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With this it will be convenient to discuss the following amendments: No. 141, in clause 36, page 16, line 20, leave out property and insert physically situated.
No. 142, in clause 36, page 16, line 21, leave out
rights and liabilities under foreign law and insert
a right in action which exists only under the jurisdiction outside the UK (disregarding any arbitration provisions).
I mentioned clause 36 a moment ago in the context of foreign property, of which the clause provides a definition. Amendments Nos. 140 to 142 are probing amendments, which attempt to clarify the definition of foreign property. The provision is important in that it applies to a partial property transfer order to preserve set-offan issue that we shall turn to shortly. Therefore, it is important to get the definition right. There is a drafting error in amendment No. 142, which the Minister may identify.
I shall give the Minister and the Committee examples of circumstances in which it is not entirely clear what is and is not foreign property. I will be hugely impressed if the Minister is able to provide an immediate answer; I fear that I am being a little unfair on him for ambushing him by providing these examples, but any guidance that he provides will be helpful. None the less, if there is uncertainty, it is helpful for the Committee to be aware of it.
We have received representations giving areas where the current definition is unclear. The examples are as follows: First, English law bearer securities held outside of the UK, for example in Euroclear, in Belgium, or in Clearstream, in Luxembourg; secondly, a New York-law-governed option over UK property, for example commodities held in a UK warehouse; thirdly, an English-law-governed right to the delivery of US securities; and finally, a German-law-governed right to the repayment of a loan denominated in sterling made by a UK bank branch.
I do not expect the Minister to provide immediate answers, but I may be doing him down. I highlight those cases to demonstrate that this is a complicated area. What is foreign property and what is UK property is not always clear, given that there are various conflicting elements, such as the choice of law, the relevant currency and the type and location of the property. There are all sorts of complicating factors. It has been put to us that clause 36 is perhaps not as clear as it might be in determining which factors are predominant.
We have already considered, in clause 32, that a property transfer instrument may make provision to transfer foreign property. In domestic law, the transfer of foreign property will be recognised as effective because it is authorised by primary legislation. The only exception to this is when the transfer is contrary to European Community law, an issue that we considered in the debate on the proposed amendment to clause 32 tabled by the hon. Member for Wellingborough. The critical question is whether the transfer of foreign property will be recognised as valid under foreign law legal regimes. If foreign courts will not recognise the transfer, it might not be practically effective.
Clause 36 makes further provision to ensure that transfers of foreign property are recognised as effective when that is not the case simply by virtue of the property transfer instrument. In particular, an obligation is imposed on the transferor to take steps to ensure the effectiveness of the transfer under the foreign law legal regime. For instance, the transferor might have an obligation to ensure that property registered in the United States, or in any other country, is effectively transferred.
The hon. Member for South-West Hertfordshire raised some interesting points on whether our definition of foreign property is adequate and on what may or may not be covered. I do not have an answer for him immediately available. However, I can respond to the point he made about arbitration when we discussed clause 32. The purpose of clauses 32 and 36 is to secure the greatest possible scope for the recognition of transfers under foreign law. International commercial documentation may be subject to arbitration provisions, so the effect of the exercise of stabilisation powers will depend on the context. In certain circumstances, it might be necessary to override provisions subject to arbitration, such as an event of default that applies on the exercise of stabilisation powers. However, if a later question arose on the compliance with the agreement by the transferee, that matter would fall to be determined by arbitration in the ordinary way.
Amendments Nos. 140 to 142 seek to change the definition of foreign property. That provision has deliberately been drafted broadly so that it applies to all property where questions of recognition under foreign law legal regimes might arise, and the hon. Gentlemans amendments are likely to narrow the scope of the definition. Again, that relates to our general point that we seek to future-proof legislation as far as possible and have broad categories, rather than specific ones for particularly narrow definitions. Were the amendments to be accepted, the provision of clause 36 could not be used for some foreign property, even if doing so would be beneficial for the resolution and in the public interest. I am sure that the hon. Gentleman would not want that to happen.
I am grateful for the Ministers explanation. Have there been discussions with the American Government about the transfer of what would, in effect, be their assets, if an American company were involved? Has there been an agreement with the Americans that one would be allowed to register in America, despite that perhaps damaging the rights of a US-based company? Has there been intergovernmental discussion on those issues?
I am not aware that the UK Government have had discussions on the Bill with foreign Governments. We have, however, consulted extensively with the banking sector. Many banks that operate in the UK are international and are governed by a variety of jurisdictions. The points that have come back to us from the consultation reflect the global nature of the banking system. In general, if a matter is wholly governed by domestic law, the transfer will be effective because it is authorised by primary legislation. Here we are talking about matters governed wholly or partly by foreign law, which will attract the additional assistance provided for in clause 36.
I shall give an example of problems that might arise if amendments Nos. 140 to 142 were accepted. The amended definition of foreign property would not extend to liabilities under foreign law, yet liabilities might form a key part of a contractual relationship critical to the operation of the banking businessfor example, the obligation to pay for services provided under an IT contract. Clauses such as clause 36 have been used in other contexts, for example in paragraph 11 of schedule 21 to the Energy Act 2004, which makes provision for energy transfer schemes where energy companies enter special administration, and in the Banking (Special Provisions) Act 2008 itself.
Although the provision in the clause cannot guarantee foreign law recognition in all circumstances, it gives the authorities the greatest scope possible under domestic law to secure such recognition, and could prove to be an essential component of a successful resolution. I therefore invite the hon. Member for South-West Hertfordshire to withdraw his amendment, because it would unnecessarily and unhelpfully get in the way of a potentially successful resolution under the SRR.
We are in danger of falling into the traditional roles of a Government Minister seeking greater flexibility and an Opposition spokesman seeking greater clarity. It is probably right that we perform those roles.
I am grateful for the Ministers comments on the arbitration provisions. As I mentioned, I did not expect him to be able to respond to the examples that I gave of ambiguity in the definition of foreign property. It may be helpful to the Committee and for the general interpretation of the clause if he could provide a written response.
I will not press the amendments. I have made my point, which is that there is a lack of clarity. I understand why the Government want flexibility in the circumstances, but outside bodies have suggested that it is not clear how the provision will work. It would be helpful for all concerned if the Minister would address that in due course. I beg to ask leave to withdraw the amendment.
Subsection (6) states:
An obligation imposed by this section is enforceable as if created by contract between the transferor and transferee.
It is not entirely clear why the deemed contractual provisions should displace a persons right under breach of statutory duty. I should be grateful if the Minister could explain why the subsection is included here. I have not noticed whether it is included elsewhere.
As I made clear, clause 32 is about property transfer instruments involving transfer of foreign property. As we said earlier, clause 36 provides a mechanism to require a transferor to take steps to ensure that the transfer is effective. Such provisions were used in the resolution of Bradford & Bingley. The transfer order provided that Bradford & Bingley should take appropriate steps to make the transfer of foreign property to Abbey Santander successful.
The mechanism for ensuring that a transferor takes appropriate action is that an obligation may be placed on him. The hon. Member for South-West Hertfordshire proposes that the obligations should not be enforceable as if created by a contract. The Government consider that this would reduce the likely effectiveness of a transfer of foreign property. If an obligation were not enforceable as a contract, it would be more difficult to compel the transferor to take steps to ensure that a transfer was successful.
For example, because the obligation is enforceable as a contract, any person who is unwilling to comply with it must consider whether the authorities would be able to bring a claim for substantial damages, should non-compliance prejudice the resolution and give rise to economic loss. Other contractual remedies would also potentially be available to compel compliance with the obligation, such as an interim injunction and an order for specific performance. The absence of such incentives to comply would reduce the likelihood of a successful resolution, particularly if a piece of foreign property was essential to the operation of the bank. Further, it could put off a potential private sector purchaser. In short, the Government do not believe it would be in the public interest to admit this provision, and it is for those reasons that we think that Amendment No. 143 would be damaging and unhelpful.
When I dealt with the United States when I was in business, our contracts always included a clause stating that they would be interpreted by the law of a particular jurisdiction. Sometimes it would be UK law and sometimes it would be US law. What happens here? If the clause states that it will be interpreted in relation to UK law, all the damages and all the threats in this very sensible clause would apply. However, if it is interpreted under the laws of the USA, none of that would apply. How do the Government intend to get around that problem unless there is some sort of mutual discussion with other states, particularly a major trading partner like the US?
I do not wish to oppose the clause. In noting its importance, I assume that the word property in the present context means anything capable of being owned. I assume that it is a broad definition and not restricted to real property. I assume that the word foreign means anything that is not susceptible to UK law. I can see that the Government are trying to make the proposals as comprehensive as possible. They need to be sweeping proposals because the subject with which we are dealing is extremely complicated.
My hon. Friend the Member for Wellingborough referred to American law but I think I am correct in saying it is not American law that would govern such a contract but the law of Delaware or California or Rhode Island. That, too, is a complication.
Some of the instruments that can be brought forward can be extremely opaque. I remember that the most opaque instrument I was capable of creating when I operated many years ago was a Liechtenstein Anstalt, which is an unincorporated body in Liechtenstein, controlled by Virgin Island bearer shares, which is almost impossible to work through. It is a very opaque suitcase. So we are dealing with complicated fields which can require very sweeping provisions.
Subsection (6) says that
an obligation imposed by this section is enforceable as if created by contract between the transferor and the transferee.
That is a sweeping provision indeed. Similarly, subsection (7)(b) says that
obligations imposed by direction are enforceable as if created by contract between the transferor and the Bank of England.
It is important that we keep a sense of proportion in having these sweeping provisions. If one goes too far with them it may well be resented by foreign legal bodies and diminish foreign law recognition. I would be reassured if the Minister could tell me that this point has been considered, that we have gone as far as we need to go and no further, that careful consideration has been given to foreign law recognition and that he is confident that, insofar as it is possible to ensure the certainty that he desires, this will indeed be the result.
Let me try to answer some of the direct questions that have been asked. The hon. Member for Gosport asked about the definition of foreign. I refer him to subsection (8), which makes it clear that this is a jurisdiction other than the UK. I am happy to confirm that property has a wider definition and is not confined to real estate.
This is an important clause. Subsection (3) states that
the transferor and the transferee must take any necessary steps to ensure that the transfer is effective as a matter of foreign law.
It is not the case, as the hon. Member for Wellingborough suggests, that we have to have extensive dialogue with other jurisdictions. We are trying to ensure that the transferor and the transferee fulfil obligations that we are imposing to take the necessary steps to help bring about a successful resolution.
Subsection (4) makes provision for the period before a transfer may be fully effective as a matter of foreign law. For this period the transferor must act on behalf of the transferee by holding any property or right for its benefit and discharging any liability on its behalf. Subsection (5) makes it clear that expenses incurred by the transferor in relation to these acts must be met by the transferee.
The hon. Member for Gosport raised some issues about what he regarded as the sweeping powers and obligations under subsections (6) and (7). As I sought to make clear in a previous debate on an amendment, we believe that it is important that there is enforceability as a contract in the unlikely instance where someone might be unwilling to comply. As I explained, in those circumstances there will be potential remedies that the authorities could bring, such as a claim for substantial damages. Other contractual remedies could potentially be available to encourage compliance with the obligation, and I mentioned an interim injunction or an order for specific performance. We think that it is right that those enforcement powers are contained in those subsections. As a general matter of course, however, we would expect to reach agreement with both the transferor and the transferee about the circumstances that will pertain with regard to foreign property. As is always the case when framing legislation, it is of course appropriate to consider every eventuality, and that is what we are seeking to do with some of the wording in the clauses subsections.