Example (i)
• Suppose that the following sequence of events happened:
Date Events
1 Jan 02 Mr A made a 6-mth deposit of $10,000 with Bank X at 12%pa 1 Feb 02 Payout by the DIS was triggered
14 Feb 02 A provisional liquidator was appointed 1 Mar 02 Payments by the DIS were made.
1 May 02 A winding-up order was issued
• In this scenario, payout by the DIS was triggered on 1 Feb 02. Since the Board expected that a provisional liquidator would shortly be appointed by the court, it therefore waited for the appointment of the provisional liquidator before making payments to eligible depositors.
• In respect of Mr A, the payment by the DIS would cover the principal amount of the 6-month deposit (i.e., $10,000) plus the interest accrued between 1 Jan 02 and 14 Feb 02, which would be $150 ($10,000 x 12% x 1.5/12). The aggregate amount of compensation payment to Mr A would thus be $10,150. The DIS would claim the same amount from the liquidator.
Example (ii)
• Now suppose that the sequence of events was slightly changed as follows:
Date Events
1 Jan 02 Mr A made a 6-mth deposit of $10,000 with Bank X at 12%pa 1 Feb 02 Payout by the DIS was triggered
15 Feb 02 Payments by the DIS were made 1 May 02 A provisional liquidator was appointed 1 Jul 02 A winding-up order was issued
• In this scenario, it was uncertain whether a provisional liquidator would be appointed by the court when the DIS payout was triggered. In order to restore depositors’
confidence in the banking system, the Board decided to make payments to eligible depositors on 15 Feb 02.
• In respect of Mr A, payment by the DIS would cover the interest accrued between 1 Jan 02 and 1 Feb 02, which would be $100 ($10,000 x 12% x 1/12). The aggregate amount of compensation to Mr A would therefore be $10,100. (Note that although this is less than what the depositor would receive if interest was accrued until 1 May 2002, he is compensated by receiving his money earlier than would be the case in a liquidation.)
• Since Mr A had assigned all his rights in respect of the 6-month deposit to the DIS, any interest accrued for the period from 1 Feb 02 to 1 May 02 would be for the account of the DIS. Therefore, the amount that the DIS would be entitled to claim in the liquidation would be $10,100 plus the interest accrued for the period from 1 Feb 02 to 1 May 02, which would be $300 ($10,000 x 12% x 3/12). This would add up to a total of $10,400.
Example (iii)
• Suppose that Mr B had more than one insurable deposit, each bearing a different interest rate, and the aggregate amount of such deposits exceeded $100,000:
Date Events
1 Feb 02 Mr B made a saving deposit of $120,000 with Bank X at 2%pa.
He also had a balance of $80,000 in his current account which did not bear any interest
1 Feb 02 Payout by the DIS was triggered 15 Feb 02 Payments by the DIS were made 1 May 02 A provisional liquidator was appointed 1 Jul 02 A winding-up order was issued
• In this scenario, payments by the DIS were made before the appointment of the provisional liquidator.
• As of 1 Feb 02, the aggregate amount of insurable deposits in respect of Mr B was
$200,000 (C/A: $80,000 and S/A: $120,000). Since this exceeds the coverage limit, a payment of $100,000 would be made to Mr B on 15 Feb 02.
• As mentioned in the consultation paper, it would be necessary to apportion the compensation payment by the DIS to the two deposit accounts of Mr B. Otherwise it would be unclear how the respective entitlements to accrued interest of the DIS and Mr B should be calculated.
• If a pro-rata approach as proposed in the consultation paper were adopted, then the respective positions of the DIS and Mr B as of 1 Feb 02 would be:
DIS - S/A: $60,000 - ($100,000 * 120,000 / 200,000)
Mr B - S/A: $60,300 - ($300 being interest accrued from 1 Feb to 1 May)
C/A: $40,000 Total: $100,300
• Although the DIS had an aggregate claim of $100,300, only the first $100,000 would receive preferential treatment under the present priority claims system.
Example (iv)
• Suppose that section 227E of the Companies Ordinance had been amended so that in the event that payment was made by the DIS before the appointment of a provisional liquidator, the date on which the DIS payout was triggered would be taken to be the
“relevant date” for the purpose of that section.
• If the above amendment were made, in calculating the dividend entitlement of Mr A in Example (ii) above, the liquidator would include interest accrued only up to the date on which the DIS payout was triggered (i.e., 1 Feb 2002), rather than the date on which the provisional liquidator was appointed (i.e., 1 May 2002). The dividend that would be paid to the DIS in respect of Mr A’s deposit would therefore be $10,100 ($100 being interest accrued between 1 Jan 2002 and 1 Feb 2002), as opposed to
$10,400 in Example (ii). This would be exactly the same amount that the DIS had paid to Mr A.
• In the case of Mr B in Example (iii) above, since no interest would accrue after the DIS payout was triggered (i.e., 1 Feb 2002), it would no longer be necessary to determine how the compensation payment made by the DIS should be apportioned to Mr B’s deposit accounts. The liquidator would simply take into account the positions of the DIS and Mr B as of 1 Feb 2002 in determining their respective entitlements to dividend payments. As a result, both the DIS and Mr B would be entitled to a claim of $100,000 in the liquidation, as opposed to $100,300 in Example (iii). (Note however that only the claim of the DIS would receive preferential treatment.)
Example (v)
• Suppose that Mr C had insurable deposits denominated in different currencies with Bank X:
Mr C - HK$ deposit: $40,000
US$ deposit: $40,000 ] (amount in HK dollar GBP deposit: $40,000 ] equivalent)
Total: $120,000
• As mentioned in the consultation paper, the Board should be given the discretion to decide the order in which the compensation payments in respect of a depositor’s deposits in different currencies should be paid out subject to the principle that this would help to minimise the Board’s potential exposure to foreign exchange risk. This means that deposits in Hong Kong dollars and US dollars would normally be paid off first.
• After the compensation payment was made, the respective positions of the DIS and Mr C would become:
DIS - HK$ deposit: $40,000
US$ deposit: $40,000 GBP deposit: $20,000
Total: $100,000
Mr C - HK$ deposit: $0
US$ deposit: $0 GBP deposit: $20,000
Total: $20,000
• Interest accrual would be calculated accordingly.
Example (vi)
• Suppose that Mr C had the following insurable deposits with Bank X:
Mr C - HK$ deposit: $40,000
US$ C/A: $40,000 ] (amount in HK dollar US$ S/A: $60,000 ] equivalent)
GBP deposit: $40,000 ]
Total: $180,000
• According to the principle illustrated in Example (v) above, the Hong Kong dollar deposit ($40,000) would be paid out first, then followed by the US dollar deposits.
However, to pay out all the US$ deposits would make the aggregate amount of compensation payment to Mr C exceed the coverage limit. Therefore, the US$
deposits would be paid out on a pro-rata basis.
• After the compensation payment was made, the respective positions of the DIS and Mr C would become:
DIS - HK$ deposit: $40,000
US$ C/A: $24,000 - (40,000/100,000*60,000)
US$ S/A: $36,000 - (60,000/100,000*60,000)
Total: $100,000
Mr C - HK$ deposit: $0
US$ C/A: $16,000 - (40,000-24,000)
US$ S/A: $24,000 - (60,000-36,000)
GBP deposit: $40,000
Total: $80,000
• Interest accrual would be calculated accordingly.