On 25 February 2013, the Administrative Law Judicial Division of the Council of State (“the Division”) gave a ruling in response to the more than 700 appeals that had been brought against the decision of the Minister of Finance (the “Minister”) of 1 February 2013 to expropriate securities and capital components of SNS REAAL N.V. and SNS Bank N.V. (“SNS”). This expropriation was based on Article 6:2 of the Intervention Act, which was added to the Financial Supervision Act (“FSA”).
More than 700 appeals were brought against the expropriation decision, and the Division had to give a ruling within 10 days after receiving these appeals. The Division upheld the major part of the expropriation decision, with the exception of future claims against SNS. All procedural objections, as well as arguments about prohibited state aid and competition issues, were denied by the Division. In this article we will describe the outlines of the ruling.
Procedural Objections, including the Right to a Fair Trial
The turnaround time of these proceedings is exceptionally short. Normally, proceedings before the administrative court take about one year. In this case, the highest general administrative court had to give a ruling about the lawfulness of the expropriation that very month. On the night before the hearing, which was on 15 February 2013, the Minister submitted a statement of defence of 105 pages. A number of the claimants in these proceedings (the “Appellants”) argued that the short term for appeal, the short time between appeal and hearing, and the short time that was available to take note of the documents had violated their right to a fair trial. They alleged that this was contrary to the Convention for the Protection of Human Rights and Fundamental Freedoms (“ECHR”). According to a number of Appellants, the Division should have postponed the hearing in order to guarantee sufficient time for preparation.
The Division rejected this argument, considering that the ECHR leaves room for consideration and the right to access to the courts is “not affected at heart”. The expropriation decision was intended to avert a serious and imminent danger to the stability of the Dutch financial system. According to the Division, this purpose will not be achieved as long as it is not certain that the expropriation decision can be upheld. What is more, the Division concluded that the Appellants could put forward their arguments both orally and in writing, and many of them have done so indeed.
Incidentally, it cannot be excluded that proceedings will be brought before the European Court of Human Rights about this matter. The Dutch Investors’ Association VBE, among others, already indicated that it is considering this option.
Authority to Expropriate
Section 6:2 of the FSA gives the Minister the authority to expropriate in the event of a serious and imminent danger to the stability of the Dutch financial system caused by the situation of a financial institution domiciled in the Netherlands. Apart from the assets of the business, the securities issued by or with the cooperation of that business can also be expropriated. The expropriation decision was taken on the basis of this Section and is an “ultimum remedium”. Pursuant to Section 6:1 of the FSA, the Minister may take less drastic measures, such as intervention in the internal powers of the financial enterprise.
The Division rules that there is no priority between the two powers mentioned above. Under Section 6:2 of the FSA, the Minister has the authority to expropriate as soon as there is a serious and imminent danger to stability; he does not first have to choose to take less drastic measures under Section 6:1 of the FSA.
Many Appellants put forward that the problems had been caused by the failing management of SNS and poor supervision by DNB, the Dutch National Bank. However, according to the Division this does not change the Minister’s authority to expropriate.
Serious and Imminent Danger to Stability of Dutch Financial System
According to the Division, the decisive aspect for the Minister’s authority was whether the situation at SNS was so bad that it caused a serious and imminent danger to the stability of the Dutch financial system. To answer this question, the position that SNS held within that system is relevant. The Minister is of the opinion that SNS, in view of its balance sheet total, number of bank accounts and role in financial traffic, was of such importance that it is a systemically important bank (“SIB”). The Division held that the Minister could take this position. The fact that SNS is much smaller than the three largest Dutch banks (ING, Rabobank, ABN AMRO) does not change the fact that a bankruptcy of SNS could jeopardize the financial system. This conclusion – in combination with the capital deficit of € 1.84 billion and the fact that SNS was not able to reinforce its financial position under its own steam – led to the judgment that the Minister could assume there was a serious and imminent danger to the stability of the Dutch financial system.
The Notorious Valuation of Real Property
According to many Appellants, the Minister wrongly based his determination of the shortage of capital deficit on the valuation that Cushman & Wakefield (“C&W”) gave to the real property portfolio of SNS Property Finance. C&W estimated the losses made on the real property much higher than Ernst & Young (“E&Y”) had done earlier. It is these (forecasted) losses on the real property that made the capital deficit of SNS insurmountable.
The Minister wanted the Division to give a ruling whilst keeping these reports secret. Section 8:29 of the Dutch General Administrative Law Act (“GALA”) provides a procedural option to do so. The Division did not fully fulfil the request of the Minister: a number of passages from the reports had to be made available to the Appellants before the hearing. On the basis of these passages that were made public, the Division arrived at the opinion that the Minister could follow the valuation of C&W. On 1 March, the Minister sent his case file to the Lower House of Parliament. It contains adjusted versions of the reports of C&W and E&Y.
From a procedural law perspective, it is interesting that not all the Appellants (including the Dutch Investors’ Association VEB) gave the Division permission to give a ruling based on reports which they could not fully inspect. On the other hand, other appellants urged that the Division take cognizance of the integral reports. In the opinion of the Division, this is a special situation. In deviation of Section 8:29 of the GALA and relying on Article 6 of the ECHR, the Division did take cognizance of the integral reports. There are no material consequences; the integral reports do not give rise to a different opinion than that the Minister could depart from the valuation by C&W.
State Aid and Competition: Ignored because of “Relativity Requirement”
The grounds for appeal relating to impermissible state aid and concentration exceeding the threshold were ignored by the Division, on the basis of Section 8:69a of the GALA. Since 1 January 2013, this Section provides for a relativity requirement in administrative law: if a standard that has been violated apparently does not aim to protect the interests of the person who relies on it, the administrative court shall ignore these grounds for appeal. In brief, the Division is of the opinion that rules of law about state aid and competition do not serve to protect the interests of the parties that have been expropriated.
What Was Rightfully Expropriated…
The Division established that the Minister has a discretionary power; he is not obliged to expropriate all securities and all assets. The Minister may also attach weight to the financial interest of the State in his choice. The Appellants’ argument that the Minister could only expropriate assets and not liabilities was rejected by the Division. Indeed this is not surprising, since the expropriation of liabilities is expressly given as an option in the legal history of Section 6:2 of the GALA. The Division’s ruling is in line with this. This is the reason why the Minister was allowed to expropriate subordinated bonds, holdings certificates and subordinated private loans. The Division did not deem the fact that non-subordinated bondholders had not been appropriated to be contrary to the principles of equality, because those bondholders have a different position on the bankruptcy ladder of priorities than subordinated bondholders.
and What Was Not…
According to the ruling, the expropriation does go too far where it concerns the expropriation of all liabilities and debts of SNS vis-à-vis expropriated parties or former holders of securities. This concerns obligations and liabilities related to the (former) possession of said securities, such as a claim of (former) holders of securities based on unlawful act, on the basis of deception by SNS when the securities were purchased. The decisive argument for the Division is that these obligations and liabilities are unsecured debts in a bankruptcy, whereas the Minister’s point of departure is that unsecured debts are not expropriated in principle. Moreover, the Minister distinguishes categories of unsecured debts, and the claim based on an obligation or liability is essentially different in nature than compensation for the expropriation of securities. The Division holds that this procedure for compensation set out in Section 6:10 of the FSA is not appropriate for the handling of individual claims based on debts or liabilities.
Violation of Property Right Acceptable
The Division is of the opinion that the dispossession is not in violation of Article 1 of the First Protocol of the ECHR. The Division refers to the “wide margin of appreciation” the Strasbourg Court provides for measures in the field of banking and the financial system. According to the Division, expropriation, given the great interests at stake (the prevention of a bank run and the possibility that other banks will be infected by the problems), is a legitimate purpose in the public interest.
The Division Offers No Opinion on Compensation
As far as the losses that were already suffered before the expropriation are concerned, the Division states that there is no rule of law to impose the obligation on the Minister to compensate the losses suffered by the investors out of public funds. The Division has no jurisdiction with regard to losses after expropriation. State Councillor Drupsteen already indicated at the hearing that the Appellants should apply to the Enterprise Section of the Court of Appeal for compensation. The only question the Division has examined is whether the Minister’s decision to expropriate SNS was lawful.
First the Minister, Then the Enterprise Section Must Make a Move
The proceedings for compensation based on Section 6:10 of the FSA are also urgent in nature. The Minister must extend an offer for compensation within seven days from the ruling of the Division. The expropriated parties should not expect much of this, since the Minister has indicated that the value of the securities and assets expropriated is nil, because the value must be determined on the basis of the expected value thereof in the event that the Minister would not have interfered – that is, after SNS would have gone bankrupt.
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