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22-04-2013

Banking System In Albania

Authors

  • Oljon Kaso, Manager
    IKRP Rokas & Partners Albania sh.p.k.

What are some of the problems that the Albanian banking sector has experienced in the judicial system?

As a result of the recent global crisis, the Albanian banking sector, too, has been negatively affected, albeit at a lower level than in other neighbouring countries, by a shortage of liquidity and the insolvency of a big number of borrowers. As the working capital fell and investment uncertainties increased, so rose the portfolio of nonperforming loans, which, in turn, led to an increased number of foreclosure cases. It should be noted that the increase in the number of foreclosures through debt collection or bailiff procedures is a clear indicator of the economic crisis and the shortage of liquidity on the market, because banks used to treat many of these cases through loan restructuring or loan buyouts on the interbank market. Debtors’ response through lawsuits filed to apply against bailiff procedures or for voiding enforceable acts soon pointed to some shortcomings of the Albanian judicial system in treating those cases, due to its inexperience. Since foreclosure-related grievance options are limited due to its very specific nature and due to the fact that a debtor’s sole remedy is to contest a Bailiff Officer’s actions or the validity of enforceable acts, lawsuits lodged with Albanian courts have been limited to the above types of subject-matter.

What are the features of these cases, and how are they treated by the courts?

A first category would include those cases that are against Bailiff Officers’actions in relation to determining collateral value during enforcement procedures; a second category would include court appeals against the amount of liability under foreclosure procedures. Both types of cases present interesting features worth examining, given the rather sui generis treatment by courts, and a potential unification of the case-law by the Supreme Court, something that the banking sector has demanded so much.

• Determination of collateral value The procedures for selling collateral under foreclosure (regarding immovable property) are governed by Article 564 of the Civil Procedure Code:

If a creditor and a debtor do not reach an agreement on the value of the object under sequestration within a week, the Bailiff Officer shall, within 15 days, issue a decision determining its value based on a report submitted by a licensed expert and on the real market value of the property at the time of seizure. The Bailiff Officer shall inform the creditor and debtor of the determined price within 10 days from the date of determination. The parties may lodge a separate appeal against the Bailiff Officer’s decision.”

It should be noted that the provisions of this article were adopted with the amendments introduced by Law No. 10052 of 2008. Prior to that, the article provided that the collateral was to be set a value by the Bailiff Officer on the basis of its recorded value on the immovable property registers or financial body registers and in the absence of such a record, by the use of relevant experts. The provision also allowed a debtor or any other concerned person to apply for a higher value of the object on the basis of an expert’s report if they did not agree with the value recorded in immovable property or financial registers. In addition to introducing the notion of agreement (or the absence thereof) between the parties -reinforcing it, even, by envisaging it as a step in the procedure- the 2008 amendment put a stronger emphasis on the market value of the collateral, giving it a final nature. The case-law does show that debtors often address Albanian courts with this type of lawsuit subject-matter, i.e. they take legal action before a court against the collateral selling value determined on the basis of a licensed expert’s report and apply for a higher amount. The purpose of this article is not to make a judgment on the specific peculiarities of individual cases, nor is it to generalize the manner how courts treat the cases under review. It rather aims at presenting a general theoretical view in reference to the court’s interference in the powers of valuation experts and Bailiff Officers. At a general theoretical (but, also, practical) level, a court is approached by a party, mainly a debtor, in the form of a lawsuit application against the collateral value determined by a licensed expert contracted by the Bailiff Officer. In general, a debtor claims the determined value to be lower than the market value, using this ground to apply against the Bailiff Officer’s specific action (!) and petition the court to adjust the amount. In quite a number of cases, the court issues an injunction order to suspend the Bailiff Officer’s actions and “corrects” the value in the final judgment whereby it orders the Bailiff Officer to resume enforcement procedures on the basis of the value it has set.

Is this court treatment accurate?

In my opinion, this treatment by the Albanian courts is wrong and has in its essence a theoretical misunderstanding, i.e. it is for the substitution of Bailiff Officer’s powers, which the Civil Procedure Code has not granted to courts. The wording used in Article 610 of the Civil Procedure Code and else is “objection against Bailiff Officer’s actions”, but no other details on the type and limits of judicial scrutiny of those actions are given. There is general agreement that judicial scrutiny of lawfulness extends to legal procedural elements (time-limits, notification, etc.) and other legal substantial elements (lawfulness of specific actions), but there are no reference provisions and, even less so, no unified positions on the type of court decision-making. As long as courts are, based on general principles, the body restoring lawfulness (of subjective right or lawful interest) it derives that they may intervene as guarantors of protection of lawfulness against Bailiff Officer’s actions, i.e. against actions for which the latter have the authority and power to undertake. But in the case of collateral value determination, a Bailiff Officer’s decision-making is bound by the value in the expert’s report which the Law has specified as a mandatory condition in view of guaranteeing debtor’s rights. In this case Bailiff Officers are entirely excluded from any responsibility for, and substantial scrutiny of, lawfulness, because it is the expert issuing the report and determining the market value the one who is held fully accountable for his conclusions. All a Bailiff Officer does in this case is a “formal ratification” of the expert’s report, mainly in terms of communicating it to the parties involved in the proceedings. I note that I do not claim that the valuation referred to above is not contestable, or that it cannot be subjected to judicial review. In the contrary, courts may verify the application of technical and professional criteria or legal requirements by an expert in relation to the preparation of his report or by a Bailiff Officer in relation to observing those requirements. Courts may not, however, assume substitute powers in setting an collateral price a priori based on other experts’ valuations, and, thus, play the role of a technical body instead of being scrutinizers of lawfulness. Courts would be acting fully in line with their powers if they voided a Bailiff Officer’s action (if they found it unlawful or incorrect as explained above), and if they ordered a redoing of the expert’s report or of the relevant bailiff action; however, they should not assume any value determination or substitution powers, since they have not been granted such powers.

What about the contestation of the liability amount?

The second category of typical debtor cases (in this case, against banks) is the lawsuit with the subject-matter “Invalidity of the executive title” whereby the amount of liability stated in Bailiff Officer’s acts is generally contested and an application for a lower amount is submitted. In my opinion, this is a grey area between the banking sector and the judicial system, which needs to be addressed immediately by the lawmakers through the respective laws and regulations, and by the Supreme Court through the unification of the relevant case-law. The Albanian judiciary has been consolidating the theory and practice (as expressed in the case-law) that the liability owed by a debtor consists of the principal amount, any interests, late payment penalties, commissions and other penalties accrued by the day when the Execution Order was issued by the court. According to Albanian courts, no interest or late-payment penalty accrued after that date may be demanded of a debtor through an executive title, but through a separate lawsuit lodged with a court. This position has led to courts reducing amounts of liabilities in foreclosure proceedings and many banks adopting amendments to their bad debt collection policies, as far as to even stop accruing any interest or late-payment penalties on their systems after execution order dates, which is translated into a significant economic cost for banks and an incentive for debtors to protract foreclosure procedures since there is no penalty for doing so. I would like to express my opinion on this sensitive issue for the banking sector through a simple and practical analysis, which I think would be useful to understand the specific issue at hand. Article 510 (d) of the Civil Procedure Code lists loan agreements as enforceable acts:

The following shall be executive title:

............................................

d) Notary acts providing for monetary obligations, and acts agreeing on loans to be taken from banks or non-bank financial institutions.”

This provision was introduced by Law No. 8812 of 17 May 2001, and addressed a legal loophole in the previous Code. This also corresponds to the consolidation of the private banking system in the Republic of Albania. Under the provision quoted above, courts issue an Execution Order on each loan agreement which, following a verification of the relevant elements is found in default vis-à-vis a bank. (It should be noted that the time of submitting an application for an Execution Order to the court is entirely in the bank’s discretion). An Execution Order is not issued on individual elements of a loan agreement but rather on the entirety of the obligation relationship between the parties as they agreed upon signing the loan agreement. That relationship is comprised of the principal, interest, late-payment fees, penalties and any other various expenses (legal, notarial, etc.). As a result, when a court grants to an obligation an enforceable nature, this presumes that all contractual obligations are recognized and assumed as such. This “courtesy” in behalf of the legislator does not come from any unjustifiable reasons, but from the fact that banks are financial institutions under constant supervision and monitoring by the respective supervisory bodies (Bank of Albania, Competition Authority, Consumer Protection Authority, etc.), and operate on the basis of a model of compliance with the domestic legislation as laid down in the supervisor’s regulations. In addition, if the enforcement of a bank loan agreement would be subjected to the general rules of judicial scrutiny, that would lead to a collapse of the lending system, given the very long duration of judicial review. The main principle of bank loans boils down to a bank’s right to lending money with the purpose of making a profit. Under that principle, one can say that in the context of legal assessment of obligation when a loan is foreclosed the bank is entitled to getting back an amount consisting of the loan principal and any damages caused in the form of lost profit (interest and late-payment fees) and effective damages (legal and judicial enforcement expenses and commissions), just as in a normal procedure (i.e. out of the enforcement procedure) the borrower who repaid a loan before its maturity would have to pay the relevant interest and commissions in addition to the loan principal. Regarding damages, a successfully completed foreclosure procedure would be considered as a premature voluntary loan repayment; therefore, the debtor’s final liability should not exceed the amount that the bank would get in the case of premature repayment, with the exception of the additional legal and judicial enforcement expenses. To pursue the same line of reasoning, if we take the case of a foreclosure that is carried out beyond the maturity of the loan (e.g. in the seventh year of a five-year loan) the bank would be entitled to the entire amount of interest and late-payment penalties as specified in the loan agreement until the end of the fifth year as if the relationship was normal, while it would have to file a separate lawsuit with a court with regard to the other two years petitioning the court to determine the amount of interest and late-payment penalties based on the general practice.

In other words, the key reference point in determining the amount to be paid back to the bank under a loan foreclosure procedure is the loan period and not the time when the Execution Order was issued.

The legal error committed by courts lies in the fact that they treat the issuance of the Execution Order as the moment of the unilateral termination of the contract by the bank, with the latter not being entitled to demand liabilities under a terminated contract. In this case the contradiction is evident because not only do the banks have full discretion in as to the moment of applying for an Execution Order (thus the element of time that the courts use loses its value) but also the Execution Order is not a termination of the contract but merely employment of a legal remedy for recovering an amount.

Do you think there are any improvements in this regard?

With the intention of concluding this article on an optimistic note, I would like to add that it is meaningful that training and round table events organized between the banking sector and the judicial system have increased in number. This shows that in both systems there are efforts for setting some basic principles of interaction, mainly from the perspective of increased transparency and protection of bank customers, but also for strengthening the stability of such financial tools as the crediting institution.

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