Client Alert On Proposed Amendments To The Law On Banks

On April 7, 2017, the Azerbaijani Parliament passed in the first reading a Draft Law "On Introducing Amendments to the Law "On Banks" (the "Draft Law").

The Draft Law, once adopted and signed into law, will introduce significant changes to the cornerstone of banking legislation in the country, completely rewriting sections of the law dealing with the appointment of temporary administration and the financial rehabilitation of troubled banks. The Draft Law comes at the time when liquidations in bankruptcy of several small and mid-sized Azerbaijani banks are currently underway, in relation to one of which (Bank Standard) the newly established regulator, the Financial Markets Supervisory Authority (the "Regulator" or "FIMSA") attempted, unsuccessfully, to introduce a financial rehabilitation program.

We summarize the major aspects of the Draft Law below:

Disposition of an Insolvent Bank

A new section is proposed to be introduced to the Law on Banks, entitled "Disposition of an Insolvent Bank", which would deal with various matters related to the appointment of a temporary administrator by FIMSA for an initial period of nine months, which could be extended for a further three months. This section sets forth in detail events that would warrant the appointment of a temporary administrator by FIMSA, the principles under which the temporary administrator would manage the insolvent bank and the powers of the administrator, as well as the possible outcomes for troubled banks. These include the following:

merger of an insolvent bank into a healthy bank; transfer of assets and liabilities of an insolvent bank (fully or partially) to an acquiring bank; establishment of a bridge bank, the transfer of healthy assets and liabilities of an insolvent bank (fully or partially) to the bridge bank, and the sale of the bridge bank to investors; sale of an insolvent bank to investors; liquidation of an insolvent bank. Voluntary debt restructuring of bank obligations

Another important novelty in the Draft Law is a previously unavailable framework that would allow banks to force a voluntary debt restructuring of the bank's obligations vis-à-vis its creditors, except for claims of depositors that are eligible for deposit insurance.

According to the Draft Law, the process of voluntary debt restructuring begins with a resolution of the Supervisory Board of the bank if a bank is not able to comply, or there is a risk of the inability on the part of the bank to comply...