The EFTA Court delivered last Friday its judgment in Case E-28/13 LBI hf. v Merrill Lynch International Ltd, a request for an advisory opinion case referred by the District Court of Reykjavik. This case is the last in a series of cases before the EFTA Court and the Court of Justice concerning the interpretation of Directive 2001/24 on the winding-up of credit institutions where an Icelandic financial institution was involved (see judgments in Case E-18/11 Irish Bank and Case C-85/12 Landsbanki). Xavier and I were the agents for the EFTA Surveillance Authority in all three cases. But let’s now come to the recent judgment:

Facts of the case:

The national court (Reykjavik District Court) referred a request for an advisory opinion to the EFTA Court concerning the interpretation of Directive 2001/24/EC (“the Directive”) on the reorganisation and winding-up of credit institutions, and in particular of its Article 30(1) on the voidness, voidability and unenforceability of acts detrimental to the creditors as a whole.

The parties to the dispute in the case in main proceedings were two credit institutions, on one hand Landsbanki hf. (“LBI”), and on the other hand Merrill Lynch Int. Ltd. (“ML”) involved in commercial transactions with each other prior to the initiation of winding-up proceedings for the former in Iceland.

In particular, LBI demanded the rescission of three payments made to the ML in July, August and September 2008 involving transactions relating to three bonds, the respective due dates of which were much later (i.e. in December 2009, May 2012 and October 2009 respectively). LBI had asked ML to buy back the bonds on the market on LBI’s behalf. In other words, the buyer of these bonds was LB and the seller ML. Moreover, the bonds had been issued by LB itself and they were governed by English law. These facts are not disputed. The disagreement arose from the fact that LBI took the view that the purchase constituted an early repayment of its debt (payment before the due date) and sought rescission thereof. ML opposed to that rescission claiming, first that the act should qualify as a purchase (which is not relevant for the questions referred) and second, that under Article 30 of the Directive, the measures in question can only be rescinded if this would be permissible under English law.

Directive 2001/24 on the reorganisation and winding up of credit institutions:

In order to keep the unity between an institution and its branches where it is necessary to adopt reorganisation measures or open up winding up proceedings, the Directive lays down uniform rules on jurisdiction, applicable law and mutual recognition of enforcement measures taken. According the Articles 3 and 10 of the Directive, the administrative and judicial authorities of the home EEA State (i.e. the EEA State where a financial institution is established) will have jurisdiction to decide on the implementation of reorganisation measures and winding up proceedings on the basis of the law of that EEA State. Article 30(1) of the Directive, at issue in the present case, establishes an exception to the application of lex concursus providing that  the law of the home State shall not apply as regards the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to the creditors as a whole, where the beneficiary of these acts provides proof that (i) the act detrimental to the creditors as a whole is subject to the law of an EEA State other than the home EEA State, and (ii) that law does not allow any means of challenging that act in the case in point.

Questions referred:

By its first question the requesting court sought to clarify whether the expression “voidness, voidability or unenforceability” of legal acts in Article 30(1) of the Directive refers only to rescission under contract law, or also to rescission in bankruptcy law on the bases of avoidance rules. By its second and third questions, the national court sought to ascertain what the beneficiary must prove and which standard of proof is required under Article 30(1), second indent of the Directive in order to trigger the non-application of the law of the home EEA State.

The EFTA Court’s findings:

Answering the first question, on which the observations of all parties involved were aligned, the EFTA Court points out that Article 30(1) of the Directive does not limit the basis on which to invoke voidness, voidability or unenforceability of an act. The decisive criterion is the capacity of an act to be prejudicial to creditors’ rights. It appears that the rules on rescission in Icelandic bankruptcy law may apply to acts that affect creditors as a whole in a detrimental manner. Accordingly, in winding-up proceedings of financial undertakings governed by the Directive, the rules on the home State on rescission in bankruptcy law shall not apply to an act detrimental to the creditors as a whole, if the act in question is subject to the law of an EEA State other than the home State and the law of that other EEA State does not allow any means of challenging that act in the case in point.

In its answer to the first question, the EFTA Court seized the opportunity to reiterate, as an obiter dictum, its case law regarding the obligation of the national courts of the EEA States to interpret national law within their competence in conformity with EEA law, i.e. to apply the interpretative methods recognised by national law, as far as possible, in the light of the wording and the purpose of the directive concerned in order to achieve the result sought by it, favouring the interpretation of the national rules which is the most consistent with that purpose. If an interpretation of national law in conformity with EEA law is not possible according to the interpretative methods recognised by national law, then this might lead to a violation of EEA law. When that is the case, the EEA EFTA State concerned is obliged to provide compensation for loss and damage caused to individuals and economic operators, in accordance with the principle of State liability. (A useful reminder here: there is no direct effect of EEA rules in the EEA EFTA pillar).

The observations made by the parties involved on the second and third questions were less aligned. The EFTA Court finds that the wording of Article 30(1) of the Directive (i.e. the phrases “rules relating to the voidance, voidability and unenforceability” and “any means of challenging”) is broad and it does not limit the basis on which the act may be challenged. As long as the act is regarded as detrimental to the entire mass of creditors, it is not decisive whether or not the possibility of challenging it is classified as part of bankruptcy law. In this respect, both substantive and procedural rules should be considered. Furthermore, the use of the words “in the case in point” entails that a concrete assessment of the specific act in question must be undertaken. Consequently, it is not necessary for the beneficiary to prove that the act is unchallengeable as such but it is sufficient if the beneficiary proves that the requirements for such a challenge are not fulfilled in the specific case at hand. As regards the standard of proof, i.e. whether the beneficiary has proved that the law applicable to the act does not allow any means of challenging it, it is assessed according to the rules of the home EEA State for determining the substance of foreign law.