Author: Philip Lane

Under the statutory or comprehensive approach, a statutory power would be conferred on the resolution authority ‘to write down by a discretionary amount or convert to an equity claim, all senior debt deemed necessary to ensure the credit institution is returned to solvency’.

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Key factors in determining the success of such a bail-in regime will include its compliance with the principles of human rights law governing peaceful enjoyment of property and the predictability of its outcome and, hence, its alignment with the expectations of market participants. However, it would appear that the Commission is considering the possibility to accord resolution authorities the power to discriminate.

Discrimination between equally ranked creditors is highly problematic both from the perspective of human rights and predictability. Discriminatory treatment defined as treating essentially identical cases differently or essentially different cases the same is per se not justified by objective differences and, therefore, unduly infringes property rights.

However, the situation could arise where a differentiated treatment of creditors of the same class may be necessary to achieve an optimal result during reorganisation. In such a scenario, the overall outcome in resolution is optimised by not respecting the pari passu principle within a class of creditors. In order to achieve the intended positive consequences of such differentiated treatment, it is important that it follows transparent principles and safeguards and that the differentiation is justified by objective criteria. In those circumstances, it will not be discriminatory. In other words, any exceptional deviation from the pari passu principle cannot be allowed to build on discriminatory treatment and, in any case, it must be ensured that the principle that creditors cannot be worse off than they would be in immediate liquidation is respected. This differentiated approach shows that the principle of no worse-off than in liquidation functions as a bottom line in the system of creditor safeguards and has to be respected in all cases, while the pari passu principle allows for exceptions, provided these are objectively justified and, therefore, non-discriminatory.