Independent taskforce of legal experts: Proposed legal solutions for unresolved issues following the bank recovery and resolution of 2013

05/05/2021 / Press release

Banka Slovenije has taken a more active role in seeking solutions to unresolved issues in connection with the recovery and resolution of the banking system in 2013, and the impact on those involved in that process from the decisions made at that time by the competent institutions. Given the unsuccessful attempts to find solutions to unresolved issues, judicial relief has still not been guaranteed for all participants in that process. The independent taskforce of legal experts set up at Banka Slovenije to draw up proposed solutions for unresolved issues has completed its work, and today presented a report of its key findings.

The taskforce consists of Prof Miha Juhart, Dr Miro Prek, Prof André Prüm and Franc Testen. Their findings, which they presented to leaders of parliamentary groups earlier today, are cited below.

Banka Slovenije will study their findings, and will brief the competent institutions accordingly.

Taskforce’s conclusions and proposed solutions

Objective liability on the part of Banka Slovenije is not the key to a solution of the issue of (potential) claims against commercial banks by former holders of qualified liabilities.

Changing the definition (qualification) of Banka Slovenije’s liability for damages (from qualified culpability to objective liability and back again) is not a suitable solution that could satisfactorily resolve the issues of bank recovery and resolution.

a) Article 350a of the ZBan-1 is not a suitable basis for assessing the former holders’ entitlement to the reimbursement of the loss suffered in the write-down. It is thus possible to clarify why the Constitutional Court interpreted the ZBan-1 such that it sets out objective liability for any losses incurred. Objective liability was then also enforced by the ZPSVIKOB. The described intervention by the Constitutional Court and the adoption of the ZPSVIKOB in essence mean that barely anything remains of the original content of Article 350a in connection with Article 223a of the ZBan-1. To put it more precisely: only the provision that Banka Slovenije is passively legitimate and liable for payment (even under modified conditions).

The provisions of the Banking Act (Article 350a of the ZBan-1) did not provide a suitable basis for resolving the claims of former holders of qualified liabilities. The Constitutional Court built upon them with its requirements for effective judicial relief, which were pursued by the legislator in the adoption of the ZPSVIKOB. Banka Slovenije's liability was modified from culpability to objective liability, where the tendency is for Banka Slovenije’s liability to again be judged according to the criteria of culpability (following the decision by the Court of Justice of the European Union). For now, it is clear only that under all arrangements to date Banka Slovenije has been designated as responsible for paying compensation to the former holders, and will also be the defendant in judicial proceedings; it is extremely questionable whether Banka Slovenije can be ordered to pay compensation.

The introduction of a reimbursement scheme funded from the budget would be a consistent solution.

b) The enforcement of objective liability is in accordance with the concepts on which Directive 2014/59/EU is based (although adopted subsequently), although these arrangements would require the compensation for the aforementioned curtailment to not be borne by Banka Slovenije. This means that in regulations governing judicial relief for former holders on the basis of Article 350a, the state should be designated the passively legitimate party (at least until the establishment of any scheme for financing resolution). Otherwise it would be a case of impermissible monetary financing: Banka Slovenije would have to settle the state’s liabilities.

For similar cases, the applicable arrangements in the EU (the BRRD) envisage resolution via funding from special resolution funds, which are built up through contributions by banks. Bank resolution would first be the responsibility of the state, and then the responsibility of the banking community, but never the responsibility of the central bank. The central bank’s obligation to provide funding for bank resolution breaches the prohibition of monetary financing, and at the same time encroaches on the independence of the central bank.

c) With regard to the existing legal arrangements (passive legitimacy of Banka Slovenije), a solution is offered by legislating for a claim of recourse by Banka Slovenije against the state on the basis of exculpation through proof of the absence of culpability. Or a solution that is even more in keeping with the nature of the legal relationship: a government scheme for financing resolution (potentially with a claim of recourse, under the principle of culpability on the part of Banka Slovenije).

Should Banka Slovenije be required to pay compensation, it could demand reimbursement from the state if it proves that it was not culpable. A more direct solution would be the establishment of a reimbursement scheme.

d) According to the described arrangements for Banka Slovenije’s objective liability, the possibility that former holders only formulate declaratory claims on the merits, and the general arrangements under the ZPP, the courts will be able to order the submission of all necessary documents and the disclosure of all necessary information, which Banka Slovenije will be required to submit and to disclose. The submitted documents and disclosed information will be properly protected, and provisions on virtual data rooms are not essential for the exercise of the former holders’ rights.

The arrangements already in force allow the former holders’ claims to be pursued even without special additional arrangements with regard to access to documents and disclosure of information.  Banka Slovenije has already granted access to all information required by the attorney of a former holder to lodge a lawsuit.

The reimbursement scheme seems to be the only solution that is sufficiently acceptable in legal terms, transparent, consistent and effective.

e) The establishment of a reimbursement scheme to reimburse the curtailment, having regard for the precepts formulated in legislation in certain similar cases of curtailment, where it was not feasible or reasonable to substantiate a system of liability for damages, seems to be a suitable option for resolving issues in the pursuit of claims by former holders.

All finally awarded amounts of all former holders and all amounts to which former holders are found to be entitled by competent authorities in prescribed proceedings (this refers to arbitration, settlement and other forms of dispute resolution that might occur: this is contingent on the appropriate amendment of the legislation) would be settled from the reimbursement scheme.

f) Restricting the burdens of the implementation of the ZPSVIKOB to the functioning of Banka Slovenije can be achieved by spinning off the resolution of disputes to a specialist department or by transferring these tasks by law to another (or new) public sector entity, which can be a solution that helps Banka Slovenije to participate more effectively in judicial disputes of this type.

g) Process mechanisms: Stipulation of the exclusive territorial and material jurisdiction of a single court, mandatory consolidation of actions, encouragement of actions lodged via a joint representative, indispensable co-litigation, special provisions on lists of parties, etc. do not satisfactorily resolve the legal and practical problems faced by the court and in particular by the defendant as a result of the sheer number of plaintiffs expected. This problem (in the phase of proceedings after declaratory claims) can be partly alleviated by the amendment of the provision on co-litigation, such that genuine indispensable co-litigation is legislated for former holders of the same class at a particular commercial bank. The taskforce also assessed the feasibility and suitability of other solutions to this problem: representative test proceedings, the collective action, and the transfer of process legitimacy.

None of the solutions under the ZPSVIKOB that the legislator believed could meet the objective set by the Constitutional Court (effective judicial relief) is of itself capable of meeting the objective: a large number of lengthy, complex judicial proceedings would be necessary. Representative test proceedings have previously been legislated, as have proceedings with collective actions; some of the potential solutions (e.g. the transfer of process legitimacy, which entails the mandatory representation of all former holders in a specific class by a single statutory representative) are extremely constitutionally questionable. Significant gains might only come in the second part of the proceedings, when and if they happen (the courts could find in the first part of the proceedings that the former holders’ claims are substantiated, and would determine the amount of compensation in the second part).

h) Representative test proceedings: There is an argument that the existing ZPSVIKOB allows for representative test proceedings to be conducted, under the mutatis mutandis application of the ZPP. If the provision on mandatory consolidation of actions is shown to prevent this, it would only require a minor revision to the ZPSVIKOB. However, representative test proceedings would significantly reduce the burden on the court solely in the event of them ending with a finding fully in favour of the claim. Otherwise the proceedings that would continue in suspended cases would face the same problems caused by the sheer number of disputes.

i) Collective action: Compensatory redress for qualified creditors could be pursued as a collective action, but it is highly uncertain what reduction in the number of proceedings would actually be brought by this solution. A solution of this type would in any case require an amendment of the law (the ZKolT, or even better, the ZPSVIKOB), which is not constitutionally questionable, as the collective action does not replace individual judicial relief, but merely augments the possibilities, provided that the opt-in principle is applied. Here the main issue seems to be the creation of a representative organisation for creditors. This approach to lodging compensatory redress might be appealing to creditors, if mechanisms for positively motivating creditors to join such an approach to pursuing redress were to be set out.

j) Transfer of process legitimacy: This is an almost perfect solution, but not only is it demanding in legislative terms, it is also constitutionally extremely questionable. It is a matter of the exclusive transfer of the right of access to a tribunal, which denies plaintiffs their right to judicial relief, and would find it hard to withstand a constitutional assessment under the strictest test of proportionality. The essential attributes of the transfer of process legitimacy and the necessary constitutional caveats addressed by the European Court of Human Rights in the Lithgow case are perhaps of interest, as they touch on certain issues that might be relevant in any decision to apply the institution of collective action under the opt-in principle to the disputed case of the former holders.

k) The taskforce draws attention to the possibility of reducing the problem of the sheer number of disputes in the scheduling phase. The solution of having the matter decided on by administrative units in administrative proceedings is worthy of consideration. This would ensure decentralisation and sharing of the burden of the large number of claims. The bases for scheduling are simple and standardised, while standardisation of the practices of administrative units could be ensured by the use of software to calculate compensation schedules.

About the reimbursement scheme:

All cases of already-functioning reimbursement schemes (trial without undue delay, the erased in part, the wrongfully convicted) involve objective liability for certain consequences of acts issued by the authorities. In all cases it is also stipulated by law that compensation payments should be borne by the state from the state budget, either from a special fund on behalf of and for the account of the state, or from an item in the financial plan of the designated authority.

The ZPSVIKOB also defines Banka Slovenije’s objective liability for the curtailment suffered by the former holders. As soon as unlawfulness is established in the narrower sense, i.e. irrespective of culpability, Banka Slovenije must reimburse the former holders for the actual curtailment of their assets, namely the value that would have remained had the extraordinary measure not been imposed (i.e. if the bank had not received state aid and would potentially not have fallen into bankruptcy, or, in the event of bankruptcy, the former holders would have been repaid (at least in part)).

The reimbursement scheme is a solution that the taskforce believes would provide an effective answer to the prohibition of monetary financing. In previous discussions this option was not elaborated in detail.

One of the potential solutions would be for the funding for the reimbursement scheme to be provided by the BAMC, the state and Banka Slovenije in accordance with the rules that were just about to be aligned in various processes.

There are several different options with regard to the approach to the creation and operation of the reimbursement scheme:

1. first proposed solution: restriction of the burdens of the implementation of the ZPSVIKOB to the functioning of Banka Slovenije:

a) Spin-off within the framework of Banka Slovenije (ensuring the organisational and functional independence of a department to deal exclusively with issues in connection with the former holders’ proceedings).

b) Tasks in connection with bank recovery and resolution now performed by Banka Slovenije are transferred by law to any of the already functioning institutions. Issues with regard to this transfer are regulated by law.

c) A new public sector entity is established by law with the exclusive task of making repayments for which it is determined in judicial proceedings and amicable resolution proceedings that such repayments should be made, to whom and in what amount.

2. second proposed solution: create a system for the amicable resolution of claims, and submit it to stakeholders for discussion and confirmation in principle (having regard for the two major groups of creditors, namely large investors and retail investors, and the two categories of claimants, namely holders of bonds and similar rights, and shareholders), then adopt it in the form of a law or other legal rules.