2.2 Procedures for managing bank and banking group crisis
2.2.3 Compulsory Administrative Liquidation – CAL
When irregularities, violations, capital losses are not only serious but of a rare severity, the crisis is considered as irreversible, and the bank is retained to be unable to continue its activity. In these cases, the banking licence is withdrawn, and the situation is assimilated to bankruptcy, but with several relevant differences.
Unlike common bankruptcy procedures, in fact, the CAL procedure is not only an insolvency measure, but the trigger for supervisory action to disregard the state of insolvency and the condition for the commencement of proceedings under the general insolvency law and is more likely to be related to safety and soundness requirements.
Under the general corporate insolvency law, by way of contrast, it is more commonly the creditor or the debtor who instigates action and not a supervisor. At the same time, extensive procedural differences between the banking law and the general insolvency law exist. The role afforded to stakeholders is generally more restrictive as it is more centred on the supervisory authority and involves less negotiation.
As already mentioned, contrary to the majority of European legisla- tors that initially chose to apply ordinary insolvency rules to banks,50
Italy early opted for a special bank insolvency regime,51 under the supervision of the public authorities. Italian legal tradition never completely welcomed the argument that “since an insolvent bank can no longer conduct the business of banking, it is no longer a bank and thus should be treated just like any other bankrupt corporation”.52 The 1993 CLB legislator agreed with the first half of this statement, but banks are already subject to special regulation which determines the conditions of their operation. It is, therefore, only the bank super- visor – and not a bankruptcy judge or a meeting of creditors – who is in a position to determine whether a bank is viable. Thus, the bank supervisor must have a voice in the insolvency procedure for the same reason as for having a voice in the authorisation procedure and during the whole life of the bank: safeguarding savings and avoiding risk contagion, for the stability of the entire financial system.
According to Art. 80 CLB, the Minister of Economy and Finance, acting on a proposal from the Bank of Italy,53 may provide for the withdrawal of banking licence and for the CAL of the bank when the serious irregularities (in administration or violations of rules of law, administrative provisions or articles of association) and the serious expected losses mentioned by Art. 70 CLB are of exceptional severity. When these conditions are met, the CAL procedure may also be disposed at the reasoned request of the administrative bodies, the extraordinary meeting, the extraordinary commissioners (when SA procedure is undergoing) or the liquidators (when ordinary volun- tary liquidation is undergoing).
As could be immediately inferred from the provision, no reference to insolvency is made. The fact that the bank is seriously violating banking rules (including capital requirement regulations) justifies, alone, the decision to expel it from the market, as that is considered sufficient to threaten all the rights and interests protected by the legal order, always at the discretion of the supervisory authorities. 54 Under Italian CLB, insolvency (intended as incapacity to pay debts upon the date when they become due in the ordinary course of business and/or inadequacy of the property and assets to discharge the bank’s debts) is a further circumstance; when this happens, the CAL procedure is certainly activated, but insolvency can also be detected in a different moment, or never, during the CAL procedure itself.
It is not by chance that a separate provision, Art. 82, is inserted in the CLB to regulate this case, also distinguishing whether the
insolvency has shown up before or after the CAL opening. According to this rule, where a bank not placed under CAL is insolvent, the court of the place where such a bank has its head office may issue a judgement of insolvency (requested by one or more creditors or by the public prosecutor or on the court’s own motion), after hearing the Bank of Italy’s and the bank’s legal representatives’ opinion. In this case, the activation of a CAL procedure is mandatory and the public authorities have no discretion. The Bank of Italy shall propose the liquidation and the minister shall issue the decree.55 Instead, if the bank is found insolvent after the CAL measure is adopted, the court 56 ascertains the state of insolvency but, after the judicial decla- ration, the ongoing (or the forthcoming) CAL procedure continues in the same manner as it would have if insolvency were not ascer- tained, that is under the direction of the Bank of Italy, and it does not turn into an ordinary judicial bankruptcy procedure; nevertheless, some BL provisions about the legal acts detrimental to the creditors57 and the criminal relevance of the bank’s representatives’ conduct58 become applicable.
Similarly to SA, the first step of the CAL procedure, after the minis- ter’s decree, is the appointment by the Bank of Italy of one or more commissioners (liquidators) and a Supervisory Committee made up of from three to five members (who nominate their chairman by majority vote), who are public officials subject to the provisions on professional and good repute requirements.59 The immediate effects of the opening of a CAL procedure (i.e., the issuing of the decree) are the banking licence withdrawal and the dissolution of the managing and control bodies replaced by the liquidators (who assume the bank’s legal representation) 60 and the committee. 61
Financial effects follow, but not promptly: Art. 83 CLB actually provides for a deferral of the common effects of a liquidation decla- ration, as these effects do not simultaneously arise with the CAL opening (i.e., the minister’s decree issuing) but later, after the liquida- tors have decided if the bank’s activity is suitable for continuation.
This is a very peculiar aspect of the CAL procedure: Art. 90, para. 3 CLB allows the CAL bodies to rapidly evaluate, at the moment of their installation, if the bank is able to remain in business and, if so, to dispose the continuation (after the Bank of Italy’s prior authoriza- tion) when this could be necessary and useful to increase the realiz- able value. So, only since the date of the CAL bodies’ installation or
since the third day after the minister’s decree has been issued, the payment of any liability is suspended, as well as the return to any third party of their property; like in any insolvency procedure, the assets of the bank’s estate are to be made available to creditors, therefore, no action and no enforcement or protective act may be promoted or brought, on any basis whatsoever. But this happens only after the evaluation of the liquidators. Some rules of the common bankruptcy procedure, concerning measures of estate preservation, also become applicable at that point.62 The aim of protecting creditors’ interests is evident, especially when “creditors” correspond to “depositors” or, in a broader sense, to “savers”. 63 Moreover, a general principle of equal treatment of all creditors is applied (pari passu(( principle or par condicio creditorum ), even if with some derogation. 64
After the special bodies’ installation (even assisted by law enforce- ment authorities if necessary), whose formalities are analogous to SA procedure, 65 liquidators concretely start the CAL operations, consisting of two phases: assessment of the bank’s liabilities and distribution of total assets. As for the first, liquidators, within 30 days of their appointment, are in charge of informing each creditor (and owner of in rem rights on financial instruments or on any asset) of the amounts which should be credited to each of them (according to the bank’s accounts and documents) and of the time limit for filing an application for further lodgement of claims, if any, 66 within 60 days of publication of the CAL decree in the Official Journal (OJ). Creditors who have not received the notification may apply to liquidators, by registered letter with advice of receipt, for recog- nition of their claims by submitting documentary evidence of the existence, type and scope of their rights.67 Not before these 60 days and not after 30 additional days, liquidators provide the Bank of Italy with the list of admitted creditors and of the amounts owed to each of them, indicating their respective rights and ranking, and the list of applicants whose recognition as an interested party has been refused. At the same time, they are obliged to file the list of admitted creditors 68 (and of the amounts owed to them, together with the list of applicants whose recognition as an interested party has been refused) with the registry of the court where the bank has its head office, thus making them available to those entitled. This deposit, which is advertised in the OJ, confers enforceability to the statement of liabilities. 69
At this point, a judiciary procedure could be inserted in the CAL procedure (whose nature is instead of the administrative kind);
within 15 days of receiving the communication or of publication of the notice on the OJ, creditors excluded, or admitted subject to a decision, may file an opposition to the statement of liabilities by means of appeal to the court where the bank has its head office. The court decides with a judgement which is contestable before the Court of Appeal and then in the Supreme Court.
Once the statement of liabilities is enforced, the second CAL phase opens: the realization of the total assets. Here, liquidators have all the powers necessary to realize assets, but some actions are subject to the favourable opinion of the committee and to the Bank of Italy’s prior authorization. Those actions, provided for by Art. 90 CLB and aimed at seeking solutions that preserve or maximize the value of the firm and protect its productive organization and customer relationships, consist of the transfer of assets and liabilities, the business or parts of the business, as well as assets and legal relationships identifiable en bloc to a third party, normally a bank. Transfers may be effected at any c stage of the procedure, including the period prior to the filing of the statement of liabilities; the transferee is responsible only for liabilities appearing in the statement of liabilities. According to this provision, liquidation may occur in different ways and techniques depending on the specific situation of the bank and the effects on third parties.
These techniques are: liquidation assets by assets (piecemeal liquida- tion); sale of assets en bloc (bulk sale); securitization of assets; transferc of assets and liabilities to another bank (Purchase and Assumption (P&A) transaction); transfer of insured deposits to another bank, usually accompanied by the transfer of assets for a corresponding amount. Liquidators may also contract loans, undertake other kinds of borrowing operations and offer the bank’s assets as security. 70
Turning to the phase of payments to creditors and restitution and allotment of assets, which follows the complete assets liquidation71 according to Art. 90, para. 1 CLB, – liquidators return assets as well as financial instruments connected with investment services and allot the bank’s liquidated assets under the priority rules established by the BL.72
In a normal situation, a separation exists between the bank’s assets and those of customers entered in the special section of the statement of liabilities (external separation), the latter in turn is separated by
the customer (internal separation). Art. 90, paras 2 and 3 regulates the cases of lack of this separation, stating that, when internal sepa- ration is not respected, liquidators, where possible, effect restitutions pro rata according to the rights on the basis of which each customer has been admitted to the special section of the statement of liabilities or liquidate the financial instruments belonging to customers and allot the proceeds on the same pro rata basis. When, instead, external separation is not respected, customers entered in the special section of the statement of liabilities participate with unsecured creditors in full (and for the part of their rights not satisfied in the cases where finan- cial instruments are insufficient). Where, after any claims of creditors or other interested parties, admission to the statement of liabilities has not been decided by the court,73 liquidators set aside the amounts and the financial instruments corresponding to the allotments and restitutions not effected to such persons for distribution or restitution to them in the event of recognition of their rights. 74
The CAL procedure may terminate in two possible ways:
1) With the last allotment to the creditors or the last restitution to customers, preceded by liquidators presenting to the Bank of Italy the closing statement of the accounts of the liquidation, the state- ment of the source and application of funds and the allotment plan, accompanied by their own report and a report by the over- sight committee. The Bank of Italy authorizes the filing of the documents with the court, advertized on the OJ, so that within 20 days of the OJ publication, interested parties may initiate legal actions by filing a petition with the court. Once this period has expired without the initiation of legal actions or once such actions have been decided by an enforceable judgement, the liquidators may proceed with the final allotment or restitution.75 The bank is completely liquidated after the deletion of the company from the commercial register and the deposit of the statutory company books, according to the provisions of the Civil Code on the liqui- dation of corporations.76 This way leads to the bank’s complete dissolution and extinction. 77
2) With a composition with creditors, the so-called “ concordato di liquidazione” (Art. 93 CLB). This option, which can be selected at any stage of the CAL procedure and is borrowed by the BL, 78 allows liquidators or the bank itself to propose creditors an agreement
stating that the latter convene to accept one specific partial payment of the total amount of their claims, which is to be divided pro rata among them in full satisfaction of their claims.79 The agreement is proposed to the court of the place where the bank has its registered office, after obtaining the opinion of the committee, and of the bank (if it is proposed by liquidators) or of the liquidators (if vice versa) and after prior authorization by the Bank of Italy. The court decides on the proposed composition, taking account of the objec- tions, if any, and of the opinion rendered by the Bank of Italy;
liquidators, assisted by the committee, supervise the implemen- tation of the composition in accordance to the directives of the Bank of Italy and, once the composition has been implemented, convene the shareholders’ meeting of the bank to adopt the following necessary action. Thus, this option leads to two alterna- tive consequences: if the shareholder’s meeting decides to modify the corporate purpose, the company will not be dissolved and will engage in other businesses. Where the modification of the corpo- rate purpose is not effected, liquidators proceed toward the dele- tion of the company from the commercial register and the deposit of the statutory company books, according to the provisions of the Civil Code on the liquidation of commercial companies. 80
Whether or not the company is dissolved, “the bank” certainly is, as the banking licence has been irreversibly withdrawn. That is the reason why, in the Italian framework, the CAL procedure is the “last resort” solution applicable when other solutions cannot be reached.