Legal Actions in Cyprus following the Haircut
Following the recent developments in the Cyprus Banking System and the Cyprus economy, and the decisions of the Eurogroup on 15 March 2013 and 25 March 2013, the Cyprus House of Representatives enacted amongst others the Recovery and Resolution of Financial Institutions Law on the 29 March 2013. Following its enactment the Central Bank of Cyprus (“CBC”) was appointed as the Resolution Authority for Laiki Bank PLC (ex Marfin Laiki) (“Laiki”) and Bank of Cyprus PLC (“BoC’).
Laiki was considered to be insolvent and pursuant to the decrees issued, the majority of its assets in Cyprus (e.g. loan portfolio, buildings, subsidiaries in Cyprus etc.) would be transferred to BoC and the liabilities of Laiki in relation to insured deposits (i.e. deposits up to Euro 100,000 or equivalent in another currency per depositor), totaling according to information Euro 3.4 billion would be assumed by BoC together with other liabilities of Laiki including its obligation to the Emergency Liquidity Assistance mechanism (according to available information Euro 9.1 billion). Depositors which held an account with Laiki now hold an account with BoC.
BoC on the other hand was considered to be in need of first tier capital to meet the applicable banking regulation requirement for capital adequacy and thus pursuant to the decree issued for the resolution of BoC, depositors of BoC would be bailed in for its rescue. This meant that depositors with balances over Euro 100,000 would take a haircut on their deposits as follows:
(a) 37,5% of the balance over Euro 100,000 would be converted into Class A shares of BoC.
(b) 22,5% of the balance over Euro 100,000 is liable to be converted to into Class A shares of BoC following evaluation of BoC’s assets and liabilities post resolution
(c) 30% of the balance over Euro 100,000 is converted into a non interest bearing bond and is blocked until evaluation of BoC’s assets and liabilities post resolution.
Further to satisfy the requirements of the agreement reached with the Eurogroup further decrees were issued which related to the sale of the operations of BoC and Laiki and Hellenic Bank in Greece to Piraeus Bank, the sale of the operations of Laiki in England to the BoC (United Kingdom).
Judicial Review Proceedings
Following implementation of the above decrees approximately 4.000 thousand judicial review proceedings were filed by depositors of Laiki and BoC, seeking orders of the Supreme Court to annul the decrees, on the grounds, inter alia, of being unconstitutional, the decrees being discriminatory, lack of exercise of proper judgment by the CBC and the Republic and other reasons.
The Republic and CBC filed preliminary objections to the proceedings claiming inter alia that the decrees are not subject to judicial review proceedings as they are not matters of public law but rather that they are matters of private law.
The Supreme Court considered the preliminary objections and the Full Bench of the Supreme Court heard both sides on these preliminary objections.
On the 7th July 2013 the Supreme Court issued its decision on the preliminary objections.
By a majority decision the Supreme Court (seven out of the nine Supreme Court judges) ruled that the proceedings in question do not come within the revisional jurisdiction of the Supreme Court. The court held so on the basis that the rights of depositors, if they are adversely affected as a result of the decrees, do not fall in the ambit of public law so as to allow the exercise of the jurisdiction of the Supreme Court to examine the legality of the decrees. The court ruled that the actions fall in the sphere of private law and that depositors rights should be pursued by means of civil law actions before the District Courts against the involved banks and / or institutions or authorities of the Republic and / or others.
The court also held that in such potential proceedings, all dimensions of rights affected can be considered. Of particular note is the remark of the court that the civil courts forum is more appropriate to determine one of the fundamental issues in the proceedings which is whether the depositors are in a better position following the decrees in comparison to the position that they would have been if the affected banks had been liquidated.
The aforementioned decision of the Supreme Court is now binding precedent on recourses filed on the same subject matter and thus will be dismissed by the Supreme Court in due course.
Possible Future Steps
Following the above judgment it is now evident that any person wishing to contest the decrees should pursue a civil action in the District Courts seeking damages against the involved banks and / or institutions or authorities of the Republic involved in the implementation of the decrees. The time limit for taking such an action is three years. Time started running from 25/03/2013.
Finally, for those who wish to resort to the European Court of Human Rights claiming a violation of human rights, it is necessary (in accordance with regulations governing the operation of the European Court of Human Rights) to exhaust all domestic remedies (i.e. available in Cyprus) before resorting to this. Otherwise, the European Court of Human Rights will dismiss such recourses.