The Winding-Up of Varde Bank
Niels C. Andersen, Legal Affairs and Jens Dalsgaard, Statistics.
INTRODUCTION
During the autumn of 1992 it became clear that Varde Bank was in need of a comprehensive adjustment of its balance-sheet structure and business scope. In order to give Varde Bank the necessary time for such adjustment, in cooperation with the Danish Financial Supervisory Authority, Danmarks Nationalbank established a Guarantee Consortium with the four largest banks in
Despite the efforts to improve Varde Bank's situation, the economic development and the structure of the bank's activities led to further losses and provisions, and in the autumn of 1993 it was acknowledged that Varde Bank would not be able to continue as an independent bank.
In order to provide a stabile environment in the period necessary to achieve a solution for the controlled winding-up of Varde Bank, Danmarks Nationalbank, at the request of the Minister for Finance and against a government guarantee, undertook to provide the necessary liquidity for the bank.
The solution entailed[2] that Sydbank (then called Sydbank Sønderjylland) was to acquire Varde Bank's core activities, i.e. a majority of its liabilities and most of its loans to customers in the County of Ribe, together with a number of other assets, including bank properties, while Varde Bank was to be restructured as a winding-up company with the remainingloans,anumber ofproperties,subordinatedcapital(subor-dinated loan capital and supplementary capital) and debt to Danmarks Nationalbank. The decision to transfer Varde Bank's core activities was adopted by the Board of Directors in December 1993, and at the last annual general meeting of Varde Bank in March 1994 it was decided to restructure Varde Bank, i.e. the parts not acquired by Sydbank, as a winding-up company under the name of VB Finans A/S.
In order to enable the divestment to Sydbank and the continued operation of the winding-up company, Danmarks Nationalbank granted Varde Bank a government-guaranteed loan of almost kr. 4 billion[3]. This loan replaced the previous liquidity commitment.
Varde Bank thus ceased to exist as an independent bank, but it was ensured that no ordinary depositors suffered losses. This article describes the background to Varde Bank's problems and outlines the considerations and deliberations behind the winding-up solution chosen, as well as some of the problems that subsequently arose in connection with the winding-up[4]. It is sought to outline the overall status of the procedure, which is not quite complete yet since a number of minor issues have not been settled, cf. Report and Accounts 2004, p. 57.
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TIMELINE FOR THE WINDING-UP OF VARDE BANK
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Box 1
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2nd half of the 1980s March 1991 – September 1992 Autumn 1992 November 1992 Autumn 1993 December 1993
March 1994 January 1996 December 2001
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| 1 The 2nd and final dividend instalment, 8.1451 per cent, was paid on
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BACKGROUND
In the late 1980s and early 1990s
In 1984, Varde Bank began to expand beyond its core area of south-western Jutland, and in
Nevertheless, the bank's increased lending activities led to considerably greater dependence on a few individual sectors. At end-1991 loans for financing activities and property administration accounted for more than 40 per cent of the bank's total lending. This was more than twice the ratio for the banking sector overall[7]. As from 1986 the bank by and large only managed to achieve breakeven. However, the results did not deviate from the overall sector until 1991[8].
In 1992 losses and provisions were approximately kr. 700 million, of which approximately kr. 250 million was attributable to the bank's activities in the property sector. In addition, approximately kr. 150 million was attributable to the currency unrest in November 1992, which, inter alia, led to substantial devaluation of the Swedish krona. In 1993, losses exceeded kr. 900 million, of which losses and provisions for property activities and building sites accounted for approximately kr. 700 million[9].
THE WINDING-UP MODEL
A number of considerations influenced the decision in the autumn of 1992 to give Varde Bank some scope for manoeuvre, as well as the subsequent decision at the end of 1993 to ensure a controlled winding-up process via a winding-up company, VB Finans. The guarantee and the capital increase in 1992, cf. below, were primarily aimed at ensuring confidence in the bank so as to prevent liquidity problems caused by a run on the bank. The intention was for the bank to be able to adjust its balance sheet and focus on core activities.
During 1993 the situation gradually changed as the losses continued, and the bank's future as an independent institution become increasingly doubtful.
In view of the conditions in the other Nordic countries it was important not to weaken confidence in the Danish financial system, since this might in itself lead to liquidity problems for otherwise sound Danish banks. Weakened confidence would in all probability primarily affect medium-sized banks, which to a large degree relied on liquidity from abroad. It was found that Varde Bank was too large to go into insolvent liquidation proceedings without any risk of systemic implications, and that owing to Varde Bank's size and poor financial position other banks would not be inclined or able to acquire it outright.
Moreover, despite its expansion Varde Bank still had a very large market share in south-western Jutland (approximately 30-40 per cent), and it was deemed that closing the bank could have a very significant impact on the local economy. The local management also had a strong wish to find a solution that focused on the sound local activities, based on the local support. The latter was reflected in a commitment by local businessmen in the autumn of 1992 to subscribe to new share capital for kr. 60 million in connection with a balance-sheet reduction. This support was a key factor behind the choice of a solution with a local organisation and a locally based Board of Directors, which gave the local area decisive influence on the winding-up process.
To ensure that VB Finans was operated in accordance with the model's underlying intentions, and to ensure insight into the ongoing winding-up process, Danmarks Nationalbank was allowed to appoint an advisor to the company's Board of Directors, without whom no significant financial decisions could be made. In addition the overdraft facilities could be terminated at two weeks' notice.
The document of appropriation from 14 December 1993, which was the basis for the government guarantee for Danmarks Nationalbank's loan of almost kr. 4 billion in connection with the transfer of certain activities to Sydbank, states three basic conditions for the government's participation:
- that the government acquires no ownership of the bank
- that government funds are not used to support shareholders or owners of supplementary capital
- that the interests of all unsecured creditors are fully considered, irrespective of the winding-up model.
It should be noted that for most types of enterprises, insolvent liquidation proceedings are a natural consequence of insurmountable financial problems. Even though banks differ from other types of enterprises in a number of areas, including that they are subject to supervision, insolvent liquidation proceedings are by no means out of the question. Otherwise a distorted incentive structure might easily be seen in the banking sector, with no market discipline in relation to risk exposure. This applies to both the board and management and potential invest-ors[10]. In economic theory this issue is known as "moral hazard".
The insolvency estate VB Finans
Like many other banks, Varde Bank had issued supplementary capital. Supplementary capital entailed greater risk than e.g. subordinated loan capital, since supplementary capital could also cover losses in connection with a reconstruction, and not only in connection with insolvent liquidation proceedings. Pursuant to the Commercial Banks and Savings Banks Act, supplementary capital could also carry greater weight when calculating the solvency ratio of the bank[11].
However, the selected model with a winding-up company, whereby Varde Bank was not reconstructed, but divested and wound up, implied that the supplementary capital could not be written down[12]. Interest payments could, however, be deferred, but in the autumn of 1995 the issue arose of whether it was possible to defer payment of the principal and accrued interest when the principal fell due. The issue was highlighted by the fact that a supplementary capital loan of LUF 500 million (approximately kr. 100 million) would mature in March 1996.
It was assessed that there was a real risk that after maturity the loan would be better positioned as an unsecured claim in the order of priority of creditors and would then be comprised by the guarantees. This would shift the assumed internal balance between the creditors and constitute a breach of the assumptions on which the guarantees, which did not cover supplementary capital, were based.
Although the winding-up had until then proceeded according to plan, it was necessary to find a solution to this problem. The idea was to avoid traditional insolvent liquidation proceedings, which could potentially be very cost-intensive due to the volume of bank activities, etc., while at the same time drawing a line in the sand in relation to the legal position of these special creditors.
The solution was the implementation of a subsidiary model in January 1996, whereby all VB Finans' assets and certain liabilities were transferred to a wholly-owned subsidiary (VB Finans af 1996 A/S) against payment in shares and a debt certificate. The subordinated capital and theoverdraftfacilitiesatDanmarksNationalbankwereamongtheactivities remaining in the parent company, against which insolvent liquidation proceedings were subsequently instigated[13].
This meant that the gradual winding-up could continue with local support based at VB Finans' previous offices in
Needless to say, the winding-up model raised a number of legal issues that had to be settled, particularly since the model with controlled winding-up of a bank via a winding-up company was untrodden ground.
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LEGAL ISSUES
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Box 2
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The establishment of first the winding-up company, VB Finans, and later the insolvent estate of VB Finans with the subsidiary VB Finans af 1996 A/S, required clarification of a number of legal issues, some of which are outlined below. Unregistered claims It must be assumed that deferment or a limited guarantee based on the external audit of the bank or, if applicable, the liquidators' reasoned estimate of potential unregistered claims is sufficient to prevent discrimination and thus potential liability in damages. Otherwise it would prevent or seriously impede the transfer of activities in the interest of the bank and thus the creditors. In Varde Bank's case, both the guarantee of kr. 750 million and the subsequent government guarantee for Danmarks Nationalbank's overdraft facility of kr. 4.4 billion constituted unregistered claims, so that remaining creditors in the winding-up company VB Finans and later the insolvent estate of VB Finans had sufficient reassurance that they would not be worse off than the creditors transferred to Sydbank2. Decision-making powers It was thus not possible to convene a general meeting to decide whether to divest a substantial proportion of the bank's activities, and the decision was therefore taken by the Board of Directors of Varde Bank. In any case, a general meeting of an ailing bank with a view to winding up the bank will create uncertainty among depositors and entail considerable risk of a run on the bank. In relation to company law it has been discussed and is to some extent still being discussed whether decisions that are not normally the exclusive competence of the general meeting under the Companies Act could be of such a scope and significance as to nonetheless require the approval of the general meeting. This is particularly relevant with regard to divestment of the company or substantial parts thereof. Most theorists today believe that a general meeting is not required since this would not be in harmony with the wish to avoid dispute concerning the powers of the Board of Directors in an area that is so significant and where circumstances often call for a rapid decision in full confidence, which can be difficult or impossible to achieve if a general meeting is to be convened3. Experience from Varde Bank shows that this legal position is necessary if the potential solutions for controlled winding-up are not to be limited beforehand4. The same problem arose in relation to the "subsidiary model" where the question again was whether the Board of Directors or possibly the company in general meeting should decide to transfer activities to the subsidiary and subsequently instigate insolvent liquidation proceedings. The requirements as to e.g. confidentiality are not quite the same as when transferring activities to an external party, but it was nevertheless assessed that the restructuring decision lay within the powers of the Board of Directors. In this connection importance should also be attached to the fact that if shareholders have no prospects of fulfilment they have no influence on traditional insolvent liquidation proceedings, and consequently it would be unnatural if at a preceding general meeting they had the opportunity to prevent a winding-up model that was favourable to the other creditors. When is a bank insolvent? This was of great importance, since section 47d of the Commercial Banks and Savings Banks Act in force at the time included a provision to the effect that the Danish Financial Supervisory Authority must file for insolvent liquidation if a financial institution is insolvent5. Two issues gave rise to legal uncertainty. Firstly, whether subordinated capital should be regarded as equity capital or loan capital, since investors in equity capital, e.g. share capital, cannot instigate insolvent liquidation proceedings. Both the report on the Danish Banking Sector (October 1994) and subsequently the Ministry of Justice have concluded that it is loan capital. This highlighted the other issue, viz. whether the insolvency assessment under section 47d of the Commercial Banks and Savings Banks Act differed from section 17 of the Danish Insolvency Act6. Under the latter's subsection
The document of appropriation of
Today the legal position is clear, in that section 234(2) of the Financial Business Act now lays down that notwithstanding section 17(2) of the Insolvency Act, a financial undertaking that is unable to meet its obligations vis-à-vis subordinated capital shall not be regarded as insolvent7. Investigations in connection with insolvent liquidation proceedings A drawback of the settlement model chosen, whereby insolvent liquidation proceedings were not instigated against Varde Bank after the divestment of its core activities to Sydbank, since Varde Bank was able to meet its obligations as they fell due, was that no such review was automatically performed. With a view to conducting a survey equivalent to the review by the liquidator in the event of insolvent liquidation proceedings, cf. above, and with special focus on the "5/11 group"
The committee's report, which was presented in December 1994, also pointed out that a number of internal and external bodies had failed in connection with the increasing losses9. |
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| 1 There are two types of unregistered claims. Firstly, they may be future claims that are unknown at the time of registration and therefore not book-entered. Secondly, they may be existing and potential claims that have not been correctly book-entered, i.e. "hidden guarantees". VB Finans had no unregistered claims of the latter type. 2 To illustrate this, a number of unknown claims against VB Finans cropped up in the mid-1990s as a result of the "asset-stripping cases", in which Varde Bank also proved to have been involved as both the seller's and the buyer's bank. Suddenly the insolvent estate became a party to a number of asset-stripping cases where the financial risk was not known initially, but only became clear after a number of legal rulings following the "Satair ruling", U1997.364H. Another risk factor was the joint and several liability with the other parties. These cases have involved considerable work, but today only a couple of cases remain that have not been formally concluded. These cases have entailed unexpected costs for case handling and payment of compensation. However, the amounts in question have not had any significant impact on the overall result of the controlled winding-up. 3 See e.g. Bernhard Gomard, Danish public and private limited companies (in Danish only), 4th edition 2000, p. 242, and Jan Schans Christensen, Investment Trusts (in Danish only), 1st edition 2003, pp. 376ff. 4 The annual general meeting subsequently took note of the Board of Directors' decision and effected the restructuring of Varde Bank as a winding-up company. Otherwise the newly established overdraft facilities at Danmarks Nationalbank would have been terminated. 5 This provision was amended as of September 6 The Legal Adviser to the Danish Government had indicated that a bank must be regarded as insolvent if there were no realistic prospects that all subordinated creditors – and thus also supplementary capital – would be fully covered. 7 Today a distinction is drawn between two types of subordinated loan capital which can be included in solvency calculations, viz. hybrid core capital and subordinated loan capital. The latter is part of the supplementary capital. 8 The 5/11 Group, with Investeringsselskabet af 5/11 1951 A/S as the main company, was partly owned by Varde Bank and a number of private individuals, and the Group had a considerable unsecured exposure with Varde Bank. 9 The report did not touch upon the issue of liability, neither in relation to criminal law nor civil law. |
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THE ACTUAL WINDING-UP PROCESS
The sale of Varde Bank's core activities to Sydbank, and the restructuring of the bank as the winding-up company VB Finans, left VB Finans with around half of Varde Bank's original asset volume, distributed on approximately 140 customers and a balance sheet exceeding kr. 6 billion.
The decision in 1993 to have the winding-up of Varde Bank's remaining activities done by a winding-up company, in contrast to traditional insolvent liquidation proceedings, was taken on the basis of e.g. an assessment of the size and complexity of the remaining activities. It was thus argued that traditional insolvent liquidation proceedings managed by a liquidator would be cost-intensive and that the result of the winding-up would undoubtedly entail substantial losses in excess of realised and written-off losses. In ordinary insolvent liquidation proceedings the creditors holding supplementary capital could therefore not expect to receive any dividend.
On the subsequent establishment of VB Finans A/S in insolvent liquidation with the fully-owned subsidiary VB Finans af 1996 A/S (the subsidiary model) it was ensured that the controlled winding-up with an organisation and a Board of Directors based in VardeBank's original local area, and with the required banking expertise, would continue irrespective of the insolvent liquidation proceedings. The traditional insolvent liquidation proceedings managed by a liquidator were thus avoided. Some of the remaining activities were active enterprises that had banked with Varde Bank prior to the reconstruction.
Such enterprises regularly need banking services – settlement of payments, transfers, etc. – and therefore an agreement was concluded with Sydbank to undertake the technical aspects of this service, since VB Finans was no longer a bank and was thus not connected to the payments infrastructure in
The loss in connection with traditional insolvent liquidation proceedings compared to controlled winding-up via a winding-up company can be compared to the difference between the valuation of the assets under insolvent liquidation and valuation of a going-concern. VB Finans' external auditors on several occasions assessed the difference to be several hundred million kroner.
On the establishment VB Finans and later the subsidiary model, much importance was thus attached to signalling to the world at large that this would not be a sellout, but that the company would take the time required to wind up activities in good order, with the optimum result. A key element in this respect was the efforts and credibility of the locally based Board of Directors, which helped ensure successful communication.
From the outset in 1994, VB Finans had approximately 30 employees, and a new CEO was appointed who had not been tarnished by the events in Varde Bank up to the collapse. VB Finans was domiciled in one of Varde Bank's former properties in
Initially, the company had to dedicate considerable resources to establishing that its liquidity was sound, cf. the overdraft facility at Danmarks Nationalbank. Therefore VB Finans could not accept the settlement of debt to the company on unfavourable conditions for the sole purpose of generating liquidity.
The winding-up company faced a huge task, since the activities of the operating bank had naturally not been prepared for a sale. A very large share of the assets were properties or related to properties (lending with real estate as collateral), so that there was a need for considerable follow-up, primarily with a view to letting empty premises and ensuring that the value of the properties was not undermined. The winding-up company therefore had considerable activities as a property company. Moreover, a substantial share of the activities was in jeopardy and therefore had to be monitored more closely and necessary measures considered on an ongoing basis.
A company whose sole objective is to wind up its activities faces a challenge in retaining qualified employees due to the uncertainty resulting from the limited lifetime of the company. This factor was taken into account via a provision in the agreement with Sydbank whereby employees of VB Finans and later VB Finans af 1996 were guaranteed a job with Sydbank afterwards. In practice the option of subsequent employment by Sydbank was only exercised to a limited extent, but it did provide security for employees. Various incentives were also included in the employees' contracts of employment, so that e.g. employees who remained with the company for longer than a certain duration would receive a cash reward.
In hindsight it is clear that the various measures did in fact help to retain qualified employees so that the winding-up could take place in an appropriate manner, and the sale of assets was effected at a satisfactory, market-based level, all things considered.
The period during which the largest share of the property portfolio in value terms was wound up (1994-1998) was characterised by a general increase in property prices, particularly towards the end of the period. All other things being equal, it should have been possible to realise substantial gains on the sale of the properties. Such gains did to some extent materialise and facilitated the sales efforts. However, some of the less significant properties in value terms were located in peripheral areas of
This does not alter the fact that the underlying increase in the general level of property prices could undoubtedly have led to better prices for VB Finans and later VB Finans af 1996 if the winding-up process had been prolonged. However, Danmarks Nationalbank's support for the steady and controlled winding-up was primarily aimed at avoiding the negative financial consequences of a sellout.
As Chart 1 illustrates, VB Finans was currently able to reduce its debt to Danmarks Nationalbank via the proceeds from the sale of its assets. By the end of 2000 the entire loan from Danmarks Nationalbank, which originally amounted to almost kr. 4 billion, had been repaid, and the company began to accumulate liquidity, which was to be disbursed to the investors in subordinated capital. Final dividend payments totalled more than 38 per cent, i.e. approximately kr. 310 million. Technically speaking, these payments were financed via the company's own funds and through disbursements from Danmarks Nationalbank, which in return acquired the estate's remaining assets, cf. below on the winding-up of the estate and distribution of dividends..
| WINDING-UP AND DEBT TO DANMARKS NATIONALBANK (YEAR-END) |
Chart 1
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Costs
The immediate loss to Danmarks Nationalbank on the previously mentioned guarantee amounts to approximately kr. 200 million. Since this loss can be met within Danmarks Nationalbank's guarantee of kr. 250 million, only Danmarks Nationalbank has suffered losses on the guarantees provided. Danmarks Nationalbank's part of the guarantee agreement is liable prior to the guarantees issued by the other guarantors. Nor is it necessary to invoke the government's guarantee to Danmarks Nationalbank for the loan to VB Finans (the overdraft facility).
In addition to the immediate loss under the guarantee, a reduction was granted on the interest rate payable by VB Finans (interest rebate) if the company operated with a deficit[14]. This was the case in the first two years of the winding-up company's life, during which the rebate totalled approximately kr. 120 million.
The compilation of the total costs for Danmarks Nationalbank should also include the costs to Danmarks Nationalbank of remunerating the employees working on the case, as well as the costs of legal assistance[15].
WINDING-UP OF THE ESTATE AND DISTRIBUTION OF DIVIDENDS
In December 2001, two legal cases between Danmarks Nationalbank and the insolvent estate, both of which related to the preferential position of two loans of the subordinated loan capital type, were settled.
The cases were brought by Danmarks Nationalbank in 2000 because no agreement had been reached with the liquidators on the preferential position of the subordinated capital. Although there was no full legal clarity in this area, the preferential position was significant to the size of any dividends payable.
In connection with the hearing of the cases in 2001, negotiations for reconciliation were initiated, which in December 2001 resulted in a settlement that also enabled accelerated winding-up of the estate and thereby earlier distribution of dividends to subordinated creditors.
The solution entailed invoking section 149 of the Danish Insolvency Act, whereby an estate can be wound up with a statement of receipts and payments incidental to the insolvent liquidation proceedings, and distribution of dividend, even though certain specifically listed parts of the estate have not been finally settled and are deferred until after the winding-up of the estate. A normal advertisement for outstanding claims is issued with a cut-off date set by the insolvency court, so as to prevent further, unknown claims on the estate.
The settlement assumed that the insolvent liquidation of the estate could be completed under section 149 before the end of the 1st half of 2002, since Danmarks Nationalbank would then ensure the subordinated creditors a dividend of 37 per cent by providing a loan to the estate against the remaining assets as collateral, and Danmarks Nationalbank would thus assume the risk on the remaining winding-up of the estate, i.e. the winding-up that would be deferred under section 149 until after the insolvent liquidation of the estate. 30 per cent was to be distributed when the final statement of receipts and payments incidental to the insolvent liquidation proceedings had been approved and the cut-off date been reached in the 1st half of 2002, while a further 7 per cent or more would be distributed in the following year.
The interesting aspect of this solution was the accelerated distribution of dividends to subordinated creditors, who would otherwise potentially have to wait for many years to receive their dividends. They were likely to receive dividends, however, since at this point the winding-up of Varde Bank had led to full repayment of Danmarks Nationalbank's loan of almost kr. 4 billion, and the estate had a deposit at Danmarks Nationalbank of a few hundred million kroner. However, owing to a number of outstanding issues[16] that wereresolved via the settlement the liquidators could not pay out dividendson account.
The settlement conditions were met during the spring of 2002 and the 1st instalment of the dividend, 30 per cent, was distributed to the investors with subordinated capital[17] on 4 April 2002[18]. Hereafter the remaining assets have been wound up for the account and risk of Danmarks Nationalbank.
After the final settlement it was established that the winding-up of Varde Bank would not require Danmarks Nationalbank to invoke the government guarantee for the loan ofalmost kr. 4 billion, and Danmarks Nationalbank released this guarantee to the Ministry of Finance. The liquidators also released the Guarantee Consortium's guarantees, since Danmarks Nationalbank's obligations to disburse dividend under the settlement continued irrespective thereof. Neither the commercial banks that participated in the Guarantee Consortium, nor the government under its guarantee, lost money on the winding-up of Varde Bank.
THE MAJOR PROBLEMS
Overall, the major problems in connection with the actual winding-up model related to the legal status of the subordinated capital. A number of cases have thus been filed, especially concerning the internal ranking of the various elements of the subordinated capital in VB Finans. Issues concerning the subordinated capital were also the reason that the original winding-up model, cf. above, under which Varde Bank was to continue as a winding-up company, had to be abandoned in the spring of 1996 and a new model set up whereby the winding-up activities were transferred to a subsidiary and insolvent liquidation proceedings were instigated against the parent company.
Given the banks' special position and the potentially very serious consequences for society in the event of a bank being subject to insolvent liquidation proceedings, compared with the insolvent liquidation of other enterprises, the capital and solvency requirements of banks imposed by legislation are very high. This is especially a case of protecting depositors, who must be sure that they have access to the funds entrusted to the banks. In principle the solvency requirement can be fulfilled by having sufficient equity capital (core capital), and to the extent that the equity capital is not sufficient, various types of subordinated capital. All capital components that can be included in the solvency calculation are subject to the legal principle that they must absorb any losses prior to other creditors and that they therefore entail greater risk than ordinary deposits and other unsecured claims. These other capital components must therefore resemble equity capital rather than loan capital.
In the case of Varde Bank, the final result of the winding-up, cf. above, was that the shareholders lost their investment[19], investors in supplementary capital received a dividend of just over 38 per cent of their original claims[20], claims for subordinated loan capital were met (partly via payments under e.g. Danmarks Nationalbank's guarantee), while all other claims were fully met from the company's own funds.
Compared with typical insolvent liquidation, a dividend of 38 per cent for subordinated creditors and thus 100 per cent cover for higher-ranking creditors must be said to be a very good result of the winding-up.
A substantial part of the subordinated capital was, however, held by private individuals. The supplementary capital was to a large extent subscribed to by Varde Bank's ordinary customers, especially customers who were already shareholders, and by private customers in
In a recent judgment by the Danish Supreme Court[21] on Himmerlandsbanken's issue of supplementary capital it was held that the subscription to new supplementary capital issued by Himmerlandsbanken almost two years prior to its insolvent liquidation was to be disregarded as unreasonable under section 36 of the Danish Contracts Act, since the sales material did not give a true and fair view of the bank's financial position, and the subscribers' claims were therefore treated as unsecured creditors[22]. In relation to Varde Bank, there was no such subsequent change in the ranking of the creditors on which the original winding-up model was based, but the supplementary capital has, nevertheless, presented significant problems in connection with the winding-up.
CONCLUSION
As the above illustrates, it is a very lengthy and laborious process to wind up an ailing bank. All things considered, the final result of the winding-up model selected for Varde Bank, which ensured full coverage for all unsecured creditors and dividend of more than 38 per cent for subordinated creditors, must be assessed to be a very positive result of a long and difficult process. There can be no doubt that the alternative to the model with a winding-up company and later the subsidiary VB Finans af 1996, i.e. traditional insolvent liquidation proceedings, would not have secured this, all things considered, substantial dividend for the subordinated creditors.
Looking back on the overall winding-up procedure and the successful use of the subsidiary model, the conclusion is that it would have been preferable to introduce the subsidiary model and thereby set a cut-off date from the outset, in connection with the divestment of the core activities to Sydbank. However, it should be specified that focus during the original negotiations was aimed at finding a solution to Varde Bank's immediate problems. This was achieved, despite the need to settle a number of complex issues.
While most of the assets were wound up during the first five years (1994-1998), the settlement of the legal disputes following in the wake of the bank's collapse has been a lengthy process. Now, more than 10 years after the establishment of the winding-up company, there are still a few pending cases, and had it not been for the settlement between the insolvent estate and Danmarks Nationalbank it is hardly likely that any dividend would yet have been paid out.
It is significant that in two cases in the 1990s where ailing banks (Himmerlandsbanken and Varde Bank) were wound up there proved to be substantial problems relating to the legal status of the supplementary capital. It is to be hoped that the subsequent regulatory amendments ensure that certain issues have been clarified[23]. Firstly, subordinated loan capital has been phased out. Secondly, supplementary capital can now be included not only in a reconstruction, but also in winding-up. Thirdly, in terms of insolvency law the interpretation of the insolvency criterion in relation to supplementary capital has been clarified.
[1] The guarantee was liable after core capital and supplementary capital, but before subordinated loan capital. Danmarks Nationalbank subscribed to kr. 250 million of the guarantee and was liable before the remaining kr. 500 million of the guarantee capital. The guarantee was to remain in force until
[2] Political coordination was undertaken by "the interministerial reference group for Varde Bank". The reference group was managed by the Ministry of Industry, and the other members were the Ministry of Finance, the Danish Financial Supervisory Authority, the Ministry of Economic Affairs and Danmarks Nationalbank.
[3] The loan was liable after core capital, supplementary capital and guarantee capital, but before subordinated loan capital. In connection with the solution the guarantors accepted an extension of the term of the kr. 750 million guarantee in order to ensure the time necessary for the settlement of the activities remaining in Varde Bank.
[4] In 1999 the Minister for Economic Affairs decided to launch an investigation into the Danish Financial Supervisory Authority's administration of a number of large cases from the first half of the 1990s that were of systemic importance, including Varde Bank. In 2004 the expert group investigating the matter issued a report The Danish Financial Supervisory Authority's Administration of a Number of Large Cases c. 1990-1995 (the Baltica Case, the Hafnia Case, et al.) (in Danish only). No serious criticism was raised against the handling of the Varde Bank case.
[5] For a more detailed description of the background to and handling of the systemic crises in these three countries, see the report The Danish Banking Sector (in Danish only), Interministerial Liaison Committee concerning the Financial Market, October 1994, Chapter 5 and Appendix 3. The crises initially cost the taxpayers in these three countries substantial amounts in billions. Alone capital injections and loans from the Swedish, Norwegian and Finnish governments in the years 1991-1994 amounted to, respectively, SEK 65 billion, NOK 25 billion and FIM 44 billion. See also the report The Rescue of Banks since 1984 (in Danish only), Interministerial Liaison Committee concerning the Financial Market, June 1995, p. 86. Many of the original costs have, however, subsequently been recouped.
[6] See also The Rescue of Banks since 1984, section 3.2, for a list of ailing banks up to and including 1994. For a more detailed analysis of common traits and differences in the development in
[7] Cf. The Danish Banking Sector, p. 47.
[8] Cf. The Danish Banking Sector, pp. 51ff.
[9] Cf. The Danish Banking Sector, p. 53.
[10] For further information, see The Danish Banking Sector, section 6.4, especially
[11] In 1991 and 1992 liable capital had to constitute at least 10 per cent of the risk-weighted assets. The option to raise supplementary capital was introduced by a legislative amendment in 1991, and the banks subsequently ceased to issue subordinated loan capital. However, there was still a substantial volume of outstanding subordinated loan capital, which was only gradually redeemed as it matured. When new capital forms are introduced, it is therefore important to be aware of the issues that arise when new and old capital forms co-exist, and to realise that new rules therefore do not in fact become fully effective until a number of years have passed.
[12] Today, the terms and conditions for subordinated loan capital must include a provision to the effect that the capital can be written down, irrespective of whether the enterprise continues or is wound up. The only prerequisite is that the enterprise's equity capital has been lost and the share capital written down to zero, cf. the Financial Business Act, s. 136(1).
[13] The insolvent liquidation order was appealed to the High Court of Western Denmark by Fiduciaire Générale de Luxembourg, who represented the investors providing the above loan of LUF 500 million, but the order was upheld. As stated above, it was in the interests of the investors that VB Finans A/S was not taken under insolvent liquidation proceedings before their loan matured in March 1996.
An interesting detail was a special rule of law in Luxembourg, which entailed that in relation to various disputes between the estate and the investors represented by Fiduciaire Générale de Luxembourg the estate must reimburse the investors and their representative for the costs of external consultants, etc. resulting from the legal issues and cases raised by the investors and their representative. This phenomenon is entirely unknown in
[14] The overdraft facility accrued interest at the discount rate, which is always below the money-market interest rate, so that there was an element of support in granting VB Finans a loan on these terms.
[15] It should, however, also be noted that the subsidiary of the insolvency estate, VB Finans af 1996 A/S, paid more than kr. 60 million in tax on operating profits from its establishment up to its insolvent liquidation in 2003.
[16] A substantial outstanding issue was the case against Fiduciaire Générale de Luxembourg. Fiduciaire represented the investors providing the previously mentioned bond loan of LUF 500 million and had filed a unsecured claim on the estate. The estate had rejected the claim and would only acknowledge it as a subordinated claim. In that connection, Fiduciaire had sued the estate in
[17] A very high percentage of claims had been filed, almost 98 per cent of the outstanding supplementary capital in the estate, and it was therefore agreed to apply VP Securities Services' registration of rights to the supplementary capital, including registration of ownership, as the basis for distribution of dividends. This meant that dividends were also payable to bond owners who had not filed claims on the estate. This solution entailed a flexible payment procedure via VP Securities Services and the account controllers. It should be noted that it was not possible for the liquidators to gain access to VP Securities Services' registrations due to the latter's confidentiality rules, and thus the bond owners could not be contacted directly.
[18] The 2nd dividend instalment was paid on
[19] At end-1989 the market value of Varde Bank was approximately kr. 850 million. Unfortunately it has not been possible to delete the shares in VP Securities Services, not even after the liquidation of the insolvent estate under section 149 of the Danish Insolvency Act since the executive order on registration, etc. of securities in a central securities depository, Executive Order no. 1168 of 1 December 2004, as interpreted by the Danish Financial Supervisory Authority and subsequently the Company Appeals Board, prevents this. Shareholders have therefore regularly been notified by VP Securities Services of their worthless shares, and there are still costs related to maintenance of the registration.
[20] Varde Bank had outstanding supplementary capital of approximately kr. 520 million. Interest accrued until the insolvent liquidation order was handed down on 22 January 1996 amounted to approximately kr. 150 million.
[21] U2005.1978H.
[22] Two of the five Supreme Court judges proposed to apply the doctrine of false assumptions, to reach the same conclusion as the majority.
[23] It is noted that regulatory amendments in this area typically do not take full effect until some years have passed.