The First Hall of the Civil Court, presided over by Madame Justice Lorraine Schembri Orland, on November 5, 2013, in the case Dr Kevin Dingli on behalf of Falcon Eye International Ltd v Cyprus Popular Bank Public Co. Ltd held, among other things, that in this case Falcon Eye International Ltd did have a prima facie claim and that there existed all necessary elements for the issuance of a warrant of prohibitory injunction.

The facts in this case were as follows.

The foreign company Falcon Eye International Ltd, registered in the British Virgin Islands, filed legal proceedings in Malta to request our courts to order the issuance of a warrant of injunction to prohibit the sale and transfer of the Cyprus Popular Bank Public Co. Ltd’s shares in Lombard Bank in security of its claims against the bank.

The applicant said that it suffered a loss of €10,066,157 as a result of the haircut measures, adopted by ‘the Resolution of Credit and other Institutions law, 2013’.

By virtue of this law, the defendant was placed in a state of ‘resolution’ and any deposit in excess of the guaranteed amount of €100,000, were bailed in. Funds in excess of €100,000 were requisitioned from the bank accounts, without the consent of depositors, including the applicant.

Laiki Bank was placed under this procedure. A special administrator was appointed to administer the assets of the bank, even though the bank was not in formal liquidation.

The administrator had to take care of the sale of assets of the bank, with the aim that they would be distributed pro rata among all its creditors, according to a ranking list which still had to be established.

The applicant filed legal proceedings in the District Court of Nicosia, Cyprus, in the names “Falcon Eye International Ltd v Cyprus Popular Bank Public Co. Ltd; Andri Ioannidou in her capacity as special administrator of the Cyprus Popular Bank Public Co. Ltd; Central Bank of Cyprus; Minister of Finance through the Attorney General Republic”.

It resulted that the applicant claimed that its human rights as protected by the Constitution of Cyprus and article I of the European Convention of Human Rights were violated, by appropriating funds from its account.

The applicant attacked the validity of the Resolution of Credit and other Institutions law of 2013.

It requested several remedies and a court declaration that any reduction of its bank accounts was in violation of Cyprus Constitution and the European Convention of Human Rights, in addition to a claim for damages against all defendants.

On July 24, 2013, the court accepted the applicant’s request provisionally and appointed a date for the sitting, to consider the application for an injunction.

The court considered that the applicant had applied for a warrant of prohibitory injunction under article 873, chapter 12. Two criteria had to be satisfied:

• First, the warrant had to be necessary to protect rights of the claimant, so that without such warrant the claimant would suffer prejudice;

• Secondly, it had to result that the claimant appeared to have prima facie rights.

The court only had to consider whether the claimant had such rights on a prima facie basis. Both elements had to exist and if one element was lacking, the court would refuse a request for the issuance of a warrant under article 873 (2) chapter 12: Mary Borg v the Commissioner of Lands (PA) (JRM) dated December 15, 2008; The Golden Shephard Group Ltd v Enemalta Corp. (PA) (RCP) dated March 17, 2009.

This was a procedural measure of an exceptional nature (Grech pro et noe v Manfre (AC) dated July 14, 1988 (Vol LXXII – II – 290). The court had to see whether if the warrant was not issued, the claimant’s rights would be prejudiced.

Prima facie rights: In the application of the law, the court had to use a restrictive interpretation. A precautionary warrant of prohibitory injunction was issued at a time when the claim was not yet judicially determined. The procedure was intended to be summary. The fact that the request for the warrant was accepted did not mean that the claimant’s rights were proven. Conversely, if the request for the warrant was not accepted, this did not mean that the claimant’s rights did not exist.

It was not the task of this court to consider the merits of the claim when issuing a precautionary warrant. This court only had to decide whether the claimant had prima facie rights which could be safeguarded by the warrant.

The bank contended that Falcon Eye International had no rights against it, but against the state. The court said that it appeared, however, that the applicant had a prima facie right of action. In Christodoulou v Central Bank of Cyprus case no. 551/2013, it was held “where the debt/obligations of the bank towards its depositors are affected, the depositor should primarily turn towards the bank in any civil action, for its contractual default in repaying the deposit, with a possible claim against the republic as having caused the breach of the contractual obligation by mean of decree”.

Irreparable damage: a representative of Laiki Bank maintained that the claimant would be in the same position as other creditors if the bank were to be liquidated. The bank said that the applicant was seeking preferential treatment, and wished to be repaid all funds which were deposited, at the expense of other creditors in the same category.

Falcon Eye International contested this statement. It said that as a depositor, its funds were taken unfairly. Allegedly the bank acted in bad faith, and stole its funds which were misappropriated. This act was null in application of the principle of fraus omnia corrumpit.

The court pointed out that the warrant was of a precautionary nature, to preserve assets until the case in Cyprus was determined. It was up to Cypriot courts to decide if and how the applicant should be refunded and the preservation of the shares would not cause any harm to the bank, as its assets would be kept in its name until the case in Cyprus was decided

Regarding the measure, the court noted the decision of the Supreme Court:

“The Supreme Court concluded the following is an indicative list of possible matters that could be examined:

(a) the sale of the foreign branches of the banks at an undervalued price;

(b) the creation of new preferential creditors and the amendment if the priorities between creditors;

(c) the mandatory nature of the conversion of depositors funds into shares;

(d) the unequal treatment between depositors;

(e) the extent of the haircut of the BOC depositors as compared to what was really required for its capital adequacy prior to the resolution measures;

(f) the accuracy of the valuations of the assets of the two banks, and

(g) any prior responsibility of any local or European agency in bringing about or permitting the creation of the circumstances leading to the current situation and the failure to adequately protect secured depositors.”

It appeared that the measures raised a number of irregularities and forms of discrimination between depositors which had to be investigated in the appropriate forum. If these issues were not resolved, the applicant could be placed in a disadvantage position. It submitted “if security is not upheld by the Maltese courts, the Special Administrator appointed by Laiki Bank will be in a position to proceed with the sale of the shares in Lombard Bank and sizeable assets which would have been available to satisfy the plaintiffs’ judgment will have been lost”.

Falcon Eye International feared that as a consequence of these measures, the assets of Laiki Bank would be used to settle its debts. It maintained that “the current assets of the Cyprus Popular Bank Public Co. Ltd are worth at least several hundred millions of euros and this is quite considerable. One must bear in mind that the amount of unsecured deposit holders being subjected to a compulsory haircut is approximately €4 billion”.

It was expected that Laiki Bank would soon be liquidated and the proceeds would be distributed pro rata among its creditors, including depositors who suffered a haircut measure and according to a ranking which still had to be established.

The court noted that the claims of Falcon Eye International went beyond simply rights for a refund pro rata in the context of a resolution and liquidation, but consisted of claims for the reintegration of the deposited funds, for damages as well as a human right action to attack the law which placed the bank in a state of “resolution”.

This court felt that the sale of its shares in Lombard Bank could cause irreparable damage to the applicant, as the funds could be co-mingled by other funds administered by the special administrator to distribute pro rata, without regard to its rights for a full refund.

The court pointed out that the warrant was of a precautionary nature, to preserve assets until the case in Cyprus was determined. It was up to Cypriot courts to decide if and how the applicant should be refunded and the preservation of the shares would not cause any harm to the bank, as its assets would be kept in its name until the case in Cyprus was decided. The requisite of proving irreparable damage was also satisfied, noted the court.

For these reasons, on November 5, 2013, the First Hall of the Civil Court gave judgment by declaring that Falcon Eye International Ltd did have a prima facie claim and that there existed all necessary elements for the issuance of a warrant of prohibitory injunction. The court therefore accepted the request for the issuance of the warrant.

Dr Karl Grech Orr is a partner at Ganado Advocates.