Banking -  Scheme.

[2022]JRC199

Royal Court

(Samedi)

27 September 2022

Advocate M. L. A. Pallot for both representors.

judgment

the commissioner:

1.        On 28^th July 2022, the Court sanctioned a scheme (“the Scheme”) by which Lloyds Bank (International Services) Limited (“Lloyds International”) transferred the whole of its deposit taking business carried on from within Jersey to the Jersey Branch of Lloyds Bank Corporate Markets Plc (“Lloyds Corporate”) and this pursuant to Article 48D of and the schedule to the Banking Business (Jersey) Law 1991 (“the Banking Law”).  We now set out our reasons. 

2.        There have been a number of schemes sanctioned by the Court where banking business carried on from a Jersey entity has been transferred to the Jersey branch of a UK entity.  This Scheme is straightforward in that Lloyds International only operates a deposit taking business, the entirety of which will be transferred to the Jersey branch of Lloyds Corporate.  Both entities are part of the same corporate group ultimately owned by Lloyds Banking Group Plc, which is incorporated in Scotland. 

3.        The rationale behind the Scheme is explained in this way.  Lloyds International’s banking business model involves making significant cash payments to both Lloyds Corporate and Lloyds Bank Plc.  It is required by the Jersey Financial Services Commission to hold capital against these placements. Lloyds Corporate, which provides this capital to Lloyds International, is required by the Prudential Regulatory Authority to deduct its investment in Lloyds International from its own capital base when assessing its own capital adequacy.  By transferring the business into its Jersey branch, Lloyds Corporate is able to reduce this duplication of capital requirements.  The Scheme will improve the position of the depositors in that once they are transferred to the Jersey branch of Lloyds Corporate, they will sit further up the creditor hierarchy, becoming direct creditors of Lloyds Corporate and benefiting from protections against bail-in in the event of its failure. 

4.        Article 48D of the Banking Law provides that the Schedule to the Banking Law shall give effect to regulate any transfer or deposit-taking business from one registered deposit-taker to another (both entities being registered deposit-takers) and the Schedule sets out the procedure for carrying out a Scheme.  The Court was satisfied that the requirements of the Schedule, subject as directed by the Court, had been complied with.  

Principles to be applied

5.        The principles to be considered by the Court in the exercise of its discretion to sanction a scheme under the Banking Law were considered in Standard Chartered (Jersey) Limited [2013] (2) JLR Note 36 and [2013] JRC 210.  The Court applied by analogy the principles which have been applied in schemes for the transfer of insurance business.  The requirements and considerations applicable to such transfers are very similar to transfers of banking business.  Sir William Bailhache, then Deputy Bailiff, referred to Re Royal London 360 Limited and Royal London 360 Insurance Company Limited [2011] JRC 192, in which Sir Michael Birt, then Bailiff, cited Re Axa Equity and Law Life Assurance Society and AXA Sun Life Plc [2011] 1 All ER (Comm) 1010 and went on to say:

“… and we would take the opportunity of transposing what Evans-Lombe J said in that case into the Jersey context so that in our judgment the principles to be applied in such cases are as follows:-

(i)        the 1996 Law confers an absolute discretion on the Court whether or not to sanction a Scheme but this is a discretion which must be exercised by giving due recognition to the commercial judgment entrusted by the company’s constitution to its directors;

(ii)       the Court is concerned whether a policyholder, employee or other interested person or any group of them will  be adversely affected by the Scheme;

(iii)      this is primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the Scheme with what would result if the Scheme was implemented. For the purposes of this comparison the 1996 Law assigned an important role to the independent actuary to whose report the Court will give close attention.

(iv)      the Jersey Financial Services Commission, by reason of its regulatory powers, can also be expected to have the necessary material and expertise to express an informed opinion on whether policy holders are likely to be adversely affected.  Again,  the Court will pay close attention to any views expressed by the Jersey Financial Services Commission.

(v)       that individual policyholders and groups of policyholders may be adversely affected does not mean that the Scheme has to be rejected by the Court.  The fundamental question is whether the Scheme as a whole is fair as between the interests of the different classes of persons affected.

(vi)      it is not the function of the Court to produce what, in its view, is the best possible Scheme as between different Schemes all of which the Court may deem fair.  It is the company’s directors’ choice which to pursue.

(vii)     under the same principle the details of the Scheme are not a matter for the court provided that Scheme as a whole is found to be fair.  Thus the Court will not amend the Scheme because it thinks that individual provisions could be improved upon.

6.        These principles have been applied in a number of cases involving the transfer of banking business, including Re Abbey National International Limited and Santander UK Plc [2015] JRC 138, Re HSBC Bank International Limited and HSBC Bank Plc [2017] JRC 180 and Lloyds Bank International Limited and Lloyds Bank Corporate Markets Plc [2019] JRC 225A.

7.        The position under English law in relation to the transfer of insurance business has evolved following a decision of the English Court of Appeal in Re the Prudential Assurance Company Limited and Another [2020] EWCA Civ 1626 (followed in this jurisdiction in the case of Representation of the Prudential Assurance Company Limited and Rothesay Life Plc [2022] JRC 001), a case in which there had been considerable opposition to the transfer of long-term insurance business (annuities) from the Prudential Assurance Company Limited to Rothesay Life Plc.  The English Court of Appeal cautioned against regarding the judgment of Evans-Lombe J in the Axa case (as transposed above) and that of Hoffmann J in Re London Life Association Limited 21^st February 1989 (unreported) as if they were comprehensive in all insurance business transfers.  A judge hearing an application for the sanction of insurance business transfer schemes should first identify the nature of the business being transferred and the underlying circumstances giving rise to the scheme (paragraph 75 of the English Court of Appeal judgment).  

8.        As the English Court of Appeal said at paragraph 82, the Court will always, in exercising its discretion, accord full weight to the opinions of the independent expert and the regulator.  This does not mean that the Court can never depart from the recommendations of the independent expert or the non-objections of the regulator, but it does mean that full weight must be accorded to them and the Court should not depart from such recommendations and non-objections without significant and appropriate reasons for doing so.

9.        In our view, that caution should be applied in this jurisdiction to schemes for the transfer of banking business to the extent that the Court has regard, by way of analogy, to the principles applied in schemes for the transfer of insurance business. 

10.      In this case, the Court is dealing with the transfer of the whole of the deposit-taking business carried on by Lloyds International to the Jersey branch of Lloyds Corporate and we are not concerned with fairness as between the interests of different classes of persons affected or of the interests of employees or other stakeholders in the transferor or transferee companies.  The paramount concern of the Court is whether the transfer will have any material adverse effect on the interests of the depositors, including the practical implications of the Scheme, the consequences of a transfer from a Jersey incorporated entity to a branch of a UK corporate entity and financial adequacy. 

11.      In terms of practical implications of the Scheme, the Court was satisfied on the evidence before it, that the applicable service standards, pricing, rates and products offered will not change as a result of the transfer and the terms of business will only be changed to replace the contracting party with Lloyds Corporate and to amend the related regulatory wording.

12.      The independent auditor’s report concluded that:

“Nothing has come to our attention that causes us to believe that:-

·         The proposed transfer of business would have a materially adverse effect on the liquidity or capital adequacy of the Transferor or Transferee, or that would indicate that the Transferor or the Transferee would not have the ability to meet their liabilities after the proposed transfer of business between the Transferor and Transferee in accordance with the terms of the Scheme;

·         The proposed transfer of business in accordance with the terms of the Scheme would disadvantage the transferring and non transferring customers and creditors of the Transferor and the customers and creditors of the Transferee; and

·         The proposed Depositor Compensation Scheme (“DCS”) arrangements and creditor hierarchy considerations would have any material adverse effect on customers upon the Scheme taking effect.”

13.      The financial position of Lloyds International and Lloyds Corporate showed that there has not been any material change to the information provided to the independent auditor for the purpose of their report.  The total customer deposits and total assets of Lloyds Corporate post transfer will significantly exceed those of Lloyds International currently. Notwithstanding that Lloyds Corporate has a lower Common Equity Tier 1 ratio than Lloyds International, Lloyds Corporate has a stronger overall capital position than Lloyds International.  As stated earlier, the Scheme will improve the position of the depositors in that once they are transferred to the Jersey branch of Lloyds Corporate, they will sit further up the creditor hierarchy, becoming direct creditors of Lloyds Corporate and benefiting from protections against bail-in in the event of its failure. 

Conclusion

14.      Applying those principles to the exercise of its discretion the Court sanctioned the Scheme for the following reasons in summary:

(i)        The directions made by the Court and the requirements of the Schedule to the Banking Law had been complied with.

(ii)       The independent auditor’s report did not highlight any concerns in relation to the implementation of the Scheme.

(iii)      The Jersey Financial Services Commission did not object to the Scheme.

(iv)      No customers of Lloyds International or Lloyds Corporate had objected to the Scheme, and

15.      The Scheme is designed to achieve a reasonable commercial objective to reduce duplication of capital requirements and allow for further investment in the business and had been devised having regard to fairness of the Scheme as a whole.

Authorities

Banking Business (Jersey) Law 1991.

Standard Chartered (Jersey) Limited [2013] (2) JLR Note 36.

Representation of Standard Chartered (Jersey) Ltd [2013] JRC 210.

Royal London 360 Limited and Royal London 360 Insurance Company Limited [2011] JRC 192.

Re Axe Equity and Law Life Assurance Society and AXA Sun Life Plc [2011] 1 All ER (Comm) 1010.

Re Abbey National International Limited and Santander UK Plc [2015] JRC 138.

Re HSBC Bank International Limited and HSBC Bank Plc [2017] JRC 180.

Lloyds Bank International Limited and Lloyds Bank Corporate Markets Plc [2019] JRC 225A.

Re the Prudential Assurance Company Limited and Another [2020] EWCA Civ 1626.

Representation of the Prudential Assurance Company Limited and Rothesay Life Plc [2022] JRC 001.

Re London Life Association Limited 21^st February 1989 (unreported).