March 2003
Insolvency impacts on the regulation of financial services businesses (regulated activities) in two ways. First, there are implications for existing customers if a financial service business (regulated activity) becomes insolvent. Second, winding up and bankruptcy may itself be part of the regulatory response to events (see paragraph 80.25). The FSA may seek the winding up of an authorised company that is carrying on a regulated activity to protect the interests of existing customers and also those who might otherwise do business with it in the future, if it continued to trade.
80.31 Insolvency of an authorised business
The general law of insolvency continues to apply to most financial services businesses, as it does to other businesses subject to the provisions of the Companies Act 1989, Part VII, for transactions carried out on regulated markets e.g. by those who trade on the Stock Exchange.
The insolvency provisions of the Act establish, so far as is practicable, a common approach across all sectors. Sections 359, 367, 372 and 375 provide the FSA with the power to ask the court to initiate various insolvency procedures. Sections 356, 357, 362, 363, 365, 371 and 374 also provide that the FSA has the right to be heard by the court in insolvency proceedings instigated by other parties.
Where the official receiver is appointed in insolvency proceedings not instituted by the FSA, and it appears that the insolvent business has carried on a regulated activity when not authorised to do so, the official receiver must report the matter to the FSA without delay.
Where the FSA is not the petitioning creditor, the official receiver must send all notices or other documents that are required to be sent to creditors to the FSA.
The official receiver can check if a firm is authorised or not by carrying out a search at www.fsa.gov.uk/consumer or telephoning 0845 606 1234.
Notes: [Companies Act 1989, Part VII] [s359, s367, s372 and s375] [s356, s357, s362, s363, s365, s371 and s374] [s370 and 373]80.32 Winding up of Insurance companies
Insolvency of insurance businesses are dealt with in a different way to other authorised persons. Sections 369, 376, 377, 378 and 379 carry forward provisions of the Insurance Companies Act 1982 in dealing with the insolvency of insurance companies. The following are included in the provisions carried forward to the Act:
A copy of the petition to wind up an authorised person with permission to carry out contracts of insurance must be served on the FSA if the petitioner is not the FSA.
In relation to the winding up of an insurer who carries out contracts of long-term insurance, the liquidator must carry on the insurance business with a view to it being transferred as a going concern to a person who may lawfully carry out those contracts.
Under section 366 an insurer effecting or carrying out contracts of long-term insurance may not be wound up voluntarily without the consent of the FSA. The Financial Services and Markets Act 2000 (Treatment of Assets of Insurers on Winding Up) Regulations 2001 (SI 2001/2968) provide that assets representing an insurer’s long term business should be available only for meeting liabilities attributable to that business.
With effect from 1 December 2001 the Insurers (Winding Up) Rules 2001 replaced the Insurance Companies (Winding Up) Rules 1985. The new rules are largely unchanged in substance.
It is to be noted, however, that on 20 April 2003 an EU Directive on the Reorganisation and Winding Up of Insurance Undertakings will be implemented in the United Kingdom. With effect from that date reference should be made to the Insurers (Reorganisation and Winding Up) Regulations 2003.
Notes: [s369] [s376] [s366] [The Financial Services and Markets Act 2000 (Treatment of Assets of Insurers on Winding Up) Regulations 2001 [Statutory Instrument 2001/2968] [Insurers (Winding Up) Rules 2001]80.33 Winding-up regime for banks, building societies, friendly societies, industrial and provident societies
The special winding-up regime for banks contained in the Banking Act 1987 remains in place. Similarly, the winding-up regimes for mutual societies, which include building societies, friendly societies and industrial and provident societies remain in the Building Societies Acts 1986 and 1997, the Friendly Societies Acts 1974 and 1992 and the Industrial and Provident Societies Act 1965. These arrangements did not change on the coming into force of the Act, as section 355(1)(b) expressly provides that Part XXIV of the Act, which deals with insolvency, is not to apply to building societies, friendly societies or industrial and provident societies.
Notes: [s355(1)(b)]80.34 Insolvency legislative amendments
A number of consequential amendments have been made to the Insolvency Act 1986, the Insolvency Rules 1986 and the Company Directors Disqualification Act 1986 pursuant to the Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001, (SI 2001/3649). A table of those amendments and their effect is detailed at Annex F.
80.35 Official receiver and insolvency practitioner exemption from Section 19
Under section 19 it is an offence for any person other than an authorised person or an exempt person to carry on a regulated activity in the United Kingdom. The Financial Services and Markets Act 2000 (Exemption) Order 2001 (SI 2001/1201) provides for certain persons to be exempt from the section 19 prohibition. By virtue of Article 5 and Part III of the Schedule to the exemption order, persons acting as official receivers or insolvency practitioners within the meaning of sections 399 and 388 of the Insolvency Act 1986 are exempt from the section 19 prohibition in respect of the conduct of investment business (but not, among other activities, effecting and carrying out contracts of insurance, accepting deposits or entering into a regulated mortgage contract). Annex G lists those regulated activities in relation to which the official receiver and insolvency practitioners are exempt from the general prohibition under section 19.
Notes: [FSMA (exemption) Order 2001 (Statutory Instrument 2001/1201)] [IA 399 and 388]80.36 Continuation of a financial services business -business/person is authorised
The official receiver, as an exempt person, will be able to deal with most aspects of the insolvency of a financial services business. If the official receiver decides to continue the business of a regulated activity, he/she is obliged to ensure that any continued trading complies with the provisions of the Act. The official receiver in such circumstances will most usually want to obtain specialist advice (see also Chapter 62). The business/person will remain the authorised person to carry on a regulated activity. The official receiver must always ensure that the business/person has permission under the Act to carry out a regulated activity before any business is continued. In such circumstances the official receiver should always consider the appointment of a special manager.
80.37 Continuation of a financial services business - business/person is not authorised
It is likely to be an extremely rare occurrence where the official receiver would carry on a business without permission to carry on that regulated activity. Early specialist advice should be sought where continued trading is deemed necessary. If the business/person does not have permission, then although the official receiver will be personally exempt, the business/person itself will continue to be subject to the Act and must obtain permission if it is to be continued.
If the business is to be continued, any investment entered into in the course of continuing to carry on a financial services business for the purpose of winding up or bankruptcy is likely to be rendered unenforceable against the other party under sections 26, 27 and 28.
80.38 Continuation of a company’s business - company not authorised
If permission cannot be obtained for the company for the continuation of the business by the official receiver, as liquidator, he/she may consider making application to the court under section 145 of the Insolvency Act 1986 for the company’s property to be vested in the official receiver as liquidator to take advantage of his/her personal exemption. As liquidator, the official receiver could then deal with the company’s property as an exempted person. Where the official receiver is acting as provisional liquidator of a financial services business, and he/she considers that certain assets of the company will depreciate in value before the hearing of the petition, he/she should apply to the court for the power to sell those assets if he does not already have the power to do so in the original order of appointment.
Notes: [IA s145]
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