Decision No. 4 of 11 March 2014 on Constitutional Case No. 12/2013
The Constitutional Court was approached by the General Assembly of Judges of the Commercial College of the Supreme Court of Cassation with a challenge of the constitutionality of § 14, para 1 (in the part „and claim actions for filling in the bankruptcy estate“), § 14, para 2 and § 15 of the Transitional and Final Provisions of the Act Amending the Commerce Act (TFP AACA) of 2013.
The texts challenged rewrite the timeframe of validity for Commerce Act (CA) texts that are elements in commercial insolvency proceedings. The movants think that the provisions in question constitute a breach of the Constitution requirements that all citizens shall be equal before the law and that equal and same legal conditions for economic activity shall be guaranteed as shall be adversary trial. Furthermore the Submission insists that the Legislature had digressed from the principles of the state committed to the rule of law.
The Constitutional Court dismissed the challenge on the following grounds:
І. Commercial insolvency is subject to special legal proceedings of universal enforcement against businessmen in insolvency or over-indebtedness and of conversion of the assets (the estate of bankruptcy) into cash to satisfy the creditors by the apportionment of the cash that has been obtained through the conversion. Bankruptcy is a kind of execution where the court resorts to enforcement to recover the debts on behalf of all creditors who, as an alternative to individual claims, may bring these claims in single adversary proceedings and receive, on a pro rata basis, their share of the defaulting debtor’s assets, inclusive of all the calculable cash equivalents. Insolvency places all creditors on a par unless any of them are preferred creditors by virtue of a law.
The creditors and debtors have antagonistic interests so mindful of that, a balance must be struck where the interests of the market, the creditors and the third bona fide parties are protected.
For the legitimate objective to materialize which is to satisfy all creditors against the debtor and to recover commercial and non-commercial receivables, the bankruptcy estate will have to be filled to the maximum on the basis of an audit, within a fixed timeframe, of the debtor’s transactions to the detriment of the creditors’ interests.
An important method to contribute to the bankruptcy estate is to declare null and void some of the debtor’s steps and transactions should they involve the creditors. This nullity is special as the steps and transactions are declared null and void providing they involve the creditors of the insolvent debtor; the legal effects of such steps and transactions never occur and the assets are incorporated back into the bankruptcy estate. The protection of creditors may be in the form of an action to repeal under Art. 135 of the Obligations and Contracts Act or by a system of two groups of special actions as per Arts. 645, 646 and 647 of the Commerce Act. The first group is made up of actions to repeal seeking to complement the bankruptcy estate and thus provide a legal safeguard whenever the debtor prior to the date of the ruling on institution of bankruptcy proceedings has taken steps and conducted transactions which decrease the assets and are detrimental to all creditors. The second group comprises actions that have no direct bearing on the decrease of the total estate of bankruptcy but seek to reinstate a creditor in relationships with all other creditors of the insolvency.
The institute of insolvency comprises substantive law and procedural regulations. As the case stands it is particularly important to draw a demarcation line between the two kinds of legislation since, in principle, new procedural regulations are applicable, upon their entry into effect, to prior relationships whereas the new substantive law provisions are applicable, as a rule, to juristic facts that occurred upon their effect.
ІІ. The aggregate amendments to the Commerce Act of 2013 are designed to improve the legal framework of proceedings, to speed up the proceedings, to eliminate abuse of time limits under the revoked modality, to protect the rights of third bona fide parties and to enact a consistent and rational legislation.
ІІІ. The provisions challenged address the timeframe of the effect of Arts. 645, 646, 647 and 649 of the Commerce Act which were rewritten to read thus:
„§ 14. (1) Paragraph (7), § 8 regarding Paragraph (2) and Paragraphs (5) - (7), § 9 and 10 shall apply to the bankruptcy proceedings and claim actions for filling in the bankruptcy estate, existing at the time of entry into force of this Act. (It is only the part „claim actions for filling in the bankruptcy estate“ that is challenged).
(2) Within one month of the entry of this Act into force the actions brought in accordance with the previously effective provisions of Article 645, Paragraph (4), Article 646, Paragraph (2), sub-paragraphs 1 and 3, Article 647 and Article 649, under which the proceedings are pending, may be withdrawn without the consent of the defendants, regardless of the stage of the corresponding proceedings.
§ 15. The claims brought prior to the entry of this Act into force under Article 646, Paragraph (2), sub-paragraphs 2 and 4 shall be examined according to the hitherto effective procedure.“
The maintenance, partly, of the procedure so far and the immediate entry into force of the provisions of the new piece of legislation is not novel: a similar approach was taken to preceding amendments to the Commerce Act.
The Submission does not state any specific evidence in support of the unconstitutionality of § 14, para 2 and § 15 of the TFP AACA. The former clause provides for an option to withdraw actions under which proceedings are pending within a month of this Act’s entry into force; however, the Constitutional Court was approached after the closing date. Actions may be withdrawn regardless of the stage of the proceedings and without the consent of the defendant and thus constitute an exception to the proper channel. The provision is a procedural law provision and becomes valid for legal relations that existed prior to its passage. The Constitutional Court holds the view that a procedural provision that affords a further legal option under easier terms is not unconstitutional the more so that the application is contingent solely upon the rightful claimant’s partial judgment.
The Court found § 15 of the TFP AACA to be consistent with the Constitution as it maintained the conditions prevailing hitherto to complete the certain proceedings that were in progress when the provision took effect. The legislative arrangement is not biased, as alleged. It is well grounded as it is heedful of the nature of the steps and transactions and of the revocation of the effect of Art. 646, para 2, sub-paras 2 and 4 of the Commerce Act.
The Constitutional Court believes that legal texts shall be seen as unconstitutional providing they disagree with specific prescriptions and principles of the Constitution or exclude each other. The Court has issued multiple pronouncements that the contradiction between legal texts constitutes a breach of the principle as set forth in Art. 4, para 1 of the Constitution and that the provisions of laws and bylaws have to be clear, precise and congruent if they are to be fit to regulate the relations at the core of society. As the case stands, the contested provisions are clear and precise and are not in the grip of the alleged controversy to justify noncompliance with the Constitution on such grounds. The enactment of the parallel application of the new and previous procedure vis-à-vis the debtor’s different steps and transaction stems from the nature of the legislative changes and is a frequent modus operandi in the legislating process.
ІV. „A state committed to the rule of law“ stands for sovereign power that is exercised on the basis of the Constitution and within the confines of the law. The Constitutional Court has made multiple pronouncements on the essence of the concept „law-governed state“ and ruled that in „substantive terms“ it is a state where justice reigns supreme and that in „formal terms“ it is a state of the domination of legal certainty where the substance of law and order lends itself to a clear and unambiguous definition. Law-abidance in state affairs makes it imperative that they be predictable and calls for legal certainty that stems from predictability. Legal certainty and stability are distinctive features of a state committed to the rule of law as they require sustained and consistent legal regulation of societal relations.
The Constitutional Court will not consider the arguments adduced in the Submission and alleging that the prescriptions challenged demonstrate a selective, socially unwarranted and imbalanced approach since the National Assembly is the only authority that is to judge, as appropriate, whether there exists an objective social need that calls for the passage of new legislation or for amendments to existing legislation.
The prohibition to enforce retroactive laws and the protection of lawfully acquired rights make up the reasoning of the Submission and are a spin-off of the principle of the state committed to the rule of law.
In principle the law takes effect ex nunc and applies to facts and circumstances that emerge after its entry into force. Each new civil law “inherits” juristic facts that emerged while the abolished law was in place and that are not cancelled: in such cases the question that arises touches on retroactive legislation that the new civil law is. The Legislature has the authority to freely fix the time limits of the operation of the laws regarding, inter alia, legal relations that resulted from the action of the revoked legislation but that are to be settled as the new legislation goes into effect. Whenever the new legislation is to be valid with respect to legal relations that were established and existed prior to its enactment, this is regarded as “unreal” retrospective effect or immediate effect of the new legislation. For the new civil law to be valid vis-à-vis legal relations that were in place prior to its entry into force, the Lawmaker shall explicitly make it retroactive. Retroactive effect always exists with procedural law provisions as it covers pending proceedings where juristic facts emerged in the past but their legal effects have not occurred. No doubt the new civil law becomes valid immediately with respect to proceedings that were not completed by the date of the law’s entry into force, may rearrange, in a new way, the juristic facts and legal relations that have emerged prior to its entry into force by means of ex nunc changes that conform to its provisions, yet this is always made contingent upon preoccupations with justice and relevance.
The Constitution does not forbid to make the new civil law retroactive with respect to facts and legal relations that already existed when it was passed; the Constitution merely fixes the date of the law’s entry into force: statutory acts go into effect three days after their promulgation unless provided otherwise. The strict prohibition of retroactive legislation is to be found solely in Art. 5, para 3 of the Constitution and is confined only to criminal laws that provide for sanctions that are new or harsher than the revoked sanctions in order to prevent the aggravation for criminal offenders. The Constitutional Court case-law draws on the Court’s understanding that any other pieces of legislation that deal with legal public relations, for instance the imposition and payment of taxes, shall not be retroactive. In general, the principles of the state committed to the rule of law rule out the passage of retroactive legislation that seeks to curtail existing rights or to impose retroactive liabilities but this shall not be valid whenever new rights are granted.
As the case stands, to subject proceedings in progress to the abolished legislation would go against the constitutional principle of justice. Apropos it should be stressed that after the 2013 amendments to the Commerce Act the treatment of steps and transactions has become more favorable than the treatment that the abolished texts accorded.
The principle of the retention of lawfully acquired rights has not been infringed on as alleged. No doubt while the Legislature judges the method by which previous legal relations are codified, it must conform this method to the principle of legal certainty, that is, the principle that makes it imperative that the stability of transactions and the predictability of the juristic facts’ legal consequences be ensured.
The Court did not share the view as presented in the Submission, viz. that the texts challenged withdraw granted rights. The new wording of the Commerce Act after the amendments as introduced by the Act Amending the Commerce Act in the insolvency part creates a more favorable treatment and, in addition, is more balanced as it protects the rights of both, the creditors and the parties to the transactions. The amendments enable the creditors to recover their claims subject, however, to certain strict conditions. This is tantamount to retroactive substantive law texts in the new civil law yet, as the case stands, such retroactive legislation is justified.
V. Art. 6, para 2 of the Constitution reads that all citizens shall be equal before the law and that there shall be no privileges or restriction of rights on the
grounds of race, national or social origin, ethnic self-identity, sex, religion, education, opinion, political affiliation, personal or social status or property status. The equality of citizens before the law is their fundamental right that recurs in other Constitution articles, Art. 19, para 2 and Art.121, para 1 that the Submission refers to.
The principle of equality stands for equality of citizens before the law and for the prohibition against discrimination on the grounds as enumerated in the Constitution. The law may provide for a differentiation with respect to the same right or responsibility, yet this is not tantamount to a breach of the principle of equality before the law if the differentiation is based on a definite criterion and if all subjects of law within the respective group meet the criterion.
The signatories of the Submission have put together the evidence on the basis of which they allege the violation of Art. 6 and Art. 121, para 1 of the Constitution but have not indicated which of the social aspects as enumerated in Art. 6, para 2 were violated. The signatories refer to the existence of “particular favoritism for one of the parties to the proceedings” but do not give the details of inequality nor do they specify which of the parties to the proceedings in progress prior to the enactment of the AACA enjoys privileges nor do they indicate what the privileges, if any, entail.
The Constitutional Court found that the texts challenged did not constitute a breach of Art. 6, para 2 of the Constitution as they neither curtail nor grant privileges. The application of certain texts from a new civil law to legal relations that existed prior to the law’s enactment will not curtail any rights of individual citizens or of a group of citizens nor will it grant social privileges and therefore, shall not be termed „discrimination“.
VІ. The right of equality is related to Art. 19, para 2 of the Constitution which reads that the Legislature shall establish and guarantee equal legal conditions for economic activity to all citizens and corporate entities.
The right to enjoy equal legal conditions for economic activity calls for even playing field for all economic actors who are engaged in identical or similar activities within a sector of the economy. Equality before the law is not the sameness of all subjects of rights and rules. To quote Decision No. 5 of 2002 on Constitutional Case No. 5/2002: „While equality stands for same legal conditions to be enjoyed by all economic actors and subjects of law that are engaged in same or similar activities in a certain sector, it does not necessarily stand for the sameness of all diverse economic sectors.“
The right to enjoy same legal conditions in doing business is not among the absolute rights. The Legislature is free, as appropriate, to codify a differentiation to apply to citizens and corporate entities that enjoy a right or fulfill an obligation subject to a criterion that is met by all members of the group. Relevance and the need to achieve objectives of public significance allow differences in the lawmaking output without any confrontation with the principle in Art. 19, para 2 of the Constitution.
The challenge does not indicate which legal texts impinge on the principle of Art. 19, para 2 and alleges that the texts challenged provide for treatment of transactions on a category by category basis and in this way let fill in the bankruptcy estate of the individual debtors by the unequal treatment of their creditors and copartners.
The Court concluded that the texts challenged were not in contravention of Art. 19, para 2 of the Constitution. The texts did not codify a discriminatory treatment of the categories of legal steps and transactions since, in general, the Legislature made the matter of insolvency subject to specific modalities of invalidity that have different legal implications.
The more favorable modality that the amendment brought to the matter of insolvency can apply, on the basis of the challenged part of § 14, para 1 of the TFP AACA, to all steps that were taken and all transactions that were conducted prior to and subsequent to the enactment. As a result, the actors of the group that consists of all creditors of the insolvency are accorded the same non-discriminatory treatment by the Legislature. The immediate entry into force of the new legal texts that provide for a more favorable legal regime creates non-discriminatory legal conditions of treatment of all creditors since some of the preconditions for the nullity of the steps and transactions under the repealed legislation have ceased to exist. The principle of the non-discriminatory conditions for economic activity would be compromised in the opposite hypothesis under which some creditors shall have to be subject to the newly passed legislation and other creditors shall have to be governed by abolished or amended provisions that impose a harsher modality of nullity.
With respect to the creditors of the insolvency, the abidance by the Constitution-proclaimed principle of equal legal conditions for economic activity should be judged not just in terms of sequence in time, i.e. prior to and subsequent to the enactment of the contested texts. The judgment of the non-discriminatory treatment of creditors should be made primarily a propos the concrete legal relation of insolvency and vis-à-vis the concrete debtor. The Court concluded that the creditors of the insolvency were not unequally treated in one and the same legal hypothesis of steps and transactions with regard to the concrete debtor and the different debtors alike.
VІІ. The claimants refer to the Constitutional Court’s case-law to allege that Art. 121, para 1 of the Constitution has been infringed on in favor of one of the parties to the proceedings inasmuch as the achievement of the party-specific objectives and goals is made easier as compared with those of the other parties. The Court holds the view that the decisions referred to have not been decreed on identical or similar cases but on cases subject to real retroactive effect and thus infringe on acquired title rights. The content of the real estate is treated by the new piece of legislation for the future and not for the past, therefore if it trims or expands the title holders’ powers, it will take effect ex nunc rather than upon the acquisition of the rights.
Art. 121, para 1 of the Constitution makes it binding on the courts as arms of the Judiciary, and not on the Legislature, to ensure the equality of the parties to proceedings. The courts are bound to ensure that the parties to an adversary trial are treated on a par on the basis of the scrupulous application of the procedural laws in the wording as approved by the Legislature.
§ 14, para 1 of the TFP AACA – its challenged part – provides for how new or amended substantive law provisions are to handle proceedings then in progress and for that reason the provision under consideration is totally irrelevant to adversary proceedings or to the equality of the parties to the proceedings. The principle of the equality of the parties to the proceedings is not related to claims that are to fill in the bankruptcy estate and is not influenced by the changes in the facts and the deadlines for the presentation of claims just as is not the impossibility to pronounce some claims valid.