CASE OF KOTOV v. RUSSIA
Preliminary objection dismissed (non-exhaustion of domestic remedies);Violation of P1-1
Anatoly Kovler;Christos Rozakis;Dean Spielmann;Elisabeth Steiner;Khanlar Hajiyev;Sverre Erik Jebens
7. The applicant was born in 1948 and lives in Krasnodar. 8. On 15 April 1994 the applicant deposited 3,330 new roubles (“roubles”) in a savings account with the commercial bank Yurak (“the bank”) offering an interest rate of 200% per annum. Between April and July 1994 he withdraw 555 roubles, representing interest that had accrued on that account. 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 him his capital plus interest as its funds were insufficient. 9. The applicant brought proceedings against the bank, seeking repayment of the capital he had deposited, together with interest, a penalty payment at 3% per day and compensation for pecuniary damage (in connection with the construction of a house) and for non-pecuniary damage (on account of health problems). 10. On 20 February 1995 the Oktyabrskiy District Court of the town of Krasnodar partly upheld his claims. It established that on the closure of his account the bank owed the applicant 3,607 roubles, representing the capital deposited and the interest due for August 1994. After calculating the index-linked sum, it ordered the bank to pay the applicant 6,276 roubles. It further ordered a penalty payment of 3,330 roubles and awarded 500 roubles for non-pecuniary damage, making a total of 10,156 roubles. 11. That decision was upheld at last instance on 21 March 1995. 12. In a decision of the Oktyabrskiy court of 5 April 1996, the above-mentioned judgment debt was raised to 17,983 roubles in view of the failure to pay the 10,156 roubles and the rate of inflation. 13. In the meantime, on 16 June 1995, at the request of the Central Bank and the Russian Savings Bank, the Commercial Court for the Krasnodar region declared the bank insolvent. 14. On 19 July 1995 the insolvency procedure was opened by that court and a liquidator was appointed to oversee the liquidation. 15. On 11 January 1996 the Commercial Court approved the provisional statement of affairs based on the bank’s financial situation at 28 December 1995. 16. On the basis of that statement the committee of creditors of the bank decided on 18 January and 13 March 1996 to distribute the assets in the first place to certain categories of creditors. Accordingly, disabled persons, Second World War veterans, individuals in need and persons having taken an active part in the liquidation process, that is to say 700 persons in total (about 10% of creditors), were reimbursed by the liquidator at 100% of the index-linked amount of their capital together with interest. It was decided to reimburse the other creditors in the same manner, as and when further assets became available. 17. The applicant sent the liquidator a request for the repayment of the 17,983 roubles owed to him. In response to that request, the sum of 140 roubles was paid to him on 6 April 1998. 18. On 22 April 1998 the applicant challenged, before the Commercial Court, the fact that other creditors had received repayment at 100%, whereas he, as a preferential creditor, had received only 140 roubles. Relying on sections 15 and 30 of the Corporate Insolvency Act 1992 (“the 1992 Act”), he sought the repayment of the remainder of the sum owed to him in accordance with the principle of proportional distribution. Section 30 of the Act provided that, where a company’s assets were insufficient to satisfy all creditors, creditors of the same class would be paid in proportion to their respective claims. In the present case, at the date of the applicant’s request, 2,305,000 roubles had been collected in the liquidation process and these funds had been used for 100% repayment to creditors in the various categories mentioned above (see paragraph 16 above). 19. On 6 July 1998 the applicant’s action was dismissed at first instance on the ground that the amount owed to him (17,983 roubles) represented 0.78% of the assets totalling 2,305,000 roubles which, having been collected in the liquidation process, had been used to repay certain categories of creditor. According to the principle of proportional distribution he was therefore entitled to receive only 0.78% of 17,983 roubles, i.e. 140 roubles. That sum had already been paid to him on 6 April 1998, whilst the remainder would be paid as and when more funds became available in the course of the ongoing liquidation process. 20. Hearing the case on appeal, the Regional Commercial Court held on 26 August 1998 that, contrary to the requirements of section 27 of the 1992 Act, the liquidator’s list of creditors had not identified those that had priority or the corresponding sums to be paid to them separately. On the basis of the documents produced by the liquidator it was not possible to establish the applicant’s level of priority in relation to the other creditors, and the liquidator himself had stated orally that the applicant belonged to the fifth level of priority. The Regional Court took the view that, in deciding to repay certain categories of creditors at 100%, the creditors’ committee had overstepped the limits of its remit under section 23 of the 1992 Act. By enforcing that decision and distributing the assets accordingly, 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 a broad interpretation of its provisions, the Regional Court ordered the liquidator to redress the violations thus observed within one month and to inform it of the measures taken in that connection. 21. 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’ committee, 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 (see paragraphs 33 and 34 below). 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’ committee that was in breach of the law. 22. The enforcement of the decision of 26 August 1998 and, in particular, the redressing of the applicant’s financial situation, were not possible on account of the lack of assets. 23. In view of the failure to enforce the decision of 26 August 1998, the applicant filed a complaint with the Commercial Court on 2 September 1998, subsequently supplementing it with a complaint of 27 January 1999. He requested that the liquidator in person repay him the index-linked amount of the remainder of his award of 17,983 roubles, with interest and compensation for the non-pecuniary damage caused by his unlawful action. 24. The complaints in question were examined in the context of the insolvency procedure opened against the bank. 25. On 4 February 1999 the Regional Commercial Court rejected the applicant’s request on the ground that, on 20 February 1995 and 5 April 1996, the Oktyabrskiy District Court had awarded the applicant the sum of 17,983 roubles to cover his claim and damages, and that it was not possible to rule on the same request a second time. The Regional Court established that the applicant appeared in the list of creditors under the number 519 and that, in respect of the actual capital deposited, the bank owed him a residual amount of 8,813 roubles. The court pointed out that this sum could be paid to him under the conditions laid down in Article 64 of the Civil Code. 26. On 31 March 1999 judges of the Regional Commercial Court, hearing the case on appeal, upheld the decision of 4 February 1999 and pointed out that, in accordance with an Act of 1998 that was in force at the time the applicant’s complaints were examined, only those debts that had accrued in the course of the bank’s operations could give rise to repayment. Accordingly, the requests for the payment of various sums to which the applicant was allegedly entitled after the bank’s insolvency and during its liquidation could not be granted. The appellate court found that, by virtue of the judicial decisions, the applicant had secured a judgment debt of 17,983 roubles, which corresponded to the damage caused to him by the bank before it became insolvent. It added that the applicant would be able to recover this sum once sufficient assets had been realised in the liquidation process. The applicant’s complaint was confined, in the appellate court’s view, to the seeking of the above-mentioned sum together with penalties for non-payment. 27. 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’ committee and the liquidator’s action concerning the 100% repayment of debts to only 700 creditors (out of the bank’s 7,567 creditors, whose claims amounted to 24,875,000 roubles) admittedly breached the principle of proportional payment to creditors at the same level of priority, but did not cause Mr Kotov 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 Mr Kotov was thus calculated in proportion to the amount of his claim and to the assets realised in the course of the liquidation ...” 28. The court further pointed out that the liquidation process was still pending and that the applicant’s claim could thus be satisfied. 29. On 17 June 1999 the Regional Commercial Court confirmed the statement of affairs, as presented by the liquidator and approved by the general meeting of creditors, and closed the insolvency procedure on grounds of insufficient assets. 30. 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 decisions of 4 February, 31 March and 9 June 1999 (see paragraphs 25-27 above), on the ground that they had been given in breach of Article 22 of the Code of Commercial Litigation, which determined the jurisdiction of the commercial courts. Among other things, he stated that the examination of the applicant’s complaints of 2 September 1998 and 27 January 1999, in the context of the insolvency procedure opened against the bank, had been contrary to the 1992 Act governing such proceedings. 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. 31. On those grounds the President sought the annulment of the decisions at issue and the discontinuance of the proceedings concerning the above-mentioned complaints. On 17 April 2001 the Presidium of the Supreme Commercial Court of the Russian Federation fully granted those requests, espousing the arguments raised in the application. 32. On 1 June 2001 the applicant submitted a request for revision 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. 33. Under Article 63 of the Civil Code, after the expiry of the period within which creditors have to file their claims, the liquidation committee draws up a provisional statement of affairs containing information on the bankrupt’s estate, the claims filed by the creditors and the results of the examination of those claims. The statement has to 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 not be able 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, the unsatisfied creditors may request the courts to order the owner of the company to honour their claims out of his own personal funds. Article 64 of the Civil Code, as in force prior to 20 February 1996, made a distinction between five classes 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 class of creditors who were pensioners, Second World War veterans or persons in need. Under a new provision that was 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. Article 64 further provides that where a legal entity in liquidation has insufficient assets, they must be distributed among creditors at the same level in proportion to their respective claims. 34. 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 Arbitration Procedure of the Russian Federation. 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 released from his obligations and to protect the parties from unlawful actions against each other. 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 those proceedings. Under section 19, the commercial courts appoint the liquidator and, in the cases provided for by the Act, examine the lawfulness of acts of the parties involved in the insolvency procedure. Article 20 lists those parties as the liquidator, the creditors’ committee, the creditor, etc. Under section 21 § 1 the liquidator takes control of the bankrupt’s property, analyses the financial situation, examines the merits of the creditors’ claims, accepting or rejecting them, oversees the liquidation process to realise the assets, takes over the administration of the insolvent entity, sets up and heads the liquidation committee, and convenes the general meeting of creditors. In accordance with section 21 § 2, taken together with section 12 § 4, candidates to the office of liquidator must be economists or lawyers or have experience of company management. They must not have a criminal record. No persons holding a position of responsibility in a company that is a debtor or creditor may be appointed. Candidates to the office of liquidator must declare their income and assets. Under section 21 § 3 the liquidator may challenge any decisions of the general meeting of the creditors’ committee when those decisions fall outside the remit of that meeting. Under section 27 § 1, after the expiry of a two-month period within which the creditors must submit their claims against the bankrupt, the liquidator will draw up a list of the accepted and rejected claims indicating the amounts for those that have been accepted and the level of priority for each one. The list must be sent to the creditors within a period of two months. 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 not enough 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 class of creditors who are disabled, Second World War veterans or persons in need. Paragraph 1 provides that any expenses of 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. 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. Under section 35 § 3, any claims that cannot be satisfied because the proceeds of the liquidation are insufficient will be regarded as extinguished. Section 38 provides that the bankrupt 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. 35. Section 21 § 3 of the 1998 Act provides that creditors are entitled to seek compensation from the liquidator in respect of any damage that the latter may have caused to them by an action or omission in breach of the law. In accordance with section 98 § 1, sub-paragraph 7, of this Act, claims against the bankrupt may be submitted only in the context of the insolvency procedure (see also section 18 § 2 of the 1992 Act). Section 114 provides for the same principles of distribution and pari passu repayment as section 30 of the 1992 Act. 36. Under Article 131 of the Code, where a commercial court orders the defendant to carry out a specific act other than a transfer of property or payment of a pecuniary award, the court will indicate by whom, where and within what time-limit the act must be carried out. Article 143 provides that insolvency cases are to be examined by commercial courts in accordance with the Code and with the specific provisions of the insolvency legislation. 37. 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 as follows: “... when examining the claims of creditors who are private 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 clauses that would prevent the 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 al.). 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 the 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. ...”