RegCORE Client Alert | Banking Union
QuickTake
On 12 December 2024, the European Court of Justice (ECJ) published its ruling in case C-118/23 (Getin Holding and Others) concerning a Polish bank's resolution. The ECJ's ruling confirms the principle that national resolution authorities (NRAs), such as the Polish Bank Guarantee Fund (BGF), must (i) act independently in the resolution of banks and that (ii) the rights of affected parties to effective legal protection, in particular shareholders' and bondholders' rights, must not be curtailed. Shareholders and bondholders bear the majority of the financial losses in resolution proceedings, including the complete destruction of capital or value of bonds.
The ECJ's ruling also emphasises that affected parties must be granted better and more effective legal protection. In particular, individual lawsuits are permissible for each individual case and an obligation to bundle lawsuits into a class action lawsuit is not permissible. This not preclude an option or a choice to bundle cases. The ECJ's judgment emphasises the importance of greater transparency and avoiding conflicts of interest and fairness by NRAs.
Background: What led to the legal dispute?
In 2022 Getin Noble Bank (GNB) was placed under resolution proceedings and the BGF commenced to act in its role as the competent NRA. As part of the performance of its duties, the BGF prescribed resolution measures to be taken against GNB in order to stabilise its financial situation. As the competent NRA, the BGF performs supervisory and resolution functions in addition to its "core" task of depositor protection as the competent polish depositor guarantee scheme (DGS). These multiple functions led some claimants to argue that conflicts of interest had arisen due to colliding objectives between the functions and the NRA's independence.
More than 8,000 claimants, including shareholders and bondholders, aimed to assert in individual lawsuits that the BGF's resolution measures were unlawful, disproportionate and interest-driven and therefore not objectively independent. In particular, their claims included:
- A violation of their property rights, as the complete write-off of the shareholders' equity and the reduction in value of the bondholders' bonds constitute a disproportionate and unjustified expropriation.
- Conflicts of interest within the BGF, as it acts simultaneously in its roles and mandates as DGS, NRA and provisional administrator and thus decisions are not made independently and objectively. It was feared that the interests of secured depositors were being favoured to the detriment of shareholders and bondholders.
- Lack of transparency and proportionality: In this context, the accusation of inadequate justification by the NRA and the disregard of potentially milder measures was also raised. The resolution measures taken are considered to be disproportionate and the reasons for the decision as not sufficiently disclosed.
- Unequal treatment of creditors: Bondholders had claimed to be disadvantaged compared to other creditors (e.g. secured depositors). This contradicts the principle of a fair and equal loss distribution.1
Throughout the resolution procedure, various measures were ordered by the NRA to stabilise GNB financially, which affect creditors differently depending on the distribution of losses. The sequence in which losses are borne is set out in Articles 46 and 47 of the EU's Recovery and Resolution Directive (BRRD)2 : Shareholders are affected by the write-down of equity the most, followed by bondholders as unsecured creditors by the write-down of claims or a "bail-in"-procedure. Secured depositors are solely affected as a last resort ("ultima ratio") when all other means have been exhausted.
The deposits of secured depositors are protected with priority as determined in resolution proceedings by the Deposit Guarantee Schemes Directive 2014/49/EU (DGSD). Bank customers with deposits invested in current accounts or savings accounts are covered by the scope of protection of the DGSD.3 Article 6 para. 1 DGSD stipulates that deposits are protected up to an amount of EUR 100,000 per depositor per credit institution. If a case of deposit protection due to the unavailability of deposits, depositors will receive a refund up to the protection limit, ensuring they do not incur any losses within this amount. The BRRD completes this protection in Art. 44 para. 2(a) BRRD, in which covered deposits are expressly excluded from a credit institution's loss absorption and bail-in procedure in the context of resolution proceedings.
Shareholders and bondholders are not covered by the protection and hence bear the greatest losses. Accordingly, shareholders as equity providers, are the first to bear the losses in a resolution process. Their equity is written off to close the institution's financial gaps.4 Usually, they lose their entire capital. In the case of GNB, indeed, the shareholders lost their entire invested capital due to the complete cancellation of shares.
If the write-down of equity is not sufficient, bonds can also be written down or converted into equity by the so-called "bail-in" tool5. Having lent money to an institution, bondholders hold a claim for repayment of the principal amount plus interest against issuing institution. The latter are generally affected in the scenario of write-offs and conversion of claims into equity. According to the principle of loss distribution set out in Art. 47 BRRD, they bear a lower risk as unsecured creditors – ranking behind shareholders – but are the next in line to bear losses. When bonds are converted into equity (i.e., "bailed-in"), bondholders effectively become shareholders of their institution and are thereby exposed to further losses.
Due to this low level of protection, shareholders and uncovered bondholders rely on effective legal protection in a resolution process. To this end, it was found that the BGF's multiple roles as DGS, NRA and provisional administrator jeopardised its operational independence and lead to conflicts of interest.6 A DGS aims to protect secured depositors and focuses on minimising losses for depositors and reimbursing deposits up to the statutory protection limit to maintain depositors confidence in the banking system.7 NRAs have the overriding objective of safeguarding financial stability and restructuring or winding up an institution in a structured manner so as to avoid systemic risks.[8] Losses are to be fairly distributed among shareholders and bondholders before the deposit guarantee scheme are resorted to. If a single authority is vested with carrying out both roles, the ECJ found that the following conflicts of interest arise:
A DGS could influence resolution measures in such a way that the losses are distributed primarily to shareholders and bondholders in order to reduce the burden on the deposit guarantee fund. On the other hand, the BGF, in its role as NRA, could be reluctant to initiate necessary resolution measures to avoid costs for the DGS.8 In particular, the exertion of influence may jeopardise the decision in the sole interest of the resolution objectives set out in Art. 31 BRRD due to prioritised self-relief of the DGS.9
Key points of the ECJ's judgment
In the course of the liquidation proceedings that were commenced in the case of GNB, shares were devalued and shareholders suffered losses. In addition, bonds were partially written off, meaning that bondholders also had to take over losses. As a result, the BGF's multiple roles as DGS and NRA was submitted to the ECJ for a judgment on the alleged conflicts of interest, unequal treatment and an investigation of the proportionality of the measures. The ECJ's ruling set out the following guiding statements:
- The NRA's independence must be guaranteed: NRAs must be free from any internal influence lying outside of the resolution mandate, such as the interests of the deposit guarantee schemes, when deciding on the measures to be taken. The structural separation of roles is necessary to avoid such conflicts of interest.10
- Shareholders and bondholders have a right to effective legal protection through individual legal lawsuits.11 Every person affected by a resolution measure has the right to an individual judicial review of the decision. A bundling of lawsuits harbours the risk of impairing the right to have the case heard within a reasonable period of time and should not led to impairing the right to a swift and fair procedure.12
- The basis for the authority's decision-making must be disclosed transparently.13 Internal guidelines to ensure independence are recommended to be published by the NRAs. However, even in the absence of such guidelines, an NRA must prove that its decisions were taken solely aimed towards accomplishing the resolution objectives.14
The judgment's significance for shareholders and bondholders
The ECJ's judgment in this case has considerable significance for shareholders and bondholders, amongst others, by:
- Strengthening individual legal protection. The judgment clarifies that shareholders, who are affected the most of all creditors, have an individual right to review of the legality of the resolution measure and that a judgment with "erga omnes" effect (i.e., validity for all) is not sufficient to safeguard the rights of each affected party;
- Review of conflicts of interest. The judgment emphasises that NRAs must be independent. The simultaneous exercise of deposit protection and resolution activities can impair this independence and an objective decision-making, setting shareholders and bondholders at a disadvantage. It provides the latter with a basis for challenging decisions with the accusation of potential conflicts of interest; and
- Transparency of the authority's decision-making. The judgment emphasises that the decision-making basis for the measures taken must be comprehensible and proportionate. Resolution authorities must prove that their decisions were made solely with respect to the resolution objectives and are not influenced by other responsibilities. The aim is to ensure more transparency and a greater control of decisions as well as the possibility of accusing them due to a lack of disclosure.
Given the above, shareholders and bondholders should monitor their position in ongoing or completed resolution proceedings to identify potential legal violations. In the case of decisions being made by resolution authorities, that are simultaneously acting in multiple roles, it may be beneficial to assess the decision-making process for conflicts of interest and a lack of independence in light of the ECJ's guiding principles. The strengthened possibility for individual legal action may, for some, indeed be used to assert claims and minimise losses.
Outlook ahead
Overall, it is expected that the judgment could lead to greater scrutiny and challenges of resolution authorities' decisions in terms of their proportionality, conflicts of interest or lack of independence. National courts in other EU Member States may need to consider this precedent case as a basis for their rulings on similar issues regarding resolution measures.
NRAs will for their part have to review and adapt their internal structures to ensure independence and avoid conflicts of interest, i.e., by ringfencing functions. In particular, decision-making processes must be made more transparent, by publishing internal guidelines for instance.
In regulatory terms, the judgment could, at some point, even result in amendments to the BRRD to define the independence of resolution authorities more clearly. Guidelines or recommendations from the European Banking Authority (EBA) or the European Resolution Board (SRB) on the separation of functions and transparency of resolution measures could follow as well to ensure harmonised standards across the EU in order to make it easier for NRAs to select resolution measures more alignment with the legislative intention. This matter is enshrined in Art. 3 para. 3 of the BRRD in that structural regulations must be issued in order to ensure the operational independence of NRAs and avoid conflicts of interest.
Footnotes
1. Art. 34, 44 of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, as of 14 November 2024 (last seen on 18 December 2024).
2. Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, as of 14 November 2024 (last seen on 18 December 2024).
3. Art. 2 Abs. 1 Nr. 3, 5, 8 DGSD.
4. Art. 46 Abs. 1 BRRD.
5. Art. 44 BRRD
6. Judgment C-118/23, ECLI:EU:C:2024:1013, Getin Holding and Others,12 December 2024, Para. 40. (last seen on 18 December 2024) (available here).
7. Art. 109 BRRD.
8. Judgment C-118/23, ECLI:EU:C:2024:1013, Getin Holding and Others,12 December 2024, Para. 59.
9. Judgment C-118/23, ECLI:EU:C:2024:1013, Getin Holding and Others,12 December 2024, Para. 111.
10. Press Release No. 197/24 regarding Judgment in Case C-118/23 (Getin Holding and Others) of the Court of Justice of the European Union, Luxembourg, 12 December 2024, p. 2.
11. Press Release No. 197/24 regarding Judgment in Case C-118/23 (Getin Holding and Others) of the Court of Justice of the European Union, Luxembourg, 12 December 2024, p. 1.
12. Judgment C-118/23, ECLI:EU:C:2024:1013, Getin Holding and Others,12 December 2024, Para. 67.
13. Press Release No. 197/24 regarding Judgment in Case C-118/23 (Getin Holding and Others) of the Court of Justice of the European Union, Luxembourg, 12 December 2024, p. 2.
14. Judgment C-118/23, ECLI:EU:C:2024:1013, Getin Holding and Others,12 December 2024, Para. 122.
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