Introduction

In a previous update on the Hypo Alpe-Adria-Bank International AG (HAA) case (for further details please see "Hypo Alpe-Adria-Bank International AG – bail-in on shaky foundations?"), the effects of the so-called 'HAA legislation'(1) (eg, the bail-in of junior creditors and the transformation of HAA into the wind-down entity HETA Asset Resolution AG) were briefly summarised.

Since then, the government has enacted the Bank Restructuring and Reorganisation Act,(2) which fully implements the EU Bank Recovery and Resolution Directive,(3) including the bail-in tool. The act came into force on January 1 2015. On March 1 2015 the Financial Markets Authority (FMA) – in its capacity as the resolution authority – issued an administrative ruling based on the Bank Restructuring and Reorganisation Act, imposing a moratorium on all liabilities owed by HETA until May 2016.(4) On April 2 2015 the Constitutional Court dismissed the individual complaints filed against the HAA legislation due to formal reasons.

This second update on the HAA/HETA situation summarises the latest developments regarding the HAA legislation, the Bank Restructuring and Reorganisation Act and the moratorium. It also includes an overview of the tough road that the legislature has paved for HAA/HETA creditors that wish to object to the measures taken by the FMA based on the Bank Restructuring and Reorganisation Act.

Judicial proceedings concerning HAA legislation

The Constitutional Court has received:

  • 34 individual complaints from Austrian and foreign banks, funds and insurers;
  • 28 requests from civil courts based on civil claims filed against HAA/HETA and Carinthia; and
  • one request filed by 73 members of Parliament.

All of the complaints requested the review or repeal of parts of the HAA legislation – in particular:

  • the Law on Remedial Measures for HAA;
  • the ordinance implementing the bail-in of subordinate debts under the Law on Remedial Measures for HAA; and
  • the Law on the Creation of a Wind-Down Entity (ie, the act establishing and governing HETA).

Most of the complaints raised concerns regarding the constitutionality of the HAA legislation, in particular by arguing that it:

  • infringes the fundamental rights of inviolability of property and equality before the law;
  • violates legislative clarity requirements and general principles of objectivity; and
  • violates EU law.

In addition, formal arguments were brought before the Constitutional Court regarding the federal legislature's lack of competence to cancel deficiency guarantees given by the province of Carinthia under the Law on Remedial Measures for HAA and the inappropriate use of an ordinance as a legal measure to enact a transfer of assets under the Law on the Creation of a Wind-Down Entity.

Due to formal reasons, the Constitutional Court dismissed the individual complaints. However, the Constitutional Court will continue its deliberations on the remaining requests and most likely render a decision in its Autumn session.

Bank Restructuring and Reorganisation Act

By making the bail-in tool(5) applicable as of January 1 2015, Austria was one of the first EU member states to adopt the EU directive fully. The Bank Restructuring and Reorganisation Act closely follows the EU directive. Based on Article 1(2) of the EU directive – which allows resolution authorities to adopt stricter rules – the legislature also included special provisions for so-called 'wind-down entities' (Section 162 of the Bank Restructuring and Reorganisation Act). Wind-down entities(6) are subject to the same rules as so-called 'reduction units' (Section 84 of the Bank Restructuring and Reorganisation Act).(7)

The structural and procedural aspects of reduction units under the Bank Restructuring and Reorganisation Act closely mirror those in the Law on the Creation of a Wind-Down Entity. However, the core provision is Section 162(6) of the Bank Restructuring and Reorganisation Act, pursuant to which a reduction unit established under Section 2 of the Law on the Creation of a Wind-Down Entity (ie, HETA) is subject to the resolution tools and resolution powers provided under the Bank Restructuring and Reorganisation Act.

Following the moratorium, the lawfulness of the extension of the scope of the Bank Restructuring and Reorganisation Act to HETA has been highly disputed. The main argument is that HETA is no longer a 'credit institution' within the meaning of the EU directive.

A recently published legal opinion(8) commissioned by HETA's shareholders concluded that the legislature was obliged under EU law to include HETA in the scope of the Bank Restructuring and Reorganisation Act. According to the legal opinion, this is because HAA was a credit institution when the EU directive was adopted (May 15 2014) and published (June 12 2014). The Law on the Creation of a Wind-Down Entity and the Law on Remedial Measures for HAA came into effect on August 1 2014 (ie, after the adoption and publication of the EU directive). Accordingly, the legislature must have been aware of the intentions and results prescribed in the EU directive. In accordance with the European Court of Justice's principles,(9) the legislature had to ensure that HAA/HETA remained within the scope of the EU directive, irrespective of the fact that HAA's banking licences were replaced by an ex actu (ie, from the act) licence under the Law on the Creation of a Wind-Down Entity.

The legal opinion also stated that, based on a purposive construction of the EU directive, wind-down entities (ie, institutions that do not actively pursue new business and whose business objectives are restricted to the best possible realisation of their portfolios) fall within the scope of the EU directive.

Based on these findings, the legal opinion concluded that, with regard to HETA, the Bank Restructuring and Reorganisation Act and the HAA legislation (apart from the allegations filed with the Constitutional Court) are reasonable and comply with the principle of objectivity. Considering that the Constitutional Court's president has already stated that the legal concerns regarding the effects of the Bank Restructuring and Reorganisation Act are similar to those regarding the HAA legislation,(10) the abovementioned observations may already be part of the Constitutional Court's considerations.

Moratorium

On March 1 2015 the FMA issued an administrative ruling deferring the maturities of all debt securities issued by HETA and all other liabilities – including interest due dates – until May 31 2016, provided that the liabilities do not qualify as non-eligible liabilities pursuant to Section 86(2) of the Bank Restructuring and Reorganisation Act (materially corresponding to Article 44(2) of the EU directive). Liabilities affected by the moratorium include:

  • bonds;
  • subordinated capital and bonded loans issued by HETA (including a €450 million bond originally due March 6 2015);
  • subordinated liabilities already subject to the Law on Remedial Measures for HAA;
  • the directive implementing the bail-in of subordinate debts under the Law on Remedial Measures for HAA;
  • eligible liabilities towards Bayerische Landesbank; and
  • all repayment claims arising out of Austria against Carinthia in relation to security granted for HETA liabilities.

Based on the situation summarised in its administrative ruling and the results of the preliminary valuation of HETA's asset quality review process, the FMA held as follows:

  • HETA will be unable to pay its debts in the near future (at the latest, in 2016).
  • Considering that Austria, in its capacity as an indirect shareholder of HETA, denied HETA additional funding, no alternative private sector measures are available to prevent the anticipated failure of HETA.
  • The moratorium is in the public interest because HETA's insolvency would:
    • affect the continuity of critical functions of HETA's former Southeast Europe banking network (HETA attempted to continue providing services to its former subsidiaries); and
    • have material negative effects on the stability of the financial markets of member states in Southeast Europe, where HETA's former subsidiaries are still active (eg, Croatia and Slovenia and non-EU member states Serbia, Bosnia and Montenegro). Further, sale of the Southeast Europe banking network might also fail because an insolvent HETA would trigger a material adverse change clause in the purchase agreement with Advent International and the European Bank for Reconstruction and Development.

With regard to HETA's financial situation, the FMA summarised that the asset quality review(11) may reveal the need for write-downs of between €5.1 billion and €8.7 billion, leading to a capital gap of between €4 billion and €7.6 billion. The FMA provided no information on whether this capital gap will be read in addition to the capital needs and liquidity measures already approved by the European Commission's September 3 2013 decision.(12)

Additional insight on the financial situation may be derived from the 2014 Public Finance Report, published by the Central Statistical Office (Statistik Austria).(13) Based on a realistic scenario, the government's expenditure for establishing HETA (ie, the capital gap for HAA/HETA) is reported as €4.5 billion. Pursuant to a press statement by a Statistik Austria director, this amount does not consider costs triggered where:

  • the Constitutional Court abolishes the subordinate debt bail-in under the Law on Remedial Measures for HAA; or
  • the sale of the Southeast Europe banking network fails.

Together, these risks would turn the realistic scenario into a worst-case scenario and create a capital gap of €7.6 billion.(14)

In the reasoning provided in its administrative ruling, the FMA deemed the moratorium's 15-month term as sufficient for carrying out the prompt valuation of HETA's assets and liabilities based on its financial statements as of December 31 2014 (to be drafted by April 30 2015)(15) and determining a strategy for the further resolution of HETA. Further, the 15-month term allows for an additional one-month period to consider the results of HETA's financial statements for the 2015 business year.

Following the moratorium, the reference to "determining a strategy for the further resolution of HETA" may be interpreted as the FMA's right to apply further resolution powers or tools under the Bank Restructuring and Reorganisation Act in order to proceed with the resolution of HETA. Such measures (in particular, the bail-in tool) must be carefully tailored in accordance with the limitations outlined in the Bank Restructuring and Reorganisation Act (Section 85(3) of the Bank Restructuring and Reorganisation Act and Article 43(3) of the EU directive, as well as Section 90 of the Bank Restructuring and Reorganisation Act and Article 48 of the EU directive (sequence of write-down and conversion)). Considering that HETA is already a wind-down entity, it is highly unlikely that applying the bail-in tool will restore its financial soundness and long-term viability. Thus, an additional reduction unit may be created to apply the asset separation tool. Further, the remainder of HETA may face insolvency.

Legal remedies

Creditors have limited rights to appeal FMA measures implemented in its capacity as the resolution authority under the Bank Restructuring and Reorganisation Act. From a procedural standpoint, a creditor faces a lengthy appeals procedure. Creditors must first file objections against the administrative ruling with the FMA, which is then bound to issue a formal decision on the objections. However, the FMA may also amend its administrative ruling, thereby restarting the process from the beginning. Appeals against the formal decision can be brought before the Federal Administrative Court. Further appeals can be brought before the Higher Administrative Court, where applicable. When reviewing FMA rulings, the administrative courts are bound by the results of the economic assessments conducted by the FMA and the Austrian National Bank.(16) The annulment of an FMA decision will not affect any FMA administrative acts or transactions which were based on the annulled decision, unless the abolition of these acts and transactions:

  • does not jeopardise the resolution objectives;
  • does not affect legitimate interests of third parties; and
  • is possible.

Essentially, remedies for a wrongful FMA decision or action are limited to compensation for the loss suffered by the creditor as a result of the decision or act. Following the successful exercise of all ordinary legal remedies before the administrative courts, a creditor may file a civil complaint against Austria with the Vienna Commercial Court within three months. If a remedy lodged by a creditor exhausts all administrative and civil court procedures, obtaining a final judgment for damages may take between three and five years, or even longer.

Comment

HETA creditors holding debts that are subject to the deficiency guarantee are in an unfortunate situation. The resolution powers under the EU directive and the Bank Restructuring and Reorganisation Act are intended to provide the FMA with instruments that aim to avoid and mitigate negative effects caused by a failing bank. In other words, the Bank Restructuring and Reorganisation Act and the EU directive seek to avoid insolvencies (ie, to prevent a situation where the deficiency guarantee would kick in). In addition, due to its accessory character, the security interest provided by the deficiency guarantee (Section 1356 of the Civil Code) is limited when it comes to the effects of resolution powers and tools on a secured liability.

Under a deficiency guarantee, a secured party may make a direct claim against the guarantor only where the debtor is insolvent or where enforcement measures have failed(17) or will likely fail.(18) In these cases – and provided that the secured liabilities are due – a deficiency guarantor will be liable for payment.

In relation to the moratorium, the courts must decide whether the deferred maturity of the claims against HETA also indirectly defers the claims against the deficiency guarantor (ie, Carinthia). While no precedent is available, considering the accessory character of the deficiency guarantee, there are valid arguments to deny direct claims while the moratorium is in effect, as the secured claims are not due under the moratorium.

Further, in relation to whether and to what the extent the bail-in tool – in particular, the write-down power – will apply to HETA's liabilities, Article 53(4) of the EU directive and Section 95 of the Bank Restructuring and Reorganisation Act stipulate that liabilities subject to a write-down must be treated as discharged. Again, the accessory character of the deficiency guarantee could arguably lead to a situation where creditors also lose their claims against the deficiency guarantor with respect of the reduced respectively discharged amount. However, this could violate the 'no creditor worse off' principle outlined in the Bank Restructuring and Reorganisation Act and EU directive. In a standard insolvency scenario (eg, other than in case of a voluntary remission of debt), creditors' claims against a deficiency guarantor are not affected by an insolvency or the compulsory reduction of claims where a majority vote approves a reorganisation plan (Section 141 of the Insolvency Act).(19)

The measures (eg, the bail-in tool and other resolution powers) provided under the EU directive and the Bank Restructuring and Reorganisation Act did not previously exist in Austria's legal system and creditors will most likely not have considered their effects when assessing the risks involved in investing and holding unsecured notes issued by HAA. However, HAA's critical financial situation has been well known since its privatisation in December 2009. Further, the terms of the deficiency guarantee materially differ from, for example, the terms and conditions of the guarantee given by Austria with respect to the €1 billion subordinate government guaranteed notes issued by HAA in 2012 (ISIN XS0863484035). Thus, when deciding on claims, the courts may also consider that, in relation to the latest issuance of these guaranteed notes, any prudential investor should have already been aware of the differences between the security level granted by an abstract guarantee (as provided by Austria) and HAA's unsecured issuances subject to a deficiency guarantee.

For further information on this topic please contact Stephan Schmalzl at Graf & Pitkowitz by telephone (+43 1 401 17 0) or email (schmalzl@gpp.at). The Graf & Pitkowitz website can be accessed at www.gpp.at.

Endnotes

(1) BGBl I 51/2014 and BGBl II 195/2014 (the financial market regulator's ordinance implementing the bail-in under the Law on Remedial Measures for HAA). The main aspects of BGBl I 51/2014:

  • establish the legal framework for a wind-down entity with an ex actu banking licence where HAA will be transformed (the Law on the Creation of a Wind-Down Entity); and
  • prepare the basis for the bail-in of subordinate creditors (the Law on Remedial Measures for HAA).

(2) BGBl I 98/2014.

(3) Directive 2014/59/EC of the European Parliament and the EU Council (May 15 2014) establishing a framework for the recovery and resolution of credit institutions and investment firms.

(4) In accordance with the Bank Restructuring and Reorganisation Act, the administrative ruling was published on the FMA's website. It can be found (in German only) at www.fma.gv.at/de/sonderthemen/bankenabwicklung/edikte.html.

(5) Section 5 of Chapter IV of Title IV of the EU directive.

(6) Section 162(2) of the Bank Restructuring and Reorganisation Act provides that specific conditions must be met in order to qualify as a wind-down entity. Among other things, the entity must be subject to a wind-down or restructuring plan approved by the European Commission before December 31 2014 and its business activities must be limited to those required in order to wind down existing portfolios.

(7) Section 84 of the Bank Restructuring and Reorganisation Act implements Article 42 of the EU directive. However, the legislature used the term 'abbaueinheit' ('reduction unit') rather than 'für die Vermögensverwaltung gegründete Zweckgesellschaft' ('asset management vehicle'), which is used in the EU directive.

(8) Stefan Perner, "Zum rechtlichen Rahmen der HETA-Abwicklung", ÖBA 2015, 239.

(9) Following the adoption and implementation of a directive, member states must refrain from adopting measures that are likely to compromise the results prescribed in the directive (ECJ December 18 1997, Case C-129/96, Inter-Environnement Wallonie ASBL v Région wallonne. Also see the Opinion of Advocate General Jacobs, delivered on April 24 1997 (ECLI:EU:C:1997:216)).

(10) In a press conference held on April 2 2015, Gerhart Holzinger – the president of the Constitutional Court – expressed his opinion that, while it has not yet been brought before the Constitutional Court, the moratorium will most likely be reviewed. The moratorium and bail-in expected to follow have a similar effect as the Law on Remedial Measures for HAA: in both cases, the legislature can annul creditors' claims or extend their maturity, respectively.

(11) Pursuant to the administrative ruling, an asset quality review was performed in order to make HETA's assets liquid within two to three years.

(12) According to the European Commission's decision of September 3 2013 (SA.32554, OJ L 176, June 14 2014), the contingent capital for the wind-up of HAA up to a maximum of €5.4 billion and the contingent liquidity support up to a maximum of €3.3 billion constitute state aid, but must be compatible with the internal market.

(13) The press release is available on Statistik Austria's website at www.statistik.at/web_en/statistics/Public_finance_taxes/index.html.

(14) Pursuant to the information available, these figures do not include payment obligations that may arise from foreign judgments rendered against HETA (eg, the recent (not yet final) decision by a Munich court ordering HETA to repay loans to BayernLB in the amount of €2.4 billion and declaring that the moratorium has no effect on claims governed by German law.)

(15) In a press release published on HETA's website (www.heta-asset-resolution.com/en/content/ad-hoc-releases-2015) on April 24 2015, HETA stated that the preparation and audit of its financial statements for the financial year ending on December 31 2014 would not be completed by April 30 2015. HETA's financial statements are expected to be available by the end of May 2015. HETA's reasoning for the delay is that the finalisation of its asset quality review took more time than initially expected. Pursuant to a press statement issued on April 27 2015, Sebastian Prinz von Schönaich-Carolath – the newly appointed chief executive officer of HETA – stated that HETA's management intends to realise HETA's assets within three to five years (ie, within a longer period than initially prescribed). Further, a write-down requirement of approximately €5.7 billion is expected to be the most realistic scenario (see Austrian newspaper Der Standard's website at http://derstandard.at/2000014950160/Neuer-Chef-der-Bad-Bank-will-die-Assets-binnen-drei).

(16) The explanatory notes to the Bank Restructuring and Reorganisation Act refer to Recital 89 of the EU directive and clarify that:

"the national resolution authorities are specifically equipped with the expertise needed for making the assessments and for determining the appropriate use of the margin of discretion. Therefore, it is important to ensure that the complex economic assessments made by national resolution authorities in that context are used as a basis by national courts when reviewing the crisis management measures concerned. However, the complex nature of those assessments should not prevent the courts from examining whether the evidence relied on by the resolution authority is factually accurate, reliable and consistent, whether that evidence contains all relevant information which should be taken into account in order to assess a complex situation and whether it is capable of substantiating the conclusions drawn therefrom."

(17) G Neumayer/Th Rabl in Kletecka/Schauer, ABGB-ON1.02 §§ 1346, 1347 Rz 56.

(18) The additional scenario provided for by Section 1356 of the Civil Code (ie, unknown residence of the debtor) does not apply in the case at hand.

(19) Riel in Konecny/Schubert, KO § 151 Rz 2; Neumayer/Th Rabl in Kletecka/Schauer, ABGB-ON1.02 § 1363 Rz 3; Gamerith in Rummel, ABGB3 II/3 § 1354 Rz 2 mwN.

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