Forced Sale – Financial Institution Restructuring Powers (FIRP)
The CDIC Act has an “institution restructuring” provision (also known as Financial Institution Restructuring Powers or FIRP) whereby an order may be made by the Governor in Council (GIC), on the recommendation of the Minister, to vest the shares and subordinated debt of a failing CDIC member institution or appoint CDIC as receiver of the member for purposes of carrying out a transaction or a series of transactions to restructure a substantial part of the business of the member.
Summary of the Power
Where a member institution is non-viable in the opinion of the Superintendent of Financial Institutions and there exists a willing buyer for all of part of it, CDIC can take control of a failing member institution for a short period of time to complete its sale, amalgamation or restructuring without shareholders’ approval.
CDIC’s key objective in using a forced sale or FIRP is to ensure a continuation of critical banking operations until a private sector transaction is complete.
Pre-Conditions for FIRP
The pre-conditions for FIRP are:
- The Superintendent of Financial Institutions forms a non-viability opinion and reports to CDIC’s Board.
- CDIC’s Board reviews options and recommends the best resolution approach for the failing bank to the Minister of Finance.
- The Minister of Finance recommends a resolution approach to the Governor in Council (GIC) – the federal Cabinet.
- The GIC makes an order authorizing the resolution approach.
In formulating its FIRP request, CDIC takes into account whether: (a) a restructuring transaction is likely to be quickly carried out; and (b) any such transaction would be consistent with CDIC’s statutory objects.
The GIC, in turn, may make orders for one of, or both of, two forms of FIRP:
- In a Share FIRP, the shares and subordinated debt of the member institution specified in the order are vested in CDIC and it becomes the sole shareholder.
- In an Asset FIRP, CDIC is appointed receiver in respect of the federal member institution.
Operations of the FIRP
CDIC’s ability to take control of and operate a member institution does not extend directly to subsidiaries of the member institution if those subsidiaries are not also CDIC members, nor do CDIC’s resolution powers apply to holding companies of CDIC member institutions that are not themselves member institutions. However, CDIC can transfer, or cause to have transferred, the shares and assets of direct and indirect subsidiaries, subject to regulatory and other third-party approval.
In a Share FIRP, CDIC would have temporary share ownership and control of the member institution. CDIC could transfer the shares to an acquirer or agree to the amalgamation of the member institution and another institution. These transactions could be preceded by a restructuring, replacement of the board of directors (and indirectly, senior management) or any other measure to stabilize the institution’s operations.
When the shares of a member institution are vested in CDIC, it can exercise the powers of shareholders. As the sole shareholder, CDIC could immediately replace the existing board of directors, which in turn could select replacements for senior management as deemed appropriate. CDIC could also exercise the powers of directors and officers.
During CDIC’s temporary control, a separate work-out company could be created to purchase “impaired” assets and to assume certain liabilities of the member institution. The workout company could be a subsidiary of CDIC. The institution would transfer such assets and liabilities to the workout company under the terms of a Purchase & Assumption Agreement.
In an Asset FIRP, CDIC has broad powers, including the ability to temporarily take possession and control of the assets, sell assets, arrange for liabilities to be assumed and carry on the business of the financial institution.
The temporary control is taken to stabilize the financial institution’s operations and then effect a transaction. The powers and duties of directors and officers of the financial institution, and the powers, rights and privileges of shareholders to vote or give approvals, are also suspended and CDIC can exercise these powers.
Existing shareholders (and sub-debt holders) would continue to own shares (and sub debt) in the financial institution. Similar to a Share FIRP, CDIC would also have the power to cause the financial institution to transfer assets and liabilities to a work-out company. CDIC could also leave some part of the failing member institution’s business behind in a stub entity, with the result that it would be liquidated while other parts of the failing member institution’s business would be continued by a third-party acquirer.
Given that FIRP is only intended as a mechanism to force a restructuring transaction, CDIC control would be terminated upon completion of the transaction, or series of transactions, or the expiration of the statutory period (60 days, up to a maximum of 180 days with extensions).
CDIC would apply for a winding-up order in respect of a member institution under the Winding-up and Restructuring Act if it believed a transaction or series of transactions could not be substantially completed before the end of the period.
When an order is made to exercise a forced sale, the CDIC Act imposes a general stay of proceedings which overrides contractual rights subject to Canadian law. [These are consistent with protections of receivers and trustees in bankruptcy under insolvency legislation.] The stays exist to allow sufficient time to stabilize the situation. Generally speaking and subject to certain exceptions related to obligations as member in Payments Canada and eligible financial contracts (or EFCs), all legal proceedings, general contract termination or enforcement rights are temporarily stayed in a bridge bank scenario.