Information Note on the Court’s case-law No. 151
April 2012
Kotov v. Russia [GC] - 54522/00
Judgment 3.4.2012 [GC]
Article 1 of Protocol No. 1
Positive obligations
Article 1 para. 1 of Protocol No. 1
Deprivation of property
Unlawful distribution of assets of private bank by liquidator: no violation
Facts – The applicant had a savings account at a private bank which went into liquidation in 1995. As a member of the first class of creditors he was entitled to payment out of the bank’s assets pro rata the value of his claim and ahead of other classes of creditor. However, the creditors’ body of the bank created a special group of “privileged” creditors (comprising the disabled, war veterans, the needy and those who had participated actively in the winding-up operation) within the first class who would receive full satisfaction of their claims before other first-class creditors. As a result, almost all the banks’ assets were used to repay the “privileged” creditors in full, while the applicant received less than 1% of his claim. In April 1998 the applicant brought proceedings challenging the manner in which the assets had been distributed. Although the courts found that there had been a breach of the law and directed the liquidator to remedy the situation, the applicant was unable to enforce the judgment because of the bank’s lack of assets. In 1999 the applicant also sued the liquidator personally for damages, but the action failed on the grounds, firstly, that it had been brought before the commercial courts instead of the courts of general jurisdiction and, secondly, that it had been brought before the bank had been wound up and so entailed a risk of “double recovery” if the applicant was successful in both actions.
In a judgment of 14 January 2010 (see Information Note no. 126) a Chamber of the Court held unanimously that there had been a violation of Article 1 of Protocol No. 1, after finding that the liquidator’s acts had engaged the responsibility of the State and that the applicant had been unlawfully deprived of his property.
Law – Article 1 of Protocol No. 1
(a) Admissibility – Temporal jurisdiction: The distribution of the bank’s assets to the “privileged” creditors was an instantaneous act which had taken place before 5 May 1998, when the Convention entered into force in respect of Russia. Accordingly, it fell outside the Court’s jurisdiction ratione temporis. However, the applicant nevertheless had a defendable tort claim when the Convention entered into force in respect of Russia and that claim outlived the original tort. The central question was why his attempt to restore his rights had failed after the entry into force of the Convention. The Court therefore had temporal jurisdiction to examine whether his rights under Article 1 of Protocol No. 1 were properly secured in the two sets of proceedings in 1998 and 1999 (Broniowski v. Poland* applied).
Conclusion: admissible (sixteen votes to one).
(b) Merits – It was common ground that the original court award had amounted to the applicant’s “possession”, that the liquidator had acted unlawfully by failing to distribute the bank’s assets according to rank and that the applicant had received much less than he could legitimately have expected. He had thus been deprived of his possessions by an unlawful act of the liquidator.
(i) State agent – The question arose, however, whether the liquidator had been acting as a State agent or, as the Government alleged, in a private capacity that did not engage the State’s responsibility. While the domestic law at the material time stated that a liquidator was not a public official, it was necessary to determine – by reference to the liquidator’s method of appointment, his supervision and accountability, objectives, powers and functions – whether that formal status corresponded to the reality of the liquidation process.
At the relevant time liquidators in Russia were private professionals chosen on the open market by the creditors’ body, a self-interested entity which paid the fees, which were fixed freely. Although a judge was required to validate the liquidator’s appointment by the creditors’ body, his role was merely to verify that the liquidator satisfied the eligibility criteria and did not entail any State responsibility for the way in which the liquidator discharged his duties. Liquidators were accountable only to the creditors’ body or individual creditors, not to any regulatory body. They did not receive any public funding. The domestic courts had only limited powers of review of compliance with the insolvency rules and no power to verify whether the liquidator’s decisions were justified from an economic or business perspective. Essentially, their role was much the same as in any other private dispute. As regards objectives, the liquidator’s task was similar to that of other private businessmen. The mere fact that his services might also be socially useful did not turn him into a public official acting in the public interest. Most importantly, the liquidator’s powers were limited to the operational control and management of the insolvent company’s property. There was no formal delegation of powers by any governmental authority. Unlike a bailiff, the liquidator had no coercive or regulatory powers in respect of third parties. At the material time, therefore, liquidators enjoyed a considerable amount of operational and institutional independence. The State’s involvement was confined to establishing the legislative framework, defining the functions and powers of the creditors’ body and the liquidator, and overseeing observance of the rules. The liquidator in the instant case had accordingly not acted as a State agent and the respondent State could not be held directly responsible for his wrongful acts.
(ii) Positive obligations: The liquidator’s wrongdoings had been serious and had occurred in an area where the State’s negligence in combating malfunctioning and fraud could have devastating effects on the economy, affecting a large number of individual property rights. The State had therefore been under a duty to set up a minimum legislative framework to enable people in the applicant’s position to assert their property rights effectively.
The applicant had instituted two sets of proceedings with a view to having his rights restored. The first, against the liquidator in his capacity as manager of the bank, had proved ineffective owing to a lack of assets.
The second, against the liquidator personally, had also failed, both on jurisdictional grounds and because it was considered to have been premature. As to the first of these grounds, the Court found that the statutory rules on jurisdiction at the time had been unclear and the commercial courts had examined the applicant’s claim at three levels of domestic jurisdiction before the question of jurisdiction arose. Consequently, any mistake the applicant had made over jurisdiction could not be held against him. As to the second ground, the Court accepted that that there was a rationale in the domestic courts’ refusal to deal with the applicant’s claims against the liquidator while the liquidation proceedings were still pending, as there was a danger of his being compensated twice for essentially the same financial loss. It was not unreasonable for an aggrieved creditor to have to wait until the debtor company ceased to exist before being able to claim damages from the liquidator in person. In the applicant’s case, the liquidation had been completed just eight days after the applicant’s claim against the liquidator was dismissed. At any point thereafter the applicant could have brought an action in damages against the liquidator, but had not done so. In sum, the law had provided for a “deferred” compensatory remedy which the applicant had failed to use. That temporary limitation on his right to seek redress against the liquidator personally had not affected the essence of his rights and remained within the State’s wide margin of appreciation in dealing with competing private interests in bankruptcy proceedings.
The legal framework in place at the material time had thus complied with the State’s positive obligation to provide a mechanism to protect the applicant’s rights under Article 1 of Protocol No. 1.
Conclusion: no violation (twelve votes to five).
* Broniowski v. Poland (dec.) [GC], no. 31443/96, 19 December 2002, Information Note no. 50.
© Council of Europe/European Court of Human Rights
This summary by the Registry does not bind the Court.
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