Jersey Unreported Judgments

Banking - matters relating to the Court's sanction regarding the Scheme of transfer.

[2017]JRC180

Royal Court

(Samedi)

26 October 2017

Before     :

J. A. Clyde-Smith, Esq., Commissioner, and Jurats Liston and Ronge.

IN THE MATTER OF THE REPRESENTATION OF HSBC BANK INTERNATIONAL LIMITED AND HSBC BANK PLC

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

Advocate M. P. Cushing for the Representors.

judgment

the COMMISSIONER:

1.        On 27^th July, 2017, the Court sanctioned a scheme of transfer under the Banking Business (Jersey) Law 1991 ("the Banking Law") between the First Representor ("HBIB") and the Second Representor ("HBEU").

2.        It was an intra-group transfer, which complied with the requirements of the Banking Law and well-established authority, which raised no issues and to which there had been no objection voiced, but in the light of the size of the businesses being transferred, we think it appropriate to record our decision in this judgment.

3.        HBIB undertook deposit-taking and associated business in and from within Jersey.  It is a private limited company registered in Jersey and is an indirect wholly owned subsidiary of HBEU, the transferee.

4.        The HSBC Group is a major global financial services provider engaged in four global businesses, consisting of retail banking and wealth management, commercial banking, global banking and markets and global private banking. 

5.        The HSBC Group wished to restructure and consolidate its business operations in Jersey, in order to simplify its business and corporate structure and realise capital and operational efficiencies as part of a wider restructuring of the business.

6.        That restructuring involves the transfer as a going concern of all banking business, investment business, fund services business, money services business and general insurance mediation business carried on by HBIB in or from within Jersey, and all property, assets and liabilities of HBIB related to these businesses, to the Jersey branch of HBEU ("HBEU Jersey"), with limited exceptions for Excluded Business as defined in the Scheme ("the Businesses").  The Scheme became effective on 1^st October, 2017.

7.        It was proposed that alongside the Scheme, there will be a contractual transfer of the business of the Hong Kong branch of HBIB to the Hong Kong branch of HBEU.  The effect of the Scheme was that the whole of HBIB's business would, with limited exceptions, be transferred to HBEU.  A separate scheme would be effected in Guernsey of the business of HSBC Private Bank (C.I.) Limited to the Guernsey branch of HBEU.

8.        The transfer was an intra-group transfer and included the transfer of:

(i)        Approximately £8.2 billion of customer deposits; and

(ii)       Approximately £346 million of loans and advances to customers.

9.        In terms of the comparison between HBIB as transferor and HBEU as transferee: -

(i)        HBIB had a profit before tax of approximately £32 million for the year ending 31^st December, 2016, whereas HBEU had a profit before tax of approximately £874 million for the year ended 31^st December, 2016.

(ii)       HBIB had total assets of approximately £8 billion as at 31^st December, 2016, whereas HBEU had total assets of approximately £663 billion as at 31^st December, 2016, (£816 billion on a consolidated basis).

The legal framework

10.      Article 48D of the Banking Law provides that the Schedule to the Banking Law has effect to regulate any transfer of deposit-taking business from one registered deposit taker to another.  Both HBIB and HBEU Jersey were registered by the Jersey Financial Services Commission to undertake deposit-taking business.

11.      The Schedule to the Banking Law requires the sanction of the Court to any scheme where the whole or any part of the deposit-taking business carried on in or from within Jersey is to be transferred from one registered person to another.  The Schedule provides in particular that the Court shall not determine any application for sanction unless the Court is satisfied that: -

(i)        an independent auditor's report has been obtained (paragraph 3 of the Schedule);

(ii)       appropriate noticed has been given (paragraph 4 of the Schedule); and

(iii)      the transferee is authorised to carry on the deposit-taking business to be transferred under the scheme (paragraph 7 of the Schedule).

Jurisdiction of the Court - Transfer under Article 48D

12.      The Court's jurisdiction to sanction the transfer of HBIB's deposit-taking business to HBEU Jersey derives from Article 48D of the Banking Law.  The case of Re Standard Chartered (Jersey) Limited [2013] JRC 172 confirms that the Court has jurisdiction to sanction the transfer under the Scheme of non-deposit-taking activities which are integral to the deposit-taking business to be transferred.  The principles established in the Standard Chartered case have been applied by the Royal Court in a number of cases, including most recently in Re Barclays Private Clients International Limited [2016] JRC 161 where the Court determined that it had jurisdiction under Article 48D to sanction the transfer of investment business, fund services business, money service business and general insurance mediation business which was integral to the banking business to be transferred.  These are the same categories of business which are proposed to be transferred to HBEU Jersey under the Scheme in this case.

13.      As part of its business offering, HBIB provided both deposit-taking and investment business services to its customers and those services were provided under standard account opening mandates which governed both the provision of investment business services and the opening of the related deposit accounts.

14.      Further, as part of its activities as an investment adviser, HBIB acted as a distributor of funds pursuant to which it provided customers with information in respect of funds.  When a customer used its investment business services, a deposit account was opened in order to receive any dividends or income generated from the investments and to hold settlement funds in respect of those investments.  Furthermore, customer accounts were used as collateral to fund obligations in respect of investment business.

15.      The Court had before it an affidavit by Tracy Nicola Garrad, the chief executive of HBIB, who confirmed that, from a practical perspective, it was not possible to separate the deposit-taking business carried on by HBIB for its customers from the investment business and fund services business.  Those businesses were integral to the deposit-taking business, which was intended to be transferred, and could not be separated without fundamentally altering the business model and, of course, the service delivered to customers.

16.      The money service business (which included foreign exchange services and foreign payments) and the general insurance mediation business (under which ancillary services are provided to, for example, credit card customers) were also integral to HBIB's deposit-taking business.

17.      It was clear to the Court from the evidence of Tracy Garrad that the non-deposit-taking activities of HBIB which it proposed would be transferred pursuant to the Scheme were integral to the deposit-taking business and had not been artificially grafted on to the deposit-taking business in order to get through the jurisdictional gateway under Article 48D of the Banking Law.  The Court was satisfied, therefore, that it had jurisdiction under Article 48D to sanction the transfer of the Businesses.

The Jurisdiction of the Court - Transfer under Paragraph 9 of the Schedule

18.      If there were any doubt as to the jurisdiction of the Court under Article 48D to sanction the transfer, the Court also had wide jurisdiction to make orders to give full effect to this Scheme under the terms of Paragraph 9 of the Schedule to the Banking Law which provides: -

"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 a part of the undertaking and of the property or liabilities of the transferor;

...

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

19.      There is no definition of "undertaking" in the Banking Law, but in the context of a corporate entity the term "undertaking" will generally be understood to include the economic and commercial activities of that entity.  The non-deposit-taking business carried on by HBIB as part of its banking operations plainly form part of its "undertaking".  Accordingly, the Court would have jurisdiction under Paragraph 9(a) of the Schedule to the Banking Law to make provision for the transfer of the investment business, fund services business, money service business and general insurance mediation business of HBIB as being supplementary to the transfer of the deposit-taking business.

20.      This is consistent with the decision of the Court in Re Standard Chartered where the Court concluded that both banking business and investment business could be transferred pursuant to Paragraph 9(e) of the Schedule stating that (paragraph 31):-

"... 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 ... so that the customers of the deposit taking business can continue to receive the services the account mandates entitle them to as a matter of contract."

Sanction - The relevant principles

21.      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 the case of Re Standard Chartered (Jersey) Limited [2013] JRC 210.  In the Standard Chartered case (at paragraph 11), the Royal Court applied the principles which have been applied in the analogous case of schemes of transfer of insurance business as set out in Re AXA Equity and Law Life Assurance Society [2001] 1 All ER (Comm) 1010, which case was cited by Birt, then Bailiff, in the Representation of Royal London 350 Limited and Royal London 360 Insurance Company Limited [2011] JRC 192:

"...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 companies 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)       but 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."

Sanction

22.      On 22^nd May, 2017, the Court had given directions and granted certain dispensations from the requirements set out in paragraph 4 of the Schedule to the Banking Law, and the Court was satisfied that appropriate notice had been given of the Scheme.  No customer had raised any objection in relation to the Scheme.

23.      The report from the independent auditor, Ernst & Young LLP dated 11^th May, 2017, had concluded that:

"31.1   nothing has come to the Independent Auditor's attention that would cause them to believe that the transfer will have a materially adverse effect on the financial position, capital adequacy, liquidity, depositor compensation arrangements or creditor hierarchy on a resolution of HBIB or HBEU Jersey.

31.2    nothing has come to the Independent Auditor's attention that would cause them to believe that HBIB or HBEU Jersey would not have the ability to meet their liabilities immediately after the transfer in accordance with the terms of the Scheme; and

31.3    nothing has come to the Independent Auditor's attention that would cause them to believe that the transfer would appear to materially disadvantage customers or creditors of HBIB or HBEU as a whole."

24.      The independent auditor had confirmed by letter dated 12^th July, 2017, that no matters had been brought to their attention, that, had they known about them, would have changed the contents of the report.

25.      The Representors had considered additional factors which fell outside the scope of the report of the independent auditor.  Those factors included a customer impact analysis, the consideration of tax implications arising from the proposed transfer and an assessment of the risks associated with the Scheme.  Having considered those factors, the Representors had concluded that the Scheme was fair to the customers of HBIB as a whole.

26.      The proposed transfer was an intra-group transfer from HBIB to its indirect parent HBEU.  The transfer would be effected with no material change in the products or service levels enjoyed by the customers, save for a limited short term impact on customers of HBIB who are resident in Hong Kong and who require regulated investment advice.

27.      HBEU had a strong financial covenant and had all the necessary regulatory licences in order for it properly to conduct the Businesses.

28.      The Representors had consulted with the Jersey Financial Services Commission throughout the transfer process and it had confirmed that it did not have any objections or specific comments to make concerning the Scheme.

29.      In the premises, the Court sanctioned the Scheme and ordered accordingly.

Authorities

Banking Business (Jersey) Law 1991.

Re Standard Chartered (Jersey) Limited [2013] JRC 172.

Re Barclays Private Clients International Limited [2016] JRC 161.

Re Standard Chartered (Jersey) Limited [2013] JRC 210.

Re AXA Equity and Law Life Assurance Society [2001] 1 All ER (Comm) 1010.

Representation of Royal London 350 Limited and Royal London 360 Insurance Company Limited [2011] JRC 192.