Bills Committee on Deposit Protection Scheme Bill


Comments on Deposit Protection Scheme Bill 2003

1. The Bar has no comment on the general policy as enshrined
in the proposed legislation but make the following comments on certain
specific aspects of the Bill.

2. Section 12(4)(c)

The Bar is of the view that the language of the existing section can be
improved. The Bar suggests the following as an alternative:

"the scope and the level of protection available to those deposits
under that scheme are not more limited or lower than that which would
be available to those deposits under the Scheme if the bank were not exempted."

3. Section 12(5)

(1) Section 12(5)(a)(ii) provides, inter alia, that a bank "shall
forthwith notify the Board of any change of circumstances which may affect
the exemption".

(2) However, the Bar notes that there does not appear
to be any sanction for breach of this reporting obligation (contrast section
12(11) which imposes criminal sanction for certain other infringement),
and that therefore the continuation of exemption depends more or less
entirely on the exempted banks' observance of their duty to report any
change of circumstances to the Board.

(3) In order to ensure that exempted banks properly honour
this reporting obligation, it may be desirable for the legislation to
impose sanction for breach of this subsection, short of imposing an annual
or otherwise periodic system for renewal of the exemption.

4. Section 21(2)

(1) Section 21(2) as it stands is ungrammatical; in particular, subsection
(a) appears to be incomplete.

(2) The Bar suggests the following as an alternative:

"If -

(a) (i) a Manager within the meaning of section 2(1) of the Banking Ordinance
(Cap. 155) has been appointed under section 52 of that Ordinance in respect
of a Scheme member; or

(ii) a provisional liquidator has been appointed in respect of a Scheme
member; and

(b) the Monetary Authority ..."

5. Section 21(3)

This subsection is a deeming provision in relation to the service of written
notice by the Monetary Authority on the Board. Given that the Board is
a public body which consists of the Monetary Authority as an ex officio
member (s.4(1)(b)) and acts through the Monetary Authority (s.6(1)), the
Bar queries whether this subsection is necessary which seems more apt
for a person who may otherwise evade service.

6. Sections 27(3) and 27(4)

(1) These two subsections deal with an agent's entitlement to compensation.
It is unclear to the Bar why it is necessary to have these two provisions.

(2) First, the expressions "agent" and "agency"
are not defined in the proposed legislation. It is unclear whether and,
if so, to what extent an "agency" within the meaning of sections
27(3) and 27(4) overlaps with a trust.

(3) In a case where a depositor holds the deposit as an
agent, it seems to the Bar that such a depositor would also hold the deposit
as a trustee, since he does not have beneficial ownership in the chose
in action in question (being the debt owed by the bank). In such a case,
either section 27(1) and (2) or section 28 would apply. Accordingly, the
Bar does not see why a separate provision has to be included with respect
to agents.

7. Section 27(5)

The Bar notes that there is no statutory definition of the expression
"client account". A definition of the nature of such an account
will in the Bar's view be useful.

8. Section 34

(1) It is unclear whether all the conditions set out in subsections (a),
(b) and (c) need to be satisfied before the Board can make an interim
payment. The word "and" or "or" between subsection
(b) and subsection (c) is missing.

(2) In any event, it seems to the Bar that it is impossible
to satisfy subsection (c), in view of section 33, which provides that
the amount of compensation payable to a depositor of a failed Scheme member
shall not exceed the amount in respect of which the depositor would, on
the winding up of the failed Scheme member, be entitled to priority under
section 265(1)(db) of the Companies Ordinance.

9. Section 36(1)(a)

(1) This subsection will have the effect that the Board has priority over
the depositor, for example, in proving in any winding up. The point is
best illustrated by an example. Assume that a depositor has a deposit
of $200,000 with the bank. The bank fails. The Board pays the depositor
$100,000 under the Scheme; the depositor has a claim for $100,000 which
is not satisfied. By virtue of this section, the Board can prove, to the
full extent of the $100,000 which it has paid the depositor, for $100,000
in the winding up of the bank. The depositor can also prove for his remaining
$100,000, but his proof is subordinated to that of the bank by section
36(1). Assume that the total dividend payable in the liquidation is 50
cents in a dollar; this means the Board will get back its $100,000, and
the depositor will get nothing in the liquidation.

(2) This is a different scheme from that in respect of
the United Exchange Compensation Fund as formerly governed by Part X of
the Securities Ordinance (i.e. sections 98-121A). In Re Forluxe Securities
(20.12.00, Yuen J), p.14, the Court held that the SFC was entitled under
s.118 to be subrogated to a client's right in the proportion which the
compensation payment bears to the client's claim. In the example given
above, under this approach the Board and the depositor would both have
an equal right to prove in the liquidation. It follows that they would
each get a dividend of $50,000 in the liquidation.

(3) The Bar assumes that a deliberate policy decision
has been made to give priority to the Board over a depositor's remaining
claim, but it does mean that in cases like the above example, the depositor
would not ultimately be any better off under the Protection Scheme.

10. Section 36(1)(b)

(1) The Bar queries whether the phrase "or any person who is subrogated,
whether or not before the Board's subrogation, to the rights and remedies
or the depositor in relation to those rights" is necessary.

(2) As a matter of common law, any person who is subrogated
to the rights and remedies of the depositor in relation the deposits will
be subject to prior equities. Accordingly, the express reference to such
persons in section 36(1)(b) appears to be superfluous.

(3) Moreover, by expressly referring to these "any
person who is subrogated", is it intended that other successors-in-title
of the depositor like assignees or personal representatives are to be
excluded from the operation of this subsection by virtue of the maxim
expressio unius est exclusio alterius?

11. Section 39(10)

The Bar thinks that the legislation should expressly provide for the right
to legal representation at hearings before the Tribunal for review of
a decision or assessment of the Board or a decision of the Monetary Authority.
It is desirable for the legislation expressly to allow an applicant to
be represented by counsel, a solicitor or such other representative authorised
by the applicant as may be approved by the Tribunal.

12. Schedule 1, para 1(a)(i)

The expression "agreed to by the depositor at the most recent time
it was negotiated" appears to the Bar to be too vague and infelicitous.
An alternative is "a deposit which had an original term to maturity
of more than 5 years", which is a phrase based on section 60(6)(b)
of Banking Act 1987 (UK).

13. Schedule 5, para 1(d)(iii)

(1) Under the definition of "excluded person", the Bar suggests
para (b)(ii) be revised as follows:

"the date on which the petition for the winding up of the company
being wound up was presented"

(2) Under the definition of "related company",
the Bar suggests para (c) to be revised as follow:

"a subsidiary of the holding company of the company"

Dated 19th September 2003.

Hong Kong Bar Association