GUIDELINES ON FORCED LIQUIDATION OF BANKS AND LOCAL BRANCHES OF FOREIGN BANKS

(as amended on 15 April 2010)

1. General provisions

1.1.These Guidelines have been prepared in accordance with the Civil Code of the Republic of Azerbaijan, the Laws of the Republic of Azerbaijan "On the National Bank of the Republic of Azerbaijan" and "On Banks" and determine the rules of forced liquidation of banks and local branches of foreign banks (hereinafter - banks).
1.2. These Guidelines shall not apply to banks that have been voluntarily liquidated and declared bankrupt.

2. Definitions

The terms used in these Guidelines shall have the following meanings:
Temporary administrator – a person responsible for the temporary management of a problem bank appointed by the National Bank on the grounds established by the legislation of the Republic of Azerbaijan.
Liquidator - a person appointed by the court on the basis of the application of the National Bank on forced liquidation of the bank and acting as a bank manager in the liquidation process to complete settlements with the creditors of the liquidated bank.
Creditor of the bank - a person who has claims against the liquidated bank’s obligations.
Interim liquidation balance - a court-approved report containing information on the composition of the liquidated bank's property, the list of creditors' claims, as well as the results of consideration of these claims.
Liquidation balance - a report prepared and approved by the court upon completion of settlements with creditors.

3. Grounds for forced liquidation of the bank

3.1. A bank which license is revoked on one or more of the following grounds shall be subject to forced liquidation:
3.1.1. if it is established that the information provided by the bank when applying for a license is incorrect;
3.1.2. if the bank does not start operations in accordance with the license within twelve months from the date of entry into force of the banking license or the National Bank determines that the bank has not attracted deposits or other repayable funds or issued loans within six months;
3.1.3. if the amount of the authorized capital or total capital of the bank is less than the minimum amount of the authorized capital or total capital (equivalent to the total capital of the local branch of a foreign bank) established by the National Bank for banks, respectively;
3.1.4. if the bank cannot ensure the safety of the assets entrusted to it;
3.1.5. if the bank does not carry out its management or current activities in a reliable and prudent manner or violates the requirements of the Law of the Republic of Azerbaijan "On Banks" and the regulations of the National Bank more than twice;
3.1.6. if the bank carries out activities not provided for in the banking license or permit;
3.1.7. if the bank becomes a subsidiary of another bank without the permission of the National Bank;
3.1.8. in case of revocation of the license of a foreign bank or foreign bank holding company with a local subsidiary bank or branch;
3.1.9. if the reorganization of the bank is carried out without the permission of the National Bank;
3.1.10. if the National Bank is unable to exercise control over the subsidiaries of the foreign bank and a foreign bank holding company, as well as the bank, which is a member of the group of companies, due to the lack of proper supervision by the banking regulatory and supervisory authority of their country;
3.1.11. if it is established that the bank deliberately provided false reports and information to the National Bank;
3.1.12. if the bank does not submit a monthly report to the National Bank on the last three reporting dates;
3.1.13. if the bank fails to comply with the orders or other written instructions given to it by the National Bank in accordance with the Law of the Republic of Azerbaijan "On Banks" and normative acts of the National Bank;
3.1.14. when it is established that the influence of one or more founders holding significant shares will endanger the bank's reliable and prudent management;
3.1.15. if the relationship between the bank and a foreign bank or a foreign bank holding company with a significant stake prevents the National Bank from exercising its supervisory functions, as well as if the banking regulatory and supervisory authorities of that country do not cooperate with the National Bank;
3.1.16. if the individuals and the heads of executive bodies of legal entities who are holders of significant participation shares are not acceptable persons with necessary qualities;
3.1.17. if the bank's administrators do not meet the relevant requirements of the Law of the Azerbaijan Republic "On Banks";
3.1.18. if the internal management and control procedures of the bank or the local branch of a foreign bank are inadequate;
3.1.19. if the bank does not operate in accordance with the business plan, as well as does not fulfill financial forecasts.

4. Appointment and composition of liquidators

4.1. Depending on the scope and nature of the work to be done in the liquidated bank, as well as the number of subsidiaries, branches, departments and representative offices of the bank, the candidacy of one or more individuals and / or legal entities shall be submitted to the court for approval by the National Bank.
4.2. The liquidator (liquidators) shall be appointed to this position with their consent.
4.3. The following persons may not be liquidators of the bank:
4.3.1. persons related to the bank and persons acting on behalf of the related persons;
4.3.2. creditors and debtors of the bank, except for the National Bank.
4.4. Terms of payment of liquidators' salaries shall be determined by the court on the basis of the proposal of the National Bank.
4.5. When appointing liquidators from among the employees of the National Bank, they shall be released from the performance of their official duties at the main place of work during the liquidation period. Their position, salary and other payments assigned to the main place of work shall be retained.

5. Purpose of the forced liquidation of the bank and the powers of the liquidator

5.1. The main purpose of the forced liquidation of the bank is to ensure that the claims of the liquidated bank's creditors are paid as soon as possible.
5 2. From the moment of entry into force of the court decision on forced liquidation of the bank and the appointment of the liquidator until the end of the liquidation process:
5.2.1. all powers of the general meeting of shareholders of the bank, other management bodies and officials of the bank for the management of the bank, including the right to dispose of the payment of property and liabilities, shall be passed to the liquidator;
5.2.2. actions taken by bank administrators or shareholders on behalf of the bank shall have no legal force;
5.2.3. all seizures of assets imposed for the purpose of protecting the bank assets and enforcing court decisions shall be null and void;
5.2.4. The remaining assets, except for the liabilities secured by the bank within the amount of pledge (mortgage), shall be protected from seizure or proceedings.

6. Obligations of the liquidator

6.1. During the period of forced liquidation of the bank, the liquidator (liquidators) shall:
6.1.1. accept the bank's assets, including all property and documents, by a court-approved handover act;
6.1.2. control the bank's assets and liabilities;
6.1.3. manage the bank’s activities;
6.1.4. determine the procedure and deadline for submission of creditors' claims to the bank;
6.1.5. dispose of liquidation accounts;
6.1.6. prepare reports reflecting the liquidation process;
6.1.7. evaluate the bank's property in accordance with the legislation and, if necessary, involve relevant specialists in this process;
6.1.8. publish information in the mass media on forced liquidation of the bank;
6.1.9. send a relevant notification to the Supervisory Board and the Management Board of the bank in connection with the commencement of the process of forced liquidation of the bank and the appointment of the liquidator;
6.1.10. place a written announcement on the beginning of the liquidation process of the bank and the appointment of the liquidator at the places of customer service;
6.1.11. add the words "in the process of liquidation" to the name of the bank and provide for the replacement of the bank's seal;
6.1.12. open liquidation accounts in the National Bank of the Republic of Azerbaijan and report to it;
6.1.13. take measures to safeguard the bank’s documents and property, as well as other property accepted as collateral (mortgage);
6.1.14. take measures to identify the bank's creditors and collect receivables;
6.1.15. prepare and submit for the court’s approval the interim liquidation balance, the report on the implementation of liquidation measures and obligations, as well as the liquidation balance of the bank, which is compulsorily liquidated within the period determined by the court;
6.1.16. inform law enforcement agencies and the National Bank in case of abuse and other violations in the liquidation process;
6.1.17. the person, replacing the liquidator, in all cases of replacement of the liquidator by another person, shall receive accounting books and reporting documentation and bank assets at liquidator’s disposal, as well as documentation of accounting and reporting of the liquidator, developed on the bank in the process of the bank’s liquidation on the basis of an acceptance act.
6.1.18. not disclose confidential information known to him in the course of the work while exercissing his powers;
6.1.19. report to the court on the implementation of liquidation measures and obligations within the time limits set by the court;
6.1.20. complete the work of the bank being forcibly liquidated and settlements with creditors;
6.1.21. exercise other powers not contradicting the legislation of the Republic of Azerbaijan and these Guidelines.
6.2. The liquidators shall operate under the supervision of the court and in close cooperation with the National Bank.

7. Commencement of liquidation work

7.1. The liquidator carrying out forced liquidation of the bank shall act in accordance with the laws of the Azerbaijan Republic, normative acts of the National Bank of the Azerbaijan Republic, other normative legal acts of the Azerbaijan Republic and these Guidelines.
7.2. The liquidator operating outside the territory of the Azerbaijan Republic shall be guided by the legislation of the Azerbaijan Republic, as well as the legislation of the country where the structural unit of the liquidated bank operates. For this purpose (as well as in the case of forced liquidation of local branches of foreign banks) the liquidator shall cooperate with the banking regulatory and supervisory body of the country having mutual representation.
7.3. The liquidator shall publish information on the liquidation of the bank and the procedure and deadline for submitting creditors' claims in the media outlets where the information on state registration of the liquidated bank has been published. The term of the creditors’ appeal to the liquidated bank for the purpose of satisfying their claims may not be less than two months from the date of publication of the information on the liquidation of the bank.
7.4. The liquidator shall take measures to identify creditors and collect receivables, as well as notify the creditors of the bank's liquidation.
7.5. The liquidator shall draw up a register of creditors’ claims in order to satisfy the creditors' claims and ensure their interests. The register of creditors' claims shall contain information on each creditor, the amount of claims on monetary obligations and / or mandatory payments, and the sequence of payment of each claim.
7.6. After the deadline for submitting creditors ' claims expires, the liquidator shall draw up an interim liquidation balance. The balance shall include information on the composition of the assets of the liquidated bank, the list of creditors ' claims, as well as the results of consideration of these claims.
7.7. The register of creditors' claims shall include undisputed claims reflected in the reports, as well as those addressed. Executive documents on court decisions that have entered into legal force in respect to the bank being liquidated shall be considered as the creditors' approved claims and recorded.
7.8. The liquidator shall open special liquidation accounts (in national and foreign currency) with the National Bank within 2 (two) business days from the date of commencement of liquidation. All cash and proceeds from the sale of the Bank's assets shall be transferred to these accounts accordingly.

8. Stages of the liquidation process

8.1. Forced liquidation of the bank shall consist of the following stages:
8.1.1. gaining control over the bank's buildings and documents;
8.1.2. inventory of assets and liabilities;
8.1.3. valuation and sale of assets;
8.1.4. satisfaction of creditors’ claims.

9. Acquisition of control over the bank's building and documents

9.1. The liquidator shall acquire physical control over the bank's building and documents using the security service, police and other available means after informing the bank's administrators of the court's decision on liquidation.
9.2. The liquidator shall also provide for the replacement of all locks and codes of the bank and its structural units and security service to ensure the control over the bank's documents and property.
9.3. In order to eliminate uncertainty related to different areas of the bank, the liquidator shall hold a meeting with the bank's employees. The rules of conduct shall be followed at the meeting and the issues shall be investigated on the merits.
9.4. The liquidator shall assign an employee to answer phone calls from customers and other lenders.

10. Inventory of assets and liabilities

10.1. The liquidator shall take an inventory of the assets and liabilities of the liquidated bank and draw up an act in accordance with the results of the audit.
10.2. The assets of the liquidated bank shall consist of cash, loans issued to legal entities and individuals, property of the bank and other claims.
10.3. All cash is counted as part of the auditing of the bank's assets. Cash in national and foreign currencies, including coins, shall be placed separately.
All non-cash funds shall be allocated and indicated in the act. Then a report on the balance of cash shall be prepared and signed by two responsible persons, indicating the date (one of them shall be the liquidator and the other shall be the person appointed by the liquidator).
10.4. The liquidator shall collect loan agreements and loan files as part of the loan review. From the date of entry into force of the court decision on the forced liquidation of the bank, the unfinished loan agreements and the prospects for their repayment shall be analyzed. Credit balances shall be reconciled with the bank's balance sheet. If there is a difference, the reasons for the difference shall be investigated.
10.5. All loan documents, including loan and other debt agreements, shall be reconciled with the accounting-registration documents after registration. If the documents are not available or discrepancies are found, an appropriate act shall be drawn up stating the reasons.
10.6. If the bank issued plastic cards into circulation, the processing company (companies) of which the bank is a member shall be sent a notice to suspend the operation on plastic cards. The liquidator shall also carry out the works to collect credit cards from both individuals and corporate customers.
10.7. The liquidator shall exercise control over the payments on loans.
10.8. The register of acquired securities shall be taken under control, their list shall be prepared and works shall be carried out on their sale.
10.9. The liquidator shall determine whether the property is owned or leased by the bank. All leased properties shall be listed and copies of all lease agreements, acts and appraisals shall be taken. It is determined whether the property owned and not owned by the bank is necessary for the bank's activities. Contracts on the lease of the property not used in banking shall be terminated in accordance with the legislation.
10.10. The liabilities of the liquidated bank shall be reconciled with the bank documents and divided into categories according to the sequence of payment. The detected difference shall be formalized.
10.11. Assets that were not reflected in the bank's balance sheet prior to the liquidation process and found during the inventory shall be reflected in the liquidated bank's interim liquidation balance.

11. Asset valuation and sale of assets

11.1. The liquidator shall organize the valuation of assets for the sale of bank assets and settlements on the bank's liabilities.
11.2. When assessing the bank's assets, it is necessary to distinguish between financial and non-financial assets.
11.3. Financial assets shall include:

• cash funds;
• securities;
• loans;
• currency valuables.

11.4. Non-financial assets shall include:

• building and premises;
• transport means;
• furniture, equipment and other properties.

11.5. Paper money and coins in foreign and national currency, as well as financial assets in the form of correspondent bank accounts shall be valued at face value.
11.6. Securities shall be valued depending on the state of the securities market.
11.7. Fair sales shall be achieved during the sale of assets.
11.8. Loans classified as "standard" loans shall be sold at market value.
11.9. The following principles shall be followed when selling problem loans:
11.9.1. the loan shall be sold at the value of the remaining debt (principal and interest);
11.9.2. If the debt is not sold to another buyer, it can be sold to the customer at a price lower than the face value. The liquidator shall substantiate each such case in the liquidation report;
11.9.3. If it is impossible to sell the problem loan, the liquidator shall take measures to sell the pledged (mortgaged) property in accordance with the legislation.
11.10. Valuation of non-financial assets shall be carried out in accordance with the legislation.
11.11. If other debtors of the bank, which is subject to forced liquidation, fail to fulfill their obligations to the bank, the liquidator shall begin the procedure of seizing the collateral (mortgage) in accordance with the law.
11.12. If the liquidated bank's funds are not sufficient to meet the creditors' claims, the liquidator shall sell the bank's property at an open auction.
11.13. The initial price of non-financial assets offered for sale may change. When an asset is sold at a price significantly below its estimated value, the liquidator shall document the reasons and report them.

12. Consideration of creditors’s claims

12.1. The creditors of the liquidated bank shall apply to the liquidator in order to secure their claims. Documents confirming the claims shall be attached to the application.
12.2. The application shall be considered by the liquidator within 15 (fifteen) days from the date of its receipt.
12.3. When reviewing the application, the liquidator shall check the legality and validity of the claim. If the relevant documents are not attached to the application, the liquidator shall require the creditor to submit these documents within 5 (five) working days. If during this period the documents are not submitted for various reasons (lost, stolen or destroyed for other reasons), the liquidator shall consider the application based on the information existing in the bank.
12.4. The liquidator shall, after reviewing the creditors' applications, inform them in writing of the outcome. This information includes:
12.4.1. full name and postal details of the creditor and liquidator, as well as the date and number of the respondent application;
12.4.2. if the claim in the application is fully or partially approved - the approved amount and the payment date;
12.4.3. in case of full or partial rejection of the claim in the application - the reasons of rejection;
12.4.4. list of the documents accompanying the information.
12.5. In case of rejection of the creditors' claims, the documents attached to the application shall be returned to the applicant.
12.6. An interim liquidation balance shall be drawn up no later than 30 (thirty) days after the deadline for acceptance of claims, taking into account the results of the inventory of assets and liabilities.
12.7. The interim liquidation balance of a bank having a subordinated structure shall be compiled taking into account the interim liquidation balance of those units.
12.8. If the creditor is also a borrower of the bank, then when considering the claim (application), the liquidator (liquidators) shall consider the issue of offsetting mutual claims in accordance with the submitted documents before the approval of the interim liquidation balance and include the result in the interim liquidation balance.

13. Secured claims

13.1. Creditors of the liquidated bank shall be compensated by the liquidator of the bank in the following order in accordance with the Civil Code of the Republic of Azerbaijan from the date of approval by the court of the interim liquidation balance:
13.1.1. claims of creditors for obligations secured by a pledge (mortgage) of the bank's property;
13.1.2. capitalized promissory payments to which the bank is liable to individuals related to injuries to life or health;
13.1.3. claims for the payment of severance pay and remuneration of persons working under an employment contract, payment of remuneration under copyright agreements;
13.1.4. mandatory payments to the budget and debts on compulsory state social insurance to the extra-budgetary state fund;
13.1.5. settlements with other creditors.
13.2. The claims of each queve shall be made after the claims of the previous queve are fully met. When the turn is approaching, the creditor's claim may be secured with his /her consent by transferring the settlement in cash and / or in kind.
13.3. In case of refusal to satisfy the creditor's claims, the creditor shall be notified in writing.
13.4. In case of refusal to satisfy the creditor's claim or refusal to consider it, the creditor may apply to the court with a claim against the liquidator until the liquidation balance of the bank is approved.
13.5. Claims made by the creditor after the expiration of the period determined by the liquidator of the bank shall be paid from the remaining property of the bank after the timely payment of the claims.
13.6. A claim that has not been raised by the creditor within the period specified by the liquidator of the bank, but which payment is required under a court decision, shall be executed in the order of priority for settlement with the creditor.
13.7. The following circumstances give grounds to consider the creditor's claim as paid:
13.7.1. if the creditor does not apply to the court with a claim on the rejected claims until the liquidation balance of the bank is approved;
13.7.2. in case of refusal to pay the creditor's claim by court decision.
13.8. In order to increase the value of the bank for its creditors, the liquidator may apply to the National Bank for the sale of the bank or the sale of certain assets and liabilities.
13.9. In case of mutual liabilities of the creditor and the liquidated bank, offsetting of claims is allowed in the following cases:
13.9.1. if there are expired mutual liabilities;
13.9.2. when the term of performance of one of the liabilities has not yet expired, but the party entitled to this claim is in favor of offsetting.
13.10. Cases of offsetting shall be determined by the Civil Code of the Azerbaijan Republic
13.11. During offsetting the followings shall be observed:
13.11.1. liabilities shall have no claims;
13.11.2. offsetting shall be agreed in writing;
13.11.3. liabilities in different currencies shall be offset at the official exchange rate of the National Bank on the same day.
13.12. As an exception, the debtor of the bank may be allowed to repay the debt through liquid property. In this case, there shall be an act on the valuation of the property to be transferred to the bank by independent appraisers on that date, and the value of the property shall not be less than the total value of the debt.
13.13. If the liquidator's obligations cannot be fulfilled due to the reasons dependent on creditors (inability to contact the creditor or his absence from the bank), the liquidator shall transfer the unpaid amount to the notary's deposit account in accordance with the legislation upon completion of settlements on the relevant group of liabilities.
13.14. Unless otherwise provided by the bank's charter, after completion of settlements with its creditors, the liquidator shall distribute the remaining property among the bank's shareholders in the manner prescribed by law, provided that the shareholders express their consent. Whether or not an agreement is reached, the liquidator shall draw up a liquidation balance and submit it to the court for approval upon completion of settlements with the creditors of the liquidated bank.

14. Cooperation of the liquidator with the National Bank

14.1. During the period of forced liquidation of the bank, the liquidator shall operate in close cooperation with the National Bank. The liquidator shall report on its activities to the National Bank in the form and terms determined by it, as well as submit the documents and information required by the National Bank.
14.2. If the liquidator discovers the existence of any of the following during the implementation of forced liquidation measures, it shall apply to the National Bank with a reasoned request to initiate bankruptcy proceedings against the bank:
14.2.1. if the amount of the bank's total capital is less than 25 (twenty five) percent of the minimum amount of total capital established for banks or the coefficient of adequacy of total capital is less than 3 percent;
14.2.2. if the bank is unable to fulfill its financial obligations when they are due;
14.2.3. if the bank is unable to pay its overdue financial liabilities on creditors' claims.

15. Relationship of the liquidator with the judicial authorities

15.1. In the process of forced liquidation of the liquidating bank, the liquidator shall cooperate with the judicial authorities, represent the bank without a power of attorney in court proceedings, and carry out the required procedural actions in accordance with these Guidelines.
15.2. The principles of working with judicial bodies, as well as cases of applying to the court that are not provided for by the rules of applying to judicial authorities and these Guidelines shall be regulated by the legislation of the Azerbaijan Republic.

16. Completion of forced liquidation procedure

16.1. The liquidator shall be dismissed by a court decision upon completion of the liquidation of the bank and submission of the relevant report to the court. The bank's accounting and other documents shall be handed over to the bank's shareholders or other governing bodies, as well as to the State Archive in accordance with the court decision, as well as the legislation.
16.2. The decision of the court on the completion of the procedure of forced liquidation of the bank shall be sent to the state registration authority of legal entities.

17. Closing provisions

17.1. Issues not regulated by these Guidelines shall be resolved in accordance with the legislation of the Republic of Azerbaijan.
17.2. These Guidelines shall be effective from the date of state registration.