutory power or make any provision in connection with (inter alia) the payment of any compensation by HMT (ibid section 12 (3) (e)).
- The FSCS had statutory limits as to the amount of compensation and it has to follow a procedure. The statutory procedures have been applied in respect of the Non Edge Depositors but HMT like the Edge Depositors made a policy decision to compensate such Non-Edge Depositors in full without regard to the compensation scheme's upper limit. However in the case of Non-Edge Depositors they were required to go through the statutory procedure. That involves the Claimants completing the FSCS standard application form. Section F of that application form contains an acknowledgment:-
"I/We understand that FSCS will, on paying any compensation to me/us take over my/our rights and claims against the Bank and against any other party in accordance with the terms of my/our agreement and acknowledgment contained in section (E) of this document and that thereafter I/we will be entitled only to the benefit of those rights and claims that might be specified in section (E)".
- Section (E) provides:-
"(1) I will accept the offer of compensation in full and final discharge of settlement of the obligations of FSCS under the relevant rules and laws. I understand that any compensation is payable by FSCS to fulfil my entitlement in compensation from FSCS in respect of the Claim.
(2) All my rights in against the Bank in respect of the Claim will pass to it and be assigned to FSCS absolutely on payment of compensation (or any part of it).
(3) All my rights against any other person which constitute a Third Party Claim as defined in paragraph 12 below will pass to and be assigned to FSCS absolutely on payment of compensation (or any part of it).
(4) On payment of compensation (or any part of it) I will no longer have the right to make an claim against the Bank or any other body in respect of the Claim or a Third Party Claim and that the right to make any such claims will be vested in FSCS. I further acknowledge any sums that would otherwise be payable to me in respect of the Claim (including any dividend or other payment in liquidation or compromise with the creditors or schemed arrangement) or a Third Party Claim will be paid instead to FSCS.
(5) I will not exercise any right or remedy that I may have or retain against the Bank or any other person arising out of or in connection with the Claim or any Third Party Claim namely
- To rescind, set aside, avoid or otherwise alter any contract or obligation;
- To set off or reduce liability in respect of such a contract or obligation
- Any right or remedy that is either personal to me or cannot be assigned or both
(6) If I recover any money or assets in respect of the Claim or in respect of a Third Party Claim I will immediately pay it or transfer it or them to FSCS.
(7) If the payment of compensation should not have been made for any reason, I will immediately fully repay (or if compensation had been paid to a Third Party for my benefit, get repaid) to FSCS any compensation paid, without any deduction or set-off, plus interest."
- It will be seen that both provisions are very wide ranging. Basically a Claimant in exchange for his compensation surrenders all rights he or she might have in respect of the original deposit for which the compensation is being paid. Further if a depositor obtains any other financial benefits they have to be paid over to the FSCS. In addition if the compensation should not have been paid the depositor has to repay it.
- All of those provisions therefore address the situation that I have considered under the section dealing with the repayment to KSF above. If KSF is repaid out of the Account in respect of a depositor who has been repaid and that depositor has become an ING Direct depositor, the depositor will become under an immediate obligation to pay FSCS/HMT the monies that have been paid on his behalf to ING Direct as compensation.
- Now all of this is artificial because the compensation package was "negotiated", set up and implemented without any of the depositors being consulted or informed. Such is the breadth of the powers under the BSPA 2008. Further as will appear from the wording of the Transfer Order in my view it has extended beyond an FSCS compensation scheme to a scheme put in place by HMT under its said wide-ranging powers so as to enable it to obtain benefits.
- The relevant provisions are paragraphs 15 and 16 of the Transfer Order (see above).
- Without the intervention of HMT none of this could have taken place. In the case of each of the Edge Depositors there would have had to have been an individual application and an individual negotiation of compensation and an individual payment. Time did not permit of such a leisurely procedure. Accordingly HMT clearly exercised its powers under section 12 BSPA 2008 to speed matters up and more. It is clear in my view that under paragraph 15 the payments by FSCS to ING Direct constitute the payment of compensation according to their respective entitlements of all Edge Depositors transferred to ING Direct. That is what it says and I can see no reason for attempting to come to any other conclusion (paragraph 15 (a)).
- Under paragraph 15 (b) each Claimant of any relevant protected deposit is deemed to have made an application and deemed to have accepted an offer of compensation and to have received the compensation. Once again these provisions seem to me to be straight forward. Further the fact of making the application as I have set out in the declarations above means that the persons are also deemed to have assigned all rights they have to FSCS in consideration of the compensation paid. As the FSCS and HMT are by virtue of paragraph 14 making a full payment representing the deposits there can be no prospect of any further compensation. In exchange for that all rights are assigned to the FSCS. The FSCS then gathers in any sums that it can do so for application in accordance with paragraph 16 of the Transfer Order. First it can prove in KFS's administration (paragraph 16 (1)). The amount of proof is equal to the amount that would have been provable if the Transfer Order had not been made and KSF had been placed in administration immediately before the effective time.
- Under paragraph 16 (5) the FSCS is to determine the proportion of any amount which it receives or recovers from KSF which is properly attributable to each type of liability and it accounts to HMT for any excess over the compensation level.
- Now that at first sight would suggest that more is being recovered by the FSCS than it would be liable to repay by way of statutory compensation. The short answer to that in my view is that that is what the provision provides and was intended so to do. The reason again in my view is self-evident namely that the relevant depositors had the benefit of a top-up from HMT and there is no reason why the FSCS cannot recover the full amount represented (for example) by payments into the Account made by KSF in respect of Edge Deposits as well as proving in the insolvency of KSF. I should observe that in the latter aspect presumably the proof under paragraph 16 (1) will have to give credit for any sums obtainable out of the Account.
- It follows from the above that I agree with the analysis of all parties that upon making the Transfer Order the depositors' rights were extinguished in the Account but that does not mean that the funds represented by a depositor who has the benefit of the Transfer Order cannot be claimed under the terms set out above.
- I should say that this is hardly surprising because the Compensation Source Book ("COMP") under which the FSCS operated was changed by the Compensation Source Book (amendment No 8) Instrument 2008 (FSA 208/53) dated 2nd October 2008. By clause 7.21 as set out in the annex to that order the FSCS was required to make any payment of compensation to a Claimant in respect of a protected deposit conditional on the Claimant in so far as able to do so assigning the whole of his rights and to make any payment of compensation to a Claimant in respect of any other protected claim conditional on the Claimant assigning the whole or any part of his rights against the relevant person or against any third party or both to the FSCS on such terms as the FSCS thinks fit.
- According to the witness statement of Mr Kuczynski dated 20th April 2009 that was the practice before 2nd October 2008. After that date however it became mandatory. The FSCS so far as I can see had no power to disregard this statutory requirement. The only way it could have been overridden would have been if HMT had exercised its powers under section 12 BSPA 2008 to relax that requirement.
- I cannot believe that HMT would ever have done that. The mandatory requirement was only introduced six days before the Transfer Order. I can see no reason why the FSCS would be directed in effect by HMT to give up a claim to £126,000,000. At the time of the Transfer Order the FSCS and HMT together assumed a liability of at least £3 bn in respect of the transferred Edge Depositors. By 15th April 2009 payments of £182,102,743.24 had been paid out in respect of Non-Edge Depositors against executed assignments received back.
- I pressed Mr Dicker QC as to whether there was any evidence which showed HMT had exercised its powers to overcome the request for the FSCS to seek an assignment. On instructions he told me that it had not made any such decision at all. I determine it did not.
THE CHALLENGE TO ASSIGNMENT CONTENTION
- All other Respondents challenge HMT's contention that the Edge Depositors' rights in the Account vested in them as a result of the Transfer Order.
- The submissions were put in various ways but they all centre on a comparison of paragraph 15 and 16 of the Transfer Order.
- It is submitted (correctly) that there is no mention of an assignment in paragraph 15 or in paragraph 16 of the Transfer Order.
- Thus it is pointed out that under paragraph 16 which is headed "liability of [KSF] to the FSCS and the Treasury" there is no mention of an assignment there. The only rights given there are the rights to prove in the administration of KSF as if the Transfer Order had not been made and KSF had been placed in administration immediately before the effective time (12.15 pm on 8th October 2008).
- TFL has an additional argument based on a "temporal" analysis.
- Fundamentally I do not accept the primary submission that paragraph 15 does not have the effect of an assignment. The reason for that is that in my view paragraph 15 (b) deems an offer to have been made and acceptance of compensation after an application has been made for the purpose of the COMP Source Book. As I have set out above the application form contains various declarations one of which is that the Claimant for compensation assigns all rights he has in consideration of receiving the payment. That in my view is an equitable assignment by signing the application. This equitable assignment becomes fully effective when the compensation is received.
- In this case the compensation is received when the amount is ascertained under paragraph 14. It is not immediate. As TFL acknowledge in their skeleton it is quite sensible to make the payment as soon as practicable. Nevertheless FSCS/HMT assumed a liability to pay ING Direct the amount when it was assigned. Although all the parties are agreed that the Edge Depositors' interest in the Account has been extinguished that in my view is an over-simplification. In my judgment the Edge Depositors' rights in the Account would only be extinguished when they have had an effective transfer to ING Direct. Until then the arrangement is inchoate but nevertheless effective in equity.
- Equally I do not accept that paragraph 16 means that FSCS/HMT's rights are limited to proving in the administration.
- The vast majority of deposits held in Edge Accounts which were transferred to ING Direct were not protected by payments into the Account. The purpose of paragraph 16 is to apply the general principle that the Edge Depositors' rights to prove in the insolvency have passed to FSCS/HMT. I do not see why that general provision should have any effect in cutting down the rights to an assignment of any other rights that the Edge Depositors would have or prevent the completion of that assignment by the deemed application for statutory compensation and the transfer of Edge Accounts to ING Direct. If FSCS and HMT do not have the benefit of the sums standing to the Account that would give an interest to the Non-Edge Depositors with a surplus return to KSF. I cannot see that FSCS/HMT would give up such a right in respect of the sums standing in the Account. It is plainly not unreasonable for them to be reimbursed out of the Account for the expense that they have incurred in protecting the Edge Depositors whose sums are matched in that Account. This has occurred with the Non-Edge Depositors and there is no reason why the Edge Depositors should be treated differently.
- Therefore I reject the submissions that paragraph 16 is all embracing as regards FSCS/HMT's rights. It is merely a "sweeping up" provision designed to ensure that ultimately whatever rights an Edge Depositor had to prove in the insolvency of KSF would be vested in FSCS/HMT.
- Although an assignment of course ordinarily would be a consensual act there is nothing consensual about this arrangement at all. The deal was done, the compensation agreed, fixed and determined to be paid and the assignment effected entirely without the knowledge and/or concurrence of the Edge Depositors. That at first sight seems alarming but given the situation and the need to act with speed it is difficult to see how any other course of action would have been effective. At the end of the day FSCS/HMT has saved the Edge Depositors by expending substantial sums of money. There would have been no option to refuse the transfer because of the wording of paragraph 15. In any event it is difficult to see why an Edge Depositor faced with replenished funds in ING Direct would refuse such a gift horse. If the Edge Depositor did not like ING Direct he would simply presumably withdraw his money and take his business elsewhere. He would hardly reject that in favour of being locked in litigation over the Account (as this case shows) and ultimately the likelihood of having to prove in KSF's insolvency for an undoubted shortfall.
- I should add that in the case of the Non-Edge Depositors where there is actually a formal assignment all parties accept that FSCS /HMT as and when those assignments are completed will be entitled to repayment of the requisite monies matched in the Account in respect of such Non-Edge Depositors.
A TEMPORAL ARGUMENT
- TFL argues that the transfer of liabilities under the Transfer Order which occurred at the effective time operated to extinguish a Claimant's interest in the trust property. Therefore it is submitted that unless the implied assignment relied upon by FSCS/HMT took place before the effective date the Claimant would retain no interest in the trust property capable of being assigned. TFL argues that the payments were to be ascertained at a later stage and until payment no compensation was deemed to have been paid thus until then no assignment would arise under FSCS's terms and conditions. Under paragraph 14 of the Transfer Order that date occurs after the effective time. This is ingenious but misconceived. In my view the Edge Depositors' interest are not extinguished finally until the Transfer Order has been completed finally as regards their interests. That occurs when the amount of compensation to be paid is agreed as between FSCS/HMT and ING Direct. That might take place after the effective date. There has been a transfer at that date but the price to be paid has yet to be determined. I do not see that the Edge Depositors' rights are extinguished until the Edge Depositors have been given the fully effective substituted interest in deposits with ING Direct. It is no different to any real property conveyancing transaction. The Transfer Order constitutes the agreement and when all the rights and obligations under it are finally completed at that stage and at that stage only will the Edge Depositors' interests in the Account be extinguished. Until then their interests in the Account are governed by the Transfer Order. The effect of the deemed application form means that FSCS/HMT are equitable assignees pending the ascertainment of the final amount and the constitution of the ING Direct deposits when they become legal assignees and the Edge Depositors' interest in the Account is thereupon extinguished.
- It is possible to conceive of circumstances in which the status of HMT and FSCS as equitable assignees might not fully protect them. For example an Edge Depositor might effect a legal assignment in favour of somebody else and that might take priority over the assignment constituted by the Transfer Order. It is not inconceivable (for example) if an Edge Depositor went bankrupt that might achieve some level of priority. All of this merely shows how paragraph 16 operates; it is a residual right to prove in the insolvency of KSF in my view and nothing more.
- In my view therefore none of the counter arguments against the stance of FSCS/HMT is correct.
- I therefore conclude that the interests of the Edge Depositors transferred to ING Direct upon completion of the formalities of the Transfer Order vest in FSCS/HMT to be disposed of as between themselves under paragraph 16 or rateably according to their contribution in respect of such interests. In making that determination I do not overlook the possibility that the payments into the Account might represent Edge Depositors who have already been repaid. I have dealt with that earlier in the judgment. Equally the amount vested in FSCS/HMT by virtue of that ruling will suffer pro rata abatement because of my determination that the beneficiaries of the trust are all customers who made deposits after 2nd October 2008 and not merely the regulated ones. FSCS/HMT cannot obtain by the assignment any better rights than the original Edge Depositors.
SUBROGATION
- Had the assignment argument been rejected FSCS/HMT contend that upon making the payments deemed under the Transfer Order they became subrogated to the Edge Depositors' rights in the Account.
- It seems to me that this is an impossible argument. It can only arise if FSCS has not exercised its rights to have an assignment. There is no suggestion that FSCS omitted to consider that or was mistaken in its understanding as to the effect of the Transfer Order. Equally one cannot carelessly exercise the powers under the BSPA 2008 to abrogate the obligation to seek compensation. Thus too any claim for subrogation must be viewed in the light of a decision being made by HMT to override the obligation to seek an assignment.
- If that is right FSCS/HMT have made a deliberate conscious decision not to seek an assignment. If that is the case I can see no prospect of an assignment being "revived" by subrogation. I cannot see a claim for subrogation can be made to revive a right which has been consciously given up.
- The case of Boscawen v Bajwa [1996] 1 WLR 328, 339 establishes that proprietary subrogation (such as is sought by FSCS/HMT) in respect of trust property should not be granted if it would give the Claimant more than he bargained for at least in the terms of giving him a better position as against other creditors than he had legitimately expected to obtain from the Transfer Order. In that case the denial of the subrogation would have given the vendor of the property an uncovenanted and unjust bonus. The bank's monies had been advanced in anticipation of the completion of a purchase by its customer. The customer's solicitors released the monies in advance of completion to the vendor's solicitors and they were then used to discharge the vendor's existing mortgage. However the sale never completed and the bank never obtained its mortgage over the property.
- The principle of subrogation was considered by the House of Lords in Banque Financier de la Cite v Parc (Battersea) Ltd [1991] 1 AC 221 Lord Hoffmann gave the leading judgment on subrogation (Lord Steyn, Lord Griffiths and Lord Clyde agreed with him). Lord Clyde summarised his views succinctly at page 237 as follows:-
"Without attempting any comprehensive analysis, it seems to me that the principle requires at least that the plaintiff should have sustained a loss through the provision of something for the benefit of some other person with no intention of making a gift, that the defendant should have received some form of enrichment, and that the enrichment has come about because of the loss. The loss may be an expenditure which has not met with the expected return. The remedy may vary with the circumstances of the case, the object being to effect a fair and just balance between the rights and interests of the parties concerned. The obligation to provide the remedy does not rest on any contractual basis but on the general principle of the common law and it may find its expression in a variety of circumstances".
- Lord Hutton was equally succinct:-
"….. where the defendant has been unjustly enriched at the expense of the plaintiff, and where equity considers that it would be unconscionable for the defendant to retain that enrichment. In such a case, as Goff and Jones say, the remedy is fashioned to the facts of the particular case. In the Orakpo case at 104E Lord Diplock stated that some rights by subrogation "appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment."
- Lord Hoffmann at page 233 referred to the well known decision of Paul v Speirway Ltd [1976] Ch 220 at page 233 as follows:-
"In Paul v Speirway Ltd [1976] Ch. 220 the plaintiff made a loan to a company in which he had a joint interest in order to enable it to pay the price due under a contract for the purchase of development land. When the company failed, he claimed to be a secured creditor by subrogation to the vendor's lien. Oliver J. found on the facts that the advance to the company was intended to be an unsecured loan and held that this excluded any remedy by way of subrogation, which would give the plaintiff more than he had bargained for. The learned judge rejected the proposition, advanced by counsel for the company, that the remedy of subrogation was available only when the common intention of the parties was (as in the three earlier cases to which I have referred) that the plaintiff should have some security which, for one reason or another, he did not get. He confined himself to the much narrower proposition, at p. 232 that:
. . . where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose instigation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation.
In formulating this proposition, the learned judge was clearly confining himself to cases in which the claim was to subrogation to security and not referring to subrogation to a mere debt, as in cases of ultra vires borrowings."
- He then went to summarise the authority at page 234 as follows:-
"These cases seem to me to show is that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system than we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff's expense; secondly, whether such enrichment would be unjust and thirdly, whether there are nevertheless reasons of policy for denying a remedy. An example of a case which failed on the third ground is Orakpo v Manson Investments Ltd [1978] A.C. 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.
This does not of course mean that questions of intention may not be highly relevant to the question of whether or not enrichment has been unjust. I would certainly not wish to question the proposition of Oliver J. in Paul v Speirway Ltd [1976] Ch. 220 that, as against a borrower, subrogation to security will not be available where the transaction was intended merely to create an unsecured loan. I do not express a view on the question of where the burden of proof lies in these matters. Oliver J., following the dictum of Lord Jenkins in Ghana Commercial Bank v Chandiram [1960] AC 732, 745 which I have quoted, held that if the plaintiff's money was used to discharge a secured liability, he was presumed to "intend that the mortgage shall be kept alive for his own benefit" and this presumption was applied by Nicholls J. in Boodle Hatfield & Co. v British Films Ltd [1986] P.C.C. 176. However, if it is recognised that the use of the plaintiff's money to pay off a secured debt and the intentions of the parties about whether or not the plaintiff should have security are only materials upon which a court may decide that the defendant's enrichment would be unjust, it could be argued that on general principles it is for the plaintiff to make out a case of unjust enrichment"..
- These principles were summarised in Goff & Jones "The Law of Restitution" (7th Edition) at paragraph 3001 referring in particular to the Boscawen case.
- The equity arises from the conduct of the parties on well settled principles and in defined circumstance so as to make it unconscionable for the Defendant to deny the proprietary interest claimed by the Claimant (per Lord Justice Millett in the Boscawen case).
- It is a restitutionary remedy dependent upon the facts of the case. It involves a party being enriched at the expense of the innocent party in circumstances whereby it is just to allow that party to be subrogated to claims in order to remedy or reduce the effect of the potential injustice.
- As appears from Lord Hoffmann's judgment he considered the question of intention was relevant only as a matter of part of the facts to be considered as to whether or not to give effect to the remedy (page 234). Nevertheless he did not question the observations of Oliver J in Paul v Speirway above. It seems to me likely therefore that whilst it remains a matter of discretion for example if a party did not intend to obtain a security it could not pray in aid the subrogation to better the position. Equally subrogation cannot be used to circumvent a transaction which the Court has declared to be ineffective. Equally a party who incidentally but voluntarily confers a benefit on another party will not be granted any restitutionary relief see Owen v Tate [1976] 1 QB 402. It was suggested somewhat faintly in argument that FSCS/HMT were making voluntary payments. Whilst I can see it is an argument that is maintainable as against HMT it cannot be maintained against the FSCS because it is required to make payments if the statutory procedure is correctly set in place and operated.
RELEVANT FACTS
- It seems to me that there are a number of factors which ought to be considered in determining whether or not a restitutionary remedy can arise.
1) KSF was forced by the Notice to make the payments into the Account.
2) It did so utilising possibly the funds of the depositors whose monies it was matching.
3) KSF's funds and funds of Non-Regulated Depositors might well have been utilised to repay Edge Depositors and Non Edge Depositors before 8th October 2008.
4) The Transfer Order did not operate to assign any of the Edge Depositors' rights to FSCS/HMT. This arose because HMT used its powers under section 12 BSPA 2008 to override the obligation of FSCS to seek an assignment when paying compensation. (As I have said above the subrogation claim could only arise if there was no assignment).
5) This failure to obtain an assignment was therefore a deliberate decision by FSCS in agreement with HMT.
6) The Edge Depositors' interests in the Account were extinguished on the implementation of the Transfer Order. There was therefore no prospect of double recovery by them.
7) The FSCS can recoup the costs of funding the ING Direct transfer (as regards its contribution) by levies from regulated deposit-takers. HMT can fund it out of its resources raised by taxation or from other sources. To allow a subrogated claim would therefore throw the losses on KSF's unsecured creditors and post-Notice Non-Regulated Depositors to the benefit of those who are required to pay levies to FSCS and taxpayers who fund HMT.
8) If those subrogation rights are not conferred the monies in the Account will be utilised to repay the Non-Regulated Depositors (in so far as they do not obtain compensation under their separate scheme), and all other depositors who made deposits in the period but who did not obtain the benefit of a matching payment into the Account. Finally it would be utilised to pay KSF in respect of any post-Notice depositors who sought and obtained repayment before 8th October 2008. If there is a surplus after all that the monies will revert to KSF. That is not of course an enrichment of KSF as it is merely obtaining its monies back.
9) Under paragraph 16 of the Transfer Order FSCS/HMT will be able to prove in the insolvency of KSF for any shortfall.
- Looking at all those factors it does not seem to me that there is any unjust enrichment at the expense of FSCS/HMT which the Court ought to address by granting a subrogation claim. The major factors appear to me to be first, the fact that the monies were originally provided by KSF anyway and the idea that repayment of KSF's money involves the unjust enrichment of KSF does not seem correct. Furthre, as I have said above the premise upon which the claim is founded is that FSCS/HMT made a conscious decision not to seek an assignment. This is precisely in my view the situation covered by Oliver J in Paul v Spierway above (as approved by Lord Hoffmann). Although in his opinion it was a factor it is such an important factor that it would require some other extraordinary circumstance to enable a restitutionary claim of subrogation to apply in the face of that deliberate decision made not to take an assignment. Finally giving effect to the claim throws a disproportionate burden of the losses sustained by KSF on the creditors and post-Notice depositors as opposed to the statutory levies in the industry and the funding of a deliberate decision made by the Government to make a payment which otherwise it was not obliged to do. It made a decision to make that payment for doubtless well understood reasons in the interests of the financial services industry and thus the economy of this country as a whole but I do not see why the monetary consequences of that decision should not be born in accordance with the normal principles of funding by HMT out of its income gathering resources as opposed to throwing the burden upon the other losers in this case.
- Therefore had the question of subrogation arisen I would have dismissed any claim to be subrogated.
ANSWERS TO QUESTIONS POSED
- I set out the answers to the questions posed below.
4.1 Was a valid trust created over some or all of the monies standing to the credit of the Account?
A valid trust was created over all of the monies standing to the credit of the Account.
4.2 If the answer to question 4.1 is that a valid trust was created over some but not all of the monies standing to the credit of the Account, over which monies was a valid trust created?
Not applicable.
4.3 If a valid trust was created over monies standing to the credit of the Account, who were the beneficiaries of the trust?
The beneficiaries of the trust were all customers who made deposits to KSF between 3rd and 7th October 2008 inclusive whether or not funds were put into the Account by KSF to match such deposits.
4.4 If a valid trust was created over monies standing to the credit of the Account, what were the terms of the trust and how was the trust to operate in relation to withdrawals made by KSF Account Holders? In particular:
4.4.1 If a KSF Account Holder had a nil balance on his account with KSF on 1 October 2008 and KSF paid monies into the Account in respect of deposits made by the KSF Account Holder into his account after 1 October 2008, how was the trust to operate in relation to subsequent withdrawals made by the KSF Account Holder from his account?
4.4.2 If a KSF Account Holder had a credit balance on his account with KSF on 1 October 2008 and KSF paid monies into the Account in respect of further deposits made by the KSF Account Holder into his account after 1 October 2008, how was the trust to operate in relation to subsequent withdrawals made by the KSF Account Holder from his account?
If a KSF Account Holder was repaid during the period KSF is entitled to be repaid out of the Account any sums standing to the credit of the Account which match deposits made during the relevant period.
4.5 If KSF became absolutely entitled to the respective proportion of the monies standing to the credit of the Account when KSF Account Holders withdrew money from their accounts after 1 October 2008, what was the consequence (if any) if KSF did not, in fact, withdraw any sums from the Account?
There is no adverse consequence. KSF can withdraw the appropriate monies from the Account as soon as they are ascertained.
The effect of the Transfer Order was to assign all KSF Account Holders' rights to FSCS/HMT.
4.6 If KSF accepted "deposits" from "customers" within the meaning of paragraph 2 of the Notice, but then failed to make corresponding payments into the Account in respect of such "deposits", did those "customers" nevertheless obtain any (and if so what) interest in the monies standing to the credit of the Account? In particular, how would such interests affect or rank as regards the interests of any other persons (including KSF) in the monies standing to the credit of the Account?
All customers who made deposits within the meaning of paragraph 2 of the Notice as determined in this judgment are beneficiaries under the trust in respect of the monies in the Account whether or not there has been a matching payment. If that creates a deficiency the loss will be born pro rata across all customers.
4.7 If a valid trust was created over monies standing to the credit of the Account for the benefit of KSF Account Holders, how (if at all), were the interests of KSF Account Holders in such monies affected by the transfer of KSF's rights and liabilities in respect of Edge Deposit Accounts and Edge Savings Accounts to DMEL and thereafter to ING Direct pursuant to the Transfer Order on 8 October 2008?
The effect of the Transfer Order was to assign all Edge Depositors's rights to FSCS/HMT.
4.8 If the answer to issue 4.7 is that the interest of any KSF Account Holder in the monies standing to the credit of the Account was extinguished if the rights and liabilities in respect of his account were transferred to ING Direct pursuant to the Transfer Order, did KSF or some other person(s) become entitled to the respective proportions of the monies standing to the credit of the Account?
The interest of Edge Depositors in monies standing to the credit of the Account were extinguished but the rights of such Edge Depositors in respect of the Account were assigned as set out in answer 4.7.
- .9 In any case found to result under 4.7 and 4.8 above, does any person(s) who provided finance in connection with the Transfer Order have any (and if so, what) equitable or restitutionary remedy in respect of monies standing to the credit of the Account?
There are no equitable or restitutionary remedies in respect of the monies standing to the credit of the Account.
4.10 If a valid trust was created, how were the interests of KSF Account Holders affected by any compensation paid by the FSCS, and in particular, did the FSCS become entitled to the interests of such payees?
Yes. HMT will also be entitled by virtue of the operation of the Transfer Order.
FURTHER QUESTIONS
- In the light of the answers to the questions posed above I suspect further matters will arise. Those will be addressed if possible when the judgment is handed down. Alternatively if there are too many matters then a further date will be fixed.
- I am grateful to all Counsel for their clear and precise submissions both written and oral.
_____________________________
FIRST SUPERVISORY NOTICE
_____________________________
To: Kaupthing Singer & Friedlander Limited
Of: 1 Hanover Street, London, W1S 1AX
Date: 3 October 2008
TAKE NOTICE: The Financial Services FSA ("the FSA") of 25 The North Colonnade, Canary Wharf, London E14 5HS has taken the following action:
ACTION
- For the reasons listed below and pursuant to sections 43, 45 and 48 of the Financial Services and Markets Act 2000 ("the Act"), the FSA has decided to impose the following requirements on you, Kaupthing Singer & Friedlander Limited ("the Firm").
- The Firm is required to:
a) immediately open a segregated trust account (the 'account') with the Bank of England, or another account provider in the United Kingdom which has been approved in writing and for this purpose by the FSA, on the terms set out in (d) and (e) below;
b) upon opening the account, credit it with a cash amount which is at least as great as the aggregate value of the deposits accepted by the Firm from its customers during the course of 2 and 3 October 2008 (the 'initial deposits');
c) thereafter credit the account with a cash amount which is at least as great as the value of any subsequent deposits accepted by the Firm from its customers from time to time (the 'subsequent deposits');
d) hold money standing to the credit of the account on trust for the benefit of the customers referred to in (b) and (c) above according to their respective interests in it (which shall be the amount of their deposit(s) less any sum withdrawn on their account); and
e) apply the money standing to the credit of the account solely to repay the initial deposits and the subsequent deposits to those customers.
- The Firm is required to maintain at all times an amount (including the amount in the account) of not less than the sum of:
a) the aggregate closing balance on 2 October 2008 in all its bank accounts (including at the Bank of England) or, if greater, the aggregate closing balance on those accounts as at the close of business on any subsequent day, unless otherwise agreed by the FSA;
b) the aggregate nominal value as at the close of business on 2 October 2008 of the securities it holds which are eligible collateral for the Bank of England's Standing Facility or, if greater, such nominal value as at close of business on any subsequent day, until otherwise agreed by the FSA;
c) the cash proceeds of any repurchase agreements or returned margin, which proceeds must be applied to the Firm's account at the Bank of England;
- The Firm is required to refrain from making or giving:
a) any instructions for any payment to, or for the benefit of, any one person, or any one person and any of his associates, which has an aggregate value in excess of £250,000 without first obtaining the written consent of the FSA;
b) any disposition of its assets to, or for the benefit of, any one person, or any one person and any of his associates, which has an aggregate value in excess of £250,000 without first obtaining the written consent of the FSA.
(In this paragraph 'person' and 'anyone person and any of his associates' does not include the Firm's Parent (Kaupthing Bank HF) or any member of the Firm's Parent's group.)
- The Firm is required to refrain from doing, or omitting to do, anything which has, or may have, the effect of:
a) transferring any assets (by dividend, loan, transfer of collateral or otherwise) from;
b) creating any charge, security interest or arrangement having a similar economic effect over any assets of; or
c) incurring, or increasing, the contractual or other liabilities (including, without limitation, any liability under a guarantee or indemnity) of, the Firm
to, in favour of, or for the benefit of the Firm's Parent and/or any member of its group unless the Firm has given the FSA at least 3 days' written notice of its proposed action and the FSA has confirmed, in writing, that it has no objection to those proposals.
- The Firm is required to:
a) refrain from entering into any arrangement with its Parent, any member of its group or any other person acting on behalf of or in concert with the Parent or any member of its group that would have the effect of reducing the capital or liquidity position of the Firm unless it has given the FSA at least 3 days' written notice of its proposed action and the FSA has confirmed, in writing, that it has no objection to those proposals;
b) refrain from undertaking any further marketing of its products in the United Kingdom;
c) draw down on any open credit lines the Firm has in order to establish and maintain a liquidity position which is equivalent to the liquidity described in the Firm's liquidity mismatch guidance;
d) call in any debts due to it from the Parent.
- In this Notice:
a) 'group' has the meaning attributed to it by section 421 of the Act; and
b) 'associate' has the meaning attributed to it in section 422 (4) of the Act.
EFFECTIVE DATE
- These requirements take effect immediately.
REASONS FOR THE DECISION
Summary
- The FSA has concluded, on the basis of the facts and matters described below, that:
a) the Firm is failing, or is likely to fail, to satisfy Threshold Condition 4 (adequate resources) in Part 1 of Schedule 6 to the Act; and/or
b) it is desirable to exercise the variation of permission in order to protect the interests of consumers or potential consumers.
Relevant Statutory Provisions
- The FSA's regulatory objectives, established in section 2(2) of the Act, include the protection of consumers and maintaining confidence in the financial system operating in the United Kingdom.
- By section 45(1) of the Act the FSA may exercise its powers in relation to an authorised person if, amongst other things, a person is failing or is likely to fail to satisfy the threshold conditions or it is desirable in order to protect the interests of consumers or potential consumers. By section 45(4) of the Act the FSA's power to vary a Part IV permission extends to including any provision in the permission as varied that could be included if a fresh permission were being given in response to an application for authorisation.
- By section 43(1) of the Act, a Part IV permission may include such requirements as the FSA considers appropriate, by section 43(2)(b) a requirement may be imposed to require a firm to refrain from taking specified action. By section 48 of the Act, on giving a person a Part IV permission, the FSA may impose an assets requirement on that person (and so, by virtue of section 45(4) of the Act, the FSA may impose such requirements when varying an authorised person's Part IV permission).
- By section 53(3) of the Act a variation may be expressed to take effect immediately, or on a specified date, only if the FSA, having regard to the ground on which it is exercising its own-initiative power, reasonably considers that it is necessary for the variation to take effect immediately, or on a particular date.
Relevant Regulatory Provisions
- In deciding to take the action described above in reliance upon the facts and matters described below, the FSA has had regard to Guidance published in the FSA handbook, in particular at EG 8 and SUP 7.3.
- EG 8.1 provides that the FSA will have regard to its regulatory objectives and the range of regulatory tools that are available to it when it considers how it should deal with a concern about a firm.
- EG 8.2 provides that the FSA will take formal action affecting the conduct of a firm's commercial business if that business is being conducted in such a way that the FSA judges it necessary to act in order to address the consequences of non-compliance with the Act, the Principles and other rules.
- EG 8.5 provides that the circumstances in which the FSA will consider exercising its power include where the FSA has serious concerns about the firm, or about the way its business is being or has been conducted.
- EG 8.7 provides that the FSA will consider exercising it own-initiative power as a matter of urgency where the information available to it indicates serious concerns about the firm or its business that need to be addressed immediately, and circumstances indicate that it is appropriate to use statutory powers immediately to ensure the firm addresses these concerns.
- EG 8.9 includes, among the facts which will determine whether the urgent exercise of the FSA's own-initiative power is an appropriate response to serious concerns, the extent of any loss or risk of loss or other adverse effect on consumers.
- SUP 7.3.4 provides that if the FSA considers that a delay would be prejudicial to the interests of consumers, the FSA may need to act immediately to vary a firm's Part IV permission with immediate effect.
Facts and matters relied on
- The Firm is an authorised person carrying on regulated activities in the United Kingdom in accordance with a permission given to it by the FSA under Part IV of the Act ("the Part IV permission").
- Kaupthing Edge, an internet bank account operated by the Firm currently has customer balances of approximately £2.8bn. This represents approximately 157,845 clients.
- There are a number of factors relating to the Icelandic economy that could have a potentially adverse effect on the Firm and/or its Parent. Those factors include:
a) a deterioration in the macroeconomic environment facing the Firm and/or its Parent.
b) risks to the Icelandic economy and banking sector identified in the Concluding Statement by the International Monetary Fund issued in July 2008.
c) concerns about the ability of the Icelandic Central Bank to provide support to the banking sector considering the sector's size relative to the rest of the economy and also because of low levels of foreign exchange reserves compared to the size of the banking sector.
d) ongoing negative publicity which may provoke investors to withdraw their funds.
- On 29 September 2008 it was reported in the press that the Icelandic government had taken control of Iceland's third largest bank, Glitner, after the bank faced short term funding problems. The Icelandic Central Bank governor was quoted as saying that without this intervention Glitner would have ceased to exist within the next few weeks.
- On 30 September 2008 the rating agency Fitch downgraded the Firm's long-term Issuer Default Rating (IDR) and senior debt to 'BBB' from 'A-' (A minus) and the short term IDR to 'F3' from 'F2'. It is anticipated that this will make it difficult for the Firm to accessing wholesale funds.
Conclusions
- The facts and matters described above lead the FSA, having regard to its regulatory objectives to the following conclusions:
a) There is a material risk that the general economic conditions affecting the Firm and/or its Parent, and the downgrading of the Firm's credit rating, pose a risk to the ongoing viability of the Firm and/or its Parent's or its Parent's group's business model.
b) There is a material risk that the Firm's assets will be inappropriately transferred or dissipated to the significant detriment of consumers (including the Firm's depositors).
c) Acute adverse market conditions mean that the Firm is experiencing, or is likely to experience, material liquidity difficulties and there is a material risk that its liquidity position will deteriorate rapidly and to such an extent that it will be unable to pay its liabilities as they fall due.
d) If this occurs, the Firm will be in breach of GENPRU 1.2.26R,which requires a firm at all times to maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.
REASONS FOR MAKING THE REQUIREMENTS EFFECTIVE IMMEDIATELY
- The FSA's reasons for making the requirements effective immediately are that:
a) The Firm is continuing to accept new deposits;
b) Any transfer of the Firm's assets to the Parent or another member of its group could further reduce the liquidity available to the Firm;
c) It is desirable that this risk to potential and existing depositors is mitigated immediately;
d) It is desirable that this risk to not meeting threshold conditions is mitigated immediately.
PUBLICATION AND CONFIDENTIALITY
- The FSA is required by section 391(5)-(6) of the Act to publish such information about the matter to which this notice relates as it considers appropriate, unless such publication would in its opinion be unfair to the firm to which the requirement applies or prejudicial to the interest of consumers.
- In the opinion of the FSA, publication of any information about the matter to which this notice relates would be prejudicial to the interests of consumers, since it would be likely to provoke a crisis of confidence in the Firm which would make it more difficult to protect the interests of existing depositors.
- You may not publish this notice or any details concerning it (except for the purpose of obtaining advice on its contents).
DECISION MAKER
- This decision was taken by the Chairman of the Regulatory Decisions Committee
IMPORTANT
- This Supervisory Notice is given to you in accordance with section 53(4) of the Act. The following statutory rights are important.
The Tribunal
a) You may refer this matter to the Financial Services and Markets Tribunal ("the Tribunal"). Under section 133 of the Act, you have 28 days from the date this Supervisory Notice was given to refer the matter to the Tribunal or such other period as specified in the Tribunal Rules or as the Tribunal may allow. A reference to the Tribunal is made by way of a written notice signed by you and filed with a copy of this notice. The Tribunal's address is: 15-19 Bedford Avenue, London WC1B 3AS (telephone 020 7612 9700). The detailed procedures for making a reference to the Tribunal are contained in section 133 of the Act and the Tribunal Rules.
b) You should note that the Tribunal Rules provide that at the same time as filing a reference notice with the Tribunal, you must send a copy of the notice to the FSA. Any copy notice should be sent to Julia Dunn at the FSA, 25 The North Colonnade, Canary Wharf, London, E14 5HS.
The FSA
c) You have the right to make written and oral representations to the FSA (whether or not you refer this matter to the Tribunal). If you wish to make written representations you must do so by 6 November 2008 or such later date as may be permitted by the FSA. Written representations should be made to the Regulatory Decisions Committee and sent to Lynn Cheesman, Regulatory Decisions Committee Professional Support Services, at the above address. If you wish to make oral representations, you should inform Lynn Cheesman by
14 October 2008.
FSA contacts
d) If you have any questions regarding the procedures of the Regulatory Decisions Committee, you should contact either Lynn Cheesman (direct line: 020 7066 3192 /fax: 020 7066 3193) or Jackie Noonan, Team Leader of RDC Professional Support Services (direct line: 020 7066 3074/fax: 020 7066 3075).
e) For more information concerning this matter generally, you should contact Julia Dunn (direct line: 020 7066 1388/fax: 020 7066 1389).
Tim Herrington
Chairman, Regulatory Decisions Committee
Statutory Instruments
2008 No.
BANKS AND BANKING
The Kaupthing Singer & Friedlander Limited Transfer of
Certain Rights and Liabilities Order 2008
Made at 12.05 pm on 8th October 2008
Laid before Parliament at 4.00 pm on 8th October 2008
Coming into force at 12.15 pm 8th October 2008
It appears to the Treasury to be desirable to make this Order for the following purpose:
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 Treasury, in exercise of the powers conferred by sections 6, 8, 12, 13(2) of the Schedule 2 to the Banking (Special Provisions) Act 2008(a), make the following Order
PART 1
GENERAL
Citation and commencement
1.—(1) This Order may be cited as the Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008.
(2) This Order comes into force at 12.15 p.m. on 8th October 2008.
Interpretation
2. In this Order—
"the 1986 Act" means the Insolvency Act 1986(a);
"the 2000 Act" means the Financial Services and Markets Act 2000(b);
"the Act" means the Banking (Special Provisions) Act 2008;
"administrator" means an administrator appointed under paragraph 13, 14 or 22 of Schedule B1 (Administration) to the 1986 Act(c) or on an administration application made to the court (and if more than one administrator is appointed, the reference to "the administrator" is to any administrator so appointed);
"the Authority" means the Financial Services Authority;
"the Bank" means the Governor and Company of the Bank of England;
"Community law" means—
(a) all the rights, powers, liabilities, obligations and restrictions from time to time created or arising by or under the Community Treaties; and
(b) all the remedies and procedures from time to time provided for by or under the Community Treaties;
"the COMP Sourcebook" means the Compensation Sourcebook made by the Authority under the 2000 Act;
"Deposits Management (Edge)" means Frontpedal Limited (in the process of changing its name to Deposits Management (Edge) Limited), company registered number 6690432, a company which is for the purposes of the Act wholly owned by the Bank;
"Edge account" has the meaning given in article 3(4);
"the effective time" means the time this Order comes into force;
"eligible claimant" has the meaning given in rule 4.2.1 of the COMP Sourcebook;
"the FEES 6 Chapter" means Chapter 6 (Financial Services Compensation Scheme Funding) of the Fees Manual made by the Authority under the 2000 Act;
"the Financial Services Compensation Scheme" means the scheme established by the Authority under Part 15 of the 2000 Act (The Financial Services Compensation Scheme);
"the first transfer" means the transfer effected by article 3;
"FSCS" means the body corporate established by the Authority under section 212 of the 2000 Act (the Scheme Manager);
"ING" means ING Direct N.V., a limited liability company incorporated in the Netherlands acting through its branch in the United Kingdom with branch reference number BR7357;
"the Insolvency Rules" means the Insolvency Rules 1986(d);
"Kaupthing" means Kaupthing Singer & Friedlander Limited, company registered number 875947;
"protected deposit" has the meaning given in rule 5.3.1 of the COMP Sourcebook;
"relevant protected deposit" means a protected deposit which relates to a transferred right or liability;
"the second transfer" means the transfer effected by article 8;
"the second transfer time" has the meaning given in article 8(2);
"transferred accounts" means the accounts to which the transferred rights and liabilities relate;
"transferred liabilities" means the liabilities transferred by article 3(1);
"transferred rights" means the rights transferred by article 3(2);
"the transitional period" means the period of 6 months following the effective time.
PART 2
THE FIRST TRANSFER
The first transfer
3.—(1) Subject to paragraph (2), by virtue of this Order the liabilities of Kaupthing to holders of Edge accounts in respect of principal and accrued interest are transferred to Deposits Management (Edge).
(2) From the effective time, Deposits Management (Edge) shall have the same rights in relation to each holder of an Edge account as it would have if Kaupthing's relevant terms of business applied.
(3) Paragraph (1) does not apply to any liability in respect of any breach of contract or other duty which arose before the effective time.
(4) In this article, "Edge account" means any of the following accounts held with Kaupthing –
(a) the accounts known as Kaupthing Edge Savings Accounts; and
(b) the accounts known as Kaupthing Edge fixed term deposit accounts.
(5) The transfer under paragraph (1) takes place at the time this Order comes into force.
No consent or concurrence required
4. The first transfer is effective despite the absence of any required consent or concurrence to, or in connection with, the transfer.
Associated liability and interference
5.—(1) The first transfer takes effect as if—
(a) no associated liability existed in respect of any failure to comply with any requirement in respect of the transfer; and
(b) there were no associated interference with the transferred rights and liabilities.
(2) In this article "associated liability" and "associated interference" have the meanings given in paragraph 2(2) of Schedule 2 to the Act.
Interests, rights and liabilities of third parties relating to transferred rights and liabilities
6.—(1) No interest or right of any third party relating to any of the transferred rights and liabilities shall arise or become exercisable by virtue of or in connection with this Order.
(2) Save as otherwise provided in this Order, no third party shall incur any liability, or be subject to any obligation, relating to any of the transferred rights and liabilities, by virtue of or in connection with this Order.
(3) Without prejudice to the generality of paragraphs (1) and (2)—
(a) the consequences specified in paragraph (4) shall not arise in respect of any relevant instrument as a result of the first transfer or any other thing done, or matter arising, by virtue of or in connection with the transfer;
(b) any circumstances which, but for sub-paragraph (a), would give rise to the consequences specified in paragraph (4) shall not be taken to have arisen for the purposes of any relevant instrument.
(4) The consequences are—
(a) the termination of a relevant instrument or any rights or obligations under it;
(b) any right to terminate a relevant instrument or any right or obligation under it becoming exercisable;
(c) any amount becoming due and payable or capable of being declared due and payable;
(d) any other change in the amount or timing of any payment falling to be made or due to be received by any person;
(e) any right to withhold, net or set off any payment becoming exercisable;
(f) any event of default or breach of any right arising;
(g) any right not to advance any amount becoming exercisable;
(h) any obligation to provide or transfer any deposit or collateral;
(i) any right to give or withhold any consent or approval; or
(j) any other right or remedy (whether or not similar in kind to those referred to in paragraphs (a) to (i)) arising or becoming exercisable.
(5) Without prejudice to paragraph (4), any provision in a relevant instrument that, as a result of the first transfer or any other thing done, or matter arising, by virtue of or in connection with the transfer or this Order, provides for an obligation not to be created, suspends or extinguishes (in whole or in part) such an obligation or renders such an obligation subject to conditions, shall be of no effect.
(6) In this article—
"relevant instrument" means an instrument which provides for interests or rights of third parties and in relation to which Kaupthing is a party or is bound;
"third party" shall be construed in accordance with paragraph 2(3) of Schedule 2 to the Act.
Exemption of Deposits Management (Edge)
7. Deposits Management (Edge) is an exempt person for the purposes of the 2000 Act in respect of any regulated activity of the kind specified by article 5 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001(a) (accepting deposits).
PART 3
THE SECOND TRANSFER
The second transfer
8.—(1) By virtue of this Order the transferred rights and liabilities are transferred to ING.
(2) The second transfer takes place immediately after the first transfer ("the second transfer time").
(3) From the second transfer time, ING shall—
(a) be liable to pay depositors any accrued interest on the transferred accounts and any interest accruing at or after that time on those accounts;
(b) have the same rights in relation to each holder of an Edge account as it would have if Kaupthing's relevant terms of business applied.
(4) Paragraph (1) does not apply to any liability in respect of any breach of contract or other duty which arose before the second transfer time.
Provision of information and assistance
9.—(1) Kaupthing shall provide Deposits Management (Edge) and ING with such information and assistance as is reasonably requested by each of them, respectively—
(a) in relation to the transferred rights and liabilities;
(b) for any purpose relating to this Order; or
(c) for any purpose relating to any other function of Deposits Management (Edge) or ING, as the case may be, which relates to its functions under this Order.
(2) Kaupthing shall provide the Treasury with such information and assistance as is requested by the Treasury for any purposes relating to this Order.
No consent or concurrence required
10. The second transfer is effective despite the absence of any required consent or concurrence to, or in connection with, the transfer.
Associated liability and interference
11.—(1) The second transfer takes effect as if—
(a) no associated liability existed in respect of any failure to comply with any requirement in respect of the transfer; and
(b) there were no associated interference with the rights and liabilities transferred under the transfer.
(2) In this article "associated liability" and "associated interference" have the meanings given in paragraph 2(2) of Schedule 2 to the Act.
Interests, rights and liabilities of third parties relating to transferred rights and liabilities
12.—(1) No interest or right of any third party relating to any of the rights and liabilities transferred under the second transfer shall arise or become exercisable by virtue of or in connection with this Order.
(2) Save as otherwise provided in this Order, no third party shall incur any liability, or be subject to any obligation, relating to any of the rights and liabilities transferred under the second transfer, by virtue of or in connection with this Order.
(3) Without prejudice to the generality of paragraphs (1) and (2)—
(a) the consequences specified in paragraph (4) shall not arise in respect of any relevant instrument as a result of the second transfer or any other thing done, or matter arising, by virtue of or in connection with the second transfer;
(b) any circumstances which, but for sub-paragraph (a), would give rise to the consequences specified in paragraph (4) shall not be taken to have arisen for the purposes of any relevant instrument.
(4) The consequences are—
(a) the termination of a relevant instrument or any rights or obligations under it;
(b) any right to terminate a relevant instrument or any right or obligation under it becoming exercisable;
(c) any amount becoming due and payable or capable of being declared due and payable;
(d) any other change in the amount or timing of any payment falling to be made or due to be received by any person;
(e) any right to withhold, net or set off any payment becoming exercisable;
(f) any event of default or breach of any right arising;
(g) any right not to advance any amount becoming exercisable;
(h) any obligation to provide or transfer any deposit or collateral;
(i) any right to give or withhold any consent or approval; or
(j) any other right or remedy (whether or not similar in kind to those referred to in paragraphs (a) to (i)) arising or becoming exercisable.
(5) Without prejudice to paragraph (4), any provision in a relevant instrument that, as a result of the second transfer or any other thing done, or matter arising, by virtue of or in connection with the second transfer or this Order, provides for an obligation not to be created, suspends or extinguishes (in whole or in part) such an obligation or renders such an obligation subject to conditions, shall be of no effect.
(6) In this article—
"relevant instrument" means an instrument which provides for interests or rights of third parties and in relation to which Kaupthing is a party or is bound;
"third party" shall be construed in accordance with paragraph 2(3) of Schedule 2 to the Act.
PART 4
FINANCIAL SERVICES COMPENSATION SCHEME
Application of Part 3
13. This Part applies where, before the effective time, Kaupthing is in default for the purposes of rule 6.3.1 of the COMP Sourcebook.
Sums to be paid to ING following the second transfer
14.—(1) The following liabilities arise at the second transfer time—
(a) the FSCS is liable to pay (as soon as practicable) to ING an amount equal to the amount that eligible claimants would, immediately before the effective time, have been entitled to claim from the FSCS in respect of claims against Kaupthing in relation to relevant protected deposits; and
(b) the Treasury are liable to pay (as soon as practicable) to ING an amount equal to the aggregate amount of the liabilities transferred to ING under the second transfer less the amount specified in sub-paragraph (a) and less £5,000,000,
and the Treasury shall subsequently make the necessary adjustment such that Kaupthing obtains the benefit (net of all costs and liabilities incurred by Deposits Management (Edge)) in connection with the first or second transfer or its obligations under this Order of the reduction of £5,000,000 referred to in sub-paragraph (b).
(2) For the purposes of paragraph (1)(a), if the quantification date for a claim would have been a date other than the date on which Kaupthing was determined to be in default for the purposes of section 6.3 of the COMP Sourcebook, the amount that an eligible claimant would have been entitled to claim from the FSCS is the lesser of—
(a) the amount which the FSCS quantifies as being the value of that claim as at immediately before the effective time; and
(b) the amount which would have been payable at the quantification date, if different, for that claim.
(3) In paragraph (2), "quantification date" has the meaning given in rule 12.3.1 of the COMP Sourcebook.
(4) As soon as practicable after the second transfer time—
(a) Kaupthing shall estimate the aggregate amount of the transferred liabilities;
(b) the FSCS shall pay to ING the amount it is liable to pay under paragraph (1)(a) as estimated by the Authority; and
(c) the Treasury shall pay to ING an amount equal to the amount estimated by Kaupthing in accordance with sub-paragraph (a) less the amount estimated by the Authority in accordance with sub-paragraph (b) and less £5,000,000.
(5) From time to time—
(a) the FSCS may revise the estimate of its liability under paragraph (1)(a); and
(b) Kaupthing may revise the estimate of the aggregate amount of the transferred liabilities.
(6) In consequence of paragraph (5), the FSCS, the Treasury and ING shall make such corresponding payments to each other as are necessary to ensure that the FSCS and the Treasury have each paid to ING the amount required (and no more than the required amount) to meet their liability under paragraph (1).
(7) If at any time after the effective time Kaupthing is placed into administration, the references to Kaupthing in paragraphs (4) and (5) are to be treated as references to the administrator.
(8) The liability referred to in paragraph (1)(a) shall be assessed by the FSCS and, in doing so, the FSCS may calculate, by any methodology or approach it considers appropriate, the total amounts of compensation that would have been paid to all eligible claimants if (and to the extent that) it considers that the costs of ascertaining the entitlement to and the amount of compensation by reference to each eligible claimant would exceed or be disproportionate to the benefit of doing so.
Payment to ING to constitute payment of compensation for the purposes of the Financial Services Compensation Scheme
15. For the purposes of Part 15 of the 2000 Act (the financial services compensation scheme), the COMP Sourcebook and the FEES 6 Chapter (including, without limitation, the power of the FSCS to impose levies)—
(a) all payments by the FSCS to ING under article 14 shall constitute the payment of compensation to each eligible claimant under the Financial Services Compensation Scheme in accordance with their respective entitlements in respect of claims against Kaupthing for relevant protected deposits;
(b) in relation to a relevant protected deposit, each eligible claimant—
(i) is deemed to have made an application for compensation for the purposes of rule 3.2.1(1) of the COMP Sourcebook; and
(ii) is deemed to have accepted an offer of compensation made by the FSCS and to have received payment of such compensation for the purposes of rule 11.2.1 of the COMP Sourcebook, and, accordingly, an eligible claimant has no right to claim, and the FSCS has no obligation to pay, for a relevant protected deposit any further compensation under the Financial Services Compensation Scheme in respect of the default of Kaupthing determined by the Authority under section 6.3 of the COMP Sourcebook.
Liability of Kaupthing to the FSCS and the Treasury
16.—(1) Kaupthing is liable to the FSCS in respect of an amount equal to the amount which would have been provable in the administration of Kaupthing in respect of the transferred liabilities had this Order not been made and had Kaupthing been placed in administration immediately before the effective time.
(2) The FSCS shall pursue recoveries from Kaupthing in respect of the liability under paragraph (1) to the extent reasonably practicable.
(3) Subject to paragraph (4), if an eligible claimant had, in relation to a relevant protected deposit, a liability to Kaupthing which would have been capable of being set-off against a liability of Kaupthing to that claimant in an administration or liquidation of Kaupthing (if that liability had not been transferred), the amount which the FSCS is entitled to recover in the administration or liquidation shall be taken to be the sum of—
(a) the amount of the reduction in the depositor's liability to Kaupthing as a result of the application of the set-off; and
(b) the amount which would have been recovered in respect of the balance of the claim (if any) provable in the administration or liquidation of Kaupthing.
(4) Paragraph (3) applies only to the extent that its application does not have the effect that the other creditors of Kaupthing are in a worse position than they would have been had the set-off been applied.
(5) The FSCS shall determine the proportion of any amount which it receives or recovers from Kaupthing which is properly attributable to each type of liability described below and shall promptly, on receipt, account for that receipt or recovery as follows—
(a) in full to the Treasury, to the extent that—
(i) the receipt is attributable to a transferred liability; and
(ii) the person to whom such a transferred liability is owed would not have been entitled to make a claim for compensation from the FSCS immediately before the effective time;
(b) by reference to the relevant proportion, to the extent that—
(i) the receipt is attributable to a transferred liability;
(ii) the person to whom such a transferred liability is an eligible claimant; and
(iii) the amount of such liability exceeds the maximum compensation that the eligible claimant would have been entitled to claim from the FSCS immediately before the effective time;
and where the receipt is attributable to a transferred liability owed to an eligible claimant in relation to a relevant qualifying deposit and the amount of such liability is equal to or less than the maximum compensation that the eligible claimant would have been entitled to claim from the FSCS immediately before the effective time that amount shall be for the account of the FSCS.
(6) In paragraph (5), the "relevant proportion" is the proportion of the total liabilities which arise under article 14(1) for which the Treasury are liable.
(7) If Kaupthing is in administration, the liability incurred under paragraph (1) shall not be treated as an expense of the administration under paragraph 99(3) of Schedule B1 of the 1986 Act or rule 2.67 of the Insolvency Rules.
(8) Nothing in this Part shall have the effect that the FSCS recovers less than it would have recovered if this Order had not been made.
FSCS's power to require information
17.—(1) The FSCS may, by notice in writing given to ING, require it—
(a) to provide specified information or information of a specified description; or
(b) to produce specified documents or documents of a specified description.
(2) Paragraph (1) only applies to information and documents the provision or production of which the FSCS considers to be necessary (or likely to be necessary) for the exercise of its functions under or by virtue of this Order.
(3) Subsections (2), (4), (5) and (7) of section 219 of the 2000 Act (scheme manager's power to require information) apply to a requirement imposed under paragraph (1) as if it were a requirement imposed under that section.
Statutory immunity
18. For the purposes of section 222 of the 2000 Act (statutory immunity) the scheme manager's functions shall include any acts or omissions carried out by the FSCS pursuant to or in connection with this Order.
PART 5
THE ADMINISTRATOR AND TRANSITIONAL PROVISIONS
Application of this Part
19. This Part applies if Kaupthing is placed into administration after the effective time.
The administration
20. The relevant provisions of the 1986 Act and the Insolvency Rules shall apply to the administration of Kaupthing subject to the modifications set out in this Part.
Objectives etc. of the administrator
21.—(1) This article only applies during the transitional period.
(2) The administrator must perform his or her functions with the objectives ("the overriding objectives") of—
(a) ensuring that Kaupthing provides, and managing the affairs, business and property of Kaupthing to enable it to provide, the services and facilities reasonably required by ING to discharge its obligations in respect of the rights and liabilities under the second transfer; and
(b) ensuring that Kaupthing performs the other obligations imposed on it by or under this Order.
(3) The administrator shall only perform his or her functions with the objective determined in accordance with paragraph 3 of Schedule B1 to the 1986 Act to the extent that to do so is not inconsistent with and does not interfere with the achievement of the overriding objectives.
(4) Paragraph 3(2) of Schedule B1 to the 1986 Act only applies to the performance of the functions of the administrator to the extent that it is not inconsistent with and does not interfere with the achievement of the overriding objectives.
(5) The Treasury may, by notice in writing, give a direction to the administrator specifying that an act (or omission) is required for the overriding objectives.
(6) The Treasury may also, by notice in writing, give a direction to the administrator requiring him or her to act (or not act) if the Treasury consider that it is necessary to give such a direction for the purposes of—
(a) protecting or enhancing the stability of the financial systems of the United Kingdom;
(b) protecting or enhancing public confidence in the stability of the banking system of the United Kingdom; or
(c) protecting depositors.
(7) The Treasury may also, by notice in writing, give a direction to the administrator that he or she need not perform his or her functions in accordance with the overriding objectives, either in relation to a particular matter or generally.
(8) The administrator must comply with any directions given under paragraph (5), (6) or (7).
(9) The services and facilities to which paragraph (2)(a) applies include (but are not limited to) the services and facilities specified in the Schedule.
(10) The administrator shall not be required to include any proposals for achieving the overriding objectives in any statement he or she makes under paragraph 49 (administrator's proposals) or paragraph 54 (revision of administrator's proposals) of Schedule B1 to the 1986 Act or to obtain approval of such proposals at any creditors' meeting or from the court.
(11) The administrator shall not enter into a transaction or a series of transactions (whether related or not) to sell, lease, transfer or otherwise dispose of any property or right of Kaupthing having in aggregate a value of more than £50 million at any time unless—
(a) the court orders otherwise;
(b) the Treasury gives its consent to the transaction; or
(c) the sale, lease, transfer or disposal has been specifically approved at a meeting of creditors summoned under paragraph 51(1), 54(2) or 62 of Schedule B1 to the 1986 Act or by a creditors' committee constituted in accordance with rule 2.50 of the Insolvency Rules and the Treasury has consented to the sale, lease, transfer or disposal.
(12) In this article, "court" means—
(a) in England and Wales, the High Court;
(b) in Scotland, the Court of Session;
(c) in Northern Ireland, the High Court.
Insolvency Act and Insolvency Rules etc.
22. Nothing in the 1986 Act, the Insolvency Rules or any other enactment or rule of law shall operate to invalidate or prejudice any act or omission done under or pursuant to this Order or give rise to a claim against or impose any liability on Kaupthing or the administrator for any act or omission so done.
Services and facilities
23. The agreement dated 8th October 2008 between the Treasury and ING relating to the provision of transitional services by Kaupthing to ING shall bind Kaupthing as if it were a party.
Use of the Kaupthing brand
24. Kaupthing shall grant to ING a non-exclusive royalty-free licence to use the Kaupthing brand and the Edge brand and any relevant brands and sub-brands of Kaupthing during the transitional period for the purposes of ING carrying on its activities in relation to the rights and liabilities transferred under the second transfer.
Compensation payable to Kaupthing
25.—(1) ING shall reimburse Kaupthing for the costs and expenses (including fees) properly incurred by the administrator during the transitional period in fulfilling his or her obligations under article 21.
(2) Paragraph (1) does not apply to any cost or expense which would have been incurred in the administration if this Order had not been made.
Continuity
26.—(1) During the transitional period, any person wishing to terminate or modify (or treat as terminated or modified) any contract or agreement with Kaupthing for services and facilities or any right or obligation under such a contract or agreement must give not less than 14 days' prior written notice to the administrator and to ING.
(2) During the transitional period, any person who provides to Kaupthing, pursuant to any contract or agreement, services or facilities which are reasonably required by Kaupthing to perform its duties under or pursuant to this Order or the agreement dated 8th October 2008 between the Treasury and ING relating to the provision of transitional services by Kaupthing to ING shall, whether or not required pursuant to such contract or agreement, provide such services to Kaupthing for the benefit of ING or, at Kaupthing's request, directly to ING.
(3) Except with the consent of the Treasury or the permission of the court, during the transitional period—
(a) no person is entitled—
(i) to terminate or modify any contract or agreement with Kaupthing for services and facilities, or any right or obligation under such a contract or agreement, where the contract or agreement or right or obligation relates to services or facilities which are reasonably required by—
(aa) Kaupthing to perform its duties under or pursuant to this Order;
(bb) the administrator to perform his or her duties under or pursuant to this Order; or
(cc) ING to carry on its functions in relation to the transferred rights and liabilities, or
(ii) to treat such a contract, agreement, right or obligation as terminated or modified, by virtue of, or in connection with, the first transfer or the second transfer, the requirement to provide services or facilities to or for the benefit of ING under paragraph (2) or the commencement of the administration in relation to Kaupthing; and
(b) any counterparty to such a contract or agreement must perform his or her obligations in accordance with that contract or agreement.
(4) The services and facilities to which paragraphs (1), (2) and (3) apply include (but are not limited to) the services and facilities specified in the Schedule.
(5) Any purported termination or modification of any contract, agreement, right or obligation in contravention of paragraph (1), (2) or (3), and any action taken in consequence of any such purported termination or modification, shall have no effect.
(6) Paragraph (2) does not apply where—
(a) Kaupthing, ING or the administrator, as the case may be, has failed to perform its payment obligations under the relevant contract or agreement and such non- payment is not remedied within 14 days of that person becoming aware of the non-performance; or
(b) Kaupthing, ING or the administrator, as the case may be, fails to notify the counterparty to the relevant contract or agreement within 14 days of its becoming aware of the request for consent to such termination, modification or non- performance of an obligation, that such consent has been withheld.
(7) Without prejudice to the generality of paragraph (3), the first transfer or the second transfer shall not have the effect of terminating or otherwise changing the terms of Kaupthing's membership (if any) of any payment system, including, in particular, BACS, CHAPS and the LINK payments systems.
(8) "Court" has the meaning given by article 21(12).
(9) This article is subject to any requirement of Community law.
Moratorium on payment to related companies
27.—(1) Kaupthing shall not make any payment, dispose of any property or modify or release any right or liability to or for the benefit of a related party without the prior consent of the Treasury, and any such purported payment, disposal, modification or release shall be void.
(2) No related party shall exercise any right of set-off or combination of accounts in respect of any debt owing by Kaupthing without the consent of the Treasury, and any such purported exercise shall be void.
(3) In this article, "related party" means any member of the same group as Kaupthing that is not a subsidiary undertaking of Kaupthing.
(4) In paragraph (1), if Kaupthing is in administration, the reference to Kaupthing is to be treated as a reference to the administrator.
(5) In paragraph (3), "group" has the meaning given by section 421 of the 2000 Act.
PART 6
MISCELLANEOUS
Construction of documents etc.
28. As from the effective time and save as otherwise provided in this Order—
(a) agreements made or other things done by or in relation to Kaupthing shall be treated, so far as may be necessary for the purposes of or in connection with the first transfer or the second transfer (but not otherwise) as made or done by or in relation to Deposits Management (Edge) or ING or both, as the case may be and as the context requires;
(b) references to Kaupthing or to any officer or employee of Kaupthing in instruments or documents relating to the transferred rights and liabilities and rights and liabilities transferred under the second transfer, shall have effect as if they were references to Deposits Management (Edge) or ING or both, or to any officer or employee of Deposits Management (Edge) or ING, as the case may be and as the context requires.
Modification to Authority's rule-making power
29.—(1) Subsections (1) and (1A)(a) of section 138 of the 2000 Act (general rule-making power) have effect as if modified by inserting after "protecting the interests of consumers"—
"or for the purposes of, to facilitate or in consequence of, a transfer under section 6 or section 8 of the Banking (Special Provisions) Act 2008".
(2) Section 148(2)(b) of the 2000 Act (modification or waiver of rules) shall also apply in relation to Kaupthing—
(a) in the absence of an application by a person subject to rules made by the Authority; and
(b) without any requirement for the consent of such a person.
(3) Section 148(4)(c) of the 2000 Act shall not prevent the Authority from modifying or waiving rules in relation to Kaupthing under section 148 of that Act provided that the Authority is satisfied that the modification or waiver is necessary for the purposes of, to facilitate or in consequence of the first transfer or the second transfer.
Modification to Authority's duty to consult on rule changes
30.—(1) Section 155(7) of the 2000 Act (consultation) has effect as if modified by adding at the end—
"or if it is making rules for the purposes of, or to facilitate or in consequence of, a transfer under section 6 or section 8 of the Banking (Special Provisions) Act 2008."
(2) Section 157 of the 2000 Act (guidance) has effect as if modified by adding after subsection (3)—
"(3A) Section 155(7) applies to proposed guidance as it applies to proposed rules with the modification made by article 30 of the Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008.".
Freedom of information
31. For the purposes of section 3(2)(b) of the Freedom of Information Act 2000 (public authorities)(a), Deposits Management (Edge) shall be deemed not to hold information on behalf of the Bank.
Proceedings against directors
32.—(1) No director of—
(a) Kaupthing; or
(b) Deposits Management (Edge),
shall be liable in connection with the first transfer or the second transfer or any other provisions of this Order and accordingly no proceedings may be brought (or, in Scotland, raised) against any such director in respect of such matters.
(2) The Treasury may in writing—
(a) waive the effect of paragraph (1), and
(b) give consent to bring (or, in Scotland, raise) such proceedings against such directors.
(3) Where paragraph (1) applies, section 232 of the Companies Act 2006(b) (provisions protecting directors from liability) shall not apply to a relevant undertaking.
(4) In this article—
"director" means a person who was a director immediately before the effective time, whether or not he has ceased to be a director at the time when proceedings in respect of that liability commenced;
"proceedings" includes proceedings under Part 11 of the Companies Act 2006 (derivative claims and proceedings by members).
Immunity of Bank
33.—(1) The Bank has immunity in relation to action or inaction in relation to or pursuant to this Order.
(2) In this article—
(a) a reference to the Bank is a reference to the Bank and anyone who acts or purports to act as a director, officer, servant or agent of the Bank;
(b) "immunity" means immunity from liability in damages.
(3) The immunity does not extend to action taken—
(a) in bad faith, or
(b) in contravention of section 6(1) of the Human Rights Act 1998(a).
Transfer of data
34. Any transfer of data under this Order is not to be taken to breach any restriction on disclosure of information, however imposed.
Frank Roy
Dave Watts
8th October 2008 Two of the Lords Commissioners of Her Majesty's Treasury
SCHEDULE
SERVICES AND FACILITIES
- Website hosting services or facilities.
- Information technology services or facilities.
- Back office processing services or facilities.
- Call centre services or facilities.
- Payment and clearing services or facilities.
EXPLANATORY NOTE
(This note is not part of the Order)
This Order is made under the Banking (Special Provisions) Act 2008 (c.2) and provides for certain rights and liabilities to be transferred from Kaupthing Singer & Friedlander Limited ("Kaupthing") to Deposits Management (Edge) Limited ("DMEL").
The Order then provides for the transfer of the liabilities transferred to DMEL to be transferred to ING Direct N.V. and for the operation of the Financial Services Compensation Scheme in relation to that transfer.
The first transfer is given effect by article 3, which transfers the liabilities of Kaupthing to holders of Edge accounts to DMEL, and confers associated rights on DMEL.
The remainder of the articles in Part 2 make provision associated with the transfer, including in relation to interests, rights and liabilities of third parties relating to rights and liabilities transferred (article 6) and exemption of DMEL from the general prohibition in the Financial Services and Markets Act 2000 in respect of accepting deposits (article 7).
Part 3 provides for the second transfer from DMEL to ING Direct N.V. It also includes provision for information obligations in relation to Kaupthing (article 9), that no consent or concurrence is required (article 10), no associated liabilities or interferences arise (article 11) and makes provision in relation to interests, rights and liabilities of third parties relating to rights and liabilities transferred in the second transfer (article 12).
Part 4 concerns the Financial Services Compensation Scheme and applies where before the transfer Kaupthing is in default for the purposes of that Scheme. It provides for certain sums to be paid to ING Direct N.V. by the Financial Services Compensation Scheme and the Treasury (article 14).
Article 15 provides that, for the purposes of the provisions which govern that Scheme, the payments made by the FSCS under article 14 constitute the payment of compensation to each qualifying claimant under that Scheme.
Article 16 provides for certain liabilities of Kaupthing to the FSCS, and requires the FSCS to account to the Treasury for certain amounts recovered by it from Kaupthing.
Part 5 makes provision in relation to the administrator and applies if Kaupthing is placed into administration after the transfer.
Article 21 imposes overriding objectives on the administrator relating to Kaupthing's obligations under the Order and the provision of services by Kaupthing to ING to enable it to operate the transferred accounts.
Article 26 imposes obligations and restrictions in relation to contracts to which Kaupthing is a party.
Article 27 imposes a moratorium on payments by Kaupthing to a related company.
Part 5 contains miscellaneous provisions, including as to construction of references in documents relating to Kaupthing (article 28) and a bar on proceedings against directors of Kaupthing and DMEL in relation to the transfers (article 32).
An Impact Assessment of the effect of this instrument on the costs to business has been prepared. It may be obtained from the Financial Stability Team, HM Treasury, 1 Horse Guards Road, London SW1A 2HQ. It is also available on HM Treasury's website (www.hm-treasury.gov.uk). Copies of the document have been placed in the libraries of both Houses of Parliament.
LT091490056
Summary
The following is an approximate summary of the relevant figures. A detailed description is provided below.
| Amount |
Description |
Description |
| £3.9bn |
Total physical cash receipts of KSF |
Total physical cash receipts of KSF |
| £946 million |
Approximate amount identified by IT script as possible "customer" "deposits" |
Approximate amount identified by IT script as possible "customer" "deposits" |
| |
£652m |
Approximate amounts removed from "customer" "deposit" group on the basis that these were proceeds of transactions being carried out by KSF (such as money market transactions). |
| |
£141m |
Approximate amounts removed from "customer" "deposit" group on the basis that they were received from financial institutions or group companies |
| |
£153m |
Amounts remaining after above deletions.
This includes:
£147m sterling (which was transferred to the Account); and
£6m equivalent foreign currency (which was not transferred) |
Explanation
The above figures and the following explanation have been prepared by Mr Carrigan to assist the Court.
Some of the figures are approximate. In particular, many of the figures were prepared recently and are not based on what Mr Carrigan did at the relevant time or the spreadsheets as used by Mr Carrigan at the time. In particular, there may be some entries involved in the present analysis that are included for the purpose of these calculations, but were posted by the Joint Administrators after the date on which the original IT script was run but which were for value on 2, 3, 6 or 7 October. It is not practicable to remove these late entries or re-create systems as at the relevant time.
During the relevant period, the total physical cash receipts by KSF totalled approximately £3.9bn (Paragraph 44 of the first witness statement of Maggie Mills). This includes amounts that were received by KSF as a banker (for example, a deposit to a current account) as well as amounts received as part of transactions being carried out by KSF (for example, a payment from a counterparty under a money market transaction).
From that £3.9bn, there were approximately £946 million amounts identified by the IT Script and the EDGE department as possible "customer" "deposits" (£126m EDGE, £819m non-EDGE).
Mr Carrigan has considered the current records of KSF to estimate the amounts that were (or, in the case of foreign currency, would have been) excluded by his manual deletion process. These amounts are as set out below.
From £946 million:
(a) An amount of approximately £652m (£406m sterling and £246m equivalent foreign currency) is referable to amounts received as part of transactions being carried out by KSF (for example, a payment from a counterparty under a money market transaction). This includes certain transactions with banks/financial institutions and group companies.
It was intended that these transactions were to be excluded by the IT Script and a large number of these transactions were excluded. However, a few such transactions remained after the operation of the IT script. This is because those money market transactions were carried out between KSF and an account-holder of KSF. They were not excluded by the IT Script because the amounts were shown in the relevant account-holder's account. However the amounts showing in the accounts were payments as a result of money market transactions between KSF and the account-holder rather than being deposits by the account-holder.
(b) An amount of approximately £141m (£140m sterling and £1.2m equivalent foreign currency) is referable to amounts that were received from banks/financial institutions or group companies.
The amount remaining after the deletions by Mr Carrigan[2][3][4][5][6][7][8][9][10][11][12][13][14] was approximately £153m (£147m sterling and £6m equivalent foreign currency).
It is not possible to obtain useful figures in relation to withdrawals from the accounts. This is because to determine the withdrawals made from the accounts to which money was deposited during the period requires an account-by-account reconciliation which has not yet been carried out and which will be time-intensive, particularly given the number of accounts involved. These numbers therefore do not reflect the withdrawals from relevant accounts in the period 2-7 October 2008.
