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Commentary on the judgement of the European Court of Justice

October 2016 - Finance. Legal Developments by George Y Yiangou & Co .

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The Court of Justice of the European Union (CJEU) dismisses the actions for annulment of the MoU and the Eurogroup statement and the actions for compensation of uninsured depositors for the restructuring of the Cypriot banking sector

In the joint cases of Mallis et al. v European Commission and European Central Bank, the claimants sought the annulment of the memorandum of understanding (MoU) and the Eurogroup statement concerning the restructuring of the banking sector in Cyprus. Based on a similar set of facts, in the joint cases of Ledra Advertising et al. v European Commission and European Central Bank the claimants requested from the CJEU the for annulment and an order requiring the Commission and the ECB to pay damages, equivalent to the diminution in value of the claimants uninsured deposits andfor breach of the right to property guaranteed by the Charter of Fundamental Rights of the EU.

On 20 September 2016, the CJEU delivered its ruling on the abovementioned cases in respect of the role of the EU institutions in the context of the adoption of the MoU, and the relationship between EU institutions and treaty-based organisations operating under public international law that were established as part of the response to the euro crisis, such as the European Stability Mechanism (ESM).

In relation to the applications for annulment of the Eurogroup statement of 25 March 2013 and the MoU, the CJEU held that the Commission and the ECB could not be regarded as the true authors of these instruments, in spite of the active participation of the said two EU institutions in the functioning of both the ESM and the Eurogroup. The CJEU therefore dismissed the appeals and upheld the General Court’s orders of 16 October 2014.

The powers conferred on the Commission and the ECB within the ESM Treaty bind only the ESM .Under no circumstance can they be regarded as conferring any decision-making powers to these two EU institutions. According to Article 13 of the ESM Treaty, the ESM ‚Äė‚Äėshall entrust the European Commission ‚Äď in liaison with the ECB and, wherever possible, together with the IMF ‚Äď with the task of negotiating, with the ESM Member concerned, a MoU detailing the conditionality attached to the financial assistance facility‚Äô‚Äô and the Commission is also entrusted to sign the MoU on behalf of the ESM. It follows that the Commission and the ECB were simply entrusted by the Board of Governors of the ESM with the task of negotiating a macro-economic adjustment programme to be set out in the form of an MoU and to monitor compliance with the conditionality attached to the financial assistance. However, the conclusion of the MoU could not be imputed to the Commission and the ECB, and an application of annulment is only available against measures adopted by EU institutions.

In addition, the Eurogroup statement and the MoU could not be annulled since they did not fall among those instruments that produce legal effects vis-à-vis third parties that are capable of being set aside by virtue of Article 263 of the Treaty on the Functioning of the European Union (TFEU). As regards the MoU, this was an international agreement concluded between the ESM and CyprusRegarding the Eurogroup statement, this was a political agreement with the Cypriot authorities and was not considered as having any binding force, given the status of the Eurogroup which was confirmed by the CJEU as a forum of discussion between ministers of eurozone Member States and not a decision-making body.

As far as the actions for compensation are concerned, the CJEU held that the fact that the activities pursued by the Commission and the ECB within the ESM Treaty cannot be viewed as conferring any decision-making power, does not in its own right rule out the possibility of any damages being claimed against the two EU institutions for unlawful conduct when acting under the ESM framework. The Commission, when negotiating and concluding an MoU on behalf of the ESM, should retain its role as guardian of the Treaties (Article 17(1) Treaty on European Union) and to that end ‚Äė‚Äėrefrain from signing a memorandum ‚Ķ whose consistency with EU law it doubts‚Äô‚Äô (para. 59, Ledra Advertising et al.). In that respect, the CJEU held that the General Court had erred in law by holding that it did not have jurisdiction to consider an action for compensation based on illegality under Article 268 and the second and third paragraphs of Article 340 TFEU. Setting aside the General Court‚Äôs ruling of 10 November 2014, the CJEU proceeded to give a ruling on the actions for compensation on the merits by considering whether the MoU violated the right to property enshrined in Article 17 of the Charter of Fundamental Rights of the European Union.

The CJEU observed that the Commission is bound to ensure that an MoU does not violate the fundamental right of one to rightfully own his lawfully acquired possessions. However, any lawful restrictions on the right to property should meet an objective of general interest pursued by the EU, namely the objective of ensuring the stability of the banking system. The CJEU had regard to the imminent risk of greater financial losses to which depositors would have been exposed had the Cyprus Popular Bank and the BoC been left to fail and the resulting losses to EU taxpayers‚Äô money had they been asked to bail-out the failing banks. It follows that the measures adopted by the bail-in sustained by the uninsured depositors of the two banks concerned did not amount to ‚Äė‚Äėan intolerable interference impairing the very substance of the depositors‚Äô right to property‚Äô‚Äô (para. 74, Ledra Advertising et al.).

Even though, on the merits, no violation of the right to property was proved, the decision is important in that it held that the Commission and the ECB may be held accountable if they do not oversee the application of EU law or observe fundamental rights when taking part in the implementation of financial assistance programs under the ESM framework.

ELENI IAKOVIDOU, ADVOCATE