Currently, one of the main issues in Slovenia is the ruling in late October 2016 of the Constitutional Court of Slovenia regarding constitutional rights violations suffered by investors in five major Slovenian banks when both their equity capital and the subordinated instruments were written off as a result of extraordinary measures exercised by the Bank of Slovenia between December 2013 and December 2014 as a result of the systemic banking crisis.
The Court’s ruling held that certain provisions of Slovenia’s Banking Act were inconsistent with the constitutional right to effective judicial protection of damages claims related to the allegedly unfounded write-off of equity and subordinated capital instruments.
The Court’s review of the constitutionality of the abovementioned extraordinary measures based on the Banking Act was initiated by applicants claiming that they had unjustifiably lost all of their investments. In their view, the regulation on compulsory write-off of the eligible liabilities of banks, established by the Banking Act, directly and disproportionately interfered with the principle of non-retroactivity and the rights to judicial protection and to private property as set forth in the Slovenian Constitution.
The Court found that the Banking Act was unconstitutional – but only regarding the provisions concerning damages claims related to damage incurred by the exercise of extraordinary measures of the Bank of Slovenia, whereas the procedure, conditions, and authorization of the Bank of Slovenia to impose the extraordinary measures were found to be consistent with the provisions of the Slovenian Constitution. The Court ruled that decisions on extraordinary measures were lawful, since the principle that individual creditors must not incur greater losses than they would in the event of the bank’s bankruptcy was respected, meaning that the right to private property had not been interfered with. In other words, according to the Banking Act, no individual creditor should incur greater damage by exercise of the extraordinary measures than they would have, had no measures had been adopted. In this case, the incurred damage would be the difference between (i) the proceeds that creditors would be entitled to in the event of the bank’s bankruptcy (or proceeds they would have gotten had the banks been solvent and bankruptcy proceedings not been necessary); and (ii) the proceeds received after the extraordinary measures imposed by the Bank of Slovenia.
Notwithstanding the Constitutionality of the Extraordinary Measures themselves, the Court found that holders of subordinated instruments had not been provided with effective judicial protection, given that the challenged provisions of the Banking Act did not consider and properly evaluate their significantly weaker factual and procedural position compared to the position of the Bank of Slovenia.
In reaching its conclusions, the following was deemed essential by the Court: (1) The lack of access to information and data related to the assessment of the value of bank assets and other relevant information that would enable claimants to bring actions for damages; (2) The absence of specific and customized procedural rules that would outweigh the information imbalance between the average holder of subordinated instruments and the Bank of Slovenia (in other words, the Court shifted the burden of proof for the necessity of extraordinary measures from the creditors to the Bank of Slovenia); and (3) The absence of specific speedy and economical collective judicial procedures to ensure well-founded and uniform decisions in disputes between all holders of subordinated instruments and the Bank of Slovenia.
Based on its findings, the Court ordered the National Assembly of Slovenia to remedy the established unconstitutionality of the Banking Act by adopting legislation consistent with the Constitution within six months.
In order to secure the constitutional right to effective judicial protection in the interim, the Court suspended the statute of limitation for damages claims against the Bank of Slovenia until the expiration of that six-month-period.
In the aftermath of the Court’s ruling, holders of subordinated capital instruments are preparing to bring actions for incurred damages estimated to surpass EUR 600 million in total (which is the amount of the written-off subordinated obligations without share capital). Claims will be based on the fact that the last published balance sheets and financial statements of the banks (on 30 September 2013) prior to the write-off (17 December 2013) did not indicate their negative capital, as reported later by the Bank of Slovenia when imposing the extraordinary measures (which were based on the different evaluation methods as established by International Financial Reporting Standards).
By Matjaz Jan, Partner, ODI Law Firm
This article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.