INTERNATIONAL ASSOCIATION OF DEPOSIT INSURERS AFRICAN REGIONAL CONFERENCE

INTERNATIONAL ASSOCIATION OF DEPOSIT INSURERS
AFRICAN REGIONAL CONFERENCE
RESOLUTION OF PROBLEM BANKS : PURCHASE AND ASSUMPTION OPTION
MAY 9TH- 13TH 2011
TRANSCORP HILTON ABUJA, NIGERIA
P & A Transaction
Process:
Legal Authorisations and
other Legal Issues
B A Taribo
Nigeria Deposit Insurance
Corporation
OUTLINE
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Legal Definition: P&A
Agreement
Legal Authorizations
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Statutory Framework
Legal Documentation
Regulatory Processes
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Other Legal Issues
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Confidentiality Agreement
Dual Status of Insurer
Least Cost Test
NDIC P&A Transactions
NDIC P & A Contract
Conclusion
LEGAL DEFINITION
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P & A Agreement refers to a Purchase of Assets and Assumption of
Liabilities Agreement.
Purchase is the transmission of property from one person to another by
voluntary act or agreement, founded on a valuable consideration. [ see Spur
Independent School Dist. v. W.A. Holt Co., Tex. Civ. App., 88 S. W. 2d. 1071,
1073.] Purchase is to own by paying or by promising to pay an agreed price
which is enforceable in law, [see First National Bank & Trust Co. of Chikasha
v. U.S.C.A. Okl.,462 F. 2d. 908, 910. ]
Assumption of Indebtedness exists when a person binds himself to pay the
debt incurred by another. [see Pawnee County Excise Board v. Kurn, 187
Okl, 110,101 p.2d. 614, 618]
Purchase Agreement is an agreement between buyer and seller of property ,
setting forth , in general, the price and terms of the sale.[ see Blacks Law
Dictionary, 6d., 1235.]
STATUTORY FRAMEWORK
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The Legal framework governing the operations of the Corporation in the
area of resolution of problem banks, in particular the utilization of P& A
option, comprised in the main the following legislation;
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the Nigeria Deposit Insurance Corporation Act 2006 [NDIC Act] which is the
Corporation’s enabling statute,
the Banks and Other Financial Institutions Act 1991 [BOFIA] which is the
Principal Legislation regulating the operations of banks in Nigeria and
outlines processes and procedures involved in the establishment and
licensing of banks as well as provides for the regulation and supervision of
banking activities, banks and other financial institutions.
the Companies and Allied Matters Act 1990 [CAMA] which is the basic law
governing the incorporation, registration and operation of companies in
Nigeria; licensed banks must first be incorporated as companies before
being licensed to operate as banks.
There are other legislation that impact upon the Corporations activities
in the area of resolution of problem banks.
STATUTORY FRAMEWORK
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NDIC ACT
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The Corporation is authorized to hold, acquire and dispose of property immovable or
moveable [ S.1[2][c]]
The Corporation pursuant to S30[1][c] is authorized, in consultation with the Central
Bank of Nigeria [ CBN] …to contract to have the deposit liabilities assumed by
another institution, in which case
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[i] the receiving or acquiring insured institution shall assume all the recorded deposit
liabilities of the failing insured institution,
[ii]the receiving insured institution shall receive those assets of the failing insured
institution that are acceptable and an amount equal to the difference between the
assumed deposit liabilities and acceptable assets shall be advanced to the receiving
insured institution by the Corporation
[iii] subject to paragraph [iii] above, any asset [including land] of the failing insured
institution shall be transferred or be vested in the receiving insured institution or the
Corporation.
The Corporation is authorized to act as liquidator of a failed insured institution [S
40[1]]
when acting as Liquidator of a failed insured institution, the Corporation is
authorized to realize the assets of the failed insured institution [S.41[2][a]] and to
pay depsitors and other creditors of the failed bank [S.41[3][a]]
STATUTORY FRAMEWORK
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BOFIA
The CBN to turnover control of failing bank to the
Corporation if condition does not improve: S 34A
Threshold for handover;
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Actions to be taken
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Significantly under capitalised banks [Risk
weighted assets ratio of <5% and >2%]
bank to submit recapitalisation plan
Cease and desist orders
Restructure bank
Removal of directors, officers and managers
Appointment of directors
Management of failing bank
Recommendation for revocation of licence
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CAMA
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Procedures for liquidation
of banking companies
Powers of the Liquidator
Procedure for payment of
creditors
LEGAL DOCUMENTATION
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Revocation of Banking
Licence
Publication in official
Gazette
Appointment of the
Corporation as
Provisional liquidator
Filing of winding up
petition
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Issuance of Winding up
Order
Advertisement for bids
Preparation of bids
Letter of Award
Contract
REGULATORY PROCESSES
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Prior to embarking on P & A transaction, some Jurisdictions
require that certain Regulatory processes should be
commenced. For instance, in the United States of America, the
primary Regulator issues a 90 day Notice on the failing status
of the problem bank . This prompts the Federal Deposit
Insurance Corporation [FDIC] to commence preparations for
the P & A transaction.
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In Nigeria, the commencement of P & A transaction is not
preceded by any specific notices issued by the Regulatory
Authorities.
CONFIDENTIALITY AGREEMENT
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The FDIC usually enters into a Confidentiality Agreement
with prospective parties to the P & A transaction to enable
them conduct due diligence on the failing bank prior to its
closure. This is to ensure completion of contract
simultaneously with bank closure.
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In Nigeria , the P & A Transactions were embarked upon
after bank closure and so the necessity for a
Confidentiality Agreement did not arise even though
prospective parties did conduct due diligence.
DUAL STATUS OF INSURER
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The Deposit Insurer when embarking on P& A transaction does
so in its capacity as Insurer and/or Liquidator.
The Deposit Insurer is only liable to pay insured deposit from the
Deposit insurance fund while the liquidator is responsible for
payment of excess uninsured deposit and other liabilities through
periodic declaration of liquidation dividends derived through
realizations from recoveries and sales of physical assets of the
failed bank.
Where the Deposit insurer also acts as Liquidator, then it has the
dual role of making reimbursement of the insured claim as well
as payment of liquidation dividends to excess uninsured
depositors and other creditors
For NDIC, the capacity in which we have embarked on P & A
transaction is as a Liquidator. This is in view of the fact that the
Corporation has powers to act as Liquidator of failed banks.
LEAST COST TEST
The FDIC is obliged to ensure that the P & A
option for resolving a failed bank is the least
cost to its Deposit Insurance Fund when
judged against all other options including
payout.
 The NDIC is under no such obligation but is
expected to weigh all the options available in
resolving the failed bank and adopt the most
feasible in the circumstances.
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NDIC P&A TRANSACTIONS
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There are three parties to the P & A transaction; the
Corporation, the Central Bank of Nigeria and the Assuming
Bank
The Corporation embarked on the P & A transaction as
Liquidator of the failed bank
The CBN became a party to the P & A transaction as a
result of the bank consolidation policy of the Federal
Government which
guaranteed payment of excess
uninsured private sector deposits of all the failed banks
The assuming banks acquired some of the assets and
assumed all of the private sector deposit liabilities of the
failed bank from the Corporation.
NDIC P&A TRANSACTION
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The CBN issued Promissory Notes to the Assuming Bank valued
to cover the shortfall in the difference between the insured and
excess uninsured private sector deposits after deduction of the
value of the assets acquired while the Corporation advanced the
insured portion to the Assuming bank
The Corporation continues with winding up the affairs of the
failed bank and its liquidation by realizing the assets of the failed
bank that were not acquired by the Assuming bank for payment
of liabilities of the failed bank that were not assumed by the
Assuming bank such as the public sector deposits and other
creditor claims.
The Corporation as Insurer and the CBN as Guarantor of public
sector deposits will stand in subrogation to the rights of public
sector depositors to receive from the Corporation as Liquidator
the liquidation Dividends declared, due and payable in respect
of insured and public sector deposits.
NDIC P & A CONTRACT
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Legal Requirements for
validity
The Purchase of Assets and
Assumption of liabilities Agreement
must fulfill all legal requirements to
make the P & A Agreement valid and
binding in Law.
 Offer
 Acceptance
 Consideration
 Enforceability
 Capacity to contract
 By Deed to transfer real property
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Terms and Conditions
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Parties
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Nigeria Deposit Insurance Corporation, as
liquidator of failed bank
Assuming Bank and
Central Bank of Nigeria
Assumption of Liabilities
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Deposit liabilities assumed by Assuming
Bank
Adjustment of Assumed Liabilities
Interest on Assumed Deposits
Continuation of Assumed Deposits
Discontinuance of Assumed Deposits
Prohibition against Conversion
Unclaimed Assumed Deposits
Discharge of Assumed Liabilities
Schedule of Deposit Liabilities
NDIC P&A CONTRACT
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Purchase of Assets
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Acquired Assets
Value of Acquired Assets
Due Diligence on Risk Assets
Adjusted Value
No Other Assets being
Purchased
Transfer of Title
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Shortfall Payment
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Consideration
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Issuance of Promissory Notes
Tenor of Promissory Notes
Rates of Promissory Notes
Composition of Promissory
Notes
Sequencing of Promissory
Notes
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NDIC P&A CONTRACT
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Adjustments
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Acquired Assets not yet
possessed
Possession of Acquired assets
Issuance of Notes on
Adjustment
Further Assurances
Other Adjustments
Assumption of Additional
Liabilities
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Others
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DUTIES WITH RESPECT TO DEPOSITORS
RECORDS
COVENANTS
REPRESENTATIONS AND WARRANTIES
INDEMNIFICATION
DISPUTE RESOLUTION
MISCELLANEOUS
Schedules
CONCLUSION
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There are obviously differences in the legal and regulatory
framework for utilizing the P & A option in resolving problem
banks amongst jurisdictions.
What is evidently uniform is that in all jurisdictions, utilizing
the P & A option in resolving problem banks would require
the formation of a contract in form of a formal agreement
to identify parties involved as well as to define and
determine their rights ,responsibilities and obligations and
the issues at stake
A Sample P& A Agreement used by NDIC is attached for
your information
Thank you for your attention.