Corporate financial activity in Iceland winding-up proceedings of financial undertakings
Gunnar Thor Thorarinsson
LOGOS
Reykjavík
Gunnar Thor Thorarinsson (Bio)
In the autumn of 2008, the Icelandic financial system faced severe difficulties which culminated in the country's three largest banks, Kaupthing Bank, Glitnir Bank and Landsbanki (the Banks), being taken over by the Icelandic Financial Supervisory Authority (FME) in October 2008, following the enactment of emergency legislation by the Icelandic Parliament, Act No 125/2008 on the Authority for Treasury Disbursements due to Unusual Financial Market Circumstances etc. (the Emergency Act).
The legal framework for the Banks and other financial institutions in Iceland is set out in Act No 161/2002 on Financial Undertakings (AFU), which is in accordance with the relevant EU legislation as implemented by Iceland through its EEA obligations. The winding-up of the Banks is governed by the AFU and the Act No 21/1991 on Bankruptcy etc. (BA).
As the collapse of a country's entire financial system was unprecedented, Icelandic law was in various aspects inadequate to deal with bankruptcies of such scale. This has required the legislator to react to issues, some of which required an urgent response. For instance, the AFU has been amended several times since October 2008. The most extensive amendment, Act No 44/2009, covers financial reorganisation, winding-up and merger of financial undertakings. Further amendments to the AFU were made in June 2011 with Act No 78/2011 (the New Act) in relation to the winding-up proceedings, primarily aimed at facilitating the completion of the winding-up with a composition of the Banks; increasing official surveillance with the winding-up procedure; as well as addressing the proper implementation of Directive 2001/24/EC on the reorganisation and winding-up of credit institutions (the Directive).
Winding-up proceedings
The affairs of the Banks have been administered by Resolution Committees, which handle the Banks' assets with the aim of maximising their value; and Winding-up Boards, which are in control of the winding-up proceedings, resolve the claims against the banks, make distributions and, possibly, propose composition with creditors.
The Resolution Committees shall endeavour to obtain as high a value as possible for the Banks, for instance, by waiting if necessary for outstanding claims to mature rather than realising them at an earlier date. This includes the possibility of holding on to a significant asset rather than selling it. To this end, a Resolution Committee may disregard resolution passed by a creditors' meeting that it considers contrary to this objective. As a result of the New Act the Resolution Committees are terminated by passing their roles to the Winding-Up Boards by January 1 2012.
The creditors of the Banks receive regular updates of the winding-up in creditors' meetings and their vote will be required in relation to any composition agreement. Soon after the Banks were taken over by the FME in October 2008, Informal Creditor Committees (the ICC's) were established in all three banks. Although the ICC's have no official standing, they meet regularly with the Resolution Committees and the Winding-up Boards of the Banks. The New Act stipulates further consultation with creditors.
If the assets of a Bank do not suffice for full payment, the winding-up may be completed in one of two ways, either with the approval by creditors of a composition agreement or with the Bank being put into liquidation. If the Winding-up Board plans to propose to creditors that the winding-up be completed with creditors approving a composition agreement, the Winding-up Board prepares a composition proposal in accordance with the rules of the BA and the AFU. One of the primary aims of the New Act is to simplify this process and increase the likelihood of the winding-up to be completed with a composition agreement instead of the Banks being put into liquidation.
Litigation
The vast magnitude of the collapse of the Banks and the financial interests involved has put Icelandic legislation under intense scrutiny and instigated litigation both in Iceland and abroad.
In Iceland, one of the most important questions addressed is the legitimacy of the Emergency Act. Further, extensive litigation has been concluded and is pending on various procedural matters.
Outside of Iceland, notable cases include two decisions from the Paris Court of Appeals from 4 November 2010, in relation to Landsbanki, and a decision of the English High Court of Justice of England and Wales from 16 March 2011, in relation to Kaupthing. In both incidents serious questions were raised in relation to the applicability of the Icelandic winding-up proceedings in other jurisdictions and whether the Directive has been properly implemented.
Various impediments on the AFU and BA have been identified through litigation which has resulted in amendments to the legislation.
Concluding remarks
In light of the significant financial interests vested in the Banks and the resurrection of the Icelandic financial system, any developments of the legislation concerning the winding-up of financial undertakings is highly relevant for creditors and other stakeholders. The conclusion of the winding-up proceedings of the Banks through distributions to creditors and/or composition of individual Banks is of great importance to the creditors and investors. At the same time, the significance for the Icelandic economy and population cannot be underestimated.