AS TO THE ADMISSIBILITY OF
Application no. 40064/98
by Credit Bank and Others
The European Court of Human Rights, sitting on 30 April 2002 as a Chamber composed of
Mr C.L. Rozakis, President,
Mrs F. Tulkens,
Mr G. Bonello,
Mr E. Levits,
Mrs S. Botoucharova,
Mr A. Kovler,
Mrs E. Steiner, judges,
and Mr E. Fribergh, Section Registrar,
Having regard to the above application lodged with the European Commission of Human Rights on 29 September 1997,
Having regard to Article 5 § 2 of Protocol No. 11 to the Convention, by which competence to examine the application was transferred to the Court,
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 first applicant is Credit Bank AD (“Credit Bank”) and the second applicant is Multigroup Bulgaria JSC Holding (“Multigroup”). They are commercial companies incorporated in Bulgaria and have their registered offices in Sofia. The application was submitted also on behalf of a third company, Discount House EOOD (“DH”) (the third applicant), which ceased to exist on 2 December 1996, when it was wound up and merged into the second applicant, its successor. Before the Court the applicants were represented by Mr N. Valner, a solicitor practising in London.
The respondent Government were represented by Mrs V. Djidjeva, Ministry of Justice.
A. The circumstances of the case
The application is based on the applicant companies’ assertion that the Bulgarian Government nullified their private transaction with State enterprises through retrospective legislation and by procuring favourable judgments of the Supreme Court and the Supreme Court of Cassation.
The transaction in question was a debt assignment. The applicant companies had bought debt owed between State-owned enterprises in respect of natural gas delivered under an inter-governmental agreement.
The Government consider that the judgments of the Supreme Court and the Supreme Court of Cassation declaring this transaction null and void as contrary to the law were not based on retrospective legislation and, being in conformity with the relevant law, cannot be seen as an arbitrary State interference with possessions.
The facts of the case, as submitted by the parties, may be summarised as follows.
1. Background to the events at issue
(a) General legal framework concerning gas revenues under the Yamburg agreement
Under a 1986 inter-governmental agreement (“the Yamburg agreement”), the Soviet Union undertook to supply natural gas to Bulgaria in exchange for Bulgaria’s participation in the construction and equipment of pipelines in the Soviet Union and deliveries of other commodities. Bulgaria received natural gas from the Soviet Union under two other similar agreements, dating from 1974 and 1986. The Yamburg agreement was amended in 1991 and later reconfirmed and amended by protocols signed in 1993 between Bulgaria and Ukraine and between Bulgaria and the Russian Federation.
In the years after 1986 a number of acts of Parliament, governmental decrees, regulations and instructions dealt with various aspects of the construction-for-gas scheme. By enacting them the State was performing a dual function, being the legislator and at the same time the owner and manager of the relevant assets. Regulation in the economic area was typically effected through subordinate legislation (see below, Relevant domestic law and practice, on the transition of Bulgarian law from that of a fully State-owned centrally controlled economy to that of a market economy).
Several State enterprises and banks were instructed to work on the Yamburg project. They entered into direct contracts with Soviet and later Russian enterprises, thereby fixing certain prices, responsibilities and other conditions. The participation of Bulgarian State enterprises changed whenever the State re-assigned responsibilities.
The 1991 and 1993 protocols amending the Yamburg agreement provided that the State enterprises involved in the project had to introduce changes in their direct contracts. The direct contracts between the Bulgarian and Russian or Ukrainian enterprises, including those signed in 1993, invariably stipulated that they were subject to amendment in case of changes in the underlying inter-governmental agreements.
Some of the construction works carried out in compliance with the inter-governmental agreements was financed directly from the State budget (section 8(1) of Decree No. 50 of the Council of Ministers of 4 August 1986), whereas others were financed by State enterprises.
By Decree no. 44 of 30 December 1988 the Council of Ministers decided that a State-owned bank, Biochim, should finance the Yamburg project. The bank was instructed to provide funds for the construction works under the Yamburg agreement and to receive reimbursement from another State enterprise - which later adopted the name Bulgargas - out of the revenues collected from gas consumers. The decree further stipulated that sums received in excess of the planned revenues should be paid into the State budget and that in case of insufficient revenues the State budget would cover the difference.
The distribution of the imported gas to Bulgarian consumers was thus the task of Bulgargas, which gradually began to handle the financing of certain construction works too.
Since a significant part of the construction works carried out by Bulgaria under the Yamburg agreement preceded the beginning of gas deliveries, the Bulgarian State incurred expenses in the period 1986-1991 which were expected to be covered by the proceeds from gas supplied to Bulgarian consumers over a number of years.
(b) The “unpaid gas debt” and legislation specifically concerning it
The big gas consumers in the country were State industrial enterprises. Having been conceived to function in the conditions of a centrally administered economy and to produce for the former communist countries, many of them ran into substantial difficulties after 1990 and defaulted on payment of their debts owed to Bulgargas. Significant unpaid arrears for the gas imported under the Yamburg and other inter-governmental agreements thus accumulated (“the unpaid gas debt”) which in turn affected the State budget.
The Law on the 1993 State Budget, published in June 1993, listed among the expected budget revenues “arrears arising out of gas importation in past years”. The Council of Ministers adopted regulations for the implementation of the 1993 State budget, published in the summer of 1993. Regulation 12 provided as follows:
“The State Company Bulgargas shall pay every month into the State budget the difference between all income from the sale of natural gas at domestic prices determined by the Council of Ministers and the actual expenditure incurred in the importation and distribution, including investment expenditures incurred in the implementation of inter-governmental agreements.”
The Law on the 1994 Budget, adopted by Parliament and published in March 1994, also listed as budget revenues the income from gas imported in return for Bulgarian participation in the Yamburg system.
Regulation 27(1) of the Regulations for the implementation of the 1994 budget, published in the State Gazette in April 1994 (Council of Minister’s Decree No. 77), contained the same text as Regulation 12 of 1993.
In addition, Regulation 27(2) provided as follows:
“... debt owed to Bulgargas JSC and Energoimpex by clients in the country for the sale of natural gas and energy supplied between 1991 and 1993 pursuant to inter-governmental agreements shall be collected in accordance with the Law on the Collection of State Debts.”
The 1995 budget adopted in May 1995 again listed among the expected revenues the income from the sale of natural gas imported under the Yamburg agreement, including past arrears.
It further provided that Bulgargas should collect the arrears through the fiscal authorities, in accordance with the Law on the Collection of State Debts, and should seek writs of execution against the debtors.
The 1996 budget also contained similar provisions while expressly referring to the revenues from the sale of Yamburg natural gas as “State debts”.
Bulgargas has at all relevant times been a wholly State-owned enterprise. Until 29 June 1993 it was a “State Company” within the meaning of Decree No. 56/1989 on Economic Activity. On that date it was transformed into a wholly State-owned joint-stock company, in accordance with the Commerce Act and the specific legislation on reorganisation of State enterprises (see below, Relevant domestic law and practice, for all questions concerning the particular legal status of such entities and the legal regime of their assets and management).
2. The debt assignment
(a) The contract negotiations
Among the biggest debtors owing significant arrears for Yamburg gas delivered between 1991 and 1993 were Himko and K (Kremikovzi), two of the country’s largest industrial enterprises, both wholly State-owned.
The applicant companies entered into negotiations with Bulgargas with a view to purchasing at a discount the “unpaid gas debt” owed by Himko and K. In a report drawn up by the managers of Bulgargas later it was asserted that their efforts to secure cash inflow through debt assignment averted an imminent grave disruption of gas deliveries with potentially dire consequences for the whole national economy.
In June 1994 a first draft contract was submitted to the Council of Ministers. On 1 August 1994, following discussions on the matter, the Council of Ministers agreed in principle while fixing a ceiling on the amounts to be assigned, requiring an undertaking by the assignees that they would not seek to have Himko or K declared in a state of insolvency or have their assets attached, and setting out further conditions. The decision of 1 August 1994 also stated that the amended draft contract should be approved by the Ministers of Industry, Finance and Power Engineering.
An amended draft contract was submitted to the Minister of Industry who issued a letter dated 6 September 1994 stating that the conditions set out in the decision of the Council of Ministers were satisfied but directing that an approved schedule of payments should be appended.
The debt assignment contract was signed on the same day by the first applicant and DH as the assignees and Bulgargas as the assignor.
According to the contract the first applicant and DH purchased at a discount “unpaid gas debts”. These were 1,252,186,494 Bulgarian levs (“BGL”) principal owed by Himko (the equivalent of about 20,890,000 US dollars at the applicable exchange rate) and a similar amount owed by K., as well as additional amounts in respect of interest due. The discount was 24% on the principal of the purchased debt and 18% on the interest.
The first applicant and DH agreed to pay directly to various companies amounts apparently owed by Bulgargas to them in respect of construction works on pipelines, including - for approximately one third of the price - those effected by a State-owned enterprise pursuant to the Yamburg agreement. In respect of the interest, the price was to be paid to Bulgargas only.
The contract contained an arbitration clause.
(b) Payments under the debt assignment contract
According to the applicants, Himko did not make any payments. Without initially challenging the debt assignment, Himko’s managers informed the applicants that they were under an obligation to pay through the fiscal authorities. Later Himko disputed the validity of the contract and the applicants brought judicial proceedings against it which ended with judgments declaring the debt assignment null and void (see below, Judicial proceedings). A significant part of Himko’s debt was eventually set off against its tax liability by decision of the fiscal authorities based on, inter alia, Regulation 27(2) of April 1994 (see above). The triangular set-off concerned sums owed by Himko to Bulgargas (the unpaid gas debt), sums owed by Bulgargas to the State and sums owed by the fiscal authorities to Himko (tax refunds).
The managers of K did not question the validity of the debt assignment and began payments immediately upon notification thereof. Within six months K paid to the applicants BGL 654,731,354, approximately half of the debt. K also agreed to sign a novation contract directly with the first applicant and DH. That contract, signed on 15 September 1994, introduced certain modifications in the manner and timetable of payments and contained an arbitration clause. K stopped paying after March 1995 and later unsuccessfully challenged the validity of the debt assignment in proceedings against the applicants (see below). Eventually, on 17 January 1997, the applicants sold the remainder of K’s “unpaid gas debt” to DSK (State Savings Bank).
The first applicant and DH, for their part, made several payments to Bulgargas and another company between 5 October 1994 and 6 March 1995 in respect of the price of the purchased debt. According to the applicants, they have paid a total of BGL 697,731,586.
3. Disputes about the validity of the debt assignment; arbitration proceedings
On 6 October 1994 Himko sent a letter to the Council of Ministers concerning the validity of the debt assignment. On 10 October and 14 October 1994 the Ministers of Industry and Finance wrote to Bulgargas, Himko and K expressing the view that the debt assignment contract was not valid or had not entered into force, as no schedule of payments had been included, contrary to the Council of Ministers’ decision of 1 August 1994.
On 5 January 1995 the assignment of the unpaid gas debt was discussed at a meeting of the Council of Ministers. The Government considered that it was contrary to the Law on the 1994 State Budget, Regulation 27 of April 1994, and the Law on the Collection of State Debts. Instructions were issued for measures to be taken against the managers of Bulgargas for having acted in breach of the law. It was further decided that there should be an “immediate suspension of the transfer of the debts ... and invalidation of the entries in the accounts ...”.
In 1995 K, having suspended payments to the applicants, brought proceedings against the first applicant and DH before the Arbitration Court of the Bulgarian Chamber of Commerce and Industry seeking a declaration that the novation contract of 15 September 1994 was invalid. By a decision of 7 August 1995 the Arbitration Court found that the contract was valid. It rejected the claim that pursuant to the Law on the 1995 State Budget and the implementing acts the arrears owed to Bulgargas by K had become the property of the State and that therefore their assignment was to be considered invalid.
On 19 July 1995 Bulgargas brought a claim before the Arbitration Court seeking recovery of an amount from the first applicant and DH. The amount sought was the difference between the sums paid by the first applicant and DH to Bulgargas and the sums received by the applicants from the debtors.
By a decision of 28 September 1995 the Arbitration Court rejected the argument that the debts assigned under the contract of 6 September 1994 were the property of the State, that they were thus not transferable and that therefore the debt assignment contract was null and void. This argument had been based on, inter alia, Regulation 27(2) of April 1994 for the implementation of the Law on the 1994 State Budget (see above). The Arbitration Court noted that Bulgargas had been and had remained the creditor in respect of the unpaid arrears. The legal provisions invoked had merely sought to introduce a special legal regime for their collection, the regime under the Law on the Collection of State Debts. That law applied to all State debts and - in cases provided for by Act of Parliament - to the collection of other debts. As the Regulations for the implementation of the 1994 budget were merely a piece of subordinate legislation, the special legal regime for collection of debts had only become applicable to Bulgargas’s debts by virtue of the provisions of the 1995 budget, adopted by Act of Parliament. In any event, even if it was considered that the special procedure had been applicable to the collection of the gas debt as of the date of the assignment contract, that fact could not alter the private law nature of the debt.
In 1995 Bulgargas again applied to the Arbitration Court seeking a declaration that because clause 16 of the debt assignment contract of 6 September 1994 was void, the entire contract was void. Clause 16 stipulated that the first applicant and DH would not seek to have K and Himko declared into a state of insolvency. On 14 June 1996 the Arbitration Court held that clause 16 was void as it purported to exclude the right to levy distress, but that this did not render the entire contract void.
4. Judicial proceedings
In 1995, not having received any payment from Himko, the first applicant and DH brought proceedings before the Vratsa Regional Court against Himko for payment of part of its debt. Bulgargas intervened in the proceedings as a third party in support of Himko. By a judgment of 18 April 1996 the Regional Court granted the claim, rejecting the objection of Himko that the debt assignment contract of 6 September 1994 was not valid. The court considered that the Court of Arbitration’s decision of 28 September 1995 was binding in this respect.
Himko appealed. By a judgment of 15 November 1996 the Supreme Court overturned the lower court’s judgment.
The Supreme Court found that the Arbitration Court’s decision of 28 September 1995 was only binding on the parties, which were, in the proceedings leading to that decision, the first applicant and DH and, as an adverse party, Bulgargas. Himko was not a party thereto.
The court further found that under an international agreement of 1986 between Bulgaria and the former Soviet Union the Bulgarian State had undertaken to participate in the construction of gas supply pipelines and deliver machines and equipment. The Soviet Union had undertaken to supply natural gas to Bulgaria. This agreement had later been reconfirmed by a protocol signed between Bulgaria and the Russian Federation.
Bulgaria’s Council of Ministers had designated a State enterprise, later incorporated as a wholly State-owned joint-stock company under the name Bulgargas, to conclude the necessary contracts for the construction works and for the supply of gas to Bulgaria. However, the Bulgarian State had remained a party to the underlying international agreement. Therefore, the natural gas thus delivered was State property. The income from gas deliveries was listed among the budget revenues under the 1993 and 1994 budget laws. By Regulation 12 of the Regulations on the implementation of the 1993 State budget Bulgargas had been entrusted with the task of selling the supplies of Russian natural gas to consumers. The Regulation provided that all revenues therefrom should be paid on a monthly basis by Bulgargas to the State budget after deduction of the expenses incurred. This was also provided for in Regulation 27(1) of the Regulations for the implementation of the Law on the 1994 State Budget. The regulations were adopted by the Council of Ministers which was competent to enact measures in execution of the State budget.
The Supreme Court found that there had therefore been a particular legal regime established by the State as the owner of the natural gas according to which all income from gas supplies had to be paid into the State budget after deduction of the delivery expenses. The assignment of the unpaid gas debt to the applicants ran contrary to this regime and the requirements of the 1993 and 1994 budget laws, including the applicable provisions on maintaining the budget balance. The contract of 6 September 1994 was void.
The Supreme Court expressly stated that its conclusions were not based on the provisions of the Law on the 1995 State Budget concerning the applicability of the Law on the Collection of State Debts. The applicable collection procedure, established in Regulation 27(2) of April 1994 and the 1995 law, was irrelevant.
The first applicant and DH submitted a petition for review (cassation) to the Supreme Court of Cassation. By judgment of 2 April 1997 the Supreme Court of Cassation upheld the judgment of 15 November 1996.
The Supreme Court of Cassation acknowledged that under the Commerce Act of 1991 Bulgargas, as a legal person separate from the State, was the owner of all its assets. However, the special legal regime, as correctly established in the impugned judgment of 15 November 1996, made it clear that the claims at issue had been fiscal and not commercial. Thus, invariably in all State budgets, for the years 1993, 1994, 1995 and 1996, the income from the sale of natural gas had been listed as an item among the expected revenues for the State budget. Had the claims at issue been commercial and not fiscal, the State would have been entitled to receive from Bulgargas only the dividends and the ordinary taxes owed by every commercial company. However, the applicable provisions clearly entitled the State to receive all revenues from the sale of natural gas after deduction of expenses, regardless of the financial results from all other activities of the company. The assignment of the Himko debt, which was a budget entry on the income side, was thus unlawful.
The Supreme Court of Cassation further mentioned that in accordance with the 1995 budget law the sums owed by Himko were subject to the special collection procedure under the Law on Collection of State Debts.
The Supreme Court of Cassation also addressed the applicants’ argument that the Constitutional Court’s judgment of 10 December 1996 (see below) had established the private-law nature of the debts at issue. It noted that the issue decided by the Constitutional Court had been whether an amendment to the Law on the 1996 State Budget had been unconstitutional rather than the civil dispute concerning the debts at issue. The refusal of the Supreme Court to suspend the proceedings pending the outcome of the case before the Constitutional Court was not, therefore, in breach of procedural rules.
None of the arbitral awards or the judicial decisions involving the applicants referred to any previous cases concerning the special legal regime of the unpaid gas debt. It appears that in this respect the dispute concerning the 6 September 1994 debt assignment was the first of its kind.
5. The laws of July and September 1996 and the Constitutional Court’s judgment repealing them
On an unspecified date in 1996 the Council of Ministers introduced in Parliament a bill on interpretation of certain provisions of the Law on the 1996 State Budget. In the reasoning accompanying the bill, the Council of Ministers stated, referring to the Vratsa Regional Court’s judgment of 18 April 1996, that there had been contradictory opinions on the question whether claims arising out of the sale of natural gas were transferable. Parliament therefore had to adopt an interpretation of the Law, as it was competent to do under the Law on Normative Acts. The proposed bill on interpretation was not adopted. Apparently it was redrafted as a bill amending the Law on the 1996 State Budget.
By acts of Parliament of 17 July and 11 September 1996 the Law on the 1996 State Budget was amended. The amendment stated inter alia that all claims arising out of the sale of natural gas were State claims and were not transferable unless otherwise provided by act of Parliament. Also, the amendment provided that a debtor who had paid into the State budget arrears due in respect of deliveries of natural gas should be considered to have discharged his debt and that the State should not be liable to any third person in respect of any sums thus received in the State budget.
By a judgment of 10 December 1996 the Constitutional Court, acting upon a referral by the President of Bulgaria, declared the amendments of 17 July and 11 September 1996 unconstitutional. It found that the amendments purported to declare as State property claims which had previously not been considered to have been State claims. This was contrary to the Constitutional guarantee on property rights. The Court further rejected the argument of the Council of Ministers that the amendment had been of an interpretative nature. The Court noted that it introduced a new provision.
6. The application to the Commission
By letter of 29 September 1997, faxed and mailed on 30 September 1997, the applicants’ lawyer stated his intention to submit an application on behalf of Credit Bank and DH and briefly described the events complained of. The letter stated that DH was a company incorporated under Bulgarian law with its registered office in Sofia.
In a letter of 6 November 1997 requesting an extension of the time for submission of the application form, the applicants’ lawyer again referred to Credit Bank and DH as the applicants. The application form, dated 19 February 1998, mentioned Multigroup for the first time.
Together with the application form the applicants’ lawyer submitted two authorisation forms: a power of attorney dated 4 September 1997 issued by the executive directors of Credit Bank and a power of attorney dated 5 November 1997 issued by the executive director of Multigroup. The latter document stated that it authorised Mr Valner to represent both Multigroup and DH.
B. Relevant domestic law and practice
1. Legal regulation on the economic activity and assets of State enterprises
According to Bulgarian law at the time of the conclusion of the construction-for-gas inter-governmental agreements, 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” - which included the power to transfer property between State enterprises in accordance with the applicable rules. State enterprises possessed distinct legal personality but were under the direct control of the relevant ministries. State assets, including debts, could be taken away from one enterprise and re-assigned to another by simple decision of the relevant ministries. Certain elements of self-management were introduced during the 1980s, within the limits of a centrally-administered and State-owned economy.
A process of replacing economic legislation began in 1990, after the beginning of democratisation.
In 1990 certain provisions of the Property Act were amended. In July 1991 a new Constitution enshrined the right to peaceful enjoyment of property. The Commerce Act, setting out rules on incorporation and management of companies, was also enacted in 1991.
Under the Commerce Act and other 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 question whether the transformed enterprises became the full owners of their assets or were beneficiaries of a right to use and manage State property was still discussed in the legal theory after 1991. While the new provisions of commercial law were based on the concept that every commercial company owned its assets, under section 8 of the Property Act (regulating real and movable property) as in force between 1990 and 1996 State-owned legal persons only “exercised, on their own account, the right to State property in respect of assets provided to them”. On the other hand the provisions of Decision No. 201 of 25 October 1993 of the Council of Ministers and section 17a (adopted mid-1994) of the Law on the Transformation and Privatisation of State Enterprises provided that in the process of transformation of a State enterprise ownership of real estate or other assets that had been used and managed by it should be deemed to belong to the transformed company. That was the prevailing view.
In 1993 a number of provisions of the Law on Obligations and Contracts which limited freedom of contract on the basis of the old concepts of a centrally planned economy were repealed. New provisions regulating commercial transactions were for the first time enacted in 1996, when a new chapter was added to the Commerce Act. In the meantime certain limitations on contractual freedom remained in provisions specifically applicable to wholly State-owned limited liability or joint stock companies, mostly relating to the transitional period pending their privatisation (additional section 1 of the Law on the Establishment of Wholly State-Owned Commercial Companies; additional section 10 of the Law on the Transformation and Privatisation of State Enterprises, sections 6 and 7 of Regulations No. 265 of the Council of Ministers of December 1992, in force until February 1994, Regulations on the Manner of Exercise by the State of its Ownership Rights in Enterprises, adopted in February 1994, Decree No. 56 on Economic Activity and the regulations for the application of the decree).
In May 1996 the new Law on State Property and amendments to the Property Act provided that State-owned commercial companies became the owners of all their assets and the State ceased to be the owner of property it had provided for the creation of a State-owned joint stock or limited liability company.
The transition from legislation regulating a State-owned centrally planned economy to one suited for a market economy was largely completed in 1996 with the adoption of the above-mentioned property laws and provisions on commercial transactions. In 1996 the remaining parts of Decree No. 56 on Economic Activity, the main piece of legislation in this area in the period before the market reforms, was repealed.
2. The Law on the Collection of State Debts
This law provides for a specific fiscal enforcement procedure for the collection of State claims, different from that under general civil procedure. According to its section 2 that procedure may also apply to the collection of other claims where so provided by act of Parliament.
3. The Constitutional Court
In accordance with the Constitution the Constitutional Court does not examine individual complaints. It rules on the constitutionality of laws if so requested by the President, certain other institutions, or a minimum of one fifth of all members of Parliament. It can also examine certain categories of cases concerning elections.
The applicants complained under Article 1 of Protocol No. 1 to the Convention that they had been deprived of their possessions as the State had invalidated their contractual claims through retrospective legislation and through the decisions of the Supreme Court and of the Supreme Court of Cassation relying on such legislation.
They further complained under Article 6 of the Convention that by procuring retrospective changes in the law the Government had interfered with the administration of justice.
The applicants clarified that their complaints were limited to the alleged expropriation of the Himko debt, the remainder (the K debt) having been assigned by them in 1997 to DSK (State Savings Bank) for consideration.
1. The Government’s objection as regards the exhaustion of domestic remedies.
The Government stated that the applicants had not exhausted the existing possibilities under Bulgarian law, such as seeking damages in tort or the recovery on grounds of unjust enrichment of sums paid under the void contract. Furthermore, in the domestic proceedings the applicants had never referred to their Convention rights.
The applicants replied that they had made normal use of the existing remedies by attempting to obtain enforcement in arbitration and judicial proceedings in which they had complained of an attempt by the Government to invalidate a binding contract through retrospective legislation, the essence of their Convention complaints. In the applicants’ view any attempt to claim damages for wrongful acts by State bodies was bound to fail after the finding of the Supreme Court of Cassation that the debt assignment had been void. Nor could they seek recovery of sums paid to Bulgargas, there being a binding arbitral decision between them excluding such a possibility. In any event, an action to recover sums on grounds of unjust enrichment would not include lost profit.
The Court considers that, insofar as the applicants complained of an alleged deliberate effort by the State to “destroy” private pecuniary claims through retrospective legislation and by securing favourable and therefore necessarily arbitrary judicial decisions, they made normal use of the remedies available under Bulgarian law.
The objection should therefore be dismissed.
2. The Government’s objections as regards the identity of the applicants, the validity of the application, alleged abuse and the six month time-limit.
The Government objected that DH could not be considered an applicant as it had ceased to exist long before the submission of the application, that Multigroup had not been a party to the impugned contract and had not established that it was DH’s successor and that the authorisation form submitted by the applicants’ lawyer allegedly only concerned Credit Bank. On that basis and considering that the application was devoid of substance the Government submitted that it was invalid or an abuse of the right to petition and that the applicants could not claim to be victims of violations of the Convention.
The Government also submitted that, even if it was accepted that all domestic remedies had been exhausted on 2 April 1997, the application had been submitted after the end of the six months allowed as it had been received by the Commission on 7 October 1997.
The applicants presented a copy of the decision concerning DH’s succession. Referring to the case of Pine Valley Developments Limited and Others v. Ireland (judgment of 29 November 1991, Series A, no. 222), they submitted that both DH and Multigroup could claim to be victims of the alleged violations.
The applicants further agreed that the final decision for the purposes of the six month time-limit was the Supreme Court of Cassation’s judgment of 2 April 1997, but stated that they had introduced the application by letter of 29 September 1997.
The Court observes that the final decision within the meaning of Article 35 § 1 of the Convention was that of the Supreme Court of Cassation of 2 April 1997. It further finds that the application was introduced by Credit Bank on 29 September 1997, and, consequently, within the six months’ time-limit.
The Court notes that the introductory letter referred to Credit Bank and DH as the applicants. DH was a limited liability company which did not exist at that time. While it is true that a legal person that has ceased to exist cannot submit an application as it cannot perform valid acts, that may be done on its behalf by its successor.
In the present case DH had merged into Multigroup, which was its successor and the company that instructed Mr Valner to submit an application. The fact that that instruction was put in writing after the introduction of the application cannot deprive the introductory letter of its legal effect: the authorisation form was submitted shortly thereafter, together with the application form.
The application was therefore validly submitted by Multigroup on behalf of DH within the six month time-limit.
It is true that Multigroup was first mentioned as an applicant in a communication made after the expiry of that time-limit. The Court considers, however, that it would be artificial to regard Multigroup and DH as separate applicants. Multigroup only claims violations of the rights of DH, acting on its behalf as its successor. As it validly submitted a timely application on behalf of DH, Multigroup cannot be ousted from the examination of the case on the sole basis that its name was not mentioned in the introductory letter.
The Court does not find any merit in the Government’s remaining objections concerning other aspects of the validity of the application and the alleged abuse of the right to petition.
It follows that the Government’s objections must be rejected.
3. Alleged violation of Article 1 of Protocol No. 1 to the Convention
The applicants complained under Article 1 of Protocol No. 1 to the Convention that they had been deprived of their possessions as the State had invalidated their contractual claims through retrospective legislation, through the decisions of the Supreme Court and of the Supreme Court of Cassation relying on such legislation, and other acts.
Article 1 of Protocol No. 1 to the Convention 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.”
(a) The parties’ submissions
(i) The Government
The Government stated that the judgments of the Supreme Court and the Supreme Court of Cassation establishing that the debt assignment contract was void as contrary to the law had not been founded on legislation subsequent to the execution of that contract but on an assessment of the applicable legal regime.
Referring to the findings of the courts, the Government submitted that under the Yamburg and other similar inter-governmental agreements and the laws regulating property and economic activities, the Bulgarian State, and not Bulgargas, had been the owner of all income from the delivery of natural gas supplied pursuant to those agreements. The sums at issue had been fiscal liabilities and had, therefore, not been amenable to civil transactions under general civil law. Furthermore, as the courts had found, assignment of the unpaid gas debt had been in breach of the laws on the State budget as in force at the relevant time.
The Government stressed that during the relevant period there had been a transition from full State ownership and control, as enshrined in the 1971 Constitution, to private property, as envisaged in the 1991 Constitution. While the Commerce Act of 1991 and the Law on Transformation and Privatisation of 1993 provided for the transfer of movable and immovable property from the State to the State-owned limited liability or joint stock companies - a step in the transition to privatisation - the State had retained full management and control rights.
Furthermore, in the Government’s submission the legal regime of the unpaid gas debt was very particular. Under the construction-for-gas scheme, for many years significant amounts had been spent for the construction of the Yamburg pipelines and paid for from the State budget. Bulgargas had the task of handling the financing of such construction by using budget revenues resulting from gas deliveries. Therefore, the laws on the State budget clearly established that the income from gas deliveries, after deduction of expenditure, did not belong to Bulgargas. Bulgargas had a liability under fiscal law to pay all such income into the State budget, a liability that remained unchanged with the transformation of Bulgargas into a joint stock company.
If it were true that Bulgargas’s obligation was the civil law obligation of a joint stock company to pay its profit to the State as its sole owner, the State would have been entitled only to a variable amount, if the income exceeded the company’s liabilities. By contrast, the laws on the State budget concerned a fiscal debt equal in value to the difference between the sums owed by Himko for gas delivered under fixed State prices and Bulgargas’s expenditure. The actual payments made by the debtor were irrelevant in the determination of the amount of the fiscal debt. Furthermore, the ordinary rules on accounting and profits were not applicable in respect of those gas deliveries handled by Bulgargas.
The Government thus considered that, the debt assignment having been void, the applicants had never acquired any proprietary right and could not complain of a deprivation of property. Therefore, there was no interference with a property right.
In any event, the legal regime of the unpaid gas debt represented the enforcement of laws for the “control of property in accordance with the general interest”, within the meaning of Article 1 of Protocol No. 1 to the Convention. There existed essential general interests of an economic and social nature which justified that legal regime.
(ii) The applicants
The applicants replied that they had validly acquired the unpaid gas debt through a private transaction. They contested the Government’s position that under Bulgarian law the unpaid gas debt was State property.
In the applicants’ view the correct account of Bulgarian law and its application to the facts of the case was to be found in the decision of the Arbitration Court of 28 September 1995. In particular, the Government’s references to the Constitution of 1971 were irrelevant as all material events had taken place after the adoption of the 1991 Constitution. Furthermore, since June 1993 Bulgargas had become a joint stock company with 100% State ownership, operating as any other commercial company under the principles of private civil law. Upon its transformation into a joint stock company it had become the owner of its immovable and movable assets.
Despite the special payment mechanism under the Yamburg inter-governmental agreement, the role assigned to Bulgargas had been that of an independent investor. Thus the contracts entered into between Bulgargas and the Russian gas supplier and between Bulgargas and Himko had been normal commercial contracts, between buyers and sellers. Furthermore, even if the unpaid gas debt had belonged to the State, this did not automatically entail a prohibition of debt assignment. There was no such prohibition under Bulgarian law.
The applicants further submitted that the Government had confused in their observations the private law right of Bulgargas to receive the price of the gas sold to Himko and the public law right of the State under budget laws to receive from Bulgargas the difference between its income and expenses. Those had been two distinct legal relationships. Bulgargas had been the creditor in the first one and the State in the second. The provisions of the budget laws requiring Bulgargas to pay amounts into the State budget had only concerned the legal relationship between it and the State whereas the debt assignment had only concerned the relations between Himko and Bulgargas. The fact that the Himko debt had been assigned to the applicants had not been capable of preventing Bulgargas from honouring its obligation to pay the proceeds into the State budget. Indeed, owing to Bulgargas’s economic difficulties, that had been the only possibility for it to secure sufficient income to make the payments due.
In the applicants’ submission the fact that the budget laws listed sums due under the Himko debt in the income section of the State budget or that gas was sold at regulated prices did not make such sums State claims, the true nature of the claims being decisive. Likewise, the retrospective provisions ordering the collection of the Himko debt through the procedure under the Law on Collection of State Debts could not make the debt State property. The special procedure under that law could also be used for the collection of other debts, if so provided by Act of Parliament. The applicants referred to the findings of the Arbitration Court and the Constitutional Court.
The applicants also stressed that their complaints were not limited to the judgments of the Supreme Court and the Supreme Court of Cassation which allegedly represented the final part of a string of attacks on the debt assignment by the Bulgarian State through its executive, legislative and judicial branches. Having endorsed the debt assignment, although such endorsement was not required by law, the Government, due to a change in policy, had deprived the applicants of their established property rights through a series of measures in a manner similar to that considered by the Court in the case of Stan Greek Refineries and Stratis Andreadis v. Greece (judgment of 9 December 1994, Series A no. 301-B).
(b) The Court’s assessment
Insofar as the Government may be understood to contest the applicability of Article 1 of Protocol No. 1 on the basis that the applicants were considered never to have acquired the gas debt as the debt assignment contract had been declared void ab initio, the Court finds that in the particular circumstances that question is indistinguishable from the substance of the complaints that the State arbitrarily nullified the debt assignment contract through retrospective legislation and other measures. The case concerns a dispute about pecuniary claims, which are “possessions” within the meaning of Article 1 of Protocol No. 1. This provision is therefore applicable.
The applicants alleged that there had been a State interference with their possessions in that the Government had nullified through a string of attacks the debt assignment contract they had entered into with a State company. In the applicants’ submission the alleged attacks consisted of retrospective legislation, the Government’s change of policy and refusal to recognise the validity of the contract, its instructions to Himko not to pay, and the judgments of the Supreme Court and the Supreme Court of Cassation, which had allegedly been secured by the Government through retrospective legislation.
(i) Were the applicants’ possessions affected by retrospective legislation or “attacks” by the executive and legislative branches?
The Court agrees with the applicants that the interpretative bill introduced in Parliament in 1996 and the laws of July and September 1996 amending the Law on the 1996 State Budget were undoubtedly an attempt on the part of the Bulgarian Government to use retrospective legislation specifically targeting the applicants in order to influence the outcome of pending civil proceedings.
However, the adopted legal provisions were declared unconstitutional and repealed by the Bulgarian Constitutional Court precisely on the ground that they sought to regulate disputes about property rights with retrospective effect and thus ran foul of the relevant Constitutional guarantees. The judgment of the Constitutional Court was delivered before the end of the civil proceedings between Himko and the applicants. It does not appear, therefore, that the Government’s attempt to amend the Law on the 1996 State Budget through retrospective legislation adopted in July and September 1996 resulted in any interference with the applicants’ possessions.
The applicants further complained that the Laws on the State Budgets of 1995 and 1996 required retrospectively that arrears of the unpaid gas debt, including those already assigned to the applicants, should be collected under the special fiscal procedure, as provided by the Law on the Collection of State Debts.
The Court observes that the applicability of the procedure under the Law on the Collection of State Debts was first introduced by Regulation 27(2) of April 1994, before the debt assignment. The applicants thus knew, when entering into the contract, that Bulgargas was required to employ the procedure under the Law on the Collection of State Debts in enforcing its rights as Himko’s creditor. In any event, even if account is taken of the Arbitration Court’s finding of 28 September 1995 that Regulation 27(2), being subordinate legislation, could not validly introduce the special collection procedure and that therefore it was lawfully introduced when it was enshrined in an Act of Parliament (the 1995 budget law), it does not appear that the applicability of the special collection procedure as such was capable of depriving the applicants, in law or in practice, of their alleged entitlement to the gas debt. It is clear that the fiscal authorities would not have been entitled to collect Himko’s debt if the courts had found that the debt assignment contract was valid and that therefore Himko had to pay the applicants.
Further, the Court does not consider that the change of the Government’s attitude after its initial approval of the debt assignment or their instructions not to pay given to Himko in 1995 may as such be regarded as such as a State interference with possessions.
The alleged arbitrary deprivation could only have occurred through the judgments of the Supreme Court and the Supreme Court of Cassation declaring the debt assignment null and void.
The central issue is, therefore, whether those courts decided on the basis of retrospective legislation and, if so, whether such an approach could be justified under Article 1 of Protocol No. 1. In addition, the Court must examine whether the impugned judgments were not arbitrary. The applicants’ allegation that the above “attacks” by the Government influenced the outcome of the judicial proceedings must also be examined here.
(ii) The judgments of the Supreme Court and the Supreme Court of Cassation
The Court observes that those judgments did not rely on the July/September 1996 laws. The Supreme Court did not mention them and at the time the Supreme Court of Casssation delivered its judgment they had already been declared unconstitutional.
The Court further finds that the Supreme Court’s judgment of 15 November 1996 was founded solely on an analysis of the law as it stood at the time of the execution of the debt assignment contract.
The Supreme Court expressly excluded reliance on the debt collection procedure in its reasoning on the nature of the debt, accepting in substance the position of the Arbitration Court that the type of procedure was irrelevant. The Supreme Court’s conclusion that the debt assignment was void was based on the finding that it contradicted the legal regime pre-dating it, including inter alia the Yamburg agreement, the 1993 and 1994 budget laws, Regulation 12 of 1993 and the first paragraph of Regulation 27 of April 1994, according to which Bulgargas had to pay into the State budget all gas revenues after deduction of expenditure.
It is true that the Supreme Court of Cassation mentioned the provision of the 1995 budget law concerning the special fiscal procedure for the collection of the unpaid gas debt. It does not appear, however, that any conclusion was drawn from that. Having upheld the Supreme Court’s findings, the Supreme Court of Cassation decided on the basis of the legal regime pre-dating the contract. Furthermore, it has not been claimed that the reference to “the budget laws of 1993, 1994, 1995 and 1996” meant anything more than a remark that the relevant legal regime had remained unchanged.
The remaining arguments of the applicants concerned the alleged arbitrariness of the judgments of the Supreme Court and the Supreme Court of Cassation.
The Court considers that an important feature
of the present case is the fact that it concerns legal regulation of
economic activities in Bulgaria in a unique period of transition from
a wholly State-owned and centrally planned economy to private property
and a market economy. The co-existence of legislation from such incompatible
systems inevitably carried a measure of uncertainty as regards the outcome
of a business dispute in an area as complex as that concerning the regulation
of the gas debt and in respect of transactions that had never before
been tested in court. While legal uncertainty may not satisfy the Convention
requirements of clarity and foreseeability and may contravene the prohibition
of arbitrariness, in the assessment whether such a situation obtained
in the present case and
whether, consequently, there was an unjustified State interference contrary to Article 1 of Protocol No. 1 to the Convention, due account must be taken of the special transitional period in Bulgaria at the relevant time.
The debt assignment was executed at a time when the transition had not been completed. It concerned sums owed by one State enterprise to another and to the State budget under specific legislation on the implementation of an inter-governmental agreement. The 6 September 1994 contract intended to channel such sums through private hands. The applicants must have been aware of the possible divergent interpretations of the applicable law and the risk inherent in such an untested transaction in the conditions of a legal transition: they sought the prior approval of the Council of Ministers although in their own view that was not required by law.
The applicants alleged that it was arbitrary to consider – as the Supreme Court and the Supreme Court of Cassation have done – that the assignment of Himko’s debt to them could contradict a legal regime requiring Bulgargas to pay certain amounts to the State. The applicants stressed the distinction between two separate legal relationships. The first was between Himko, the gas consumer, and Bulgargas, the seller. The unpaid obligations of Himko to Bulgargas formed the “unpaid gas debt” at issue in the present case. The second was between Bulgargas and the State. Bulgargas had to pay its profit to the State.
The Court reiterates that, according to Article 19 of the Convention, its duty is to ensure the observance of the engagements undertaken by the Contracting Parties to the Convention. In particular, it is not its function to deal with errors of fact or law allegedly committed by a national court unless and in so far as they may have infringed rights and freedoms protected by the Convention (see, mutatis mutandis, Garcia Ruiz v. Spain [GC], no 30544/96, ECHR 1999-I, p. 109, § 28).
In the present case it does not appear that the Supreme Court and the Supreme Court of Cassation were unaware of the distinction between Himko’s debt to Bulgargas and the latter’s obligations. They rejected, however, the applicants’ arguments that Bulgargas owed only its profit to the State budget and that the debt assignment could not possibly affect the relations between Bulgargas and the State budget. The courts considered that the gas delivered by Bulgargas to Himko remained State property, that there existed a particular legal regime under which all arrears due by gas consumers were to be paid into the State budget after deduction of the related expenditure only and that the debt owed by Himko to Bulgargas was thus a State debt as well.
It is true that the Arbitration Court decided otherwise in well-reasoned decisions. It is not the task of the European Court of Human Rights, however, to re-examine the substance of the dispute and replace the national courts.
The Court observes that it was not arbitrary for the Supreme Court to conclude that the res judicata effect of the arbitral awards did not bind Himko which had not been a party to the arbitration proceedings. The finding of the Supreme Court of Cassation that the Constitutional Court’s judgment concerned only the constitutionality of a law and not the civil dispute between the applicants and Himko cannot be seen as arbitrary either, regard being had to the Bulgarian constitutional system in which the Constitutional Court does not examine individual complaints.
Having regard to the transitional period in Bulgaria at the relevant time and noting that the Supreme Court and the Supreme Court of Cassation gave very detailed reasoning, the Court does not consider that in the particular circumstances the fact that other fora reached different conclusions in cases pending before them or the alleged lack of sufficient foreseeability rendered the impugned judgments arbitrary.
The Court does not find it established that the Government’s alleged hostility to the contract unduly influenced the Supreme Court or the Supreme Court of Cassation. Furthermore, there has been no allegation that in the judicial proceedings the applicants could not put forward their point of view or that the proceedings were otherwise unfairly conducted.
It follows that the judgments of the Supreme Court and the Supreme Court of Cassation declaring the debt assignment void as contrary to the law were not based on retrospective legislation and were not arbitrary. Therefore, they cannot be seen as an unjustified interference with the applicants’ possessions within the meaning of Article 1 of Protocol No. 1 to the Convention.
The complaints under that provision are therefore manifestly ill-founded within the meaning of Article 35 § 3 of the Convention and must be rejected under § 4 of that provision.
4. Alleged violation of Article 6 the Convention
The applicants complained under Article 6 of the Convention that by procuring retrospective changes in the law the Government had interfered with the administration of justice.
The parties essentially referred to their submissions under Article 1 of Protocol No. 1 to the Convention.
The Court, referring to its findings above that
the laws of July and September 1996 were struck down by the Constitutional
Court and did not affect the applicants, that the provisions of the
1995 and 1996 budget laws concerning the procedure for the collection
of the gas debt were not applied by the Supreme Court and the Supreme
Court of Cassation in the impugned judgments and that the Supreme Court
and the Supreme Court of Cassation
did not rely on retrospective legislation and did not decide arbitrarily, finds that the complaint under Article 6 is also manifestly ill-founded and must be rejected in accordance with Article 35 §§ 3 and 4 of the Convention.
For these reasons, the Court by a majority
Declares the application inadmissible.
Erik Fribergh Christos Rozakis
CREDIT BANK AND OTHERS v. BULGARIA DECISION
CREDIT BANK AND OTHERS v. BULGARIA DECISION