Insolvency in the banking sector has been on the front burner of economic discussions in recent times. And as a business reality, insolvencies are inevitable. The Ghanaian banking sector has seen a number of developments in recent times that touches on the stability of the financial institutions. This Q&A considers the legislative framework for resolving insolvencies in the banking sector.
Does the Banks and specialised Deposit Taking Institution Act, 2016 (Act 930) deal with banking insolvency?
Yes.
In fact, section 138 of the Banks and Specialised Deposit Taking Institution Act, 2016 (Act 930) provides that no other enactment in force governing corporate insolvency shall apply to banking insolvencies in Ghana. In other words, Act 930 provides its own comprehensive rules for dealing with insolvencies in the banking and deposit taking sector independent of the general legislation in the area (i.e., the Corporate Insolvency and Restructuring Act 2020 (Act 1015).
When is a banking institution considered insolvent?
Section 123(4) of Act 930 explains that a banking institution can become insolvent in two ways. The first instance is where the bank is unable to pay its obligations as they fall due. The second is where the value of the liabilities of that bank or specialised deposit-taking institution exceeds the value of its assets.
If yes, can you list out the various options that the Act provides as a means of dealing with an insolvency?
The Act makes provision for the placement of an insolvent banking institution into official administration, receivership or liquidation.
Can you briefly explain these options in a bit more detail?
Official Administration
Official administration under the Banks and Specialized Deposit-Taking Institutions Act is an early intervention measure instituted by the Bank of Ghana as a way of preventing a financial institution from declining. It is similar to Administration under the CIRA. The administrator may be appointed compulsorily by the Bank of Ghana or voluntarily by a bank through a resolution of its board or shareholders.
The administrator takes over the powers of the board and key management personnel. He or she has effective control over the affairs of the company and unrestricted access to all data, books, assets and property of the company. The Administrator reports directly to the Bank of Ghana. The administration is ideally supposed to last for a period of six months. This period may be extended for two consecutive three-month periods. This means that administration under this Act must come to an end within one year at the latest.
During the period of administration, a moratorium is placed on court actions against the bank in administration. Mortgages and other securities are also frozen for the time being. Dividends are not paid. And the act overrides any third party’s rights of termination, acceleration or modification under a contract with the bank which arises by virtue of the bank being placed in administration.
The Official Administrator’s aim during administration is to put the bank back unto its feet through recapitalization, or other remedial or corrective measures. To do this, the Act endows him/her with extensive powers including the power to take inventory of and manage all the assets and property of the company, give or restrict access of employees and to compel action with the aid of law enforcement agents. The administrator also has the power to report and bring suits against officers and employees of the bank who engage in illegal activities.
The administration comes to an end at the end of the period specified in the instrument which appoints the administrator. Alternatively, the Bank of Ghana may remove the administrator for various reasons. When the administration is successful, the administrator must appoint directors and key management person whom he/she will hand over to before leaving office.
Receivership
Act 930 provides for receivership as a means of mobilizing the existing assets of the companies for the purpose of settling the bank’s creditors. Act 930 empowers the Bank of Ghana to appoint a receiver over a bank or specialized deposit taking institution when that institution’s licence to operate is revoked when it is found to be insolvent or when it is significantly undercapitalized.
Alternatively, a bank may by a resolution of its board of directors or shareholders commence a voluntary liquidation process. When the process is voluntary, the company must first obtain permission from the Bank of Ghana. The Company must demonstrate that it is able to meet all of its debt obligations. If at any time in the process the Bank of Ghana is of the view that the bank would not be able to pay all of its creditors, it will intervene and appoint an official receiver over the bank.
The receiver is granted extensive powers once he or she is appointed over a bank or SDI. The receiver may restrict access to the bank’s offices, data, books, assets, and properties etc. to only a small group of authorized personnel. He or she takes over the role and powers of the bank, its shareholders, directors and key management personnel. He or she may enter mergers, restructure the debt of the bank, waive some of the bank’s obligations on certain types of transactions among others. The receiver reports directly to the Bank of Ghana on a monthly basis.
The receiver is obligated to notify the general public of the commencement of receivership. The notices must be published in two national daily newspapers and pasted in every office of the insolvent bank nationwide.
Once receivership begins, the bank can no longer receive deposits. Neither is it permitted to pay out on any transactions except in the ordinary course of its business of winding up. Again, a moratorium is placed on the commencement or continuation of suits against the bank or entry or execution of judgments against the bank.
Is there a difference between a liquidation and a receivership under the Banks and Specialised Deposit Taking Institutions Act?
From Act 930, liquidation is used in a narrow sense to mean that the power of the receiver to sell and transform the nature of an asset for the benefit of the bank and its creditors. The Bank of Ghana does not have the power to confer a mandate on the receiver to liquidate the company qua company. The Receiver’s mandate only stretches to the liquidation of the assets of the company in receivership.
From your reading of the relevant provisions in the Banks and Specialised Deposit Taking Institutions Act, what is the general object of the provision dealing with the management of insolvent banks. And do you think these objectives have been largely achieved?
Act 930 was designed to ensure that banks and financial institutions comply with the highest industry standards and to protect the interest of depositors. The act does this by laying down minimum capitalization requirements, qualifications for the directors and key management personnel, early warning signs of impending financial danger, among other things. When the bank begins to show signs of duress, the Act specifies various corrective and remedial measures including administration to help remedy the situation. And when nothing can be done to save the banking business, the Act empowers the Bank of Ghana to appoint a receiver to liquidate the assets of the bank in a manner that protects the depositors and other creditors. From the foregoing, it is clear that Act 930 has been able to achieve its objectives thus far.
Authors: Audrey Naa Dei Kotey and Clara Mettle-Nunoo
You can download the full article here