Bail-in Is the Responsibility of Member States

Commission approval of State aid to bail-out a bank does not give rise to right for compensation for creditors who are bailed-in.

Introduction

Investors in banks who lost their money have sought compensation both at EU and national level. So far, claims for damages at EU level have been unsuccessful. In some instances, the cases before EU and national courts have been closely linked. Investors have argued that the outcome at EU level could impact on the outcome at national level. One such case was the subject of the judgment of the General Court of 19 December 2019, T‑812/14 RENV, BPC Lux 2 Sàrl and others, v European Commission.[1]

BPC Lux 2 Sàrl and others sought the annulment of Commission decision SA.39250 that had authorised Portuguese aid to Banco Espírito Santo [BES] that had been granted in the context of the resolution of BES.

BPC Lux 2 Sàrl and the other applicants, are financial service companies. They were subordinated creditors of the now defunct BES, holding lower tier 2 bonds. In July 2014, BES disclosed losses of EUR 3.6 billion which resulted in an almost immediate decrease of its deposits by 17%. Then the Portuguese authorities decided to put BES into resolution and to create a temporary “bridge bank” to hold its essential functions. This bridge bank was called Novo Banco. The non-performing assets and liabilities were taken over by BES which in effect became a “bad bank”. In other words, BPC Lux 2 Sàrl and the other applicants were bailed-in.

The Portuguese Resolution Fund provided the bridge bank with initial capital of EUR 4.9 billion. In August 2014, Portugal notified to the European Commission the resolution of BES and the creation and capitalisation of the bridge bank through the Fund.

The Commission found, in decision in SA.39250, that the notified measure constituted State aid and approved it for being compatible with the internal market. In December 2014, the applicants appealed against that Commission decision.

On 19 July 2017, the General Court ordered the appeal to be dismissed as inadmissible [case T-812/14, BPC Lux 2 Sàrl and others v European Commission] on the grounds that the applicants did not have legal standing in bringing any action against the Commission decision.

BPC Lux 2 Sàrl and the other companies argued that annulment of the Commission decision would increase their chances of successfully claiming damages for having been bailed-in.

A natural or legal person can bring action for annulment against a decision of an EU institution if it can show that that decision affects it directly and individually [Article 263 TFEU]. The problem for anyone wanting to appeal against a Commission decision on State aid is that such decisions are addressed to Member States. Nonetheless, when the Commission decision prohibits individual aid or orders the recovery of incompatible aid from an identified beneficiary, then it is much easier to prove that the decision has a direct and individual effect. In its judgment of July 2017, the General Court considered that annulment of Commission decision SA.39250 would not reverse the position of the Portuguese authorities to resolve BES and split it into a “good” and a “bad” bank. Therefore, the Commission decision did not really affect BPC Lux 2 Sàrl and the other applicants.

A similar conclusion was reached by the General Court in case T‑321/13, Adorisio and others v European Commission, concerning State aid granted to the Dutch bank SNS. In that case too the applicants argued that their position as creditors who lost money would benefit from annulment of the Commission decision authorising the aid, including the bail-in of creditors. The General Court rejected that argument because the Dutch authorities would not reverse their decision to bail-out the bank and bail-in the creditors. The Court also pointed out that creditors’ claims for damages against Member States were a matter for national courts, not EU courts.

In the present case, after the negative judgment of the General Court, BPC Lux 2 Sàrl and the other companies lodged an appeal before the Court of Justice. On 7 November 2018, the Court of Justice, in case C‑544/17 P, BPC Lux 2 Sàrl and others v European Commission, annulled the order of the General Court and referred the case back to the General Court. The judgment of the Court of Justice was analysed on the StateAidHub on 27 November 2018 [view http://stateaidhub.eu/blogs/stateaiduncovered/post/9367].

The initial error of the General Court

In its December 2019 judgment, the General Court, first, referred to the reason for the annulment of its initial order. “(41) As a preliminary point, it must be borne in mind that the Court of Justice, …, upheld the appeal lodged by the applicants and set aside the initial order. The Court of Justice considered that the General Court had erred in law in holding that the applicants’ action was inadmissible by reason of the absence of a legal interest in bringing proceedings.”

Therefore, the task that the General Court set for itself was to determine whether the applicants were “parties concerned” within the meaning of Article 108(2) TFEU or an “interested party” within the meaning of Article 1(h) of the then procedural Regulation 659/1999. In other words, could the holders of BES bonds who were bailed-in be considered as “party concerned” or “interested party”?

Party concerned or interested party

In answering that question, the General Court recalled as a preliminary point that “(52) the Commission found, without initiating the formal investigation procedure provided for in Article 108(2) TFEU, that the notified measure, taking the form of an injection of capital into the Bridge Bank, constituted State aid that was compatible with the internal market within the meaning of Article 107(3)(b) TFEU. Thus, the contested decision is addressed solely to the Portuguese Republic. The procedure for reviewing State aid is, in view of its general scheme, a procedure initiated in respect of the Member State responsible for granting the aid”.

“(53) It must therefore be considered to what extent the applicants have standing to bring proceedings against a decision that is not addressed to them and that they seek to have annulled.”

Then the General Court referred to the right of appeal conferred by the Treaty to any person who is directly and individually concerned by a decision of an EU institution. “(54) Under the fourth paragraph of Article 263 TFEU, any natural or legal person may, under the conditions laid down in the first and second paragraphs of that article, institute proceedings against an act addressed to that person or which is of direct and individual concern to them, and against a regulatory act which is of direct concern to them and does not entail implementing measures.”

“(55) In the first place, the applicants claim that they have standing to bring proceedings as an ‘interested party’ within the meaning of Article 108(2) TFEU and Article 1(h) of Regulation No 659/1999.”

“(56) Within the meaning of Article 108(2) TFEU and Article 1(h) of Regulation No 659/1999, ‘interested parties’ are inter alia any person, undertaking or association of undertakings whose interests might be affected by the granting of aid, that is to say, in particular competing undertakings of the beneficiary of that aid”.

“(57) It is common ground that the applicants are not competing undertakings of the beneficiary of the aid at issue.”

“(58) However, …, the definition of ‘interested party’ is not limited solely to competitors of the beneficiary of the aid. That definition includes any person, undertaking or association of undertakings whose interests might be affected by the granting of aid”.

“(59) The applicants may therefore be regarded as ‘parties concerned’ within the meaning of Article 108(2) TFEU provided that they demonstrate that their interests have been adversely affected by the contested decision”.

“(60) However, to recognise any person having a purely general or indirect interest with regard to the State measures to which objection is taken as having the status of a ‘party concerned’ would lead to an interpretation which is clearly incompatible with the provisions of Article 108(2) TFEU and, in actions for annulment against decisions taken on the basis of Article 108(3) TFEU, it would have the effect of depriving the concept of a ‘person individually concerned’ for the purposes of the fourth paragraph of Article 263 TFEU of all legal significance, by transforming that remedy into a sort of actio popularis”.

“(61) The applicants submit, in that regard, that they were adversely affected by the contested decision as creditors of BES. In particular, they claim that the direct effect of the contested decision is that they have lost nearly the entire value of their bonds and that they have been deprived of the opportunity to contribute to the restructuring of BES, by participating in its recapitalisation through the contribution of private capital, or to benefit from its orderly winding up.”

“(62) As a preliminary point, it must be recalled that, by the contested decision, the Commission found that the measure notified by the Portuguese authorities, consisting in a capital injection of EUR 4 899 million by the Fund into the Bridge Bank, constituted State aid that was compatible with the internal market in accordance with Article 107(3)(b) TFEU, taking into account the commitments given by those authorities.”

“(63) As regards, first, the decrease in value of the bonds, it must be noted, as was held by the Court of Justice, that the decline in the value of the bonds held by the applicants is attributable to the decision by the Portuguese authorities to put BES into resolution”.

With respect to attribution of responsibility, it is worth noting that, in its judgment of November 2018, the Court of Justice observed in addition that “if the contested decision were to be annulled, that would not have the effect of obliging the Portuguese Republic to reverse its decision to create a Bridge Bank and not to include in the assets of that bank bonds of the kind held by the appellants.” [paragraph 54 of the judgment of the Court of Justice] Two comments are in order here. First, BES bonds held by third parties are counted as liabilities, not assets. The applicants wanted to “participate” in the capitalisation of Novo Banco as creditors, not debtors. Second, it was impossible, of course, for the Court of Justice to know with such certainty what the Portuguese authorities would have done in an alternative scenario. But if the Portuguese government had not excluded those bonds, they would have to lost more of their value simply because the asset side of BES had shrunk as a result of the loss of value of its non-performing loans.

“(64) The fact that the bonds held by the applicants have remained in the Bad Bank is attributable to the decision by the Portuguese authorities to put BES into resolution, which involved the creation of a Bridge Bank to which the assets of subordinated debt holders could not be transferred”.

“(65) In those circumstances, the effects, alleged by the applicants, of the contested decision on the value of their bonds, assuming that those effects have been established, are only of an indirect nature such that the applicants cannot benefit from the status of a ‘party concerned’ within the meaning of Article 108(2) TFEU.”

It is important to note at this point that in paragraph 55 of its judgment, the Court of Justice referred to the “the inextricable links between the contested decision and the decision to put BES into resolution”. Although the General Court did not examine the nature and implications of those “inextricable links”, it seems that its conclusion that the applicants were not a “party concerned” was based on the fact that regardless of whether the Commission would approve or not the aid, the applicants would have been bailed-in anyway. Although I think this is the only reasonable conclusion, nevertheless, the General Court should have developed its reasoning in more detail. If the Commission would not have approved the aid, say on the grounds that it was excessive, Portugal would simply have to bail-in more creditors or bail-in subordinate creditors to a greater extent. Once BES lost part of its assets, its liabilities had to be reduced too. And, there was no way the Commission would object to bail-in of creditors, given that burden-sharing was and is a fundamental condition for the compatibility of the aid, precisely because without reduction of its liabilities, a near failing bank cannot return to viability. Therefore, the decisive issue here is not who decides on the bail-in of creditors [after all, State aid rules require Member States to bail-in creditors], but whether bail-in could have been avoided. The answer is no. Interestingly, the 2013 banking guidelines allow aid without burden sharing when burden sharing would be excessive or would threaten financial stability. The latter possibility has not been used so far, while the former possibility has been used in just a couple of cases.

“(66) As regards, second, the loss of the opportunity to contribute to the restructuring of BES by participating in its recapitalisation or to benefit from its orderly winding up, it must be noted that the alleged loss of opportunity, assuming that it has been established, is also attributable to the decision by the Portuguese authorities not to have recourse to private capital to restructure BES and to put the latter into resolution, which involved the creation of a Bridge Bank to which the sound assets have been transferred.”

“(67) In the light of the foregoing, it must be held that the contested decision, in any event, affected the applicants’ interests only indirectly so that they cannot benefit from the status of a party ‘concerned’ within the meaning of Article 108(2) TFEU.”

“(68) In the second place, the applicants claim that they have standing to bring proceedings as a party directly and individually concerned”.

“(69) However, as is apparent from paragraphs 63 to 66 above, the effects, alleged by the applicants, of the contested decision on their situation are attributable to the decision of the Portuguese authorities to put BES into resolution.”

“(70) It should, moreover, be noted that the applicants refer only to the economic effects of the contested decision on their situation without providing evidence capable of showing that their legal situation was directly affected by the decision.”

“(71) The mere fact that a measure may exercise an influence on an applicant’s substantive position cannot suffice to allow it to be regarded as directly concerned by the measure”.

“(72) In the light of the foregoing, it must be held that the contested decision did not have any direct effects on the legal situation of the applicants.”

“(73) Given that the applicants have failed to prove that they are directly concerned by the contested decision, it must be held that they do not have standing to bring proceedings for annulment of that decision without it being necessary to rule on whether the applicants are individually concerned or on whether the contested decision constitutes a regulatory act which does not entail implementing measures, as the concept of direct concern is subject to an identical interpretation in the context of the application of the fourth paragraph of Article 263 TFEU”.

On the basis of the above reasoning, the General Court dismissed the appeal of BPC Lux 2 Sàrl and the other companies.

————————————————

[1] The full text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=221775&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=2091008.

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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