Insight: “Judicial protection and rule of law vs automatic recognition of administrative reorganisation measures for banks in pending judicial proceedings” by Dolores Utrilla

Today, Advocate General Kokott delivered her Opinion in Banco de Portugal and Others (C-504/19), a case stemming from a request for a preliminary ruling from the Spanish Supreme Court concerning the interpretation (and, implicitly, also the validity) of Directive 2001/24 on the reorganisation and winding up of credit institutions. This is a very interesting case on the procedural effects (in judicial proceedings pending in one Member State) of mutual recognition of reorganisation measures for credit institutions adopted in a different Member State, and on the compatibility thereof with the right to effective judicial protection and the rule of law.

1. Background of the case

The request for a preliminary ruling stems from a dispute originating in the imminent insolvency in 2014 of the then second largest Portuguese bank, Banco Espírito Santo (BES). In this context, Banco de Portugal, which was the Portuguese central bank and supervisory authority at the time, set up a ‘bridge bank’ called Novo Banco. In August 2014, it transferred all the healthy business areas of BES to Novo Banco, while all ‘toxic liabilities’ remained in the assets of the BES and its subsidiaries.

The applicant in the proceedings before the Spanish Supreme Court was initially an investor in the Spanish subsidiary of BES. However, from August 2014 contractual relations were taken over by the Spanish branch of Novo Banco. In February 2015, the applicant brought an action against the Spanish branch, seeking a declaration that the relevant contract was void on the ground of poor advice given by BES in making its investment. This action was upheld by the competent Spanish court of first instance in October 2015, but Novo Banco brought an appeal against this judgment alleging that, in accordance with two decisions made by Banco de Portugal in December 2015, the liabilities at stake did not belong to Novo Banco but to BES. Although it can be understood that liability for poor investment advice to the applicant was initially transferred to Novo Banco by decision of August 2014 of the Banco de Portugal, the decisions of December 2015 returned that liability to the Spanish branch of BES, with retroactive effect from 3 August 2014.

The competent Spanish court of appeal dismissed the appeal finding that Novo Banco lacked standing. Novobanco then brought a special cassation appeal before the Spanish Supreme Court, which must rule on the issue of whether the decisions adopted by Banco de Portugal in December 2015 should be granted mutual recognition. In the affirmative, and according to Spanish procedural law, the referring court would be obliged to set aside the judgments of the lower courts and dismiss the appeal, despite the fact that those judgments (at least under the legislation then in force) were legally correct.

2. The question posed to the Court of Justice

In particular, the case before the Court of Justice revolves around the interpretation of Article 3(2) of Directive 2001/24, which concerns the law applicable to the adoption of reorganisation measures for credit institutions with their head offices within the EU. This provision sets out that the reorganisation measures adopted by the administrative or judicial authorities of the home Member States ‘shall be fully effective in accordance with the legislation of that Member State throughout the Community without any further formalities, including against third parties in other Member States, even where the rules of the host Member State applicable to them do not provide for such measures or make their implementation subject to conditions which are not fulfilled’.

The Spanish Supreme Court notes that, according to Article 3(2) of the Directive, in legal proceedings pending in other Member States the courts must, without any further formalities, recognise the effects of a Decision by the competent administrative authority of the home Member State that is intended retrospectively to change the legal framework that existed at the time the proceedings were commenced and that renders ineffective any judgments that do not accord with the provisions of the new decision. The referring court therefore is calling on the Court of Justice to determine whether this provision is compatible with the fundamental right to an effective remedy (Article 47 of the Charter), the principle of the rule of law (Article 2 TEU), and the general principle of legal certainty.

However, according to the Spanish and the Italian Government, the Commission, the Council, and the European Parliament, the obligation of recognition of Article 3(2) of Directive 2001/24 would not apply in respect of reorganisation measures by virtue of Article 32 of the same Directive. According to this provision, ‘the effects of reorganisation measures or winding-up proceedings on a pending lawsuit concerning an asset or a right of which the credit institution has been divested shall be governed solely by the law of the Member State in which the lawsuit is pending’.

3. The Opinion of Advocate General Kokott

In her Opinion today (available here), Advocate General Kokott states, firstly, that Article 32 of Directive 2001/24 applies to the main proceedings, but that this does not give rise to any exception to the principle of mutual recognition arising from Article 3(2) of the Directive.

As to the question posed by the referring court, the Opinion notes that the problems raised by the Spanish Supreme Court (resulting from the need to set aside previous judgments and to dismiss the appeal in the main proceedings) are not a direct consequence of Article 3(2) of the Directive, but rather a consequence of the specific procedural effects that the Spanish legal order associates with a (retroactive) change in the material legal situation during the current proceedings. Advocate General Kokott thus makes clear that the problems from the perspective of EU primary law do not stem from the obligation of mutual recognition under Article 3(2) of Directive 2001/24, but from the lack of possibilities to react to such obligation under Spanish procedural law. This consequently raises the question of whether such national procedural rules are compatible with the principles of legal certainty and effective judicial protection.

For these reasons, Advocate General Kokott advises that the Court of Justice rule that the recognition of a reorganisation measure adopted in a Member State pursuant to Article 3(2) of Directive 2001/24, which retroactively changes the substantive legal position which is the subject of proceedings in another Member State, cannot have as its consequence that the party to whose detriment that change operates will inevitably be unsuccessful and have to pay all of the costs of the proceedings. The Court is further advised to rule that such a result makes the bringing of the action itself a risk and may dissuade a claimant from exercising his rights before the courts, which is not compatible with Article 47 of the Charter.

Dolores Utrilla is an Associate Professor at the University of Castilla-La Mancha and an Assistant Editor at EU Law Live