Banks are liquidated when they become financially insolvent and are unable to meet their obligations. Liquidation is a process that involves selling the bank’s assets to repay its debts, thereby closing the bank and ensuring a fair distribution of remaining assets to its creditors. This action is taken to protect the stability of the financial system and minimize the impact on society.

The rationale behind bank liquidation is to protect the stability of the financial system and to prevent further losses for bank creditors and depositors. Liquidation can help maintain public confidence in the banking sector, preventing bank runs and minimizing the risk of contagion to other financial institutions. The impact on society may include job losses, reduced access to credit, and disruptions to local economies.

The decision to liquidate a bank or impose penalties depends on the severity of the bank’s financial situation and the risk it poses to the stability of the financial system. A bank may be penalized for regulatory breaches or mismanagement, while liquidation is reserved for cases where a bank’s solvency is beyond repair, and no viable restructuring or recovery plan exists.

Applicable Banking Law in Ireland

Bank liquidation in Ireland is governed by the Companies Act 2014, the European Union (Bank Recovery and Resolution) Regulations 2015, and the Central Bank Act 1942. These laws outline the process of liquidation, the powers and responsibilities of the liquidator, and the distribution of assets to creditors.

The Bank Recovery and Resolution Directive (BRRD) is an EU-wide framework that aims to harmonize the approach to bank resolution and recovery across member states. The BRRD outlines the tools and powers available to resolution authorities in managing failing banks, including the sale of business, bridge institution, asset separation, and bail-in. In Ireland, the BRRD is transposed into national law through the European Union (Bank Recovery and Resolution) Regulations 2015.

Local insolvency regulation in Ireland, primarily the Companies Act 2014, sets the rules and procedures for winding up a company, including banks. These regulations outline the appointment of a liquidator, the process of valuing and realizing the assets, and the distribution of proceeds to creditors. The liquidation process must also adhere to the specific rules and requirements set out in the Central Bank Act 1942 and the European Union (Bank Recovery and Resolution) Regulations 2015.

Bank Liquidation Procedures in Ireland

Before liquidation becomes necessary, the distressed bank and the regulatory authorities will typically explore possible recovery and resolution options. This may include recapitalization, restructuring, or finding a suitable buyer for the bank. If these efforts fail and liquidation becomes the only option, the regulatory authorities will initiate the process by petitioning the High Court to appoint a liquidator.

The liquidator is responsible for valuing the assets of the distressed bank. This process involves assessing the fair market value of the bank’s assets, taking into account any potential write-downs or impairments. Write-downs may occur if the value of the assets has been overestimated, or if there are difficulties in realizing the assets at their book value. Factors that may lead to write-downs include market conditions, the quality of the assets, and the presence of non-performing loans in the bank’s portfolio.

Collecting foreign assets of the bank can be challenging due to differences in legal frameworks, jurisdictions, and enforcement procedures. These difficulties may result in longer timeframes for the liquidation process and lower repayment percentages for creditors. Factors that may impact the collection of foreign assets include the need for cooperation from foreign authorities, the legal complexities of asset recovery across jurisdictions, and currency exchange risks.

The appointment of a liquidator in Ireland is initiated by the regulatory authorities, typically the Central Bank of Ireland, who will petition the High Court to wind up the distressed bank. The High Court will then appoint a liquidator, who is usually a professional insolvency practitioner, to manage the liquidation process, realize the bank’s assets, and distribute the proceeds to creditors.

The distribution of assets to creditors is carried out according to the priority of claims established by the Irish insolvency law. Secured creditors are generally paid first, followed by preferential creditors, which include employee wage claims and certain tax liabilities. Unsecured creditors are then paid on a pari passu basis, meaning they receive a proportionate share of the remaining assets, based on the size of their claim. Any remaining assets, if any, are distributed to the shareholders of the bank.

Secured creditors hold collateral or security against their loans, which gives them a priority claim in the liquidation process. They will be paid from the proceeds of the sale of the secured assets, up to the value of their claim. Unsecured creditors, on the other hand, do not have any security against their loans and will only receive a share of the remaining assets after secured and preferential creditors have been paid.

The duration of the liquidation process varies depending on the complexity of the bank’s affairs, the number of creditors, and the nature of the assets involved. In general, the liquidation process can take several months to several years to complete. Creditors can expect to receive payouts as the liquidator realizes the assets and distributes the proceeds according to the priority of claims. However, it is important to note that the exact timing and amount of payouts will depend on the success of the asset realization process and the amount of assets available for distribution.