Jersey Unreported Judgments

Banking - application for the sanction of the Court to a scheme by which the first representor will transfer its business to the second representor.

[2013]JRC172

Royal Court

(Samedi)

4 September 2013

Before     :

J. A. Clyde-Smith, Commissioner, sitting alone.

 

IN THE MATTER OF THE REPRESENTATION OF STANDARD CHARTERED (JERSEY) LIMITED

AND IN THE MATTER OF AN APPLICATION PURSUANT TO ARTICLE 48D OF THE SCHEDULE TO THE BANKING BUSINESS (JERSEY) LAW 1991.

Advocate M. P. Cushing for the Representors.

judgment

the commissioner:

1.        The representors seek the sanction of the Court under the provisions of the Banking Business (Jersey) Law 1991 ("the Banking Law") to a scheme by which the first representor ("Standard Chartered Jersey") will transfer its business (with certain exceptions) to the second representor ("Standard Chartered Bank").  That application will be heard on 11^th September, 2013, but in the meanwhile, on 17^th July, 2013, the Court granted the representors dispensation from certain of the requirements of the Banking Law and reserved its decision on a discrete issue of law. 

2.        This will be an inter-group transfer by which the Standard Chartered Bank Group wishes to reorganise and consolidate all of its Jersey based private banking business (including deposit taking business and investment business) and to simplify its corporate structure in relation to that business by transferring the business of Standard Chartered Jersey to the Jersey branch of Standard Chartered Bank. 

3.        As at 31^st December, 2012, Standard Chartered Jersey has 12,992 customers, deposits of some US$ 5.3 billion and total assets of some US$ 6.1 billion.  It employs 150 individuals, whose employment contracts will be transferred with its business to the Jersey branch of Standard Chartered Bank, which will take on the role as principal employer under its two occupational pension schemes.  There will be no redundancies. 

4.        Standard Chartered Bank is the main operating company in the Group employing 89,000 people in an extensive global network of more than 1700 branches and outlets in 68 markets.  It is rated AA- by the international credit rating agencies Standard and Poors and Fitch Ratings and rated A1 by Moody's Investor Service Credit Rating Agency.  Standard Chartered Jersey by contrast is unrated.  As at 31^st December, 2012, Standard Chartered Bank had deposits of some US$ 144 billion and total assets of some US$ 387 billion.  The aggregate amount of the customer deposits which are proposed to be transferred pursuant to the scheme represent less than 4% of the total deposits held by Standard Chartered Bank.  The total assets of Standard Chartered Jersey are under 2% of the total assets of Standard Chartered Bank.  The transferring business will therefore represent a very small percentage of business of Standard Chartered Bank whose existing customers will not be affected by the transfer. 

5.        Both representors are authorised by the Jersey Financial Services Commission to carry on deposit taking business under the Banking Law and to carry on investment business under the Financial Services (Jersey) Law 1998.  They say that the proposed transfer will achieve a more efficient use of capital and liquidity resources for the Standard Chartered Group. 

6.        Prior to an amendment to the Banking Law brought in in 2008, such transfers had to be effected by way of private law passed before the States of Jersey.  They are now governed by Article 48D of the Banking Law, which provides that the Schedule to that Law shall have effect to regulate any transfer of deposit-taking a business from one registered deposit taker to another.  Paragraph 4 of the Schedule sets out a number of requirements and the representors sought dispensation in respect of certain aspects of Paragraph 4B, which is in the following terms:-

"4       Those requirements are -

(a) ...

(b)       except where the Court has otherwise directed, that a statement -

(i)        setting out the terms of the scheme, and

(ii)       containing a summary of the report mentioned in paragraph 3 sufficient to indicate the opinion of the auditor on the likely effects of the scheme on the customers of the transferor and transferee concerned,

has been sent to each of those customers and to every member of the   transferor and transferee."

7.        The Court directed that the statement need not be sent to the customers of Standard Chartered Bank as the scheme does not involve the transfer of their accounts and the independent auditor has concluded that this scheme would not have any adverse effect on those customers.  It would, of course, be published by formal notice in the Jersey Gazette and posting on the website of both Standard Chartered Jersey and Standard Chartered Bank, Jersey branch. 

8.        The Court directed that the statement need not be sent to the members of the representors because the proposed transfer is an internal transfer within the Standard Chartered Group and the parent companies of both have given their approval. 

9.        The Court finally directed that the statement need not be sent to the small number of "hold-mail customers", customers whose whereabouts are unknown, deceased customers and new customers, on the basis of the proposals set out in the affidavit of Richard Ingle, the Chief Executive Officer of Standard Chartered Jersey, dated 10^th July, 2013.  All of the dispensations directed by the Court had been approved by the Jersey Financial Services Commission. 

10.      The discrete issue of law which arose was whether Article 48D of the Banking Law is wide enough to cover the transfer of the investment management business carried on by Standard Chartered Jersey in addition to the transfer of the deposit-taking business.  The representors had obtained a helpful opinion from Mr Martin Moore QC of Erskine Chambers dated 27^th June, 2013, on this issue, from which I have gratefully drawn.  

11.      Mr Ingle explained in his affidavit that with the exception of an anomalous small number of legacy Swiss customers who have deposit accounts with Standard Chartered Bank (Switzerland) SA, investment business services are not available to the customers of Standard Chartered Jersey unless they have a deposit-taking relationship with it.  All customers utilise the deposit-taking business of Standard Chartered Jersey and approximately 25% of customers also avail themselves of the investment business services.  With the exception of the legacy Swiss customers, all customers sign standard account opening mandates which govern both the deposit-taking and investment businesses.  All dividends and other income generated for customers through investment business services are paid in to those deposit accounts, which are used by customers as collateral and to fund margin calls when customers utilise investment business services.  From a practical perspective, it is not possible to separate the deposit-taking business carried on by Standard Chartered Jersey for the benefit of its customers from the investment business which is undertaken for those customers.  Accordingly, it is proposed that save in relation to certain assets, all of Standard Chartered Jersey's private banking business, including both the deposit-taking business and the investment business will be transferred as part of the scheme. 

12.      As previously mentioned, the jurisdiction to sanction a banking business transfer derives from article 48D of the Banking Law which states:-

"The schedule shall have effect to regulate any transfer of deposit-taking business from one registered deposit taker to another."

13.      The Schedule opens in paragraph 1 in these terms:-

"Where it is proposed to carry out a scheme under which the whole or part of the deposit-taking business carried on in or from within Jersey by a registered person (the "transferor") is to be transferred to another body whether incorporated or not (the "transferee") the transferor or the transferee may apply to the court for an order sanctioning the Scheme."

14.      The Court may not determine the application and make an order unless the application is accompanied by a report from an independent auditor and the Court is satisfied that the requirements of paragraph 4 have been complied with.  Those requirements include (unless the Court otherwise directs as it has in this case) the sending of a statement to the customers of the transferor and transferee setting out the terms of the scheme and a summary of the report sufficient to indicate the opinion of the auditor on the likely effects of the scheme. 

15.      The Schedule also provides by paragraph 9 as follows:-

"Where the Court makes an order under this schedule sanctioning a scheme, the court may, either by that order or by a subsequent order, make provision for all or any of the following matters:-

(a)       the transfer to the transferee of the whole or part of the undertaking and of the property or liabilities of the transferor;

(b)       the allotting or appropriation by the transferee of any shares, debentures, policies, deposits or other like interests in the transferee which under the scheme are to be allotted or appropriated by the transferee to or for any person;

(c)       the continuation by or against the transferee of any legal proceedings pending by or against the transferor;

(d)       the dissolution, without winding up, of the transferor;

(e)       such incidental, consequential and supplementary matters as are necessary to secure that the scheme shall be fully and effectively carried out."

16.      These provisions closely follow the provisions of Section 49 of the Insurance Companies Act 1982 which governed the transfer of long-term insurance business in the United Kingdom.  The jurisdiction to sanction banking business transfers under UK legislation derives from Part 7 of the Financial Services and Markets Act 2000 ("the FSMA") which provides relevantly as follows in Section 106:

"(1)     A scheme is a banking business transfer scheme if it -

(a)       satisfies one of the conditions set out in subsection (2);

(b)       is one under which the whole or part of the business to be transferred includes the accepting of deposits; and

(c)       is not an excluded scheme. 

(2)       the conditions are that -

(a)       the whole or part of the business carried on by a UK authorised person who has permission to accept deposits ("the authorised person concerned") is to be transferred to another body ("the transferee");

(b)       the whole or part of the business carried on in the United Kingdom by an authorised person who is not a UK authorised person but who has permission to accept deposits ("the authorised person concerned") is to be transferred to another body which will carry on in the United Kingdom ("the transferee")". 

17.      Mr Moore advises that the procedural requirements in terms of notification are rather more relaxed in the United Kingdom in that the FSMA does not require notification of customers, albeit the customers are invariably notified in accordance with the obligation to treat customers fairly and have regard to their information needs, and no independent report is required.  

18.      The orders which an English court may make following sanction are set out in rather more detail in the FSMA by Sections 112 and 112A, but, crucially, Section 112(1)(a) to (d) corresponds exactly to sub-paragraphs (a) to (c) and (e) of paragraph 9 of the Schedule.  Unlike in Jersey the power to order dissolution without a winding up does not in the United Kingdom extend to banking business transfers but is limited to insurance business transfers (see Section 112(8) of the FSMA). 

19.      The question which arises is whether the difference in wording in the two pieces of legislation leads to a different result in that a UK transfer can include business which is not "deposit-taking" such as investment management services or mortgage origination business, whereas in Jersey such transfers would not be permitted so that in effect Article 48D only permits transfers of pure deposit-taking activities (whatever that phrase might mean). 

20.      The first question to consider is whether the language of Article 48D is necessarily restricted so as to apply to only those transfers which comprise only deposit-taking business and nothing else. 

21.      As a matter of first impression provided that the scheme in question involves the transfer of the whole or part of a deposit-taking business there is nothing express in the language which forces one to conclude that it cannot also do other things.  Furthermore, in relation to the position under Jersey law there are some indications in the text of the Schedule that the Court's jurisdiction is not narrowly confined to pure deposit-taking business.  They are as follows:-

(i)        The reference to customers (as defined in paragraph 14 of the Schedule) includes persons who have borrowed money from a transferor.  It seems a highly improbable conclusion that this includes only those persons whose loans have been funded by other deposits rather than by access to wholesale funding or corporate bonds.  If that is so then the scope of the Business Law is already wider than a pure deposit-taking activity.  

(ii)       The ancillary powers in Paragraph 9(a) refer to ordering the transfer of the whole of the undertaking and property of the transferor.  This is again capable of being much wider than the pure deposit taking business and, had the jurisdiction been intended to be limited, one might have expected words of limitation to quality what, on the face of it, are words of very wide application. 

(iii)      The same point can be made in relation to the power to dissolve without winding up.  There will inevitably be assets and liabilities which are not connected with the deposit taking activity which must be transferred before the Court could contemplate a dissolution without winding up.  The inclusion of that power strongly suggests a wide scope of the jurisdiction. 

22.      Just because the language of the FSMA makes it expressly clear that the jurisdiction of the courts in the United Kingdom is not narrowly confined, does not mean that some form of limitation in the words of Article 48D should be implied.  The approach of the English court to insurance business transfer schemes is highly instructive in that the language of Section 105 of the FSMA, which gives the court the jurisdiction to sanction an insurance business transfer scheme, is much closer to that of Article 48D.  It is to be noted that neither Section 105 nor Article 48D contain the express clarificatory words of Section 106 of the FSMA.  Section 105 provides as follows:-

"105

(1)       A scheme is an insurance business transfer scheme if it -

(a)       satisfies one of the conditions set out in subsection (2);

(b)       results in the business transferred being carried on from an establishment of the transferee in an EEA State; and

(c)       is not an excluded scheme.

(2)       The conditions are that -

(a)       the whole or part of the business carried on in one or more member States by a UK authorised person who has permission to effect or carry out contracts of insurance ("the authorised person concerned") is to be transferred to another body ("the Transferee");

(b)       the whole or part of the business, so far as it consists of reinsurance, carried on in the United Kingdom through an establishment there by an EEA firm ... ("the authorised person concerned") is to be transferred to another body ("the Transferee");

(c)       the whole or part of the business carried on in the United Kingdom by an authorised person who is neither a UK authorised person nor an EEA firm but who has permission to effect or carry out contracts of insurance ("the authorised person concerned") is to be transferred to another body "the Transferee").

23.      In the context of a discussion about the relationship between an insurance business transfer scheme and the width of Section 112(1)(d), which is the equivalent of paragraph 9(e) of the Schedule, Lindsay J had this to say in Re Norwich Union Linked Life Assurance Limited [2004] EWHC 2802 (Ch) at paras 11 - 12:-

"11.    For my part, I would thus start from the position in which it is no necessary requirement of an IBTS (Insurance business transfer scheme) that, whilst effecting a transfer of the kind provided for in section 105, it should do nothing else.  Indeed, I see the line (if there is one) between that which, incidental or supplementary to or consequential upon the transfer in the Scheme, may be within the scheme itself and what, at the time of the scheme or later, can only be authorised under section 1123, as being unclear.  That is not to say that the contents of an IBTS are boundless; its predominant purpose must be to result in one or more of the transfers of the described kind.  Moreover, it may be (though I do not need to decide and do not decide this issue) that only such supplemental provisions can be within an IBTS under the more liberal views taken of what is "necessary" under section 112(2)(d).  However, there are good reasons, if the proponents of a scheme from the outset see the need for a given supplemental provision, that it should be included within the scheme itself. ... ... In that way policyholders have a four-fold protection; the supplemental provision comes within the purview of the FSA, it is reported upon by the appointed Independent Expert, is explained to members and is required to obtain the sanction of the court as being "appropriate".  By contrast, a subject dealt with only outside the scheme under section 112(1)(d) (but at the same time as the scheme or later), as it requires only the sanction of the Court under section 112, leaves those who might be affected by it unprotected in the other three ways.  If the proponents of the scheme are in doubt as to which jurisdiction, section 111(1) or section 112(1)(d) is relevant they can, again as was done here, in effect invoke both.

112.    In the result I see myself as having jurisdiction in relation to the supplemental provisions in the draft order by one of two routes; either they are in the scheme and will stand or fall (and hence stand) with the rest of it or they are matters which upon the scheme being sanctioned properly fall within the more liberal view of what is "necessary" within section 112(1)(d)."

24.      This analysis is equally applicable to the similar wording of Article 48D.  Clearly, a scheme's predominant or major purpose must involve a transfer of deposit-taking activity but that does not have to be the only thing it does.  Thus the anomalous legacy Swiss customers referred to above would not deprive the Court of jurisdiction.  Once one accepts, as I do, that the language of Article 48D does not require a constrained interpretation of the jurisdiction of the Court, the question for the Court is then whether, as a matter of discretion, the Court should sanction the transfer. 

25.      In England the Court has taken the view exemplified in the approach the Court took in UDT-v-Kirkwood [1966] 2 QB 431, where the Court had to construe the phrase "any person bona fide carrying on the business of banking" for the purpose of the Section 6 of the Moneylenders Act 1900.  In particular, the judgment of Diplock LJ shows a willingness to accept that business models evolve where he said at p 466E - 1676B:-

"It is to be observed that in contrast to the second limb of paragraph (d) of Section 6 of the Money-Lenders Act 1900, that for a person to fall within this description banking may not be the primary object of the business carried on by him.  He may carry on a composite business of which the accepting of deposits of money from customers on running account may be only a minor part.  As the evidence shows, this is the case today with many "merchant bankers" and with some discount houses who also carry on a banking business."

The English Court, says Mr Moore, has been prepared to consider that a banking business transfer can encapsulate many types of activities of which a private bank providing deposits and portfolio management services is but one. 

26.      In my view, provided the non-deposit taking activities are integral to the business to be transferred and have not been artificially grafted on to a deposit-taking activity in order to get through the jurisdictional gateway, the Court can exercise its discretion to sanction the scheme.  From the description of the business of Standard Chartered Jersey given to me, which is distilled above, it is clear that the deposit-taking and investment management services are integral to each other, managed on a unitary basis and could not be separated without fundamentally altering the business proposition and model.  On that basis there does not seem to be any good reason for the Court to decline to sanction the Scheme on structural grounds.  

27.      There is a further reason for considering that the Court can sanction a transfer of Standard Chartered Jersey's business pursuant to Article 48D, even if a restricted view of the Court's jurisdiction is (contrary to my view) the correct construction of Article 48D. 

28.      This derives from the width of the Court's jurisdiction under Paragraph 9(e) of the Schedule which mirrors the provisions of Section 112(1)(d) of the FSMA and which enables the Court to make orders:-

"with respect to such incidental, consequential and supplementary matters as are, in its opinion, necessary to secure that the scheme is fully and effectively carried out."

29.      There have been some differences of judicial opinion in England on the precise ambit of Section 112(1)(d) but the wider interpretation is now well settled.  As Henderson J noted in the banking business transfer case of Re Alliance & Leicester [2010] EWHC 2858 (Ch) at para 32):-

"It appears by now to be fairly well settled, and certainly it is my own view, that the word "necessary" in this context does not mean "indispensable" but rather means something falling between indispensable and desirable.  In addition, the word has to be read in the context of the phrase as a whole, so that if a step is necessary in order to implement the scheme in an effective and commercially sensible way, it will be perfectly proper to make an order under section 112 for that purpose."

30.      Mr Moore advises that in the United Kingdom these provisions have been used for a very wide variety of ancillary matters including splitting contracts, affecting contracts between the bank and third party counterparties, cloning pension schemes and even affecting contracts between two third parties. 

31.      Thus, in this case and adopting the same settled wider interpretation, because of the inter-connected nature of the private banking business of Standard Chartered Jersey it would, in my view, be entirely proper to utilise the supplementary provisions to effect the transfer of the investment management services (including those of the legacy Swiss customers referred to above) so that the customers of the deposit taking business can continue to receive the services the account mandate entitle them to as a matter of contract.  

32.      I conclude therefore that the Court does have jurisdiction to sanction a transfer of the investment management business of Standard Chartered Jersey in conjunction with its deposit-taking business and there is no reason from a structural viewpoint to decline to exercise its discretion to do so. 

Authorities

Banking Business (Jersey) Law 1991.

Financial Services (Jersey) Law 1998.

Insurance Companies Act 1982.

Financial Services and Markets Act 2000.

Re Norwich Union Linked Life Assurance Limited [2004] EWHC 2802.

UDT-v-Kirkwood [1966] 2 QB 431.

Moneylenders Act 1900.

Re Alliance & Leicester [2010] EWHC 2858.