2010/07/27 - Pl. ÚS 19/09: Insolvency Proceedings

27 July 2010

HEADNOTES

A

dispositive legal act cannot be the content of a legal fiction without

violating the dispositive principle on which the civil trial is built,

and ultimately also violating the principle of autonomous will

[(judgment of the Constitutional Court Pl. ÚS 42/08 of 21 April 2009 (N

90/53 SbNu 159; 163/2009 Coll.)]. The provision of § 399, paragraph 2,

the part of the second sentence after the semi-colon of the Insolvency

Act, whereby the fiction of withdrawal of a petition for debt discharge

denies a party to a bankruptcy proceeding the possibility of disposition

of the proceeding, is inconsistent with Art. 2 par. 3 of the Charter

and Art. 2 par. 4 of the Constitution of the Czech Republic, as well as

with Art. 36 par. 1 of the Charter.

 

 

CZECH REPUBLIC

CONSTITUTIONAL COURT

JUDGMENT

 

IN THE NAME OF THE CZECH REPUBLIC


On

27 July 2010, the Plenum of the Constitutional Court, composed of Court

Deputy Chairwoman Eliška Wagnerová and Judges Stanislav Balík, Vlasta

Formánková, Ivana Janů, Vladimír Kůrka, Dagmar Lastovecká, Jiří Mucha,

Jan Musil, Jiří Nykodým, Miloslav Výborný and Michaela Židlická, ruled a

petition from the High Court in Olomouc seeking the annulment of part

of § 399 par. 2, the part of the second sentence after the semi-colon,

of Act no. 182/2006 Coll., on Insolvency and Methods of Resolving It

(the Insolvency Act), as follows:

 

The

provision of § 399 in paragraph 2, the part of the second sentence

after the semi-colon, of Act no. 182/2006 Coll., on Insolvency and

Methods of Resolving It (the Insolvency Act), which reads: “if he does

not appear without an explanation, or if the insolvency court does not

find his explanation to be justified, he is deemed to have withdrawn the

petition for debt discharge,” is annulled as of the day this judgment

is promulgated in the Collection of Laws.

 


REASONING

 

I. Recapitulation of the Petition

 

1.

On 3 July 2009 the Constitutional Court received a petition from the

High Court in Olomouc seeking the annulment of part of § 399 par. 2, the

part of the second sentence after the semi-colon, of Act no. 182/2006

Coll., on Insolvency and Methods of Resolving It (the Insolvency Act).

The contested provision constructs the legal fiction of withdrawal of a

petition for debt discharge if a debtor does not, without an

explanation, appear at a meeting of creditors called to discuss the

manner of debt discharge and voting on the adoption thereof, or if the

insolvency court does not find his explanation to be justified. This

provision is then related to § 394 par. 2 of the Insolvency Act, under

which the insolvency court takes cognizance of the withdrawal of the

petition by a decision that is delivered to the person who filed the

petition, the debtor, the insolvency administrator and the creditors’

committee, and § 396 par. 1 of the Insolvency Act, under which the

consequence of withdrawal of the petition for debt discharge is that the

debtor’s insolvency is handled in bankruptcy proceedings. In judgment

file no. Pl. ÚS 42/08 of 21 April 2009, the Constitutional Court

annulled part of § 394, paragraph 2, the part of the sentence after the

semi-colon, which read: “an appeal is not permissible.” The judgment was

promulgated in the Collection of Laws on 9 June 2009 as no. 163/2009

Coll.

 

2.

The petitioner stated that it is conducting insolvency proceedings,

file no. KSOS 16 INS 4988/2008, 2 VSOL 87/2009, in which the insolvency

court applied § 394 par. 2 of the Insolvency Act, in the wording in

effect until 8 June 2009, as well as § 369 par. 1 (evidently meaning §

396 par. 1) and § 399 par. 2 of the Act. The insolvency proceeding was

opened at the Regional Court in Ostrava – Olomouc branch (the “Regional

Court”) on 8 December 2008; the debtor filed a petition to permit debt

discharge, together with the insolvency petition. In its resolution of

20 January 2009, ref. no. KSOS 16 INS 4988/2008-A-9, the Regional Court

determined that the debtor was insolvent, appointed an insolvency

administrator, and permitted resolution of the insolvency through debt

discharge. At the same time it ordered a review hearing on 5 March 2009,

which was to take place at 9:00 a.m. in the offices of the Regional

Court, and it called a creditors’ meeting for the same time and place,

which was to take place immediately after the conclusion of the review

hearing. Although the debtor was duly summoned, he failed to appear at

the creditors’ meeting, without providing an explanation. Therefore, on

that date the Regional Court issued resolution ref. no. KSOS 16 INS

4988/2008-B--12, in which it took cognizance of withdrawal of the

petition to permit debt discharge, opened a bankruptcy proceeding

concerning the debtor’s assets, and decided that the bankruptcy

proceeding would be conducted as a simplified bankruptcy proceeding. The

debtor contested this decision in full, in an appeal in which he

claimed that he was prevented from attending the creditors’ meeting by

poor health, which he supported by a confirmation from his doctor of 10

March 2009. The debtor asked the petitioner to annul the resolution

opening bankruptcy proceedings concerning his assets and to return the

matter to the Regional Court for further proceedings, or that the

petitioner itself rule on debt discharge by setting a payment calendar.

According to the petitioner, it is also worth noting the content of the

official record prepared after the creditors’ meeting by the insolvency

judge, according to which, on 5 March 2009 at 10:00 a.m. the debtor was

in the law office of Mgr. K. in Šumperk, where he stated that he

believed the review hearing and the creditors’ meeting were to take

place at the District Court in Šumperk.

 

3.

The petitioner stated that in judgment file no. Pl. ÚS 42/08 the

Constitutional Court stated the legal opinion that § 394 par. 2 of the

Insolvency Act, the part of the sentence after the semi-colon, was

unconstitutional because of its connection, in application, to the

evidently unconstitutional part of § 399 par. 2 (the sentence after the

semi-colon) of the Insolvency Act, which reads: “if he does not appear

without an explanation, or if the insolvency court does not find his

explanation to be justified, he is deemed to have withdrawn the petition

for debt discharge.” In that judgment the Constitutional Court

emphasized that one of the fundamental principles governing a civil

trial is the dispositive principle. Withdrawal of the petition to permit

debt discharge is a dispositive act by the debtor, and it follows from

its nature that it cannot be the content of a legal fiction, i.e. it

cannot be deemed that the debtor withdrew the petition when he did not

in fact do so. Therefore, the fiction of withdrawal of the petition

constructed by § 399 par. 2, the part of the second sentence after the

semi-colon, of the Insolvency Act is, under the cited judgment,

inconsistent with the nature of a civil proceeding.

 

4.

Art. 89 par. 2 of the Constitution of the Czech Republic gives the

general courts an obligation to decide in accordance with legal opinions

stated in Constitutional Court judgments, not only in the particular

matter concerned in a judgment, but also in matters that address similar

or identical issues. In its judgment file no. III. ÚS 252/04 of 25

January 2005 (N 16/36 SbNU 173), the Constitutional Court emphasized the

obligation, when deciding other cases of the same kind, to be guided by

the “ratio decidendi,” i.e. the controlling legal rules (grounds for

decision) explained and applied in the judgment. Thus, the petitioner

reflected the legal opinion of the fiction of withdrawal of a petition

to permit debt discharge as stated in judgment file no. Pl. ÚS 42/08.

 

5.

In support of the arguments contained in the judgment, the petitioner

referred to the framework for withdrawal of a petition contained in § 96

of Act no. 99/1963 Coll., the Civil Procedure Code, as amended by later

regulations, (the “Civil Procedure Code”), in relation to which court

practice concluded that a petition can be withdrawn only by an act which

does not give rise to any doubts as to its content and meaning, and it

is thus quite unquestionable that the party to the proceeding has no

interest in having his petition addressed, and agrees that the court

will not rule on this petition. While the Civil Procedure Code presumes

an understandable and certain expression of will, without any

conditions, the Insolvency Act allows the consequences of withdrawal to

arise without the debtor’s expression of will having met the conditions.

 

6.

For these reasons, the petitioner concluded that § 399 par. 2, the part

of the second sentence after the semi-colon, of the Insolvency Act is

inconsistent with Art. 36 par. 1 and Art. 38 par. 2 of the Charter of

Fundamental Rights and Freedoms (the “Charter”). If the dispositive

authorization of a party to the proceeding is replaced by a legal

fiction, as a result of which, due to the party’s inactivity, or even

only on the basis of the court’s evaluation, the entire proceeding is

stopped, then according to the petitioner that construction is also

inconsistent with Art. 2 par. 3 of the Charter. Therefore, in accordance

with Art. 95 par. 2 of the Constitution of the Czech Republic and § 64

par. 3 of Act no. 182/1993 Coll., on the Constitutional Court, as

amended by later regulations, (the “Act on the Constitutional Court”)

the petitioner submitted the matter to the Constitutional Court, asking

that it annul § 399 par. 2, the part of the second sentence after the

semi-colon, of the Insolvency Act as of a date that it sets in its

judgment.

 

7.

In conclusion the petitioner pointed to the fact that the insolvency

proceeding cannot be interrupted, and that the consequences of opening

bankruptcy proceedings concerning the debtor’s assets arose by

publication of the decision in the insolvency register, and proposed

that the Constitutional Court address its petition as urgent under § 39

of the Act on the Constitutional Court, because further steps within a

bankruptcy proceeding may lead to changes that will make the originally

permitted debt discharge impossible for the debtor. Moreover, according

to the petitioner, a decision on this petition, if it is granted, may

also be important for the insolvency proceedings of other debtors.

 


II. Conduct of the Proceeding and Recapitulation of the Statements of the Parties

 

8.

In accordance with § 69 of the Act on the Constitutional Court, the

Constitutional Court called on the Chamber of Deputies of the Parliament

of the Czech Republic and the Senate of the Parliament of the Czech

Republic, to respond to the petition.

 

9.

The Chamber of Deputies, through its Chairman, Ing. Miloslav Vlček,

stated that the bill of the Insolvency Act was discussed in the first

reading on 26 October 2005, as publication 1120, and was then assigned

to the Constitutional Law Committee, which discussed it at its meetings

on 1 December 2005 and 20 January 2006; it recommended passing it, as

amended by a comprehensive amending proposal contained in Committee

Resolution no. 235 (publication 1120/1), which also newly amended § 399

par. 2 of the Insolvency Act. The second reading of the bill took place

on 27 January 2006, and the amending proposals presented in it were

processed as publication 1120/2. The bill was approved in the third

reading on 8 February 2006, as amended by the comprehensive amending

proposal from the Constitutional Law Committee and other amending

proposals. The Act was then signed by the appropriate constitutional

authorities and promulgated in the Collection of Laws as no. 182/2006

Coll. The provision in question was not affected by later amendments to

the regulation.

 

10.

The Senate of the Parliament of the Czech Republic stated that the bill

of the Act whose provision is proposed to be annulled was passed to it

on 28 February 2006, and the Organization Committee assigned it for

discussion, as publication no. 288, to the Constitutional Law Committee

and the Committee for the Economy, Agriculture, and Transportation. The

bill was discussed by both committees on 15 March 2006, and 22 March

2006; both recommended adopting the Act in the wording approved by the

Chamber of Deputies. The bill was approved by the Senate at its 10th

session, as resolution no. 416 of 30 March 2006; out of 54 senators

present, 49 voted to adopt the Act, no one voted against, and 5 of those

present abstained from voting. There was no discussion concerning the

provision that is the subject of the proceedings before the

Constitutional Court; discussion concerned the institution of debt

discharge only as regards the possibility of applying it in the case of a

legal person that is not an entrepreneur. Thus, in the approval process

no opinion was stated that would either support or refute the

petitioner’s claim that § 399 par. 2 of the Insolvency Act is

unconstitutional. The senate discussed the bill within the bounds of the

competence provided by the Constitution of the Czech Republic and in

the constitutionally prescribed manner; it acted on the basis of the

majority belief that the Act was in accordance with the constitutional

order of the Czech Republic and with its international obligations. It

is now up to the Constitutional Court to evaluate the constitutionality

of the provision in question.

 

11. All parties to the proceedings agreed to waive a hearing, under § 44 par. 2 of the Act on the Constitutional Court.

 


III.  The Text of the Contested Statutory Provision

 

12. The contested provision of the Insolvency Act reads:
§ 399

    […]

   

(2) The insolvency court shall deliver to the debtor and insolvency

administrator, using personal delivery, a summons to the creditors’

meeting pursuant to paragraph 1, with instructions that their presence

is necessary. The debtor is required to take part in the meeting

personally and answer questions from the creditors present; if he does

not appear without an explanation, or if the insolvency court does not

find his explanation to be justified, he is deemed to have withdrawn the

petition for debt discharge.

    […]

 

 

IV. Petitioner’s Active Standing

 

13.

Under Art. 95 par. 2 of the Constitution of the Czech Republic, if a

court concludes that a statute that is to be applied when adjudicating a

matter is inconsistent with the constitutional order, it shall submit

the matter to the Constitutional Court. Further specifics on this

authorization are given in § 64 par. 3 of the Act on the Constitutional

Court, under which a court may submit to the Constitutional Court a

petition seeking annulment of a statute or of individual provisions

thereof. The condition for addressing such a petition on the merits is

that the wording of Art. 95 par. 2 of the Constitution of the Czech

Republic must be met, meaning that the statute must be one that is to be

applied in adjudicating the matter, i.e. the statute, or its

provisions, that is proposed to be annulled is to be applied directly by

the petitioner when resolving the particular dispute. The

Constitutional Court found that this condition had been met, because the

petitioner will review the justification for the debtor’s appeal

against the insolvency court’s decision, issued precisely due to the

effects of the legal fiction of withdrawal of the petition that is

contained in the contested provision. The Constitutional Court verified

the facts concerning the conduct of the insolvency proceeding in the

Regional Court’s file KSOS 16 INS 4988/2008, available electronically at

https://isir.justice.cz  (the insolvency register).

 

14.

For completeness, the Constitutional Court notes that a conclusion that

the petitioner is authorized is not inconsistent with the opinion

stated in judgment file no. Pl. ÚS 42/08, in which the Constitutional

Court stated that the same petitioner did not have active standing to

submit a petition seeking the annulment of part of § 399 par. 2 of the

Insolvency Act (point 22 of the judgment). That legal opinion arose in a

particular procedural situation, where annulling the provision in

question was not part of the proposed judgment of the petition, and,

especially, where the Constitutional Court addressed the issue of

whether it is even in the petitioner’s competence at all to rule on the

appeal on the merits. In other words, as regards judgment file no. Pl.

ÚS 42/08, the petitioner was in a situation where it had to address the

issue of permissibility of an appeal, and not the issue of justification

of the appeal, and therefore at that time it was not directly applying

the contested provision. Of course, in the presently adjudicated matter,

as already explained, the situation was different.


 

V. Constitutional Conformity of the Legislative Process

 

15.

In a proceeding on a petition seeking the annulment of a statute or

part thereof, the Constitutional Court reviews whether the contested

legal regulation was adopted and issued within the bounds of the

competence provided by the Constitution of the Czech Republic and in a

constitutionally prescribed manner (§ 68 par. 2 of the Act on the

Constitutional Court). As the constitutional adoption of the contested

part of the Insolvency Act was not questioned by any of the parties to

the proceeding, the Constitutional Court verified the constitutional

conformity of the legislative process only formally, using publicly

available sources (),

and found that all the prescribed procedures were observed during the

adoption of the contested legal regulation. Regarding the conduct of the

legislative process, one can refer in full to the recapitulation

provided by the parties to the proceeding (points 9 and 10 of this

judgment).


 

VI. The Constitutional Court’s Legal Review

 

16.

The provision of § 399 par. 2 of the Insolvency Act imposes on a debtor

for whom debt discharge has been permitted, an obligation to take part

in a creditors’ meeting and answer their questions; in the event of the

debtor’s unexplained absence, the statute imposes a penalty in the form

of the fiction of withdrawal of the petition, and the resulting effects.

As a result of applying this fiction, the debtor loses the opportunity

of resolving his insolvency through debt discharge, and bankruptcy

proceedings are opened against him (§ 396 par. 1 of the Insolvency Act).

The insolvency court takes cognizance of the withdrawal of the petition

by a resolution (§ 394 par. 2 of the Insolvency Act).

 

17.

The Constitutional Court has already considered the complex of

provisions regulating the consequences of a debtor who has been

permitted debt discharge missing the creditors’ meeting, in judgment

file no. Pl. ÚS 42/08, published as no. 163/2009 Coll., in which it

annulled § 394 paragraph 2, the part of the sentence after the

semi-colon, of the Insolvency Act, which ruled out an appeal against a

decision in which a court took cognizance of withdrawal of a petition.

In the cited judgment, the Constitutional Court stated that, in terms of

preserving the insolvency debtor’s right to a fair trial, it appears

necessary that a remedy exist against a court decision issued on the

basis of the fiction of withdrawal of a petition under § 399 par. 2 of

the Insolvency Act, both for purposes of correcting obvious errors that

may appear in the court’s actions (e.g., the debtor’s explanation is

filed in a different file), and because the effects of the fiction may

arise as a result of the insolvency court’s evaluative judgment (if the

insolvency court does not find the explanation to be justified).

 

18.

At the same time, the Constitutional Court critiqued the construction

of the legal fiction contained in § 399 par. 2 of the Insolvency Act:

“The civil proceeding rests, among other things, on two fundamental

principles – the dispositive principle, and the adversarial principle.

The close relationship between substantive private law and public civil

procedure law is best expressed through the dispositive principle. The

meaning and purpose of civil procedure law is to protect subjective

private rights, i.e. public civil procedure law serves private

substantive law, and if it does not fulfill that role, it loses its

meaning. The functional connections between private substantive love,

which is based on the autonomous will of parties to private law

relationships, and public civil procedure law and reflected in

procedural law primarily through the dispositive principle, which

governs civil trials. The dispositive principle is a specific reflection

of private law autonomous will in the area of a civil trial. The

parties have the right, in accordance with the dispositive principle, to

freely handle both the proceeding and the subject matter of the

proceeding. Procedural rights, which are derived from the dispositive

principle, are reserved exclusively to the bearers of these rights

through dispositive procedural acts; it follows from the nature of these

dispositive procedural acts that they cannot be the subject of a legal

fiction, i.e. it cannot be specified that someone withdrew a petition

even though he did not do so. The legal construction of the fiction of

withdrawal of a petition for debt discharge is inconsistent with the

nature of a civil trial, which applies not only to an adversarial civil

trial, but to any kind of civil court proceeding, i.e. including an

insolvency proceeding. A dispositive legal act cannot be the content of a

legal fiction without violating the dispositive principle on which the

civil trial is built, and ultimately also violating the principle of

autonomous will. As the Constitutional Court stated, e.g. in judgment

file no. I. ÚS 167/04, of 12 May 2004 (N 70/33 SbNU 197), autonomy of

will and free individual action is guaranteed at the constitutional

level by Art. 2 par. 3 of the Charter of Fundamental Rights and

Freedoms. Art. 2 par. 3 of the Charter must be understood in two senses.

Its first dimension represents a structural principle, under which

state power can be exercised vis-à-vis the individual and his autonomous

sphere (including autonomous volitional expression) only in situations

where the individual’s conduct violates an expressly formulated

prohibition provided by law. However, such a prohibition must also

reflect only the requirement consisting of preventing the individual

from interfering in the rights of third parties, and in promoting the

public interest, if it is legitimate and proportional to such limitation

of the individual’s autonomous behavior. This principle must be

understood as an essential requirement of every democratic state

governed by the rule of law (Art. 1 par. 1 of the Constitution of the

Czech Republic). Art. 2 par. 4 of the Constitution has a similar

content. In its second dimension, Art. 2 par. 3 of the Charter functions

as an individual’s subjective right to have the state power respect the

autonomous expression of his personality, including volitional

expression that is reflected in his specific behavior, provided such

behavior is not expressly forbidden by law. Art. 2 par. 3 of the

Charter, in its second dimension, where it functions as an individual’s

fundamental right, must be applied directly. This dimension does not

mean mere that it radiates into ordinary law, but is a subjective right

that is in effect directly vis-à-vis the state power. Therefore, state

bodies are required, when applying ordinary law, to interpret the norms

of that right, which reflect Art. 2 par. 3 of the Charter and Art. 2

par. 4 of the Constitution as an objective constitutional principle, so

as not to interfere in the individuals’ subjective right to autonomy of

the will, which is also guaranteed by Art. 2 par. 3 of the Charter in

its second dimension.’. The obligation to respect the autonomy of the

will applies not only to the bodies that interpret and apply the law,

but undoubtedly also for legislators. Therefore, on one hand the attempt

to speed up a proceeding is desirable, but on the other hand it cannot

take such a form that, by replacing a procedural act by a party it

actually takes away his possibility to act freely. Therefore, mature

legal orders use, e.g. the institution of presumptions only when

determining the factual state of affairs, i.e. in clarifying and

determining the decisive factual circumstances. Thus, institutions that

accelerate the process (e.g. a default judgment or preclusive deadlines)

are used only in an area to which the adversarial principle applies,

and it is not possible, in the interests of speeding up the proceeding,

to use these means for disposition of the proceeding and the subject

matter of the proceeding. It is not a function of a legal fiction to

make certain decisive facts more probable, all the more so a fiction

cannot apply to a party’s fundamental right to disposition of the

proceeding and the subject matter of the proceeding (further, see Macur,

J. Rozsudek na základě fikce uznání nároku podle ustanovení § 114b o.

s. ř. [Decision on the Basis of the Fiction of Recognizing a Claim under

§ 114b of the Civil Procedure Code] Bulletin Advokacie, no. 2/2002, pp.

28–36).” (point 20 of Constitutional Court judgment file no. Pl. ÚS

42/08).

 

19.

The Constitutional Court also emphasized that the fiction of withdrawal

of a petition for debt discharge is unacceptable from a constitutional

law viewpoint even more so because it is not a mere procedural act

whereby the party acts for disposition of the proceeding, but it has

fundamental substantive law consequences for debtor and creditor (the

subsequent opening of bankruptcy proceedings). It was only the

petitioner’s lack of active standing in the proceeding under file no.

Pl. ÚS 42/08 that prevented the Constitutional Court from then canceling

the now contested part of § 399 par. 2 of the Insolvency Act (cf. point

22 of the cited judgment).

 

20.

The Constitutional Court had no reason to diverge from the

abovementioned conclusions; therefore, it stated that § 399, paragraph

2, the part of the second sentence after the semi-colon of the

Insolvency Act, whereby the fiction of withdrawal of a petition for debt

discharge denies a party to a bankruptcy proceeding the possibility of

disposition of the proceeding, is inconsistent with Art. 2 par. 3 of the

Charter and Art. 2 par. 4 of the Constitution of the Czech Republic, as

well as with Art. 36 par. 1 of the Charter, wherefore it ruled, under §

70 par. 1 of the Act on the Constitutional Court, that this provision

is annulled as of the day this judgment is promulgated in the Collection

of Laws.