The banking landscape in Cyprus has faced a series of challenges in recent years, including the fallout from the Eurozone crisis and the collapse of several banks. This has left many foreign account holders concerned about the safety of their investments and seeking guidance on navigating the complexities of bank liquidation in Cyprus. This applies in particular to foreign account holders who may not be fully aware of their rights or the procedures surrounding bank liquidation.

Bank Liquidation: Understanding the Basics

Bank liquidation is the process by which a bank’s assets are sold off to cover its liabilities and debts, ultimately leading to the closure of the bank. This can occur for several reasons, such as insolvency, mismanagement, or regulatory breaches. In Cyprus, the legal framework governing bank liquidations is set forth by the Central Bank of Cyprus and European Union regulations, including the Bank Recovery and Resolution Directive (BRRD).

The BRRD, which came into effect in January 2015, provides the legal framework for bank resolution across the European Union. Its primary goal is to minimize the risks associated with bank failures and protect taxpayers from bearing the burden of bank bailouts. Under the BRRD, the Central Bank of Cyprus, as the national resolution authority, has the power to intervene when a bank is deemed to be failing or is likely to fail.

Liquidation Procedures in Cyprus

Declaration of failure: The Central Bank of Cyprus or the European Central Bank (ECB) determines that a bank is failing or likely to fail, based on criteria such as capital adequacy, liquidity, and the bank’s capacity to meet its obligations.

Resolution or liquidation decision: The Central Bank of Cyprus decides whether to apply resolution tools (such as a bail-in, the sale of the bank, or the establishment of a bridge institution) or to initiate the liquidation process. This decision is made based on the public interest and the need to preserve financial stability.

Appointment of a liquidator: If the decision is made to liquidate the bank, the Central Bank of Cyprus appoints a liquidator who is responsible for managing the bank’s assets, recovering debts, and distributing the proceeds to the bank’s creditors.

Asset valuation: The liquidator conducts an independent valuation of the bank’s assets to determine their fair market value. This valuation is critical for determining the payout order for creditors. The liquidation process may be prolonged due to the need to sell illiquid or long-term assets to cover the bank’s short-term obligations. This delay can increase administrative costs and create uncertainty for creditors and depositors awaiting reimbursement.

Payout to creditors: The proceeds from the sale of the bank’s assets are distributed to the creditors based on a priority ranking established by Cypriot law. This order typically includes the following sequence: secured creditors, depositors (covered by the Deposit Guarantee Scheme), unsecured creditors, subordinated debt holders, and shareholders.

The Appointment of a Liquidator

The appointment of a liquidator is a crucial step in the bank liquidation process. A liquidator is a legally appointed representative responsible for overseeing the winding up of a failed bank’s affairs, realizing its assets, and distributing the proceeds to creditors in accordance with the applicable laws. The following steps are taken:

Determination of Bank Failure: The CBC, in consultation with the European Central Bank (ECB), assesses the financial condition of the bank in question and determines whether it is failing or likely to fail. A bank in Cyprus is considered to have failed or is likely to fail when it meets one or more of the following conditions: insolvency, liquidity shortages, regulatory non-compliance, or a deteriorating of its financial condition.

Resolution or Liquidation Decision: If the failing bank is deemed to pose a threat to the public interest or financial stability, the CBC may choose to place the bank under resolution. In cases where resolution is not deemed appropriate, the CBC decides to initiate liquidation proceedings. A special administrator can be appointed in cases where a bank faces severe financial distress or is deemed to be failing or likely to fail, but before the decision to liquidate or resolve the bank is taken. The Central Bank of Cyprus (CBC), as the competent authority, can appoint a special administrator to take control of the bank’s operations and management with the primary objective of stabilizing the bank, protecting depositors, and safeguarding the financial system’s stability.

Appointment of a Liquidator: Once the decision to liquidate the bank is made, the CBC appoints a qualified liquidator to manage the process, ensuring that the liquidation is conducted transparently and in compliance with the law. Upon the appointment of the liquidator, the powers of the bank’s shareholders, board of directors, and management are legally suspended. The liquidator assumes full control over the bank’s operations and assets. The shareholders and property rights are effectively set aside to enable the liquidator to perform their duties in a manner that protects the interests of the depositors and creditors. This legal suspension of shareholder and property rights is necessary to ensure that the liquidator can effectively carry out their responsibilities, including:

Evaluating the bank’s assets: The liquidator determines the value of the bank’s assets and identifies potential recoveries. A maturity mismatch may result in heavy losses.  This can severely complicate the liquidation process and impact the overall recovery for creditors and other stakeholders.

Adjudicating creditor claims: The liquidator assesses and verifies the legitimacy of creditor claims, calculating the exact amounts owed to each creditor. Creditors are asked to provide claim evidence and submit repayment instructions within the applicable statutory limits.

Prioritizing claims and distributing assets: The liquidator adheres to the established creditor hierarchy, paying out creditors based on their priority in the order established by law.

Dissolving the bank: Once the assets have been distributed to creditors and any remaining legal and administrative matters have been resolved, the liquidator formally dissolves the bank.

Throughout the liquidation process, the rights and interests of shareholders and property owners are legally subordinate to the interests of depositors and creditors. This is to ensure that the liquidation process is conducted in a fair and orderly manner, with the primary focus on reimbursing creditors and maintaining financial stability.

Legal Framework and Applicable Laws

Several laws govern the liquidation process in Cyprus, including the Cyprus Banking Law, the Insolvency Law, the Companies Law, and the BRRD. The key legislation in this context is the BRRD, which provides a harmonized approach to bank resolution and liquidation across the EU.

For foreign account holders, the most relevant aspect of the BRRD is the Deposit Guarantee Scheme (DGS). The DGS is a safety net for depositors, providing a guarantee of up to €100,000 per depositor, per bank. In the event of a bank liquidation, the DGS ensures that eligible depositors receive compensation up to this threshold. Importantly, this scheme applies to both residents and non-residents, ensuring that foreign account holders are not left out in the cold.

Priority of Claims and the Creditor Hierarchy

The priority of claims and creditor hierarchy is critical in determining the order in which creditors are reimbursed. The hierarchy is as follows:

Covered Depositors: According to the Deposit Guarantee and Resolution of Credit and Other Institutions Scheme Law of 2016, covered deposits up to €100,000 per depositor are protected by the Deposit Guarantee Scheme (DGS). The DGS reimburses covered depositors within seven working days from the date of bank failure. Account surpluses are converted into unsecured claims.

Preferential Creditors: A secured creditor has priority over an unsecured creditor and has the right to collect the security provided to them. These include, among others, employee salary arrears, tax and social insurance arrears, and amounts owed to the DGS for covered deposits.

Unsecured Creditors: These are ordinary creditors without collateral or preferential rights. They are reimbursed on a pro-rata basis after the liquidator has distributed the assets to covered and preferential creditors.

Subordinated Creditors: These creditors have agreed to rank behind other creditors in the event of liquidation. Their claims are settled only after all other creditor claims have been addressed.

Shareholders: Lastly, if any residual assets remain after satisfying all other claims, they are distributed among the shareholders.

Safeguarding Your Assets

As a foreign account holder of a failed bank in Cyprus, you are likely concerned about the timely reimbursement of your assets and the complex legal procedures involved in liquidation. The process of bank liquidation in Cyprus is undoubtedly challenging and can leave foreign account holders of failed banks feeling vulnerable and uncertain about their assets.