Author Paul Whittingham

Issue September 09

Pub IoD

None of us will have forgotten the extraordinary scenes last autumn when exceptional measures were taken by governments around the world to prop up or nationalise some of the most famous names in the banking world.

But how does the process of nationalisation actually work?

Essentially there are two principal ways in which it happens. In the case of RBS, for example, a colossal number of shares were offered to shareholders but only 0.24 per cent were taken up. The rest were acquired by the Government, giving it a 60pc shareholding. Perhaps more intriguing is the way in which Northern Rock was nationalised back in early 2008. The Banking (Special Provisions) Act was rushed through ‘on the nod’.

In normal circumstances, this legislation would have been regarded as outrageous and the sort of Act which one might have expected more from Robert Mugabe. The Act authorised the Treasury to take over a bank when it believes that it is necessary for maintaining the stability of the UK financial system, and if it considers there is a serious threat to that stability.

The Treasury then has wide powers which include:

• Any shares in the bank get automatically transferred to the Treasury without the need for any formal transfer or consent of the relevant shareholders, or anybody who might need to agree to such a transfer.
• For bearer shares to be deemed to be transferred even though the actual bearer will still have the share certificate.
• The transfer of leasehold properties, in which case the requirement for landlords to give their consent is simply deemed to been given.
• For the pension scheme assets of the relevant bank to be transferred to another pension scheme without the need for obtaining consent from anybody.
• To declare that any licences or permits required concerning the bank’s transferred assets are to remain in force.

Where this Act differs from Mr Mugabe’s approach to ‘smash-and-grab’ legislation is the requirement for the Treasury to establish a mechanism in each case for establishing compensation to people affected by the transfer of shares, property or other rights.

However, the Act specifically states that the value of the shares must be ascertained on the basis that the Bank of England’s financial support (or promise of guarantees) was not available or withdrawn. This gave rise to litigation by a group of disgruntled Northern Rock shareholders to see if the compensation rules had been unfairly applied in their case.

The powers of the Act have now been re-enacted in a more sophisticated form by the Banking Act 2009.

The Treasury has made plenty of use of its extraordinary powers. The Bradford & Bingley was broken up using them, and they were used to transfer assets of certain Icelandic banks to ING Direct in October.

Extraordinary times require exceptional measures…

Paul Whittingham, Partner

Head of Corporate Department

Tel: 01473 261334

Email: paul.whittingham@ashtonkcj.co.uk

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