Section 103: State aid
581.Part 3 of the Banking Act 2009 creates a new administration procedure for banks in certain cases. For example, the Bank may apply to the court for an order appointing a bank administrator following a transfer under Part 1 (special resolution regime) of some of the business of a failing bank: (a) to a commercial purchaser (section 11(1)); and/or (b) to a bridge bank (section 12(1)).
582.A bank administrator has two objectives: (a) Objective 1 is to provide support to the acquirer of the transferred business in order to ensure the business can continue to be operated effectively; and (b) Objective 2 is “normal administration” (that is, to rescue the residual bank as a going concern or to achieve a better result for the bank’s creditors as a whole than would be likely if the residual bank had been wound up without first being placed in bank administration). The bank administrator is required to begin working towards both objectives immediately upon appointment (section 137(2)). However, Objective 1 is to take priority over Objective 2. This means that the interests of the creditors are essentially subordinated until such time as Objective 1 has been completed.
583.Section 103 inserts into Part 3 a new section 145A which confers a power on the Treasury to issue directions to a person appointed as a bank administrator for the purposes of ensuring compliance with any undertakings, commitments or conditions given or imposed in relation to the consideration and approval by the European Commission of any State aid given in connection with an exercise of transfer powers under Part 1 of the Act.
584.Article 107 of the Treaty on the Functioning of the European Union effectively prohibits Member States from using State resources to provide aid to institutions on a selective basis where such aid would distort or threaten competition (as this would be incompatible with the principles of the internal market), unless such aid is approved by the Commission, for example, where aid is provided to remedy a serious disturbance in the economy of a Member State. In many cases the resolution of an institution by way of an exercise of one or more of the stabilisation powers under Part 1 of the Act will involve the use of public funds (in other words, State resources), for example, by virtue of the provision of: (a) a capital facility to the residual of a failed institution; (b) a capital facility to a bridge bank; or (c) funding to facilitate the transfer of business from a failed institution to a private sector purchaser. Therefore, in such cases the UK will need to notify and seek the approval of the European Commission to any aid provided and ensure compliance with any undertakings, commitments or conditions in relation to the approval of any aid granted.
585.The new power of direction ensures that the UK can secure compliance with any commitments given in connection with a State aid measure, and any undertakings given or conditions imposed on the residual of a failed institution by issuing a direction under subsection (2) to a bank administrator. Such a direction would give cover to a bank administrator to act in such a way as may be necessary to secure compliance with any conditions imposed by the Commission which would otherwise be incompatible with the administrator’s duties towards the creditors of the failed bank (for example, a requirement for the failed bank to surrender its Part 4A permission to carry on a specific regulated activity or to cease entering into new contracts to provide a particular kind or regulated financial service which the administrator may otherwise wish to maintain/carry on for the purposes of achieving the best outcome for the creditors of the failed bank). In addition, subsection (7) confers a power on the Treasury to confer on the person subject to the direction immunity from liability in damages for action or inaction taken in accordance with a direction.