CASE OF BÄCK v. FINLAND
No violation of P1-1
Nicolas Bratza
13. The applicant was born in 1957 and lives in Karperö. In 1988 and 1989 he and another person contracted to guarantee a bank loan granted to N. As N. was eventually unable to meet the reimbursement conditions, the applicant and his co-guarantor each paid the bank approximately 113,000 Finnish markkas (FIM) (approximately 19,000 euros (EUR)), excluding interest, in 1991. 14. In 1995 N. applied for a debt adjustment in accordance with the 1993 Adjustment of Debts (Private Individuals) Act (laki yksityishenkilön velkajärjestelystä, lag om skuldsanering för privatpersoner 57/1993 – “the 1993 Act”) and proposed a payment schedule for the court’s approval. The applicant opposed the request, arguing that such an adjustment could lead to an unjustified deprivation of his property, consisting of his claim against N. The applicant argued that N. was young and healthy and could be expected to be able to reimburse his debts to the guarantors in due course. In the alternative, the applicant requested that the adjustment of N.’s debts be postponed. 15. On 19 April 1996, after N. had found employment, the District Court (käräjäoikeus, tingsrätten) of Korsholm granted him a debt adjustment and adopted a payment schedule which was to take effect on 1 June 1996 and remain in force for five years. The applicant’s claim against N. was reduced to FIM 2,168 (EUR 365). The District Court considered that N.’s solvency had been significantly weakened on account of his previous unemployment and unsuccessful business activities. Given that N. was already able to reimburse FIM 420 (EUR 71) per month to his creditors at the time of the court’s examination, it was not possible under the 1993 Act to postpone the entry into force of the payment schedule. The District Court gave the following reasons: “... With reference to Tomas Bäck’s submission, the District Court notes that under the Adjustment of Debts (Private Individuals) Act it is possible to reduce the amount of a claim and even to write a claim off. Considering that a guarantee always involves a risk as to the possible obligation to pay the creditor and the possibility of recourse against the principal debtor, the District Court finds that the claim in question cannot be considered as a possession that would enjoy inviolable protection under the European Convention on Human Rights. ...” 16. Among N.’s seventy other creditors was F. bank, with a claim amounting to FIM 231,722 (EUR 38,973), of which the District Court retained FIM 4,510 (EUR 759) as part of his payment schedule. 17. The applicant appealed, contending that the almost total extinction of his claim against N. violated his property rights under the Convention. No legislation on debt adjustment had existed at the time when the applicant had contracted to guarantee N.’s debts. Furthermore, the extreme step of writing off his claim discriminated against him as a private creditor who, unlike creditor banks, would receive no compensation from the State. 18. On 14 October 1996 the Vasa Court of Appeal (hovioikeus, hovrätten) upheld the District Court’s decision and its reasoning. The applicant was refused leave to appeal to the Supreme Court (korkein oikeus, högsta domstolen) on 19 February 1997. 19. The 1993 Act was enacted during a recession in the Finnish economy, one of its purposes being to reduce the high volume of unpaid debts owing to banks. The banks received substantial subsidies from the State in compensation. Under the 1993 Act, a court may write off debts on condition that the debtor agrees to a payment schedule in favour of the creditors determined by the court (section 25). The court assesses the income needed to cover the debtor’s essential living expenses and to meet any obligation to pay allowances (sections 4-5). The excess income is to be used to pay off the creditors during a fixed period in amounts determined by the court (section 23). 20. If the debtor fails to comply with the payment schedule or contracts a new debt, the schedule may be annulled, thereby enabling all creditors to claim payment as if no debt adjustment had been granted (section 42). If the debtor’s ability to pay or other conditions change significantly while the reimbursement scheme is in force, the debtor must inform the creditors within one month (section 7). Both the debtor and the creditors may seek to have the payment schedule amended, extended or annulled while it remains in force or, in certain circumstances, within five years from the adoption of the schedule (sections 30 and 61). If the payment schedule is amended in favour of the creditors, it may be extended by a period corresponding to the period during which the debtor’s ability to pay had improved (section 44). 21. The court may hear submissions from one or several creditors, guarantors and co-debtors before deciding on the request for debt adjustment (section 52). An appeal lies to the relevant appellate court, unless it is specifically prohibited or concerns a procedural matter (section 63). 22. At the material time, the court could obtain, at the request of a creditor, the relevant information on the possible existence of circumstances which could lead to the refusal of an application for debt adjustment. Since 1997 the court can also obtain this information of its own motion. 23. In its parliamentary bill (no. 183/1992), the government noted that an insolvent private individual seldom had enough possessions to repay a creditor, as the bankruptcy costs had priority. Neither could a declaration of bankruptcy eliminate a natural person’s future responsibility for his or her debts. Allowing an adjustment of the overall debts and fixing a payment schedule could help the debtor meet his or her future financial obligations, provided he or she complied with that schedule. Such assistance would also reduce the overall cost to society. The courts should seek to adjust a debt in the manner least detrimental to the creditor and only to the extent that such an adjustment was necessary to remedy the debtor’s financial situation. Since underlying contractual terms should be interfered with as little as possible, the partial or total extinction of a claim should be considered as a very last resort. The possibility of ordering a payment schedule to remain in force for five years would enable the creditors to receive at least partial satisfaction. It was noted that somewhat similar legislation for debt adjustment had been, or was being, enacted in countries such as Denmark, France, Germany, Norway, Sweden and the United States of America. 24. In 1997 the 1993 Act was amended, inter alia, so as to tighten further the conditions for granting a debt adjustment (section 9a and section 10). A further amendment provided for the possibility of extending the payment schedule for a further two years, for exceptional reasons and provided the creditor was also a private individual (section 31a). These amendments were not applicable to the applicant’s case. 25. The Netherlands Government agreed with the respondent Government’s views and drew attention to the Debt Repayment (Natural Persons) Act (Wet schuldsanering natuurlijke personen) which came into force in the Netherlands in 1998 and was similar to the Finnish legislation. 26. In their view, declaring that the full or partial repayment of debts was no longer enforceable ipso jure at the end of a debt-repayment procedure did not contravene Article 1 of Protocol No. 1. Both the Finnish and Netherlands laws on debt adjustment served the public interest as they were aimed at preventing personal bankruptcy. As a result of bankruptcy, people were frequently discouraged from setting up an income-generating activity, since by so doing they would face claims from old creditors. Bankruptcies also placed a heavy burden on society and creditors did not benefit from having to pursue bankrupt debtors for years on end. Debt-adjustment procedures sought to satisfy all parties concerned by striking a proper balance between their respective interests. This complied with the letter and spirit of Article 1 of Protocol No. 1. 27. They noted, finally, that a guarantor voluntarily took the risk that not all the funds he or she might have to pay to a creditor could be recovered from the debtor. The Convention did not afford protection against such a risk. 28. The Norwegian Government joined the respondent Government in arguing that the debt adjustment provided for in the respective States’ legislation did not contravene the rights which Article 1 of Protocol No. 1 afforded to creditors. 29. The Norwegian Debt Settlement Act of 1992 (Act relating to Voluntary and Compulsory Debt Settlement for Private Individuals – gjeldsordningsloven) contained provisions similar to those found in the Finnish legislation. The Norwegian Act served vital societal goals and struck a balance between competing interests. The primary purpose of the Act was to rehabilitate individuals with serious and permanent debt problems by affording them an opportunity to regain control over their financial affairs, in the absence of which they easily became dependent on the social welfare system on a permanent basis. In addition, the Act was intended to ensure that debtors would fulfil their obligations as far as possible and that the distribution of a debtor’s assets would be organised properly. The position of creditors was not to be weakened any more than strictly necessarily. 30. The Swedish Government likewise agreed with the arguments of the respondent Government and referred to the Swedish Debt Adjustment Act (skuldsaneringslagen) of 1994. This legislation essentially corresponded to the Finnish legislation and was of vital importance to society as it sought to rehabilitate individuals with very large debts, affording them a chance to lead a decent life. The legislation applied to residents in a “qualified” state of insolvency who appeared unable to pay their debts within the foreseeable future. In the longer term, severe insolvency not only created suffering for the individual concerned but also resulted in a loss of production, an increased need for care and treatment, and an expansion of the grey sector of the economy. 31. The debt-adjustment legislation also had a preventive effect, as it lessened the interest of credit institutions and others in lending money without verifying the prospective debtor’s solvency. This in turn reduced the risk of individuals facing a serious debt burden. 32. The rehabilitating purpose of the legislation was weighed against the individual creditors’ interest in maintaining their claims. Hence a further purpose of the Swedish legislation was to protect the creditors as a group, since the debtor would be paying at least part of his or her debt to each of them. Creditors were thus likely to receive a better dividend on their claims than would otherwise have been the case. 33. By the end of 2002, over 32,000 applications had been lodged and some 12,000 persons had been granted a debt adjustment in Sweden. 34. When the Swedish legislation was being considered (Government Bill 1993/94:123), it was noted that debt adjustment would not amount to a deprivation of property, even though it would limit the creditor’s possibility of asserting a claim or even extinguish it. A claim against a debtor in a “qualified” state of insolvency would largely be of a merely formal nature, as the creditor could hardly expect to receive any payment. Through debt adjustment, the creditor could obtain payment of at least part of the claim’s nominal value. Against this background, and bearing in mind the significant general interest in favour of debt adjustment, the Swedish Government concluded at the time of enacting the 1994 Act that a scheme to that effect would not contravene Article 1 of Protocol No. 1. 35. The United Kingdom Government considered that even if Article 1 of Protocol No. 1 came into play, any interference with the rights of creditors was justified as regards a bankruptcy system involving the cancellation of debts in whole or in part. Cancellation of debts was a common feature of many bankruptcy schemes in the western world, including that of the United Kingdom. Debtors could get into financial difficulties for reasons which were not of their own making. Bankruptcy schemes were aimed at rehabilitating the debtors, both financially and socially. The absence of these schemes could have adverse social consequences, as the very existence of debts might prevent an individual from carrying on certain activities. If debtors who had failed in business could not be discharged from their debts, this could act as a deterrent to entrepreneurship and responsible risk-taking. 36. Creditors such as the applicant could protect their position by not dealing with a particular debtor; by inquiring into the debtor’s financial position; by asking for a security; by taking out an insurance policy; or by obtaining a guarantee from a third party. At any rate, creditors were presumed to be acting in the knowledge of insolvency law and its consequences.