Cyprus Mail
Business

Legal challenge over BoC restructuring

By Elias Hazou

A FORMER Bank of Cyprus (BoC) board member is mounting a legal challenge against the decision to place the island’s largest lender under administration.

In an application filed with the Supreme Court earlier this month, Irini Karamanou, formerly a non-executive member of the bank’s board, is also contesting the decision for the fire-sale of the bank’s Greek operations, as well as the transfer of all of Laiki’s emergency liquidity – which are liabilities on the balance sheet – to BoC.

Her application is directed against both the Central Bank of Cyprus and the finance ministry, the two entities co-responsible for restructuring the two Cypriot banks.

Whether the Supreme Court agrees to hear her application or dismisses it outright remains to be seen. Only recently the top court ruled that it has no jurisdiction to hear appeals lodged against the ‘bail-in’, noting that the matter falls under private law and not administrative law.

But Karamanou hopes the court will see her action as different and will agree to hear the case. That’s because she is demanding neither compensation nor a direct reversal of the haircut decision, although implicitly her application does challenge those decisions.

Rather, Karamanou’s application takes the line that, as a board member of BoC, she was unable to meet her fiduciary duties toward the shareholders.

She claims the appointment of an administrator for BoC was illegal as the bank was neither bankrupt nor insolvent at the time of the appointment.

Therefore the decisions subsequently taken to the detriment of the bank’s shareholders should likewise be considered illegal and void.

The bank’s board disagreed with the restructuring, but it was enforced by decree regardless.

To back her argument, Karamanou’s application cites the fact that in September 2012 the bank published results showing that it was both solvent and had positive equity, even after sustaining losses due to the write-down of Greek debt that it held.

A key point Karamanou raises is an apparent conflict concerning the Central Bank’s sweeping powers. The Central Bank, she says, cannot act as a regulator for the banks – for which someone might argue that the regulator was at least partly responsible for the lenders’ woes – and simultaneously oversee their resolution or restructuring.

Under the terms of the bailout, Cyprus was required to fold part of Laiki into BoC; the latter was also required to sell its Greek operations to Piraeus Bank.

Karamanou argues that the decision to sell the bank’s Greek operations was a political one, and that it had been taken long in advance of the fact.

What’s more, that decision contravened the procedures laid out in the ‘Resolution of Credit and Other Institutions Law’ of March 2013. The law provides for highest-bid tenders prior to the sale of bank operations, something that was never done.

In addition, the law stipulates that the operations of a bank that is under administration or undergoing restructuring may be sold to another credit institution, to an ‘interim’ bank, or to an assets management company.

But the same law makes no stipulation for selling a bank’s operations (Laiki) to a second bank (BoC) which is also undergoing restructuring. Yet this is precisely what happened with BoC.

In her application, Karamanou argues that BoC has landed in hot water precisely as a result of the deals providing for the sale of Greek operations – which stripped the bank of assets – and for assuming Laiki’s €9bn in emergency liquidity without any tradeoffs. Despite the capital controls now in place, these actions have brought about an outflow of deposits due to loss of depositors’ confidence and also a decline in the bank’s goodwill, jeopardising its chances of survival.

And regarding the decision to recapitalise the bank through a ‘bail-in’ of depositors, Karamanou says shareholders were never given the chance to raise capital.
The point Karamanou makes is that the burden of proof for restructuring the bank fell on the regulator, who needed to support, with data, his decision to place BoC under administration. The regulator never adequately justified its decision, she says.

Moreover, the findings of investment firm Pimco – which had calculated the bank’s capital needs – were kept from the BoC leadership.

However it’s also true that when in March a decision was taken to restructure the BoC, the bank did need recapitalising as it did not meet core tier 1 capital requirements.

On the sale of the bank’s Greek operations and the assumption of Laiki’s ELA obligations, Karamanou says neither of these decisions was ratified by the BoC board at the time as both were perceived not to serve shareholders’ interests.

Karamanou resigned along with the rest of the board in late March.

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