Bank Recapitalisation, Investor Losses, and Access to Effective Remedies: Inadmissibility Decision in Kotnik and Jukič v Slovenia 

By Jernej Letnar Černič

The global financial crisis from 2008 to 2014 led to several bank bankruptcies worldwide and pushed many others to the brink of collapse. The crisis was exacerbated by the mismanagement of bank funds, as banks in many European countries, such as Iceland, Slovenia, and Spain, among others, approved loans without sufficient guarantees, leading to capital losses and inadequate capital, and in some cases to the cancellation of their financial instruments. In the case of Slovenia, state authorities, through the 2012 Act Regulating Measures of the Republic of Slovenia to Strengthen the Stability of Banks and the intervention of the Bank of Slovenia, have recapitalised several state-owned and private banks, thereby eliminating derivative financial instruments, such as shares and sub-ordinated bonds, held by thousands of ordinary investors and entities. This complaint filed with the European Court of Human Rights (ECtHR or Court) stems from an ongoing transition process in Slovenia, highlighting several rule of law deficiencies in Slovenian institutions that could have prevented the financial losses suffered by the applicants and thousands of other rights-holders in a similar situation.

Facts

The ECtHR dealt in the case of Kotnik and Jukič v Slovenia (nos. 56605/19 and 25424/23, 11 February 2025) with the applications by two Slovenian investors who submitted that that the Slovenian state violated their right to an effective legal remedy (Article 13 ECHR) due to the lack of implementation of the Court’s 2021 judgment in the case of Pintar and Others v Slovenia concerning their rights to a effective remedy and to peaceful enjoyment of their possessions under Protocol 1 to the ECHR relating to measures taken by the Bank of Slovenia in 2014. In 2014, due to the banks’ poor liquidity situation, the National Assembly of the Republic of Slovenia, under the supervision of the Bank of Slovenia, carried out a consolidation of distressed state-owned and private banks and cancelled specific financial instruments, namely subordinated bonds and shares, without compensation. With these measures, the Slovenian state authorities aimed to prevent the collapse of individual banks and the banking system as a whole. The Bank of Slovenia cancelled the subordinated bonds and shares owned by the applicants in two Slovenian banks: the formerly private Celje Bank and the state-owned Nova KBM Bank. The applicants, as holders of the cancelled financial instruments, were left without any compensation for their cancelled investments.

The ECtHR had found in Pintar and Others v Slovenia, which also included the same two applicants (among others) as in the present case, a violation of Article 1 of Protocol 1 concerning the protection of the right to peaceful enjoyment of possessions, particularly concerning its procedural dimension. It noted that “… the interference with the applicants’ possessions was not accompanied by sufficient procedural guarantees against arbitrariness and was thus not lawful within the meaning of Article 1 of Protocol No.1” (para. 110). However, the ECtHR did not dive into the question of the reasonableness of the public policies by noting:

In the Kotnik and Jukič inadmissibility decision, which is the focus of this blog post, the applicants argued that the developments since the Court’s Pintar and Others judgment had interfered with their right to an effective legal remedy and with their right to the peaceful enjoyment of their possessions. The present case represents the latest decision of domestic and international courts regarding claims by holders of financial instruments to assert liability for economic losses suffered as a result of the Slovenian state authorities’ decisions in 2014 to resolve the liquidity of formerly state-owned and private banks.

In 2016, the Court of Justice of the European Union already ruled that the extraordinary measures should not be excessive, i.e., they must not go beyond what is necessary to resolve a particular bank’s capital deficit (C‑526/14, 16 July 2016, para. 155, point 5). The Slovenian Constitutional Court, thereafter, in 2016, held that Article 350a of the Banking Act and Article 265 of the Resolution and Compulsory Dissolution of Banks Act, which enabled the deletion of subordinated bonds and shares based on decisions of the Bank of Slovenia, were unconstitutional as it did not provide adequate judicial protection for investors (U-I-295/13, 19 October 2016). On this basis, the National Assembly adopted the 2019 Act on Judicial and Out-of-Court Protection Procedure for Former Holders of Qualified Bank Liabilities, which the Constitutional Court later annulled, also based on a judgment of the Court of Justice of the European Union (C-45/21, 13. September 2022), due to non-compliance with the principle of financial independence of the Central Bank (U-I-4/20, 16 February 2023).

The Court’s reasoning

This latest inadmissibility decision concerns the assessment of the measures taken by the Slovenian authorities following the Court’s judgment in the case of Pintar and Others v Slovenia. In 2024, following the submission of both applications in the examined case, Slovenia adopted the Act on the Procedure for Judicial Protection of Former Holders of Qualified Bank Liabilities (the 2024 Act), which theoretically enables former holders to claim compensation due to the decision of the Slovenian Central Bank to cancel their financial instruments (ibid., Article 3). The 2024 Act also provides access to relevant data from the files maintained by the Bank of Slovenia in individual proceedings (ibid., Articles 8-22). It allows former holders of cancelled bonds and shares to recover up to 60% of the financial loss incurred due to the extraordinary measure, including 60% of the amount of interest (ibid., Article 26 (2)). If individual former holders of cancelled bonds and shares refuse to accept this compensation, they can individually or collectively claim the full amount in court proceedings.

Some former holders of financial instruments, including both applicants in the present case, have also initiated a review of the constitutionality of the 2024 Act (U-I-118/24, 5 December 2025). The Constitutional Court recognised their legal interest, but the case is still pending at the time of writing this post. The Court has emphasised that, once the state has adopted legislative measures to prevent violations of human rights or to enforce compensation, the applicants must use these remedies in order to be considered to have exhausted domestic remedies (Kotnik and Jukič v Slovenia, para 66).

The ECtHR, therefore, decided to dismiss both applications for failure to exhaust domestic remedies, arguing that domestic courts are best placed to resolve court cases related to the 2024 Act (para. 67). It also held that the domestic courts should deliver an assessment whether extraordinary measures were justified in times of crisis, and whether the applicants, as investors in derivative instruments, need to accept some risks (ibid). As noted above, the Slovenian authorities had adopted the relevant law, which provides rights-holders with access to claim civil damages to compensate for their losses. At the same time, in paragraph 68, the ECtHR emphasised the applicants’ right to file a new complaint if they are unsuccessful in claiming legal remedies in Slovenia within a reasonable time limit (ibid., para. 68). As such, their quest for enforcement of compensation for the deletion of derivatives has not yet been concluded with this decision of the European Court. The outcome of this case remains open in many respects, as the ECtHR can only assess whether ECHR standards have been complied with once the decisions of the Slovenian ordinary courts and the Slovenian Constitutional Court on this matter are made.

Lessons learnt and possible future impacts of the judgment

What are the implications of the reasoning of the Court and further observations on the case? First, the case (in)directly concerns the role of domestic institutions in upholding the rule of law, a fundamental principle of modern constitutional democracies. If the Slovenian state institutions had effectively supervised the banks, recapitalisation would most likely have been necessary. Those banks had issued non-transparent loans without proper guarantees to individuals and entities close to them, as well as to entities from diverse interest groups, including those from political and business sectors. Nonetheless, institutions had not effectively and diligently supervised them. Moreover, in contrast to similar challenges in Iceland and Spain, Slovenian authorities, in most cases, failed to successfully prosecute the former management and supervisory board members of recapitalised banks. Instead, the taxpayers covered the incurred losses. As a result, if the rule of law functioned adequately in Slovenia, there would be no need for an application to the ECtHR.

Second, the Court was reluctant to pick sides in the application brought by the applicants already in Pintar and Others, where it stated that a State Party has discretion to find the right balance between the general interest of the state and society and the individual rights of the applicants. As a result of its inadmissibility decision, it did not pronounce itself either in Kotnik in Jukič v Slovenia on whether the extraordinary measures, which led to the cancellation of shares, bonds, and interests thereof, violated the applicants’ property rights or whether the state, by enacting laws, found a reasonable or fair balance between the general interest of the state and the applicants’ right to the peaceful enjoyment of their possessions. Nonetheless, the Court pointed out the possibility of filing another application upon exhaustion of domestic remedies should the applicants or other rights-holders in a similar situation still consider their right to effective access to compensation for at least part of their investments to be violated. However, it appears that the ECtHR has not adequately considered the temporal aspect of the right to an effective remedy. The applicants and other rights-holders have now been waiting over a decade for compensation for the interference with their property rights, incurring substantial financial and non-financial costs. They will have to overcome new hurdles to obtain at least part of the compensation. The old phrase “justice delayed, justice denied” applies to the core of this case. What is the point of such an adequate remedy if applicants wait a decade or more for the judicial decisions and potential compensation?

As a result, the Court recognised that Slovenian authorities have both negative and positive obligations to ensure that rights-holders—the applicants—have access to court to claim the liability of the Slovenian state and formerly state-owned banks for the damage, or at least part of the damage they incurred due to the cancellation of their shares, bonds, and associated interests. Nonetheless, the Court was not prepared to give instructions to the Slovenian authorities regarding what constitutes the right balance in such cases. It is up to national authorities to decide and implement what they have enacted in practice. Therefore, much of the implementation depends on the strength of the Slovenian state institutions—both executive and judicial—to enforce the 2024 law, thereby enforcing the judgment of the European Court in Pintar and other relevant cases. An indirect message also follows from this case—and others—that states are not allowed to cancel shares and bonds of rights-holders without a careful balancing exercise that considers the state’s and rights-holders’ competing interests at stake. The ECtHR will play a crucial role in reassessing the national approach of Slovenian authorities and courts in likely future cases.

Third, the Court’s reasoning and argumentation both in Pintar and others and Kotnik and Jukič could have been more strongly grounded in documents adopted in the last decade and a half in the international arena on business and human rights. In particular, the Court could have referred to the United Nations Guiding Principles on Business and Human Rights (UNGPs), adopted by the UN Human Rights Council in 2011. These principles establish a three-pillar normative framework regarding the responsibility of state and non-state actors for business-related human rights violations. The UNGPs provide, amongst others, that states are obliged to respect human rights and to protect rights-holders against adverse business activities. The examined case is a textbook example of interference with human rights by state, or formerly state-owned, enterprises.

Fourth, the case exemplifies how the European Court approaches the execution of its judgments, particularly the adoption of specific and general measures to implement its rulings. The Court dismissed the application in this case due to ongoing execution and implementation processes in Slovenia, particularly the pending decision of the Constitutional Court of Slovenia, as well as future decisions of Slovenian ordinary courts. These courts will assess the legality, proportionality, and legitimacy of the decisions made by the so-called expert committee (the 2024 Act, Articles 23-25), which will determine whether individuals have a right to compensation for cancelled bonds, shares, and associated interests from formerly state-owned banks.

Way forward

This examined case reveals the thin line between the public interest and the right to private property. Every country, including the Republic of Slovenia, should undertake the rescue of formerly state-owned banks by recapitalising them in a manner which, at the same time, protects the interests of holders of derivative financial instruments. This is crucial for the trust of primary and secondary international financial markets, as well as of institutional and retail investors. Nonetheless, it is up to the national authorities to find the right balance between the public interest and the right to peaceful possession of private property. The Committee of Ministers of the Council of Europe is then tasked with assessing whether the execution of the judgment in the case of Pintar and others complies with the ECHR. The applicants and other rights-holders are still facing a long and winding road to enforce their property rights. Moreover, the on-going judicial saga concerning the former holders of cancelled bonds and shares continues to undermine the trust in access to effective legal remedies generally.