OPINION OF ADVOCATE GENERAL
WAHL
delivered on 22 June 2016 (1)
Case C‑41/15
Gerard Dowling
Padraig McManus
Piotr Skoczylas
Scotchstone Capital Fund Limited
v
Minister for Finance
Notice parties: Permanent TSB Group Holdings plc and Permanent TSB plc
(Request for a preliminary ruling from the High Court (Ireland))
(Company law — Directive 77/91/EEC — Protection of the interests of shareholders in relation to the capital of a limited liability company — Decision 2011/77/EU — Financial assistance granted to Ireland — Recapitalisation of Irish Life and Permanent plc — Directive 2001/24/EC — Reorganisation measures)
1. Did the Irish Government breach central provisions of EU company law when, in the summer of 2011, it took control of Irish Life and Permanent Group Holdings plc (subsequently Permanent TSB Group Holdings plc; ‘ILPGH’ or ‘the Company’) and, on the same occasion, of its subsidiary Irish Life and Permanent plc (subsequently Permanent TSB plc; ‘ILP’ or ‘the Bank’)? That is the gist of the dispute of which the High Court (Ireland) is seised.
2. In line with my stated position in my Opinion of 18 February 2016 in Kotnik and Others, (2) I consider, for the reasons given below, that the rights conferred upon shareholders by Directive 77/91/EEC (‘the Second Directive’) (3) do not preclude a Member State from urgently recapitalising an ailing credit institution which is central to the backbone of its economy, failing which that economy might be severely harmed and might, in turn, cause risk to that of other Member States.
3. I am therefore of the mind that the measure at issue in the matter under consideration was taken in compliance with EU law. However, in the final analysis, that is a matter for the High Court to verify.
I – Legal framework
A – EU law
1. The Second Directive
4. Pursuant to Article 8 of the Second Directive, shares may not be issued at a price lower than their nominal value, or, where there is no nominal value, their accountable par.
5. Under Article 25 of the Second Directive, any increase in capital must be decided upon by the general meeting, save where previously authorised by the statutes or instrument of incorporation or by the general meeting under the conditions set out in that provision.
6. Article 29(1) of the Second Directive provides that whenever the capital is increased by consideration in cash, the shares must be offered on a pre-emptive basis to shareholders in proportion to the capital represented by their shares. Moreover, pursuant to Article 29(4), the right of pre-emption cannot be restricted or withdrawn by the statutes or instrument of incorporation, but only by decision of the general meeting under the conditions specified in that paragraph.
2. Directive 2001/24/EC (4)
7. Article 2 of Directive 2001/24 (‘Definitions’) defines ‘reorganisation measures’ as ‘measures which are intended to preserve or restore the financial situation of a credit institution and which could affect third parties’ pre-existing rights, including measures involving the possibility of a suspension of payments, suspension of enforcement measures or reduction of claims’.
8. Article 3 of Directive 2001/24 (‘Adoption of reorganisation measures — applicable law’) provides that the administrative or judicial authorities of the home Member State are alone empowered to decide on the implementation of one or more reorganisation measures in a credit institution, including branches established in other Member States. Those measures are to be applied in accordance with the laws, regulations and procedures applicable in the home Member State, except where otherwise provided. Once they become effective in the Member State where they have been taken, such measures are to be fully effective in accordance with the legislation of that Member State throughout the European Union without any further formalities, including as against third parties in other Member States, even where the rules of the host Member State applicable to them do not provide for such measures or make their implementation subject to conditions which are not fulfilled.
9. Article 9 of Directive 2001/24 (‘Opening of winding-up proceedings — Information to be communicated to other competent authorities’) lays down rules substantially similar to Article 3 in respect of decisions to open winding-up proceedings.
3. Decision 2011/77/EU (‘the Implementing Decision’) (5)
10. The Implementing Decision was adopted on the basis of Regulation (EU) No 407/2010, (6) in particular Article 3(3) thereof. Recitals 1 to 3 of the decision are worded as follows:
‘(1) Ireland has recently come under increasing pressure in financial markets, reflecting rising concerns about the sustainability of the Irish public finances in view of comprehensive public support measures to the weakened financial sector. Due to its excessive exposure to real estate and construction projects, the domestic banking system has experienced large losses in the aftermath of the collapse of those sectors. The current crisis in the economic and banking sectors has also had a dramatic impact on Ireland’s public finances, compounding the impact of the recession. Falling tax revenue and an increase in cyclical expenditure, in particular due to rising unemployment, have contributed to a high general government deficit and a steep increase in debt, compared to the favourable pre-crisis positions and despite the implementation of five important fiscal consolidation packages since mid-2008. Support measures for the banking sector, including significant capital injections, have added greatly to the deterioration in the public finance position. Current market concerns primarily reflect the fact that the solvency of the Irish sovereign and the banking system have become inextricably linked in the crisis; they have led to a steep increase in Irish sovereign bond yields, while the domestic banking system is effectively cut off from international market funding.
(2) In view of this severe economic and financial disturbance caused by exceptional occurrences beyond the control of the government, the Irish authorities officially requested financial assistance from the European Union, the Member States whose currency is the euro and the International Monetary Fund [“IMF”] on 21 November 2010 with a view to supporting the return of the economy to sustainable growth, ensuring a properly-functioning banking system and safeguarding financial stability in the Union and in the euro zone. On 28 November 2010, an agreement at technical level was reached in respect of a comprehensive policy package for the period 2010-2013.
(3) The draft economic and financial adjustment programme [“the Programme”] submitted to the Council and the Commission aims at restoring financial market confidence in the Irish banking sector and the sovereign, enabling the economy to return to sustainable growth. To achieve these goals, the Programme contains three main elements. First, a financial sector strategy which comprises fundamental downsizing, deleveraging and reorganisation of the banking sector, complemented by appropriate recapitalisation to the extent needed … In support of this ambitious policy package, the Irish authorities are requesting financial assistance from the Union and the Member States whose currency is the euro, and bilateral loans from the United Kingdom, Sweden, Denmark and the IMF.’
11. Article 1 of the Implementing Decision provides:
‘1. The Union shall make available to Ireland a loan amounting to a maximum of EUR 22.5 billion, with a maximum average maturity of 7½ years.
…
4. The first instalment shall be released subject to the entry into force of the Loan Agreement and the Memorandum of Understanding. Any subsequent loan releases shall be conditional upon a favourable quarterly assessment by the Commission, in consultation with the [European Central Bank; “ECB”], of Ireland’s compliance with the general economic policy conditions as defined by this Decision and the Memorandum of Understanding.
…
8. The Commission shall decide on the size and release of further instalments. The Commission shall decide on the size of the tranches.’
12. Article 2 of the Implementing Decision specifies that the Commission is to manage the assistance given to Ireland in a manner consistent with Ireland’s undertakings and with recommendations by the Council, and lays down the modalities governing the exercise of that supervision. Article 3 of the Implementing Decision approves the Programme prepared by the Irish authorities, and provides that the disbursement of further instalments is to be made on the basis of a satisfactory implementation of the Programme, which is to include, inter alia, the following measures:
‘5. With a view to restoring confidence in the financial sector, Ireland shall adequately recapitalise, rapidly deleverage and thoroughly restructure the banking system as set out in the Memorandum of Understanding … In particular, Ireland shall:
(a) take action to ensure that domestic banks are adequately capitalised in the form of equity, if needed, so as to ensure that they respect the minimum regulatory requirement of a 10.5 % core tier 1 capital ratio for the entire duration of the EU financial assistance programme, while deleveraging towards the target loan-to-deposits ratio of 122.5 % by end-2013;
…
7. Ireland shall adopt the following measures during 2011, in line with specifications in the Memorandum of Understanding:
…
(g) the recapitalisation of the domestic banks by end July 2011 (subject to appropriate adjustment for expected asset sales in the case of Irish Life & Permanent) in line with the findings of the 2011 [prudential capital assessment review (“PCAR”) and prudential liquidity assessment review (“PLAR”)], as announced by the Central Bank of Ireland on 31 March 2011;
…’
B – Irish law
13. The Credit Institutions (Stabilisation) Act 2010, as amended (‘the Act’), applies to credit institutions to which financial support has been given. It was passed into law on 21 December 2010.
14. The objectives of the Act are set out in section 4. They include addressing the disruption to the economy and the financial system and the threat to the stability of certain credit institutions in Ireland and the financial system generally; implementing the reorganisation of credit institutions in Ireland in the context of, inter alia, the Programme; and preserving or restoring the financial position of a ‘relevant institution’.
15. Section 2 of the Act defines certain concepts used in the Act, such as a ‘credit institution’ (a person authorised in the State to accept deposits or other repayable funds from the public and to grant credit on its own account) and a ‘relevant institution’. The latter denotes, under subsection (a), a body with its registered office in Ireland and that is, or was on the date on which the Act came into operation, a licensed bank and to which financial support has been given or is to be given by the Minister for Finance (‘the Minister’); and, under subsection (f), a holding company of such a body.
16. Section 7 of the Act empowers the Minister to propose so-called direction orders to the High Court that a relevant institution be directed to take (within a specified period) or refrain from taking (during a specified period) any action. Following on from this, section 9 of the Act governs the procedure for issuing direction orders. It provides:
‘(1) As soon as may be after completion in relation to a proposed direction order of the procedures required by section 7, the Minister shall apply ex parte to the [High] Court for [a direction order] in the terms of the relevant proposed direction order.
(2) The [High] Court, when hearing an ex parte application under subsection (1), shall, if satisfied that the requirements of section 7 have been complied with and that the opinion of the Minister under that section was reasonable and was not vitiated by any error of law, make a direction order in the terms of the proposed direction order (or those terms as varied …).
(3) If in a proposed direction order the Minister has declared the intention of preserving or restoring the financial position of a credit institution, and the [High] Court is satisfied that the Minister made the proposed direction order or part of it with that intention, the [High] Court shall declare in the relevant direction order that the direction order or the relevant part of it is a reorganisation measure for the purposes of [Directive 2001/24].
…’
17. Section 11(1) of the Act provides that the relevant institution in question, or any member thereof, may apply to the High Court to have a direction order set aside. According to subsection 3, the High Court ‘shall set aside the direction order only if it is of the opinion that there has been non-compliance with any of the requirements of section 7 or that the opinion of the Minister under section 7(2) was unreasonable or vitiated by an error of law.’ Alternatively, the High Court may, under subsection 4, vary a direction order rather than set it aside, in the event that one of those legal flaws has been established.
18. Section 47 of the Act provides for the inclusion, within a direction order, of a provision to the effect that any power exercisable by the members of the relevant institution concerned in general meeting may be exercised instead by the Minister.
19. Under section 52 of the Act, ‘any order made under this Act … that is declared to have been made with the intention of preserving or restoring the financial position of a credit institution is intended to have effect in accordance with [Directive 2001/24] and any law giving effect to it’.
20. Lastly, section 53 of the Act states that its provisions and any order made pursuant thereto have effect notwithstanding the effects of a number of other rules listed in that provision, including the Irish Companies Acts, save where the Act provides otherwise. Moreover, section 61 essentially provides that the making of a direction order is not to be construed as giving rise to a contractual event of default.
II – Facts, procedure and the questions referred
21. The order for reference states that ILP is a credit institution established in Ireland. At the relevant time, ILP was the owner of the Irish Life Group (‘Irish Life’), which included Irish Life Assurance plc and Irish Life Investment Managers Ltd.
22. ILPGH is a company incorporated with limited liability in Ireland, which came into existence on foot of a scheme of arrangement approved by the High Court in January 2010. (7) It was at all material times a holding company which was the entire owner of ILP. ILPGH did not hold any other assets and is not a credit institution, nor was it at the material time.
23. The applicants in the main action (collectively, ‘the applicants’) are members of and shareholders in ILPGH. Messrs Gerard Dowling, Padraig McManus and Piotr Skoczylas are individual shareholders. Mr Skoczylas was also, for a period, a director of ILPGH, having been elected at an Extraordinary General Meeting of ILPGH that was held on 20 July 2011 (‘the EGM’). Scotchstone Capital Fund Limited is a company owned by Mr Skoczylas, and is also a shareholder in ILPGH.
24. From 2008 onwards, ILP, together with other Irish banks, became increasingly reliant upon State and EU financial support. As time went by and the financial turmoil of those years did not subside entirely, the efforts of the Irish Government to support the banks did not succeed in convincing the markets of either the banks’ viability or the State’s capacity to continue supporting them. By late 2010, it was apparent that there was a serious threat to the financial stability of the State, due in significant part to the State’s commitments to the banks. The State had guaranteed deposits in respect of Irish Life to an amount of circa EUR 26 billion.
25. In November 2010, the Irish State entered into binding legal commitments with the Commission, the ECB and the IMF, including a commitment to recapitalise viable Irish banks, in the context of the Programme. As part of the Programme, the Central Bank of Ireland committed itself to carry out the PCAR and PLAR and to determine the capital needs of the banks on the basis of the results. Those results were published on 31 March 2011. Ireland committed itself legally to ensure recapitalisation in line with the reviews by 31 July 2011.
26. Subsequently, the Central Bank of Ireland, in its capacity as independent regulator, directed ILP to raise regulatory capital in the sum of EUR 4 billion. This direction was binding on ILP and was not the subject of any legal challenge.
27. The referring court explains that it has considered that on the balance of probabilities, (a) the required capital could not have been raised from private investors; (b) the required capital could not have been raised from existing shareholders; and (c) failure to recapitalise by the deadline would have led to a failure of ILP, whether by reason of a run on ILP by depositors, revocation of its licence, a call for repayment of the various debt instruments, cessation of funding under the emergency liquidity assistance scheme or a combination of some or all of those possibilities. Such a failure would, moreover, (d) as a matter of probability, have resulted in a complete loss of value to the shareholders.
28. Also, in the view of the High Court, (e) the failure of ILP would, as a matter of probability, have had extreme, adverse consequences for the Irish State, whether by reason of a run on the bank and subsequent calls on the State guarantee of up to circa EUR 26 billion, the contagion effects in relation to the other banks, a full or partial withdrawal of funding to the State under the Programme for non-compliance with its terms, sanctions imposed under the FEU Treaty, or a combination of some or all of these possibilities. The adverse consequences for the State would, as a matter of probability, (f) have worsened the threat to the financial stability of other Member States and the European Union. The decisions by the State to invest in the recapitalisation was made in fulfilment of its legal obligations and in the interests of the State’s financial system, the citizens of the State and the citizens of the European Union.
29. The State decided to recapitalise ILP by way of a subscription by the Minister for ordinary shares in the sum of EUR 2.3 billion, contingent capital in the sum of EUR 0.4 billion, and a ‘stand by’ investment of EUR 1.1 billion. The price to be paid per share was EUR 0.06345, a discount of 10% on the middle market price on 23 June 2011. The calculation of the number of shares that had to be issued in return for the EUR 2.3 billion resulted in the acquisition by the Minister of 99.2% of the Company. In the view of the High Court, (g) the share price on that date was not the result of a false market, as the applicants had argued. The share price had been falling over the previous number of years, and fell dramatically on publication of the PCAR and PLAR results. As a matter of probability, this was because the market doubted that ILP had the ability to achieve the required recapitalisation in a way that would be attractive to investors.
30. The Commission gave its approval, under the State aid rules, for the rescue and recapitalisation of ILP by means of the State investment. (8) The operation was also approved by the competent national authority for the purposes of Directive 2004/25/EC. (9)
31. The Minister’s proposal was supported by the board of ILP, which considered that ILP had no other option available to it in terms of achieving the required recapitalisation. The EGM was called with a view to passing the necessary resolutions. However, the proposal was not accepted by the shareholders voting at the EGM, who wished to explore other avenues for the raising of the required capital and instructed the board to seek an extension of time for the recapitalisation.
32. Neither the Minister nor the Central Bank of Ireland was minded to seek such an extension which, having regard to the source of the deadline, in their view would have required the consent of the Council, the Commission, the ECB and the IMF. Therefore, on 25 July 2011 the Minister drafted a proposed direction order pursuant to the provisions of the Act. The Governor of the Central Bank of Ireland communicated his views, which were supportive of the proposed direction order as being likely to achieve the statutory purposes of the Act. The chairman of the board of the Company referred the Minister to a letter he had written after the EGM, outlining the views of the dissenting shareholders.
33. The ex parte application for a direction order was made and granted by the High Court on 26 July 2011 (‘the Direction Order’), by which the Minister obtained 99.2% of the issued shares of ILPGH. It was therefore necessary to remove the Company’s shares from the official lists in Ireland and the United Kingdom. By application dated 3 August 2011, the applicants requested the High Court to set aside the Direction Order, pursuant to section 11 of the Act. Entertaining doubts as to whether the measures proposed by the Minister were necessary, unreasonable or vitiated by legal error, the High Court decided on 2 December 2014 to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:
‘(1) Does the [Second Directive] preclude in all circumstances, including the circumstances of this case, the making of a [d]irection [o]rder pursuant to section 9 of the [Act], on foot of the opinion of the Minister that it is necessary, where such an order has the effect of increasing a company’s capital without the consent of the general meeting; allotting new shares without offering them on a pre-emptive basis to existing shareholders, without the consent of the general meeting; lowering the nominal value of the company’s shares without the consent of the general meeting and, to that end, altering the company’s memorandum and articles of association without the consent of the general meeting?
(2) Was the Direction Order made by the High Court pursuant to section 9 of the [Act] in relation to [the Company] and [the Bank] in breach of European Union Law?’
34. Written submissions were lodged by the applicants, ILP, ILPGH, Ireland, the Italian and Cypriot Governments, and by the Commission. At the hearing held on 19 April 2016, oral argument was presented by the applicants, ILP, ILPGH, Ireland, and the Commission.
III – Analysis
A – Introductory remarks
35. Not only has the financial crisis given rise to a number of landmark decisions of the Court. (10) It has also fostered litigation brought in connection with the adoption of measures to rescue ailing credit institutions. (11) Typically, those measures have required ‘burden-sharing’ in order, first, to reduce the amount of public financial support and, second, to deter speculation in risky business ventures (so-called morally hazardous behaviour). It is argued that the main action involves such measures.
36. In the matter under consideration, it is not disputed, first, that the Second Directive in principle applies to companies such as ILP and ILPGH, and second, that ILP was in economic difficulties and bound to follow the direction given by the Central Bank of Ireland. Rather, the applicants question the legality of the measures taken by the Minister. Their point of view is essentially that other, less onerous measures were conceivable that did not involve forgoing the approval of the general meeting of ILPGH, in their view in breach of Articles 8, 25 and 29 of the Second Directive.
37. Indeed the applicants’ main argument is that it is ILP, and not ILPGH, that is a credit institution. They argue that, for the purposes of maintaining the financial stability of the Irish economy, the Minister could, and ought to, have limited the extent of his intervention to ILP, rather than requesting the High Court to make ILPGH the target of the lion’s share of the contested measures. In their view, ILPGH is simply a holding company with a share capital separate from ILP’s which was not bound by the direction given by the Central Bank of Ireland or, for that matter, liable for ILP’s actions and omissions.
38. It is not necessary to reply to that argument in order to answer the first question referred by the High Court. However, as it appears to be helpful in order to enable the High Court to take a position in the main action, I shall give further consideration to that argument when answering the second question, which in my view supplements the answer to be given to the first question. I shall therefore conclude this Opinion by providing a joint answer to both questions.
B – The first question
1. Preliminary observations
39. The first question is framed in general terms, rather than only referring to the circumstances of the main action. I infer from this that the High Court seeks, first and foremost, an answer of principle from the Court. Accordingly, as I read it, by its first question the referring court essentially asks whether, on a proper construction of Articles 8, 25 and 29 of the Second Directive, those provisions preclude legislation of a Member State in accordance with which, in order to address the disruption to the economy and the financial system and the threat to the stability of certain credit institutions in that Member State and the financial system generally as well as minimising the risk of spread to other Member States, a court may order a public limited liability company to which that directive applies, which is of systemic importance to the economy of that Member State and which cannot, of its own volition, meet the regulatory requirements imposed by that Member State relating to the prudential supervision of financial institutions, to be taken over by the government without the consent of the general meeting.
40. Consequently, the leitmotiv of the matter under consideration is, once more, the question of the limits to the government’s powers to take over, in times of crisis, an ailing credit institution which constitutes one of the pillars of the economy. In this instance, the limit at issue is drawn by the rights which the shareholders, assembled in general meeting, derive under EU law — in casu Articles 8, 25 and 29 of the Second Directive — to veto such a takeover.
2. The general approach informing the Court’s decision
41. As I have stated in the introductory part of this Opinion, I believe that the Court ought to follow the approach that I have proposed in Kotnik and Others. (12) That case also concerned, among other things, the limits to State intervention in the ailing financial sector set by EU company law rules, albeit through the medium of State aid. I shall set out below, at points 44 to 51, what that case concerned and why it is similar to the case at hand.
42. However, before doing so, I would begin by calling to mind a basic principle: the independent legal personality of public limited companies, which constitutes a cornerstone of the internal market and, in particular, the freedom of establishment as specified in the second paragraphs of Articles 49 and 54 TFEU. (13) The fact that a public limited company might be experiencing financial difficulties does not, in itself, justify negating shareholders’ rights under the Second Directive. (14) Doing so would rob Article 17 of the Second Directive (15) of all purpose.
43. For that reason, the notion, raised by ILP, ILPGH and Ireland, that Article 65(1)(b) TFEU would justify a derogation from the Second Directive for reasons of the prudential supervision of financial institutions and, besides, that the Court has recognised that the reputation of the national financial sector market may, in principle, justify restrictions on the freedom of movement, (16) must be promptly dismissed. Indeed, in a field which has been exhaustively harmonised at the EU level, a national measure must be assessed in the light of the provisions of that harmonising measure and not of those of primary law. (17) Moreover, the Court appears to have already considered and rejected a similar argument. (18)
44. That said, as I have essentially already spelled out in points 93 to 121 of my Opinion in Kotnik and Others (19) and to which I refer in extenso, I would disagree with the view of the applicants that the Second Directive precludes a Member State from taking urgent measures in order to preserve financial stability within its territory as well as minimising a risk of contagion. In particular, I share the doubts expressed by the High Court (20) that the line of cases which I shall call the Pafitis case-law (21) provides authority to interpret the Second Directive in the manner sought by the applicants, for the reasons indicated in the abovementioned Opinion.
45. First, just as was the case in Kotnik and Others, it would be an understatement to say that from a factual point of view, the circumstances giving rise to the Pafitis case-law are highly different from those of the cases currently pending before the Court. Indeed, as was discussed at the hearing, while recognising, at paragraph 57 of Pafitis and Others, (22) that the Second Directive continues to apply to ‘ordinary reorganisation measures’ — such as the circumstances of that case — the Court did not take a position as to reorganisation measures which must be classified as extraordinary.
46. Second, the essential purpose of the Second Directive and, in particular, Article 25 thereof is, in point of fact, to maintain the balance of powers between the different organs of a public limited company (as well as between individual shareholders), especially in case of conflicts between them, (23) and not to preclude a Member State from intervening in respect of such a company in order to address a serious disturbance of its economy of a potentially contagious nature. Indeed, the directive itself concedes that it might be necessary for a Member State to enact legislation which is at odds with the powers of the general meeting where it is necessary to prevent serious and imminent harm. (24)
47. Last, insofar as the latter is concerned, the state of play of European cooperation and integration in financial and monetary matters has, as correctly noted by Ireland, evolved dramatically since the time those judgments were delivered — at the level of both primary law (25) and secondary law. (26) Those are the principal reasons why the Court ought not to adhere rigidly to the Pafitis case-law.
48. Moreover, in my view, the matter under consideration does not raise issues substantially different from those of Kotnik and Others.
49. Evidently, the facts of Kotnik and Others are not identical to those of the main action. Whereas Kotnik and Others concerned the imposition of a ‘bail-in’ measure in respect of share capital, hybrid financial instruments and subordinate debt, in the case under consideration, the Direction Order entailed, inter alia, an increase in share capital. Nevertheless, the combined effect of the massive increase in share capital of ILGPH and the shareholders’ inability to exercise pre-emption rights in the main action was to deprive the original shareholders, who currently possess less than 1% of the shares, of the influence which their shares would otherwise have given them — in other words, to dilute their rights. Therefore, the Direction Order de facto also involves a burden-sharing measure. (27)
50. Moreover, it is also true that Kotnik and Others primarily concerns State aid law rather than EU company law. However, by the fifth question referred in that case, the Ustavno sodišče (Constitutional Court, Slovenia) has sought to ascertain whether certain points of a Commission communication in the field of State aid to the banking sector (28) breach the recast version of the Second Directive, that is to say, Directive 2012/30/EU (29) (which, in my view, they do not). In order to provide a useful answer, I have considered that a broader reading of that question involves analysing, in addition, whether national provisions which entrust the adoption of the burden-sharing measures to the national central bank, as envisaged in that communication, are compatible with that directive. In the abovementioned Opinion, I have reached the conclusion that the answer to that more widely framed question ought to be that, in the circumstances giving rise to that case, such provisions are not incompatible with Directive 2012/30.
51. Hence, as I see it, the issues raised by the fifth question referred in Kotnik and Others and those raised in the matter under consideration are to a large extent the same. Accordingly, the two cases ought to follow the same approach.
3. Features specific to the main action
52. I have stated above at point 44 the general approach which ought to inform the Court when ruling upon the case under consideration. At this juncture, I wish to highlight certain features specific thereto.
a) Financial and economic context of the recapitalisation
53. As for the financial and economic contexts in which the recapitalisation took place, there can hardly be any doubt that they were exceptional — and not simply from a domestic point of view. In point of fact, they were so exceptional that the Council agreed, in the Implementing Decision (see in particular recital 2 thereof), that they warranted the adoption of the Programme. The Commission concurred, approving, pursuant to Article 107(3)(b) TFEU, the State aid measures involved in the rescuing and restructuring of ILP in order to remedy a serious disturbance in the Irish economy (see point 30 above). None of those decisions have been challenged, and the policy assessments made therein are therefore final.
54. Against that backdrop, the Court has admittedly — and rightly — held, in the Pafitis case-law, that the fact that national rules are categorised internally as ‘special’ or ‘exceptional’ does not in itself justify departing from the rules of the Second Directive. (30) However, that statement ought not to be misread as extending to a situation of an international magnitude such as the one giving rise to the main action.
55. That said, I must admit to being more hesitant with regard to the argument that EU law obliged Ireland to recapitalise as it did. That argument is submitted by ILP, ILPGH and Ireland in order further to distinguish the case under consideration from the Pafitis case-law. To be sure, pursuant to Article 3(5)(a) of the Implementing Decision, there was a common understanding that Ireland was to take action to ensure that its domestic banks were adequately capitalised in the form of equity, if needed, so as to ensure that they respected the minimum regulatory requirements for the entire duration of the EU financial assistance programme, while deleveraging towards the target loan-to-deposits ratio. Furthermore, under Article 3(7)(g), Ireland was to recapitalise the domestic banks by end July 2011, subject to appropriate adjustment for ILP’s expected asset sales, in line with the PCAR and PLAR. However, the Implementing Decision did not require Ireland to recapitalise in the manner prescribed in the Direction Order. That was an issue for Ireland alone to decide. In other words, EU law did not require the High Court to issue the Direction Order.
56. Moreover, the ‘obligation’ to recapitalise was part of the consideration given for the financial assistance under the support programme which Ireland received at its own request. Indeed, under Articles 1(4) and 3(2) of the Implementing Decision, the recapitalisation of the domestic banks, including ILP, was simply a condition for the aid. In that connection, as the Commission rightly pointed out at the hearing, the Implementing Decision is ultimately rooted in Article 122(2) TFEU, a provision which refers to providing ‘financial assistance’ under ‘conditions’, rather than conferring upon the European Union the power to set binding economic policy objectives. (31)
57. Hence, it is not obvious that the European Union had unilaterally imposed an obligation. For the same reason, it is not necessary to consider whether, as the Italian Government argues, Regulation No 407/2010 and, by the same token, the Implementing Decision constitute a lex specialis in relation to the Second Directive.
b) Nature of the contested measure
58. Another factor which I wish to point out is the nature of the Direction Order. That order was issued, pursuant to the procedure set out in the Act, by the High Court, that is to say, an impartial and independent body. It is a judicial decision. That also distinguishes the case under consideration from the Pafitis case-law. In that line of cases, the competent minister alone decided, under the applicable legislation, whether to place undertakings in serious financial difficulties under the scheme enacted by that legislation. The minister also had the power to transfer the undertakings concerned to a company charged with restructuring them whose capital was entirely underwritten by the State, and to approve decisions of that company to increase the capital of the undertakings concerned. Those cases were therefore symptomatic of unrestrained government interference in the autonomy of a public limited company.
59. That the Direction Order was issued by a judicial body warrants further remarks. In point of fact, the Second Directive recognises the importance and the authority of judicial decisions, referring to them on several occasions. (32) In particular, under Article 30 of the Second Directive, a reduction of capital does not have to be put to the general meeting where it is ordered by a court. In that respect, it could be argued that the independence of the judiciary sets it even further apart from the independence of certain other regulators which, although not answerable to national governments, are clearly not immune from policy considerations. (33)
60. Now, the applicants, relying on a number of rulings of the Irish courts, (34) consider that the Direction Order is not a court order, but effectively an administrative decision of a provisional nature.
61. I disagree.
62. First, the decisions cited by the applicants were given, inter alia, in the context of establishing, under Irish law, the applicable standard of review in connection with an application to set aside a direction order under section 11 of the Act. As the Direction Order was issued by a judicial body and not an administrative one, applying the standard normally used when judicially reviewing administrative acts appeared excluded. However, that issue of domestic law does not alter the point that, for the purpose of the Second Directive, a judicial decision exists.
63. Second, the fact that the Direction Order was issued ex parte, or that it can be set aside in a procedure brought under section 11 of the Act, is a matter of Irish procedural law of no consequence for the interpretation of the Second Directive. I should add that the referring court has stated that the Minister did not fail to submit candidly the view of the majority of the shareholders at the EGM to the High Court.
64. Last but not least, the applicants’ view implies that the Irish courts blindly rubberstamped the Minister’s proposed direction order without considering its merit at all. That idea cannot be entertained.
65. Hence, for the purpose of the Second Directive, the Direction Order is a judicial decision, and not a mere administrative measure.
c) The relevance of Directive 2001/24
66. Next, Ireland, supported by ILP and ILPGH, argues that the Direction Order is a ‘reorganisation measure’ as used in Article 2 of Directive 2001/24. Taking the view that Directive 2001/24 is a lex posterior et specialis in relation to the Second Directive, that government argues that the effect of such a measure is to override the rights of shareholders under the Second Directive.
67. In my Opinion in Kotnik and Others, (35) I have stated that a ‘reorganisation measure’ consists of three cumulative requirements: it must (i) be adopted by the competent administrative or judicial authorities of a Member State; (ii) have the purpose of preserving or restoring the financial situation of a credit institution; and (iii) potentially affect third parties’ rights. Those requirements appear to be met as regards the Direction Order. (36)
68. However, I fail to see the need to take an authoritative stance on whether Directive 2001/24 overrides the provisions of the Second Directive. Given that the former was adopted many years after the latter, it is fair to ask why Directive 2001/24 then does not contain a provision granting it primacy over the Second Directive. (37)
69. Moreover, the two directives have different legal bases (38) and scopes ratione personae (the Second Directive applying to public limited liability companies and Directive 2001/24 to credit institutions). Their aims are also different: whereas the aim of the Second Directive is to ‘ensure minimum equivalent protection for both shareholders and creditors of public limited companies’, (39) Directive 2001/24 merely establishes, as argued by the Commission, a system of mutual recognition of national reorganisation and winding-up measures, without seeking to harmonise national legislation on that subject, as is apparent from recital 6 thereof. (40) It is therefore not clear to me that the two pieces of legislation are at odds with each other.
70. On the contrary, it seems to me that the two directives tend to complement each other. On the one hand, the judgment in Pafitis and Others (41) made it clear that the Second Directive in principle applies to a public limited liability company, irrespective of its status as a credit institution. On the other hand, Directive 2001/24 is not concerned with shareholder rights. Indeed, according to recital 8 of Directive 2001/24, ‘certain measures, in particular those affecting … shareholders’ rights, need not be covered by this Directive to be effective in Member States insofar as, pursuant to the rules of private international law, the applicable law is that of the home State’. Accordingly, recital 10 specifies that ‘shareholders … are not to be regarded as third parties for the purposes of’ Directive 2001/24.
71. This leads me to agree with the Cypriot Government when it essentially argues that both directives ought to be interpreted harmoniously so as to preserve the unity and coherence of EU law.
72. On that note, it seems to me that the most coherent interpretation is one according to which, first, reorganisation measures affecting shareholders’ rights are not governed by Directive 2001/24 but by the law of the home State — in casu Irish law, specifically the Act — and second, as I have stated above at points 58 and 59, the Second Directive inherently recognises the authority of judicial decisions.
4. Concluding remarks
73. On the basis of the foregoing, I take the view that the matter under consideration essentially raises the same issues as in Kotnik and Others and ought, therefore, to be dealt with in largely the same way. The circumstances of the main action confirm this.
74. The applicants assert, in that eventuality, that this would amount to the Court retroactively resiling from its case-law, contrary to the principle of legal certainty.
75. Such criticism is entirely without merit.
76. First, such a view fails to take into account the difference between clarifying or nuancing case-law on the one hand, and overturning it on the other (the Court indicates specifically when it intends to depart from its case-law). (42) The matter under consideration does not give rise to setting the Pafitis case-law aside — on the contrary, it tends to confirm it on principle. It is a simple instance of distinguishing between situations and the relevant case-law.
77. Second, as for the issue of retroactive application, suffice it to say the applicants are correct in this regard. However, that is an intrinsic feature of the preliminary ruling mechanism set up under the Treaties, which does not give rise to a breach of legal certainty. (43) In any event, no request for limiting the effects of a ruling in time has been received, nor is it likely that the Court would grant it. (44)
78. On the matter of principle therefore, I propose that the Court should answer the first question referred to the effect that, on a proper construction of Articles 8, 25 and 29 of the Second Directive, those provisions do not preclude legislation of a Member State according to which, in order to address the disruption to the economy and the financial system and the threat to the stability of certain credit institutions in that Member State and the financial system generally as well as minimising the risk of spread to other Member States, a court may order a public limited liability company to which that directive applies, which is of systemic importance to the economy of that Member State and which cannot, of its own volition, meet the regulatory requirements imposed by that Member State relating to the prudential supervision of financial institutions, to be taken over by the government without the consent of the general meeting.
79. However, I have yet to address the specifics of this case. That is the subject of my answer to the second question referred.
C – The second question
80. By its second question, the High Court wishes to know whether the Direction Order was ‘in breach of European Union law’.
81. That succinct question is direct and to the point. However, it raises a number of issues of form.
1. Jurisdiction of the Court and admissibility of the question
82. The Cypriot Government considers the second question to be inadmissible, as the wording of it does not identify the provisions of EU law which might fall to be considered.
83. It is true that the wording of the second question merely refers to ‘European Union law’.
84. I would point out that it is not the task of the Court to consider, of its own motion, which provisions of EU law might be relevant in the main action. On the contrary, that is an obligation incumbent on the national court under Article 94(c) of the Rules of Procedure. (45)
85. I also consider the second question to be doubly problematic from the point of view of the jurisdiction of the Court.
86. First, the referring court essentially requests the Court to apply EU law to the facts of the main action. That is not a power which Article 267 TFEU bestows upon the Court. (46)
87. Second, it is not the task of the Court, in preliminary ruling proceedings, to rule upon the compatibility of measures of national law with EU law. (47)
88. Nevertheless, although the order for reference does not explicitly state how the second question differs from the first, its rationale seems clear enough to me. Whereas the first question is couched in general terms, asking whether the Second Directive per se precludes granting effect to any measure adopted without the consent of the general meeting which would breach the rights which shareholders derive under that directive — a question which I propose answering in the negative — the second question specifically inquires to the circumstances of the main action. In other words, the referring court seems to want to know whether EU law precludes recapitalising in the manner done in the main action. The vagueness of the term ‘European law’ ought not to stand in the way of considering this to refer, at the very least, to the Second Directive.
89. In that connection, the Court has consistently held that its powers under Article 267 TFEU extend to providing the national court with the necessary guidance on the interpretation of EU law that might be useful for its decision. (48)
90. Hence, as suggested by the Commission and as announced above at point 38, I shall provide a joint answer to both questions.
2. Substance
91. At this juncture, I would recall that, by the Direction Order, Ireland was giving effect to the condition for financial assistance to recapitalise its banks, as laid down in Article 3(5)(a) and (7)(g) of the Implementing Decision. In that regard, as stated in recital 11 of the Implementing Decision, ‘the operations which the Union financial assistance helps to finance must be compatible with Union policies and comply with the law of the Union’. That includes not only positive rights which individuals derive directly under EU law, but also the general principles of EU law, including the fundamental rights which Member States must observe when implementing EU law. (49) Those general principles comprise not only the right to property enshrined in Article 17 of the Charter, (50) but also the principle of proportionality. (51) Specifically, the latter principle requires Member States to employ means which, while enabling them effectively to attain the objective pursued by their domestic laws, are the least detrimental to the objectives and the principles laid down by the relevant EU legislation. (52)
92. It is for the High Court, when reviewing the Direction Order pursuant to section 11 of the Act, to consider whether the principles mentioned in the preceding point have been observed and, in particular, whether the Direction Order constitutes the measure least detrimental to the objectives and the principles laid down by the Second Directive.
93. In that connection, the main criticism levelled by the applicants against the Direction Order (see point 37 above) warrants attention. Their complaint, as I understand it, is not that it was unnecessary to recapitalise ILP or that the Irish Government took control of ILP. It is that the Minister took control of ILPGH and, thereby, confiscated the alleged capital which it contained on the day the Direction Order took effect.
94. Neither the order for reference nor the written observations of ILP and ILPGH or Ireland explicitly address why the Direction Order was aimed not only at the Bank, but also at the Company. The applicants argue that ILPGH, as a holding company, had its own capital which belonged to its shareholders which allegedly amounted to EUR 453 million before the adoption of the Direction Order. The sole passage in the order for reference which broaches that issue is a statement that ‘the paid[-]in share capital of the Company was not counted as part of the recapitalisation and has not been taken out of the Company by the Minister’.
95. However, the hearing helped to dispel some of the doubts on that issue. Ireland, supported by ILP and ILPGH, stated that the intervention at the level of ILPGH had ‘made no difference as regards ILPGH’s shareholders. Had the Minister intervened at the level of ILP, the shareholders would have been the 100% owners of an ILPGH that owned 0.8% of ILP, as opposed to being 0.8% shareholders of ILPGH’. (53) Those parties proceeded to state that the Direction Order had been addressed to ILPGH, rather than the Bank, to secure Ireland a return on its investment, inasmuch as it was deemed that ILPGH — which, according to that government, has been relisted in the meantime — was more attractive to prospective purchasers.
96. Those statements are of the utmost importance. They find support in the background to the scheme of arrangement mentioned above at point 22 and lodged with the file, from which it emerges that ILPGH’s start-up capital was raised by a contribution in kind consisting of the entire share capital in ILP (or something akin thereto). Moreover, as held by the High Court, ILPGH did not hold any assets other than ILP. The statements would therefore explain the High Court’s finding that ‘the failure of ILP would, as a matter of probability, have resulted in a complete loss of value to the shareholders [of ILPGH]’.
97. On the assumption that those statements are correct, the applicants’ contention that the Direction Order is unjustified must be dismissed. Indeed, in that scenario, the Bank was and is the sole asset of the Company, meaning that the Bank’s failure would lead to the Company’s shares becoming entirely worthless, as indicated in the order for reference. I am therefore unable to see how, in that eventuality, there might have been any interference in the applicants’ right to property. It would rather seem that by their action, the applicants seek to acquire the ‘very substantial gift’, as ILP and ILPGH have branded it in their written submissions, which they were not offered by the Minister at the EGM or in its wake.
98. This would, furthermore, lead me to consider it unnecessary to examine the legal consequences arising from a possible breach of Articles 8, 25 and 29 of the Second Directive. In any event, as Ireland points out, the Court is not asked, at present, to rule on the remedial action available in the event of an affirmative answer to either question referred, and I shall not pursue that line of thought any further.
99. All the same, it is for the High Court to verify that the statements mentioned above at point 95 are correct.
100. In light of the above, the joint answer to both questions ought to be as stated above at point 78, on condition that the Member State concerned has recourse to means which, while enabling it effectively to attain the objectives pursued by its emergency legislation, are the least detrimental to the objectives and the principles laid down by the Second Directive. The national courts are to verify that this is the case.
IV – Conclusion
101. In the light of the foregoing considerations, I propose that the Court answer the questions referred by the High Court (Ireland) to the effect that, on a proper construction of Articles 8, 25 and 29 of Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the [EEC] Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, as amended, those provisions do not preclude legislation of a Member State according to which, in order to address the disruption to the economy and the financial system and the threat to the stability of certain credit institutions in that Member State and the financial system generally as well as minimising the risk of spread to other Member States, a court may order a public limited liability company to which that directive applies, which is of systemic importance to the economy of that Member State and which cannot, of its own volition, meet the regulatory requirements imposed by that Member State relating to the prudential supervision of financial institutions, to be taken over by the government without the consent of the general meeting. However, that Member State must employ means which, while enabling it effectively to attain the objectives pursued by the abovementioned legislation, are the least detrimental to the objectives and the principles laid down by Directive 77/91. That is a matter for the national courts to verify.