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You are here: BAILII >> Databases >> European Court of Human Rights >> DRUZSTEVNI ZALOZNA PRIA AND OTHERS v the Czech Republic - 72034/01 [2006] ECHR 1166 (31 January 2006) URL: http://www.bailii.org/eu/cases/ECHR/2006/1166.html Cite as: [2006] ECHR 1166

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SECOND SECTION

DECISION

AS TO THE ADMISSIBILITY OF

Application no. 72034/01
by DRUZSTEVNÍ ZÁLOZNA PRIA AND OTHERS¹
against the Czech Republic

The European Court of Human Rights (Second Section), sitting on 31 January 2006 as a Chamber composed of:

Mr J.-P. Costa, President,
Mr I. Cabral Barreto,
Mr K. Jungwiert,
Mr V. Butkevych,
Mr M. Ugrekhelidze,
Mrs A. Mularoni,
Mrs E. Fura-Sandström, judges,
and Mr S. Naismith, Deputy Section Registrar,

Having regard to the above application lodged on 26 March 2001,

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

The first applicant, DruZstevní záloZna PRIA, is a cooperative savings and loan association² (hereinafter “the applicant association”) whose headquarters are in Brno. It is represented by its supervisory board (kontrolní komise). Eight other applicants, Jiří Medek, František Zoubek, Vladimír Olšaník, Karel Pospíšil, Dagmar Kousalová, Josef Frommel, Ludmila Kramolišová and Jiřina Solaříková, are Czech nationals. They are members of the applicant association and of its management and supervisory organs. In the course of the proceedings before the Court, 633 other applicants, all members of the applicant association, joined the proceedings. All the applicants were represented before the Court by Mr M. Nespala, a lawyer practising in Prague.

The Government were represented by their Agent, Mr V.A. Schorm, from the Ministry of Justice.

The facts of the case, as submitted by the parties, may be summarised as follows.

The applicant association was created under the Cooperative Savings and Loan Associations Act (zákon o spořitelních a uvěrních druZstvech; hereinafter “the Act”) and its name was entered in the Commercial Register (obchodní rejstřík) at the Brno Regional Court (krajský soud) on 23 August 1995.

On 11 January 2000 the Office for the Supervision of Cooperative Savings Associations (Úřad pro dohled nad druZstevními záloZnami) (hereinafter “the OSCSA”) put the applicant association into receivership (nucená správa), pursuant to section 28(3)(c) of the Act,³ for a period of six months on the grounds that it had contravened this legislation, having engaged in activities outside its scope without authorisation. An official receiver (nucený správce) was appointed to replace the applicant association’s decision-making bodies. The OSCSA was acting under section 27(1) of the Act⁴, read in conjunction with section 26(2) of the Banks Act (zákon o bankách), which provided that a cooperative savings association could be put into immediate receivership without prior notice to remedy an urgent breach.

Referring to an audit of the applicant association’s activities, the OSCSA noted that the applicant association had concluded on 6 May 1999 three contracts with S7, a limited liability company, under the terms of which the latter had assigned to the applicant association receivables due to it from two debtor companies, amounting to CZK 126,235,132 (EUR 4,287,715) in total, for an agreed price of CZK 14,431,000 (EUR 490,165). The OSCSA ruled that the applicant association had thereby purchased the receivables of a third party by covering in fact the latter’s debt. It qualified the transaction as the grant of a loan to a third party. Since section 3 of the Act prohibited cooperative savings associations from providing loans to non-members, the OSCSA concluded that the applicant association had flagrantly violated the Act.

The OSCSA further noted that the auditors had discovered that the applicant association had entered into a contract on 2 and 5 August 1999 to grant a loan of CZK 22,000,000 (EUR 747,254) to a limited liability company, MLM Brno, and had signed two contracts on 25 June 1999 with OPES, a joint stock company, for the purchase of securities (cenné papíry) at a total price of CZK 41,200,056 (EUR 1,399,405). The OSCSA ruled that these transactions were also illegal, as section 1(6), read in conjunction with section 3, of the Act did not allow cooperative savings associations to acquire securities other than public bonds (dluhopisy), municipal bonds (komunální obligace) or mortgage bonds (hypoteční zástavní listy).

The receivership became effective on 12 January 2000, the date the applicant association was notified of the OSCSA’s decision.

On 26 March 2000 the applicant association lodged a constitutional appeal (ústavní stíZnost) with the Constitutional Court (Ústavní soud) against the receivership order and applied, at the same time, for an order striking down certain provisions of the Act. It relied, inter alia, on section 75(2)(a) of the Constitutional Court Act, which enables the Constitutional Court to hear a constitutional appeal, even if domestic remedies have not been exhausted, if it substantially affects the appellant’s personal interests.

On 7 April 2000, following an administrative appeal by the applicant association which had no suspensive effect, the Ministry of Finance upheld the receivership order of 11 January 2000.

On an unspecified date, the applicant association applied for judicial review (správní Zaloba) under Article 247⁵ et seq. of the Code of Civil Procedure challenging, in particular, the reasons for which it had been put into receivership.

On 1 May 2000 Act no. 100/2000 entered into force, extensively amending the Act (hereinafter “the amended Act”).

On 21 June 2000 the OSCSA granted the receiver permission to suspend withdrawals from deposit accounts held with the applicant association in view of its precarious financial situation: on 20 June 2000 the amount owed by the applicant association on outstanding term deposits came to at least CZK 83,000,000 (EUR 2,819,186), while the cash available in its current accounts was only CZK 21,500,000 (EUR 730,271).

On 12 July 2000 the OSCSA renewed the receivership order under the amended Act as the previous deficiencies persisted. It referred, inter alia, to the first receivership order and to three decisions by which it had prohibited or restricted the applicant association’s activities, including withdrawals from deposit accounts⁶.

On 9 November 2000 the Ministry of Finance upheld that decision.

On 12 December 2000 the Constitutional Court dismissed the applicant association’s constitutional appeal for non-exhaustion of the remedy under section 75(1) of the Constitutional Court Act. It reiterated that the principle requiring the exhaustion of domestic remedies could exceptionally be derogated from if the effectiveness of the protection of constitutionally guaranteed fundamental rights and freedoms was endangered. It found that, contrary to section 72(1) of the Constitutional Court Act, which provides, inter alia, that “a constitutional appeal may be introduced by any natural person who claims to be the victim of a breach of the fundamental rights or freedoms recognised in a constitutional law or an international treaty by a valid decision taken in proceedings to which he was a party”, the applicant association had lodged its constitutional appeal before the receivership order had become effective.

On 15 January 2001 the applicant association, represented by the president of its supervisory board, filed a second application for judicial review, challenging the Ministry of Finance’s decision of 9 November 2000.

On 10 and 25 January, 2 February, 4 April and 3 May 2001 respectively⁷, the OSCSA granted the receiver permission to suspend withdrawals from deposit accounts held by the applicant association.

On 6 June 2001 the OSCSA granted the receiver permission to petition for a winding-up order, which he did on 18 June 2001. On 9 July 2001 the Brno Regional Court appointed an interim administrator (předběZný správce).

On 12 July 2001 the OSCSA again placed the applicant association in receivership. It based its decision on the applicant association’s report of 3 July 2001, which contained a statement of its outstanding debts and available funds. It was noted in the report that the applicant association was insolvent, as it had only CZK 59,257,000 (EUR 2,012,729) at its disposal, which was insufficient to enable it to honour its outstanding debts of at least CZK 218,000,000 (EUR 7,404,610). Moreover, because of its lack of funds the applicant association had missed an annual contribution to the OSCSA that had fallen due on 30 April 2001. The OSCSA further noted that the applicant association’s financial statements as of 31 December 2000 disclosed a negative equity of CZK 222,949,000 (EUR 7,572,708).

On 4 October 2001 the Ministry of Finance upheld the third receivership order. On 21 March 2002 the applicant association, represented by the president of its supervisory board, filed an application for judicial review of the Ministry’s decision.

On 17 April 2002 the applicant association filed a claim for damages with the Ministry of Finance under the State Liability Act (Law no. 82/1998) for damage caused by a public authority as a result of an irregularity in a decision or procedure.

On 19 April 2002, pursuant to section 28(1)(h) of the Act, the OSCSA withdrew the applicant association’s licence (povolení působit jako druZstevní a úvěrní záloZna). It found irregularities in the way the applicant association had conducted its affairs, as attested by its inability to meet its liabilities, and that no improvement could be expected. It observed that, by 15 March 2002, the applicant association had recorded total overdue liabilities of at least CZK 200,000,000 (EUR 6,793,220) while having at its disposal only CZK 56,006,000 (EUR 1,902,305). The cumulatative value of the ratios reflecting the balance between assets and liabilities were just under 28%, when Article 7 § 1 of Ministry of Finance Decree no. 387/2001 on the Liquidity and Solvency Rules for Savings and Credit Cooperative Associations required a cumulative value from 31 December 2001 onwards of at least 45%.

The OSCSA found that as of 15 March 2002 the applicant association had disclosed a negative value of its capital of CZK 243,705,000 (EUR 8,277,709), whereas under Article 10 § 1 of Ministry of Finance Decree no. 386/2001 on the Rules for the Capital Adequacy of Savings and Credit Cooperative Associations, cooperative savings associations were obliged to have achieved by 31 December 2001, and to maintain thereafter, a capital adequacy of at least 0.1%.

The OSCSA further stated that on 17 April 2002 the applicant association had submitted a report on its financial management results which showed that the irregularities in the applicant association’s affairs, including its failure to comply with the capital adequacy, liquidity and solvency rules, were so serious that there was no reasonable prospect of their being remedied.

By a letter of 22 May 2002, the Ministry of Finance rejected the applicant association’s claim for damages. On 28 May 2002 the applicant association brought an action, through its legal representative acting under an authority signed by the presidents of the board of directors and the supervisory board, against the Ministry of Finance for the damage (Zaloba na náhradu škody) caused by the misconduct of the State authorities involved in the receivership proceedings.

In a judgment of 21 June 2002, the Prague High Court (Vrchní soud) dismissed the applicant association’s first request for judicial review as being unsubstantiated, finding that the applicant association had been put into receivership in accordance with the national law then in force and that the OSCSA had not exceeded its margin of appreciation (meze volného správního uváZení). The court held, inter alia, that:

“Putting a cooperative savings and loan association into receivership is one of the measures which the [OSCSA] may use in addition to or instead of other sanctions specified in section 28(2) of [the Act]. ...

Admittedly, the [OSCSA] chose the strictest measure. However, [it] did not breach the [Act] or act contrary to its aims, which are the only grounds on which [the OSCSA’s] decision may be quashed ... The [OSCSA] found ... that the volume of available assets destined for direct payments to members of [the applicant association] within three months had decreased to 6.77% of the volume of deposits (the Act lays down a minimum of 15%) ... as a consequence of ... a number of ... financial transactions entered into by the [applicant association]. The [OSCSA] discovered other breaches of the [Act] and the applicant association’s articles of association.”

On 3 July 2002 the OSCSA appointed a liquidator (likvidátor). On 31 October 2002, following an appeal by the applicant association, the Ministry of Finance upheld the appointment.

In the meantime, on 12 September 2002, the applicant association had lodged a constitutional appeal against the High Court’s judgment, alleging a violation of Article 11 § 4 (property rights) and Articles 36 and 38 (right to legal protection) of the Charter of Fundamental Rights and Freedoms (Listina základních práv a svobod), as well as Articles 6 and 13 of the Convention and Article 1 of Protocol No. 1.

On 5 December 2002 the High Court upheld the Regional Court’s decision of 9 July 2001 concerning the appointment of the interim administrator (předběZný správce).

On 30 January 2003 the Constitutional Court rejected the constitutional appeal of 12 September 2002 as manifestly unfounded.

On 10 April 2003 two members of the applicant association joined the proceedings in its action for damages.

On 23 April 2003 the Prague 1 District Court (obvodní soud) dismissed the applicant association’s action for damages on the ground that it had been lodged by an unauthorised person. It stated, inter alia, that members of the board of directors and of the supervisory board were not entitled to file the action in the name of the applicant. At the same time, the court severed the two members’ claims, ruling that they should be heard separately.

On 20 May 2003 the applicant association appealed. However, on 5 September 2003 the District Court discontinued the proceedings stating in particular:

“Section 28(d) § 1 of [the Act] grants the supervisory board of a cooperative savings and loan association the right to challenge the course of the receivership, but an action for damages caused by the receivership cannot be equated to the right of the supervisory board to appeal against decisions of [the OSCSA] under section 28(d)(1) of [the Act].”

On 9 February 2004 the Supreme Court (Nejvyšší soud) rejected the second application for judicial review, lodged by the applicant association on 15 January 2001, against the Ministry of Finance’s decision of 9 November 2000 upholding the second receivership order. The court found that the application had been lodged by an unauthorised person, as only the receiver had authority to lodge such an appeal. It referred to section 28(d) of the amended Act, which provides that the functions of the savings association’s statutory organs other than the supervisory board are suspended by the notification of the receivership order, that the receiver assumes the functions of the board of directors and the credit commission (úvěrová komise), and that the supervisory board is entitled to appeal against decisions of the OSCSA.

On 23 April 2004 the applicant association lodged a constitutional appeal against the decision of the Supreme Administrative Court.

On 26 April 2004 the Prague Municipal Court (městský soud) upheld the District Court’s decision of 5 September 2003.

On 28 April 2004 the Regional Court made a winding-up order against the applicant association. A trustee in bankruptcy (správce konkurzní podstaty) was appointed.

On 7 March 2005 the Constitutional Court dismissed the applicant association’s last constitutional appeal.

It would appear that the third application for judicial review filed by the applicant association is still pending before the Supreme Court.

COMPLAINTS

The applicants claimed that the Savings and Loan Associations Act was unclear in that the conditions for appointing a receiver were ambiguous. Moreover, the Act referred to the Banks Act even though the activities of private banks were different from those of cooperative savings associations. Even assuming the OSCSA’s decision to put the applicant association into receivership was legal, it had violated the latter’s interests.

THE LAW

Invoking Article 1 of Protocol No. 1, the applicants complained that the OSCSA had put the first applicant into receivership. They further complained under Article 13 of the Convention that they did not have an effective remedy.

A. Whether the applicants had standing as victims

(a) The applicant association

The Court reiterates that under Article 34 of the Convention it may receive applications from individuals and others “claiming to be the victim of a violation by one of the High Contracting Parties of the rights set forth in the Convention or the protocols thereto”. In order to claim to be a victim of a violation, a person must be directly affected by the impugned measure (see, for example, Buckley v. the United Kingdom, judgment of 25 September 1996, Reports of Judgments and Decisions 1996-IV, p. 128, §§ 56-59). The concept of “victim” as used in Article 34 of the Convention must be interpreted autonomously and independently of domestic law notions, such as a capacity to bring or take part in legal proceedings (Greek Federation of Customs Officers, Gialouris and Others v. Greece, no. 24581/94, Commission decision of 6 April 1995, DR 81-B, p. 127).

The applicant association was affected by the receivership, in that it was prevented from managing its affairs. It is therefore clear that the association has an interest in the subject matter of the application.

The Court considers that, even though the application form submitted by the applicant association states that “the applicant is the organ – the supervisory board of the Cooperative Savings Association PRIA”, it appears from the substance of the application that the association, through its supervisory organ, wished to lodge an application. In these circumstances, the Court finds that the first applicant has properly lodged an application with the Court, within the meaning of Article 34 of the Convention, and the Court has jurisdiction to examine it. In this respect the Court notes that not only the substantive rights under the Convention and its Protocols, but also the procedural rights under Article 34 of the Convention, must be interpreted as guaranteeing rights which are practical and effective as opposed to theoretical and illusory (see Cruz Varas and Others v. Sweden, judgment of 20 March 1991, Series A no. 201, p. 36, § 99).

(b) The other 641 applicants

The Government maintained that this part of the application was incompatible with the principles expressed in the Agrotexim and Others v. Greece judgment (24 October 1995, Series A no. 330-A) and that the 641 individual applicants were not entitled to lodge an application with the Court.

They added that a cooperative savings association was a legal person independent of its members. It could own property which was kept strictly apart from that of its members. Receivership did not lead to any restriction on the property rights of the members, only the association.

The applicants disputed the Government’s arguments. They maintained that on 23 June 2000 the receiver had issued – with the OSCSA’s approval – the first order prohibiting the first applicant’s members from withdrawing their deposits. That measure did not constitute a mere “administrative decision”, as there was no right of appeal against it. The receiver continued to adopt such measures until 10 July 2002 when the OSCSA had again prohibited or restricted the applicant association’s activities.

According to the applicants, the measures adopted by the receiver under section 28(d)(3) of the Act to limit the rights of the applicant association had simultaneously affected its members’ rights to the peaceful enjoyment of their deposits.

The Court considers that the question concerning the victim status of the individual applicants is closely linked to the substance of their complaints under Article 1 of Protocol No. 1 and Article 13 of the Convention, and should be joined to the merits.

Insofar as the alleged breach of Article 6 § 1 of the Convention, the Court recalls that Article 6 § 1 of the Convention extends only to “contestations” (disputes) over civil rights and obligations which can be said, at least on arguable grounds, to be recognised under domestic law; it does not in itself guarantee any particular content of those rights and obligations in the substantive law of the Contracting States (see W. v the United Kingdom, judgment of 8 July 1987, Series A no. 121-A, p. 32, § 73). In the present case, the Court notes that Czech law does not contain a right for a member of a cooperative savings association to file an action for administrative review against a decision putting the association under receivership.

It follows that this part of the application must be rejected as being incompatible ratione materiae, within the meaning of Article 35 §§ 3 and 4 of the Convention.

B. As to the complaints

 1. Alleged violation of Article 1 of Protocol No. 1 to the Convention

(a) The Government’s objection as regards exhaustion of domestic remedies

As the Government considered the application of the members of the applicant association to be incompatible with the Convention, they lodged submissions on the alleged violation of Article 1 of Protocol No. 1 only in respect of the latter.

They stated that the applicant association’s constitutional appeal against the Supreme Administrative Court’s decision of 9 February 2004 was still pending before the Constitutional Court and that, therefore, this part of the application was premature.

The Government further stated that the applicant association’s third action for the damage⁸ allegedly caused by the alleged misconduct of the State authorities was still pending. The Prague 1 District Court had in fact stayed the proceedings on 1 September 2003 on the ground that the applicant association could not act through its board of directors. The Prague Municipal Court had upheld that decision on 26 April 2004. The judicial administrator’s appeal on points of law filed against the Municipal Court’s ruling has been pending before the Supreme Court since 10 December 2004.

The Government concluded that the applicant association’s complaints under Article 1 of Protocol No. 1 were inadmissible for non-exhaustion of domestic remedies.

The applicants disputed the Government’s arguments. They referred to the rulings by the national courts in the present case⁹ that only the receiver was empowered to act in the name of the applicant association during the receivership. It followed that the applicant association was not entitled to appeal against any decisions other than those of the OSCSA concerning the receivership or the withdrawal of its licence. Moreover, the applicant association’s members were not considered by the court as having power to act on behalf of the applicant association.

The applicants noted that the trustee in bankruptcy who was appointed after the winding up order was made on 28 April 2004 did not act on behalf of the applicant association but independently on his own account, so that the applicant association had no say in the procedure. In these circumstances, the appeal on points of law which has still to be heard did not constitute an effective domestic remedy, as the applicant association was no longer a party to the proceedings.

The Court observes that the applicant association’s constitutional appeal of 23 April 2004 was dismissed by the Constitutional Court on 7 March 2005. It therefore dismisses this part of the Government’s objection.

As to the second part of the Government’s objection concerning the pending action for damages, the Court observes that under Article 35 § 1 of the Convention, normal recourse should be had by an applicant to remedies that are available and sufficient to afford redress in respect of the breaches alleged. The existence of such remedies must be sufficiently certain not only in theory but also in practice, failing which they will lack the requisite accessibility and effectiveness (see Hartman v. the Czech Republic, no. 53341/99, § 57, ECHR 2003-VIII).

The Court has already held that the conditions for filing an action in damages under the State Liability Act are so restrictive as to make this remedy ineffective (see Rodinná záloZna, spořitelní a úvěrové druZstvo and others, (dec.) no. 74152/01).

In the present case, the Court observes that the proceedings on the applicant association’s action for damages were discontinued because the board of directors had not been authorised to act on the applicant association’s behalf. Although the trustee in bankruptcy did lodge an appeal on points of law, the Court notes that the applicant association was first managed and represented by the receiver appointed by the OSCSA and subsequently, after the winding-up order was made, by the trustee in bankruptcy appointed by the court. The action for damages currently before the Supreme Court relates precisely to the events which led to the appointment of the receiver and the trustee, and the actions of the receiver. The Court considers that, having regard to the conclusions of the courts that have thus far ruled on the applicant association’s action for damages, and in view of the conflict of interest between the applicant association and its receiver and trustee, the action for damages does not, in the special circumstances of the present case, appear to be a remedy requiring exhaustion within the meaning of Article 35 § 1 of the Convention.

Accordingly, the application cannot be declared inadmissible for non-exhaustion of domestic remedies.

(b) The merits

The applicants complain that the OSCSA placed the applicant association under receivership although it performed its activities in accordance with the object of its business activities, and when it did not face any problems of liquidity. The receivership reduced the applicant association’s business activities; deposits and payments were stopped and its members could not dispose of their property. According to the applicants, the receivership cannot be considered to have been imposed in the public interest whilst violating the interests of the association’s members. They relied on 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.”

The Government did not dispute that going into receivership had interfered with the applicant association’s right to the peaceful enjoyment of its possessions, and that the complaint should therefore be considered in the light of the second paragraph of the aforesaid provision.

Relying on the OSCSA’s decision of 11 January 2000, the Government observed that the applicant association was put into receivership after an audit commissioned by OSCSA of its activities for the period from 13 December 1999 to 6 January 2000 revealed serious irregularities, involving grave and repeated violations of the relevant provisions of the Act. Owing to the extent of the applicant association’s financial misconduct, the OSCSA had decided to put it into receivership without first giving it an opportunity to remedy matters. The applicant association had contracted liabilities that were too extensive to be financially compatible with prudent business; its representatives had contravened the Act and the applicant association’s own articles of association, thereby putting the entire operation and its liquidity at imminent risk and, in turn, seriously jeopardising the pecuniary interests of its members. According to the Government, the OSCSA’s decision to put the applicant association into receivership was a bona fide attempt to consolidate its financial position and to protect the individual members’ deposits.

The Government further stated that the OSCSA’s decision of 12 July 2000 to renew the receivership was similarly driven by the need to effectively protect the applicant association’s liquidity, and thus the financial interests of its members. The OSCSA’s findings showed that on 20 June 2000 the applicant association’s liabilities on outstanding term deposits amounted to at least CZK 83,000,000, while the cash available in its current accounts was only CZK 21,500,000. In addition, in its financial statements as at 31 December 1999, the applicant association disclosed a loss of CZK 57,500,000 for the year 1999 which represented at least 19% of the total volume of deposits. In sum, the applicant association was unable to command sufficient funds to pay out all the outstanding deposits and was, therefore, perennially insolvent.

As the applicant association had failed during the first period of receivership to remedy the situation, and certain additional factors seriously endangering its security and stability had also come to light, the OSCSA decided, under section 28(b) of the Act, to renew the receivership.

The Government maintained that the third receivership order of 12 July 2001 was based on the applicant association’s report of 3 July 2001, containing a statement of the outstanding payables and the funds available to cover them. It was noted that the applicant association did not have sufficient funds at its disposal to honour its outstanding obligations and that, as such, was insolvent. In the course of the administrative proceedings the applicant association’s representative confirmed that the association was unable to honour its contractual and statutory obligations for lack of funds. By not being able to pay out its members’ outstanding deposits, the applicant association seriously endangered their interests and its own security and stability. Moreover, the applicant association’s financial statements drawn up by the auditor on 31 December 2000 indicated that the association disclosed a negative equity of minus CZK 222,949,000 (EUR 764,967). The OSCSA finally recalled that on 18 June 2001 the receiver had filed a bankruptcy petition.

The Government further observe that, in March 2002, the applicant association recorded total overdue liabilities of at least CZK 200,000,000 (EUR 6,666,667) while having at its disposal only CZK 56,006,000 (EUR 1,866,867) available to cover its outstanding liabilities. The cumulative values of the ratios reflecting the balance between assets and liabilities, within the meaning of section 6 of Decree of the Ministry of Finance no. 387/2001 on the Liquidity and Solvency Rules for Savings and Credit Cooperative Associations, were 27.91% for the time zone defined in section 5(1)(a); 37.30% for the time zone defined in letter b); and 27.47% for the time zone defined in letter c). However, under Article 7 § 1, cooperative savings and loan associations were obliged to have achieved by 31 December 2001, and to maintain thereafter, a cumulated value of the assets and liabilities balance of at least 45% in each of the time zones specified in Article 5 § 1(a)-(c).

The OSCSA further found that as of 15 March 2002 the applicant association had disclosed a capital of minus CZK 243,705,000 (EUR 8,123,500), although under section 10(1) of Decree no. 386/2001 on the Rules for the Capital Adequacy of Savings and Loan Cooperative Associations, cooperative savings and loan associations were obliged to have achieved by 31 December 2001 and maintain thereafter a capital adequacy of at least 0.1%. The OSCSA finally noted that, on 17 April 2002, the applicant association had submitted to it a report of its financial management results disclosing that the shortcomings in its activities, including its failure to respect the capital adequacy, liquidity and solvency rules, were so serious that they could not be reasonably expected to be remedied.

In the light of these circumstances, the Government concluded that the repeated imposition of receivership on the applicant association complied with the requirements of the second paragraph of Article 1 of Protocol No.1. According to them, such a measure was absolutely necessary in order to protect the pecuniary interests of the applicant association’s members and to stabilise the national financial cooperative system.

The applicants dispute the Government’s arguments. They maintain that the criterion of a menace to the stability of the cooperative banking sector, put forward by the Government to justify the receivership, would have also had to relate to the first receivership order of 11 January 2000. However, at that time, the applicant association administered and managed CZK 328,000,000 (EUR 10,933,333) as its members’ deposits on their time-fixed accounts and CZK 16,000,000 (EUR 533,333) as deposits on their current accounts. Actually, the cooperative savings and loan associations sector accumulated in 1999 as much as 10,814,000,000,000 (EUR 360,466,666,666) in deposits, of which the applicant association held only 3.07%. In the light of these circumstances, the receivership order was unjustified as the applicant association could not have endangered the stability of the sector. Moreover, under section 3(1) of the Act, the applicant association provided its services only to its members and not to the public, unlike national banks.

As to the three business transactions referred to by the OSCSA in its first receivership order, the applicants argue that the OSCSA’s findings were insufficiently established and generally a misrepresentation. The receivership order failed to explain why these transactions would have menaced the stability of the applicant association or its members’ interests.

The applicants further dispute the Government’s argument that the OSCSA referred, in its first receivership order, to section 26(2) of the Banks Act. Since 1 September 1998 receivership could only be ordered, pursuant to section 30 of the Banks Act, if deficiencies established under section 26 menaced the stability of the banking sector as a whole and, at the same time, if the shareholders of the bank did not undertake the necessary steps to rectify matters. Section 28(6) of the Act then in force, in conjunction with section 30 of the Banks Act, excluded placing the applicant association into receivership on the grounds cited in the OSCSA’s decision of 11 January 2000. According to the applicants, the aforesaid business transactions could not have menaced the interests of its members.

The applicants contended that not even the need to protect its members’ pecuniary interests could justify the imposition of receivership. The possibility to put a cooperative savings and loan association under receivership contradicted the principles of Article 1 of Protocol No. 1 as there was no public interest to justify such limitations on the applicant association’s rights. Each member of such associations takes part in the latter’s financial management and in the composition of its statutory and supervisory bodies. He or she can thus influence the association’s activities and its economic results, unlike a national bank, the clients of which cannot do so.

The applicants consider the duration of the receivership illegal: under section 28(f)(1)(c) of the Act it could last a maximum of twelve mouths, but in the present case the receivership lasted 30 months.

As to the second receivership ordered by the OSCSA on 12 July 2000, the applicants state that the data submitted by the Government do not correspond to the real situation as found by the applicant association’s supervisory board and assessed by subsequent expert opinions. Since 1 May 2000 when Act no. 100/2000 entered into force, the applicant association’s supervisory board could restart work and collect the relevant documents, which was difficult as the receiver was not unwilling to assist.

As established by the control organ of the applicant association, and its general meetings of 30 June and 1 September 2000, the deposits of CZK 38,963,574 (EUR 1,298,786) were legally terminated as of 30 June 2000. However, from 20 January and 30 April 2003, these deposits did not mature because of the interruption of the notice periods following the OSCSA’s decision of 20 January 2000, by which certain activities of the applicant association had been restricted or prohibited. According to the applicants, the applicant association’s current accounts amounted to CZK 31,500,000 (EUR 1,050,000) and its funds available within two months represented CZK 45,000,000 (EUR 1,500,000). Moreover, this balance did not include CZK 22,000,000 (EUR 733,333), which represented the investment outside the capital stock of MLM and which had to be immediately returned, the receiver acting as an executive head of the latter company. In sum, the applicant association’s available funds were at least CZK 98,500,000 (EUR 3,283,333). The applicant association was therefore able to honour its members’ terminated deposits.

According to an audit report elaborated by TOP Auditing, s.r.o., on 31 December 1999, the applicant association did not record a loss of 57,500,000 (EUR 1,916,666), but showed a profit of 14,236,524 (EUR 141,217). The data contained in the Government’s observations were, however, based on data established by the receiver. In addition, a financial control carried out in November 2001 found that the data contained in a financial statement concerning the year of 1999 had been distorted by the receivership by as much as CZK 73,566,705 (EUR 2,452,224), to the detriment of the applicant association.

The applicants also argue that the Government’s observations regarding the second renewal of receivership do not correspond to the factual and legal situation. In fact, wherever they speak about the applicant association, they mean the receiver’s actions and behaviour. It was the receiver who submitted the distorted data concerning the applicant association to the OSCSA. The obligation of CZK 218,000,000 (EUR 7,266,667) quoted by the Government constituted the applicant association’s obligation vis-à-vis the Fund, amounting to CZK 190,818,636 (EUR 6,360,621). According to the applicants, this obligation arose because of the incorrect procedure followed by the OSCSA which - against the true legal situation established by the resolutions of the general meetings of 30 June and 1 September 2000 - informed the Funds that the applicant association was not able to honour its obligations vis-à-vis its members under normal legal and contractual conditions. The applicant association, being represented by the receiver employed by the OSCSA, could in no way influence this procedure. Furthermore, the excessively high costs of the receivership worsened the applicant association’s economic situation.

As to the Government’s argument that, during the public hearing, the receiver confirmed his report of 3 July 2001, the applicants maintain that this oral hearing started on 12 July 2001 at 7:15 pm on the premises of the OSCSA once the general meeting of the applicant association’s members had finished. The only issue discussed during the general meeting was the proposal of the receiver to recall the members of the applicant association’s organs. Before this meeting, the receiver advised that the receivership would finish, pursuant to section 28(f)(1)(c) of the Act, by 12 July 2001 and that, consequently, the applicant association’s organs had to be modified, despite the fact that three fifths of the members had already been changed at the general meeting held on 30 June 2000. According to the applicants, the new organs did not take all legal steps to defend the applicant association’s rights and those of its members, who from the outset were against the receivership and its prolongation. The applicants believe that the receiver artificially created - with the tacit approval of the OSCSA – the precognitions for the extension of the receivership and, at the same time, deliberately created the conditions for the association’s economic collapse.

The applicants conclude that the receivership violated Article 1 of Protocol No. 1.

The Court, having regard to the parties’ submissions, considers that these complaints raise complex issues of law and fact under the Convention, the determination of which should depend on an examination of the merits of the complaints. The Court concludes, therefore, that this part of the application is not manifestly ill-founded within the meaning of Article 35 § 1 of the Convention. No other grounds for declaring the said complaints inadmissible have been established.

2. Alleged violation of Article 13 of the Convention

The applicants complain that they did not have any effective remedy at their disposal. They rely on Article 13 of the Convention which provides:

“Everyone whose rights and freedoms as set forth in [the] Convention are violated shall have an effective remedy before a national authority notwithstanding that the violation has been committed by persons acting in an official capacity.”

The Government disputed that the applicant association had an arguable claim for the purposes of Article 13, and requested the Court to declare this complaint manifestly ill-founded.

They maintain that, under section 28(10) of the Act then in force, the OSCSA’s decision to put a cooperative savings association into receivership could be appealed to the Ministry of Finance within 15 days of the service thereof. The applicant association did this twice. The Ministry reviewed the decisions in their entirety, examining in particular the legality of and reasons for which the applicant association went in receivership. Moreover, the applicant association could, and did, contest the decisions of the Ministry of Finance by filing an action for judicial review. On 15 January 2001 it lodged such an action against the Ministry’s decision to uphold the second receivership order of 12 July 2000, which was ultimately dismissed by the Supreme Administrative Court on 9 February 2004, as having been brought by an unauthorised person. The Government consider that this remedy is effective within the meaning of Article 13 of the Convention. Since 1 January 2003, the date of entry into force of the new Code of Administrative Procedure¹⁰, the administrative courts have been fully competent to consider the applicant association’s action for judicial review and effectively protect its rights, reviewing the legal and factual aspects of the case.

The Government finally maintain that the applicant association could file a constitutional appeal, which is also an effective domestic remedy. In this respect, they point out that on 30 January 2003 the Constitutional Court dismissed the applicant association’s constitutional appeal against the first receivership order of 11 January 2000.

The applicants maintain that the receivership was ordered before the applicant association was given the possibility to object to the audit report, drafted pursuant to Act no. 552/1991 on State Control¹¹. The record of the auditor’s control was transmitted to the applicant association’s statutory organs on 10 January 2002. The next day, the OSCSA, without waiting for the applicant association’s comments, issued the receivership order which became effective on 12 January 2000. The decision of the head of the control group concerning the applicant association’s comments was delivered to the receiver on 18 February 2000. Taking into account that the applicant association’s statutory organs were replaced by the receiver on 12 January 2000, the association could not appeal against the decision of the head of the control group or rebut the allegations contained in the control record. Moreover, administrative procedural law in force at the material time, i.e. until 31 December 2002, did not offer an effective remedy against administrative decisions, including the control protocol.

Referring to the jurisprudence of the national courts adopted in the present case, the applicant association was not entitled - through its statutory organs - to bring actions or other domestic remedies except by way of an appeal by its control commission against the decisions of the OSCSA, by which the receivership was renewed and by which its licence was withdrawn.

The Court, having regard to the parties’ submissions, considers that these complaints raise complex issues of law and fact under the Convention, the determination of which should depend on an examination of the merits of the complaints. The Court concludes, therefore, that this part of the application is not manifestly ill-founded within the meaning of Article 35 § 1 of the Convention. No other grounds for declaring the said complaints inadmissible have been established.

3. Alleged violation of Article 6 § 1 of the Convention

The applicant association complain that the decisions taken by the national administrative authorities in the present case could not be fully reviewed by an independent judicial body.

The Court considers appropriate to examine this aspect of the application under Article 6 § 1 of the Convention which provides, so far as material, as follows:

“In the determination of his civil rights and obligations ... everyone is entitled to a fair and public hearing ... by an independent and impartial tribunal. ...”

The Government concede that the rules in force until 31 December 2002 did not allow for the review of administrative decisions by judicial bodies that had full jurisdiction, within the meaning of Article 6 § 1 of the Convention. The administrative courts could only review the legality of administrative decisions and not their merits. However, to rectify this unsatisfactory situation, the new Code of Administrative Procedure was adopted and came into force on 1 January 2003. The Government recall in this connection that the Supreme Administrative Court, dealing with the applicant association’s action for administrative review, applied the new administrative rules. This part of the application is therefore manifestly ill-founded.

The applicant association disputes the Government’s arguments.

The Court, having regard to the parties’ submissions, considers that these complaints raise complex issues of law and fact under the Convention, the determination of which should depend on an examination of their merits. The Court concludes, therefore, that this part of the application is not manifestly ill-founded within the meaning of Article 35 § 1 of the Convention. No other grounds for declaring it inadmissible have been established.

For these reasons, the Court unanimously

Declares inadmissible the complaint of the individual applicants submitted under Article 6 § 1 of the Convention;

Decides to join to the merits the question concerning the victim status of the individual applicants;

Declares admissible, without prejudging the merits, the remainder of the application.

S. Naismith J.-P. Costa
Deputy Registrar President