The Norm of the Credit Institution Law on the Insolvency of a Credit Institution Complies with the Satversme
On 1 March 2013 the Constitutional Court pronounced its Judgement in Case No. 2012-07-01 “On Compliance of Section 179(1) of the Credit Institutions Law with Article 105 of the Satversme of the Republic of Latvia and Section 179 (2) of the Credit Institutions Law with the first sentence of Article 92 of the Satversme of the Republic of Latvia”.
The interests of the depositors and the public have been balanced in the insolvency procedure of a credit institution
Contested Norms
Section 179(1) of the Credit Institution Law (hereinafter also – the first contested norm): “The decision on the implementation of restoration shall be taken by the administrator. The decision on the implementation of restoration and the restoration plan shall come into effect after its approval by the Financial and Capital Market Commission and the meeting of creditors. The restoration of the credit institution shall be managed by the administrator in accordance with the restoration plan adopted and approved by the Financial and Capital Market Commission and the meeting of creditors.”
Section 179(2) of the Credit Institution Law (hereinafter also – the second contested norm): “A court may revoke a decision on the implementation of a restoration plan on the basis of an application by an administrator, meeting of creditors or the Financial and Capital Market Commission if the adoption of such decision has been achieved by fraud or duress, or a misleading influence has occurred.”
Norms of Higher Legal Force
Article 105 of the Satversme: “Everyone has the right to own property. Property shall not be used contrary to the interests of the public. Property rights may be restricted only in accordance with law. Expropriation of property for public purposes shall be allowed only in exceptional cases on the basis of a specific law and in return for fair compensation.“
The first sentence of Article 92 of the Satversme: “ Everyone has the right to defend his or her rights and lawful interests in a fair court.“
The facts
The constitutional complaint was submitted by the creditors of the insolvent joint stock company “Latvijas Krājbanka”. They note that the contested norms deprive them of the right to decide upon issues related to their property, since by leaving the decision on implementation of the restoration procedure at the discretion of the administrator and the Financial and Capital Market Commission (FCMC), the creditors are not involved in the decision taking. Likewise, they have been deprived of access to court, since it is impossible to appeal against the decision to refuse implementation of restoration.
The Court Findings and Ruling – in Brief
The Court, examining the compliance of the first contested norm with Article 105 of the Satversme recognised that the norm had a legitimate purpose – protection of other persons’ rights and the welfare of the whole society, namely, the norm ensures fast and effective insolvency procedure of a credit institution, as well as the stability of financial market.
The Court concluded that the contested norm ensures a balance between the creditors’ interests and those of the society as a whole. Thus, Section 179(1) of the Credit Institution Law complies with Article 105 of the Satversme.
The Constitutional Court recognised that the second contested norm had not been applied vis-à-vis the submitters of the constitutional complaint. The Constitutional Court Law provides that a person may submit a constitutional complaint only with regard to a norm, which directly infringes upon the fundamental rights of this person. Therefore the Constitutional Court recognised that it was impossible to continue legal proceedings regarding the compliance of Section 179 (2) of the Credit Institution Law with Article 92 of the Satversme and terminated legal proceedings in this part. At the same time the Court noted that the Civil Procedure Law envisages the possibility to appeal against the insolvency administrator’s actions, including decision on not implementing the restoration procedure.
The Court Findings and Ruling – Expanded
Regarding the compliance of Section 179(1) of the Credit Institution with Article 105 of the Satversme
On the content of the right to own property
The Constitutional Court notes that Article 105 of the Satversme envisages comprehensive guarantees to property rights, including, the right to claim in connection with meeting obligations, as well as the right to decide on property related issues. However, the Court also recognises that the owner assumes risks related to the use of his or her property. The State does not have the obligation to avert the loss of the property’s value caused by market factors, as well as to assume responsibility for the credit institution’s liabilities vis-à-vis its creditor. [13]
On the obligations of the State in the case if a credit institution becomes insolvent
The Constitutional Court recognises that in the case of a credit institution becoming insolvent, the State, nevertheless, assumes a certain scope of commitments. The State has established a scheme for guaranteeing deposits, in the framework of which the depositor is paid the guaranteed compensation, if he or she is entitled to it. Thus the State protects the bank creditors right to own property. [13]
In the case of insolvency of a credit institution, the creditor has no possibility to satisfy its claim by collecting it from the debtor in accordance with the general procedure. Therefore the State has the obligation to envisage a procedure, in the framework of which the creditors could realise their right as effectively as possible. [13]
The law envisages that the decision on how to handle the financial resources of an insolvent credit institution is taken by FCMC and the administrator, their actions have the purpose to protect the depositors’ interests and the stability of the financial and capital market. [13]
On restricting the right to own property
The Constitutional Court concludes that the choice of solution in the insolvency procedure has been primarily placed within the competence of the administrator, limiting the creditors’ possibility to decide upon issues related to their property. Therefore the Court recognises that the first contested norm restricts the fundamental right envisaged by Article 105 of the Satversme. [14].
Thus, the Court had to establish, whether the restriction of the fundamental right is constitutional, i.e.:
- whether it has been established by law,
- whether the restriction has a legitimate aim,
- whether the restriction complies with the principle of proportionality. [15]
The Court establishes that the case does not contain a dispute, whether the restriction to the fundamental right has been laid down with a law adopted in due procedure. [15.1]
On the legitimate aim of the contested norm
The Constitutional Court notes that the solutions in cases of insolvent credit institutions are aimed at the protections of depositors. In the insolvency procedure of a credit institution it is important, first of all, to ensure lawful and effective course of this procedure, by entrusting it to a professional and independent expert – the administrator, secondly, to ensure the stability of financial market, by imposing certain duties and granting rights to the supervisor of the financial and capital market – FCMC [15.2]
Thus, the contested norm has a legitimate aim – fast and effective solution to the insolvency procedure and the stability of financial market, aimed at the protection of other persons’ rights and welfare of the whole society. [15.2]
On the proportionality of the restriction to the fundamental right
The Constitutional Court recognises that the procedure, in which the decision on implementing restoration is adopted and approved, balances the interests of the creditors and society, envisaging reciprocal supervision and influence of the involved institutions and creditors, as well as ensures that a restoration plan, which is unfeasible and threatens the stability of the financial system, is not adopted, and that the creditors’ rights are not unfoundedly restricted. [18.1]
Since the creditors’ knowledge cannot be sufficiently extensive to assess the feasibility of restoration under the concrete conditions, it is the administrator, being an official with expert knowledge and experience, who is responsible for the implementation and completion of the insolvency procedure. The creditors have the right to submit their restoration plans. [18.1]
At the same time the administrator bears full responsibility for the losses that the creditors incur because of his or her fault. [18.1]
In addition, FCMC also participates in assessing the insolvency solution (both in the case of restoration and bankruptcy procedure). [18.1, 18.2] Moreover, without the creditors’ consent restoration is impossible. Thus, the procedure for adopting and approving the decision on applying restoration, balances the interests of society and the creditors, envisages reciprocal supervision and influence of the involved institutions and the creditors. [18.1] The court controls the lawfulness of the bankruptcy procedure, thus ensuring balance between the interests of the creditors and society. [18.2]
Therefore the Constitutional Court recognised that the restriction to the fundamental right is proportional and Section 179(1) of the Credit Institution Law complies with Article 105 of the Satversme.
Regarding the compliance of Section 179(2) of the Credit Institution Law with Article 92 of the Satversme
The Constitutional Court establishes that the second contested norm was not applied in the insolvency procedure of the insolvent joint stock company “Latvijas Krājbanka”, therefore it cannot infringe upon the fundamental rights of the submitters of the constitutional complaint. [19.1] At the same time the Court examined the applicants’ statements that the “creditors have no right to appeal against the decision not to implement restoration”. The Court found that, firstly, the Civil Procedure Law envisaged the right to appeal against any action by the administrator or lack thereof, secondly, several creditors of the insolvent joint stock company “Latvijas Krājbanka” had used this possibility in practice. Therefore the Court recognised that the legal proceedings regarding the compliance of Section 179(2) of the Credit Institution Law with Article 92 of the Satversme should be discontinued. [20]
The Constitutional Court decided:
- to recognise Section 179(1) of the Credit Institution Law as compatible with Article 105 of the Republic of Latvia;
- to terminate legal proceedings in the part of the case regarding the compliance of Section 179(2) of the Credit Institution Law with the first sentence of Article 92 of the Satversme;
The Judgement is final and not subject to appeal, it comes into force as of the day of its pronouncement.
Linked case: 2012-07-01