In a landmark ruling Slovenia's top court has abrogated a law that required the Slovenian central bank to compensate those who lost their investments during the banking sector bailout of 2013, when roughly tens of thousands of holders of shares and junior bonds were completely wiped out.

The court had ruled in 2016 that recourse needed to be provided for roughly 100,000 potential plaintiffs who lost money they had invested in bank shares and bonds before major segments of the Slovenian banking system had to be bailed out in 2013 to prevent its collapse.

The law was finally passed in 2019 after years of political bickering but was immediately challenged by the central bank, which saw it as a threat to its independence. It was suspended by the court in 2020 pending the final decision and now the judges have declared that the solutions are unacceptable.

In a ruling issued on 7 March, the court said that not all of the law's provisions are unconstitutional, but "what counts is that a different ruling would have resulted in a splitting of the economic and legal liability for compensation to former holders into two separate entities, which cannot be assumed to be consistent with the legislator's intention".

The key finding highlighted by the Constitutional Court is that the law's Article 40, a pivotal provision which determines the compensation and damage payments, violated the constitutional principle of the central bank's independence as interpreted by EU law. Considering this provision as the core of the law, the judges decided to abrogate the act as a whole.

Echoing the central bank's argument that ordering it to tap into reserves could have forced it to seek unconstitutional funding or loans from the state, the Constitutional Court said that Banka Slovenije would have potentially been subject to political pressure in exchange for funds.

The ruling was expected given that the EU Court reached a similar conclusion in a landmark judgement handed down in September last year. The EU Court effectively set limits on central bank liability by saying that the extent of damages and eligibility must be precisely determined.

The court said at the time that EU law does not prohibit national legislation under which a central bank is liable for damage suffered by former holders of financial instruments cancelled due to reorganisation measures ordered by the central bank.

But it does preclude national legislation which determines that a central bank is liable for damage caused by the cancellation of financial instruments "in such sums as might impair the bank's ability to perform its tasks effectively".