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The clause relates to termination rights. In particular, it contains a definition of default event provision and provides a list of circumstances. Amendment No. 139 would delete items (e) to (i). We are raising a query because the items provide examples of circumstances that do not appear to be termination rights or default events as such but could cover almost any obligation under a contract.
For example, item (e) reads,
a sum becomes payable or ceases to be payable, and item (f) reads,
delivery of anything becomes due or ceases to be due.
Item (h) reads,
any other right accrues, changes or lapses, and (i) reads,
an interest is created, changes or lapses.
Those situations are quite broad and might happen in the course of a contract without any suggestion of a default event. Will the Minister clarify why those subsections are there? Does he recognise the concern that, given the current drafting of clause 35, a default event appears to be very broadly defined, and will he explain to the Committee why that is the case?
The clause sets out certain provisions relating to events of default and makes similar provisions to those in clause 21, which we debated last week. As has been noted, events of default are extremely common in contractual documentation. If the act of making a transfer or events leading up to that act triggered contractual rights for parties to terminate or modify their contractual arrangements with a failing bank, it could reduce significantly the banks ability to continue as a going concern. That would reduce the value of the business transferred and might even render resolution under the special resolution regime impossible. Clearly, that would have a number of significant implications for the resolution.
A transfer of property is likely to be characterised as an event of default, which would give counterparties the right to terminate or modify contractual arrangements in the event that the authorities exercise the transfer powers. Therefore, the provisions in the clause specifying that the authorities may turn off event of default clauses are extremely important for a successful transfer.
Subsection (1) defines a default event provision. The hon. Gentlemans amendment would significantly narrow that definition. In broad terms, what he seeks to achieve is to carve out events that do not relate specifically to the right to terminate, modify or replace agreements. Although the amendment would still provide the authorities with the means to turn off any right to terminate, they would not have the power to turn off other rights that might accrue through the exercise of the property transfer power. We believe that the existence of those rights could pose significant challenges to the resolution.
For example, suppose that the counterparty could create the right for a penalty sum to be payable if the property transfer powers were exercised. That could require the authorities to pay a substantial sum if relevant property were transferred to either a bridge bank or a private sector purchaser. That would not be in the public interest, and could have the same economic and commercial effect as a right to terminate the agreement, or perhaps an even more adverse effect.
The hon. Gentleman says that the powers are very broad. They are far more refined than the powers taken in the Banking (Special Provisions) Act 2008, which includes powers for authorities to turn off any event of default of any person having a specified connection with a deposit taker, a very broad power indeed. In contrast, the provisions in clause 35 are significantly more refined. The default event provision cannot be entirely unrelated to the transfer. Instead, it must be related to
the making of the [property transfer] instrument...anything that is to be, or that may be, done under or by virtue of the instrument, and...any action or decision taken or made under this or another enactment in so far as it resulted in, or was connected to, the making of the instrument.
They are also designed to be adapted to particular circumstances. Therefore, where practicable, an event of default could be modified rather than entirely disapplied, as provided for in subsection (4). The very broad powers in the Banking (Special Provisions) Act 2008 have been narrowed following consultation and contained in clause 35.
I hope that I have demonstrated to the Committee that this clause is necessary and that the amendments would place an unwarranted restriction that might get in the way of a successful resolution.
This clause is extremely important and the Government are right to draw it to our attention. I wonder what would happen in the case that, although the default clause could not be operational under law, nevertheless the company with the default clause went ahead. Is this similar to chapter 11 protection in the USA, where creditors cannot enforce against a company that is in chapter 11? Is it the intention that if a company is dealing with a bank which then has a transfer under these provisions, it is forced to continue with the original contract in the manner in which it was first drawn up and not allowed to stop? I assume that is what it means, but I would like the Minister to clarify that point.
I am happy to provide what clarification I can. It is important to set this clause within the overall context of what we are trying to achieve, which is to deal with failing banks and to find the most appropriate remedy, whether it be transfer to a private sector purchaser, a bridge bank or taking the failing bank into temporary public ownership. This clause sets out certain provisions in relation to events of default. In the circumstances of a failed bank where we want to take action in the public interest and protect depositors, we cannot have a situation where events of defaultbuilt into contracts under normal contractual arrangementscan be engaged and in effect frustrate the action that we want to take in the public interest. Disapplying these events of default provisions, as we seek to do in this clause, is a sensible way to ensure that we can use the SRR for the purposes intended.
I understand the Ministers argument entirely. It is right that the person who would normally enforce the default clause is not allowed to enforce the default, which may be to claim back the money. Does it go further to establish the principle that parties have to continue with the contract in the previous form, or are they allowed to stop the contract but not enforce the default clause?
I understand the point the hon. Gentleman is making. The purpose is certainly to allow transfers to go ahead and there will be a right to continue the contract. He raises an important point about whether a counterparty might subsequently desire a change of contract in the future; I think that that would be part of normal commercial arrangements. The intention is to deal with situations as I have described, in which we are trying to rescue all of or parts of a failing bank. It would not be possible to transfer property effectively if events of default were being exercised on a routine basis, which is common in normal commercial contracts. That is why the termination rights clause is in the Bill and is essential if we are to have effective property transfers.