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Bank enforcement titles are unconstitutional: What next?

Poland’s Constitutional Tribunal has held that bank enforcement titles are contrary to the Polish Constitution because they violate the constitutional principle of equality. Pursuant to this judgment, the relevant provisions of the Banking Law—Art. 96(1) and Art. 97(1)—will cease to be in force on 1 August 2016. The ruling is fundamentally important for the entire banking sector and for bank customers.

Constitutional Tribunal judgment of 14 April 2015 (Case P 45/12)

The disputed provisions of the Banking Law authorise banks to issue writs of enforcement on the basis of their own books and records and other documents connected with banking activity. Bank enforcement titles enable banks to execute against their debtors without an examination of the merits of the claim by a court, but merely on the basis of the court’s formal examination of the bank enforcement title itself.

Without judging the soundness of this ruling or the validity of the arguments raised in the case by state authorities (such as the Parliament) and various interest groups, it is important to consider what practical consequences the ruling will have and how it may change the requirements that banks impose on borrowers.

The Constitutional Tribunal postponed the abrogation of the regulations in question by nearly a year and a half, until August 2016. This was intended to give lawmakers time to modify the laws accordingly and enact transitional regulations. It also gives time for currently pending cases to be resolved.

As suggested by the tribunal, the new regulations affording banks instruments for protection of their claims should not be as disadvantageous to the banks’ customers as the bank enforcement title is. One question is whether it is realistic to expect such regulations to be adopted within the available timeframe, considering the duration of the legislative process and particularly the fact that the parliamentary elections in Poland fall right in the middle of the grace period. It will also be interesting to see if the solutions adopted also cover the troublesome privilege awarded recently to Poland’s cooperative savings and loan associations (SKOK) (discussed in our article “A troublesome privilege”).

Another question is how banks will act from now until potential new regulations are adopted in this area. Certain guidelines were provided by the Constitutional Tribunal, indicating that apart from bank enforcement titles the banks also have other means at their disposal to secure the repayment of loans, in particularly promissory notes. A promissory note may serve as the basis for issuance of an order for payment permitting commencement of execution. The difference from a bank enforcement title is that in proceedings for an order of payment the borrower can dispute the bank’s claim on the merits. This gives the banks’ customers a higher level of protection against unauthorised actions by the banks. From the point of view of the banks, however, this means higher costs and prolongation of the execution process, as well as increased risk in conducting banking operations. Another unknown is whether shifting a large number of execution cases currently conducted by banks onto the path of proceedings for an order for payment will paralyse the overburdened courts.

It therefore cannot be ruled out that banks will pursue other options. One of them is for banks to use a notarial submission to execution under Art. 777 of the Civil Procedure Code. Like the bank enforcement title, such submission constitutes a writ of enforcement enabling commencement of execution without an examination of the merits of the case by the court, but only a formal examination of the writ. A notarial submission to execution even has certain advantages compared to a bank enforcement title, such as the possibility of using this means by non-bank entities. But obtaining such a writ requires the involvement of a notary (as the declaration must be made in the form of a notarial deed) and carries additional costs. For these reasons, use of this solution on a retail scale may be difficult, but in the case of corporate lending appears to be a likely alternative. The Constitutional Tribunal itself pointed to this option in the case of larger loans, indicating that notaries are part of the system of legal protection.

Another possibility is broader use of other permissible forms of security reducing banking risk, such as third-party guarantees or other personal or in rem security.

At this stage, just a few days after the judgment was handed down, it is too early for an in-depth analysis of how the situation may unfold. It will be interesting to see how Poland’s banking sector responds to the ruling and what legislative initiatives are taken in this area.

Łukasz Szegda, Banking & Finance Practice, Wardyński & Partners