5. Cooperative failure proceedings
(1)Methods of bankruptcy proceedings under fixed sum protection
Methods of bankruptcy proceedings consist of the pay-off method, whereby insurance payouts are made directly to each depositor, etc., and the financial assistance method, whereby all or part of the failed cooperative’s credit business is transferred to a rescuing cooperative and financial assistance is given. However, a report by the Financial System Council in December 1999 set out the basic principles on bankruptcy proceedings, stating “When a financial institution fails, the method of bankruptcy proceedings expected to require the smaller cost should be chosen, while it is also important to minimize confusion associated with the bankruptcy. Thus, financial institutions should place priority on choosing the financial assistance method as a method of bankruptcy proceedings, and should avoid activating insurance payouts as far as possible.” In light of this, the financial assistance method is to be chosen with priority under fixed sum protection. Nevertheless, since non-insured savings and general receivables are repaid according to the asset situation of the failed cooperative, assets need to be protected by placing constraints on the cooperative’s business, in order to maintain equality among depositors and creditors and prevent the outflow of assets. Therefore, since bankruptcy proceedings under fixed sum protection utilize bankruptcy legislation with court supervision and temporal constraints are also applied, this is expected to entail greater difficulty that bankruptcy proceedings under full protection.
The Corporation is studying schemes of such bankruptcy proceedings under fixed sum protection and the work of receivers, in the following directions.
(2)Outline of the financial assistance method
Financial assistance means that, when a cooperative has failed, the Corporation provides monetary grants and other relief within the scope of the pay-off cost to a rescuing cooperative that undertakes credit business transfer, merger, etc., under bankruptcy law. Financial assistance makes it easier to expedite mergers and other remedies, and ensures that the insured savings of the failed cooperative are taken over and protected by the rescuing cooperative. Financial assistance can take seven forms, namely monetary grants, loans or deposits of funds, purchase of assets, guarantees or assumption of debt, undertaking of debt, underwriting of preferred investment, and other loss sharing.
These procedures are based on the assumption that the failed cooperative will be administered by a receiver in practical terms (see ③ below).
①Application of the Civil Rehabilitation Act
Under fixed sum protection, non-insured savings and receivables are repaid in accordance with the asset situation of the failed cooperative. Therefore, when a cooperative fails, to maintain equality among its depositors and creditors and prevent the outflow of assets, assets need to be protected by placing constraints on the cooperative’s business (such as repayments of savings, etc.), and bankruptcy laws are used for this purpose. Specifically, civil rehabilitation proceedings are filed against the failed cooperative, and it is assumed that insured savings and healthy assets will be transferred to the rescuing cooperative while other savings and receivables are repaid in accordance with the asset situation of the failed cooperative, under court supervision.
② Outline of the basic scheme
The bankruptcy proceedings scheme is premised on the assumption of cases in which not enough advance preparation can be made for calculating insured savings (name-based aggregation), dividing assets, etc.
(a) Immediately after bankruptcy, the failed cooperative and the rescuing cooperative enter a basic agreement on credit business transfer, the main content of which is “to transfer insured savings, settlement operations and healthy assets to the rescuing cooperative within a target period of 6 months”.
(b)The failed cooperative files for the start of civil habilitation proceedings, and after insured savings have been calculated, the repayment of insured savings, settlement operations and loan operations are resumed and continued.
(c)The work of dividing up assets is also carried out, and insured savings and healthy assets are transferred to the rescuing cooperative with a target period of 6 months. However, non-insured savings and debts to general creditors are repaid in line with civil habilitation plans in accordance with residual assets.
③Administration by receivers
As soon as a cooperative fails, the prefectural governor (or, when the failed cooperative is a credit federation of agricultural cooperatives or a credit federation of fishery cooperatives, the Minister of Agriculture, Forestry and Fisheries and the Commissioner of the Financial Services Agency; the same applies below) activates a process of ordering operations by a receiver and the administration of assets (hereinafter “a receivership order”). A receiver is then appointed to administer the failed cooperative.
The authority to represent the failed cooperative, execute its operations and administer and dispose of its assets now resides solely in the receiver. The main operations expected to be undertaken by the receiver are as follows.
(a)Immediately after bankruptcy, the failed cooperative and the rescuing cooperative enter a basic agreement on credit business transfer.
(b)A petition for the start of civil rehabilitation proceedings is filed.
(c)If the bankruptcy occurs on a weekend or a Friday, the following preparations are carried out on Saturday and Sunday to enable the resumption of operations on the Monday.
・Simultaneous closure of all external channels, calculation of insured savings via name-based aggregation, preparation for repayment of insured savings, identification of unprotected settlement debt, preparation for new operations such as offsetting based on applications filed by depositors, etc.
・Guidance to employees of the failed cooperative on the future operational structure, etc.
・Revision of the management structure, revision of financial instruments
・Revision of financing standards
・Rigorous PR designed to prevent confusion among customers
(d)Insured savings repayment, settlement operations and loan operations are resumed on the Monday. Steps are taken to prevent confusion in branches.
(e)Loan assets and other assets are divided up.
(f)Insured savings and healthy assets are transferred to the rescuing cooperative with a target period of 6 months, and toxic assets are disposed of by sale to servicers or outsourcing purchase to designated receivables recovery companies.
(g)After about 1 year, the failed cooperative’s residual assets are paid off based on a rehabilitation plan.
(h)In the meantime, civil litigation and criminal indictment proceedings are carried out against former managerial personnel to clarify responsibility for the business failure, and multiple operations are carried out with courts, prefectures, related external bodies and the Corporation itself as partners.
The receiver is usually selected from attorneys, certified public accountants, JA-Zenchu (the Central Union of Agricultural Co-operatives), JF Zengyoren (the Nationwide Federation of Japan Fisheries Cooperatives), the Corporation, and others.
④ Forms of financial assistance
Systems of financial assistance include the following.
(a)Financial assistance to rescuing cooperatives
When part of credit business consisting of insured savings, healthy assets, etc., is transferred to a rescuing cooperative or when insured savings are transferred, monetary grants and other forms of financial assistance may be provided. In this case, the rescuing cooperative and the failed cooperative may jointly apply for toxic assets that cannot be transferred to the rescuing cooperative to be purchased by the Corporation.
Besides these, the Corporation also has the option of providing financial assistance to federations and others (i.e. federations of agricultural and fishery cooperatives and the Norinchukin Bank) that provide support via mutual assistance agreements, or to designated support corporations that undertake support operations concerning mergers and others (excluding transfers of insured savings) based on guidance by the Norinchukin Bank, respectively. The latter are designated support corporations provided in Article 32 paragraph 2 of the Act on Enhancement and Restructuring of Credit Business Conducted by the Norinchukin Bank and Specified Agricultural and Fishery Cooperatives, etc. (Law No. 118 of 1996).
(b)Financial assistance to failed cooperatives
When a failed cooperative transfers part of its credit business or transfers insured savings to the rescuing cooperative, untransferred assets and liabilities remain in the failed cooperative. In this case, to ensure that creditors related to the untransferred liabilities do not suffer disadvantage due to said credit business transfer, the Corporation has the option of providing financial assistance (limited to monetary grants) to the failed cooperative (Note).
Specifically, if the failed cooperative’s assets decrease as a result of the partial transfer of credit business, or the repayment rate to creditors remaining in the failed cooperative decreases in comparison to the expected repayment rate to creditors before the credit business transfer, the Corporation may provide monetary grants to the failed cooperative with the aim of preventing this.
(Note) In the Savings Insurance Act, this is expressed as “to ensure equity among the creditors of failed agricultural and fishery cooperatives”.
(c)Additional financial assistance
After initial financial assistance has been provided in cases of credit business transfer, merger, etc., the Corporation may decide to provide additional financial assistance upon receiving an application for the same from the rescuing cooperative at the stage when the entirety of undetermined rehabilitation claims has been revealed.
⑤Procedure for financial assistance
Upon receiving approval from the prefectural governor regarding the appropriateness of the merger, etc. (Note) or mediation in the merger, etc., the rescuing cooperative may apply to the Corporation for financial assistance. On receiving the application, the Corporation then decides whether financial assistance is possible, the amount of financial assistance, and other matters deemed necessary when providing financial assistance, following a resolution by the Policy Board, and receives the approval of the competent ministers. Once the Corporation has made this decision, it enters an agreement with the rescuing cooperative on financial assistance, and provides financial assistance.
(Note) Appropriateness may only be approved if all of the following four conditions are met.
・That the merger, etc., will help to protect depositors and other creditors.
・ That financial assistance by the Corporation is indispensable to achieving the merger, etc.
・That, if there were no merger, etc., for the failed cooperative related to the merger, etc., and all of its operations connected with credit business were abandoned or dissolved, it could cause significant impediment to the smooth supply and demand of funds and the convenience of users in regions or sectors where the failed cooperative conducts credit business.
・That it is deemed certain that financial assistance by the Corporation will be utilized for the rescuing cooperative’s sound and proper running of credit business.
(3)Outline of methods used for insurance payouts
There are two types of insured event that result in insurance payouts by the Corporation, as defined below. Insurance payouts are made on the basis of claims from depositors once various preparations have been made, such as name-based aggregation of savings accounts (calculation of insured savings per depositor) in the cooperative subject to the insured event.
Type 1 insured event
Suspension of repayment of savings, etc., by the cooperative
In this case, the Corporation decides whether or not to make insurance payouts within 1 month from the date of the insured event (may be extended by a maximum of 1 month if necessary), following a resolution by the Policy Board.
Type 2 insured event
Approval for a resolution to dissolve the cooperative, decision to start bankruptcy proceedings, dissolution order, or statutory dissolution (Note)
In this case, no decision by the Corporation is required, as insurance payouts are made as a matter of course.
(Note) Statutory dissolution results from a deficiency in the statutory number of members or cooperative members needed for the cooperative to maintain its organization.
The amount of insurance payouts made to depositors is the total of savings and others covered by insurance (principal plus interest, etc.) deposited with the cooperative on the date of the insured event, where the amount of principal is the full amount in the case of savings for payment and settlement, and 10 million yen per depositor in the case of general savings, etc. It is possible, however, to defer payment for collateral savings and others until the secured receivables related to the collateral right are dissolved.
When a Type 1 insured event occurs, the Corporation decides insurance payouts and matters for public announcement (the timeframe, place, method, handling hours and other aspects of insurance payouts) following a resolution by the Policy Board. It then announces matters for public announcement regarding insurance payouts, by publishing in the Official Gazette, posting in branches of failed cooperatives, and other methods, and thus makes every effort to familiarize depositors with the event.
In the case of a Type 2 insured event, insurance payouts do not require a resolution by the Policy Board. In such cases, therefore, the Corporation determines matters for public announcement and announces them.
Besides the method of paying cash and others directly to depositors, the Corporation’s insurance payout methods include that of creating ordinary deposits equivalent to the insurance payout amount in another healthy financial institution and transferring these to the depositors. This is done to process payment smoothly and promptly and avoid the risks involved in handling cash.
①Purpose of suspense payments
Suspense payments are made to furnish the immediate living costs and others of depositors in a failed cooperative, when an insured event occurs but it is expected that a considerable number of days will be required until insurance payouts start or insured savings are repaid. Before the Corporation can make suspense payments, it must make a decision to that effect following a resolution by the Policy Board within 1 week from the date of the insured event.
② Suspense payment amounts, etc.
The limit for suspense payments is 600,000 yen per account for each depositor with ordinary savings (principal portion). Later, when insurance payouts or other payments are made, the amounts of these suspense payments are deducted from the insurance payouts and others issued to those depositors, etc.
When suspense payments are made, the procedure for public announcements, etc., is the same as that for insurance payouts.
(5)Record of insurance payouts and suspense payments
There have been no instances of insurance payouts or suspense payments since the system was launched.
(6)Outsourcing of insurance payout and suspense payment operations
After deciding to make insurance payouts or suspense payments, the Corporation may outsource payments and other ancillary operations to cooperatives or other financial institutions.
(7)Other loan operations
①Loans of funds for repayment of savings
The Corporation may, following a resolution by the Policy Board and with the approval of the competent ministers, loan funds necessary for the repayment of savings to cooperatives subject to a receivership order, or failed cooperatives subject to an order for receivership by a trustee or interim receiver based on the Civil Rehabilitation Act.
②Loans of funds to repay settlement debt
The Corporation may, following a resolution by the Policy Board and with the approval of the competent ministers, loan funds necessary for the repayment of settlement debt to cooperatives subject to a receivership order, or failed cooperatives subject to an order for receivership by a trustee or interim receiver based on the Civil Rehabilitation Act.
③Loans of funds to prevent decreases in asset value
The Corporation may, following a resolution by the Policy Board and with the approval of the competent ministers, loan funds necessary to prevent decreases in asset value to cooperatives subject to a receivership order (limited to cases after filing for the start of rehabilitation proceedings), or failed cooperatives subject to an order for receivership by a trustee or interim receiver based on the Civil Rehabilitation Act.
(8)Purchases of savings and other receivables
In the system of purchasing savings and other receivables, the Corporation purchases non-insured savings and others (i.e., of savings and others covered by insurance, those other than savings for payment and settlement with a principal in excess of 10 million yen, and foreign currency savings, plus the interest and other accruals on these) of a cooperative subject to an insured event, based on claims by depositors, etc., for an amount corresponding to the estimated proceeds payment. The estimated proceeds payment is calculated by multiplying the amount of savings and others on the date of the insured event by a fixed rate (the estimated proceeds payment rate) determined in consideration of factors including the anticipated bankruptcy dividend of the cooperative subject to the insured event. Under this system, depositors may essentially recover part of their repayments or dividends in advance without waiting to receive them in full.
This estimated proceeds payment may be carried out in conjunction with either method of bankruptcy proceedings, i.e. the financial assistance method or the insurance payout method.
When the recovered amount of purchased savings and other receivables exceeds the estimated proceeds payment, after deducting the expenditure needed for the purchase, the Corporation then makes an additional payment of the surplus portion to depositors (settlement payment).
When the Corporation purchases savings and other receivables, it determines matters including the timeframe, place and method of purchase, and makes them publicly known, following a resolution on the estimated proceeds payment rate by the Policy Board and with the approval of the competent ministers.
○ Conceptual scheme of the treatment of savings, etc., when a cooperative fails
(inside bold line = protected by savings insurance)
|Classification of savings, etc.||
Up to 10 million yen
Excess of 10 million yen
Savings, etc., covered by savings insurance
Current savings, non-interest bearing ordinary savings, etc.
Savings for payment and settlement purposes (Note 1)
Full amount of principal protected
General savings, etc.
Protection for principal up to 10 million yen, plus interest, etc., thereon (Note 2)
Estimated proceeds payment
Portion of principal exceeding 10 million yen and foreign currency savings, plus interest, etc. × Estimated proceeds payment rate
Subject to partial deductions
Interest bearing ordinary savings, time savings, installment savings, Norinchukin Bank debentures (custody products (Ritsuno Wide)), etc.
Savings, etc., not covered by insurance
Foreign currency savings
Negotiable certificates of deposit, Norinchukin Bank debentures (other than custody products (Warino and Ritsuno)), etc.
Paid in accordance with the asset situation of the failed cooperative
(Note 1) Refers to savings that satisfy three conditions, namely that they are (1) interest-free and (2) payable on demand, and that (3) a payment service can be provided.
(Note 2) The benefit compensation for installment savings is protected in the same way as interest.
(9)Procedure based on the Act on Special Provisions concerning Rehabilitation
The Corporation registers rehabilitation and bankruptcy receivables (i.e. prepares a list of depositors and submits it to the court), exercises voting rights on draft rehabilitation plans, and carries out other acts on behalf of depositors in order to expedite rehabilitation and bankruptcy proceedings for failed cooperatives under the Act on Special Provisions concerning Rehabilitation Proceedings of the Agricultural and Fishery Cooperative Savings Insurance Corporation.
When the Corporation is to exercise voting rights, it notifies depositors, etc., in advance and publicly announces the content of the draft rehabilitation plan to which it wishes to consent.
(10)Designated receivables recovery companies
The Corporation may enter an agreement with a receivables recovery company, and carry out various operations to implement the agreement.
Specifically, it may implement the following vis-à-vis the designated receivables recovery company:
①Investing the funds necessary to expedite recovery operations under the provisions of the agreement;
②Compensating for losses incurred by the designated receivables recovery company when executing operations under the provisions of the agreement;
③Guaranteeing debts arising from loans or borrowings of funds, based on applications from the designated receivables recovery company in connection with the funds needed to purchase assets and other funds needed to expedite recovery operations under the provisions of the agreement;
④Receiving payment of profits accrued by the designated receivables recovery company when executing operations under the provisions of the agreement,
⑤Giving guidance and advice necessary to implement recovery operations.
(11)Operations in response to financial crisis
When the competent ministers (in this case, the Minister of Agriculture, Forestry and Fisheries and the Prime Minister) deem that an extremely grave impediment to the maintenance of orderly credit conditions in Japan or the region where the cooperative in question operates could arise if measures ① or ② are not taken, said measures may be taken following a resolution of the Financial Crisis Response Council (chaired by the Prime Minister).
①Underwriting of preferred investment by the Corporation to improve the capital adequacy of cooperatives (except those in ② below), etc.
②Financial assistance by the Corporation to an amount exceeding the costs needed to make insurance payouts to a failed or over-indebted cooperative (in this case, a receivership order is placed on the cooperative).
The main source of funds needed for operations to respond to financial crisis is to be allocated from the cooperative’s contributions (when this is not enough, government subsidies) and borrowings (borrowing limit: 100 billion yen (with a government debt guarantee subject to a Diet resolution)).