Preparations for Brexit have seen a surge in the number of applications to the High Court in relation to cross-border mergers under the Companies (Cross-Border Mergers) Regulations 2007 (CBMR 2007) and insurance and banking business transfers under Part VII FSMA 2000. These applications are raising novel issues for the courts.
Joint applications under Part VII FSMA 2000 and CBMR 2007
Recent cases involving the transfer of insurance businesses have seen applications to the court being made under both Part VII FSMA 2000 and CBMR 2007.
A joint application was made in Re AIG Europe Ltd [2018] EWHC 2818 (Ch). As part of its preparations for Brexit, the company proposed to transfer the UK and non-EEA business written by its UK offices to a new English company (AIGUK) by means of an insurance business transfer under Part VII FSMA 2000. The remainder of its business was to be transferred to a new Luxembourg company (AESA) by means of a cross-border merger under CBMR 2007.
As the scheme qualified as an insurance business transfer scheme within the meaning of s 105 FSMA 2000, it was required to be carried out under Part VII FSMA 2000 (s 104 FSMA 2000: see Business transfer schemes under Part VII FSMA 2000, Q&A here), and could have been carried out under Part VII alone. However, the company considered that transferring its EEA business by means of a cross-border merger (and thus securing the benefit of universal succession) would facilitate recognition and enforcement of the transfer in other jurisdictions. The company therefore made a joint application for both (a) the court’s sanction and an order under s 112 FSMA 2000 to give effect to the transfer to AIGUK; and (b) a pre-merger certificate under regulation 6 CBMR 2007 in relation to the proposed transfer to AESA (see Cross-border mergers, Q&A here).
This raised the issue as to whether it was permissible for the court to sanction an insurance business transfer scheme under Part VII FSMA 2000 in circumstances where the transfer of the insurance policies was to be achieved in part by an order under s 112(1)(a) FSMA 2000 and in part by means of a cross-border merger under CBMR 2007. Snowden J was satisfied that it was. While an insurance business transfer scheme will not have effect unless sanctioned by the court under s 111(1) FSMA 2000, this is not sufficient to transfer the relevant business. In general, the relevant transfer will be effected by an order under s 112(1)(a) FSMA 2000 but, in referring to the ‘transfer’ of insurance business, s 105 FSMA 2000 does not restrict the methods by which a transfer could be achieved. Snowden J therefore held that, subject to sanction under s 111(1) FSMA 2000, a transfer by cross-border merger is a means by which a transfer of insurance business may lawfully be carried into effect under Part VII. Snowden J also considered that he was entitled to make ancillary orders under s 112(1)(c) and (d) FSMA 2000, not only in respect of the transfer of business to AIGUK but also in respect of the transfer of business by means of the cross-border merger to AESA. Provided the scheme in question fell within s 111(1), the availability of the powers under s 112(1)(c) and (d) did not depend on the making of an order under s 112(1)(a).
In Re AIG Europe Ltd, it was clear which part of the business was being transferred by means of the Part VII transfer and which was being transferred pursuant to the cross-border merger. The same delineation was not a feature of Re Assured Guaranty (London) plc and Assured Guaranty (UK) plc (unreported, Zacaroli J) 25 October 2015, which was heard on the same day that judgment in Re AIG Europe Ltd was handed down. In Re Assured Guaranty, the entire businesses of the companies were to be transferred under Part VII FSMA 2000 and the companies were also the subject of a merger by absorption under CBMR 2007 (again with a view to facilitating recognition of the transfer in other jurisdictions). Zacaroli J, who was provided with the judgment in Re AIG Europe Ltd, was content to hold that the arrangements fell within the scope of the legislation and it was not necessary to delineate in the manner which was used in Re AIG Europe Ltd.
Business transfer schemes: scope of s 112(1)(d) FSMA 2000
Questions as to the scope of s 112(1)(d) also came before the court in Re Barclays Bank plc [2018] EWHC 2868 (Ch). As part of its planning for continuity of service provision to EEA clients in light of Brexit, Barclays Bank plc (BB) and its subsidiary Barclays Capital Services Ltd (BCSL) propose to transfer part of their business to another subsidiary of BB, Barclays Bank Ireland plc (BBI) by means of a banking business transfer scheme under Part VII FSMA 2000. The evidence was that the investment banking products and services provided to clients by BB and BCSL were highly interconnected and, in practice, operated as one overall business.
This was a directions hearing before Zacaroli J at which the issue was whether, as part of BB’s business transfer scheme, an order could be made under s 112(1)(d) transferring the business of BCSL to BBI. For a scheme to qualify as a banking business transfer scheme, it must be one under which ‘the whole or part of the business to be transferred includes the accepting of deposits’ (s 106(1)(b) FSMA 2000: see Business transfer schemes under Part VII FSMA 2000, Q&A here). While the business to be transferred by BB included the accepting of deposits, the business to be transferred by BCSL did not (and so the court had no jurisdiction under s 106 to sanction a scheme in respect of the transfer of BCSL’s business). It was therefore proposed that the ancillary orders sought at the hearing for sanction of the BB business transfer scheme include an order under s 112(1)(d) transferring BCSL’s business to BBI.
S 112(1) provides that if the court makes an order under s 111(1) FSMA 2000 sanctioning a business transfer scheme, it may ‘by that or any subsequent order make such provision (if any) as it thinks fit… (d) 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’.
Previous authorities in the context of both insurance and banking business transfers have demonstrated that the court’s power to make orders under s 112(1)(d) is broad. The question was whether the power extended to making an order ancillary to a banking business transfer scheme where that order would have the effect of transferring the business of a third party entity (which could not itself be transferred pursuant to such a scheme).
Zacaroli J noted that orders involving the modification of counterparties’ contractual rights and obligations were at the heart of a transfer of the transferor’s own business under s 112(1)(a). The issue was whether, by a supplementary order under s 112(1)(d), counterparties of the transferor could be subjected to such modification in connection with their rights against a third party. Zacaroli J considered that Re Copenhagen Reinsurance Company (UK) Ltd [2016] EWHC 944 (Ch) (which modified affected policyholders’ rights as against a third party guarantor in the context of an insurance business transfer scheme: see FC Feature 3 August 2016) suggested that they could. In his view, s 112(1)(d) was sufficiently broad to permit the court to make orders which modified contractual and other rights as between clients of the business of BB transferred under the scheme and a third party such as BCSL, provided that any such orders satisfied the requirements of the section.
As seen above, these requirements include that the order be ‘necessary to secure that the scheme is fully and effectively carried out’. On the assumption that evidence presented at the sanction hearing as to the degree of interconnection between clients’ relationships with BB and BCSL and the consequences of not making such an order was sufficient to demonstrate this, Zacaroli J considered that the transfer of BCSL’s business was capable of satisfying this requirement. Further, while the nature of the order sought was far removed from the nature of the orders made in earlier cases, Zacaroli J did not regard it as impossible to describe the transfer of BCSL’s business as ‘incidental’, ‘consequential’ or ‘supplementary’ in the context of the case. Whether the court should exercise its discretion to make an order under s 112(1)(d) was a matter for determination at the sanction hearing.
FC Q&A are being updated to reflect these decisions.