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 • • Legal Definition: P&A Agreement Legal Authorizations – – – Statutory Framework Legal Documentation Regulatory Processes • Other Legal Issues – – – • • • Confidentiality Agreement Dual Status of Insurer Least Cost Test NDIC P&A Transactions NDIC P & A Contract Conclusion LEGAL DEFINITION     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  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;     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  NDIC ACT   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      [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    BOFIA The CBN to turnover control of failing bank to the Corporation if condition does not improve: S 34A Threshold for handover;   Actions to be taken        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  CAMA    Procedures for liquidation of banking companies Powers of the Liquidator Procedure for payment of creditors LEGAL DOCUMENTATION     Revocation of Banking Licence Publication in official Gazette Appointment of the Corporation as Provisional liquidator Filing of winding up petition      Issuance of Winding up Order Advertisement for bids Preparation of bids Letter of Award Contract REGULATORY PROCESSES  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.  In Nigeria, the commencement of P & A transaction is not preceded by any specific notices issued by the Regulatory Authorities. CONFIDENTIALITY AGREEMENT  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.  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     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.  NDIC P&A TRANSACTIONS     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    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  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  Terms and Conditions  Parties     Nigeria Deposit Insurance Corporation, as liquidator of failed bank Assuming Bank and Central Bank of Nigeria Assumption of Liabilities          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  Purchase of Assets       Acquired Assets Value of Acquired Assets Due Diligence on Risk Assets Adjusted Value No Other Assets being Purchased Transfer of Title  Shortfall Payment  Consideration  Issuance of Promissory Notes Tenor of Promissory Notes Rates of Promissory Notes Composition of Promissory Notes Sequencing of Promissory Notes     NDIC P&A CONTRACT  Adjustments       Acquired Assets not yet possessed Possession of Acquired assets Issuance of Notes on Adjustment Further Assurances Other Adjustments Assumption of Additional Liabilities  Others         DUTIES WITH RESPECT TO DEPOSITORS RECORDS COVENANTS REPRESENTATIONS AND WARRANTIES INDEMNIFICATION DISPUTE RESOLUTION MISCELLANEOUS Schedules CONCLUSION     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.