IZGREV AD AND TK-HOLD AD v. BULGARIA

FIFTH SECTION

DECISION

Application no. 34655/11
IZGREV AD and TK-HOLD AD
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 25 May 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 applicants, Izgrev AD (“the first applicant”) and TK‑Hold AD (“the second applicant”), are Bulgarian joint-stock companies. The first of them was registered in 1991 and has its seat in Oryahovo. The second applicant was registered in 1996 and has its seat in Sofia. The applicants were represented before the Court by Ms S. Margaritova-Vuchkova, a lawyer practising in Sofia.

2.  The Bulgarian Government (“the Government”) were represented by their Agent, Ms I. Stancheva-Chinova, 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 1991 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 13-15 below.

5.  Until 1997 the State owned all shares in the first applicant. After the first applicant was offered for privatisation, in 1997 the second applicant acquired 80% of its shares. Other persons acquired the remaining shares, including company I., which on 14 May 1998 bought from the State 8% of the first applicant’s shares.

6.  After company I. failed to pay several instalments of the price due under the 1998 privatisation contract, in 2004 and 2005 the Post‑Privatisation Control Agency (later on Privatisation and Post‑Privatisation Control Agency, hereinafter “the Agency”, see paragraph 16 below) brought proceedings against it and on unspecified dates its claims were allowed by the national courts. In 2005 the Agency obtained a writ of execution against I. No part of its debt was paid.

7.  In 2007 the sum due by company I., including interest and penalties accrued by that time, totalled 56,393 Bulgarian levs (BGN, the equivalent of 28,845 euros (EUR)). In 2009 the Agency obtained another writ of execution against company I., on the basis of a court judgment given in 2007, ordering it to pay a further BGN 30,196 (the equivalent of EUR 15,455).

8.  On 15 February 2007, upon an application by the Agency on the basis of paragraph 8 of the transitional provisions of the Privatisation and Post‑Privatisation Control Act (hereinafter “paragraph 8”, see paragraphs 17-18 below), a property register official registered a mortgage against several real properties belonging to the first applicant – plots of land in Oryahovo and industrial buildings – as a security for company I.’s debt. Subsequently a bailiff ordered those properties’ public sale.

9.  In November 2010 the bailiff held such a sale and sold to a third party two industrial buildings owned by the first applicant. The sale price was sufficient to cover the entirety of company I.’s debt, which by that time had increased to BGN 120,673 (the equivalent of EUR 61,725) – the sums of the two writs of execution mentioned above, plus additional interest, penalties and costs. By a decision of 4 April 2011 the bailiff transferred that money to the Agency, and the remainder of the price received at the public sale – to the first applicant.

10.  After the abolition of paragraph 8, on 18 December 2015 the first applicant brought tort proceedings against Parliament and the Agency, relying on Article 4 § 3 of the Treaty on the European Union (hereinafter “the TEU”), which enshrines the principle of sincere cooperation (see paragraph 29 below). It sought BGN 120,673 in compensation for pecuniary damage, arguing that paragraph 8 contradicted EU law and that it had unjustifiably suffered damage on the basis of that provision.

11.  The action was allowed in a judgment of the Sofia City Court of 29 January 2019. Relying in particular on the Supreme Court of Cassation’s judgment of 27 January 2016 (see paragraph 22 below), the domestic court found that paragraph 8 contradicted provisions of EU law and should not have been applied by the authorities subsequent to Bulgaria’s accession to the EU. It found the two defendants jointly liable to pay the first applicant the damages it had claimed.

12.  It is unclear whether an appeal has been lodged against the above judgment.Relevant background facts, domestic law and practiceTransformation of State-owned enterprises and their privatisation

13.  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”.

14.  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 companies or State-owned joint-stock companies. The newly-created companies became the owners of all assets until then used and managed by the respective enterprise.

15.  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).

16.  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

17.  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.

18.  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

19.  In 2012 the European Commission initiated infringement proceedings against Bulgaria pursuant to Article 259 of the Treaty on the Functioning of the European Union (hereinafter “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 36 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 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.

20.  In 2015 Parliament repealed paragraph 8. The explanatory note accompanying the bill reiterated the reasons given in the European Commission’s reasoned opinion.

21.  After this amendment, on 24 September 2015 the European Commission closed the infringement case.Relevant developments of the domestic case-law

22.  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 referred to 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.

23.  The above findings were upheld 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.).

24.  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.).

25.  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 22 above) and on Article 4 § 3 of the TEU (see paragraph 29 below), awarded to the affected companies compensation for any damage inflicted on them. In one case the compensation comprehended additional losses incurred by the claimant after the sale of its property (Решение № 44 от 26.04.2016 г. на БАС по гр. д. № 96/2016 г.). In another case the compensation awarded included non-pecuniary damage (Решение № 18 от 22.03.2019 г. на БАС по в. гр. д. № 381/2018 г.). In the former of the two cases cited above the proceedings have been stayed after reaching the Supreme Court of Cassation, pending the adoption of an interpretative decision on the competence of the administrative and civil courts to examine claims under Article 4 § 3 of the TEU (Определение № 440 от 18.04.2017 г., гр. д. № 5165/2016 г. ВКС, IV г. о., on the interpretative proceedings at issue see paragraph 27 below).

26.  In many other cases the national courts have already 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.).Other developments and relevant provisions

27.  The question whether civil courts, applying the general law of tort, or administrative courts, competent to apply legislation concerning special occasions of tort liability of the State and the municipalities, were competent to examine claims under Article 4 § 3 of the TEU has been answered differently by different Bulgarian courts. As a result, in 2015 the Supreme Court of Cassation and the Supreme Administrative Court opened proceedings for a joint interpretative decision. That decision has not yet been delivered.

28.  In the meantime, a draft bill regulating that matter and specifying in which cases claims under Article 4 § 3 of the TEU 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.

29.  Article 118 § 2 of the Code of Civil Procedure provides that where a claim had been lodged with a court lacking the jurisdiction to examine such claim, that court has to transfer the claim to a court with jurisdiction.Relevant law of the European Union

30.  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.”

31.  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

32.  The applicants, relying on Article 1 of Protocol No. 1 and Articles 13 and 14 of the Convention, complained about the mortgage and the public sale of properties of the first applicant. The second applicant argued that, holding the majority of the shares of the first applicant, it was also affected by these measures.

THE LAW

33.  The Court is of the view that the complaints fall to be examined solely under 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 partiesInitial observations by the Government

34.  In their initial observations on the admissibility and merits of the case, submitted on 18 October 2018, the Government argued that the interference with the first applicant’s property rights had not breached Article 1 of Protocol No. 1, in particular because the aim of paragraph 8 had been to prevent any abuse on the part of defaulting buyers under privatisation contracts and to further the economic and social policies of the State.Submissions by the applicants

35.  In their submissions accompanying their just-satisfaction claims, received on 17 December 2018, the applicants informed the Court for the first time of the proceedings the first of them had brought in 2015 under Article 4 § 3 of the TEU. They pointed out that the outcome of these proceedings was unclear, that the possibility to seek damages under the provision at issue had been unavailable at the time of the lodging of the application, and that the second applicant had no standing and could not assert its rights in the proceedings brought by the first applicant.

36.  The applicants contested additionally the Government’s arguments on the merits of the case, considering that the State had unjustifiably put itself in a privileged position in the post-privatisation process and that it was unfair to hold the first applicant liable for the debt of a third party such as company I.Additional observations by the Government

37.  In response to the applicants’ submissions the Government argued, in observations received on 27 February 2019, that the second applicant could not be considered a victim of the alleged violations of the Convention, because it was the first applicant which had been directly affected by them. In the Government’s view, there were no exceptional circumstances as defined by the Court in particular 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.

38.  In response to the new facts submitted by the applicants, the Government raised an objection of non-exhaustion of domestic remedies. They pointed out that the first applicant had brought tort proceedings against the State and that its claim had been allowed in full by the first‑instance court. The Government considered the remedy at issue effective, noting that the first applicant had the possibility to obtain adequate redress.Additional observations by the applicants

39.  After the Court had invited the applicants to comment on the Government’s inadmissibility pleas, on 8 April 2019 the applicants argued, relying in particular on Khlaifia and Others v. Italy [GC] (no. 16483/12, §§ 52-54, 15 December 2016), that the Government were estopped from making its plea regarding the victim status of the second of them. They reiterated their position that the second applicant was a victim of the alleged violations of the Convention.

40.  The applicants contested in addition the Government’s arguments on non-exhaustion of domestic remedies. They considered that the claim the first of them had brought before the domestic courts was not identical to the complaints raised before the Court, because it did not concern an alleged violation of Article 1 of Protocol No. 1. Moreover, the Sofia City Court’s judgment of 29 January 2019 was not final, and none of the similar proceedings brought before the domestic court had ended with a final judgment. Lastly, the applicants pointed out once again that the remedy at issue had been unavailable at the time of the lodging of the present application.The Court’s assessment

41.  The second applicant maintained that its rights had been affected as it is the majority shareholder 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 its 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.

42.  The Government raised an objection of non-exhaustion of domestic remedies, pointing out that the first applicant had brought tort proceedings against the State, which were still pending (see paragraph 38 above).

43.  The argument at issue was raised in the Government’s additional observations in response to the applicants’ comments and claims for just satisfaction. The Court has held that a Government may be estopped from pleading non-exhaustion at a certain stage of the proceedings before it, and that only exceptional circumstances are capable of exempting a Government from their obligation to raise an objection to admissibility in a timely manner (see, among others, Khlaifia and Others, cited above, §§ 52-53, and Khusnutdinov and X v. Russia, no. 76598/12, § 64, 18 December 2018).

44.  In the case at hand, the applicants informed the Court of the proceedings brought by the first of them in 2015 only in their comments in response to the Government’s observations (see paragraph 35 above). Moreover, the judgment of the Sofia City Court allowing the first applicant’s claim was given on 29 January 2019, after the Government had made their observations on the admissibility and merits of the case in October 2018 (see paragraphs 11 and 34 above). Even though in a leading judgment of 2016 the Supreme Court of Cassation found that paragraph 8 contradicted EU law and should not have been applied after 2007 (see paragraph 22 above), the bulk of the subsequent case law in which the national courts struck down measures under that provision or awarded damages is also recent (see paragraphs 24-25 above). Accordingly, the Court accepts that at the time of the submission of their initial observations on the admissibility and merits of the case the Government could not have known of all the circumstances allowing them to plead non-exhaustion. They are thus not estopped from doing this at a later stage of the proceedings.

45.  The assessment of whether domestic remedies have been exhausted is normally carried out with reference to the date on which the application was lodged with the Court. However, as the Court has held on many occasions, this rule is subject to exceptions, which may be justified by the particular circumstances of each case (see Baumann v. France, no. 33592/96, § 47, 22 May 2001, and Demopoulos and Others v. Turkey (dec.) [GC], nos. 46113/99 and 7 others, §§ 87-88, ECHR 2010).

46.  In the present case, the relevant circumstances – in general and as concerns the applicants in particular – changed considerably after the lodging of the application in 2011. In 2012 the European Commission initiated infringement proceedings against Bulgaria (see paragraph 19 above), which in 2015 led to the revocation of paragraph 8 by the Bulgarian Parliament. In the view of the European Commission, shared by Parliament, that provision contradicted EU law (see paragraphs 19-21 above). This was confirmed in 2016 and 2017 in judgments of the Supreme Court of Cassation (see paragraphs 22-23 above).

47.  After that a body of case-law developed, as the national courts started declaring null and void mortgages registered on the strength of paragraph 8 or, as in the case of the first applicant, awarding damages in cases where the properties mortgaged under that provision had already been sold (see paragraphs 11 and 24-25 above). Indeed, many of the former category of cases (where mortgages were declared null and void) have not yet ended with a final judgment. As concerns, moreover, the latter category (cases where damages were awarded), a case reaching the Supreme Court of Cassation has been stayed, for the purpose of clarification of a matter of procedure, and the Court has not been informed of any case completed with a final judgment.

48.  Nevertheless, these developments are sufficiently indicative of a trend in the case-law of the national courts, which have started considering measures under paragraph 8 unlawful as contradictory to EU law and affording appropriate redress.

49.  As to the most recent developments concerning the State’s tort liability under Article 4 § 3 of the TEU, namely the proposal for an interpretative decision and the bill under examination in Parliament defining the competence of the civil and administrative courts in these matters (see paragraphs 27-28 above), they are only concerned with procedural aspects and do not question, in principle, the already established liability of the State for breaches of EU law. Even if it turns out eventually that the first applicant’s claim, currently pending before the civil courts, would fall within the competence of the administrative courts, the claim will fall to be transferred to the competent court (see paragraph 29 above).

50.  In view of the foregoing considerations, the Court sees no reason to doubt that the first applicant has a reasonable prospect of success in the tort proceedings brought in 2015, in which it was successful at first instance and in relation to which the Court has not been informed of a pending appeal.

51.  The applicants disputed the relevance of the remedy at issue on the ground that the proceedings brought by the first of them before the domestic courts were not concerned with an alleged violation of Article 1 of Protocol No. 1 – the subject matter of the proceedings before the Court. However, the Court observes that the tort alleged by the first applicant in the domestic proceedings – the mortgage and public sale of its properties, on the basis of paragraph 8, to satisfy company I.’s debt towards the State – is identical to the interference with its rights complained of in the current proceedings (see paragraphs 10 and 32 above). While, indeed, the domestic courts may be unlikely to find expressly in the proceedings brought by the first applicant a breach of Article 1 of Protocol No. 1, it is clear that their examination concerns what is effectively an interference with the applicant’s property rights protected under this provision.

52.  The Court finds accordingly that the remedy currently pursued by the first applicant – tort proceedings based on Article 4 § 3 of the TEU – is capable of providing adequate redress for the alleged violation of its rights under Article 1 of Protocol No. 1. It is to be additionally noted that in the judgment of 29 January 2019 the applicant was awarded the entire sum transferred to the State at the time of the sale of its properties (see paragraph 11 above). There seems to have been no impediment for the applicant to claim also compensation for any loss of profit as well as for non-pecuniary damage, given that compensation on such grounds was awarded in other similar cases (see paragraph 25 above).

53.  To sum up, seeing that it found already that the tort proceedings brought by the first applicant offered a reasonable prospect of success, and also that they are capable of providing adequate compensation for any breach of the applicant’s rights under Article 1 of Protocol No. 1, the Court considers the proceedings at issue an effective remedy for the purposes of Article 35 § 1 of the Convention.

54.  The Court concludes that it is justified to make an exception to the rule that the assessment of whether domestic remedies have been exhausted is normally carried out with reference to the date on which the application was lodged (see paragraph 48 above). Finding the opposite and substituting its own assessment for that of the national courts in proceedings which have been successful at first instance and which may still be pending would be tantamount to ignoring the Court’s subsidiary role (see Laurus Invest Hungary KFT and Others v. Hungary (dec.), nos. 23265/13 and 5 others, § 42, ECHR 2015 (extracts)).

55.  Accordingly, the application is premature and must be rejected for non-exhaustion of domestic remedies pursuant to Article 35 §§ 1 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

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