What is a Creditor or Insolvency Hierarchy in Bank Liquidation?

Companies are liquidated and dissolved when their liabilities exceed their assets and creditors fear that they get duped by the financial position of the company. The court may then intervene and force the company into liquidation. The same can happen when credit institutions are in financial trouble. Three main stages are then initiated to resolve the matter. The first is statutory administration, followed by deposit insurance. At the end of the line comes bank liquidation. Account holders and other creditors must pay close attention to the terms and conditions of each stage to minimize risk and maximize repayment.

The closure of a bank impacts benign creditors and causes stress around a large group of stakeholders. A pro-active approach towards the fund recovery process is therefore recommended. Even though the special administrator, DGS administration and eventually the liquidator reach out to creditors with information on the requirements for recovery planning, creditors may prepare for a smooth application of their repayment plan. The authorities work in the best interest of the public and the company. They have no duty towards the creditors other than what is laid down in the legal framework to secure the public interest.

Challenges at distressed financial institutions must be resolved in an orderly manner. Resolution authorities have a wide spectrum of tools and measures to clear up the financial difficulties of credit institutions. Solutions may vary from private or public capital injections to restructuring or corporate reorganization and even dissolution. Not all failures allow for financial support and some of them may therefore be subject to the novel bail-in or the more traditional bank liquidation.

A liquidation or winding up of a financial institution is the process of collecting and realizing the assets of the company. After the liabilities have been discharged, the remaining balance is distributed to creditors or stakeholders. All assets of the company are merged into a single fund on liquidation. This fund is subject to the expenses of the winding up and the rights of the preferential creditors. After their prioritized claims are paid in full, the remainder is subject to a statutory trust for the benefit of all the unsecured creditors. The insolvency hierarchy is then outlined accordingly. Rather than a claim on the statutory trust, secured creditors collect the security for payment made available to them. Creditors with unsecured claims are restricted to claiming against free assets that are not encumbered by a security. All remaining assets are then distributed proportionately and equally among the unsecured creditors.