The prevention of heavy losses for creditors during the liquidation of a financial institution requires compliance with several procedures.
The final stage of a bank failure is dissolution or liquidation. By then, account holders had several opportunities to reclaim part (if not all) of their money through statutory administration and deposit insurance. Depending on the capital position and financial structure of the bank, creditors may hold a prioritized and secured position, or belong to the subordinated group of unsecured claimants. This latter group can file a claim to the free assets of the bank distributed to the common fund. As a result, unsecured creditors (that include bank account holders) may not be repaid their full outstanding account balance.
Staged recovery for creditors in bank failure is recommended to safeguard outstanding account balances. This method is suitable for every creditor irrespective of their outstanding account balance whether this exceeds the insured DGS limits or not. Multisided approaches to recovery strengthen the position of individual creditors and enable them to benefit from different possibilities for repayment. It alleges three main building blocks, statutory administration, deposit insurance and bank liquidation, complemented with (collective) civil action. All provide singular yet lucrative repayment opportunities for eligible account holders.
Bank liquidation is governed by local insolvency regulation. Regardless of the jurisdiction of the court and the location of the bank, there are several perpetual aspects. These include the appointment of a liquidator including the commission of inspection, the submission and verification of claims, the creditor and insolvency hierarchy, and the procedures to wind up and dissolve the company.
Bank Liquidation Procedures
Regulators place failing financial institutions, and those likely to fail, under statutory administration to assess their resolvability. The resolvability assessment allows the regulator to determine whether the failure of the bank must be treated in an institutional or systemic was. This distinction is critical to design the resolution plan for the bank. Resolution tools and legal safeguards are available to avoid disruption of the payment system, maintain public confidence and protect and support bank deposits.
Systemically Important Financial Institutions are of great concern for the stability of a local economy. Their failure has adverse effects and a special resolution regime therefore applies. The failure of privately owned credit institutions is considered an isolated and thus institutional matter. This means that losses of are absorbed by its shareholders and creditors in a similar way as applied to traditional insolvency regulation.
The liquidation, dissolution and winding up of an insolvent company is a process whereby assets of the bank are collected in and realized, its liabilities discharged, and the net surplus, if any, distributed to the persons entitled to it. The bank is stripped of its license and upon completion of the process, the company is dissolved. Procedures begin with the appointment of a (provisional) liquidator by the court. The liquidator, a qualified insolvency practitioner, takes over the company and acts in the best interest of the company. He or she does not work for the creditors of the bank but merely ensures that a fair distribution of assets can happen. This involves the formulation of a resolution and recovery plan and possible establishment of a committee of inspecting consisting of creditors and other stakeholders. When wrongs and fraud against the bank are identified, the liquidator can take legal action against the wrongdoer and file complaints with the regulator.
As the bank is liquidated, its assets form a common fund. The fund is subject to the expenses of winding up and the rights of preferred creditors. Following the payment of secured creditors, a statutory trust is formed for the benefit of unsecured creditors and account holders. Unsecured creditors are only allowed to claim against the free assets of the bank. Therefore, the assets that are secured remain exclusively available to preferential creditors. The assets are then distributed on a pro-rata or pari passu basis.
The standard hierarchy of claims determines the sequence under which creditors are paid. Bank account holders have restricted and limited access to their belongings during statutory administration and deposit insurance. The surplus on their account is subject to bank liquidation procedures and at a later stage perhaps civil action. Creditor and insolvency hierarchies define a funnel for repayment. Advance payments are made to eligible creditors via a local deposit insurance fund. The first position is reserved for the costs of the liquidation, preferential and secured creditors and holders of fixed and floating charges. The second position is available for senior unsecured liabilities, followed by subordinated debt. Such subordinated debt are regular account balances. The last position contains Tier 1 equity and Tier 2 debt.
Bank Account Holders Can Reclaim Their Assets via a Deposit Guarantee Claim
Statutory administration may provide account holders with restricted access to their belongings. Where outstanding balances exceed the potential of these capital controls, the deposit guarantee claim can bring a solution. Eligible account holders can submit their claim to the deposit protection scheme and request repayment of their insured account balance. Deposit insurance is triggered when a regulatory authority determines that the bank is insolvent, unable or likely to become unable to maintain its financial obligations to its creditors or is about to suspend payments. Claims to the scheme can only be submitted after the official activation and before the final closure.
Corporate Liquidation and Dissolution
The procedures for claim submission and verification are similar for all the stages of the resolution and recovery process. Administrators must be certain that payments are made to the correct and eligible creditors. Claim verification is only possible when creditors submit verifiable documentation that proves account ownership and claim eligibility. Therefore, creditors are urged to submit their claim form with supporting evidence within reasonable time. Depending on the quality of the administration and the availability of the corporate assets, claimants can expect to receive repayment in tranches when liquidity becomes available for distribution via the general pool of assets. The liquidation ends and the company gets dissolved when all assets are realized and creditors are paid. It is possible that creditors and shareholder must absorb the losses of the company. After the dissolution is completed, creditors still have the possibility to file claims of liability against their alleged wrongdoers.
Need Help To Get Your Money Back? Contact us Today:
Bank liquidation is an uncertain, emotionally loaded and in the end often disappointing process. Account holders must set aside their frustrations and comply with the requirements of every step of the resolution. This is not always easy and therefore, our focus centers on the matters that we can control. Recovery potential is there, you just need to know what to do. Do not wait, do not procrastinate. It will undoubtedly limit your options. Contact us today:
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