In this article we examine a recent landmark case where the European Court of Justice recognized that if a creditor challenges a national banking resolution process on the grounds that it has suffered damage, it should also have legal standing to bring a case against the relevant State aid decision as these processes are inextricably linked.
This may now provide a plausible route for creditors to attack State aid approvals of bank resolution, something that has been very difficult to date — despite the extraordinary damage that such decisions do to creditors.
In August 2014, the Portuguese authorities put Banco Espírito Santo (BES) into resolution under the Portuguese national resolution framework — this was at a time before the Bank Recovery and Resolution Directive (BRRD) had come into force. In order to carry out an orderly resolution, the Portuguese authorities designed a number of support measures, including State aid, which involved the following:
• the sound business activities of BES were transferred to a Bridge Bank called Novo Banco;
• the other residual assets and liabilities remained with BES which would be wound-down within the next two years;
• the Bridge Bank received State funds of €4.8 billion to provide it with initial share capital, before it was sold off in order to ensure that there is no distortion of competition;
• the Portuguese authorities agreed that none of the claims of the shareholders and holders of subordinated debt or any hybrid instruments could be transferred to the Bridge Bank. Therefore, such claims were retained by BES; and
• The European Commission (EC) approved these measures the same day they were notified in its August 2014 State aid decision (the EU State aid decision). The subordinated creditors stuck in BES appealed the State aid decision to the General Court and also appealed the national resolution proceedings in the Portuguese courts.
Before the General Court, the creditors faced a challenge to establish standing. They argued that the State aid decision had caused them damage. In particular the resolution approved by the EC meant they went from holding bonds in a valuable (if undercapitalized) bank, to holding bonds in bank with no valuable assets, no ability to conduct new business and whose banking license was to be withdrawn after a short winding-up period. This meant that they had suffered substantial losses and their legal position was changed.
The General Court held the creditors had no standing to appeal the State aid decision. In particular, it held that the proceedings before the national courts in Portugal had a different subject matter to the appeal of the EU State aid decision — which of course was inevitable given that an appeal against a State aid decision can only be brought in the General Court — and the annulment of the latter could not have an effect on the Portuguese court’s interpretation of Portuguese laws that were the subject of the national court proceedings. The General Court therefore found that the creditors had no standing on the basis that annulment of the EC’s State aid decision could not affect their legal position. The General Court also held that the value of the creditors’ claims was not affected by the EU State aid decision, but rather the decision to put BES into resolution.
The creditors appealed to the Court of Justice, arguing that the annulment of the EU State aid decision would significantly increase the likelihood of success of the proceedings that had been brought before the Portuguese courts against the decision to put BES into resolution — because the lawfulness of that resolution depended in part on the lawfulness of the State aid used to support it. The creditors argued the two things are inextricably linked. The creditors added that this success could either result in the annulment of the decision to put BES into resolution or in their right to claim damages for the losses that had been incurred due to the unlawful resolution of BES.
In previous cases, the Court of Justice held that a party retains a legal interest in the outcome of an action for annulment where that action may constitute the basis of an action for damages.2 The Court of Justice has also held that an interest in bringing proceedings could arise from any action before the national courts in the context of which the possible annulment of the contested act before the EU Courts is capable of benefiting the applicant.
On November 7, 2018, the Court of Justice found for the creditors of BES and set aside the General Court’s decision to find their appeal inadmissible. Since the creditors had already brought an action before the Portuguese courts for the annulment of the decision to put BES into resolution, the annulment action could benefit the creditors — generating sufficient legal interest to maintain standing. It was not for the General Court to assess whether the creditors’ claim before the national courts was well founded, as the EU courts do not have any legal basis to do that.
The Court of Justice agreed that even though the appeal of the State aid decision before the Court of Justice and the appeal of the BES resolution in Portugal necessarily had different subject matters, these cases were inextricably linked because the State aid decision was granted in the context of the resolution of BES.4 On this basis, the Court of Justice found that the General Court was wrong to conclude that the creditors had no legal standing to bring an appeal against the State aid decision. The case has now been returned back to the General Court.