A financial institution is a corporation with a license to engage in specific activities. These activities include the provision of liquidity to the market. As such a license as a credit institution is granted by domestic regulator or respective central bank. Failure of a financial institution leads to the withdrawal of the banking license to enable corporate liquidation and dissolution. This is preceded by resolution decrees that cover special administration to control the outflow of funds, and the activation of the local deposit protection scheme. The winding up procedures are then governed by the applicable local laws.
The early days of bank failure, resolution and special administration provide most account holders with limited access to bank and payment facilities and their money. Yet, the potential synergy of these initial measures and recovery possibilities pave the path for maximum recovery. Once the resolution plan is formulated and the bank remains unable to repay its creditors on demand, the deposit protection scheme is activated. The early measures and deposit protection scheme provide bank customers with the first two crucial steps for repayment of their account balance.
From the start of the resolution and special administration procedures, until the liquidation is approved, creditors can improve their further prospects by administrative optimization and civil actions against alleged wrongdoers that prevent access to their funds. When the liquidation is approved and the provisional liquidator appointed, the corporate structure changes drastically. Insolvency law gives the liquidator particular powers. As a consequence, the liquidator assumes control over the company and acts in the best interest of the company. The result is that only the liquidator can file complaints with the authorities for disturbances and alleged fraud against the company. Public prosecutors then investigate the matter and decide on further action. Until there is no such judicial declaration, little pro-active action can be expected from the authorities.
The appointment of a provisional liquidator is the first step in the liquidation procedure and aims to investigate the financial position of the company and ultimately the winding up of the insolvent company. The provisional liquidator formulates an initial recovery and repayment plan, accompanied by a professional expense sheet. Sometimes this needs approval by the court.
The current financial ecosystem is subject to cross-border and international transactions. It is challenging to reconcile different interests, legal systems and objectives in different countries. Execution of the bank liquidation recovery plan therewith is a daunting task. Assets of the bank are normally held in different jurisdictions. There are several reasons for the return of the funds not happening all at the same time. Therefore a liquidator starts repayment when the pool of funds is substantially enough to make partial payments to the creditors. In order to qualify as a receiving creditor, a proof of claim and proof of ownership must be presented. Without such evidence, no payments are made to the alleged claimant who may eventually lose his right to reclaim his money. Once assets are collected in and realized, liabilities can be discharged. Such repayment is made by following the applicable creditor or insolvency hierarchy. This hierarchy is in general divided in the following sections:
- Section 1: Costs, fees and charges of the liquidation, Remuneration of staff members, Regulatory fines and other penalties, Tax claims, DGS advance payment claim.
- Section 2: Preferential creditors, incl. secured claims and senior unsecured liabilities.
- Section 3: Subordinated debt, incl. bank deposits, paid on a pari passu basis.
- Section 4: Remaining unsecured creditors, paid on a pari passu basis.
- Section 5: Shareholder distribution.
Each section is paid in full before payments can be made to the next section. As such, the lower a position in the creditor or insolvency hierarchy, the more likely a depreciation of the available funds becomes. It is therefore mission critical to qualify for repayment by using all the different options for recovery.