CASE OF DRUŽSTEVNÍ ZÁLOŽNA PRIA AND OTHERS v. THE CZECH REPUBLIC
Violation of P1-1;Violation of Art. 6-1;Reminder inadmissible;Damage - reserved
Isabelle Berro-Lefèvre;Karel Jungwiert;Mark Villiger;Peer Lorenzen;Rait Maruste;Renate Jaeger;Zdravka Kalaydjieva
6. On 11 January 2000 the Office for the Supervision of Credit Unions (Úřad pro dohled nad družstevními záložnami) (“the OSCU”) placed the applicant credit union in receivership (nucená správa) for a period of six months under section 28(3)(c) of the Act, on the ground that it had contravened the legislation in question, having engaged in activities outside its remit without authorisation. A receiver (nucený správce) was appointed to replace the applicant credit union’s decision-making bodies. The OSCU was acting under section 27(1) of the Act read in conjunction with section 26(2) of the Banks Act (zákon o bankách). 7. Referring to an audit of the applicant credit union’s activities, the OSCU noted that the applicant credit union had on 6 May 1999 concluded three contracts with S7, a limited liability company, under the terms of which the latter had assigned to the applicant credit union receivables due to it from two debtor companies, amounting to CZK 126,235,132 (EUR 3,366,582) in total, for an agreed price of CZK 14,431,000 (EUR 384,862). The OSCU ruled that the applicant credit union had thereby purchased the receivables of a third party by effectively covering the latter’s debt. It qualified the transaction as a loan to a third party. Since section 3 of the Act prohibited credit unions from providing loans to non-members, the OSCU concluded that the applicant credit union had acted in flagrant breach of the Act. 8. The OSCU further noted that the auditors had discovered that the applicant credit union had entered into a contract on 2 and 5 August 1999 to grant a loan of CZK 22,000,000 (EUR 586,721) to a limited liability company, MLM Brno, and had signed two contracts on 25 June 1999 with OPES, a joint stock company, for the purchase of securities (cenné papíry) at a total price of CZK 41,200,056 (EUR 1,098,770). The OSCU ruled that these transactions were also illegal, as section 1(6) read in conjunction with section 3 of the Act did not allow credit unions to acquire securities other than public bonds (dluhopisy), municipal bonds (komunální obligace) or mortgage bonds (hypoteční zástavní listy). 9. The receivership became effective on 12 January 2000, when the applicant credit union was notified of the OSCU’s decision. 10. On 26 March 2000 the applicant credit union lodged a constitutional appeal (ústavní stížnost) with the Constitutional Court (Ústavní soud) against the receivership order and applied at the same time for an order striking down certain provisions of the Act. It relied, inter alia, on section 75(2)(a) of the Constitutional Court Act, which enables the Constitutional Court to hear a constitutional appeal even if domestic remedies have not been exhausted, if it substantially affects the appellant’s personal interests. 11. On 7 April 2000, following an administrative appeal by the applicant credit union, the Ministry of Finance upheld the receivership order of 11 January 2000. 12. On the same date a petition to adjudge the applicant credit union bankrupt (konkusní řízení) was filed with the Brno Regional Court (krajský soud). During 2001 a large number of creditors joined the proceedings. 13. On an unspecified date the applicant credit union applied for judicial review (správní žaloba) of the imposition of receivership under Article 247 et seq. of the Code of Civil Procedure, asserting that the statutory conditions for such a step on the part of the OSCU had not been met. 14. On 1 May 2000 Act no. 100/2000 entered into force, extensively amending the Act (hereinafter “the amended Act”). The powers of supervisory boards of credit unions were confined to the right to appeal decisions adopted by the OSCU. 15. On 21 June 2000 the OSCU granted the receiver permission to suspend withdrawals from deposit accounts held with the applicant credit union in view of its precarious financial situation. According to its findings, the sum owed by the applicant credit union on outstanding term deposits amounted to at least CZK 83,000,000 (EUR 2,213,539), while the cash available in its current accounts was only CZK 21,500,000 (EUR 573,386). 16. On 12 July 2000 the OSCU renewed the receivership order under the amended Act as the previously identified deficiencies remained. It referred, inter alia, to the first receivership order and to three decisions by which it had prohibited or restricted the applicant credit union’s activities, including withdrawals from deposit accounts (decision nos. 322/2000/II of 20 January 2000, 1217/2000/II of 9 March 2000 and 2407/2000/II of 25 April 2000). 17. On 9 November 2000 the Ministry of Finance upheld that decision. 18. On 12 December 2000 the Constitutional Court dismissed the applicant credit union’s constitutional appeal for non-exhaustion of ordinary remedies under section 75(1) of the Constitutional Court Act. It reiterated that the principle requiring the exhaustion of ordinary remedies could be derogated from in exceptional circumstances if the effective protection of constitutionally guaranteed fundamental rights and freedoms was endangered. It found that, contrary to section 72(1) of the Constitutional Court Act, which provides, inter alia, that “a constitutional appeal may be introduced by any natural person who claims to be the victim of a breach of the fundamental rights or freedoms recognised in a constitutional law or an international treaty by a valid decision taken in proceedings to which he was a party”, the applicant credit union had lodged its constitutional appeal before the receivership order had become effective. 19. On 15 January 2001 the applicant credit union, represented by the president of its supervisory board, applied for judicial review, challenging the Ministry of Finance’s decision of 9 November 2000. 20. On 10 and 25 January, 2 February, 4 April and 3 May 2001 respectively (decisions nos. 114/2001, 369/2001, 838/2001, 1645/2001 and 2134/2001), the OSCU allowed the receiver to suspend withdrawals from deposit accounts held with the applicant credit union. 21. According to the Government, on 6 June 2001 the OSCU granted the receiver permission to file on its own a petition with a court to adjudge the credit union bankrupt, which he did on 18 June 2001. 22. On 9 July 2001 the Regional Court appointed an interim trustee (předběžný správce). 23. On 12 July 2001 the OSCU again placed the applicant credit union in receivership. It based its decision on the applicant credit union’s report of 3 July 2001 which included a statement of its outstanding debts and available funds. It was noted in the report that the applicant credit union was insolvent, as it had only CZK 59,257,000 (EUR 1,580,333) at its disposal, which was insufficient to enable it to honour its outstanding debts of at least CZK 218,000,000 (EUR 5,813,872). Moreover, because of its lack of liquid assets the applicant credit union had omitted to pay an annual contribution to the OSCU that had fallen due on 30 April 2001. The OSCU further noted that the applicant credit union’s financial statements as of 31 December 2000 disclosed negative equity to the tune of CZK 222,949,000 (EUR 5,945,858). 24. On 4 October 2001 the Ministry of Finance upheld the third receivership order. 25. On 21 March 2002 the applicant credit union, represented by the president of its supervisory board, filed an application for judicial review of the Ministry’s decision. 26. On 17 April 2002 the applicant credit union filed a claim for damages with the Ministry of Finance under the State Liability Act (Act no. 82/1998). 27. On 19 April 2002 the OSCU withdrew the applicant credit union’s licence (povolení působit jako družstevní a úvěrní záložna). It found irregularities in the way the applicant credit union had conducted its affairs, as attested by its inability to meet its liabilities, and considered that no improvement could be expected. It observed that by 15 March 2002, the applicant credit union had recorded overdue liabilities totalling at least CZK 200,000,000 (EUR 5,333,828), while having at its disposal only CZK 56,006,000 (EUR 1,493,632). The cumulative value of the ratios reflecting the balance between assets and liabilities was just under 28%, whereas section 7(1) of Ministry of Finance Decree no. 387/2001 on the liquidity and solvency requirements for credit unions required a cumulative value from 31 December 2001 onwards of at least 45%. 28. The OSCU found that as of 15 March 2002 the applicant credit union had disclosed a negative capital value of CZK 243,705,000 (EUR 6,499,403), whereas under section 10(1) of Ministry of Finance Decree no. 386/2001 on the capital adequacy requirements for credit unions, cooperative savings associations were obliged to have achieved by 31 December 2001, and to maintain thereafter, a capital adequacy of at least 0.1%. The OSCU further stated that on 17 April 2002 the applicant credit union had submitted a report on its financial management results which showed that the irregularities in the applicant credit union’s affairs, including its failure to comply with the capital adequacy, liquidity and solvency requirements, were so serious that there was no reasonable prospect of their being remedied. 29. By a letter of 22 May 2002 the Ministry of Finance dismissed the applicant credit union’s claim for damages. On 28 May 2002 the applicant credit union, through its legal representative empowered by the presidents of the board of directors and the supervisory board, brought an action for damages against the Ministry of Finance. 30. In a judgment of 21 June 2002 the Prague High Court (Vrchní soud) dismissed the applicant credit union’s first request for judicial review as being unsubstantiated, finding that the applicant credit union had been placed in receivership in accordance with the national legislation then in force and that the OSCU had not decided outside its discretionary power (volné uvážení). The court held, inter alia, that: “Placing a credit union in receivership is one of the measures which the [OSCU] may apply in addition to or instead of other sanctions specified in section 28(2) of [the Act]. ... Admittedly, the [OSCU] chose the strictest measure. However, [it] did not breach the [Act] and did not proceed contrary to the [Act’s] aims, which are the only grounds on which [the OSCU’s] decision may be quashed (Article 245(2) of the Code of Civil Procedure)... If the [OSCU] found ... that the amount of available assets reserved for direct payments to members of [the applicant credit union] within three months had decreased to 6.77% of deposits (the Act lays down a minimum of 15%) ... as a consequence of ... a number of ... financial transactions entered into by the [applicant credit union], and if the [OSCU] discovered other breaches of the [Act] and the applicant credit union’s articles of association, then there is no ground for this court to find that the OSCU, when imposing the receivership, decided outside its discretionary powers.” 31. On 3 July 2002 the OSCU appointed its liquidator (likvidátor). On 31 October 2002, following an appeal by the applicant credit union, the Ministry of Finance upheld the appointment. 32. In the meantime, on 12 September 2002, the applicant credit union had lodged a constitutional appeal against the High Court’s judgment, alleging a violation of Article 11 § 4 and Articles 36 and 38 of the Charter of Fundamental Rights and Freedoms (Listina základních práv a svobod), as well as Articles 6 and 13 of the Convention and Article 1 of Protocol No. 1. 33. On 5 December 2002 the High Court upheld the Regional Court’s decision of 9 July 2001 concerning the appointment of the interim receiver. 34. On 30 January 2003 the Constitutional Court rejected the constitutional appeal of 12 September 2002 as manifestly unfounded. 35. On 10 April 2003 two shareholders of the applicant credit union joined the proceedings concerning its action for damages. 36. On 23 April 2003 the Prague 1 District Court (obvodní soud) dismissed the applicant credit union’s action for damages on the ground that it had been lodged by an unauthorised person. It stated, inter alia, that members of the board of directors and of the supervisory board were not entitled to bring the action on behalf of the applicant credit union. At the same time, the court severed the two shareholders’ claims, ruling that they should be heard separately. 37. On 20 May 2003 the applicant credit union appealed. However, on 5 September 2003 the District Court discontinued the proceedings, stating in particular: “Section 28(d)(1) of [the Act] grants the supervisory board of a credit union the right to challenge the conduct of receivership, but an action for damages sustained as a result of the receivership cannot be equated with the right of the supervisory board to appeal against decisions of [the OSCU] under section 28(d)(1) of [the Act].” 38. On 9 February 2004 the Supreme Administrative Court (Nejvyšší správní soud) rejected the second application for judicial review, lodged by the applicant credit union on 15 January 2001 against the Ministry of Finance’s decision of 9 November 2000 upholding the second receivership order. The court, referring to section 28(d) of the amended Act, found that the application had been lodged by an unauthorised person, as only the receiver had authority to lodge such an appeal. 39. On 23 April 2004 the applicant credit union lodged a constitutional appeal against the decision of the Supreme Administrative Court. 40. On 26 April 2004 the Prague Municipal Court (městský soud) upheld the District Court’s decision of 5 September 2003. 41. On 28 April 2004 the Regional Court, on a petition filed by 217 creditors, shareholders of the applicant credit union, declared the applicant credit union to be insolvent. A trustee (správce konkurzní podstaty) was appointed, accordingly. 42. On 13 October 2004 a creditors’ meeting (schůze věřitelů) was held, at which the creditors’ committee (věřitelský výbor) was elected. On 8 December 2004, 7 November 2005 and 18 January 2006 respectively, three review meetings took place. 43. In the meantime, on 7 March 2005, the Constitutional Court had dismissed the applicant credit union’s latest constitutional appeal. 44. On 8 March 2006 the Regional Court received a list of the applicant credit union’s assets. The realisation of the assets included in the list is, according to the Government, under way. In connection with this insolvency dispute, the Regional Court has registered 35 judicial disputes. 45. It would appear that the third application for judicial review filed by the applicant credit union is still pending before the Supreme Court. According to the Commercial Register as it stands, the applicant credit union is still the subject of insolvency proceedings. 46. Article 11 § 4 provides that expropriation or other forcible limitation of ownership rights is possible only in the public interest and on the basis of law, and against compensation. 47. Under Article 36 § 1 anyone may assert his or her rights under a set procedure before an independent and impartial tribunal, and in specified cases before another organ. Under paragraph 2, anybody who claims that his or her rights have been violated by a decision of a public administrative organ may apply to a court for a review of the legality of that decision, unless the law provides otherwise. However, the review of decisions affecting the fundamental rights and freedoms listed in the Charter may not be excluded from the jurisdiction of the courts. Paragraph 3 provides that everybody is entitled to compensation for damage caused to him or her by an unlawful decision of a court, another organ of the State or the public authorities, or by maladministration. Under paragraph 4, the conditions and detailed provisions in this respect are determined by statute. 48. Under Article 38 § 1 nobody may be denied access to his lawful judge. The jurisdiction of the court and the competence of the judge are determined by statute. Paragraph 2 provides that everybody is entitled to have his or her case considered in public without unnecessary delay and in his or her presence, and to comment on all submitted evidence. The public may be excluded only in cases specified by law. 49. Section 1 provided that a credit union is a legal entity governed by the provisions of the Commercial Code on cooperatives unless the Act provides otherwise. 50. Section 3 stipulated, inter alia, that credit unions may provide loans to and receive deposits from their members, other credit unions and banks. 51. Section 24(1) and (2) provided that the head of the OSCU is appointed and removed from office by the Minister of Finance and that he is empowered, subject to the Minister’s approval, to decide on the status, remit and policy of the OSCU. 52. Under section 27(1) the OSCU must have exercised its powers with due diligence and efficiently while respecting the interests of credit union shareholders. 53. In accordance with section 28(2) the OSCU may have imposed sanctions for any breach of the Act or other statute by a credit union or its organs or members. 54. Under section 28(3)(c) the OSCU was empowered, inter alia, to impose receivership for a period of six months instead of or together with the sanctions provided for in the preceding subsection. 55. In accordance with section 28(3) the OSCU may have issued repeated receivership orders. 56. Under section 28(6) receivership was governed by the Banks Act, which applies mutatis mutandis. 57. Section 28(10) provided that a decision on receivership may have been appealed before the Ministry of Finance within 15 days of its service. 58. Section 28(11) stipulated that proceedings before the OSCU are governed by the Code of Administrative Procedure unless the Act provides otherwise. 59. The newly inserted section 28(d)(1) provides that the powers of all the organs of a credit union, with the exception of its supervisory board, are suspended on service of a receivership order and are assumed by the appointed receiver. The supervisory board is entitled to appeal the OSCU’s decisions. 60. Section 28c(1) provides that a receiver is appointed, removed and employed by the OSCU, which decides on his or her remuneration. 61. Section 26(2) provided that a bank may be placed in receivership by the Czech National Bank without any prior notice or invitation to remedy deficiencies identified in its business. 62. Section 26(3) stipulated, inter alia, that business transactions to the detriment of a bank’s clients or transactions which constitute a risk to the stability and security of the banking sector of the financial market; infringements of the Banks Act or other statutes or secondary legislation adopted by the Czech National Bank; and a situation where the total volume of reserves and provisions set aside by the bank is not sufficient to cover the risks arising from the volume of classified assets recorded by it, are considered to be deficiencies within the meaning of the Act. 63. Under section 26(4) proceedings on receivership were governed by the administrative procedure legislation unless the Banks Act provides otherwise. 64. According to section 30 the Czech National Bank may have imposed receivership where deficiencies in a bank’s activities endangered the stability of the banking system and the shareholders had not taken the necessary steps to eliminate them. 65. Article 245(2) provided that a court, while reviewing a decision adopted by an administrative authority within its discretionary power granted by a statute, may have examined only whether such a decision had been taken in conformity with rules laid down by a statute. 66. Article 247 et seq. entitled individuals or legal entities claiming that their rights had been curtailed by a decision of an administrative authority to apply for judicial review to determine the legality of that decision. 67. Under Article 250i § 1 the court, when reviewing the legality of the decision, must have relied on the facts as they stood at the time of delivery of the impugned decision; no evidence was taken. 68. The Code entered into force on 1 January 2003, replacing Part V of the Code of Civil Procedure. 69. Article 71 § 1(d) and (e) provides that a plaintiff is obliged to substantiate the relevant factual and legal grounds on which the action is based and to identify evidence in its support. 70. Under Article 75 § 2 the administrative court bases its decision on the facts and the law as they stood at the time of the impugned ruling. It may take evidence in this respect under Article 77 § 1. 71. Under Article 59 § 1 an appellate authority has full jurisdiction to examine a contested decision. If need be, it may complete the proceedings in question and remedy any shortcomings identified. 72. Article 244 § 6 provides that the supervisory board of a cooperative is entitled to request from the board of directors any information concerning the financial situation of the cooperative. The board of directors is obliged to inform the supervisory board without delay of any fact which might have serious consequences for the financial situation of the cooperative or the status of the cooperative or its shareholders. I. State Control Act Section 17 provides that an audit made by a controlling authority may be contested by objections which have to be raised within five days from the service of the audit on a controlled person. Under Section 18 an employee of a controlling authority is empowered to decide on raised objections. A controlled person may appeal that decision before the head of that authority within 15 days from that decision. The decision on the appeal is irrevocable. According to Section 26 the Code of Administrative Procedure is not applicable on proceedings under Section 18. J. Judgment of the Constitutional Court’s Plenary of 27 June 2001 (no. 276/2001) 73. Articles 244 – 250s [Part V] of the Code of Civil Procedure, in so far as they governed procedure of administrative courts, were repealed as of 31 December 2002 by this ruling. In its reasoning the Constitutional Court found these provisions contrary to Article 6 of the Convention as they, inter alia, limited jurisdiction of administrative courts to review administrative acts to issues of legality. It found that that the legislation in question empowered administrative courts to quash merely illegal decisions, not those embodying errors in fact. In other words, as the Constitutional Court put it, deliberation of administrative authorities could not be replaced, according to those provisions, by that of independent courts.