A credit institution typically possesses funds belonging to depositors. However, there may be situations when the institution also holds property that belongs to third parties. This article aims to examine the concept of third-party property in the case of a credit institution’s insolvency.
Pursuant to the Credit Institutions Law, the list of properties of a credit institution shall include deposits and interest on deposits but shall not include other properties belonging to third parties that are held by the credit institution.
First, it is necessary to define the term “holding.” “Holding” implies having actual power over an asset that is owned by another.
The Credit Institutions Law does not provide a legal definition of the term “third party.” It does stipulate that a “creditor” is a person bound by a contract that has a claim against a credit institution. A third party also has a claim against a credit institution, so that characteristic is not decisive in determining whether a person is a third party or not.
Furthermore, in accordance with the Credit Institutions Law, a “customer” is a person to whom a credit institution provides financial services. Consequently, we can presume that a third party is a person to whom the credit institution does not provide financial services.
The Senate of the Republic of Latvia in the decision of March 29, 2019, in case No. SPC–3/2019 has indicated that: “In order for the balance of funds in the client’s account to be included in the credit institution’s assets [..] it is insufficient to establish the account balance on the day of [the] insolvency application. It is also necessary to make sure that the funds are not the property of a third party, especially in a situation where the customer of a credit institution indicates in the application to the administrator the circumstances due to which it considers that the funds should be recognized as the property of a third party.”
Consequently, the credit institution is obliged to make sure the funds are not considered to be the property of a third party.
The Financial and Capital Market Commission (FCMC) considers that the concept of a “property owned by third parties and held by the credit institution” is to be interpreted narrowly. As such, the provision in question does not provide for the inclusion of funds that are in the possession of the credit institution and not in holding and are reflected in the balance sheet of the credit institution – i.e., the credit institution is entitled to use them.
The FCMC explains that property owned by third parties and held by a credit institution is considered to be funds that, in accordance with the concluded agreement, are kept separately by credit institutions from other property of the credit institution.
This raises one question: if a credit institution has terminated its business relationship with a person but the funds remain with the credit institution, should that person be regarded as a “creditor” or a “third party”? To answer this, it is essential to examine and clarify the legal and practical implications that result from a credit institution’s termination of its business relationship with a client.
According to the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing of Latvia, a credit institution has the right to terminate business relations with a client on its own initiative by closing the relevant client accounts and transferring the funds to the same person’s account in another credit institution. Thus, upon termination of the business relationship, the credit institution is no longer entitled to provide any financial services to the person, and the credit institution is obliged by law to transfer the funds.
It can be concluded that in cases where a credit institution has terminated its business relationship with an individual and subsequently becomes insolvent, the funds belonging to the individual are considered assets of a third party in the possession of the credit institution. Therefore, these funds must be excluded from the institution’s property used to satisfy creditor claims.
By Armands Rasa, Partner, and Anete Boze, Attorney, Widen
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.