FIRST SECTION
DECISION
AS TO THE ADMISSIBILITY OF
Application no. 49429/99
by CAPITAL BANK AD
against Bulgaria
The European Court of Human Rights (First Section), sitting on 9 September 2004 as a Chamber composed of:
MrC.L. Rozakis, President,
MrP. Lorenzen,
MrsS. Botoucharova,
MrA. Kovler,
MrV. Zagrebelsky,
MrsE. Steiner,
MrK. Hajiyev, judges,
and Mr S. Nielsen, Section Registrar,
Having regard to the above application lodged on 23 December 1998,
Having regard to the observations submitted by the respondent Government and the observations in reply submitted by the applicant,
Having deliberated, decides as follows:
THE FACTS
The applicant, Capital Bank AD, is a joint‑stock company in bankruptcy with registered office in Sofia, Bulgaria. The application was introduced on its behalf by Mr Anguel Parvanov and Mr Mancho Markov, chairman and vice‑chairman of its board of directors. The application form was also signed by the representatives of its three shareholders, First Financial AD, a company with registered office in Sofia, Bulgaria, Royal Flash Ltd, a company with registered office in Moscow, Russia, and Rontadent Trade Ltd, a company with registered office in Tver, Russia.
The respondent Government are represented by Ms M. Pasheva, co‑agent, of the Ministry of Justice.
A. The circumstances of the case
The facts of the case, as submitted by the parties, may be summarised as follows.
1. Problems with the applicant bank’s financial situation, actions taken by the Bulgarian National Bank in connection with that and first bankruptcy proceedings against the applicant bank
On 27 March 1997 the Bulgarian National Bank (“BNB”) found that the applicant bank was insolvent.
On 5 May 1997 BNB filed with the Sofia City Court a petition for the opening of bankruptcy proceedings against the applicant bank.
By a decision of 15 May 1997 BNB, finding that the overall amount of the applicant bank’s outstanding big loans exceeded twenty times (the regulatory maximum being eight times) the amount of its capital (including paid‑up capital and reserves), which put at risk its ability to operate, limited the bank’s activities. In particular, it prohibited it from taking deposits, extending loans or other credits, buying bills of exchange or promissory notes, entering into foreign currency or precious metals transactions, entering into deposit transactions, acting as a surety or guarantor or providing a security for third parties, effecting non‑cash operations, clearing the checking accounts of third parties and effecting factoring operations. BNB also appointed a special administrator to control the activities of the applicant bank and to verify whether it complied with the restrictions imposed. The special administrator had the right to access all of the applicant bank’s premises and to check all its operations.
It seems that the applicant bank did not seek judicial review of this decision.
On 23 September 1997 the Sofia City Court, finding that BNB had not revoked the licence of the applicant bank, which was a precondition to declaring a bank bankrupt under the new Banking Act 1997, discontinued the bankruptcy proceedings. Its decision was upheld by the Supreme Court of Cassation on 12 November 1997.
2. Attempt to improve the applicant bank’s financial situation
Remedying the financial problems noted in BNB’s decisions of 27 March and of 15 May 1997 was possible in principle by increasing the applicant bank’s capital.
On 23 March 1997 the general meeting of shareholders of the applicant bank resolved to issue new shares up to the amount of 12,000,000,000 old Bulgarian levs (BGL), to be subscribed by the shareholders. The resolution was registered by the Sofia City Court and took effect on 12 May 1997.
Two of the applicant bank’s shareholders, Royal Flash Ltd and Rontadent Trade Ltd, subscribed the shares and, accordingly, became liable to pay them up. However, they sought to discharge this liability by other means. On 30 June and 7 and 29 August 1997 the two shareholders purchased debts due by the applicant bank to BNB and several other banks and companies. By virtue of these debt assignments the applicant bank’s shareholders became also its creditors. They advised the applicant bank that they wished to set off their obligations to pay up their newly subscribed shares against the debts that the applicant bank now owed them. Accordingly, the applicant bank made entries in its accounts whereby it effected the required setoffs.
On 11 November 1997 BNB, exercising its powers under section 65 of the Banks Act of 1997, ordered the applicant bank to cancel the above‑mentioned entries in its accounts. It reasoned that the setoffs represented non-cash consideration for the shares and that they had been effected in breach of sections 72 and 73 of the Trade Act and of section 19(2)(5) of the Banks Act of 1997. BNB also ordered the applicant bank to present to it a fresh balance sheet reflecting the cancelling of the entries.
In its later decision of 20 November 1997 (see below) BNB apparently considered that the setoffs were in fact a transformation of existing assets which could not improve the applicant bank’s financial situation.
3. Revoking of the applicant bank’s licence and second bankruptcy proceedings against it
On 20 November 1997 BNB revoked the applicant bank’s licence and appointed two special administrators to act in place of the applicant bank’s board of directors. The reasons for its decision were as follows:
“In its decision [of 27 March 1997] BNB’s board of governors found that the [applicant bank] was insolvent and petitioned the court to open bankruptcy proceedings against it.
With a view to allowing the [applicant bank’s] managing bodies to improve its financial situation by increasing its capital and accumulating additional funds and thus allowing it to come out of its state of insolvency, [BNB’s] banking supervision department did not propose revoking the bank’s licence by reason of insolvency.
The analysis of the [applicant bank’s] financial situation as of 11 November 1997, carried out by [BNB’s] banking supervision department, indicates that the bank’s capital has not been increased through the accumulation of additional funds, but mainly through the transformation of assets – which was, moreover, not carried out in the most correct manner –, which does not lead to a substantial improvement of the bank’s financial situation.
The overall capital adequacy of the bank is negative – minus 16.74%, and the valuation of the bank’s assets and liabilities, carried out in accordance with BNB’s supervisory requirements and rules, indicates that value of the bank’s liabilities exceed the value of its assets by BGL 1,072,977,000. Moreover, the bank has not paid for more than seven working days a due debt of 437,975.65 United States dollars [(USD)] to the Commercial and Savings Bank AD (in bankruptcy). Because of all these facts BNB’s deputy governor in charge of the banking supervision department has proposed to revoke the bank’s licence by reason of insolvency.”
The decision, which was sent to the applicant bank by fax on 20 November 1997 and officially served on it on 2 December 1997, stated that it was immediately enforceable and not subject to judicial review.
The applicant bank submits that the debt to which BNB was referring had in fact been paid on 5 September 1997. In support of its submission it presents a decision of 12 April 2001 of an enforcement judge at the Sofia District Court which indicates that as of 5 September 1997 the applicant bank had paid in full a debt to the Commercial and Savings Bank AD under a writ of execution. The applicant bank further submits that BNB was informed of the payment of the debt through a report by the applicant bank’s special administrator issued on 8 September 1997.
On 24 November 1997 BNB filed with the Sofia City Court a petition for the opening of bankruptcy proceedings against the applicant bank. In the petition it repeated, almost verbatim, the findings it had made in its decision of 20 November 1997.
A hearing was held on 17 December 1997, at which the applicant bank was represented by the special administrators previously appointed by BNB. A prosecutor from the Sofia City Prosecutor’s Office also took part in the proceedings, as mandated by section 81 of the Banks Act of 1997.
The counsel retained by the special administrators argued that there was no indication that the applicant bank’s liabilities exceeded its assets or that it had defaulted on a debt which had fallen due. This position was supported by the participating prosecutor, who also submitted that the gathering of evidence with respect to the applicant bank’s real financial situation was needed.
In a judgment of 6 January 1998 the Sofia City Court granted BNB’s petition, declared the applicant bank insolvent and bankrupt, terminated the powers of its bodies, divested the bank of its property, ordered the sale of its assets and appointed trustees. It found that the prerequisites for opening bankruptcy proceedings – an order for revoking of the bank’s licence and presentation of a copy of this order to the court – were in place. The Banks Act of 1997 provided for a limited competence of the court in bankruptcy proceedings in respect of a bank. The only fact the court had to verify in such proceedings was whether the two above prerequisites were in place. The judgment continued:
“...in view of the new procedure introduced by the Banks Act [of 1997], ... the objection ... that BNB’s averment of [the applicant bank’s] insolvency is not supported by evidence is unfounded. Unlike the repealed Banks and Credit Business Act [of 1992], which provided that BNB had to ... prove ... the insolvency of a bank, the new Banks Act [of 1997] does not contain such a requirement. Moreover, in section 79(1) and (3) of the Act the legislature has exhaustively specified the conditions for the opening of bankruptcy proceedings [in respect of a bank] and the requirements that BNB’s petition has to conform to. These boil down solely to indicating the grounds pursuant to which the licence of the bank has been revoked under section 21(2) of the Act.
The logical and comparative law construction of the above provisions ... leads to the categorical conclusion that the changes in the statutory regime of bank bankruptcy are aimed, on the one hand, at a significant reduction of the competence of the court, [even] at taking away its power to establish the insolvency of a bank, and, on the other hand, at empowering [BNB] to establish whether a bank is insolvent or not, without a requirement to substantiate or prove its finding before the court...
An argument in favour of the above conclusion is section 21(5) of the Act, which expressly provides that the decision of [BNB] to revoke a banking licence is not subject to judicial review. ... The collection of evidence relating to the ... insolvency of a bank would run counter to the above-cited prohibition against judicial review.
In view of all this the court finds that all requests and objections of [the applicant bank] ... contesting BNB’s averments about its insolvency are inadmissible and must be left without examination. The same goes for the evidence presented by [the applicant bank]: even though it was admitted, it should not be taken into account, as it is absolutely irrelevant to the dispute at hand. The two above-cited prerequisites – the order for ... revoking the banking licence of [the applicant bank] and the presentation of a copy of this order to the court... – are sufficient for the resolution of this dispute.”
As the judgment was immediately enforceable, from that moment onwards the persons having the right to act on the applicant bank’s behalf were the court‑appointed trustees. Accordingly, these trustees represented the applicant bank in the ensuing stages of the proceedings.
The trustees did not file an appeal against the judgment, but the Sofia City Prosecutor’s Office did. It argued that the court had erred in not examining whether the applicant bank was in fact insolvent. It had thus turned the proceedings into a mere registration of BNB’s request to declare the applicant bank bankrupt. Had the court bothered to look at the actual circumstances, it would have found that the applicant bank had more than USD 3,000,000 in cash, as evidenced by a report drawn up by the BNB‑appointed special administrators of the applicant bank. This fact raised the question whether BNB’s finding that the value of the applicant bank’s liabilities exceeded the value of its assets was indeed true. Also, BNB had not specified the amount and maturity of the overdue debt which the applicant bank had failed to pay for more than seven working days. It was thus impossible to carry out an independent examination of the veracity of its averment. The Prosecutor’s Office presented an expert report according to which the applicant bank’s assets adequately covered its liabilities.
In reply BNB argued that the appeal was unfounded. So did the court‑appointed trustees.
On 10 March 1998 a three‑member panel of the Supreme Court of Cassation upheld the lower court’s judgment. Although it held that it could independently establish the facts without deferring to BNB’s findings, it held that the applicant bank was indeed insolvent. The analysis of the evidence showed that according to BNB’s deputy governor the value of the applicant bank’s assets was BGL 8,391,953,000, and the value of its liabilities was BGL 9,464,930,000. The difference between these numbers was exactly the amount mentioned in BNB’s decision and its ensuing bankruptcy petition. Turning to the other fact evidencing insolvency – the non‑payment of a due debt for more than seven working days – the court held that the applicant bank indeed owed another bank more than two and a half million USD under a debt rescheduling agreement of 18 September 1997. No payments had been made in satisfaction of that debt. The applicant bank’s objection that it could not make any payments because of the prohibition to effect non‑cash operations imposed on it by BNB’s decision of 15 May 1997 was unfounded. In any event, the reasons for not being able to make a payment were irrelevant, since the impossibility – however caused – to pay a debt for more than seven working days was of itself sufficient for the court to find insolvency.
The Chief Prosecutor’s Office filed a petition for review of the judgment of the three‑member panel.
On 30 June 1998 a five‑member panel of the Supreme Court of Cassation dismissed the petition for review in the following terms:
“The first-instance court’s construction of the law – the Banking Act [1997] – is correct. The regime of bank bankruptcy is lex specialis in relation to the general commercial bankruptcy ... In this context it has to be reckoned that the ... prerequisites for ... declaring a bank bankrupt are governed not by the general rules of the Trade Act but by the special ones of the Banks Act [of 1997]... This is made necessary by the specific character of the banking business ... [Banks operate] predominantly with others’ money, which necessitates compliance with strict requirements for capital adequacy, formation of provisions and ... liquidity. [BNB controls compliance with these requirements] in performance of its function of banking supervision, with a view to preserving the stability of the banking system and of achieving effective and enhanced protection of depositors. Because of this specificity bankruptcy proceedings for banks are expedited, with a view to advancing the interests of the creditors of the insolvent bank.
...
The Sofia City Court correctly held that the soundness and the expediency of BNB’s decision to revoke [the applicant bank’s] licence may not be controlled by the court, because [BNB has a special competence] in discharging its banking supervision duties. By virtue of section 82 of the Banking Act [1997] the court is bound by [BNB’s] bankruptcy petition, if it meets the requirements of section 79(3) in conjunction with section 21(2). [T]he court does not carry out an additional examination of circumstances evidencing the insolvency of a bank. ... BNB alone ... has the competence to determine extra-judicially the existence of the two grounds for [declaring a bank insolvent]. [This determination] is not reviewable by the court, which has no latitude in such proceedings. Once BNB has established the insolvency of a bank before the opening of bankruptcy proceedings, the court may not reconsider the issue. It must only carry out a formal, ex facie verification of [BNB]’s petition for the opening of [bankruptcy proceedings], without venturing into the substantive issues... , because the very revoking of the licence constitutes the ground for opening of such proceedings. The court may only verify whether the [BNB]’s decision is void, but may not examine whether [BNB’s] finding of insolvency is borne out by the facts...”
The bankruptcy proceedings against the applicant bank are apparently still pending.
4. Refusal of the applicant bank’s trustees to lodge an application with the Court
On 18 December 1998 the applicant bank’s shareholders asked its trustees to lodge an application under the Convention on its behalf.
On 23 December 1998 the trustees informed the shareholders that they could not lodge an application on the applicant bank’s behalf because such an action would fall outside their mandate under Bulgarian law.
5. The attempt to have BNB’s decision revoking the applicant bank’s licence declared null and void by the Supreme Administrative Court
On an unspecified date in 2002 one of the applicant bank’s shareholders, First Financial AD, lodged with the Supreme Administrative Court an application for judicial review of BNB’s decision to revoke the bank’s licence. It argued that the decision was null and void. Later the chairman and the vice‑chairman of applicant bank’s board of directors, purporting to act on the bank’s behalf, requested leave to intervene in the proceedings.
In a decision of 5 March 2002 a three‑member panel of the Supreme Administrative Court held that the applicant bank’s request to be allowed to intervene in the proceedings was inadmissible because it had been lodged by persons who no longer represented it. Following its placing into bankruptcy it was only the trustees who could validly act on its behalf, as provided by section 84(3) of the Banks Act of 1997 read in conjunction with section 658(1) of the Trade Act. The court went on to hold that First Financial AD’s application for judicial review of BNB’s decision was inadmissible. Section 21(5) of the Banks Act of 1997 excluded BNB’s decisions to revoke a bank’s licence from judicial review. That provision was to be construed according to its plain meaning and was applicable regardless of whether the request was to annul the decision or declare it null and void. On the other hand, First Financial AD had no standing to lodge an application for judicial review, because BNB’s decision was addressed to the applicant bank and not to its shareholders.
The chairman and the vice‑chairman of the applicant bank’s board of directors and First Financial AD appealed.
In a decision of 10 April 2002 a five‑member panel of the Supreme Administrative Court declared the applicant bank’s appeal inadmissible and First Financial AD’s appeal ill‑founded. It held that refusal to allow the applicant bank to intervene in the proceedings was not subject to appeal. It also held that First Financial AD’s application for judicial review was properly left without examination on the merits. The prohibition of section 21(5) of the Banks Act of 1997 applied regardless of whether the request was to annul BNB’s decision or declare it null and void.
B. Relevant domestic law and practice
1. BNB’s powers
(a) To limit a bank’s activities
Under the Banks and Credit Business Act of 1992, superseded on 1 July 1997 by the Banks Act of 1997, BNB could, inter alia, limit the activities of a bank and the types of transactions it could enter into (section 56(1)(5) of the Banks and Credit Business Act of 1992).
(b) To order remedial action
Section 65(1)(1) and (2)(3) of the Banks Act of 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.
(c) To appoint special administrators at a bank
Under section 56(1)(5) in conjunction with section 58(2) of the Banks and Credit Business Act of 1992 BNB could appoint special administrators („квестори“) with the power to, inter alia, control the activities of the bank, verify whether it complied with the restrictions imposed, have access to its premises and check all its operations (see also section 58(1)(1) and (2) of the Act).
Under section 69 of the Banks Act of 1997 BNB may, in certain circumstances (e.g. when placing a bank under compulsory administration or revoking its licence) appoint special administrators. These special administrators act in place of the banks’ board of directors (section 71(1)), i.e. on behalf of the bank. They are hired and dismissed by BNB (section 69(3)), it may give them directions (section 71(3)) and they are accountable to it (section 71(5)).
(d) To revoke a bank’s licence
BNB mandatorily revokes the licence of a bank on the ground of insolvency when (i) the bank does not pay for more than seven working days a debt which has fallen due or (ii) the total amount of the bank’s liabilities is greater than the total amount of its assets (section 21(2) of the Banks Act of 1997). The value of the bank’s assets and liabilities 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 (see above) if such have not already been appointed (section 21(4)). The administrators represent the bank until the court appoints trustees (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 (sections 7(2) and 11(1) of the Administrative Procedure Act), BNB does not inform the bank about the commencement of the procedure for revoking its licence and does not have to examine and take into account the bank’s representations and objections, if any (section 21(5) of the Banks Act of 1997). By contrast, under section 56(4) of the repealed Banks and Credit Business Act of 1992, when revoking a bank’s licence BNB could only dispense with informing the bank about the commencement of the procedure or with examining its representations and objections in exigent and urgent cases.
After revoking a bank’s licence on the ground of insolvency, BNB must mandatorily file with the court a petition for bankruptcy of the bank (section 79(1) of the Banks Act of 1997).
2. Judicial review of BNB’s decisions
(a) Provisions of the Banks Act of 1997
Whereas BNB’s decisions under the Banks and Credit Business Act of 1992 were, without limitation, subject to review by the Supreme Administrative Court (section 88(2) and (3)), the Banks Act of 1997 prohibits judicial review of a number of BNB’s decisions. Thus, coercive measures ordered by BNB under section 65 of the Act 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)).
(b) Judgment no. 18 of 1997 of the Constitutional Court
On 14 November 1997 the Constitutional Court delivered its judgment (реш. № 18 от 14 ноември 1997 г. по конституционно дело № 12 от 1997 г., обн., ДВ брой 110 от 25 ноември 1997 г.) in a case brought by fifty‑one members of Parliament who considered, inter alia, that sections 21(5) and 65(4) of the Banks Act of 1997 should be declared contrary to Article 120 § 2 of the Constitution, which provides that all administrative decisions are subject to judicial review unless such review has been excluded by statute.
The Constitutional Court rejected the request in the following terms:
“[This] court has already clearly and categorically expressed the view that ‘judicial review of administrative acts is a constitutive element of the rule of law’...
The Court is of the view that the question of the judicial review of administrative acts may be resolved only in accordance with the express provision of Article 120 § 2 of the Constitution. According to this provision judicial review of administrative acts may be limited only by statute. In the case at hand this is the Banks Act [of 1997].
In view of the wording of Article 120 § 2 in fine of the Constitution, the Court may not come up with an interpretation providing exceptions from the exception. It is only the legislature that may, by statute, exclude certain administrative acts from judicial review. [Article 120 § 2] does not lay any criteria limiting the legislature’s powers in this respect. This is a question falling within the legislature’s competence...
In the same time the Court deems it necessary to point out that the legislature’s right to exclude certain categories of administrative acts from judicial review is not absolute. In exercising this right the National Assembly must have regard to the main constitutional principles relating to the rule of law and the protection of the fundamental human rights. The power granted to the National Assembly by Article 120 § 2 in fine is an exception and has to be construed and applied restrictively. The character of this exception requires the National Assembly to use its powers in this respect only when it has serious and good reasons to do so. To hold otherwise would mean to render the principle of judicial review meaningless. For this reason [the Court] is empowered to assess in each specific case whether the legislature’s discretion has been exercised within the limits laid down in the Constitution...
The analysis of the acts excluded from judicial review by the Banks Act [of 1997] indicates that the legislature has remained within the bounds of the constitutional appreciation in protecting the public interest and the interest of the depositors. These are mainly acts of banking supervision where the competence of the supervisory body cannot be supplanted by a judicial decision ...”
3. Bank bankruptcy
Before 1 July 1997 bank bankruptcy was regulated by the Banks and Credit Business Act of 1992. From that date onward the newly adopted Banks Act of 1997 became applicable to such proceedings.[1] The regime of bank bankruptcy set forth in the Banks Act of 1997 contained a number of special features. Only BNB, and not just any creditor or the bank itself, could file a petition for bankruptcy of the bank (section 79(2) of the Banks Act of 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 licence of the bank under section 21(2) (section 79(3)). A certified copy of BNB’s decision for revoking the licence had to be enclosed to the petition (ibid.). The petition was examined by the court in chambers and in the presence of a prosecutor (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 also to 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 („синдици“) in whom these powers, including the right to represent the bank in court[2], vested (section 84(3) in conjunction with section 658(1) of the Trade Act). The bank’s bodies, however, continued to exist and, according to the doctrine, could act on its behalf in certain limited circumstances (Таджер, В., Несъстоятелност по Търговския закон, 1996, стр. 133). In particular, the bodies could act in situations where the bank had a conflict of interests with the trustees: e.g. when the bank requested the replacement of the trustee if he or she did not perform his or her duties or imperilled the creditors’ or the debtor’s interests through his or her actions, or when the bank sought compensation from the trustee for damage caused due to his or her fault (Орсов, З., Правомощия на органите за управление на търговското дружество в несъстоятелност, Търговско право, бр. 5/1999 г., стр. 50). The court could appoint trustees only from a pool of persons featuring on a list drawn by BNB (section 84(1)). The Trade Act applied only insofar as the Banks Act of 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 declaring a debtor insolvent and opening bankruptcy proceedings against it is immediately enforceable.
4. Capital and capital adequacy of a bank
A bank’s paid‑up capital at incorporation must not be less than BGL 10,000,000,000 (or 10,000,000 new Bulgarian levs (BGN)[3]) (section 23(2) of the Banks Act of 1997). All payments made by the shareholders against subscribed shares must be in cash, until attainment of this minimum capital. Furthermore, a bank’s paid‑up capital must at all times surpass BGN 10,000,000 (section 2(2) of BNB’s Regulation no. 8 of August 1997 on the capital adequacy of banks).
Also, a bank’s “capital adequacy”: the ratio between its “capital base” – defined as its primary, or tier-one, capital (including paid‑up shares plus premiums and statutory and other reserves minus intangible assets, losses, and treasury shares – section 9 of Regulation no. 8) plus supplementary capital elements, or tier-two, capital (including retained earnings, special reserves, hybrid capital instruments, subordinated debt, etc. – section 10) – and its risk-weighted assets and off-balance-sheet items may not be less than 12% (section 23(3) of Regulation no. 8).
5. Capital maintenance: payment for subscribed shares
Under Bulgarian law banks are joint-stock companies (section 1(1) of the Banks Act of 1997). The capital of joint‑stock companies is increased by, inter alia, issuing new shares (section 192(2) of the Trade Act). Once these shares have been subscribed, the subscriber is under the obligation to pay cash or to provide non-cash consideration for the shares (section 188(1)). The manner and conditions for providing non-cash consideration are laid down in sections 72 and 73 of the Trade Act.
Whenever a bank decides to increase its capital by issuing shares against non-cash consideration, it has to obtain the prior written approval of BNB (section 19(2)(5)[4] of the Banks Act of 1997).
At the relevant time section 120(2) of the Trade Act prohibited the setoff of the obligation of a member of a limited liability company („дружество с ограничена отговорност“) to pay up his or her share against a debt due by the company to the member. The legal opinion as to whether the above prohibition applied also to joint-stock companies in the absence of an express text was not entirely settled, but the doctrine considered that it did, as it was a capital maintenance rule (Герджиков, О., Коментар на Търговския закон, Книга трета, Том І, 1998, стр. 915‑16). Although expressed in dicta, this seems to have been the opinion of the Supreme Court of Cassation as well (опред. № 51 от 26 февруари 1999 г. по гр.д. № 41/1999 г. на ВКС V г.о., Търговско право, бр. 3/1999 г., стр. 35). In October 2000 the legislature fully clarified the issue by adopting new section 73a of the Trade Act whereby this proscription was explicitly expanded to apply to both limited liability companies and joint-stock companies.
6. Legal base for cancelling of entries in bank accounts
Section 11(4)[5] of BNB’s Regulation no. 3 on bank transactions provides that, if entries in a bank account have been made in violation of the law, a bank must cancel those entries of its own motion. According to the doctrine, this provision in effect allows extra‑judicial voiding of bank transactions (Калайджиев, А., Същност на вписването по банковата сметка, Търговско право, бр. 6/1998 г., стр. 7).
COMPLAINTS
1. The applicant bank complained under Article 6 of the Convention that the courts had not examined in substance whether it had been in fact insolvent and had instead chosen to defer to the findings of BNB, considering themselves only competent to verify the formal validity of BNB’s decision to revoke the applicant bank’s licence on the ground of insolvency. The applicant bank further complained that in the proceedings before the Sofia City Court it had been represented by the special administrators appointed by and answerable to BNB, and before the Supreme Court of Cassation it had been represented by the trustees – also depending on BNB – appointed by the Sofia City Court. In its view, this had rendered the proceedings not truly adversarial. The applicant bank also relied on Article 13 of the Convention.
2. The applicant bank complained under Article 1 of Protocol No. 1 that BNB’s decision to revoke its licence on the ground of insolvency, which had constituted an interference in its right to continue its business and manage its property, had not been made in accordance with law. More specifically, the applicant bank submitted that BNB’s findings had not been borne out by the facts. The applicant bank also relied on Article 13 of the Convention.
THE LAW
1. The Government’s objection that the application was not validly lodged on applicant bank’s behalf
The Government submitted that the application had not been validly introduced on behalf of Capital Bank AD for the purposes of Article 34 of the Convention. The application had been lodged by persons who no longer represented the bank, because their powers had been terminated and vested in trustees in bankruptcy. When invited to lodge an application on the bank’s behalf, the trustees had declined to do so, because they had deemed that there had been no infringement of its Convention rights. The Government therefore invited the Court to declare the application inadmissible.
The applicant bank replied that it was true that after the Sofia City Court’s judgment of 6 January 1998 the powers of the bank’s bodies had been vested in the trustees. Nevertheless, these bodies had not ceased to exist and those of their powers which had not been vested in the trustees could be exercised by them. This was the opinion of the Bulgarian legal doctrine. As regards the fact that the application form had also been signed by the bank’s shareholders, in certain circumstances Bulgarian law allowed shareholders to act on behalf of a company if its bodies remained passive. If it was only the trustees who could validly lodge an application on the bank’s behalf, then no application would have been lodged, because the trustees had refused to do so. It was not true that the trustees’ refusal had been motivated by the fact that they had considered that there had been no infringement of the bank’s rights; they had refused because they had been of the view that lodging an application would be outside their mandate.
The Court starts by reiterating that the Convention and its Protocols must be interpreted as guaranteeing rights which are practical and effective as opposed to theoretical and illusory. This principle is also applicable to Article 34 of the Convention, which confers upon individuals and non‑governmental organisations a right of a procedural nature (see Cruz Varas and Others v. Sweden, judgment of 20 March 1991, Series A no. 201, p. 36, § 99).
The Court notes that when the application was lodged with the Court on 23 December 1998, the applicant bank was represented by its trustees, in whom, in accordance with section 84(3) of the Banks Act of 1997 (as in force at the material time) in conjunction with section 658(1) of the Trade Act, the powers of the bank’s bodies, including the right to represent the bank in court, had been vested. Therefore, the trustees had the right to apply to the Court on the bank’s behalf if they considered it appropriate. However, when they were invited to do so, they refused, claiming that such an act would be outside their mandate. The question arises whether in these circumstances the trustees alone were authorised to lodge an application on the bank’s behalf.
In its Agrotexim and Others v. Greece judgment of 24 October 1995 (Series A no. 330, pp. 25‑26, §§ 68‑71) the Court held that in principle a company had to apply to the Convention institutions through its statutory bodies or, in the event of liquidation, through its liquidators. It was only in exceptional circumstances, in particular where it was clearly established that it was impossible for the company to apply through its liquidators, that an application could be lodged on its behalf by others, e.g. its shareholders.
In the present case, in contrast to the situation obtaining in Agrotexim and Others, the application does not concern a matter in respect of which the trustees could be expected to act in protection of the bank’s interests. On the contrary, it relates precisely to the complex of events leading to the appointment of the trustees and to the role of the trustees in the proceedings before the Sofia Court of Appeals and the Supreme Court of Cassation. There is therefore a clear conflict of interests between the bank and the trustees, making it unfeasible for the bank to apply to the Court through them (see Camberrow MM5 AD v. Bulgaria (dec.), no. 50357/99, 1 April 2004 and Roseltrans, Finlease and Myshkin v. Russia (dec.), no. 60974/00, 27 May 2004).
In view of the foregoing considerations, the Court concludes that to hold that the trustees alone were authorised to represent the bank in lodging an application with the Court would be to render the right of individual petition conferred by Article 34 theoretical and illusory (see Credit and Industrial Bank v. the Czech Republic, no. 29010/95, § 51, ECHR 2003‑XI (extracts)). The Court accordingly finds that, having regard to the particular nature of the complaints made, there existed exceptional circumstances which entitled Mr Anguel Parvanov and Mr Mancho Markov, chairman and vice‑chairman of the bank’s board of directors, as well as the bank’s shareholders, First Financial AD, Royal Flash Ltd and Rontadent Trade Ltd, to lodge a valid application on the bank’s behalf.
The Government’s objection must thus be rejected.
2. Complaint under Article 6 of the Convention
The Court considers that the applicant bank’s complaints that the courts did not examine in substance whether it was in fact insolvent and that in the proceedings against it it was represented by the special administrators appointed and answerable to BNB and by trustees appointed by the first‑instance court and depending on BNB falls to be examined under Article 6 of the Convention, which provides, as relevant:
“1. In the determination of his civil rights and obligations ..., everyone is entitled to a fair and public hearing ... by an independent and impartial tribunal established by law.”
The Government argued that Article 6 of the Convention did not prohibit in all circumstances the limitation of judicial review of administrative action. Certain limitations of the right of access to the courts were permitted by implication since this right by its very nature called for regulation by the State. The Contracting States enjoyed a certain margin of appreciation in this respect. It was clear that the acts of banking supervision effected by BNB aimed at achieving economic stability. Moreover, the three‑member panel of the Supreme Court of Cassation had in fact scrutinised BNB’s findings of fact and had found them to be correct.
The findings of the experts at the time indicated that the applicant bank could not come out of the financial difficulties it was in, that the attempts to increase its capital were made in violation of the law, without prior permission being obtained from BNB, and that no fresh money had been received by the applicant bank.
The Government were therefore of the view that the exclusion from judicial review of BNB’s decision to revoke a bank’s licence on the ground of insolvency was not contrary to Article 6 of the Convention.
Concerning the second aspect of the applicant bank’s complaint, the Government submitted that the bankruptcy of banks was subject to special regulation. The trustees in such proceedings were appointed and dismissed only by the bankruptcy court, from a pool of persons selected by BNB, not, as was the case with ordinary bankruptcy proceedings, by the general meeting of creditors. Moreover, the bankruptcy court’s decision in this respect was no subject to appeal. It was the need to ensure the economic stability of the country which had called for such a special regulatory framework. The Government concluded that this had not impacted the fairness of the proceedings.
The applicant bank replied that it had never had access to a court competent to determine whether it had in fact been insolvent, i.e. whether its liabilities had exceeded its assets and whether it had failed to pay for more than seven days a debt which had fallen due. The Sofia City Court had expressly refrained from making any findings in this respect and from examining the veracity of BNB’s averments. During the hearing before that court the bank’s compulsory administrators and the participating prosecutor had adduced certain evidence to prove that BNB had erred, but the court had refused to take that evidence into account, considering it completely irrelevant. Concerning the Government’s averment that the three‑member panel of the Supreme Court of Cassation had examined all relevant facts, the applicant bank submitted that the three-member panel had not gathered evidence about the facts which had served as grounds for BNB to revoke the licence. Finally, the five‑member panel of the Supreme Court of Cassation had expressly confirmed that the courts could not inquire whether the facts which had grounded BNB’s decision to revoke the licence had indeed occurred. If the courts had verified that, they would have found that the revoking of the licence had been illegal and that there existed no grounds for declaring it insolvent and for opening bankruptcy proceedings against it.
As regards the second limb of its complaint, the applicant bank pointed out that in the proceedings before the three-member and the five-member panel of the Supreme Court of Cassation the trustees had acted in concert with BNB and against the interests of the applicant bank. The lawyer retained by the trustees had not requested the gathering of any pieces of evidence and had opposed the prosecutor’s office appeal against the Sofia City Court’s judgment.
The Court considers, in the light of the parties’ submissions, that the complaints raise serious issues of fact and law under the Convention, the determination of which requires an examination of the merits. The Court concludes therefore that these complaints are not manifestly ill‑founded within the meaning of Article 35 § 3 of the Convention. No other ground for declaring them inadmissible has been established.
3. Complaint under Article 1 of Protocol No. 1
The Court considers that the applicant bank’s complaint that BNB’s decision to revoke its licence on the ground of insolvency had not been made in accordance with law falls to be examined under Article 1 of Protocol No. 1, which provides as follows:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
The Government submitted that the interference with the Capital Bank AD’s possessions was prompted by the need to protect financial stability and private property. The bank’s licence fell completely within the margin of appreciation of the State, through its instrumentality BNB. BNB allowed certain entities to engage in banking business only on the premise that they complied with certain conditions and had the right to revoke their licences if they had ceased to comply with these conditions. By revoking the bank’s licence BNB had not interfered with the property rights of Mr Anguel Parvanov and Mr Mancho Markov, which the Government considered as the real applicants. The Government further submitted that the regulation of bank bankruptcy in domestic law was satisfactory, in that it tried to balance the various interests involved: those of the depositors, of the banks’ shareholders and creditors, and of the banking system as a whole. This had largely been achieved by the adoption in 2002 of the Bank Bankruptcy Act, which exhaustively enumerated the powers of the various bodies involved: the court, the Central Bank, the trustees, etc.
The applicant bank submitted that BNB’s findings in its decision of 20 November 1997 had been arbitrary and not based on the facts. BNB had specified neither the nature and the source of the debt which it had considered unpaid by the applicant bank, nor its maturity. In fact, that debt had been paid on 5 September 1997, as evidenced by the decision of 12 April 2001 of an enforcement judge at the Sofia District Court. If the applicant bank had had the opportunity, it would have been able to prove that before the domestic courts. BNB’s finding that the applicant bank’s liabilities exceeded its assets was likewise contradicted by the reports of the BNB‑appointed special administrators and by the findings of the experts commissioned by the Prosecutor’s Office. The applicant bank’s capital adequacy was a number greater than the number cited by BNB in its decision and well within the regulatory requirements. In sum, the applicant bank argued that BNB’s decision had not been based on an objective assessment of the facts, and that that had been done deliberately and despite the fact that BNB had known that the facts cited in its decision had not been true.
The Court considers, in the light of the parties’ submissions, that the complaint raises serious issues of fact and law under the Convention, the determination of which requires an examination of the merits. The Court concludes therefore that this complaint is not manifestly ill‑founded within the meaning of Article 35 § 3 of the Convention. No other ground for declaring it inadmissible has been established.
For these reasons, the Court unanimously
Rejects the Government’s objection that the application was not validly lodged on Capital Bank AD’s behalf;
Declares the application admissible, without prejudging the merits of the case.
Søren NielsenChristos Rozakis
RegistrarPresident
[1]. On 29 December 2002 the provisions of the Banks Act of 1997 relating to bank bankruptcy were superseded by the Bank Bankruptcy Act of 2002.
[2]. In a decision of 19 July 1999 (опред. № 234 от 19 юли 1999 г. по гр.д. № 52/1999 г. на ВКС, петчленен състав, Бюлетин на ВКС, бр. 1-2/1999 г., стр. 18) the Supreme Court of Cassation held that the debtor, not the trustee, had standing to appeal the judgment for the opening of bankruptcy proceedings against it. The rationale adopted by the court was that the trustee might have a conflict of interests with the debtor.
[3]. On 5 July 1999 the Bulgarian lev was denominated. One new Bulgarian lev (BGN) equals 1,000 old Bulgarian levs (BGL).
[4]. At present section 19(4)(5).
[5]. At present section 11(5).
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