Caja Mediterrneo Bank Insolvency - Case Study Example

?CAJA MEDITERRANEO (CAM) BANK INSOLVENCY By 1st, February, Caja Mediterraneo (CAM) Bank Insolvency Introduction The insolvency process entails attempts to rescue failing financial institutions. A company is considered bankrupt if it is incapable of paying its debts. Moreover, a company is considered incapable of paying its debts if a court manages to prove to satisfaction that the company’s assets are less than liabilities, which should be inclusive of the contingent, and prospective liabilities. The insolvency test includes the Cash Flow Test, which assesses the ability of the company to pay its due debts. The Balance Sheet Test assesses the value of the assets possessed by a company. If assets are lesser than liabilities, then the company is considered to be in the process of collapsing. For most companies, the insolvency process is considered the last resort. Therefore companies do all they can to avoid the process. The insolvency process is used to rescue companies that have been operating for quite some time but are facing liquidity problems. Moreover, companies with large debts and have lesser liquid assets than the loan are considered incapable of paying their debts. Caja de Ahorros del Mediterraneo was the ninth bank in Spain to collapse. In 2011, FROB rescue managers realized that the bank had several irregularities, which were attributed to creative accounting for personal gains. This paper focuses on analyzing the Spanish company "CAM bank" which is in insolvency administration (Penty 2011, Web). Overview of Caja Mediterraneo (CAM) Bank Caja Mediterraneo, or CAM was a savings bank located in Spain that had to be sold to Banco Sabadell for one Euro. Caja Mediterraneo was a non-profit social institution, which had benefited more than five, 100, 000 people from its social commitments. In 2007, the bank had a budget of 60.1 million euros to be used for social commitment activities. The bank incurred great losses, which led to its collapse. (ANCODEESPANA 2012, 3-10). In the first nine months of 2009 alone, the bank lost 1.7 billion Euros. The loans that could be considered bad were about 20.8 percent. CAM was formed after 29 financial institutions integrated. The institutions had been formed in different times with the oldest having being formed as early as 1875. The bank adopted its current name in 1988 (manta 2012, Web). The trademark Caja Mediterraneo started being used in 2007. Initially the bank used the trademark Caja de Ahorros de Alicante y Murcia. Some of the institutions absorbed to form CAM include Caja de Ahorros de Torrent, which had been formed in 1906, and Caja de Ahorros Provincial de Alicante y Valencia which was absorbed in 1991 (‘Caja Mediterraneo and Accenture Deploy Alnova Core Banking Platform’ 2010, Web). By 1975, several other institutions had joined to form the current CAM. Such institutions included Caja Rural de Ahorros y Prestamos del Sindicato Catolico Agricola de Yecla, Monte de Piedad y Caja de Ahorros de Alcoy, Caja de Ahorro y Monte de Piedad de Yecla, Caja de Ahorros de Nuestra Senora de los Dolores in Crevillent, Caja de Ahorro y Monte de Piedad de Elche, Caja de Ahorros de Novelda, Caja de Ahorros de Nuestra Senora de Monserrate, Caja de Ahorros del Sureste de Espana, Caja de Ahorro y Monte de Piedad de Alicante, and Caja de Ahorro y Monte de Piedad de Jumilla. Others include Caja de Ahorro y Monte de Piedad de Murcia, Caja de Ahorro y Monte de Piedad de Cartagena, and Caja Rural de Ahorros y Prestamos del Sindicato Catolico Agricola de El Progreso (‘Spain's central bank favors merger of Caja Madrid’ 2010, Web; manta 2012, Web). By December 2007, CAM Bank was considered the fourth largest Spanish savings Bank. The ranking was based on customer loans and deposits. Moreover, the Bank was ranked the third larger in term of market share and the number of office openings. The bank originated in Murcia and Alicante provinces and offered banking services across Spain. With a network of about 1,100 offices, the bank employed about 7,100 workers and served more than 3, 300, 000 clients. CAM was mainly involved in retail banking. The customers included Small and Medium Enterprises (SMEs) and individuals. In addition, the bank was involved in provision of services such as insurance as well as asset management (Anon 2011, Web). In 2008, the financial problems facing the bank were evident. The bank issued non-voting public shares as the first Spanish savings bank to do so. Through the Initial public offering (IPO), the bank was able to raise 292 pounds (House 2011, Web). The External Administration That Resulted From the Insolvency of the Company The insolvency process is important since it helps failing companies, which cannot pay their creditors to have a fresh start. The process works by enabling the company liquidate their assets in order to be able to repay their debt. However, the process can involve creating a repayment plan. During the insolvency period, the problems identified included presence of liquidity problems, the assets were low in quality, deterioration in margins, the solvency process was quite delicate, the management capacity was wanting, there was lack of a realistic restructuring plan, and there was high risk of incurring losses (ANCODEESPANA 2012, 3-20; Bjork 2011, C3). In 2011, Executive committee of the Bank of Spain together with the directors of Savings Bank for the Mediterranean (CAM) named an impermanent administrator who was Bank Restructuring Fund (FROB) (Anon. 2011, Web). Most Similar Form of Administration That May Have Been Adopted If the Company Had Been Incorporated in United Kingdom His section will first describe the measures take in the insolvency process and discuss the form of insolvency that could have been adopted if the company was in UK. The insolvency process involved a regularization process , which made use of 5.25 billion Euros. The bailout funds were paid by the private banking sector of Spain. (Kandell 2011, Web). Before the insolvency process starts, the failing institution must undergo the insolvency test to ensure that the rights of creditors are protected. The restructuring plan for Caja de Ahorros del Mediterraneo was prepared by Fondo de Reestructuration Ordenada Bancaria-FROB . However, Banco de Espana had to approve the plan before being implemented. The plan entailed reducing the capital for Banco CAM SAU to nothing. This was important since it would enable the company adjust Caja de Ahorros del Mediterraneo in Banco CAM SAU. This was followed by capital increase. The capital turned out to be negative but the plan enable increase of the capital to 2.8 billion Euros (House 2011, Web). The increased resulted from payments by Fondo de Garantia de Depositos de Entidades de Credito. This resulted in reduction of Caja de Ahorros del Mediterraneo shareholding in Banco CAM SAU to zero. In agreement with Article 5.3 of Royal Decree law 11/2010, Caja de Abhorros del Mediterraneo resigned from its role as a credit bank. The bank was submitted into a special fund (Anon 2011, Web; IMF Country Report 2012, 2-10). If the company was in UK, the insolvency process would have entailed use of statutes such has Insolvency Act of 1986, Company Director Disqualification Act of 1986 and the Companies Act of 2006. UK bankruptcy law follows a certain set of laws most of which are connected to UK company law. In UK, the form of insolvency can be either the cash flow insolvency or balance sheet insolvency. A company is considered to be in need of insolvency if it is incapable of paying debts. This occur if a creditor gives 3 weeks to be repaid more than 750 Euros but the company does nothing within that period. Additionally can prove that a company is incapable of paying its debts or that the assets are less than liabilities (Marshall 2002, 23-27). The cash flow insolvency considers a number if a company has been incapable of paying its debts as well as the ability of the company to pay its debts in future. Therefore, creditors are able to request for insolvency earlier. The insolvency process involves a number of steps, which include making company voluntary arrangements, change in Administration, receivership, and liquidation. The process aims at increasing the company’s assets (Kandell 2011, Web; Graham 2002, 97). When a company is about to be involved, UK law provides certain measures and procedures to be used by the company to rescue its assets. The company voluntary arrangement enables company directors to agree with creditors to accept repayment to avoid liquidation of other measures such as a more costly administration (Egan 2012, 20-23; Cook & Pond 2006, 26-30). It this measure fails to work the company goes under administration as directed by the Enterprise Act of 2002. This entails replacement of board of directors by a qualified insolvency practitioner. The insolvency practioner is supposed to work towards rescuing the company with the interests of creditors in mind. The third measure is the administrative receivership is available for only few companies and involves selection of insolvency practitioner by the holder of floating charge used to cover all the assets of the company. This step is guided by the law of receivership, which states that the primary duty of the practioner is meeting the needs of the creditors. If the above procedures fail, the business is wound up. This result in breaking up of company assets, which are later, sold. In UK, an appointed liquidator facilitates the entire process of insolvency (Marshall 2002, 25-29; IMF Country Report 2012, 22-28). The Effects of Insolvency Administration on Creditors In UK, the Administration law is found in Insolvency Act 1986. The procedure to be followed by the company entering insolvency is found in Schedule B1. Some of the procedures are also provided in Enterprise Act 2002, which is based on Corks Report. The report focused on transparency, collectivity, and accountability as important aspects in enhancing the rescue process. The appointed administration replaces the directors. The law has a statutory moratorium that precludes creditors from bringing any enforcement procedures in their attempt to recover their debts. The secured creditors are also forbidden from taking or even selling any of the assets even with a leave from the court. The administration Schedule B1 is supposed to be put in place for the benefit of the creditors. To ensure that the administrator is evenhanded while dealing with the different types of creditors, the appointment of the administrator should be done transparently (Cook & Pond 2006, 21-25). The administrator maybe petitioned by the company director or the creditors. According to Enterprise Act 2002, an existing company director is allowed to apply to be an administrator if he or she holds a floating charge over the company’s property. However, the application should be done out of court and the director is required to give a 5 days’ notice (Graham 2002, 97). The person who holds the preferred floating charge is mandated to appoint the proffered practioner to take charge. The administrator is supposed to design the restructuring proposal. The proposal is then forwarded to registrar as well as all the unsecured creditors within a period of 8 weeks. The creditors are then allowed to vote to reject or approve the plan. If approved, the administrator makes all the other decisions such as selling the business or winding down. However, the administrator must act in creditors interests (Egan 2012, 20-23; Penty 2011, Web). Conclusion Insolvency refers to the process of rescuing financial institutions such as banks that are collapsing and cannot pay their debtors. Caja de Ahorros del Mediterraneo (CAM) collapsed and was incapable of repaying its debts such thus it had to be put in an insolvency process. The bank had posted a loss of 1.7 billion Euros by September 2011. The Bank was taken over by and restructuring process was suggested by Fondo de Reestructuracion Ordenada Bancaria-FROB (Bank Restructuring Fund). The shareholding had to be reduced to zero in accordance with Article 5.3 of Royal Decree-Law. The bank was then transformed to a special fund and is still under the insolvency process. Works Cited ANCODEESPANA 2012, Report to the executive committee Proposing the initiation of disciplinary proceedings, Madrid: Caja de Ahorros del Mediterraneo. Anon. 2011, Banc Sabadell buys Caja de Ahorros del Mediterraneo (CAM) for just €1 after a successful regularisation process, CNA, 7 Dec. Available at: http://www.catalannewsagency.com/news/business/banc-sabadell-buys-caja-de-ahorros-del-mediterraneo-cam-just-%E2%82%AC1-after-successful-regul. Anon. 2011, Caja de Ahorros del Mediterraneo’s Stake In Banco Cam SAU Drops Down To Zero; Announces General Reaorganization, Reuters, 15 Dec. Available at: http://www.reuters.com/finance/stocks/CAHM.MC/key-developments/article/2451698. Bjork, C. 2011, Global Finance: Bank-Sale Pain for Spain, New York, N.Y., United States, New York, N.Y.: C3. Caja Mediterraneo and Accenture Deploy Alnova Core Banking Platform 2010, New York, United States, New York, Available at http://search.proquest.com/docview/760003552/13BF9B9F95F52CE4963/1?accountid=45049 Cook, G. & Pond, K. 2006, "Explaining the choice between alternative insolvency regimes for troubled companies in the UK and Sweden,” European Journal of Law and Economics, vol. 22, no. 1, pp. 21-47. Egan, M.E. 2012, "Holding Pattern,” Legal Week, vol. 14, no. 31, pp. 20-23. Graham, D. 2002, "A dark and neglected subject: landmarks in the reform of English insolvency law", International Insolvency Review, vol. 11, no. 2, pp. 97-97. House, J. 2011, Bank of Spain to Take Over CAM, New York, N.Y., United States, New York, N.Y. Available at http://search.proquest.com/docview/878781708/13BF9BAB2295CCB8B10/1?accountid=45049 IMF Country Report 2012, Spain: Safety Net, Bank Resolution, and Crisis Management Framework—Technical Note, Madrid: International Monetary Fund. Kandell, J. 2011, "Can Spain's New Government Clean Up The Country's Banks?", Institutional Investor, Available at http://search.proquest.com/business/docview/993118367/13BF7167A73573142F9/3?accountid=45049 Marshall, J. 2002, "Comparing Europe's insolvency rules", International Financial Law Review, vol. 21, no. 6, pp. 23-30. Spain's central bank favours merger of Caja Madrid, CAM, 3rd partner 2010, London, United Kingdom, London. Available at http://search.proquest.com/business/docview/366932018/13BF715C7DC4148EF60/6?accountid=45049 manta 2012, Caja De Ahorros Del Mediterraneo, [Online] Available at: http://www.manta.com/c/mm01cyq/caja-de-ahorros-del-mediterraneo [Accessed 1 Feb 2013]. Penty, C. 2011, Spanish Caja Merger Collapse May Scare Off Potential Investors. Bloomberg, 1 April, Available at: http://www.bloomberg.com/news/2011-03-31/spanish-caja-merger-collapse-may-scare-off-potential-investors.html. Read More