Plan for Failing Icelandic Bank May Pass Muster

(CN) - Iceland's scheme to reorganize failing banks should move forward if it gives affected investors adequate remedies in court, an adviser to the EU's highest court said Thursday.

After the international financial crisis brought down Iceland's financial system in 2008, the tiny nation's parliament adopted a series of measures aimed at reorganizing its banks. Specifically, one provision barred legal action against banks that have been granted a suspension of payments due to creditors.

Landsbanki Islands Bank received a moratorium on payments in December 2008. Just before that, however, a French court executed two attachment orders against the bank on behalf of creditor in that country.

The bank challenged the orders in France's Court of Cassation, arguing that EU banking laws allow Iceland's own reorganization measures and prohibit the French court's judgment in favor of the creditor. The Court of Cassation then asked the Court of Justice whether Icelandic law falls within the scope of EU reorganization rules designed to ensure mutual recognition of legislative action across member state borders.

In his opinion for the EU high court, Advocate General Cruz Villalon said Thursday that Iceland's attempts at bank reorganization comply with European law - as long as creditors are given their day in court. The French court must decide whether that is the case, according to the opinion, which is not available in English.

The adviser also highlighted the apparent intent of Icelandic lawmakers to make the measures temporary and limited for specific situations. While the EU directive on bank reorganization typically recognizes only national measures made judicially or administratively, emergency actions taken by legislators should also be viewed as valid, Villalon said.

Since EU law nevertheless requires equal treatment for creditors, the provision blocking legal action against Icelandic banks may deprive creditors of legal remedies unfairly, he added.

The adviser's opinion is not binding on the Court of Justice, which has opened deliberations in the case. The decision on France's request for a preliminary ruling will be given at a later date.

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