X Receivership Under the Banking Law
- T. Asser
- Published Date:
- April 2001
1. General Issues
As treated in this book, receivership is a bank administration procedure for the restructuring or the closure and liquidation of banks by a receiver. It should be distinguished from rehabilitation and bankruptcy procedures under general insolvency law, even though the receivership provisions found in the banking law are often derived from provisions of the general insolvency law or include provisions of the general insolvency law by reference. It should also be distinguished from provisional administration.
Receivership can be carried out either under regulatory administration where the receiver is appointed and supervised by the bank regulator, or under judicial administration where the receiver is appointed and supervised by the courts. The principal bank resolution procedures used in a receivership are treated below in this chapter.
Objectives of Receivership
The functional objective of a receivership for a bank is to maximize the value of the bank for its creditors, including the government (if it has provided exceptional financial support to the bank) and the deposit insurance agency. The objective may be achieved by saving the business of the bank as a going concern pending its transfer to another institution in a sale or merger, or by closing and liquidating the bank, under the authority of a receiver appointed by the bank regulator or the court. Usually, upon completion of this process, the bank’s operating license is revoked. For practical purposes, the effects of a regulatory bank receivership may be compared with those of a formal insolvency proceeding.
Advantages of Receivership over Provisional Administration
In most countries where the banking law provides for a receivership, these advantages are mainly that, whereas under provisional administration bank owners largely retain their rights, under receivership the rights of the bank’s owners are suspended or vested in the receiver and the receiver can exercise superpowers of a trustee in bankruptcy. Accordingly, the receiver is usually granted full control over the business of the bank and relative freedom in restructuring the bank and negotiating transfers of the bank’s business at terms that are most favorable for the bank’s creditors, including the deposit insurance agency, without requiring shareholders consent.304
For these reasons and from a systemic viewpoint, a bank receivership is much to be preferred over provisional administration. Even if, after a receiver is appointed, it were decided to save the bank as a going concern in the same manner as under provisional administration, the receiver would generally have the authority to do so.
Typically, a bank receivership is carried out pursuant to provisions of banking law (France, Italy, Luxembourg, Netherlands, Norway, Switzerland, United States),305 provisions of a general or special insolvency law (Austria, Belgium, Canada, Denmark, England, France, Germany, Netherlands, Switzerland), or provisions of company law (Australia).306 In several countries (France, Switzerland), the law offers two receiverships for banks: solvent banks are liquidated by a receiver appointed under the banking law or the company law, for instance, when their banking license has been revoked for reasons unrelated to their financial condition, while insolvent banks are liquidated by a receiver appointed by the courts under insolvency law;307 in the Netherlands, the law provides for forced bank liquidation by a receiver of insolvent banks under both the general insolvency law and the banking law.308 In a third group of countries (Italy, Luxembourg, Norway, United States), forced liquidation in a receivership for both solvent and insolvent banks is carried out under banking law only.309
Where bank receiverships are governed by the banking law, a more or less comprehensive set of rules and procedures governing forced liquidation is usually included in the banking law, either in the form of special liquidation provisions for banks,310 or by incorporating provisions of general insolvency law into the banking law by reference,311 or both.312
2. Appointment of a Receiver
In some countries where the banking law provides for a bank receivership, the receiver is appointed by the court, often at the request of the bank regulator.313
In other countries, receivers for a bank are not appointed by the court but by the bank regulator,314 or by another governmental authority. In Italy, the receiver is appointed by the bank regulator following a decree of the Minister of the Treasury revoking the banking license and ordering the forced liquidation of the bank.315 Similarly, in Norway, the receiver is an administration board appointed by the regulator following a royal decree placing the bank under receivership.316 In Canada, the Canada Deposit Insurance Corporation (CDIC) is appointed as receiver of federal banks by order of the Governor in Council, upon the recommendation of the Minister of Finance (supervising the bank regulator).317 In the United States, the Federal Deposit Insurance Corporation (FDIC) may appoint itself as receiver of an insured depository institution after consultation with its bank regulator; the FDIC may accept the appointment by state authorities as receiver of insured state-chartered depository institutions.318
The statutory grounds for the appointment of a receiver often center on the actual or imminent insolvency of a bank. In banking law, three types of criteria are used to determine a bank’s insolvency. Under standards of the first type, built on general bankruptcy law criteria, a bank may be deemed insolvent when it is established that the bank is unable to pay its obligations as they are due and payable and has no current prospect of being able to do so; this condition is also known as liquidity insolvency.319 The second type of standard is known as balance sheet insolvency; it is used to declare a bank insolvent when the bank’s balance sheet shows a deficit.320 The third type of standard is regulatory insolvency; according to this standard, a bank may be deemed insolvent when its capital is no longer adequate to comply with prudential capital adequacy standards.321 Both the second and third types of standard use the value of assets on the bank’s balance sheet; as this means that these assets must be recorded at appropriate values, rules applicable to bank balance sheets in general or the valuation of bank balance sheet assets in particular may be set by law or regulation.
As receivership is the ultimate intrusion into a bank’s business and in keeping with the administrative law principle of proportionality, the law may make the appointment of a receiver subject to a determination by the bank regulator that the bank cannot be restored to compliance through regulatory corrective action.322
Generally, the law uses permissive language in phrasing the grounds for the appointment of a receiver. There are countries, however, where in certain circumstances the law makes the appointment of a receiver for a bank mandatory, for instance, when the bank’s banking license has been revoked.323
Once the decision has been made that a receiver should be appointed, the appointment should be made without delay.324 The receiver should immediately take control of the bank’s assets and its books, make an assessment of the bank’s financial condition for the regulator, and recommend to the regulator or the court a course of action. Preferably, a receivership is carried out in accordance with a plan of action.325
If a receivership is not preceded by provisional administration, the tasks of the receiver need not be limited to the liquidation of the bank but may be extended to include an attempt to save the bank as a going concern326 or to sell the bank to, or merge it with, another institution. The following provisions of the law of Norway may serve as an illustration of such extended tasks of a receiver:
- (1) The administration board (receiver) shall endeavour as rapidly as possible to draw up arrangements enabling the continued operation of the institution’s activities on a sufficient financial basis, or seek to bring about a merger with, or have its activities transferred to, other institutions, or wind up the institution.
- (2) The administration board shall as soon as possible prepare internal guidelines for the institution’s operation. The board shall ensure that a liquidation committee is established which the board can consult, and the board may engage experts to assist in liquidation.
- (3) Decisions of material significance to the institution require Kredittilsynet’s (the regulator’s) approval before they are implemented.
- (4) The administration board shall within three months of its appointment provide Kredittilsynet with an assessment of the institution’s position and present a plan for the further work of the board. Kredittilsynet may extend this period.
- (5) The auditor shall examine the conduct by the financial institution of its business and prepare an audit report.327
3. Legal Effects of the Appointment of a Receiver
In many countries, the appointment of a receiver for a bank must be given the necessary external legal effects by notifying the bank of the appointment and by announcing the appointment to the public through newspapers or the Official Gazette or entry into the register of companies.
Powers of the Receiver
As a rule, the powers of a receiver include not only the powers of the bank’s management but also the powers of its owners. Thus, for example, the law may provide that the powers of the organs of the bank are exclusively exercised by the receiver,328 or that the bank’s organs are suspended or become inoperative and the receiver assumes the authority vested in them.329 In some countries the powers of the receiver also include some of the superpowers of a trustee in bankruptcy;330 thus, the law may grant special powers to transfer liabilities and provide for the binding effect of the assumption of debt obligations on the creditors concerned without their agreement.331
In countries with bank receivership, a common feature of the receivership is that it effectively terminates the rights of the bank’s owners to their bank, if not legally, then in an economic sense. This is done not only to deny existing bank owners a free ride at the expense of the state budget, but also and especially to facilitate transfers of the bank’s business and other financial measures that are required to maximize the value of the bank for its creditors, without the need to obtain shareholder consent.
The law may achieve this result by suspending the rights of the bank’s shareholders,332 or by providing that the receiver shall exclusively exercise all powers of the bank’s organs (including the general meeting of shareholders).333 In the United States, the FDIC, as receiver and by operation of law, succeeds to all rights, titles, powers, and privileges of any stockholder or member of the bank under receivership.334 And if the law does not provide for such succession, it may be provided by government decision, as in Canada where the Governor in Council may by order vest the shares and subordinated debt of the bank in the CDIC as receiver.335 In France, when a bank is under receivership, the law authorizes the court, at the bank regulator’s request made in the interest of the bank’s depositors, to order some owners of the bank who exercise legal or factual control over the bank to dispose of their shares at a price set by the court, or to decide that for a period fixed by the court their shareholder voting rights will be exercised by a trustee appointed by the court, or to order the disposal of all shares of the bank.336
In accordance with principles of general insolvency law, the banking law may attach to bank receivership an automatic stay of debt-service payments by, or legal proceedings against, the bank concerned.338 In some countries, a stay of judicial actions and proceedings may be obtained from the courts.339 Claims resulting from activities conducted during the moratorium and certain financial contracts or claims secured by collateral may be excluded from the moratorium.340
The timing of the effectiveness of a moratorium is important for payment system operators. This issue is discussed more fully below.341
Appeal Against Decisions of Receiver
Where the receivership is carried out under judicial supervision, appeals against decisions of the receiver would normally be brought in the court administering the receivership.
In case of regulatory receivership without judicial supervision, the law may offer special judicial procedures for remedial action by interested parties, especially where it concerns the disallowance of their claims.342
A receivership should terminate when its objectives have been accomplished or when the bank under receivership is submitted to judicial proceedings under the general insolvency law. In France, the powers of a liquidator appointed by the regulator under the banking law terminate when the bank in liquidation becomes insolvent and the liquidator must cede control of the bank to a receiver appointed by the court under the general insolvency law.343
One of the arguments most frequently used in support of an extrajudicial receivership is that it ensures a speedier bank resolution than proceedings under general insolvency law. If this argument is valid, the law should set a time limit to an extrajudicial receivership, after which the bank must be turned over to the bankruptcy court. This is provided for in Canada, where the Canada Deposit Insurance Corporation has 60 days to complete its activities concerning a bank whose shares have been vested in the CDIC, before proceedings must be initiated for the bank’s liquidation under the Winding-up and Restructuring Act.344