Long slog ahead for National Bank shareholders in compensation battle

Almost 12 months since they presented a formal claim for €325 million in compensation for the forcible nationalisation of their private bank, the National Bank of Malta shareholders are still way behind any foreseeable conclusion to their 43-year battle.

In 1972, the NBOM was taken under administration by the Mintoff administration after a run on its deposits and the refusal of the Central Bank to prop up its reserves: within a year, the bank was to become the Bank of Valletta.

Its 49 shareholders, amongst them members of the Maltese nobility whose banks were amalgamated to form the NBOM, were in 2014 finally recognised by the Constitutional Court as having had their rights breached by being forced to surrender their shares, overnight: a harrowing example of the late Dom Mintoff’s uncompromising, and heavy-handed style of government.

But their claim for damages, drawn up by retired banker Anthony R. Curmi, was met with a disparaging reception by the government, which insists that the National Bank shares had no value whatsoever when the NBOM was nationalised.

The government retains a 25% shareholding in Bank of Valletta.

At this stage, lawyers for both sides are engaged in a courtroom conundrum to negotiate the demands, but a next sitting is now set for October because of disagreements on points of principle.

In the last sitting in June, both sides failed to nominate experts who will examine the claims before the court gets to decide whether the bank had been a going concern at the time of its nationalisation; whether the valuation will be based either on the day the bank was nationalised in December 1973, or before; and how to handle the National Bank’s bad debts at the time.

Unless the two sides agree on a way forward, it will be Mr Justice Joseph Micallef to appoint a panel of experts who can determine the terms of reference on these points.

‘Worthless shares’

The Maltese government contends that by the time depositors withdrew an enormous Lm2.5 million from the National Bank over four days in December 1972, its shares were worthless. Around 350 shareholders lost their shares after they were forced to sign them over to the government, without compensation.

Mintoff used the occasion to legislate a Council of Administration to take over the bank. Shareholders were forced to sign over their shares to the state without compensation overnight. In an address to the nation on TV on 11 December, Mintoff compared himself to a cowboy “firing a shot in the face of a cattle stampede”.

But the Constitutional Court in its judgment of 2014 confirmed that the shares had value, despite the temporary liquidity problems and that shareholders are entitled to compensation.

It said that despite the liquidity problem the NBOM faced, “a benefit was reaped from the shares that were handed over without compensation, and used to the advantage of the Council of Administration, and eventually to the Bank of Valletta” – and that therefore the bank was not insolvent and still had considerable market value at the time.

In fact, Curmi’s appraisal is that the €325 million claim “constitutes a fair and reasonable compensation” for the Lm7 million which he says was the net asset value of the bank in 1973.

On the other hand, the government’s consultants – former IMF consultants Piero Ugolini, Richard Nun, and Larry Chilton – have insisted in a report to the courts that Curmi’s assessment is based on “unrealistic and invalid assumptions”.

“This fails to recognise the success of BOV was due primarily to the ownership of GOM which restored public confidence in the bank by fully guaranteeing all deposits, which NBOM would have been unable to do,” they claim.

They also accused the bank of having had a “history of self-serving and imprudent management practices” which endangered it through non-performing loans that increased bad debts. “The government had no choice except to intervene in order to protect the depositors and creditors and to preserve stability of the broader financial system.”

Inflated bad debts

Upon takeover in 1973, the bank’s Council of Administration produced a balance sheet claiming a negative equity of Lm253,000, which the NBOM shareholders claim was achieved by excessively inflating the bank’s doubtful debts.

Curmi says the bank’s own properties were significantly undervalued by the Council, no provision was made for the goodwill from its 27 branches across Malta and Gozo, and that provisions for bad debts were raised by 151% from Lm2.3 million to Lm5.9 million.

This was based on a property index specifically created at the time, which claimed that villas, houses and apartments had fallen in price by 36.6% and the price of undeveloped land by 84%. This allowed the Council to raise the provision for bad debts.

And yet by 1978, Bank of Valletta managed to reduce these bad debts by Lm4.3 million over a period of just five years.

Indeed the Bank of Valletta immediately began to register profits (as in fact the NBOM had for years – 1972 having been its most profitable year ever); and not only did the previously ‘worthless’ assets suddenly acquire considerable value for its new owner, but debts that had previously been classified as ‘unrecoverable’ were nearly all recovered in full.