England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/10/2009

Lord Justice Richards :

1. The claimant ("Kaupthing") is the ultimate parent company of, and 100% shareholder in, Kaupthing Singer & Friedlander Limited ("KSF"). It challenges the legality of the Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order, SI 2008 No. 2674 ("the Transfer Order"), made on 8 October 2008 by HM Treasury ("the Treasury") pursuant to section 6 of the Banking (Special Provisions) Act 2008 ("the 2008 Act"). The main effect of the Transfer Order was to transfer to a third party the liabilities of KSF to the holders of its "Edge" accounts. The broad context in which the order was made was the developing financial crisis and growing loss of confidence in the banking sector in September and early October 2008.
2. Kaupthing is the largest Icelandic bank and is registered in Iceland. It states that it was seriously damaged by the making of the Transfer Order. The Transfer Order was followed almost immediately by the placing of KSF into administration on the application of the Financial Services Authority ("the FSA") pursuant to section 359 of the Financial Services and Markets Act 2000 ("the 2000 Act"). Certain of Kaupthing's creditors treated the circumstances of KSF's administration as an event of default by Kaupthing under various loan agreements, making it necessary for the board of directors to seek protection for Kaupthing from the Icelandic authorities. On 9 October the board of directors resigned and the Icelandic supervisory authority ("the FME") appointed a receivership committee ("the Resolution Committee") which assumed the powers and authority of the board. In effect, Kaupthing was nationalised.
3. The proceedings are stated to have a dual motivation to them. First, the Icelandic economy was devastated by the collapse of the country's three main banks, and we are told that there is a widespread belief in Iceland that the British Government is to blame for much of the damage and, in particular, that the Treasury overreacted in relation to KSF. The application is brought with the support of the Icelandic Government. Secondly, the Resolution Committee regards the application as a first and necessary step in a claim for damages under the Human Rights Act 1998 which it intends to pursue against the Treasury in order to discharge its duties to the creditors of Kaupthing and the FME.
4. In view of the first motivation for the proceedings, the court should stress at the outset that its sole function is to determine the legal issues raised by the challenge to the Transfer Order and that those issues are very limited in scope. The first main issue is whether the Transfer Order was made for the purpose specified in the enabling legislation. The second main issue is whether the Treasury failed to identify (and properly to understand and inform itself about) a specific threat to the stability of the UK financial system arising out of KSF's liquidity difficulties, and wrongly treated the issue simply as an undifferentiated part of a wider global, or Icelandic, financial crisis. In so far as the claimant's evidence makes wider criticisms of the British Government or the UK regulatory authorities, they are not relevant to the issues for decision and it is not appropriate for the court to consider them.

The Banking (Special Provisions Act) 2008

5. The immediate occasion for the enactment of the 2008 Act was the need to take Northern Rock into public ownership. The Act was intended to provide an interim regime conferring powers on the Treasury to deal with the developing financial crisis. Comparable powers are now contained in the Banking Act 2009.
6. The relevant power in the 2008 Act is that conferred by section 6, which provides:

"6.(1) The Treasury may by order make provision for or in connection with, or in consequence of, the transfer of property, rights and liabilities of an authorised UK deposit-taker to either (or each) of the following –

(a) a company wholly owned by the Bank of England or the Treasury;

(b) a body corporate not within paragraph (a)."

By section 13(5), a statutory instrument containing such an order is subject to annulment in pursuance of a resolution of either House of Parliament.

7. The conditions for the exercise of the power to make an order under section 6 are contained in section 2, which provides, so far as material:

"2.(1) The power of the Treasury to make an order under –

…

(b) section 6 (transfer of property, rights and liabilities of an authorised UK deposit-taker)

is exercisable in relation to an authorised UK deposit-taker if (and only if) it appears to the Treasury to be desirable to make the order for either or both of the following purposes ….

(2) The purposes are –

(a) 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 …."

8. Other sections relate inter alia to the determination of compensation and the making of further onward transfers to a third party, but it is unnecessary to set them out in detail. The question for decision in relation to the Transfer Order is whether the Treasury satisfied the conditions laid down in the material parts of section 2 for the exercise of the power under section 6.

The wider regulatory context

9. The Treasury's relevant responsibilities include formulating the Government's financial and economic policy and informing and accounting to Parliament for the management of serious problems in the financial system and any measures used to resolve them. The Bank of England, as lender of last resort, has for many years pursued a non-statutory objective of protecting the stability of the financial system (which has since been given a statutory footing in the Banking Act 2009).
10. Since the enactment of the 2000 Act, the FSA has been responsible for the supervision of banks. The scheme of regulation, so far as relevant, is as follows. Accepting deposits in the UK is a regulated activity which cannot be done without permission from the FSA under Part IV of the 2000 Act. An authorised person must satisfy certain threshold conditions, which include the condition that his resources must in the opinion of the FSA be adequate in relation to the regulated activity in question. Permission granted by the FSA may be subject to such requirements as the FSA considers appropriate. The FSA may issue an authorised person with a notice varying or cancelling his permission to conduct a regulated activity, or varying the requirements of such permission, if he is failing or likely to fail a threshold condition. A person who is aggrieved by the exercise of those powers may refer the matter to the Financial Services and Markets Tribunal for fresh consideration on the basis of all the material placed before it. In the event that an authorised deposit-taker is unable to meet its liabilities to depositors, eligible retail depositors are each entitled to up to £50,000 compensation under the Financial Services Compensation Scheme ("the FSCS").
11. The Treasury, the Bank of England and the FSA work together in order to ensure that the financial system in the UK is stable. In the event of a financial crisis, the Bank and the FSA provide the Treasury with their assessment of the seriousness of the crisis and the implications for the stability of the financial system, and the three authorities discuss the measures to be taken. Events impacting on financial stability will engage the expertise of the Bank of England in particular.

The relevant facts

12. Since February 2008 KSF had provided savings and fixed deposit accounts in the UK, under the brand name "Edge". By the time of the Transfer Order, approximately 170,000 depositors had Edge accounts, with total deposits of about £2.7 billion. As a condition of KSF's authorisation to accept deposits, the FSA required it to hold liquid assets equivalent to 90-95% of the deposits held. Kaupthing considers that level to have been excessive, but the FSA's judgment on the matter is not open to challenge now.
13. By late September 2008 the world financial system was in "melt down" and banking shares had collapsed. The effects were particularly severe on the three main Icelandic banks, Kaupthing, Glitnir and Landsbanki (which had a UK subsidiary, Heritable plc, as well as a UK branch known as Icesave), and there was growing concern about their ability to fund their liabilities.
14. On 29 September the Icelandic Government took a controlling 75% interest in Glitnir. The governor of Iceland's central bank was quoted as saying that without this intervention Glitnir would have ceased to exist within a matter of weeks. The nationalisation of Glitnir aggravated the crisis of confidence in the Icelandic banking sector and triggered a net outflow of deposits from Iceland's banks.
15. On 30 September there was a net outflow of deposits of £37 million from KSF. This led to "code red" being declared in respect of KSF's liquidity contingency plan, which involved a "severe stress situation which has led to KSF being very uncertain that it can meet all of its commitments over one week". It also required KSF to draw down on a £1.1 billion deposit arrangement that it had with Kaupthing; but, as a result of a drop in its own liquidity, Kaupthing was unable to honour its obligation to KSF. The situation resulted in a significant breach of KSF's liquidity requirement. The Fitch rating agency downgraded KSF's long-term default rating to BBB, and Moody's placed its credit ratings of Kaupthing on review for possible downgrade, leading to a further loss of confidence in the group's prospects.
16. On 1 October there was a meeting between representatives of KSF and the FSA, at which KSF presented a plan for raising cash, or cash equivalent, of approximately £1.25 billion by 10 October. According to the claimant, the FSA agreed with this plan.
17. On Friday 3 October the FSA issued a First Supervisory Notice imposing on KSF a number of additional requirements, including the ring-fencing of customer deposits received during 2 October and thereafter placing them in a segregated trust account with the Bank of England or another UK account provider approved for the purpose.
18. On the same day an issue arose as to whether Kaupthing had transferred £1.6 billion out of KSF, something which Kaupthing denied. On the evening of 3 October the FSA sent an email in these terms:

"Our guidelines required KSF to maintain at least 95% of the instant access retail deposits amounting to circa £2bn to be maintained in cash or near cash equivalents. KSF has consistently reported to us that it is maintaining its liquidity above these levels. As at today these funds only amount to £500m.

[It is] therefore clear to us that KSF has breeched [sic] our liquidity guidelines and in its reporting has substantially overstated the true liquidity position. Additionally KSF has used its liquidity position to fund circa £500m of margin calls of its parent, this again is in clear breech [sic]of our guidelines. Our meetings with the local management have confirmed that they were well aware that this was the position.

We now require the total of these funds namely £1.6bn (£1.1bn of intra group deposit and the margin call payments of £500m) to be returned to KSF on a permanent basis by close of business on Monday to enable us to allow KSF to continue to operate as a regulated deposit taking entity in the UK …."

19. According to a witness statement of Mr Gudni Adalsteinsson, formerly Chief Treasurer of Kaupthing, the FSA agreed on 3 October that Kaupthing had two weeks to try and improve KSF's liquidity; and a plan was developed on 4 October and agreed with the FSA on 5 October for achieving the necessary liquidity by raising in the region of £1 billion over the next two weeks, rising to approximately £1.6 billion over the following few weeks. This is disputed in a witness statement of Mr Clive Maxwell, a senior Treasury official holding the position of Director of Financial Stability. He sets out his understanding, based on information communicated by the FSA to the Treasury at the time, that in the course of intensive discussions over the weekend of 4/5 October the FSA had been prepared to allow KSF to stagger the payments it needed to receive in order to increase its liquidity resources, but this concession was conditional on KSF starting to receive funds from Monday 6 October. The existence of an agreed plan as described in Mr Adalsteinsson's statement also seems inconsistent with the FSA's email of 3 October, set out above, and with the contents of a witness statement of Ms Sheila Nicoll, Director of the Retail Firms Division at the FSA, which was filed in support of the FSA's application to the court for an administration order against KSF on 8 October. Ms Nicoll states that on 5 October KSF's opening liquidity position showed a net outflow of £13 million, reducing overall cash resources to £120 million; the FSA was assured by Kaupthing that it would provide KSF with £186 million of liquidity; in the event, approximately £36 million flowed into KSF on 7 October but the balance of £150 million was not received because, the FSA understood, it was blocked by the Icelandic Central Bank.
20. On 6 October trading in the shares of Icelandic banks was suspended and the Icelandic Government enacted emergency legislation which included guarantees for depositors in Icelandic branches of the banks. The Icelandic Prime Minister indicated that no rescue plan to bolster the Icelandic Central Bank's foreign exchange reserves and to extend liquidity to the banks would be forthcoming at that time. There was a plunge in the value of the Icelandic currency relative to the euro. UK depositors increased their withdrawals of deposits in Icelandic banks. Neither the £1.6 billion increase in liquidity referred to in the FSA's email of 3 October nor the £186 million referred to in Ms Nicoll's witness statement was forthcoming.
21. On 7 October the Icelandic Government effectively nationalised Landsbanki, setting off a run on its UK branch, Icesave (but account holders were denied access to their accounts). The Treasury made a transfer order under section 6 of the 2008 Act in respect of the current accounts of Landsbanki's UK subsidiary, Heritable Bank plc, which went into administration. These events led to further withdrawals from Edge accounts, giving rise to a negative cash balance of £27 million. KSF's access to the BACS payment system was suspended and it was denied intra-day credit within the CREST payment system.
22. The FSA continued to monitor the situation closely. Reference has been made above to the sums that had been promised for 6 October but had not arrived. Mr Maxwell's understanding, as set out in his witness statement, is that on the morning of 7 October Kaupthing assured the FSA that it had transferred €175m to KSF which would arrive within an hour. In response the FSA sent an email at 12.05 stating that if KSF did not receive funds that day it would not be able to continue. The promised €175m did not arrive. In an email sent at 17.35 the FSA told Kaupthing:

"We have noted that you are now experiencing an increase in retail outflows in your UK subsidiary and there is a real risk that this will continue through tomorrow.

We are therefore of the view that there is a real risk that the subsidiary will not survive and if that looks to be the case, we will have no choice but to put it into Administration.

A final decision will not be taken until 7.30 a.m. tomorrow in order to allow your discussions with JC Flowers to continue overnight [these were discussions for the sale of KSF to JC Flowers].

We would therefore ask that you provide confirmation, via email, by 6.30 a.m. tomorrow as to the success or otherwise of these discussions. In order for us to be comfortable to allow the subsidiary to continue operating beyond 7.30 a.m. we need this confirmation accompanied with a clear commitment that JC Flowers will provide immediate funding tomorrow to enable your UK subsidiary to meet its obligations and with a clear funding plan demonstrating support for the company beyond this immediate period."

23. In an email sent to the FSA at 18.57, Kaupthing set out further measures on which it had been working, and stated that if it did not reach an agreement with JC Flowers it still believed it was able to support KSF to go through the crisis and secure enough liquidity for the business.
24. On 8 October at 00.03, Kaupthing informed the FSA by email that the talks with JC Flowers had failed but that it still intended to support KSF and would secure enough liquidity for it. It would transfer £300 million to KSF in the morning; and further funds would become available by way of new liquidity in the course of the day and later in the week. The FSA responded at 07.11, requiring evidence by 09.00 that, inter alia, the £300 million had been transferred to KSF, together with details of how Kaupthing would plan to meet the known outflows from KSF over the next 10 days, and a plan for how it would fund the full repayment of the £2.8 billion Edge deposits in the likelihood that this would become necessary and maintain an appropriate level of liquidity buffer thereafter. The email also stated that, given the recent payment problems, the FSA wanted confirmation by 09.00 that the Icelandic Central Bank would approve the payments in question.
25. At 07.32 on 8 October the British Government announced a package of measures of support to the banking sector, including a bank recapitalisation scheme. At 07.49 Kaupthing informed the FSA of its desire to participate in the recapitalisation scheme immediately and sought guidance as to how to pursue an immediate application. It does not appear that such guidance was given, and Kaupthing did not make any request to the Treasury to participate in the scheme. In any event, however, the evidence before the court does not show that Kaupthing (or KSF) would have met the conditions of the scheme or that this route was capable of alleviating the immediate problems of liquidity that led to the making of the Transfer Order.
26. Internal emails between Kaupthing and KSF show that continuing efforts were being made to secure the transfers that Kaupthing had promised and that the FSA had required to be made by 09.00 on 8 October; but that deadline passed without the transfers being made. At 11.30 the FSA determined that KSF's threshold conditions were not satisfied, in particular the condition as to adequacy of resources. It therefore issued a Second Supervisory Notice, requiring KSF to refrain from accepting any deposits from 13.30 that day. As recorded in the notice, the FSA considered it desirable to impose the requirement in view of KSF's liquidity position "and the fact that, in the opinion of the FSA, there is no realistic prospect of [KSF's] liquidity position improving sufficiently and within a reasonable period".
27. At 12.05, after the FSA had issued its notice, the Treasury made the Transfer Order (see below).
28. At 14.49, KSF was put into administration on an application made to the court by the FSA.
29. At a much later date, by an order made on 18 December 2008 under the 2008 Act, the compensation payable to KSF in respect of the rights and liabilities transferred by the Transfer Order was determined as nil.

The Transfer Order

30. The Transfer Order was made at 12.05 pm on 8 October 2008, came into force at 12.15 pm and was laid before Parliament at 4.00 pm on the same day. Its recital states:

"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 …."

31. In broad outline, by article 3 the liabilities of KSF to holders of Edge accounts were transferred to a company owned by the Bank of England, and by article 7 an onward transfer to ING Direct N.V. was effected.
32. Accompanying the Transfer Order was an explanatory memorandum prepared by the Treasury and containing information for the Joint Committee on Statutory Instruments. It included the following material passages:

"3. Matters of special interest to the Joint Committee on Statutory Instruments

…

3.2 … It is important that the transfer of certain rights and liabilities in Kaupthing Singer & Friedlander has effect as soon as possible following the making of the Order. It is in everyone's interest for the transfer of these rights and liabilities to be effected as swiftly as possible to avoid uncertainty. Transferring the Kaupthing deposit book of 'Edge' accounts to a publicly owned company followed by an immediate transfer of retail deposits of Kaupthing to ING Direct N.V. will provide protection and continuity of business for depositors.

4. Legislative background

…

4.2 Section 2 of the Act requires that, before making an Order under section 6, the Treasury must consider that it is desirable to make the Order for either or both of the purposes set out in section 2(2). The Treasury considers it desirable to make the Order for the purpose set out in section 2(2)(a), that is, to maintain the stability of the UK financial system in circumstances where the Treasury considers that there would be a serious threat to its stability if the Order were not made.

7. Policy background

7.1 The purpose of the Act is to enable the Government to act to secure the continued stability of the UK financial system and to protect the public interest.

7.2 The purpose of the Order is to transfer the Kaupthing deposit book of 'Edge' accounts to a publicly owned company followed by an immediate transfer of retail deposits of Kaupthing to ING Direct NV [which] will provide protection and continuity of business for depositors."

33. A related regulatory impact assessment stated:

"What is the problem under consideration? Why is Government intervention necessary?

Protecting the public interest and maintaining stability of the UK financial system in circumstances where the Financial Services Authority has determined that a deposit taker is no longer meeting its threshold conditions for authorisation.

What are the policy objectives and the intended effects?

To support financial stability; to protect depositors' money; and to protect the interests of the taxpayer.

What policy options have been considered? Please justify any preferred option.

The purpose of the Order is to transfer Kaupthing's deposit book of 'Edge' accounts indirectly to ING Direct N.V. The purpose of the Order is to transfer Kaupthing's deposit book of 'Edge' accounts via a transfer into a company wholly owned by the Bank of England followed by the onward transfer of those accounts to ING Direct N.V. The Government has considered a number of options and weighed up the various competing considerations and considers this to be the best solution for protecting depositors and ensuring retail consumer confidence. In reaching this view, the Government has weighed up the various competing considerations, such as letting an administrator organise a swift payout or taking the whole company into temporary ownership."

34. Mr Maxwell's first witness statement on behalf of the Treasury sets out at some length the factual history and the Treasury's reasons for making the Transfer Order. The key points in the witness statement are conveniently summarised in the skeleton argument of Mr Jonathan Crow QC. They begin as follows:

i) The FSA had prohibited KSF from accepting new deposits and had reached the conclusions as to liquidity recorded in the Second Supervisory Notice. It was unlikely that Kaupthing or the Icelandic Government could give any meaningful assistance once KSF had failed the threshold condition as to adequacy of resources. The Treasury considered that KSF would not be able to meet the demands of depositors for the repayment of their money.

ii) The Treasury, the Bank of England and the FSA were in regular contact as the financial position of the Icelandic banks deteriorated in the days leading up to the making of the Transfer Order. Careful consideration was given to the nature and extent of the threat to the stability of the financial system posed by the weak financial state of KSF, Landsbanki and its subsidiary, Heritable plc.

iii) The Bank of England was concerned about the effect that the abrupt closure of KSF, Landsbanki and Heritable would have on the confidence that other banks' customers had in the safety of their deposits, particularly those who held deposits with the subsidiaries and branches of banks based in the EEA. It considered that, to minimise the risk of a wider loss of confidence among retail depositors, the process by which depositors were paid should be as rapid as possible and clearly communicated. It was concerned that there would be a flight from less well-capitalised banks to banks perceived to be more secure. Depending on the degree of contagion, it considered that there could be a widespread re-rating of weak UK banks and building societies, resulting in creditors calling in loans to banks and building societies and the further tightening of funding across the UK financial system, although it said the risk was mitigated by the fact that "the banks were seen as essentially Icelandic banks".

iv) The FSA considered that the worst outcome would be a run on the UK subsidiaries and branches of other banks based in the EEA and on financial institutions offering similar products. It also advised that the FSCS was receiving more inquiries about deposit protection than ever before and was concerned that financial stability would be threatened as more consumers moved deposits to Ireland, where the government had said they would guarantee bank deposits in full, and other places offering more comprehensive guarantees. It was concerned that, if KSF failed, it might not be able to complete payouts to account holders of KSF and Landsbanki within six months.

35. At this point it is better to switch to Mr Maxwell's own words, quoting that part of his witness statement where he pulls the various threads together in explaining the basis on which the Transfer Order was made:

"43. In the light of the matters summarised above, both prior to and immediately after the FSA's supervisory notice being issued upon 8 October 2008, the Treasury decided that its power to make an order under the 2008 Act was exercisable because it considered that it was desirable to make such an order for the purpose of maintaining the stability of the UK financial system and there would be a serious threat to the stability of the UK financial system if the order were not made. The Treasury reached this decision on the basis of the advice it had received from the Bank and the FSA …., and following an appropriate investigation, and consideration, of the facts pertaining to the threat to financial stability if retail depositors were not repaid rapidly.

44. In summary, the serious threat was as follows:

(i) The world's financial system was in a state of crisis; which encompassed the Icelandic banking groups, a number of which were at risk of failing ….

(ii) By 8 October 2008 it appeared likely that KSF would fail to meet the threshold criteria for authorisation under [the 2000 Act] and would be prohibited from accepting any new deposits; in the event of such a prohibition, it would have been unlikely to improve its liquidity position and regain authorisation from the FSA ….

(iii) In the event of KSF's failure, both the willingness … and the ability … of the Icelandic authorities to protect the deposits of its customers were doubtful;

(iv) The failure of KSF without the rapid payout of retail depositors being achieved (especially with Landsbanki and Heritable failing as well) would have been likely to result in the effects on depositor and consumer confidence, confidence in the deposit guarantee arrangements and the withdrawal of deposits and possibly credit facilities from the deposit takers (not only deposit takers directly comparable to the Icelandic bank but potentially others as well) described in the FSA's and Bank's advice ….

45. The matters referred to in paragraph 44(i)-(iv) above were likely to have a destabilising effect upon the UK economy. In the extremely nervous atmosphere among retail depositors then pertaining, the Treasury concluded that it would have been very damaging to financial stability for 170,000 retail depositors to face a substantial delay in receiving the payments which they were entitled to from the FSCS and for some of them to be threatened with the loss of some of their deposits. Such an outcome would have been likely to have resulted in a wider loss of confidence in other UK financial institutions, in particular, small and medium-sized deposit-takers, threatening their viability. Whilst the fact that KSF was a subsidiary of an Icelandic bank was thought to reduce the risk of impact on more mainstream British banks and building societies, the threat to the stability of the UK financial system was considered to be serious none the less. In these circumstances the Treasury considered that it was desirable to make an order under the 2008 Act in order to maintain stability in the UK financial system in circumstances where it considered that there was be [sic] a serious threat to its stability if the Transfer Order was not made."

36. In relation to the claimant's argument, considered below, that the explanatory memorandum showed that the Treasury's purpose was not to maintain the stability of the UK financial system but to protect UK depositors of KSF, Mr Maxwell made the following three points in his second witness statement:

"13. Firstly, the Treasury was well aware that, in the circumstances of KSF, it could make an order under the 2008 Act only in order to maintain the stability of the UK financial system in circumstances where we considered that there would be a serious threat to that stability if we did not. Indeed the Explanatory Memorandum itself stated that the purpose of the Act was to enable the Government to act, by making transfer orders, to secure the continued stability of the UK financial system. It therefore did not need repeating that that was why the Treasury was making the Order: the relevant paragraph of the memorandum merely set out, very briefly, why and how the transfers effected by the order would achieve that object.

14. Secondly, the purpose of an explanatory memorandum is to provide for the non-legal reader a brief and very general summary of the effect of the instrument. It is not intended to set out the full analysis and reasoning justifying the measure.

15. Thirdly, I described in my first statement the extremely nervous atmosphere among retail investors at the time, and the dangers of a wider loss of confidence in other financial institutions in the UK. To state, as Kaupthing's skeleton indicates that the Government should have stated, that the Government was making the Transfer Order in order to avoid a widespread panic and run on other UK banks would have risked bringing about just the effect the Government was aiming to avoid."

The first main issue: purpose

37. By section 2 of the 2008 Act, the power to make the Transfer Order depended, so far as material, on it appearing to the Treasury to be desirable to make the order for the purpose of "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". Where an enactment lays down a qualifying condition in terms of the purpose of some person in doing an act, the court will construe the enactment as requiring the main or dominant purpose to be the one specified: Bennion on Statutory Interpretation, 5^th ed., section 397 (page 1268).
38. The first ground advanced by Mr Richard Drabble QC on behalf of Kaupthing is that the primary purpose of the Transfer Order was not to maintain the stability of the UK financial system, but to protect the depositors of KSF. He submits that the contemporaneous material supports that ground. The recital to the Transfer Order and paragraph 4.1 of the explanatory memorandum merely recite the statutory test in the 2008 Act. The only express reference to the Treasury's actual purpose is contained in paragraphs 3.2 and 7.2 of the explanatory memorandum, which state that the order "will provide protection and continuity of business for depositors". That can be seen to have been the primary purpose. Whilst the admissibility and veracity of Mr Maxwell's witness statements are not challenged, what he says about purpose should be given little weight as compared with the contemporaneous explanation given to Parliament in the explanatory memorandum. In particular, the point made by Mr Maxwell about the risk of a lack of consumer confidence spreading to depositors in other banks is not referred to in the explanatory memorandum, nor in the regulatory impact assessment. The avoidance of a threat to the UK financial system is not identified at all on the face of the documentation.
39. In my judgment, that line of argument is untenable. It is clear on the face of the Transfer Order itself and from the explanatory memorandum that the primary purpose was to maintain the stability of the UK financial system. The recital to the Transfer Order does not merely recite the statutory test, but states in terms that it appears to the Treasury to be desirable to make the order for the purpose in section 2(2)(a). Paragraph 4.2 of the explanatory memorandum contains a similar statement. The regulatory impact assessment, in referring to the problem of "maintaining stability of the UK financial system" and to policy objectives which include "to support financial stability", provides further support for that as the purpose of the order. All that is, moreover, entirely consistent with the fuller explanation given in Mr Maxwell's witness statements, which carry substantial weight of their own and in the face of which the claimant's case as to purpose must fail in any event. The court would have to reject the veracity of Mr Maxwell's evidence before it could find that the primary purpose of the order was not to maintain the stability of the UK financial system; yet the veracity of the statements has not been put in issue.
40. It is true that the contemporaneous documents do not spell out the nature of the risk to the stability of the UK financial system or how the Transfer Order would help to maintain stability. They refer to protection and continuity of business for depositors of KSF but do not refer in terms to the wider loss of confidence and consequential impact on other UK deposit-takers that might arise if the depositors of KSF were not protected (though the regulatory impact assessment does use more general language when talking in terms of "protecting depositors and ensuring retail consumer confidence"). It is, however, entirely understandable that the wider risk was not something that the Treasury considered it appropriate to spell out, given that, as Mr Maxwell says, to state it would have risked bringing about just the effect the Government was aiming to avoid. Whilst the documents contain an incomplete statement of the Treasury's reasoning process, I am entirely satisfied that what they say about protecting depositors of KSF is merely a part of the reasoning that led the Treasury to consider it desirable to make the Transfer Order for the statutory purpose, rather than a statement of a different and primary purpose for which the Transfer Order was made.

Second main issue: specific threat

41. The second ground advanced by Mr Drabble is that the Treasury failed to identify the specific threat posed to the stability of the UK financial system as a whole by the liquidity difficulties faced by KSF. The need to identify a specific threat is said to arise because section 2(2)(a) of the 2008 Act requires the Treasury to consider that there would be a serious threat to the stability of the UK financial system "if the order were not made". It was not open to the Treasury to treat the matter simply as an undifferentiated part of a wider global, or Icelandic, financial crisis. Linked with this ground, though included as a separate ground in the written submissions, is the contention that the Treasury failed properly to understand and inform itself as to the circumstances which were said to give rise to the threat to stability, so as to be able to assess the likelihood of that threat being realised and its consequences.
42. In developing his submissions on this issue, Mr Drabble put a lot of weight on the plan that was said to have been developed on 4 October and agreed with the FSA on 5 October, and on the indications given by Kaupthing during the night of 7/8 October that it would secure enough liquidity for KSF, including the transfer of £300 million in the morning of 8 October. He submitted that there was no evidence in Mr Maxwell's witness statements that the Treasury took into account the potential increase in KSF's liquidity or that it considered whether a disorderly failure of KSF could be avoided by such an increase in liquidity. The Treasury made no contact with Kaupthing or KSF on 8 October to consider the issue. Yet the reasoning set out by Mr Maxwell is dependent on Kaupthing not being able to provide the promised liquidity.
43. Mr Drabble's written skeleton argument takes the point a little further. The rhetorical question is asked: what threat was posed to the UK financial system as a whole, in the context of the overall crisis, by providing Kaupthing and KSF with the time to give final effect to its detailed plans for improving liquidity? Further, although the Treasury now relies on a threat to stability arising out of a loss of consumer confidence, that explanation does not appear in the contemporaneous documents; the likelihood of such a threat being realised was not explicitly assessed; and the reality was that any threat to the stability of the UK financial system did not arise from the circumstances of Kaupthing and KSF, which was an issue of limited import in the context of the overall crisis and the bank bail-out announced on the morning of 8 October.
44. In my judgment, Mr Drabble's submissions have an air of artificiality and unreality to them. The factual question under section 2 of the 2008 is whether it appeared to the Treasury to be desirable to make the Transfer Order for the purpose of maintaining the stability of the UK financial system in circumstances where the Treasury considered that there would be a serious threat to its stability if the order were not made. On the evidence before the court, I have no doubt that it did appear to the Treasury to be desirable to make the Transfer Order for that purpose and that the circumstances were such that the Treasury did consider that there would be a serious threat to the stability of the UK financial system if the order were not made. That is clear from the witness statements of Mr Maxwell and in my view is supported by the contemporaneous documents even though, as already discussed, they do not spell out the Treasury's reasoning process in full.
45. In order to form the views necessary for the making of the Transfer Order, the Treasury had to consider the position if the order were not made. It did so. It considered the specific threat of a disorderly failure of KSF and the consequences of such a failure; it did not treat the matter simply as an undifferentiated part of a wider global, or Icelandic, financial crisis.
46. There was no failure on the part of the Treasury properly to understand and inform itself about the circumstances giving rise to the threat. It was in receipt of full advice from the FSA and the Bank of England. It was aware of the FSA's assessment that KSF was in breach of its threshold condition as to adequacy of resources and that, in the opinion of the FSA, there was no realistic prospect of KSF's liquidity position improving sufficiently and within a reasonable period. The Second Supervisory Notice, reflecting that assessment, meant that KSF would be unable to accept new deposits from 13.30 that day. The Treasury had ample material on which to reach a properly informed view. I do not accept that it acted in any way unlawfully in failing to make further inquiry about the possibility of Kaupthing or KSF securing a sufficient increase in KSF's liquidity to avoid a disorderly failure. It was fully entitled in the circumstances to act on the information available to it.
47. Nor do I accept the factual correctness of the argument advanced by Mr Drabble as to the possibility of an improvement in KSF's liquidity. On the evidence, it cannot be said that a plan was agreed on 4/5 October to which Kaupthing was entitled still to be working. Moreover, although indications were given by Kaupthing during the night of 7/8 October that transfers would be made on the morning of 8 October to improve KSF's liquidity, the deadline set by the FSA had passed without such transfers being made; and the evidence does not provide a basis for rejecting the FSA's opinion that there was no realistic prospect of KSF's liquidity position improving sufficiently and within a reasonable period. This goes further than the technical point that there has been no legal challenge to the Second Supervisory Notice itself, though the court certainly has to proceed, as Mr Crow submitted, on the basis that the various decisions of the FSA to impose the threshold conditions in the first place and to issue the supervisory notices all stood without challenge.
48. I therefore see no legal error in the Treasury's decision-making process. For good measure, I would add that even if the Treasury had made contact with Kaupthing or KSF on the morning of 8 October to discuss the plans to increase KSF's liquidity, I can see no realistic possibility, on the evidence before the court, that this might have led to a material alteration in the Treasury's views so as to produce a different outcome in which the Transfer Order was not made.
49. Finally, it has not been contended that the actual decision to make the Transfer Order was an unreasonable one on the information available to the Treasury, and any such argument would be plainly doomed to failure. For my part, I have difficulty in seeing what other decision the Treasury could reasonably have taken in the circumstances.

Other grounds

50. Mr Drabble did not pursue a separate ground to the effect that the Treasury failed to consider whether lesser alternatives could deliver the required objective. He accepted that if he succeeded on the second main issue he did not need the separate ground, and that if he failed on the second main issue he could not realistically succeed on the separate ground.

Conclusion

51. For the reasons I have given, none of the grounds of challenge to the Transfer Order has substance to it, and I would dismiss the application for judicial review.

Mr Justice Maddison :

52. I agree.