Commencement of Bank Insolvency Proceedings

Banking authorities have an informational advantage and are, thus, better placed than creditors to assess a bank’s true situation and to detect insolvency at an early stage. It is, therefore, generally accepted that the supervisory authority must have the power to initi­ate insolvency proceedings against a bank.8

Many jurisdictions go further and grant to their supervisors exclusive competence to commence proceedings. Two justifications are usually put forward in support of this approach: First, the declaration of a bank’s insolvency may have systemic implications, which the bank’s creditors would fail to take into account. Second, the decentralized initiation of proceedings might allow frivolous or malicious creditors to initiate proceed­ings against solvent banks. In other countries, however, a bank’s owners, management, or creditors also are entitled to bring proceedings before the insolvency courts on the usual grounds of corporate insolvency law. This approach seeks to preserve the rights of parties who have a financial stake in the bank to bring proceedings, and it assumes that the pro­cedural requirements of court-based proceedings will provide sufficient safeguards against abuses. It also recognizes that those parties may ensure that insolvency proceedings are launched against insolvent banks even if the supervisors are unjustifiably reluctant to take action.

Where other parties are allowed to bring insolvency proceedings before the insolvency courts, the law should require prior consultation with the supervisory authority before proceedings are filed. Subsequently, the supervisory authority should be fully entitled to

participate in all stages of the proceedings. In particular, the authority should have a right to be heard before the original decision on the declaration of insolvency. The supervisory authority—or a member of its staff or other person proposed by the authority—could also be eligible for appointment as official administrator, liquidator, or both. The supervisory authority should be given full access to an insolvent bank’s records. It should receive documents and notifications as if it were a creditor. It should be entitled to submit restruc­turing plans and other proposals to the court, raise objections to the proposals of other parties, and participate in all hearings and shareholders’ or creditors’ meetings. It also should retain the power to control the timing and manner (including the content) of pub­lic announcements relating to the original filing of proceedings and subsequent actions, as well as to take other appropriate measures (e. g., to declare a short “bank holiday”) to enhance the quality and credibility of information available to the market and to prevent a crisis of confidence.

In an administrative system, where the commencement of insolvency proceedings takes the form of a decision of the supervisory authority, the law should grant to the bank’s owners an opportunity to appeal against the decision to a special tribunal or to seek judicial review in the general administrative courts. In all cases, the available rem­edy should be specified in the legislation, and the procedure should be expeditious. It is, however, of singular importance that the exercise of any rights of appeal or review does not automatically lead to an interim restoration of the old owners and directors in the bank’s management. It is also important that the system for the exercise of any right of appeal or judicial review should include safeguards for the avoidance of abuse by inter­ested parties and should not result in the provision of interim relief by way of staying of the administrative proceedings.

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