** Annulment actions against resolution of Banco Popular
dismissed in their entirety **
On 1st June, the General Court rendered its judgment in the five pilot cases (out of almost 100 cases initially lodged) concerning the 2017 Banco Popular resolution and dismissed these actions in their entirety (T-481/17, T-510/17, T-523/17, T-570/17 and T-628/17). These cases deal with the first-ever banking resolution done at a European level, decided by EU institutions and a newly established EU agency, the Single Resolution Board (SRB). Both the Banco Popular resolution and the system for resolution at the EU level had been highly criticised in the media, by legal and economic scholars. While not setting aside all criticism, the Court strengthens the role and credibility of the Single Resolution Board, as well as the entire resolution framework through these judgments.
Before the global financial and euro crisis in 2007, failing banks were dealt with at the national level with all the negative consequences that this entailed. The EU responded to the incapability of the Member States’ financial systems to deal with the failing cross-border banks by inter alia creating the European Banking Union. What we saw was one of the most drastic redistribution of competences from the Member States towards the European Union in recent decades. Unfortunately, as many legal and economic scholars have argued, the European Banking Union is flawed, incomplete, and institutionally complex in several respects. The Single Resolution Mechanism, the pillar of the Banking Union that deals with failing (or likely to fail) banks, started functioning in January 2016. In June 2017, the SRB (which is the central decision-making entity in the Single Resolution Mechanism), with approval from the European Commission, adopted the decision to sell Banco Popular Español SA to Banco Santander S.A. for 1 euro. As a result, and according to the EU institutions, the bank’s depositors were protected and the financial stability in Spain and Portugal was guaranteed. However, the bank’s shareholders and creditors were ‘bailed-in’ and lost a significant amount of money, which led to the annulment proceedings of the SRB’s decision and/or Commission decision before the General Court. Nevertheless, the criticism concerning the SRM, and the Banco Popular resolution has led to uncertainty as to the proper functioning of the entire European Banking Union. This created distrust among investors that failing banks would be wound up in an orderly and legalistic manner and that the SRB acts within the confines of the founding rules hurting the banking sector.
As Banco Popular was the first bank to be resolved under this system, the judicial review by the General Court is of tremendous importance. The substance of the legal claims and arguments raised in the almost 100 cases are covered by the legal claims and arguments invoked by the parties in these five pilot cases.
The claimants invoked violations of several rights, such as inter alia the right of the defence, the right to effective judicial protection and the duty to state reasons in particular with regard to the Charter of Fundamental Rights, the duty of care and good administration, the right to property, the principle of proportionality and non-discrimination, the right to be heard, several provisions of the founding regulation on the grounds that the conditions for applying the resolution instrument were not met. In particular, the arguments relate to the fact that the bankruptcy of Banco Popular has not been demonstrated and that there was a failure to examine other instruments less detrimental to shareholders. The claimants also contested the valuation reports arguing that they were not fair, prudent, and realistic, as the expert (Deloitte) stated that there were a number of gaps and inconsistencies in the available information and that the valuation had to be regarded as highly uncertain and provisional. Some of these actions also raise objections of illegality concerning the Regulation on the Single Resolution Mechanism, on the ground that the procedure provided for by that regulation infringes the principle of the delegation of power (Meroni doctrine) and violates many fundamental rights. The claimants argued that the resolution process was flawed and that the SRB did not fulfil its obligation to ensure that the shareholders and creditors were dealt with fairly. More specifically regarding the Commission’s decision, the Commission was criticized for not having thoroughly examined the SRB’s resolution before approving it. Although this case law is undoubtedly important on several levels this brief note can only flag some of its most prominent legal issues.
Firstly, and remarkably, there was considerable doubt against which decision an action for annulment could be brought before the General Court. The founding regulation makes the question seem easy to answer. Paragraphs (1) and (2) of Article 86 SRM Regulation state that proceedings may be brought before the Court of Justice against decisions of the SRB. One would assume that this means that the drafters of the SRM Regulation had in mind that the SRB’s decisions must create legal effects. On this point there exist conflicting opinions. In the almost 100 cases lodged, some lodged an action only against the SRB decision, others only against the Commission decision. Others opted to be safe rather than sorry and therefore lodged an action against both. It was argued in the Banco Popular cases that only the Commission decision endorsing the resolution decision of the SRB, can be challenged (para 107, T-481/17). The explanation is that only the Commission decision brings about definitive legal effects. Article 18(1) of the SRM Regulation explains that the SRB adopts the resolution scheme which enters into force if no objection has been expressed by the Council or by the Commission within 24 hours. The General Court gives us the necessary reassurance and explains that an action may be brought against the resolution scheme adopted by the SRB, without the requirement that action must also be brought against the Commission decision (para 149, T-481/17). On the one hand, how could the Court have gone against the literal wording of the text of the founding regulation as it explicitly states that action for annulment must be brought against the Board? On the other hand, the Court highlights that only when endorsed by the Commission, the scheme can produce legal effects and constitutes an act against which a separate, independent action for annulment can be brought. This looks confusing and begs the question as to how an action can be brought against the SRB decision if, according to the Court, it only generates legal effects after the endorsement by the Commission? The Court answers this question by focusing on the fact that the SRB decision intends to produce legal effects (paras 114, 117, 120, T-481/17). The Court additionally explains that interpreting otherwise would be contrary not only to the provisions of the SRM Regulation but also to the principles of legal certainty and effective judicial protection, in so far as any person affected by a resolution decision adopted by the SRB would be subject to a condition for the admissibility of his appeal which is not expressly provided for (para 147, T-481/17). When you read Article 18(1) you could additionally question what would happen when the Commission and/or the Council fail to either endorse or object to the SRB’s resolution scheme within 24 hours? In any case, we now know that judicial protection is guaranteed in such a hypothetical case as action can be lodged against the SRB’s decision. The General Court’s judgments on this point are, in terms of legal certainty, a very welcome development.
As a second preliminary point, the Court took a stand on the scope of its review. It stated that a limited review should be carried out and that the “EU courts must not only establish whether the evidence relied on is factually accurate, reliable and consistent, but also review whether that evidence constitutes all the relevant information which must be taken into account in order to assess a complex situation and whether that information is capable of supporting the conclusions drawn from it” (paras 167-170, T-481/17). While the appropriate standard for reviewing administrative discretion is omnipresent, it remains remarkably ambiguous. The SRB has a ‘technical discretion’, entailing that it acts as an administrative body and that its discretion and limited judicial review are justified by the complexity of the economic, legal, and political assessments the SRB has to make. It might be suggested that the judges call in external expertise when technical questions come before it, but in practice, the Court makes extremely limited use of this possibility. Because of the highly technical matters to be considered in the preparation of resolutions, an overly intrusive standard of review is not recommended. The commented cases show that an area-specific standard or review has not been established.
Going into the details of alleged infringements of the fundamental rights invoked by the claimants would go beyond the scope of this post. In any case, the Court holds that where there had been infringements on the fundamental rights invoked, they were justified, necessary, and in line with the principle of proportionality.
The Court was furthermore bold enough to step into the treacherous discussion on the delegation of powers to the Board and the compliance with the revised Meroni case law. However, it followed the lenient line of case-law of the Court of Justice following its Short-Selling judgment and concluded that the principles relating to the delegation of powers are not breached (paras 118, 120-122, T-570/17; paras 214, 216-218, 228, 231-232, T-510/17). The General Court focused on the remarks shared by the Council Legal Service in its leaked opinion on the SRM proposal and explained that because the Commission and the Council ‘must’ endorse the resolution scheme with regards to its discretionary aspects there is no actual transfer of responsibility and autonomous powers have not been delegated to the SRB. The Court thus admits that the SRB is equipped with a discretionary power and consequently involvement by an EU institution is necessary in order to bear the legal and political responsibility. If, however, a situation would arise where the Commission and/or Council fail to endorse (or object to) the SRB’s resolution scheme would we not have a breach of the Meroni and Short-Selling case law? I am afraid that these judgments will not be able to set the criticisms aside on this matter.
The Court goes on to tell us that no manifest error of assessment could be found when the SRB and Commission decided that the conditions for resolution had been met. Additionally, the Court explains to us that while the expert (Deloitte) stated that there were a number of gaps and inconsistencies in the available information and that the valuation had to be regarded as highly uncertain and provisional (para 232, T-570/17; para 590, T-628/17), this is all considered normal and inherent in any provisional valuation under these urgent circumstances (para 242, T-570/17). I will leave it to the experts to comment on whether this is effectively the case.
Finally, and crucially, the judgments address the possibility for the Commission to endorse the SRB decision within a maximum period of 24 hours. If one reads through the Article 18 resolution procedure in the SRM Regulation, it indeed sounds highly unlikely that the Commission could in 24 hours thoroughly assess the situation and be able to take an informed and substantiated stance on the SRB’s resolution scheme. It is clear that there is not much time for the Commission and/or the Council to react and exercise their power of endorsement. As the Court rightly so rules, this should pose less of a problem for the Commission as the Commission participates in practice as an observer in the SRB’s meetings. In the judgment, the Commission had to extensively provide proof to the Court that it was indeed already informed since the 2nd of May 2017 of the liquidity problems suffered by Banco Popular (paras 111, 132-136, T-570/17). It is undoubtedly to be applauded that the General Court thoroughly vetted the Commission’s claim that it is fully aware of all circumstances surrounding a potential resolution before having to decide within 24 hours on the definitive resolution of a bank. It shows that the legal reality can be quite different from the practice. This unfortunately leaves unanswered the same question for the Council would it be asked to decide on a resolution scheme in the future.
In conclusion, the judgments strengthen the role and credibility of the SRB as well as the entire resolution framework. It also fills some gaps with regard to judicial review and legal certainty. This will hopefully be able to address the distrust among investors and weaken the negative impact this has on the banking sector. Unfortunately, the judgments are not able to dispel all remaining questions surrounding the SRM and its Board.
Posted by Jolien Timmermans, PhD Researcher at the Ghent European Law Institute.
Suggested citation: J Timmermans, “Good job! The General Court pats the SRB on the shoulder for its first ever banking resolution”, REALaw.blog, available at https://realaw.blog/?p=1570
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