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. Last Updated: 07/27/2016

Long Arm of the Central Bank

Russia's Central Bank moved to impose crisis management on Tveruniversalbank two weeks ago, the second time in less than two months that the bank has attempted to forestall the collapse of one of the country's top 20 banks.

Under crisis management, a bank's executives must obtain Central Bank authority for all decisions of any consequence.

The Central Bank's authority to take such action stems from amendments made by the State Duma earlier this year to the Law on Banking, which dates back to 1990.

The legislation allows the Central Bank to take such action on a number of grounds.

Basically, the Central Bank can move on a bank which is in an "unsatisfactory financial position" or in the event of its "failure to perform obligations toward depositors and creditors which could serve as grounds for the submission of an application to institute insolvency proceedings against [it] in an arbitrage court."

The bank in question has the right to appeal the decision to the Central Bank, and also to the Arbitration Court, said Max Gutbrod, an attorney with Baker & McKenzie in Moscow.

Should a bank call a halt to withdrawals by depositors, the new Civil Code provides a clear basis for legal recourse. Article 64 of the code lays down categories of priority for claims against the bank's remaining assets.

As first passed, rights came in the following order:

?employees owed money who have in some way been incapacitated through their work for the bank came first;

?all other employees of the bank;

?debts of the bank secured by pledges;

?the state in the form of budgetary (mainly tax) obligations;

?depositors of the bank.

In a subsequent amendment passed by the Duma last November, however, individual depositors were given priority over corporate depositors.

John Sheedy, a partner at Coudert Brothers in Moscow, said the amendment gave precedence to individual depositors, although some question might be raised as to whether the amendment was intended to put depositors higher in priority than, for instance, employees who had been disabled in the course of their work for the bank.

In the case of Tveruniversalbank, the Central Bank has told depositors that their accounts can be transferred to Sberbank starting Aug. 1.

In practice recourse through the courts can be difficult, largely because though there is a bankruptcy law, it does not function as it is supposed to. Judges can be loath to pursue cases which relate to bankruptcy, said one Western lawyer in Moscow who asked not to be identified.

Small savers who find themselves unable to withdraw their funds from troubled banks may just have to wait until the authorities decide to deal with the bank themselves.

Gutbrod at Baker & McKenzie said, however, if the bank against which a claim is made has liquid assets at other banks, it can be relatively easy for creditors to obtain court orders to draw upon them, and to enforce those orders. The procedure can be faster than in his native Germany, he said.

However, if no such assets can be identified, claiming physical assets is in contrast extremely difficult, Gutbrod said. This is so difficult, in fact, that most foreign claimants do not in general attempt to pursue such claims.

In Russia there are professional "executors," who act on behalf of clients to take physical assets after court orders. Such executors usually work, said Gutbrod, on the basis of fees related to the size of the claim, and therefore they give preference to large claims.

Further legislation on bank liquidation is in preparation. This week the banking subcommittee of the Duma is due to discuss a new Law on the Bankruptcy of Banks, said Pavel Medvedev, the head of the committee. The draft law will then be discussed by the Duma and could enter into law by the end of the year, he said.

As yet, the drafting of the legislation is at an early stage. One of the ideas being considered, Medvedev said, was for a license for official auditors who would have the power to declare banks insolvent and restructure them.