Leiden Law Blog

“Judge-made law has played its part.” The changing role of the judiciary in bank insolvencies

Posted on by Matthias Haentjens in Private Law
“Judge-made law has played its part.” The changing role of the judiciary in bank insolvencies

I had the honour of delivering the ‘Meijers lecture’ last month, which marks the beginning of our new faculty year. In that lecture, I showed how in the area of insolvency, and more specifically bank insolvencies, judge-made law has indeed played its part. Current bank insolvency law must be found in administrative law statutes, and the role of the bankruptcy judge has been taken over by government authorities who act on the basis of those administrative law statutes. Thus, if any court is involved, it is the administrative court. But this administrative court can play but a minimal role, which entails dramatic consequences for the legal protection of any relevant stakeholder.

This development is very recent, for it was in response to the last global financial crisis that many jurisdictions drastically overhauled their rules governing bank insolvencies. In short, previous bank insolvency regimes mainly consisted of either the direct or indirect application of general insolvency law, and these have been replaced with an administrative resolution regime. In this administrative regime, wide-ranging powers have been conferred to government authorities to manage the resolution of banks in financial distress.

General corporate distress law is also undergoing a process of overhaul in many countries to enhance the possibilities for rescuing viable businesses and to streamline the liquidation of unviable ones. The changes just discussed in both fields share a remarkable common characteristic: the minimisation of the role of the judiciary – traditionally omnipresent in insolvency cases. On the one hand, corporate insolvencies are increasingly subjected to prearranged restructurings, out-of-court workouts and (partial) out-of-court liquidations. On the other hand, crisis management in the banking sector has been taken away from the insolvency judge and placed in the hands of government agencies.

This begs the more normative question of what the (remaining) involvement of the court in bank insolvencies should be. Different answers are possible, and this question has indeed been answered in various ways. The CJEU, for instance, held that: "The review by the European Union judicature (…) is necessarily limited and confined to verifying whether the rules on procedure and on the statement of reasons have been complied with, whether the facts have been accurately stated and whether there has been any manifest error of assessment or misuse of powers" The Dutch Supreme Court, on the other hand, held, when considering the damages the State should award in the context of the SNS REAAL nationalisation: "the court (…) independently determines the amount of damages, and can ground that decision on all facts and circumstances proven in the proceedings as well as on testimony it has ordered to be given [rather than merely assess the Government’s proposal for damages]" (my translation). 

Certainly, the difference in the approach both courts have taken may be attributed to their different nature; in the cases cited, the CJEU administered administrative EU law, while the Dutch court administered tort law/civil law. However, this is not an answer to the question concerning what the (remaining) involvement of the court should be. To the contrary, it shows the variety of possible answers and stresses the importance of formulating one.

However, in bank insolvencies, judge-made law has played its part and bank insolvency law is now administered by government agencies. These agencies act on the basis of administrative law statutes and the role of the administrative court has been marginalised. This may be the result of a recent preference for public welfare over individual justice in bank insolvencies. I therefore concur with Meijers when he approvingly quoted Augustine Birrell (1850-1933), who was Chief Secretary for Ireland, but also the author of humorous essays, an academic and a lawyer, as having said “Judge-made law has played its part. To statute-law belongs the future. Let us pray for well-drawn statutes”. But where Meijers added “let us pray also for judges (…) clever men with an independent spirit and who can stand the weight of honours”, our prayers must be trained on the government agencies administering bank insolvency law. Let us pray for their fair and equitable judgment, but also for clever academics with independent spirits keeping them in check!

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