CASE OF KOTOV v. RUSSIA
No violation of Article 1 of Protocol No. 1 - Protection of property (Article 1 para. 1 of Protocol No. 1 - Deprivation of property;Possessions)
Alvina Gyulumyan;Anatoly Kovler;Ann Power-Forde;Christos Rozakis;Corneliu Bîrsan;Dean Spielmann;Egbert Myjer;Elisabet Fura;Elisabeth Steiner;George Nicolaou;Giorgio Malinverni;Guido Raimondi;Jean-Paul Costa;Josep Casadevall;Karel Jungwiert;Khanlar Hajiyev;Kristina Pardalos;Nicolas Bratza;Peer Lorenzen;Sverre Erik Jebens
12. The applicant was born in 1948 and lives in Krasnodar. 13. On 15 April 1994 the applicant made a deposit in a savings account with the commercial bank Yurak (“the bank”). After the bank announced that it was changing the interest rate, the applicant requested the closure of his account in August 1994, but the bank informed him that it was unable to repay his capital plus interest as its funds were insufficient. The applicant sued the bank, seeking repayment of the capital he had deposited, together with interest, a penalty payment and compensation for pecuniary and non-pecuniary damage. 14. On 20 February 1995 the Oktyabrskiy District Court of the town of Krasnodar partly upheld the applicant’s claims and ordered the bank to pay him a total of 10,156 Russian roubles (RUB) (which included the capital of the deposit, interest accrued, compensation for non-pecuniary damage and penalties). That decision was upheld and became final on 21 March 1995. In a judgment of the Oktyabrskiy District Court of 5 April 1996 the above-mentioned award was recalculated in line with the inflation rate. The award was thus raised to RUB 17,983. 15. In the meantime, on 16 June 1995, at the request of the Central Bank and the Russian Savings Bank, the Commercial Court of the Krasnodar Region declared the bank insolvent. On 19 July 1995 the insolvency procedure was opened by that court and a liquidator was appointed by the court to oversee the bank’s administration in that connection. 16. On 11 January 1996 the Commercial Court approved the provisional statement of affairs based on the bank’s financial situation at 28 December 1995. As a result of the sale of the bank’s assets, RUB 2,305,000 had been accumulated on the bank’s account. According to the Government, the bank had incurred debts against 7,567 first-class creditors, whose claims amounted to RUB 24,875,000. 17. Under the law which defined the order of distribution of assets of insolvent entities, the applicant belonged to the first class of creditors, whose claims were to be satisfied before others. However, on 18 January and 13 March 1996 the creditors’ body of the bank created a special group of “privileged” creditors within the first class. That privileged group included disabled persons, war veterans, persons in need and persons who had actively assisted the liquidator within the insolvency proceedings. Those categories of creditors were to receive full satisfaction of their claims before other creditors belonging to the same class (the first). As a result, almost all of the funds collected during the liquidation process were used for repayment to those “privileged” creditors: they were reimbursed by the liquidator at 100% of the amounts due to them. On 6 April 1998 the applicant received the sum of RUB 140 (i.e. less than 1% of the amount of RUB 17,983 owed to him by the bank under the 1996 judgment). 18. On 22 April 1998 the applicant challenged, before the Commercial Court, the fact that other creditors had received repayment at 100%, whereas he had received less than 1% of the amount due to him. Relying on sections 15 and 30 of the Corporate Insolvency Act 1992 (“the 1992 Act”), he claimed that he belonged to the same class as the “privileged” creditors, and that the bank’s assets should have been distributed evenly. He sought repayment of the remainder of the sum owed to him, in accordance with the principle of proportional distribution of the assets of the bank amongst creditors of the same class. 19. On 6 July 1998 the applicant’s action was dismissed at first instance. On 26 August 1998 the Commercial Court of the Krasnodar Region reversed the judgment of the first-instance court and held that, in deciding to repay certain categories of creditors at 100%, the creditors’ body had overstepped the limits of its powers under section 23 of the 1992 Act. By enforcing that decision and distributing the assets at 100% to the “privileged” creditors, the liquidator had, in turn, disregarded the requirements of sections 15 and 30 of the Act. Pointing out that section 30 of the Act was not open to broad interpretation, the Commercial Court of the Krasnodar Region ordered the liquidator to redress the violations thus observed within one month and to inform it of the measures taken in that connection. 20. The liquidator appealed on points of law to the Federal Commercial Court for the North Caucasus, arguing that he had distributed the assets pursuant to a decision of the creditors’ body, that the distribution had complied with Article 64 of the Civil Code and that it had not therefore been in breach of the requirements of section 30 of the 1992 Act. On 12 November 1998 his appeal on points of law was dismissed. Upholding the decision of 26 August 1998, the court stated that the liquidator should not have enforced a decision by the creditors’ body that was in breach of the law. 21. It appears that the enforcement of the decision of 26 August 1998 (upheld at last instance on 12 November 1998) and, in particular, the redressing of the applicant’s financial situation, were not possible on account of the bank’s lack of assets. 22. In view of the failure to enforce the decision of 26 August 1998, on 2 September 1998 the applicant filed a complaint with the Commercial Court (supplemented by him on 27 January 1999). He requested that the liquidator in person repay him the remainder of his 1995 award of RUB 17,983, with interest, plus compensation for non-pecuniary damage and loss of time, representing a total of RUB 22,844. 23. By a ruling of 4 February 1999 the Commercial Court rejected the applicant’s request. The complaints in question were examined in the context of the insolvency procedure opened against the bank; within the same procedure the court examined the bank’s balance sheet, as submitted by the liquidator. A representative of the Central Bank of Russia was present at the hearing. The Commercial Court found that on 20 February 1995 and 5 April 1996 the Oktyabrskiy District Court had already awarded the applicant the sum of RUB 17,983 to cover his deposit, plus penalties and damages, and that it was not possible to rule on the same request for a second time. The Commercial Court further established that the applicant appeared in the list of creditors as number 519 and that, in respect of the actual capital originally deposited, the bank owed him a residual amount of RUB 8,813. The court pointed out that this sum could be paid to him under the conditions laid down in Article 64 of the Civil Code. The court also rejected the claims for loss of time, as the relevant legislation did not provide for such compensation. Furthermore, the applicant [had] “failed to prove that the losses were caused by the liquidator’s actions”. 24. On 31 March 1999 the Commercial Court of the Krasnodar Region, hearing the case on appeal, upheld the decision of 4 February 1999. The court of appeal held, firstly, that the applicant’s claims against the liquidator were “stand-alone claims, examined by the court of first instance and ... rightly rejected”. The court of appeal’s reasoning read as follows: “The law in force does not envisage satisfaction of claims which did not arise during the period of the bank’s operations but only during the period of the insolvency procedure ... On a bank’s insolvency, its debt obligations are declared due, but the insolvency procedure is initiated with a view to amassing liquidation assets which must be allocated among the debts owed to creditors and arising prior to the insolvency. Furthermore, [the applicant’s] right to recover [the original court award] from the bank already exists; therefore, satisfaction of his claims [against the liquidator] would lead to repeated recovery of the same amount, but this time in the form of damages, which is unfounded. [In the original court award the applicant] was also awarded a sum for non-pecuniary damage, and in light of the above such damages cannot be awarded for a further period. The existing provisions of civil legislation make no provision for compensation for loss of time. The court of appeal also takes into account the fact that the failure to pay the amounts [due to the applicant] is a result of the absence [of funds], since, following the court of appeal’s judgment of 26 August 1998 ... the assets of the bank in liquidation did not increase ..., as is evident from the report provided by the liquidator on the work of the liquidation committee and the documents appended to the report”. 25. The applicant lodged a cassation appeal against that judgment. On 9 June 1999 the Federal Commercial Court for the North Caucasus dismissed the applicant’s appeal on points of law on the following grounds: “The decision of the creditors’ body and the liquidator’s action ... admittedly breached the principle of proportional payment to creditors at the same level of priority, but did not cause [the applicant] the damage he alleged, because the 100% satisfaction of all first-level creditors was not possible on account of the lack of assets available for distribution. The sum repaid to [the applicant] was thus calculated in proportion to the amount of his claim and to the assets realised in the course of the liquidation. Taking into account the fact that the insolvency procedure was ongoing when the dispute was examined, the courts of first and appellate instance rightly referred to the possibility of [the applicant’s] receiving the outstanding debt owed to him under Article 64 of the Civil Code of the Russian Federation. The claims for non-pecuniary damage and compensation for loss of time were rightly refused by the court as unjustified on the grounds set out in the earlier judicial decisions. In view of the above [the court of cassation] finds that the refusals by the courts of first and appellate instance to grant [the applicant’s] claims were justified. There are no grounds for overruling or modifying the judicial decisions taken.” 26. On 17 June 1999 the Regional Commercial Court confirmed the statement of affairs as presented by the liquidator and approved by the creditors’ body, and closed the insolvency procedure on grounds of insufficient assets. The applicant did not attempt to bring any new claims against the liquidator. 27. After the Government had been given notice of the application, the President of the Supreme Commercial Court of the Russian Federation lodged, on 31 January 2001, an application for supervisory review (protest) against the judgments of 4 February, 31 March and 9 June 1999, on the ground that they had been given in breach of Article 22 of the Code of Commercial Procedure, which determined the jurisdiction of the commercial courts. Among other things, he stated that examination of the applicant’s complaints against the liquidator within the context of the insolvency procedure opened against the bank had been contrary to the 1992 Act governing such procedures. Since those complaints had concerned a dispute between the applicant and the liquidator, they were not related to the insolvency procedure as such and the applicant should have submitted them to the courts of general jurisdiction. On those grounds the President sought the annulment of the decisions at issue and discontinuance of the proceedings concerning the above-mentioned complaints. 28. On 17 April 2001 the Presidium of the Supreme Commercial Court of the Russian Federation granted those requests in full, endorsing the arguments raised in the application for supervisory review. The Presidium concluded that the commercial courts had not had jurisdiction to hear the case against the liquidator in person, annulled the decision rendered in 1999 and closed the proceedings. 29. On 1 June 2001 the applicant submitted a request for supervisory review of the 17 April 2001 decision to the same Presidium. On 4 July 2001 his request was dismissed as ill-founded by the Vice-President of the Supreme Commercial Court. 30. The Draft Articles on Responsibility of States for Internationally Wrongful Acts adopted by the International Law Commission (ILC) in 2001 (Yearbook of the International Law Commission, 2001, vol. II, Part Two), and their commentary, codified principles developed in modern international law in respect of the State’s responsibility for internationally wrongful acts. In that commentary the ILC stated, inter alia, as follows (see paragraph (6) of the commentary to Chapter II): “In determining what constitutes an organ of a State for the purposes of responsibility, the internal law and practice of each State are of prime importance. The structure of the State and the functions of its organs are not, in general, governed by international law. It is a matter for each State to decide how its administration is to be structured and which functions are to be assumed by government. But while the State remains free to determine its internal structure and functions through its own law and practice, international law has a distinct role. For example, the conduct of certain institutions performing public functions and exercising public powers (e.g. the police) is attributed to the State even if those institutions are regarded in internal law as autonomous and independent of the executive government.” 31. The ILC, in its commentary, described the phenomenon of “parastatal entities”. It noted as follows (see paragraph (3) to the commentary to Article 5): “The fact that an entity can be classified as public or private according to the criteria of a given legal system, the existence of a greater or lesser State participation in its capital, or, more generally, in the ownership of its assets, the fact that it is not subject to executive control – these are not decisive criteria for the purpose of attribution of the entity’s conduct to the State. Instead, article 5 [of the Articles] refers to the true common feature, namely that these entities are empowered, if only to a limited extent or in a specific context, to exercise specified elements of governmental authority.” 32. As the ILC also recognised: “Beyond a certain limit, what is regarded as ‘governmental’ depends on the particular society, its history and traditions. Of particular importance will be not just the content of the powers, but the way they are conferred on an entity, the purposes for which they are to be exercised and the extent to which the entity is accountable to government for their exercise” (see paragraph (6) of the commentary to Article 5). 33. Under Article 63 of the Civil Code, after expiry of the period within which creditors must file their claims, the liquidation committee draws up a provisional statement of affairs containing information on the bankrupt company’s estate, the claims filed by the creditors and the results of the examination of those claims. The statement must be approved by the body that has taken the decision to wind up the company. If the company’s monetary assets are insufficient to satisfy the creditors’ claims, the liquidation committee will sell off the estate by auction. The distribution of assets to the creditors may begin in accordance with the interim statement once it has been approved, except in respect of fifth-level creditors who will be unable to receive any money owed to them for one month following that approval. Once all the payments have been made, the final statement of affairs is drawn up and approved in the same manner. Should the assets prove insufficient, unsatisfied creditors may request the courts to order the owner of the company to honour their claims out of his own personal funds. 34. Article 64 of the Civil Code, as in force prior to 20 February 1996, made a distinction between five categories of creditors, providing that payment could be made to a given class only when the creditors at the previous level had been satisfied. According to this classification the applicant belonged to the fifth class of “other creditors”. Article 64 made no mention of a category of creditors who were pensioners, war veterans, persons in need or persons assisting the liquidator in the insolvency proceedings. 35. Under a new provision, inserted into this Article on 20 February 1996, when a bank or other lending institution is wound up, private persons having made deposits with it are to be repaid as a first priority. 36. Article 64 further provides that where a company in liquidation has insufficient assets, they must be distributed among creditors at the same level in proportion to their respective claims. 37. Under section 3(1) and (2) of the 1992 Act, insolvency cases fall within the jurisdiction of the commercial courts, which examine them in accordance with the rules laid down in the Act or, where no such rule exists, in accordance with the Code of Commercial Procedure of the Russian Federation. 38. Under section 15 of the Act, insolvency procedures are opened in order to satisfy the creditors’ claims on a pari passu basis, to declare the bankrupt company released from his obligations and to protect the parties from unlawful actions against each other. 39. Section 18(2) provides that, after a company has been declared insolvent and an insolvency procedure has been opened against it, any claims against the company’s assets may be submitted only in the context of such procedure. 40. Section 20 lists the various participants in insolvency proceedings as the liquidator, the general meeting of creditors, the creditors’ committee, the creditors, etc. The general meeting of creditors may form a creditor’s committee and define its functions (Section 23 (2)). The Court will use the term “the creditors’ body” as referring to either of these bodies, as the case may be. 41. The creditors’ body nominates a candidate to act as the liquidator before the commercial court for approval (Section 23(2) of the Act) which then appoints the liquidator (Section 19). Under section 21(1) the liquidator takes over the administration of the insolvent company, convenes a general meeting of creditors, takes control of the insolvent company’s property, analyses the financial situation, examines the merits of the creditors’ claims, accepts or rejects them, oversees the liquidation process to realise the assets, sets up and heads the liquidation committee. 42. In accordance with section 21(2), taken together with section 12(4), candidates for the office of liquidator must be economists or lawyers, or have experience of company management. They must not have a criminal record. No one holding a position of responsibility in a company that is a debtor or creditor may be appointed. Candidates for the office of liquidator must declare their income and assets. 43. In the situations referred to under the Act, the commercial court examines the lawfulness of all actions by the participants involved in the insolvency procedure (Section 19). Under section 21(3) the liquidator may challenge before the court any decisions of the creditor’s body when those decisions fall outside its remit. 44. Under section 27(1), after the expiry of a two-month period within which the creditors must submit their claims against the insolvent company, the liquidator will draw up a list of the claims that have been accepted and rejected, indicating the amounts for those that have been accepted and the level of priority for each. The list must be sent to the creditors within a period of two months. 45. Section 30 establishes the various levels of priority for the distribution of the proceeds of the liquidation. Payment of the sums due to creditors at a given level is made once those at the previous level have been satisfied (paragraph 3). If insufficient assets are realised to pay in full the creditors at a given level, the money that is available will be paid to them pari passu in proportion to the amounts of their respective claims (paragraph 4). Section 30 makes no mention of a category of creditors who are disabled, war veterans, persons in need, or persons assisting the liquidator. Paragraph 1 provides that any expenses arising from the liquidation, the liquidator’s fees and the expenses of the debtor company’s ongoing operations must take priority over the claims of first-level creditors. 46. Section 31 provides that a creditor may challenge before the commercial courts any decision of the liquidator which, in his view, breaches his rights and legitimate interests. 47. Under section 35(3), any claims that cannot be satisfied because the proceeds of the liquidation are insufficient will be regarded as extinguished. 48. Section 38 provides that the bankrupt company will be regarded as wound up from the time of its exclusion from the corresponding national register, pursuant to the decision of the commercial court closing the insolvency procedure. 49. On 8 January 1998 a new Insolvency Act was adopted (“the 1998 Act”). It replaced the 1992 Act and was applicable to insolvency procedures opened after 1 March 1998. Section 21(3) of the 1998 Act provided that creditors were entitled to seek compensation from the liquidator in respect of any damage that the latter might have caused to them by an action or omission in breach of the law. Section 114 provided for the same principles of distribution and pari passu repayment as section 30 of the 1992 Act. 50. In accordance with section 98(1), sub-paragraph 7, of this Act, claims against the bankrupt company may be submitted only in the context of the insolvency procedure (see also section 18(2) of the 1992 Act). 51. On 26 October 2002 the new Insolvency Act was adopted. It replaced the 1998 Act, and, in the following years, the 2002 Act underwent a number of changes. Section 20-4 (4) of the 2002 Act establishes liability of the liquidator for damage caused to the creditors by his failure to comply with his duties, if that failure was established by a final court decision. The 2002 Act provides that a liquidator should be covered by a professional liability insurance to cover his liability to the creditors (Section 20 of the Act). Sections 32 and 33 stipulate that bankruptcy cases are within the jurisdiction of the commercial court, irrespectively of the status of the creditors. Section 20 (12) stipulates that “disputes related to the professional activities of the [liquidators] ... are within the competence of commercial courts”. Pursuant to Section 60 of the Act creditors of a bankrupt company are entitled to complain to a commercial court about the liquidator’s acts or omissions within the bankruptcy proceedings. 52. Since the 1990s the Russian judicial system has been comprised of three elements – courts of general jurisdiction, commercial courts and constitutional courts. Under Article 25 § 1 of the Code of Civil Procedure of 1964 (in force at the material time), courts of general jurisdiction were competent to hear civil cases in which at least one party was a natural person (as distinct from a legal person, such as a company). 53. The Code of Commercial Procedure of 1995 (No. 70-FZ of 5 May 1995, in force at the material time) stated that the commercial courts could determine “economic disputes arising from civil, administrative and other legal relationships ... between legal persons ... and individual entrepreneurs...” (Article 22 § 1 of the Code). Article 22 § 3 stipulated that commercial courts were competent to hear other cases, namely “insolvency (bankruptcy) cases concerning legal entities and natural persons”. Article 22 § 4 stipulated that commercial courts were competent to hear cases involving natural persons (not having individual entrepreneur status) where this was provided for by the Code itself or by another federal law. 54. Article 31 of the Code of Commercial Procedure stipulated: “... A creditor who considers that his rights and legitimate interests are breached by a decision of the liquidator can bring an application (zayavlenie) before the commercial court. Following the examination of such an application the commercial court should take an appropriate decision.” 55. Article 143 of the Code provided that insolvency cases were to be examined by commercial courts in accordance with the Code and with the specific provisions of the insolvency legislation. 56. Section 3 of the 1992 Insolvency Act stipulated that commercial courts had jurisdiction to hear insolvency cases. 57. The 1998 Insolvency Act contained similar provisions. Sections 5 and 29 of that Act provided that insolvency cases where the debtor was a company (as opposed to a natural person) fell under the jurisdiction of the commercial courts. Section 55 of the 1998 Act provided that the commercial courts were competent to hear creditors’ applications concerning a breach of their rights or legitimate interests by the liquidator. 58. Sections 5, 34 and 50 of the 1999 Banks Insolvency Act provided for the jurisdiction of commercial courts in the insolvency procedures concerning banks and also contained references to the Code of Commercial Procedure. 59. A judgment of 12 March 2001 by the Constitutional Court concerned, inter alia, questions of access to a court in insolvency procedures. Paragraph 4, concerning the constitutionality of section 18(2) of the 1992 Act (section 98(1) in conjunction with sections 15(4) and 55(1) of the 1998 Act), reads: “... when examining the claims of creditors who are natural persons ..., the commercial courts do not have jurisdiction to issue binding directions of a pecuniary nature to the liquidator, acknowledging the existence of a claim or right in favour of creditors ... This limitation ... must not be interpreted as preventing the courts of general jurisdiction from examining on the merits the pecuniary claims ... of those creditors ..., in accordance with the legislation on insolvency. Nor do the provisions at issue contain any clause that would prevent commercial courts from giving decisions that enable the persons concerned to secure in full their right to judicial protection in the context of insolvency procedures, especially as other provisions of the Federal Law on insolvency (bankruptcy) precisely provide for the settlement of disputes through the courts (sections 41, 44, 57, 107, 108 et seq.). The refusal by a commercial court to examine a complaint on the grounds that it does not have jurisdiction ... does not prevent the creditor from applying to the courts of general jurisdiction in order to secure protection of his rights ... The right to judicial protection, as enshrined in the Constitution, must be upheld even in the absence of legislative norms establishing a division of jurisdiction between the commercial courts and the courts of general jurisdiction. It follows from this interpretation that [the provisions at issue] do not prevent the courts of general jurisdiction from examining claims filed by non-corporate creditors against the liquidator and seeking ... compensation for damage, nor do they prevent the commercial courts from securing the enforcement, in accordance with the above-mentioned Federal Law, of the decisions taken by the courts of general jurisdiction ...”