FIFTH SECTION
DECISION
Application no. 25207/11
TARGOVSKA BAZA OOD and Dimitar Nikolov POPNIKOLOV
against Bulgaria
The European Court of Human Rights (Fifth Section), sitting on 27 August 2019 as a Committee composed of:
Ganna Yudkivska, President,
Síofra O’Leary,
Lado Chanturia, judges,
and Milan Blaško, Deputy Section Registrar,
Having regard to the above application lodged on 23 March 2011,
Having regard to the observations submitted by the respondent Government and the observations in reply submitted by the applicants,
Having deliberated, decides as follows:
THE FACTS
1. The applicant company, Targovska baza OOD (“the first applicant”), is a Bulgarian limited liability company registered in 1993 and having its registered seat in Varna. The applicant, Mr Dimitar Nikolov Popnikolov (“the second applicant”), is a Bulgarian national who was born in 1955 and lives in Varna.
2. The applicants were represented before the Court by Ms N. Dobreva, a lawyer practising in Sofia. The Bulgarian Government (“the Government”) were represented by their Agent, Ms I. Nedyalkova, of the Ministry of Justice.The circumstances of the case
3. The facts of the case, as submitted by the parties, may be summarised as follows.
4. The first applicant was set up in 1993 to take over the assets of a State-owned enterprise. The process of transformation of State-owned enterprises into companies in the 1990s is described in more detail in paragraphs 17-19 below.
5. Until 1998 the State owned all shares in the first applicant. After the first applicant was offered for privatisation, on 28 October 1998 another company, T., bought 70% of those shares. On 31 May 2004, following a further privatisation procedure, the second applicant bought from the State the remaining 30% of the first applicant’s shares. On 2 July 2004 company T. transferred its shares in the first applicant to another company, wholly owned by the second applicant.
6. In the meantime, since it transpired that company T. had failed to meet the obligations it had undertaken under the 1998 privatisation contract, namely to pay the price for the shares it had bought, to make investments and to maintain a number of jobs, between 2003 and 2009 the Post‑Privatisation Control Agency (later on Privatisation and Post‑Privatisation Control Agency, hereinafter “the Agency”, see paragraph 20 below), brought several actions against it. Its claims were allowed by the national courts, the awards including penalties agreed upon in the privatisation contract in case of failure of company T. to meet its obligations. The Agency obtained several writs of execution and in 2005 initiated enforcement proceedings against T.
7. Meanwhile, in 2006 Parliament adopted paragraph 8 of the transitional provisions of the Privatisation and Post-Privatisation Control Act (hereinafter “paragraph 8”, see paragraphs 21-22 below). Relying on that provision, in the beginning of 2007 the Agency applied with a property register official to have mortgages registered in its favour of real properties of the first applicant, as a security for company T.’s debt. Such mortgages were entered into the register on 28 February and 5 March 2007. They concerned two plots of land, one in Varna and one in Devnya, with a number of industrial buildings on them. At the time, T.’s debt towards the Agency totalled 248,133 Bulgarian levs (BGN, the equivalent of 126,922 euros (EUR)) and 50,000 United States dollars (USD). Additional sums were added to the debt in the years that followed, after the completion of further proceedings against T., as described in the previous paragraph.
8. In the beginning of 2009 the first applicant brought proceedings against the Agency, seeking that the mortgages be declared null and void and struck off the property register. It pointed out, in particular, that paragraph 8 was not applicable to already existing privatisation contracts, and that it and its shareholders had not been parties to the privatisation contract entered into by company T.
9. The action was dismissed on 13 July 2009 in a judgment of the Varna Regional Court, which found, relying on paragraph 8, that the mortgages were valid, given that this provision did not require that the mortgaged property be owned by the defaulting buyer under the privatisation contract. It considered that paragraph 8 offered “reinforced protection” to the State in the process of privatisation.
10. Upon appeal by the first applicant, on 6 November 2009 the above judgment was upheld by the Varna Court of Appeal. In a final decision of 24 September 2010 the Supreme Court of Cassation refused to accept for examination the first applicant’s appeal on points of law.
11. In 2011 company T. was declared insolvent and became subject to liquidation proceedings. The Agency joined these proceedings as a creditor, but was apparently unable to obtain adequate payment of T.’s debt towards it. The parties have not specified the exact sums it received. Company T. was wound up on 12 February 2015.
12. By a decision of 28 July 2015 the bailiff in charge of the enforcement proceedings brought by the Agency against company T. (see paragraph 6 above in fine) declared the first applicant a debtor in those proceedings and indicated to it that it had to pay BGN 11,112 (EUR 5,683) of company T.’s debt; failing that, its mortgaged properties would be put up for public sale. Since no payment was effectuated by the first applicant, in 2016 and 2018 the bailiff attempted to sell its mortgaged property in Varna, but was unsuccessful. No attempts have been made to sell the first applicant’s mortgaged property in Devnya.
13. In 2017 the first applicant brought new proceedings against the Agency, under Article 439 of the Code of Civil Procedure (see paragraph 31 below). It contested the enforcement against it of BGN 11,112 of company T.’s debt, arguing, inter alia, that that enforcement and the mortgages of its property were unlawful as they were based on paragraph 8, which contradicted Article 63 of the Treaty on the Functioning of the European Union (hereinafter “the TFEU”) guaranteeing the free movement of capital.
14. The action was dismissed in a judgment of the Varna District Court of 22 December 2017.
15. However, the action was allowed upon appeal, in a judgment of the Varna Regional Court of 4 June 2018, which found that the first applicant did not owe the Agency BGN 11,112 of company T.’s debt. The domestic court considered that the mortgages of the first applicant’s property were null and void, noting that they were based on paragraph 8, and that in its judgments of 27 January 2016 and 30 June 2017 (see paragraphs 26-27 below) the Supreme Court of Cassation had held that this provision could not be relied on by the authorities after Bulgaria’s accession to the European Union. This meant that the first applicant’s property could not be used to secure company T.’s debt.
16. The above judgment entered into force on 21 March 2019, after the Supreme Court of Cassation found the Agency’s appeal on points of law inadmissible.Relevant background facts, domestic law and practiceTransformation of State-owned enterprises and their privatisation
17. Until the beginning of the 1990s, almost all economic activity was owned and administered by the State. All commercial assets were the property of the State and were only allocated to State enterprises for “use and management”.
18. A process of replacing communist economic legislation began in the early 1990s. Under legislation adopted in 1991 and 1992, State enterprises had to be transformed, by decision of the relevant ministry and upon registration at the competent court, into State-owned limited liability or joint-stock companies. The newly-created companies became the owners of all assets until then used and managed by the respective enterprise.
19. That transformation was in particular regulated in the 1992 Transformation and Privatisation of State and Municipally-Owned Enterprises Act (Закон за преобразуване и приватизация на държавни и общински предприятия). That Act also dealt with the privatisation of the newly-created State-owned companies. It remained in force until 2002. After that date privatisation was regulated by the Privatisation and Post‑Privatisation Control Act (Закон за приватизация и следприватизационeн контрол).
20. The body competent to exercise post-privatisation control under the Privatisation and Post-Privatisation Control Act was the Post-Privatisation Control Agency (“the Agency”). In 2010, after being also tasked with managing privatisation itself, it was renamed to Privatisation and Post‑Privatisation Control Agency. It is in particular in charge of receiving all payments under privatisation contracts, verifying compliance with such contracts and, where necessary, taking action against any defaulting buyers.Paragraph 8
21. In 2006 Parliament added paragraph 8 to the transitional provisions of the Privatisation and Post-Privatisation Control Act (“paragraph 8”). Under that provision, in cases where persons who had bought shares in State or municipally-owned companies had not met their obligations under the privatisation contracts, the Agency could seek to have a mortgage registered in its favour (законна ипотека) against real properties belonging either to those persons (the buyers in the privatisation procedure) or to the privatised companies. A 2008 amendment to paragraph 8 allowed other security measures against the assets or properties of the privatised companies.
22. According to media reports, the Agency used this provision to register more than 400 mortgages against the properties of privatised companies. The Agency’s director at the time explained that some of the companies which had participated in the privatisation had been created especially for that purpose and did not have any assets save their shares in the privatised companies. As a result, the properties of the privatised companies in which they had shares were considered “the most reliable” security for their obligations.Infringement proceedings brought by the European Commission
23. In 2012 the European Commission initiated infringement proceedings against Bulgaria pursuant to Article 259 of the TFEU, and on 21 March 2013 delivered a reasoned opinion, taking the position that paragraph 8 breached the rules on the free movement of capital and the freedom of establishment (Articles 49 and 63 of the TFEU – see paragraph 33 below). The European Commission pointed out that, where the State mortgaged the assets of a privatised company, European investors who had invested in it would be unable to dispose freely of these assets and to take appropriate managerial decisions. The Commission expressed concern furthermore that even where only one of the shareholders in a privatised company had breached its obligations under the privatisation contract, paragraph 8 authorised the State to impose mortgages and other security measures on the property of the privatised company.
24. In 2015 Parliament repealed paragraph 8. The explanatory note accompanying the bill reiterated the reasons given in the European Commission’s reasoned opinion.
25. After this amendment, on 24 September 2015 the European Commission closed the infringement case.Relevant developments of the domestic case-law
26. In a judgment of 27 January 2016 (Решение № 147 от 27.01.2016 г. на ВКС по т. д. № 3013/2013 г., II т. о.) the Supreme Court of Cassation examined an appeal on points of law brought by the Agency against the judgment of a court of appeal declaring mortgages under paragraph 8 null and void. The Supreme Court of Cassation upheld that judgment, after concluding that paragraph 8 was incompatible with Article 63 of the TFEU. Relying on case-law of the Court of Justice of the European Union and the European Commission’s position set out in the reasoned opinion mentioned above, the domestic court found that paragraph 8 infringed the rights of direct and portfolio investors in privatised companies and unjustifiably enhanced the economic interests of the Bulgarian State to the detriment of those investors. It concluded that the application of paragraph 8 was “inadmissible” after Bulgaria’s accession to the European Union in 2007 and, as concerns the particular case before it, that the mortgages against the plaintiff’s property based on that provision were indeed null and void.
27. The above findings were confirmed in a subsequent judgment of the Supreme Court of Cassation, given on 30 June 2017 (Решение № 37 от 30.06.2017 г. на ВКС по т. д. № 2637/2014 г., I т. о.).
28. Relying on those two judgments, in a number of later cases first- and second-instance courts declared mortgages based on paragraph 8 null and void (Решение № 76 от 26.04.2018 г. на ОС-Пазарджик по т. д. № 147/2017 г.; Решение № 3187 от 21.05.2018 г. на СГС по гр. д. № 7571/2016 г.; Решение № 287 от 25.10.2018 г. на ПАС по в. т. д. № 344/2018 г.; Решение № 416 от 20.02.2019 г. на САС по в. т. д. № 3792/2018 г.).
29. In other cases where properties mortgaged under paragraph 8 had already been sold to satisfy the State’s claims, first- and second-instance courts, relying in particular on the Supreme Court of Cassation’s judgment of 27 January 2016 (see paragraph 26 above) and on Article 4 § 3 of the Treaty on the European Union (hereinafter “the TEU”), which enshrines the principle of sincere cooperation (see paragraph 32 below), awarded to the affected companies compensation for any damage inflicted on them (Решение № 651 от 29.01.2019 г. на СГС по гр. д. № 3714/2016 г.; Решение № 44 от 26.04.2016 г. на БАС по гр. д. № 96/2016 г.; Решение № 18 от 22.03.2019 г. на БАС по в. гр. д. № 381/2018 г.).
30. In many other cases the national courts have examined on the merits tort claims based on Article 4 § 3 of the TEU (Решение № 109 от 25.01.2019 г. на АдмС-Варна по адм. д. № 560/2016 г.; Решение № 264 от 26.11.2018 г. на ВтАС по в. гр. д. № 276/2018 г.; Решение № 6149 от 1.10.2018 г. на СГС по гр. д. № 7849/2017 г.). A bill regulating the procedural aspects of the authorities’ tort liability under this provision, specifying particularly in which cases claims would be examined by the administrative courts and in which by the civil courts, was introduced in Parliament on 12 April 2019, and was approved at first reading on 29 May 2019.Other relevant provisions
31. Article 439 of the Code of Civil Procedure entitles a debtor to bring an action to contest the enforcement of a debt against him. Such a claim must be based on facts occurring subsequent to the proceedings in which the debt was established.Relevant law of the European Union
32. Article 4 § 3 of the TEU provides as follows:
“Pursuant to the principle of sincere cooperation, the Union and the Member States shall, in full mutual respect, assist each other in carrying out tasks which flow from the Treaties.
The Member States shall take any appropriate measure, general or particular, to ensure fulfilment of the obligations arising out of the Treaties or resulting from the acts of the institutions of the Union.
The Member States shall facilitate the achievement of the Union’s tasks and refrain from any measure which could jeopardise the attainment of the Union’s objectives.”
33. The relevant provisions of the TFEU read:
Article 49
“Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.
Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.”
Article 63
“1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.
2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.”
COMPLAINTS
34. The applicants complained under Article 1 of Protocol No. 1 about the liability of the first applicant for company T.’s debts and of the mortgages against its properties.
THE LAW
35. The applicants alleged a breach of Article 1 of Protocol No. 1, which reads 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.”Arguments of the partiesThe Government
36. The Government asked the Court to declare the second applicant’s complaints incompatible ratione personae, arguing that he was not a direct victim of the alleged violation of Article 1 of Protocol No. 1. They pointed out that – while owning, directly and through another company of his, all shares in the first applicant – the second applicant did not himself own the properties mortgaged by the State and had not participated in the domestic proceedings concerning those mortgages. In the Government’s view, there were no exceptional circumstances as defined by the Court in Agrotexim and Others v. Greece (24 October 1995, § 66, Series A no. 330‑A), justifying the disregard of the first applicant’s separate legal personality.
37. In their observations on the admissibility and merits of the case, submitted on 22 October 2018 (before the Supreme Court of Cassation’s decision of 21 March 2019 – see paragraph 16 above), the Government argued also that the complaints were premature, since the proceedings described in paragraphs 13-16 above, under Article 439 of the Code of Civil Procedure, were still pending. In their observations in response to the applicants’ claims for just satisfaction, submitted on 12 February 2019, the Government reiterated the above argument, adding that a further remedy was developing under domestic law, namely a tort action against the State based on a finding that paragraph 8 contradicted European Union law and that any action taken under it was unlawful. In support of the latter argument the Government referred to a judgment of a first-instance court, given on 29 January 2019 (one of the judgments cited in paragraph 29 above).
38. The Government made a number of additional arguments on the admissibility and merits of the case.The applicants
39. The applicants contested the Government’s argument concerning the second applicant’s standing to apply to the Court. They pointed out that, as the owner of all shares in the first applicant, he could be considered directly affected by the State actions complained of.
40. The applicants also disputed the Government’s argument based on non-exhaustion of domestic remedies. They considered that the first applicant had already “exhausted” the remedy provided for in Article 439 of the Code of Civil Procedure, since the remedy at issue was “the same” as the one already used by it – namely the action to declare the mortgages of its property null and void, dismissed by the national courts in 2009-10. Moreover, in the proceedings brought by the first applicant in 2017 the national courts had not acknowledged a violation of its rights and could not award any compensation.
41. The applicants made further submissions on the admissibility and merits of the case.The Court’s assessment
42. The second applicant maintained that his rights had been affected as he is the owner of the first applicant. The Court notes that the interference complained of in the present case formally concerns the property of the first applicant, which asserted its rights in the domestic proceedings. The corresponding complaints under the Convention are examined in the paragraphs below. To the extent that the Government contested the standing of the second applicant, who was not a party to the domestic proceedings, to complain of a violation of his own rights in that context, the Court considers that there is no need to address the issue as, in any event, the application is inadmissible for the reasons outlined below.
43. In 2007 the Agency mortgaged two properties of the first applicant as a security for company T.’s debt towards the State (see paragraph 7 above). The first applicant’s attempts in 2009-10 to have the mortgages declared null and void were unsuccessful (see paragraphs 8-10 above). After company T. was wound up in 2015 and the State’s claims remained unsatisfied, a bailiff put up for public sale one of the first applicant’s mortgaged properties, but could not sell it (see paragraph 12 above).
44. In 2017 the first applicant brought proceedings against the Agency under Article 439 of the Code of Civil Procedure, seeking a declaration that it was not liable for part of company T.’s debt. This time it was successful (see paragraphs 13-16 above). In its judgment the Varna Regional Court noted that the mortgages against the first applicant’s properties were null and void since they were based on a provision which was incompatible with EU law (see paragraph 15 above).
45. The Court has not been informed of the sums still owed to the State as part of company T.’s debt after that company’s winding up in 2015; nor has it been informed whether the first applicant is still considered liable for that debt (save the part concerned by the proceedings referred to in the preceding paragraph). The Court has not been informed either whether the enforcement proceedings opened by the Agency in 2005 and in which the first applicant was declared a debtor (see paragraphs 6 and 12 above) are still ongoing.
46. Nevertheless, the Court finds it reasonable to accept that, if any part of company T.’s debt is still owed to the State and payment of another part of that debt is sought from the first applicant in the future, the first applicant could once again contest any such payment by bringing proceedings under Article 439 of the Code of Civil Procedure. The remedy at issue has been effective when previously used by the first applicant, and the Varna Regional Court’s findings in the judgment of 4 June 2018 (see paragraph 15 above) were in line with the emerging domestic case-law concerning the consequences of the application of paragraph 8 (see paragraphs 26-28 above). Lastly, it is not the Court’s task to determine whether the procedural avenue at issue is “the same” as the one pursued by the first applicant in 2009-10 – an argument raised by the applicants (see paragraph 40 above). As already noted, subsequently the first applicant was successful when bringing proceedings under Article 439 of the Code of Civil Procedure, and there is no reason to believe that this would not be the case in the future.
47. Consequently, the first applicant, while possibly still considered liable for company T.’s debt and, presumably, treated as a debtor in the enforcement proceedings initiated by the Agency, has not paid any part of that debt and has currently a means at its disposal to parry any future attempt on the part of the Agency to obtain such payment.
48. It is true that the mortgages against the first applicant’s property appear to be still in force. Their existence might, in itself, amount to interference with the first applicant’s rights, as they may affect its ability to manage the mortgaged properties and dispose of them.
49. The Court points to the Government’s additional argument (see paragraph 37 above), concerning a developing compensatory remedy under domestic law based on the established incompatibility of paragraph 8 with EU law. While the Government only made this argument in their observations in response to the applicants’ claims for just satisfaction (ibid.), the Court does not consider that they were estopped from doing so, seeing that the relevant developments of the domestic case-law are recent (see paragraph 29 above), and the Government relied in particular on a judgment given in January 2019, namely after they had submitted their observations on the admissibility and merits of the case (see Cenbauer v. Croatia, no. 73786/01, § 31, ECHR 2006‑III). Moreover, even though none of the tort proceedings initiated by companies affected by measures under paragraph 8 appear to have ended with a final judgment (see paragraph 29 above), Bulgarian courts do examine tort claims based on alleged breaches of EU law and the matter is being regulated on a legislative level (see paragraph 30 above). The Court sees no reason to question, in abstracto, the ability of the remedy at issue to provide adequate redress.
50. The Court thus considers that, has the first applicant sustained any damage as a result of the registration of mortgages against its property based on paragraph 8, it has an effective means at its disposal to obtain compensation.
51. Accordingly, if it is still considered to owe to the State any part of company T.’s debt, the first applicant has an effective means at its disposal to oppose any payment required from it. It has, moreover, an adequate opportunity to seek compensation for any damage that could have been inflicted on it through the registration of mortgages against its properties in favour of the State. Were the Court to ignore the latter procedural avenue available to the first applicant, it would disregard its subsidiary role under the Convention (see Laurus Invest Hungary KFT and Others v. Hungary (dec.), nos. 23265/13 and 5 others, § 42, ECHR 2015 (extracts)).
52. The application is therefore inadmissible as manifestly ill-founded and for non-exhaustion of domestic remedies, and must be rejected in accordance with Article 35 §§ 1, 3 (a) and 4 of the Convention.
For these reasons, the Court, unanimously,
Declares the application inadmissible.
Done in English and notified in writing on 19 September 2019.
Milan BlaškoGanna Yudkivska
Deputy RegistrarPresident
Full & Egal Universal Law Academy