Polish Banks Lose Fast-Track Enforcement
Polish Constitutional Tribunal’s judgment dated 14 April 2015 in case No. P 45/12
Polish banks currently benefit from a statutory privilege which allows them to enforce claims against debtors under accelerated and simplified proceedings. The Constitutional Tribunal has put an end to this, after having found the privilege to breach a constitutionally rooted principle of equality. The ruling has shocked the Polish banking community. This article explores the ruling and suggests ways in which banks can mitigate the consequences of it.
A fast enforcement mechanism
The pre-enforcement privilege allows a Polish bank to enforce a debt claim easily and quickly, as if it were a court judgment. To do this, the bank’s representatives must execute a written statement, containing the bank’s seal. This is known as the “banking enforcement title”. The only precondition is the debtor’s consent to enforcement in this way, which is routinely provided as a condition precedent in almost all local banking transactions. Once the bank issues a banking enforcement title, the only thing it needs to do before instructing a public bailiff to collect the debt is to obtain an enforcement writ from the court. If all formalities are complied with, this can be done quickly and simply, without the other party present, and without any argument. The debtor’s only recourse is an anti-enforcement suit or an injunction.
The privilege, dating back to the Great Depression, was initially given to Polish state banks, not private lenders. It developed during the Communist era, and survived Poland’s transition to capitalism, and became available to all banks seated in Poland. It was designed to help banks manage credit risk. In return, banks were expected to play a key role in the resurgence of the Polish economy. The privilege does not extend to financial institutions other than banks, including to non-bank assignees of credit claims, such as securitisation funds. These creditors must generally sue their debtors before enforcing their claims.
It is debatable whether foreign banks operating on a cross-border basis can benefit at all from banking privileges which were designed for Polish establishments. Thus, for the avoidance of doubt, foreign banks rely instead on obtaining a voluntary submission to enforcement from a borrower, which must be done before a notary. This procedure, which is available to any creditor, is more complex and runs a higher risk of procedural irregularity. Notarial submission to enforcement must precisely define the formalities and conditions which a creditor must fulfil to apply for an enforcement writ from the court. This, as a matter of practice, results in some ambiguously drafted notarial deeds being unenforceable.
Banking privilege criticised
For the last couple of years, banking enforcement titles, and banks in general, have been attracting increasing attention and criticism from the public. This was particularly so after the collapse of Lehman Brothers and various banking scandals (or alleged scandals) in Poland1 and abroad. Critics argued that the banks, as private entrepreneurs, should not be allowed to step into the shoes of the state, and unilaterally decide on the existence and amount of a debt, without any substantive review. Scholars have also argued against the pre-enforcement banking privilege, describing it as an inequitable and outdated solution.
Banks considered that the pre-enforcement privilege is an important mechanism for creditors lending money on a massive scale, and is beneficial to clients because it reduces the cost of enforcement (and therefore the cost of lending). They also argued that banks are highly regulated businesses supervised by the Polish financial watchdog.
Is the banking privilege constitutional?
Despite the growing criticism, the ruling of the Constitutional Tribunal came as a surprise, mainly because the tribunal had considered the banking enforcement title in 2005 and found that it did not violate the Polish Constitution (case No. P 10/04). At that time, for procedural reasons, the only constitutional standards considered were access to justice and protection of consumers.
Ten years later, the Constitutional Tribunal has considered it again, having received constitutional questions from two district courts dealing with a petition for a writ of enforcement on a banking enforcement title. This time, the Tribunal was asked to assess if the banking privilege complies with a different standard, the equality principle set out in the Polish Constitution. In response, it ruled on 14 April 2015 that the privilege violates the Polish Constitution by distorting equality between: (i) the bank and its clients; (ii) the bank and other non-bank creditors; and (iii) the banks’ clients and debtors of non-bank creditors.
To let the banking sector adapt to the ruling, the Tribunal decided that the relevant statutory provisions2 would lose their binding force on 1 August 2016.
Impact of the ruling
From 1 August 2016, banks will not be allowed to issue banking enforcement titles and will instead have to resort to other instruments, such as a notarial submission to enforcement. The consequences of the ruling on the banks’ current practices is less obvious, as some scholars have argued that the courts should not attach writs of enforcement to banking enforcement titles before 1 August 2016. This is unlikely to be the prevailing practice of the Polish courts, but cannot be entirely excluded.
The Constitutional Tribunal’s ruling will affect enforcement of existing loans. An option for banks will be to ask current borrowers to agree to substitute the banking submission to enforcement, which may turn out to be ineffective in future, with a valid notarial submission to enforcement, although this is not a change that banks could easily impose unilaterally. However, this should be possible if a particular loan agreement contains a clause that the debtor shall take any action to maintain and perfect the existing security (as in the further assurance clause in the LMA standard).
Polish banks should take advantage of any debtor’s request to amend the facility terms, particularly in a debt restructuring scenario, and demand a notarial submission to enforcement. Banks could also use contractual rights (if available) which allow a bank to accelerate the facility if any security documents (including the submission to enforcement) cease to be legal, valid, binding or enforceable (for example the unlawfulness and invalidity event of default clause in the LMA standard).
Footnotes
1. Please also refer to A. Ksionda, Class action suits gain popularity in consumer claims, European Finance Litigation Review, June 2014, pg. 21-22.
2. The Constitutional Tribunal abrogated art. 96.1 and art. 97. 1 of the Polish banking law dated 29 August 1997 (as amended) because these provisions were contradictory to art. 32.1 of the Constitution of Republic of Poland dated 2 April 1997 (as amended).
