Kaupthing Bank HF, R (on the application of) v HM Treasury

The claimant challenged the lawfulness of the Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008 (SI 2008 No. 2674), made by the Treasury under section 6 of the Banking (Special Provisions) Act 2008. The court framed two principal legal issues: (i) whether the Transfer Order was made for the statutory purpose in section 2(2)(a) of the 2008 Act, namely maintaining the stability of the UK financial system where there would be a serious threat to that stability if the order were not made; and (ii) whether the Treasury had failed properly to identify and inform itself as to a specific threat to UK financial stability arising from KSF’s liquidity difficulties (as opposed to treating those difficulties as an undifferentiated part of the global/Icelandic crisis).

The court held that the dominant purpose of the Order was to maintain UK financial stability, relying on the recital to the Order, the explanatory memorandum and the regulatory impact assessment, together with the unchallenged witness evidence of Treasury officials (notably Mr Maxwell). The court further held that the Treasury had before it adequate material from the FSA and the Bank of England, had considered the consequences if the Order were not made (including the specific risk of a disorderly failure of KSF and contagion), and had not unlawfully failed to inform itself or to make further inquiries. The application for judicial review was dismissed.

Background and parties: Kaupthing Bank hf (the Icelandic ultimate parent) challenged the Transfer Order that transferred liabilities of its UK subsidiary Kaupthing Singer & Friedlander Limited (KSF) in respect of "Edge" deposit accounts to a Bank of England-owned company and then onward to ING Direct N.V. The transfer followed intense instability in September–October 2008 affecting Icelandic banks; the Transfer Order was made on 8 October 2008 under section 6 of the Banking (Special Provisions) Act 2008. KSF was placed into administration that afternoon under section 359 of the Financial Services and Markets Act 2000.

Relief sought / procedural posture: The claimant sought judicial review of the Transfer Order. The hearing took place before Lord Justice Richards (with Mr Justice Maddison agreeing) and the application was determined at first instance.

Issues framed by the court:

• Whether the Transfer Order was made for the statutory purpose in section 2(2)(a) of the 2008 Act (maintaining stability of the UK financial system where there would be a serious threat if the order were not made), or instead primarily to protect KSF depositors.
• Whether the Treasury failed properly to identify and assess a specific threat to UK financial stability arising from KSF’s liquidity position, or failed to inform itself adequately about the prospect of KSF obtaining the liquidity necessary to avoid a disorderly failure.

Court’s reasoning and findings: The court applied the principle that where a statutory condition is expressed in terms of purpose the dominant purpose must be the one specified. It concluded that the Transfer Order and accompanying explanatory memorandum and regulatory impact assessment showed on their face that the Treasury’s primary purpose was to maintain UK financial stability. The court gave significant weight to contemporaneous documents and to the unchallenged witness evidence of Treasury officials explaining that protection of depositors formed part of, but did not replace, the statutory purpose of maintaining system stability.

On the second issue, the court found that the Treasury had considered the position if the Order were not made; had received and acted on detailed advice from the FSA and the Bank of England; and had sufficient material to form the requisite view. The court rejected arguments that the Treasury had failed to take account of plans or assurances that might have improved KSF’s liquidity, concluding that the FSA’s assessment that there was no realistic prospect of a timely improvement in KSF’s liquidity was available and that the Treasury was entitled to act on the information before it. The court found no error of law in the decision-making process and no basis for relief.

Wider context: The court emphasised its limited role in adjudicating the legal challenge and declined to adjudicate on wider political or policy criticisms. The court accepted that contemporaneous documents did not set out the Treasury’s full reasoning in detail but held that the omissions did not vitiate legality where witness evidence and other documents supported the statutory purpose and adequate consideration of the specific threat.

The application for judicial review is dismissed. The court held that the dominant purpose of the Transfer Order fell within section 2(2)(a) of the Banking (Special Provisions) Act 2008 (maintaining the stability of the UK financial system where there would be a serious threat if the order were not made). The Treasury had adequate material from the FSA and the Bank of England, had considered the specific threat of a disorderly failure of KSF and its consequences, and there was no unlawful failure to inform itself or to inquire further. The decision to make the Transfer Order was lawful.