Constitutional Court
18 April 1996
Facts
The case was initiated by the Lithuanian Court of Appeals, which asked the Court to examine whether the provisions of the Law on Commercial Banks comply with the Constitution.
Complaint
The request was based on the fact that the contested provisions of the Law empowered the central bank - the Bank of Lithuania - to suspend the powers of the bank's board, to remove the bank's board of directors, the chief executive officer, and to appoint an interim administrator of the bank, which means in practice that a state institution - the Bank of Lithuania - takes over the assets of a commercial bank and manages them. The bank's shareholders lose the ability to manage and use their assets. Private property rights and the freedom and initiative of the individual to engage in economic activity are curtailed.
Court’s ruling
The Court noted that the legal regulation of property relations is characterised by differentiation, which is determined by the intensification of economic life, the accumulation of capital and other factors.
Guarantees of the protection of shareholders' property rights in shares and the bank's property rights in its assets are enshrined in the Constitution. The protection of property rights may be regulated differently by law, depending on the different position of the subjects in the pursuit of defined objectives. The activities of a bank as an economic entity are of an exceptional nature. A bank is an undertaking operating based on share capital, which is engaged in the business of accepting deposits and other repayable funds and/or granting loans and bearing the risks and liabilities associated therewith, as well as in other activities provided for in the law. Thus, the financial basis of the bank's business activities is twofold: share capital and borrowed funds. It should be noted that borrowed funds usually exceed the share capital by a considerable margin. Since the essence of banking activities is the relending of borrowed money, it is important to ensure that the bank's obligations to its creditors are balanced with the obligations of the bank's debtors to the bank.
The law provided for the possibility of imposing sanctions on a bank in connection with violations committed by the bank's management bodies and non-compliance with the requirements imposed on economic activity. At the same time, the main purpose of the measure provided for in the law - suspension of the activities of the bank's management bodies - is preventive: in the event of a threat to the sound and stable operation of the bank, the aim is to protect the interests of depositors, to ensure the security, safety, soundness and stability of the bank and the banking system. It also aims at preserving the bank's assets and improving its performance.
When a bank becomes insolvent, i.e. when its own assets are less than it needs to settle its liabilities, the property rights of depositors and other creditors are violated. Since insolvency essentially means the loss of ownership of the bank, the property rights of shareholders are also affected. According to the law, if the Bank of Lithuania concludes that a commercial bank is insolvent, both parties have the right to apply to the court independently for the opening of insolvency proceedings against the bank to protect their violated rights. The Bank of Lithuania, which is entrusted by law with the task of ensuring the sound functioning of the money market, credit and settlement system, also has the right to file a petition with the court on the insolvency of a bank.
The court must open insolvency proceedings against a bank if the interested party's petition meets the general requirements of the Code of Civil Procedure and the additional conditions laid down by law. Accordingly, the opening of bank insolvency proceedings is subject to the fulfilment of the relevant procedural requirements under that law. This cannot be regarded as a violation of the principle of the independence of the judge and the judiciary.