Legal Standing of Investors in Failed Banks

Investors that lodge claims before national courts for damages from resolution of banks have legal standing to request annulment of Commission decisions authorising State aid to those banks.


It is now ten years since the start of the financial crisis. In these ten years, the Commission has adopted about 500 decisions dealing with State aid to banks and other financial institutions. That is a pretty high number, even though many of those decisions have been routine authorisations of prolongation of already approved schemes. Relatively few formal investigations have been opened and only a very small number of decisions (fewer than five) have been negative.

The handful of negative decisions may be interpreted as a sign of leniency on behalf of the Commission. That was probably true at the beginning of the crisis, but as the disruption of financial markets eased and as regulators and the Commission began to understand how financial markets were impacted, the Commission gradually but steadily tightened the rules on State aid to banks. The seventh and latest set of rules – the 2013 banking communication – is the toughest. Aid is allowed only after shareholders and subordinated creditors are bailed in. Not surprisingly, there have been several legal challenges by investors who suffered losses, most of which have been successfully defended by the Commission. A notable exception, in this respect, is the ING case (T-29/10, ING v Commission and C-224/12 P, Commission v ING), which, however, was not initiated by aggrieved creditors.

Despite its impressive record, recently the Commission suffered a setback in a case brought by an investor. But that is probably only the loss of a battle than a war. On 7 November 2018, the Court of Justice set aside an order of the General Court which had declared an action for annulment of a Commission decision as inadmissible. The Court of Justice sent the case back to the General Court. That was an easy victory for the investor won on procedural issues. When it appears again before the General Court it will have to prove that there was something wrong with the substantive part of the original Commission decision, a considerably harder task.

This case is one of many concerning broader issues of claims against damages. Investors who saw the value of their bank shares and bonds evaporate have sought compensation from banks and public authorities which resolved or liquidated those banks. EU courts, by and large, have rejected all claims brought against EU institutions such as the Commission and the European Central Bank. This is because EU courts have ruled that the decisions on resolutions, liquidations, bail-ins and haircuts have been taken by Member States and national authorities. A very small window was opened by the judgment in Ledra Advertising of September 2016 (C-8/15 P – C-10/15 P). The Court of Justice concluded that EU institutions, such as the Commission, could be non-contractually liable. But as it also became evident it was not easy for investors to prove non-contractual liability because there was no direct link between EU decisions and financial losses from bail-ins at national level.

In the case which is reviewed below, investors in a defunct Portuguese bank are trying a different approach. By seeking the annulment of a Commission decision authorising aid, they hope to prove in domestic legal proceedings that the measure resolving the bank was also defective. It seems that the gist of their argument in the domestic proceedings is that, although the liability for the resolution of the bank rests with the national rather than the European authorities, any error in the related Commission decision would corroborate their argument that the national decision resolving the bank was also erroneous because losses were disproportionately spread across the various classes of investors.

One may speculate whether this is an argument that is likely to succeed. Given that different classes of investors bear different risks, it is doubtful that the national court will accept that all investors should have been treated equally. In order to succeed, bailed-in investors must ultimately show that there was an alternative option that would not have resulted in the same losses. That would be equivalent to performing financial magic. The rabbit coming out of the magician’s hat would be the alternative option not chosen. It is rather unlikely that there was an alternative that was less painful to investors and creditors.


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The initial General Court order

On 19 July 2017, the General Court, in case T‑812/14, BPC Lux 2 Sàrl v European Commission, rejected an application for annulment of Commission decision SA.39250 concerning the resolution of the Portuguese Banco Espírito Santo (BES).1

BPC Lux 2 Sàrl was a subordinated creditor of BES holding lower tier 2 bonds. The largest shareholder of BES was BES Group. In 2014, the Bank of Portugal found that the Group itself was in financial trouble.

In July 2014 BES published its results and revealed heavy losses. This led to a significant fall in deposits. The Portuguese authorities decided then to put BES into resolution. The sound business activities of BES were transferred to a “bridge bank” and the non-performing assets and other liabilities (i.e. shareholders and subordinated bond holders) of BES remained within BES, which became a “bad bank”.

In August 2014 Portugal notified to the Commission its intention to grant EUR 4899 million to capitalise the bridge bank via the Portuguese Resolution Fund (RF). The Commission concluded that the notified measure constituted State aid compatible with the internal market under Article 107(3)(b) TFEU.

The General Court had to decide whether BPC Lux 2 Sàrl had legal standing and whether its application was admissible.

The General Court recalled the principle that “(24) an action for annulment brought by a natural or legal person is admissible only in so far as that person has an interest in the annulment of the contested measure.”

“(25) In order for such an interest to be present, the annulment of the measure must of itself be capable of having legal consequences or, […], the action must be liable, if successful, to procure an advantage for the party who has brought it”.

In addition, EU courts may examine “(26) whether the Commission’s finding has binding legal effects such as to affect an applicant’s interests”.

BPC Lux 2 Sàrl pointed out that its bonds were not transferred to the newly capitalised bridge bank but were left in the rump bad bank. In addition, they suffered a fall in value as a result of the decision of the Portuguese authorities to resolve BES.

The General Court deduced from these views put forth by BPC Lux 2 Sàrl that “(29) it is clear that the use of public funding for the Bridge Bank, […], is merely an extension of the Portuguese Republic’s decision to have recourse to a resolution procedure.”

“(30) Therefore, it is not the public funding of the Bridge Bank which may have had a concrete effect on the value of the applicants’ claims, but the Portuguese authorities’ decision to adopt the resolution procedure in such a way that was prejudicial to the applicants’ interests, a decision which the applicants must challenge before the national courts”.

Then the Court claimed that “(31) 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 applicants”. This was a statement that was not backed by any evidence. Would indeed Portugal go ahead with the creation of a bridge bank if it could not capitalise it and would Portugal act contrary to a Commission decision not authorising the injection of public money in the bridge bank? The prospect of such events seems remote. A more likely scenario is that the Portuguese authorities would simply liquidate BES and compensate small depositors, just as Italy did with Banca Popolare di Vicenza and Veneto Banca.

The Court also referred to the commitments given by Portugal to the Commission during the preliminary examination of the aid measures and found that the Commission took account of commitments which had been voluntarily given by Portugal.

Lastly, the General Court rejected the argument of BPC Lux 2 Sàrl that it had legal standing on the grounds that it had also initiated proceedings before a national court against and that annulment of the Commission decision would have an impact on those proceedings. The General Court considered in paragraph 34 of its order that the subject matter of the two cases were different. While before the General Court, BPC Lux 2 Sàrl requested annulment of the Commission decision because it was allegedly contrary to the policy of supporting banks during the crisis, before the national court it pleaded that the resolution violated the principle of proportionality.

The General Court concluded that “(36) if the contested decision were annulled, that would procure no advantage for the applicants.” It then proceeded to order the dismissal of the action as inadmissible on the grounds that BPC Lux 2 Sàrl did do not have any legal interest in requesting the annulment of Commission decision SA.39250.


The action before the Court of Justice

BPC Lux 2 Sàrl immediately appealed against the order of the General Court. The Court of Justice ruled on that appeal on 7 November 2018, in case C‑544/17 P, BPC Lux 2 Sàrl v European Commission.2

After a brief summary of the actions of the Portuguese government, the Commission decision and the order of the General Court, the Court of Justice recalled that “(28) an action for annulment brought by a natural or legal person is admissible only in so far as that person has an interest in the annulment of the contested measure. Such an interest requires that the annulment of that measure must be capable, in itself, of having legal consequences and that the action, if successful, may procure an advantage for the party which has brought that action”.

It then rejected several arguments put forth by the Commission that BPC Lux 2 Sàrl had not provided sufficient evidence to prove its interest. The Court explained that “(34) in order for an action seeking annulment of an act, submitted by a natural or legal person, to be admissible, the applicant must justify in a relevant manner its interest in the annulment of that act”.

In the present case, BPC Lux 2 Sàrl “(35) submitted that the annulment of the contested decision would very significantly increase the likelihood of success of the judicial review proceedings which they had brought before the Portuguese courts against the decision to put BES into resolution. In particular, they stated that such success would result either in the annulment of that decision to put BES into resolution or in their having the right to claim damages for losses incurred due to the unlawful resolution of BES.” “(36) In particular, […] the annulment of the contested decision by the General Court would, first, support the arguments which they had already put forward in the national proceedings, according to which the resolution of BES was disproportionate in Portuguese law, and, second, make it possible to put forward, again in the context of those proceedings, the argument that, in the absence of the State aid at issue, the resolution of BES could not have achieved the objective of preventing its insolvency.”

On the basis of that reasoning, the Court of Justice considered appropriate to “(40) examine whether the General Court erred in law […] by holding that, since the proceedings before it and the proceedings before the national courts did not have the same subject matter, any annulment of the contested decision would have no effect on those national proceedings and would therefore procure no advantage for the appellants.”

“(41) It is clear from those paragraphs of the order under appeal that the General Court found that the national proceedings concerned the sole question of whether the recourse to a resolution procedure was compliant with national law, whereas the action before it concerned only whether the financing of that resolution procedure was compatible with EU law. From this the General Court concluded that any assessment, by itself, of the Commission’s compliance with EU law would have no effect on the Portuguese courts’ interpretation of their national law, in particular on the question whether the principle of proportionality, as protected by Portuguese constitutional law, had been infringed.”

“(42) In that regard, the Court has held that, in principle, a party retains its interest in continuing an action for annulment where that action may constitute the basis of an action for damages”.

“(43) The possibility of an action for damages suffices to justify such an interest in bringing proceedings, in so far as that interest is not hypothetical”.

“(44) The Court has also held that an interest in bringing proceedings could arise from any action before the national courts in the context of which the possible annulment of the contested act before the EU Courts is capable of benefiting the applicant”.

“(46) In the present case, the appellants, in their appeal, submit that the damage which they have sustained lies in the fact that, because their bonds remained in the Bad Bank, the resolution procedure had the result that they changed from holding bonds in BES to holding bonds in a bank which had no valuable assets, which had no ability to conduct new business and whose banking licence was to be withdrawn after a short winding-up period. They therefore suffered substantial losses and their legal position was changed. Furthermore, …, the appellants submit that, in view of the size of their financial losses, their situation is not comparable to the situation when the normal insolvency rules under Portuguese law apply, since those rules provide for the repayment of all creditors of a company, including the subordinated bondholders, on the basis of the company’s assets and in accordance with the order of repayment. In that reply, the appellants concluded that they had lost their right to claim against all the assets of BES, including the good assets, under the relevant normal Portuguese insolvency rules.”

“(53) It is apparent, […] that the contested decision and the BES resolution decision are inextricably linked. In particular, […] the resolution procedure ‘entailed’ the creation of a temporary credit institution, to which the sound business activities of BES were transferred. It is also apparent … that, …, the creation of a Bridge Bank was seen as the ‘only means’ of maintaining financial stability in the Portuguese Republic, and that the Commission concluded that the State aid at issue was compatible with the internal market, taking into account the commitments given by the Portuguese authorities, which concerned both the Bridge Bank and the Bad Bank and related to their orderly winding-down. Amongst those commitments was, in particular, the prohibition on transferring to the Bridge Bank claims of shareholders and claims of holders of subordinated debt.”

“(54) Admittedly, it is common ground, […], that the fall in the value of the bonds held by the appellants is attributable to the decision to put BES into resolution. Similarly, […], 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.”

“(55) However, given the inextricable links between the contested decision and the decision to put BES into resolution, […], which demonstrate, in particular, that the State aid at issue was granted in the context of the resolution of BES, it must be held that, […], the General Court was not permitted to conclude, […], that, because the subject matter of the latter action was not the same as that of the action brought before the General Court, a possible annulment of the contested decision could not in any way affect the Portuguese courts’ assessment of the action brought before them, in particular in the manner outlined by the appellants both in their written pleadings before the General Court and in their appeal before the Court of Justice.”

For all of the above reasons, the Court of Justice found that the appellants had a legitimate interest. It therefore set aside the order of the General Court, and referred the case back to the General Court.


1 The full text of the Order of the General Court can be accessed at:

2 The full text of the judgment can be accessed at:



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 is professor at the University of Maastricht and the University of Nicosia. 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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