CAMBERROW MM5 AD v. BULGARIA
Inadmissible
Christos Rozakis
The applicant, Camberrow MM5 AD, is a company with registered office in the village of Zeleni Dol, the Blagoevgrad region. It held approximately 98% of the shares of Dobrudjanska Commercial Bank AD (“DCB AD” or “the bank”), a bank with registered office in Dobrich. The applicant was represented before the Court by Mr Y. Yankov and Mr F. Martineau, lawyers practising in Sofia and Paris respectively. On 23 September 1996 BNB found that as of 31 August 1996 DCB AD's capital adequacy had been minus 54.06%, which was significantly below the level set forth in the Banks and Credit Business Act 1992. The fact that the capital adequacy of the bank was negative indicated that the bank's riskweighted assets significantly exceeded the amount of its capital base. The bank experienced durable difficulties to perform its obligations on the date of their maturity, as evidenced by the high number of noncompleted payments. For a prolonged period the bank had not had enough liquid funds to perform its obligations to pay. For the period after 2 September 1996 the bank had had waiting payments every day. As of 20 September 1996 these payments had been 5,416 amounting in total to 587,872,561.76 old Bulgarian levs (“BGL”) [On 5 July 1999 the Bulgarian lev was denominated. One new Bulgarian lev (“BGN”) equals 1,000 old Bulgarian levs (“BGL”)]. Thus, BNB was of the opinion that there was a risk of DCB AD becoming insolvent within the meaning of section 64(1) and (2) of the Banks and Credit Business Act 1992. Therefore BNB placed the bank under special supervision („особен надзор“). It removed its board of directors from office and appointed special administrators („квестори“) to act in its place. It also limited the bank's activities, prohibiting it from taking deposits, extending loans, dealing with commercial papers, dealing with foreign currency and precious metals, making guarantees, effecting noncash payments, clearing cheques, acting as a stock broker and carrying out factoring operations. It also prohibited the bank to pay dividends and to dispose of its assets. DCB AD did not seek judicial review of this decision. On 10 November 1996 BNB petitioned the Dobrich Regional Court to open bankruptcy proceedings against DCB AD. The bank, which was respondent in these proceedings, was represented by the special administrators previously appointed by BNB. On 2 September 1997 BNB found that during the period of special supervision, which had expired on 1 September 1997 (i.e. two months after the entry into force of the Banks Act 1997 – paragraph 13 of the transitional and concluding provisions of the Act), DCB AD's financial situation had improved through the efforts of the special administrators. Its debts towards other financial institutions had been paid off and the bank had collected more than BGL 4,000,000,000 it had extended as loans and had thus improved its capital adequacy. Also, it could be expected that its overall capital adequacy would improve sharply during the following month. However, as at that time the bank was still unable to pay off all its creditors, certain restrictions on its activities had to be maintained. Accordingly, BNB, exercising its powers under section 65 of the Banks Act 1997, reappointed the special administrators for a period of one month, ordered DCB AD to increase its capital adequacy to 2% of its tierone capital not later than 30 September 1997, and prohibited it from receiving deposits, extending loans, paying dividends, effecting noncash operations and clearing cheques until it had attained the said 2% ratio. The decision stated that it was not subject to judicial review. On 12 September 1997 the general meeting of shareholders of DCB AD resolved to increase the bank's capital from BGL 1,404,480,000 to BGL 20,000,000,000 through the issuing of 18,595,520 new shares with par value of BGL 1,000 each. 8,045,520 new shares were to be subscribed exclusively by the applicant and the remaining 10,550,000 shares were to be subscribed by all shareholders of DCB AD pro rata their respective shareholdings. On 26 September 1997 the resolution was entered in the register of companies kept by the Dobrich Regional Court. The applicant subscribed the shares and, accordingly, became liable to pay them up. However, it sought to discharge this liability by other means. On 4 May 1997 it had purchased debts due by DCB AD to three other banks. By virtue of these debt assignments the applicant, apart from being shareholder of DCB AD, had become also its creditor. It advised DCB AD that it wished to set off its obligation to pay its newly subscribed shares against the debt that DCB AD now owed to it. Accordingly, on 26 September 1997 DCB AD made entries in its accounts whereby it effected the required setoff. Also, on 27 August 1997 the applicant had made a contract with DCB AD whereby it had provided funds to the bank under the understanding that they were given as a hybrid capital instrument for the increase of the bank's capital base. The applicant had transferred to DCB AD BGL 2,258,096,800 pursuant to the contract. On 3 November 1997 BNB, exercising its powers under section 65 of the Banks Act 1997, ordered DCB AD to cancel the abovementioned entries in its accounts and to return the amounts given by the applicant. It reasoned that the setoff had represented non-cash consideration for the shares and that it had been effected in breach of sections 72 and 73 of the Trade Act and of section 19(2)(5) of the Banks Act 1997. Further, BNB found that the contract whereby the applicant had provided a hybrid capital instrument to DCB AD had not been approved by BNB, as required by section 10(4) of its Regulation No. 8 on the capital adequacy of banks, and was thus invalid. Meanwhile, on 30 September 1997 the Dobrich Regional Court, acting on the joint motion of BNB and DCB AD, decided to stay the proceedings under the bankruptcy petition against the bank. Also, on 3 October 1997 BNB, finding that the previous special administrators' mandate had expired, appointed new special administrators of DCB AD. On 11 November 1997 BNB revoked DCB AD's licence by reason of insolvency. It found that a check up of its assets and liabilities as of 30 September 1997 indicated that the liabilities exceeded its assets by BGL 6,161,379,000. The decision stated that it was not subject to judicial review. On an unspecified date in November 1997 BNB requested the Dobrich Regional Court to resume the proceedings for declaring DCB AD bankrupt. On 2 December 1997 the Dobrich Regional Court held a hearing in chambers. DCB AD was represented by attorneys retained by the special administrators appointed by BNB. The attorneys for DCB AD argued that the bank's assets exceeded its liabilities and that BNB's determination in this respect had been erroneous. Also, DCB AD tried to commence an action for declaratory judgment to the effect that BNB's decision for revoking the bank's licence had been unlawful. The court rejected the action as inadmissible, holding that by section 21(5) of the Banks Act 1997 BNB's decisions for revoking a bank's licence were not subject to judicial review and that it was thus not competent to examine the action. In a judgment of the same date the Dobrich Regional Court declared DCB AD insolvent and bankrupt, terminated the powers of its bodies, appointed trustees in bankruptcy („синдици“) (the companies Yavor Zartov AD and BDO Binder), divested the bank of its property and ordered the sale of its assets. It held that whereas under the Banks and Credit Business Act 1992 it had had the power to independently ascertain whether a bank was indeed insolvent either because its liabilities exceeded it assets or because it could not discharge a undisputed debt which had fallen due, under the new Banks Act 1997 it was precluded from verifying the existence of these prerequisites. According to section 82 of the Act, the court's task was only to ascertain whether BNB's bankruptcy petition complied with the requirements of sections 79(3) and 21(2) of the Act, i.e. whether it was facially valid and indicated the grounds on which the bank's licence had been revoked. In the case at hand BNB had revoked DCB AD's licence and had indicated the ground on which it had done that. Therefore its bankruptcy petition had to be allowed. As the judgment was immediately enforceable, from that moment on the persons having the right to act on behalf of DCB AD were the courtappointed trustees. Before the trustees had started performing their duties, the bank's attorneys filed appeals against the judgment for declaring DCB AD bankrupt and against the decision in which the Dobrich Regional Court had rejected the action for a declaratory judgment as inadmissible. However, once the trustees started performing their duties, they withdrew the powers of the attorneys and withdrew the appeals. Accordingly, in a decision of 12 February 1998 a threemember panel of the Supreme Court of Cassation discontinued the appeal proceedings and declared that the Dobrich Regional Court's judgment had entered into force. On 8 June 1998 the applicant complained to the prosecution authorities about the actions of the vicegovernor of BNB who had signed BNB's decision of 3 November 1997 and had proposed the revoking DCB AD's licence on 11 November 1997. It argued that she had acted ultra vires with a view to causing prejudice to DCB AD. The prosecution authorities opened criminal proceedings against the vicegovernor and on 15 June 1998 charged her. However, on 23 April 1999 the Chief Prosecutor's Office discontinued the proceedings, holding that the vicegovernor had acted lawfully and had not abused her office. On an unspecified date in June 1998 the applicant requested the Dobrich Regional Court to replace the trustees. It argued, inter alia, that their actions had prejudiced the creditors of DCB AD. In particular, the trustees had failed to collect a number of the bank's receivables and had deposited 1,200,000 United States dollars (“USD”) of the bank's money in a another bank which was experiencing financial difficulties. On 22 June 1998 the Dobrich Regional Court rejected the motion, holding that the applicant did not have standing to make such a request and that the trustee of a bankrupt bank could only be removed if BNB had struck its name off the register of bank trustees it was keeping. The applicant did not appeal against this decision. On 13 July 1998 the Dobrich Regional Court discharged Yavor Zartov AD and BDO Binder as trustees in bankruptcy. It appointed Ms A.G. as the new trustee of DCB AD. The applicant did not specify whether this was done on its motion, on the motion of another creditor or of the court's own motion. However, it appears that this was done because in June 1998 the Trade Act was amended to provide that only natural persons, and not juridical persons, could be trustees in bankruptcy. On 16 December 1999 the applicant requested the Dobrich Regional Court to replace the new trustee. It argued, inter alia, that she had failed to collect a number of the bank's receivables, that she had been squandering the bank's assets, that she had deposited USD 1,200,000 of the bank's money in another bank which was experiencing financial difficulties and that she had made unnecessary expenses. In a decision of 22 December 1999 the Dobrich Regional Court rejected the request. It held that the trustee had not failed to perform her duties. In particular, she had commenced a large number of actions to recover the bank's dues. The depositing of the USD 1,200,000 had been done by the previous trustees. Finally, the trustee had been making monthly reports about the expenses she had been incurring. The court instructed the trustee to reduce to a minimum the number of attorneys she had retained to prosecute actions on the bank's behalf. The applicant did not appeal against the decision. On 11 October 2000 the applicant requested BNB to strike Ms A.G. out of its register of bank trustees in bankruptcy. It averred that she had deposited USD 1,200,000 in another bank which had gone bankrupt. The expenses (allegedly 3,000,000 Bulgarian levs (“BGN”)) she had incurred for administrating the bankruptcy estate – in particular, by retaining a high number of lawyers to prosecute cases on behalf of the bank – had been unreasonably high. Further, she had done nothing or very little to collect the bank's dues and had kept the bank's accounting books in a very poor manner. BNB carried out an inspection in DCB AD and in a letter of 2 March 2001 rejected the applicant's request. As regards the deposit of USD 1,200,000 in another bank, BNB found it had been done by the previous trustees. Moreover, as of the date of the deposit the other bank had not experienced financial difficulties. At the time Ms A.G. had been appointed, she had tried to withdraw the amount from the other bank, but had succeeded only partially. She had made a claim before the trustees of the other bank in respect of the part of the amount which had remained at the other bank at the time it had been declared bankrupt. As regards the fact that Ms A.G. had commenced a large number of actions, the vast majority of those had been against debtors of DCB AD and for the avoidance of transfers, i.e. for the benefit of the bankruptcy estate. The number of lawyers retained by the trustee had been minimal and the expenses, compared to those for the administration of the estates of other bankrupt banks, had been smaller. The overall expenses incurred by the trustee had not been BGN 3,000,000, as claimed by the applicant, but BGN 1,554,647.92. On 5 February 2001 the applicant requested the Dobrich Regional Court to replace the trustee. It argued that she had improperly filed actions against DCB AD and that she had been squandering the bank's assets. On 5 March 2001 the trustee filed objections against the request, submitting that it was inadmissible and unfounded. As regards the actions she had filed against DCB AD, those were actions seeking to avoid transfers effected by the bank prior to becoming bankrupt; the court examining those actions had instructed the trustee to constitute the bank as a codefendant. The trustee further provided a detailed account of the expenses she had incurred. In a decision of 13 March 2001 the Dobrich Regional Court rejected the applicant's request. It held that it was inadmissible, because a bank's trustee in bankruptcy could only be removed by the court if he or she had been stuck off the register of bank trustees kept by BNB. Nevertheless, the court proceeded to examine the request on the merits and held that it was also unfounded. It found that in 2000 the applicant had signalled BNB about alleged irregularities in the trustee's activities and that BNB had carried out an inspection and had not found any wrongdoing on the part of the trustee. The court went on to state that the fact that the trustee had constituted DCB AD as a codefendant in the actions she had filed was not improper; on the contrary, it had been done pursuant to the court's express instructions. The applicant's contention that the trustee had squandered the bank's assets was unsubstantiated. The trustee had provided a detailed account of the amounts she had expended. That account, as well as the results of BNB's inspection of 2000, indicated that she had not spent large amounts, as averred by the applicant. The applicant appealed to the Varna Court of Appeals. In a decision of 4 May 2001 the Varna Court of Appeals vacated the lower court's decision and declared the applicant's request inadmissible. It held that in proceedings for the bankruptcy of a bank the court could only remove the trustee if he or she had been struck off the register of bank trustees kept by BNB. Therefore the Dobrich Regional Court should have declared the request inadmissible and should not have examined its merits. Despite an express request by the Court in a letter to the applicant of 3 December 2002, the applicant did not provide any information about the further course of these proceedings. However, the published caselaw of the Supreme Court of Cassation (определение № 586 от 9 ноември 2001 г. по ч.гр.д. № 535/2001 г., ВКС V г.о., БВС 9/2001, № 19, с. 34) indicates that the applicant appealed to that court and that in a decision of 9 November 2001 it quashed the Varna Court of Appeals' decision and remitted the case with instructions to the lower court to examine the request on the merits. It held that the striking of a trustee off the register kept by BNB and the removal of the trustee pursuant to a request by the debtor or a creditor – such as the applicant – were completely distinct hypotheses. The fact that BNB could bring about the discharging of a trustee did not mean that a creditor could not request her removal if she did not perform her duties properly or imperilled the creditor's interests through her actions. Similarly, despite the above-mentioned express request by the Court, the applicant did not provide any information about the proceedings on remittal before the Varna Court of Appeals. Noting however that Ms A.G. was not removed as trustee, the Court concludes that apparently the Varna Court of Appeals examined the applicant's request on the merits and found it to be unfounded. On 16 August 2001 the applicant requested the Dobrich Regional Court to annul certain actions of the trustee which it considered prejudicial to DCB AD's creditors. On 5 September 2001 the judge in charge of the bankruptcy proceedings informed the applicant that he did not have the power to annul actions of the trustee. On 24 November 1999 some of DCB AD's assets were put on sale by the trustee, at a price fixed by experts appointed by BNB. The applicant submitted that it had tried to challenge that price as being too low, but that the courts examining its request had rejected it as inadmissible because they had considered that the experts' valuation was not subject to judicial review and that a creditor of the bankrupt bank did not have standing to appeal against the fixing of the sale price. Despite an express request by the Court in a letter to the applicant of 3 December 2002, the applicant did not provide any further details, not did it submit any documents relating to these events. On an unspecified date in the end of 2001 or the beginning of 2002 DCB AD's trustee in bankruptcy asked the Dobrich Regional Court for permission to sell the bank as a going concern. In a decision of 6 February 2002 the Dobrich Regional Court granted permission. On 20 May 2002 the trustee entered into a contract with the Central Cooperative Bank AD (“CCB AD”) whereby it agreed to purchase DCB AD as a going concern. The contract provided that CCB AD would pay BGN 1 for the bank and pay BGN 4,170,000 to the bank's fourth-tier creditors (all previous tiers having been already paid off), which consisted solely of the Ministry of Finance (which had indemnified all depositors of the bank and had subrogated itself in their claims). By an annex to the contract of 19 June 2002 CCB AD agreed to pay the creditors BGN 4,500,000 instead of BGN 4,170,000. The trustee submitted the contract to the Dobrich Regional Court for approval. The court requested BNB to submit its observations on the contract. BNB submitted its observations on 26 June 2002. It maintained that CCB AD's offer to buy DCB AD was fully compliant with the Banks Act 1997 and that CCB AD had enough funds to pay the creditors of the bankrupt bank. In a decision made in chambers on 10 July 2002 the court approved the contract, terminated the bankruptcy proceedings and struck DCB AD from the register of companies. It held, inter alia, that the sale of DCB AD as a going concern would not prejudice its creditors' interests and would not put them in a worse position than that which would have obtained in case the bank's assets were sold apiece. The net worth of DCB AD, as assessed by experts appointed by the trustee with the assent of the court, was a negative value. The total value of its assets, as assessed by the same experts, was BGN 4,169,000. Since the price agreed by CCB AD was BGN 4,500,000, the creditors were in fact placed in a better position. Moreover, the creditors would receive their dues much faster (within one month after the sale had been approved by the court) than if the bank's assets were to be sold apiece. The assets which had been sold apiece thus far had generated proceeds amounting only to BGN 874,766.28, whereas the aggregate of the creditors' claims against DCB AD amounted to BGN 22,185,355. As provided by section 94(9) of the Banks Act 1997, the decision was not subject to appeal. Under the Banks and Credit Business Act 1992 (superseded on 1 July 1997 by the Banks Act 1997) BNB could put a bank under special supervision, if it found that the bank was at a risk of becoming insolvent (section 65(1)). By section 64 of the Act, a bank was at such a risk when (a) its capital adequacy was below a certain minimal level or when (b) due to the state of its assets there was a risk that it could not pay its debts at maturity. When BNB placed a bank under special supervision, it could remove the members of its governing bodies from office and appoint special administrators with powers to act in their place (section 65(2) in limine and section 65(2)(7)). It could also limit the bank's activities and prohibit it from paying dividends or from disposing of its assets (section 65(2)(3), (4) and (5)). Paragraph 13 of the transitional and concluding provisions of the Banks Act 1997 provides that the regime of special supervision imposed on a bank under the repealed Banks and Credit Business Act 1992 lapses if within two months after the entry of the Act into force (i.e. 1 September 1997) BNB does not revoke the bank's licence. Section 65(1)(1) and (2)(3) of the Banks Act 1997 allows in broad terms BNB to order a bank to remedy violations it has made of the Act and of BNB's regulations and other acts and directives. Under section 69 of the Banks Act 1997 BNB may, in certain circumstances (e.g. when placing a bank under compulsory administration or revoking its licence) appoint special administrators („квестори“). These special administrators act in place of the banks' board of directors (section 71(1)), i.e. on behalf of the bank. They are appointed and dismissed by BNB (section 69(1)), it may give them directions (section 71(3)), and they are accountable to it (section 71(5)). BNB mandatorily revokes the licence of a bank on the ground of insolvency when (a) the bank does not discharge for more than seven working days a debt which has fallen due or (b) the total amount of the bank's debts is greater than the total amount of its assets (section 21(2) of the Banks Act 1997). The value of the assets and of the debts of the bank is determined by BNB in accordance with supervisory requirements and rules prescribed in regulations issued by it (section 21(3)). When revoking a bank's licence, BNB appoints special administrators if such have not been appointed before that (section 21(4)). The administrators manage and represent the bank until the court appoints trustees in bankruptcy (section 69(3)). BNB's decision to revoke a banking licence is immediately enforceable (section 21(5)). In derogation of the general rules of administrative procedure, BNB does not have to inform the bank about the opening of the procedure for revoking its licence, nor does it have to examine and take into account the bank's explanations and objections, if any (ibid.). After revoking a bank's licence on the ground of insolvency, BNB must mandatorily file with the competent court a petition for the opening of bankruptcy proceedings against the bank (section 79(1)). Whereas BNB's decisions under the Banks and Credit Business Act 1992 were, without limitation, subject to review by the Supreme Administrative Court (section 88(2) and (3)), the Banks Act 1997 prohibits judicial review of a number of BNB's decisions. Thus, coercive measures ordered by BNB under section 65 of the Banks Act 1997 are not subject to judicial review (section 65(4)); neither are its decision to revoke a bank's licence (section 21(5)), or to appoint or replace special administrators (sections 65(4) and 69(4)). A bank's “capital adequacy”: the ratio between its “capital base” – defined as its primary, or tierone, capital (including paid-up shares plus premiums and statutory and other reserves minus intangible assets, losses, and treasury shares – section 9 of BNB's Regulation No. 8 on the capital adequacy of banks) plus supplementary capital elements, or tiertwo capital (including retained earnings, special reserves, hybrid capital instruments, subordinated debt, etc. – section 10 of the Regulation) – and its riskweighted assets and offbalancesheet items may not be less than 12% (section 23(3) of the Regulation). Hybrid capital instruments may be included in the tiertwo capital of a bank only after the approval of the vicegovernor of BNB (section 10(4) of the Regulation). Before 1 July 1997 bank bankruptcy was regulated by the Banks and Credit Business Act 1992. From that date onward the newly adopted Banks Act 1997 became applicable to such proceedings.[ On 29 December 2002 the provisions of the Banks Act 1997 relating to bank bankruptcy were superseded by the Bank Bankruptcy Act] The regime of bank bankruptcy set forth in the Banks Act 1997 contained a number of special features. Only BNB, and not just any creditor or the bank itself, could file a petition for the opening of bankruptcy proceedings against a bank (section 79(2) of the Banks Act 1997). BNB mandatorily filed such a petition after revoking a bank's licence on the ground of insolvency (section 79(1)). The petition needed only specify the grounds for revoking the bank's licence under section 21(2) (section 79(3)). The petition was examined by the court in chambers (section 81). There was no possibility for reorganisation of the bank (section 91), it was divested of all its assets (section 82(6)), and, when allowing the petition, the court had to also immediately order the sale of the assets and the distribution of the proceeds to the bank's creditors (section 82(7)). The court terminated the powers of the bank's bodies (general meeting of shareholders, board of directors, etc.) (section 82(4)) and appointed trustees in bankruptcy in whom these powers, including the right to represent the bank in court, vested (section 84(3) in conjunction with section 658(1)(6) [At present section 658(1)(7)] of the Trade Act). The court could appoint trustees only from a pool of persons featuring on a list drawn up by BNB (section 84(1)). The Trade Act applied only insofar as the Banks Act 1997 did not contain special rules and insofar as its provisions were compatible with the special features of bank bankruptcy (section 97). Section 634 of the Trade Act, which appears to have been thus applicable, provides that the court's judgment for declaring a debtor insolvent and for the opening of bankruptcy proceedings against it is immediately enforceable. Section 657(2) of the Trade Act provides that upon the motion of the debtor or any creditor the bankruptcy court may discharge the trustee if he or she does not perform his or her duties or imperils the creditor's or the debtor's interests through his or her actions. Section 663(3) of the Trade Act provides that the trustee is liable to indemnify the debtor and the creditors for all damage caused due to his or her fault. Section 84(2) of the Banks Act 1997 provided that the bankruptcy court must discharge the trustee if he or she was struck off the list of bank trustees kept by BNB. In Bulgarian law there are two methods for disposing of the assets of a bankrupt company in order to satisfy its creditors' claims: (a) selling them apiece or (b) selling the company as a going concern, i.e. as an aggregate of assets and liabilities. Section 94a of the Banks Act 1997 gave preference to the second method. It provided that the trustee of a bankrupt bank had to first try to sell it as a going concern. He or she had to opt for the other method and dispose of the bank's assets apiece only if the sale as a going concern was not possible within six months after all creditors' claims had been filed and allowed or if that would place the bank's creditors in a worse position. A bankrupt bank could be sold only to another bank (section 94(1) of the Banks Act 1997). The buying bank had to pay directly to the creditors of the bankrupt bank by opening bank accounts in their names within one month after the sale had been approved by the court (section 94(6)). The issue which creditors were to be thus paid off and which not was to be determined in the sale contract. The buying bank was liable to pay only those creditors whose claims it had agreed to pay off. All other creditor's claims were extinguished (section 94(4)). The shareholders' rights, including the right to a share of the remaining assets of the bank, if any, were likewise extinguished, unless the buying bank had agreed to pay to the shareholders as well (section 94(5)). The procedure for selling a bankrupt bank as a going concern was as follows: the trustee requested the bankruptcy court to allow the sale of the bank through direct negotiations (section 93(1)). After receiving permission from the court, the trustee approached potential buyers and entered into a contract with them. He or she then submitted the contract for approval by the court. The court had to call for observations from BNB (section 93(3)), and, after receiving them and verifying whether the sale did not contravene the law and did not prejudice the creditor's interests (section 93(4)), approved it, terminated the bankruptcy proceedings and struck the bank off the register of companies. The court's decisions were not subject to appeal (section 94(9)).