KEY POINTS PUTTING THE AND BANK RESOLUTION RECOVERY DIRECTIVE THE TEST TO BayernLB and Austria are locked in a battle over the winding-down of Hypo-Alpe-Adria Feature Bank, with BayernLB one of the largest creditors “bailed in” under a new special law which cancels sub-sovereign guarantees. A complaint by BayernLB to the Austrian Constitutional Court may lead to a reference to the CJEU over interpretation of the Bank Recovery and Resolution Directive. There are strong arguments that the new law fails to adhere to key restrictions on use of the bail-in tool. Interpretation of Arts 43 and 44 of the Bank Recovery and Resolution Directive is likely to be crucial to determining the legality of cancelling sub-sovereign guarantees as part of a bail-in. Authors Hodge Malek QC and James Potts Putting the Bank Recovery and Resolution Directive to the test This article examines a dispute over one of the most controversial European bank turing obligations until 2019; court bail-ins to date, of Hypo-Alpe-Adria Bank, and considers how the CJEU is likely to proceedings will determine whether they interpret the bail-in powers in the Bank Recovery and Resolution Directive. qualify as restructuring obligations, in which case they will cease to exist; any liquidation profits to be distributed The likelihood of the Court of Justice provide welcome insight on the limits of proportionately to creditors of restruc- ■of the European Union (CJEU) the bail-in powers. turing obligations and then to share- being required to rule on EU bail-in holders, but without any regard to the legislation has significantly increased, as FEDERAL LAW ON REMEDIAL guarantees. German Landesbank BayernLB pursues a MEASURES FOR HAA complaint to the Austrian Constitutional HAA has had a troubled history since a Likely to give rise to further Court over alleged “expropriation” of decade of breakneck expansion in Austria controversy is the fact that the guaranteed €800m in guaranteed loans as part of the and the Balkans came to a sharp halt in the subordinated debt includes €150m of debt bail-in of failed Austrian lender Hypo- financial crisis. It was sold by the province held by a subsidiary of the World Bank, Alpe-Adria Bank International AG of Carinthia to BayernLB in 2007, bailed the International Bank for Reconstruction (HAA). out by the Austrian government in 2008, and Development. The World Bank has Austria’s “Federal Law on Remedial and then nationalised in 2009. sought an exemption from the bail-in. Measures for HAA”, which came into force The Federal Law is part of a package Ordinarily, international convention is on 1 August 2014, seeks to wind down the of measures seeking to avoid HAA that it is given preferred creditor status. troubled bank whilst avoiding much of the simply going into insolvency by instead However, to date Austria has refused, and burden falling on Austrian taxpayers. It transforming it into an asset management the World Bank is said to be considering breaks new ground by wiping out €800m company (Heta Asset Resolution AG) legal action (Art VII(4) of the IBRD’s of loans by BayernLB (which is 94% owned without a banking licence and partially Articles of Association provides that its by the state of Bavaria) and €890m of other exempt from normal insolvency laws, in assets are “immune from… expropriation subordinated debt, despite guarantees by order then to wind down its portfolio and or any other form of seizure by executive or HAA’s home province of Carinthia. (It realise its assets. This will be carried out legislative action”). If the World Bank were is likely that the ultimate bill under the via a federal divestment holding company. exempted, the burden would fall yet more guarantees would have been picked up by The Federal Law provides for: heavily on other bondholders, which might the central Austrian government.) bail-in of €890m of subordinated debt well give rise to further arguments that The Federal Law raises significant with redemption dates pre-dating 30 the bail-in offends the principle of equal questions about the scope and June 2019, for which Carinthia had treatment between creditors. interpretation of the Credit Institutions provided deficiency guarantees, together This is only one strand of a long-running Reorganisation and Winding Up with cancellation of those guarantees dispute between BayernLB and Bavaria, Directive (2001/24/EC) (“CRWD”) (however, guarantees by the State of on one side, and HAA and the Austrian and the Bank Recovery and Resolution Austria in respect of debt with redemp- authorities, on the other. The Munich Directive (2014/59/EC) (“BRRD”). Many tion dates post-dating 30 June 2019 will Regional Court has begun hearing the trial of these issues are unlikely to be found not be cancelled); of BayernLB’s action against HAA for “acte clair” and therefore, unless Austria bail-in of €800m of loans from BayernLB refusing to repay €2.4bn of loans following reaches a settlement with BayernLB and made after the 2008 bail-out, which were HAA’s nationalisation in 2009. HAA other affected creditors, may necessitate also guaranteed by Carinthia; claims it was under-capitalised from 2007- a reference to the CJEU, which would compulsory deferral of disputed restruc- 2009 and that BayernLB’s managers hid Butterworths Journal of International Banking and Financial Law January 2015 7 Feature this from regulators and investors; it has on the following bases: mechanism in either the CJEU or the counterclaimed for repayment of €3.4bn Extra-contractual liability of the EU Spanish administrative courts. of loans that have already been redeemed. for losses resulting from adoption of Separately, in December 2014 Austria the bail-in scheme (pursuant to Arts CREDIT INSTITUTIONS filed a claim against BayernLB for €3.5bn 268, 340(2) and 340(3) TFEU). REORGANISATION AND WINDING alleging it was misled about HAA’s financial Violation of the right to property in Art UP DIRECTIVE condition when Austria agreed to bail it out 17(1) of the Charter of Fundamental CRWD does not seek to harmonise in 2008. In the same month BayernLB sued Rights of the EU (“the Charter”) and reorganisation and winding up measures Austria for €2.4bn claiming the government Art 1, Protocol 1 of the European Con- across Member States, but principally aims had guaranteed HAA’s post-nationalisation vention on Human Rights (ECHR). to ensure that such measures are mutually loans. On 12 December 2014 the Vienna Breach of the principles of proportion- recognised (see recital (6)). “Reorganisation Commercial Court handed down judgment ality, protection of legitimate expecta- measures” are defined in Art 2 as: dismissing a test case brought by BayernLB tions, and non-discrimination. against one of the former shareholders “measures which are intended to from which it bought HAA, finding that Netherlands preserve or restore the financial BayernLB had been misled but would have In 2013, the Netherlands nationalised situation of a credit institution and bought the bank without a discount anyway; SNS Bank and SNS Reaal, expropriating which could affect third parties’ pre- BayernLB has said it will appeal. the holdings of shareholders and junior existing rights, including measures Meanwhile, Austria has agreed to bondholders without compensation. The involving the possibility of a suspension sell off HAA’s prime asset, its Balkans Amsterdam Court of Appeal’s Enterprise of payments, suspension of enforcement PUTTING THE AND BANK RESOLUTION RECOVERY DIRECTIVE THE TEST TO network, to US private equity firm Advent Chamber ruled that compensation should measures or reduction of claims”. International and the European Bank for be paid, but this did not derail the bail-in Reconstruction and Development. A sale as a whole. The European Commission Article 3 provides that member states was one of the European Commission’s adopted Decision C (2013) 1053 (22 “shall alone be empowered to decide conditions for permitting Austria to grant February 2013), finding that state aid on the implementation of one or more state aid to HAA. BayernLB has indicated provided by the Netherlands as part of the reorganisation measures in a credit it will refuse to consent to the sale, which bail-in was compatible with the internal institution”, in accordance with domestic if it led to the deal falling through could market. A challenge to this decision, law. The Directive envisages that credit put HAA in breach of the EC’s state aid Adorisio v Commission (Case T-321/13) institutions in difficulty must be wound up conditions. was ruled inadmissible by the CJEU, in the absence of reorganisation measures including on the basis that annulment of or in the event of such measures failing NEW TERRITORY FOR EUROPEAN the Commission’s Decision would not have (recital (13)). BAIL-INS any legal effect on the expropriation of the However, the Directive does not Bailing in instead of bailing out is the new applicants and it had not been shown that, specify the content of powers to implement normal in the Eurozone. No wholesale even if annulment led to the insolvency reorganisation measures. Nor does it legal challenge to a bail-in has yet been of SNS Bank and SNS Reaal, this would mandate any derogation from fundamental successful, but none has gone as far as procure any advantage for them. Treaty principles, such as the principle the HAA bail-in in cancelling deficiency of equal treatment between creditors (to guarantees by a sub-sovereign body. Spain which express reference is made in recitals The Spanish bail-in legislation introduced (12) and (16)). Accordingly, it would be Cyprus under Royal Decree-Law 24/2012 (in force questionable if it were suggested that In the case of Cyprus in 2013, depositors from 31 August 2012) mirrors Spanish CRWD provides a mandate for the Federal with uninsured deposits over €100,000 insolvency law, with shareholders the Law, which both disadvantages creditors as were bailed-in as shareholders to first to bear losses, followed by preference compared with an insolvency situation, and recapitalise the Bank of Cyprus and the shareholders and then bondholders in order treats creditors unequally since guarantees Laiki Bank, whereas insured deposits of priority.