# Liquidator appointed to Berehaven Credit Union



## Brendan Burgess (23 Jul 2014)

http://www.irishtimes.com/business/...-order-to-wind-up-cork-credit-union-1.1875751



> Paul Gallagher SC , for the Central Bank, had earlier  told the judge an orderly orderly wind up of Berehaven Credit Union was  “in the the public interest”. Counsel said the Central Bank was also of  the opinion  the credit union “may be unable to to meet its obligations  to creditors”.
> 
> 
> Two reviews, conducted in 2010 and  earlier this year, identified corporate governance failures  which had  not been rectified, the court was told.
> ...


Is this the first time a liquidator has been appointed to an active Credit Union?  ptsb took over the assets and liabilities of Newbridge, before a liquidator was appointed. 

It's a bid odd that the ILCU allowed a member to collapse? However, it sounds as if they had no option, if the board was resisting making any changes.


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## Brendan Burgess (23 Jul 2014)

There seems to have been some shenanigans here ok

http://www.thepropertypin.com/viewtopic.php?f=19&t=58896

It seems that the ILCU may have already put €2.3m into the CU.

http://www.independent.ie/irish-new...00-loans-breach-law-says-report-29188713.html


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## Sunny (23 Jul 2014)

The other concerning part is that questions were raised in 2010 and yet the next review doesn't seem to have been done for 4 years and then suddenly it is liquidated in a month? I am sure it's not as straight forward as that but I would like to hear the full story.


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## Elnino (23 Jul 2014)

I am not allowed to post a link but the Resolution Report is on the Central Bank website and is quite detailed.

The Central Bank are claiming that it was cheaper to liquidate the Credit Union than to pay another Credit Union the €1.3m required to recapitalise it in order to take it over. Unlike Newbridge this was an ILCU Credit Union so it will be interesting to hear what they have to say about it.


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## dereko1969 (23 Jul 2014)

[broken link removed]

Has a link to the resolution report (downloadable).


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## Brendan Burgess (23 Jul 2014)

Page 2: As at 30 June 2014, based upon the Prudential Return submitted by BCU to the Registry of Credit Unions (“RCU”), BCU had 3,500 members, total savings of c. €11.3 million  and  total  assets  of  €11.4  million  of which  gross  loans  (pre-provisions) comprised  c. €1.7 million. 


So it has loans of only 1.7m. (Was €11.5m at 30 SEpt 2009) 

What are the other €10m of assets? 




> [FONT=&quot]28[/FONT][FONT=&quot].          Those reviews have highlighted that the BCU Board has failed to maintain adequate internal  controls  and  governance.    The  common  issues  and  concerns  identified  by[/FONT]
> [FONT=&quot]independent third parties are as follows:[/FONT]
> 
> _[FONT=&quot]L[/FONT]__[FONT=&quot]ending practices[/FONT]_[FONT=&quot][/FONT]
> ...


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## Brendan Burgess (23 Jul 2014)

This is particularly worrying as it suggests a structural problem for all credit unions: 



> The  decline  in  its  financial  performance  in  particular  reflects  the  fact  that  BCU’s  asset  mix has evolved from being heavily loan biased historically to being cash and investment biased more  recently.  Given  credit  unions  are  heavily  dependent  on  loans  as  income  generating assets (with cash and investments yielding low returns), BCU’s ability to generate sufficient surpluses  to  grow  its  income  and  cover  its  costs  is  highly  constrained.  The  decline  in  its income  generating  ability  can  only  be  addressed  by  growing  its  loan  portfolio  again  on  a basis  that  is  profitable.  In  the  current  climate  with  low  credit  demand  it  is  questionable whether  this  is  feasible,  and  BCU’s  recent  track  record  in  respect  of  credit  performance would question its capacity to do so.  Therefore, it is unlikely that BCU will be able to address its  current  financial  difficulties  by  trading  its  way  back  to  a  solvent  position  and  further capital would be required if the loan portfolio is to grow and there is no obvious source for that capital.


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## Brendan Burgess (23 Jul 2014)

Point 67 - there are no depositors over €100,000



> Having reviewed a savings file for BCU dated 31 March  2014,  it  would  appear  there  are  no  deposits  which  are  incapable  of  being  paid  out under the DGS.  If any BCU depositors are deemed to be ineligible under the DGS, they will rank as general creditors of BCU in liquidation. Whether or not there are depositors that are ineligible will be determined following a formal invocation of the DGS in accordance with the DGS Regulations.


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## Brendan Burgess (23 Jul 2014)

The fees for the liquidation will be €400k


73.3   total assumed liquidation expenses (including liquidator fees, staff redundancy costs, legal  costs,  ancillary  costs  (travel  and  accommodation  etc.)  and  a  liquidation contingency) are €400,000.


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## Brendan Burgess (23 Jul 2014)

> 76.  As  at  30  June  2014,  in  its  prudential  return  BCU  had  total  gross  loans  of  €1.7  million. The value of BCU’s loan book, after attached shares and the current stock of bad debt provisions were subtracted was €0.2 million. This amount is a proxy for the expected amount of “new money”  that  can  be  recovered  (or  additional  value  that  can  be  realised)  on  the  BCU  loan book  from  borrowers,  excluding  recoveries  of  attached  shares.  In  percentage  terms,  this represents 13% of BCU’s gross loans outstanding.




If the valuation of the €1.7m loan accounts after provisions is only €200k , why do they not just transfer them to another credit union in the area and pay the acquiring Credit Union 10% of any cash recovered?


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## Brendan Burgess (23 Jul 2014)

All lenders will pay the cost of this.

92
A  further  important  factor  in  relation  to  the  cost  comparison  between  transfer  and liquidation relates to the question of who bears the costs. The DGS would be invoked in the event of a liquidation. Each credit institution covered by the DGS is required to maintain a 
balance  in  the  Deposit  Protection  Account  (the  “DPA”)  equivalent  to  0.2%  of  their  total deposits in order to fund the DGS. When compensation payments are made by the Bank out of  the  DPA,  the  amount  paid  is  pro-rated  against  the  holding  of  each  credit  institution.  At year end each credit institution is required to replenish its holding in the DPA to the required level.  In this manner, the cost of insuring the depositors of a liquidated credit institution is borne in full by the credit institutions sector itself.


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## Elnino (23 Jul 2014)

Brendan Burgess said:


> Page 2: As at 30 June 2014, based upon the Prudential Return submitted by BCU to the Registry of Credit Unions (“RCU”), BCU had 3,500 members, total savings of c. €11.3 million  and  total  assets  of  €11.4  million  of which  gross  loans  (pre-provisions) comprised  c. €1.7 million.
> 
> 
> So it has loans of only 1.7m. (Was €11.5m at 30 SEpt 2009)
> ...





> Point 22
> 
> Furthermore,  due  to  a contraction  in domestic property  prices, BCU booked  impairments  on  its  fixed  assets
> resulting in a current carrying value of €635K.




Presumably the remainder of the assets is investments which should be fairly liquid. The sale of the premises and investments should pay for a large part of the deposit guarantee scheme payout of €11.3m and the liquidators fees of 400k.


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## Brendan Burgess (23 Jul 2014)

I am surprised that we are not given any details of the investments.  They might be long term investment products.  

It would be hard to sell an office investment property in Berehaven!


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## Elnino (23 Jul 2014)

Brendan Burgess said:


> If the valuation of the €1.7m loan accounts after provisions is only €200k , why do they not just transfer them to another credit union in the area and pay the acquiring Credit Union 10% of any cash recovered?



The acquiring Credit Union would probably have to take over all the assets and liabilities of BCU including its share accounts, premises and investments. The acquiring Credit Union would have to increase their own statutory reserve by 10% of the assets acquired plus they would want to be compensated for the deficit on the BCU balance sheet. Taking all that into account they probably would have looked for compensation of something around €2m which the CBI has calculated is higher than the deficit on liquidation. 

Also as you said above Brendan the deficit on the liquidation will actually be paid for by other Credit Unions and the Banks through the DGS whereas any compensation payable to an acquiring Credit Union would have to be funded by the Central Bank / Department of Finance. Although any such cost would probably be recouped from other Credit Unions at a later stage through an industry funding levy.


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## WizardDr (23 Jul 2014)

The first thing that needs to said is that the 10% Regulatory Reserve Ratio is BOGUS.

1. It is against ALL assests so that if you had 100% Government Bonds it would still require 10% reserve.
2. It does not distinguish between risky and less risky assets.
3. It is exclusively drawn from Retained Earnings.
4. No other form of equity is seemingly encouraged or facilitated.
5. The concept of shares should be divided between equity and savings i.e. the ownership should change to those that are prepared to put up permanent risk capital .
6. The central bank would e exposed if there was a judicial review focused on:
- the regulatory reserve ratio;
- the restrictions on lending because of the mindless focus on a bogus ratio.


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## Sunny (24 Jul 2014)

WizardDr said:


> The first thing that needs to said is that the 10% Regulatory Reserve Ratio is BOGUS.
> 
> 1. It is against ALL assests so that if you had 100% Government Bonds it would still require 10% reserve.
> 2. It does not distinguish between risky and less risky assets.
> ...


 

What's bogus about it? There is nothing to stop credit unions that are sophisticated enough to move to a risk based regulatory reserve ratio.


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## Bronte (24 Jul 2014)

Brendan Burgess said:


> I am surprised that we are not given any details of the investments. They might be long term investment products.


 
You've analysed credit unions before and it's always interesting even if I don't fully understand the structures.

But for this one, do you agree or not that liquidation was the correct course of action?  (f you have the time)


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## Brendan Burgess (24 Jul 2014)

Hi Bronte

It's a bit hard to follow the report. 

It seems that the guys in charge should not have been in charge  There was no real way of forcing them out other than liquidation. 

As well as that, they have the following huge problem: They have €11.6 m in shares but only €1.6m in loans.  There is simply no demand for loans in the economy.

The directors should have accepted that the CU was unsustainable, but probably solvent. They should have sought an orderly wind down by telling their customers to withdraw 90% of their savings. 

If everyone took out all their savings, they would be short around €1.7m in cash until the loans get gradually repaid. The ILCU should have lent them this money. They would probably get most of it back and they would prevent the huge damage this has done to confidence in the credit unions generally.


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## demoivre (24 Jul 2014)

Central Bank Q&A for [broken link removed] CU members.


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## danash (24 Jul 2014)

*What is the real story here ?*

Why is nobody ( Morning Ireland etc ) referencing the situation with the former inspector, Manageress and Treasurer of the CU having joint loans on foreign property ?

_off topic content removed - please do not take this thread off topic by general conspiracy theories about the Central Bank and the Credit Union movement.  Feel free to discuss them in a separate thread. Thanks - Brendan _


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## Bronte (24 Jul 2014)

danash said:


> Why is nobody ( Morning Ireland etc ) referencing the situation with the former inspector, Manageress and Treasurer of the CU having joint loans on foreign property ?


 
The Independant article from 2013 refers to the fact that some of the actions were reported to the Gardai.  I wonder what the Gardai are doing, presumably investigating with a view to prosecuting.  Or maybe doing nothing. 

Maybe the Independant newspaper or Daily Mail will follow up on this.


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## Brendan Burgess (24 Jul 2014)

danash said:


> Why is nobody ( Morning Ireland etc ) referencing the situation with the former inspector, Manageress and Treasurer of the CU having joint loans on foreign property ?


.

Charlie Weston covers it in today's Indo 

Documents  seen by this newspaper show he obtained loans totalling €350,000 to buy  foreign properties from Berehaven, which he had been charged with  monitoring from 2001.
A probe into the Co Cork credit union by accountants [broken link removed]  points out that the loans were not being repaid. He took out the loans  jointly in the name of other members of Berehaven Credit Union, the KPMG  documents state. Some of these people may not have been aware their  names were on loans.
 - See more at:  http://www.independent.ie/irish-new...eached-law-30455945.html#sthash.64i7lqrV.dpuf


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## WizardDr (6 Aug 2014)

What is interesting from recent case law is what exactly we mean by 'insolvent'.

1st - your assets exceed your liabilities - but because your assets are illiquid - you are unable to pay your bills - then you may easily be insolvent.

Conversely - your liabilities exceed your assets - but you have large liquid asets - such as €10m in liquid investment - you might certainly be solvent.

In the case here - the only reason there would have been a run on shares so as to put a surge in demand to repay - er the Central Bank creates the panic.

I think they have mislead the High Court and have used a sledge hammer approach.

The matter about returns on investments is a different matter.

Given that this Nation pays away a lot of money by way of interest to anonymous bond holders in other countries - why then should the Credit Unions not be facilitated with the easy ability to buy bonds and lower the outflow out of the country?

Why indeed. Apparently its not in the Central Bank brief to propose solutions.

Indeed.


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## Brendan Burgess (7 Aug 2014)

Hi Wizard

Insolvency is different for a trading company than for a deposit taker. 

Berehaven's members had €10m in savings.  It probably did not have enough assets to pay all these savers if they wanted to withdraw the money.

So the CB was absolutely correct to shut down Berehaven to protect the savers ( and the taxpayer who effectively guarantees them) 

However, the liquidation was the wrong approach. The board of Berehaven should have understood this 5 years ago and should have repaid all their members' savings under their own steam. Then there would have been no need for the expense or disruption of a liquidation. 

But the CUs refuse to take any advice or direction from anyone.  So maybe the CB had no option other than appointing a liquidator.


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