Author: | Published: 30 Sep 2004
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When the Bank of Credit and Commerce International (BCCI) collapsed in the summer of 1991, winding-up proceedings that commenced in both Luxembourg and England led to complex conflict of laws issues with far-reaching legal and practical consequences. After changes to EU law that took effect on May 5 2004, a similar situation should never arise again in the EU.

The Directive on the Reorganization and Winding-Up of Credit Institutions is part of the EU's initiative to harmonize insolvency proceedings in Europe to promote the development of economic activities. This initiative has also resulted in the implementation of the EU Directive on Settlement Finality in Payment and Securities Settlement Systems, together with the recent adoption of the EU Regulation on Insolvency Proceedings and the EU Directive on the Reorganization and Winding-Up of Insurance Undertakings.

The EU Insolvency Regulation came into force on May 31 2002 but insurance undertakings and credit institutions are expressly excluded from its ambit. The rationale for these exclusions is that such entities are subject to special regimes and their national supervisory authorities have wide-ranging powers of intervention.

The Credit Institutions Directive should have been implemented by member states by May 5 2004. Its principal purposes are to simplify proceedings when an EU credit institution is in financial difficulties, enabling efficient reorganization or distribution of assets; to ensure that reorganization measures and winding-up proceedings affecting credit institutions are recognized in all member states without further formality; and to ensure that all EU creditors are treated equally.

The Credit Institutions Directive aims to introduce uniform conflicts of law rules and mutual recognition for reorganization methods and winding-up proceedings involving credit institutions. It does not, however, seek to harmonize substantive law or policy between different member states.

The Directive applies to undertakings whose business it is to receive deposits or other repayable funds from the public and to grant credits for their own account. In the UK, this means that the Credit Institutions Directive applies to any bank or building society or other person authorized by the Financial Services Authority to carry on the regulated activity of accepting deposits. Article 2(3) of the Banking Consolidation Directive contains a number of exceptions, such as municipal banks and credit unions.

Unlike the EU Insolvency Regulation, the Credit Institutions Directive does not have any concept of main or secondary proceedings, nor does it have the requirement for a centre of main interests or an establishment to open such proceedings. Instead, the Credit Institutions Directive provides for a single set of winding-up proceedings or reorganization measures that will be started in the member state in which the credit institution has been authorized to take up and pursue its business, known as the home member state. The home member state's rules apply throughout the EU, subject to a number of exceptions described below.

For the purposes of the UK, implementing regulations make it explicit that the Credit Institutions Directive will apply to: administrations where the appointment is by the court, winding-up by the court, a creditors' voluntary winding-up that has been confirmed by order of the court, company voluntary arrangements and the appointment of a provisional liquidator. Due to the requirement in the Credit Institutions Directive that only the relevant judicial or administrative authority of the home member state may decide on reorganization measures with respect to a credit institution, the implementing regulations do not cover non-court routes into administration for such institutions.

Further, there was much debate, both at the time of the consultation process referred to above and subsequently, as to whether schemes of arrangement under section 425 of the Companies Act 1985 should fall within the ambit of the Credit Institutions Directive. However, the position is now clear and schemes on their own are generally excluded by the UK implementing regulations. Similarly, receiverships fall outside the scope of the Credit Institutions Directive. This is consistent with the EU Regulation and the Insurance Directive, and it acknowledges the use of receiverships to enforce the rights of a particular secured creditor, as opposed to the interests of the general body of creditors as a whole.

Under the Credit Institutions Directive, the administrative or judicial authorities of the home member state will have sole power to decide upon the implementation of the reorganization measures in relation to a credit institution, including its branches in other member states. The general rule is that the reorganization measures will be applied in accordance with the laws, regulations and procedures applicable in the home member state, unless the Credit Institutions Directive provides otherwise. These methods will be fully effective in accordance with the legislation of the home member state throughout the EU without any further formalities.

In the absence of reorganization measures, or in the event of such measures failing, the credit institution in difficulty must be wound up. The administrative or judicial authorities of the home member state will have sole jurisdiction to determine the opening of the winding-up proceedings concerning a credit institution, including branches established in other member states. Once a decision to open winding-up proceedings has been taken by the home member state, it will be recognized immediately without further formality in all other member states. The laws, regulations and procedures of the home member state determine, in particular, the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors; the respective powers of the credit institution and the liquidator; the conditions under which set-off may be invoked; the effects of winding-up proceedings on current contracts to which the credit institution is a party; and the claims which are to be lodged by the credit institution and the treatment of claims arising after the opening of winding-up proceedings.

Although the general rule is that the law of the home member state determines all the effects of reorganization measures or winding-up proceedings, both procedural and substantive, the Credit Institutions Directive also makes provision for the fact that those effects may conflict with the rules normally applicable in the context of the economic and financial activity of the credit institution in question and its branches in other member states. Therefore, the Credit Institutions Directive provides that the adoption of reorganization measures or the opening of winding-up proceedings will not affect certain contracts or other rights, including employment contracts and employment relationships; third parties' rights in rem; reservation of title; and netting agreements.

It will often be the case that a financially-troubled credit institution has its head office outside the EU but has branches operating in one or more member states. The Directive aims to address this situation by providing that it will apply to such branches, but only where the credit institution in question has branches in at least two member states. In this type of situation, although separate proceedings will have to be commenced in each member state in which a branch operates and each branch will receive individual treatment in regard to the application of the Directive, the relevant parties in the member states should nevertheless endeavour to coordinate their activities. However, it is unclear how this is to be done and this may, in practice, prove to be one of the more interesting aspects of the Directive once fully implemented.

Finally, one of the necessary consequences of the winding-up of a credit institution is the variation or withdrawal of authorization to pursue the business of banking. However, this will not prevent the person entrusted with the winding up from carrying on some of the credit institution's activities insofar as that is necessary or appropriate for the purposes of the winding up.


The Credit Institutions Directive will simplify the processes for conducting cross-border insolvency proceedings and for clarifying, in advance of any insolvency, the legal basis on which insolvency proceedings will take place.

The costs of reorganizations and winding-ups should be reduced. It will be possible to take action more quickly and effectively to protect the interests of creditors when an EU credit institution gets into financial difficulties. And a single set of proceedings for EU credit institutions will ensure that creditors are treated equitably.

For example, let's return to the question posed at the beginning of this article concerning BCCI SA and how this liquidation would be conducted after implementation of the Credit Institutions Directive. As explained above, as a general rule, the home member state's legal rules would apply throughout all other member states without further formality. In the case of BCCI SA, this would be the law of Luxembourg, which is substantially different from that in England and Wales. Although this approach will not find favour with supporters of the mandatory application of English law in all cases, it will nevertheless provide some certainty going forward and avoid much of the confusion and difficulties experienced in BCCI (No. 10) [1996] 4 All ER 796.

It remains to be seen if the Credit Institutions Directive will achieve the stated aim of mutual recognition of winding-up proceedings and reorganization measures across the member states. This is clearly a desirable goal and with careful consideration and appropriate planning, credit institutions and their professional advisers should be able to maximize the benefits of this coordinated approach to pan-European insolvencies.

It is unclear how the banking industry will deal as a matter of practice with the issues that seem certain to arise out of the Credit Institutions Directive. In particular, the drafting of legal opinions and contractual counterparty risk seem certain to be hot topics going forward. However, most of the provisions of the Credit Institutions Directive only affect credit institutions once they are in financial difficulties. Due to the regime of prudential supervision of credit institutions under EU law, cases of cross-border reorganization measures or winding-up proceedings involving such institutions being undertaken are, fortunately, rare.

This article first appeared in the June 2004 issue of IFLR.