A complaint against the decision of the Slovenian Central Bank to write-down equity, hybrid and subordinated instruments in failing Slovenian banks and to recapitalise these institutions had been brought before the Court of Justice before BRRD entered into force. The Court of Justice decided, in a judgment dated 16 July 2016, that the "no creditor worse off" principle provided satisfactory protection for investors' property rights and that the recapitalisation of the banks was in conformity with European company law.
Context
On 17 December 2013 the Slovenian Central Bank was confronted with five banks not having sufficient assets to satisfy their creditors and took rescue measures to save these banks. In the course of this process, the value of the shareholders' rights, hybrid instruments and subordinated debt was written down to zero as a condition precedent for the granting of State aid by the Slovenian State, in accordance with Slovenian banking law.
On 18 December 2013, the European Commission authorised the granting of this State aid, considering that the support complied with points 40 to 46 of its Communication of 10 July 2013 relating to the banking sector (OJ 2013/C 216).
A request for a preliminary ruling ensued, submitted by the Slovenian constitutional court, regarding the legality of the measures, notably with regard to Article 17 of the Charter of Fundamental Rights of the European Union (OJ 2000/C 364) and Articles 29, 34, 35 and 40 to 42 of the Second Company Law Directive (Directive 2012/30/EU of 25 October 2012, OJ 2012/L 315).
In the meantime, the BRRD (Directive 2014/59/EU, OJ 2014/L 173) has set up banking resolution instruments, more specifically the bail-in tool (see Eubelius Spotlights March 2016). The BRRD explicitly excludes the application of the above-mentioned articles of the Second Company Law Directive when the bail-in tool is used.
The Court's ruling
Protection of the property right
The Court states that "the scale of losses suffered by shareholders of distressed banks will, in any event, be the same, regardless of whether those losses are caused by a court insolvency order because no State aid is granted or by a procedure for the granting of State aid which is subject to the prerequisite of burden-sharing".
Moreover, the Court notes that the subordinated creditors would not suffer a greater reduction of their property right than they would have suffered under insolvency proceedings if no State aid had been granted (§77 and 78).
Therefore, the Court judges that the 100% write-down of the investors' rights, as a precondition for the granting of financial support by the Slovenian State, is not contrary to Article 17 of the Charter.
This principle ("no creditor worse off") constitutes, within the framework of the BRRD, one of the main protections for shareholders and holders of "eligible liabilities" (Art. 2(1)(71) BRRD).
Non-applicability of Directive 2012/30 due to exceptional circumstances
Articles 29 and 34 of Directive 2012/30 provide that, as a rule, it is the general meeting of shareholders which decides on capital increases and reductions. The Court judges that those rules "relate to the normal operation of public limited liability companies".
In its Pafidis judgment of 12 March 1996 (C-441/93), the Court had decided that legislative provisions authorising a State to impose a capital increase on a bank infringed the principles enshrined in Directive 2012/30, even if the capital increase was meant to avoid the bankruptcy of a bank.
The Court distinguishes the case at hand, judging that the Pafidis case involved a single bank, whereas in the case at hand the measures took place "to overcome a systemic financial crisis capable of adversely affecting the national financial system as a whole and the financial stability of the European Union" and that "although there is a clear public interest in ensuring throughout the European Union a strong and consistent protection of investors, that interest cannot be held to prevail in all circumstances over the public interest in ensuring the stability of the financial system".
The Court rules that the European Communication concerning the banking sector, which requires the write-down of shareholders' and other creditors' rights prior to the granting of State aid to a struggling bank, does not contravene the rules contained in Directive 2012/30.
Belgian company law, banking law and BRRD
The Banking Act of 25 April 2014, as amended by the Royal Decrees of 18 and 26 December 2015 (confirmed by an act of 27 June 2016) are silent when it comes to the link between, on the one hand, the write-down or conversion instrument (art. 250 et seq.), including the bail-in tool (art. 267/1 et seq.), and, on the other hand, the rules of the Belgian Companies Code.
Article 250 allows the resolution authority to write-down or convert relevant capital instruments into shares or other instruments of ownership of the credit institution, when the conditions for using the resolution tools are met, in particular when the write-down or conversion action is necessary to avoid the institution becoming no longer viable, or prior to any measure entailing extraordinary public financial support (art. 254 §2). Article 254 §1 states that the resolution authority may require a credit institution to issue Common Equity Tier 1 instruments to the holders of the relevant capital instruments.
In the framework of resolution powers, the system is even more intrusive, since the resolution authority is then entitled to exercise all the powers of the general meeting of shareholders (art. 276 §2, 1° and 281 §1, 1°).
In all cases, the measures are preceded by an independent valuation, which in some instances remains provisional (art. 246 and 248), and are subject to ex ante judicial control (art. 294 et seq.).
Conclusions
The Court of Justice holds that exceptional circumstances, capable of adversely affecting the financial stability of a nation or of the Union, justify departures from the corporate law principle of capital protection. Moreover, it holds that the bail-in tool, because it is subject to the "no creditor worse off" principle, does not contravene property rights, as sanctioned by the Charter of Fundamental Rights of the European Union.
This case paves the way for serene implementation of the banking resolution instruments.