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On a special auction of government securities

Case No. 1/97

 

 

THE CONSTITUTIONAL COURT OF

THE REPUBLIC OF LITHUANIA

 

R U L I N G

 

On the compliance of the Resolution of the Government of the Republic of Lithuania (No. 1169-22) “On the Special Auction of Government Securities” of 31 August 1995 with the Constitution of the Republic of Lithuania, Paragraph 2 of Article 1 of the Republic of Lithuania’s Law on State Treasury, Item 5 of Article 21 of the Law on the Government of the Republic of Lithuania, as well as Article 4 of the Republic of Lithuania’s Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies”

 

17 June 1997, Vilnius

 

The Constitutional Court of the Republic of Lithuania, composed of the Justices of the Constitutional Court: Egidijus Jarašiūnas, Kęstutis Lapinskas, Zigmas Levickis, Augustinas Normantas, Vladas Pavilonis, Jonas Prapiestis, Pranas Vytautas Rasimavičius, Teodora Staugaitienė, and Juozas Žilys

The court reporter—Daiva Pitrėnaitė

Vytenis Gudelis, a state consultant, and Robertas Martinkus, a state consultant and adviser to the Prime Minister, both acting as the representatives of the Government of the Republic of Lithuania, the party concerned

The Constitutional Court of the Republic of Lithuania, pursuant to Paragraph 1 of Article 102 of the Constitution of the Republic of Lithuania and Paragraph 1 of Article 1 of the Law on the Constitutional Court of the Republic of Lithuania, in its public hearing, on 4 June 1997, considered case No. 1/97 subsequent to the petition submitted to the Court by a group of the members of the Seimas of the Republic of Lithuania, the petitioner, requesting an investigation into whether the Resolution of the Government of the Republic of Lithuania (No. 1169-22) “On the Special Auction of Government Securities” of 31 August 1995 was in compliance with the Constitution of the Republic of Lithuania, Paragraph 2 of Article 1 of the Republic of Lithuania’s Law on State Treasury, Item 5 of Article 21 of the Law on the Government of the Republic of Lithuania, as well as Article 4 of the Republic of Lithuania’s Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies”.

The Constitutional Court

has established:

I

On 31 August 1995, the Government adopted Resolution No. 1169-22 “On the Special Auction of Government Securities” (the said resolution was classified, it has not been published in the official gazette “Valstybės žinios”, it was declassified by the decision of the 19 March 1997 government sitting, government sitting protocol No. 12, Item 26). The content of the resolution in question is as follows:

In an attempt to render support for the Vakarų Bankas and the Aurabankas in solving their temporary liquidity problems, the Government of the Republic of Lithuania shall resolve:

1. On 1 September 1995, to organise a close auction of short-term loan bonds under the following parameters of the issue:

1.1. the number if the issue shall be 50062;

1.2. the maximum size of the issue shall be 50 million litas;

1.3. the term of the bonds shall be 63 days;

1.4. the nominal value of one bond shall be 100 litas;

1.5. the payment day for the purchased bonds shall be 1 September 1995;

1.6. the day of the repurchase of the bonds shall be 3 November 1996;

1.7. the uppermost margin of annual interest under which claims must be satisfied shall be 26 per cent.

2. The Ministry of Finance must deposit up to 30 million litas received for the sold government bonds with the Vakarų Bankas on the condition that the latter shall guarantee the returning of the deposit with its building which is at the address: Gynėjų St 14, Vilnius, while the remaining portion of the funds received for the sold government bonds must be deposited with the Aurabankas. The funds shall be deposited with the said banks for the term not exceeding 4 months, receiving no less than 27 per cent of annual interest.”

The petitioner requests an investigation into whether this government resolution is in compliance with Paragraphs 1 and 2 of Article 128 of the Constitution, Paragraph 2 of Article 1 of the Law on State Treasury, Item 5 of Article 21 of the Law on the Government, as well as Article 4 of the Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies”.

II

The petitioner grounds his request on the following arguments.

According to Paragraph 1 of Article 128 of the Constitution, decisions concerning state loans and other basic property liabilities of the state shall be adopted by the Seimas on the recommendation of the Government. Paragraph 2 of Article 128 of the Constitution provides that procedures concerning the management, utilisation, and disposal of state property shall be established by law. Item 5 of Article 25 of the Law on the Government consolidates the provision that the Government shall hold, use and dispose of the state property according to the procedures and situations established by law. Paragraph 2 of Article 1 of the Law on State Treasury provides that the money resources which are disposed of by the Government may only be used for financing the needs established by law. Article 4 of the Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies” granted the right to the Government to take loans only for financing the 1995 state budget deficit.

The petitioner alleges that at the time when the Government adopted the aforesaid resolution, the Constitution and aforementioned laws had not granted the right to the Government to adopt the decisions set forth in the resolution, therefore, in the opinion of the petitioner, there exist the grounds for maintaining that the Government exceeded its competence and that its Resolution (No. 1169-22) “On the Special Auction of Government Securities” of 31 August 1995 contradicts the Constitutions and the laws.

In the course of the preparation of the case for the court hearing, the representative of the petitioner J. Razma noted in writing that, on 31 August 1995, the Government adopted the resolution on a state loan regardless of the proposals of the Budget and Finance Committee of the Seimas set forth in paper No. 109-14-201 of 19 June 1995 for the Government to prepare and submit draft legal acts to the Seimas for deliberation wherein the establishment of the size of state internal and foreign debts, as well as their legalisation, coping with and other questions linked with basic property liabilities of the state were regulated. The Government neither took account of these recommendations, nor did it move that the Seimas adopt a decision concerning the 50 million litas state loan.

III

In the course of the preparation of the case for the court hearing, R. Martinkus and V. Gudelis, the representatives of the Government, party concerned, noted in their explanations that, in their opinion, the most important fact is that the Government of 1995, under the cover of the laws then in force, as well as ostensible necessity to strengthen commercial banks, in fact covered embezzlements of certain private persons which had been made in the commercials banks Aurabankas and Vakarų Bankas which were indicated in the impugned government resolution. This was confirmed by subsequent events: the funds allotted for the said banks by the Government and officially registered as deposits were dispensed, while the deposits themselves were not returned. They are of the opinion that, in adopting the impugned resolution and assessing the actual condition of the said banks, it was practically impossible for the Government not to foresee such a destiny of the deposits. Another aspect of this problem is the fact that state funds were embezzled in an attempt to make use of the then valid laws and other legal acts as a cover.

The representatives of the Government called one’s attention to the fact that on the day of the adoption of the impugned resolution the state held shares for only 39, 000 Lt in the Vakarų Bankas and not a single share in the Aurabankas. The deposit put with the Aurabankas was capitalised, i.e., it was converted into the shares of the stock company Turto Bankas which was undergoing the founding procedure.

During the process of the judicial investigation the representatives of the party concerned explained that the Law on Approving the State Budget of 1995 allowed the Government to take a loan for financing the state budget deficit. The wording of the impugned government resolution to organise a targeted issue of government loan bonds in an attempt to render support to commercial banks is not a correct one. One might say that it is for this that the said government resolution contradicts the aforesaid law. The representatives of the party concerned noted that the money received during the auction, after they had been in the deposits of the commercial banks, were allowed to be used for financing the state budget deficit, therefore, in their opinion, the government resolution must have consisted of 2 parts: the first—on the issue of government loan bonds for the purpose of financing the budget deficit, the second—on the right to deposit the received money in the banks providing the shortage of the budget does not arise.

The representatives of the party concerned also noted that the deposit of state funds with a bank is in itself not its financing. By placing the deposits, the Government was formally not financing the Vakarų Bankas and Aurabankas, however, in reality the matters happened to be different. Both aforesaid banks had negative capital, as well as big debts, therefore, when the impugned government resolution was being adopted, it was evident that the deposits would not return. The Government is entitled to and must strengthen banks, however, it must do so only in pursuance of laws. In the case at issue the state funds had not been used rationally. There were a number of violations in implementing the said government resolution. The state has incurred losses due to the impugned government resolution.

In the opinion of the party concerned, the Government adopted a classified resolution on support for commercial banks as it did not want to publicise the problems of banks to which the public was very sensitive.

The Constitutional Court

holds that:

1.1. The fundamentals of legal regulation of state revenues and state expenditure are consolidated in the Chapter of the Constitution entitled “Finances, the State Budget”. Paragraph 1 of Article 128 of this chapter stipulates: “Decisions concerning State loans and other basic property liabilities of the State shall be adopted by the Seimas on the recommendation of the Government.”

According to this norm of the Constitution, the Seimas establishes the size of the amount that must be lent for state investments or to finance certain needs by entitling the Government to adopt respective decisions; the Seimas, on the recommendation of the Government, has also the right to adopt a decision regarding extraordinary state loans or other basic property liabilities of the State. Thus, the norm of Paragraph 1 of Article 128 of the Constitution implies that the question of state loans or other basic property liabilities of the State must always be considered and decided on in the Seimas.

State loan is financial means (it may also be material values, services) received under the name of the state under loan agreements or other loan liabilities and which are returned in respective (internal or foreign) currency. One of the ways of the receiving of a state loan is the sale of government bonds with the obligation of their subsequent repurchase. The provision of the Government Resolution “On the Special Auction of Government Securities” of 31 August 1995 to organise, on 1 September 1995, an auction of short-term loan bonds is a decision on a state loan of 50 million litas.

The funds of a state loan are state revenue, while the covering of loans is expenditure of the state budget. Paragraph 1 of Article 131 of the Constitution consolidates an exclusive right of the Seimas in the sphere of the state budget: the Seimas shall approve by law the state budget, i.e., the size of state revenue and that of state expenditure. Regulation of the state budget is based on the principles of rational financial planning, those of balancing the entirety of public revenue and expenditure, and their qualitative and quantitative equalising. The financial control carried out by the Seimas helps to implement the aforesaid principles. Therefore, as a rule, decisions concerning state loans are adopted by law when the state budget is being approved. For instance, the Government was given the right by Article 4 of the Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies” to take loans for financing the deficit of the state budget of 1995 providing it did not exceed 419,359 thousand litas (when the budget was being implemented, this amount was increased).

1.2. The Government accomplishes executive power, its powers are defined by the Constitution and laws. In its activity the Government must proceed from the principles of democracy, lawfulness and openness (Article 4 of the Law on the Government). The lawfulness principle of the executive power requires that its activity should be based on law. This means that the Government must accomplish respective actions under the competence granted to it and to restrain from actions which are not allowed by legal norms.

Items 2 and 4 of Article 94 of the Constitution prescribe: the Government shall implement laws and execute the state budget. When the Government was implementing the Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies”, it was allowed to take a state loan only for the purpose provided for in the law—financing the deficit of the state budget. According to Article 13 of the Law on Budgeting, allocations from the state budget shall be made for the following national needs: education, culture, health care and sport; social welfare and social relief; science and technological progress; regulation of environmental protection and economic development; national defence; maintenance of state power, state government and law enforcement institutions; subsidies to municipal budgets; public order and protection of society; development of the Republic’s foreign relations; the expenses of coping with the state debt; increase of the working cash balance of the state budget; compensation of expenses for application of fare advantages for using public transport; implementation of other measures pursuant to the laws of the Republic of Lithuania.

Thus, it was possible to take a state loan in 1995 to finance either the state needs enumerated in the Law on Budgeting or other measures provided for in the laws in case there existed insufficiency of funds in the state budget.

1.3. The preamble of the impugned government resolution shows that “in an attempt to render support for the Vakarų Bankas and the Aurabankas in solving temporary liquidity problems”, the Government shall resolve to organise a 50 million value close auction of government loan bonds.

As it was mentioned, the Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies” entitled the Government to take a state loan for financing the state budget deficit only. Thus, it is only for this purpose that the organisation of the auctions of government securities was allowed. Meanwhile, taking account of the purpose of the auction of the issue of government loan bonds formulated in the preamble of the impugned government resolution, the conclusion should be drawn that this targeted state loan was not designated for the execution of the state budget. There did not exist at that time any other decision of the Seimas concerning a possibility of taking a targeted state loan to support commercial banks.

The Constitutional Court notes that a 50 million litas issue of government loan bonds is a basic property liability of the state to repurchase the bonds by paying interest. When this question was being decided, Paragraph 1 of Article 128 of the Constitution must have been followed. This means that the Government was allowed to adopt a decision concerning such an issue of securities provided there existed a respective decision of the Seimas.

The argument that the right of the Government to adopt independent decisions concerning state loan arises out of the Resolution of the Supreme Council of the Republic of Lithuania “On Commissioning the Government of the Republic of Lithuania with Decision of Certain Questions” of 6 October 1992 is not grounded. The said resolution commissioned the Government with “regulation by its decision the questions of <...> issue and turnover of securities”. This is a commissioning with an establishment of corresponding legal rules of issue of securities and their turnover. At the time of adoption of the impugned government resolution, the norm of the Constitution concerning the competence of the Government as regards the question of taking a state loan was already in force, therefore, its disregard or a too wide interpretation of the competence of the Government on the basis of a substatutory act would mean that the principle of the supremacy of the Constitution in the system of legal acts—a fundamental requirement for a democratic state—is disregarded.

In assessing the compliance of the impugned government resolution with Paragraph 1 of Article 128, one must also take into consideration the fact that there exist two important aspects of legal regulation in the content of the said constitutional norm. First of all, as it was already mentioned in this ruling of the Constitutional Court, an imperative requirement is consolidated in the constitutional norm that only the Seimas may adopt decisions concerning state loans and other basic property liabilities of the state. The Government has the right to initiate discussions on such issues at the Seimas. The second aspect which is of importance in the present case is the fact that deliberations upon state loans and other basic property liabilities of the state imply an open discussion. Meanwhile the Government did not appeal to the Seimas with a motion to decide the question of a targeted state loan designated for supporting commercial banks and, therefore, the Seimas did not consider this question. Such a decision of the Government was not in line with the principle of openness.

Thus, the investigation into the legal regulation which existed at the time of adoption of the impugned government resolution shows that the Government had no right to organise an auction of securities for any purpose but financing the state budget. The Government, by adopting a classified resolution to organise a close auction of government loan bonds designated for supporting commercial banks, overstepped the powers granted to it by the Constitution in the sphere of state loan taking and disregarded the purpose of taking a state loan which had been established in the Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies”.

Therefore, one should conclude that the impugned government resolution contradicts Paragraph 1 of Article 128 of the Constitution and Article 4 of the Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies”.

2.1. Paragraph 2 of Article 128 of the Constitution stipulates: “Procedures concerning the management, utilisation, and disposal of State property shall be established by law.”

The entirety of the rights of management, utilisation and disposal of property constitutes the content of the right to property. The said norm of the Constitution commissions the legislature to regulate state property relations by law.

The state property right is a type of public property right. The Chapter “The Public Property” of the Civil Code consolidates that the subject of the right to state property shall be the state (Article 97 of the Civil code), while the institutions of supreme state authority and governance shall manage, utilise and dispose of state property (Article 99 of the Civil Code).

The nature of state property as public property determines a respective limitation on the powers of the subjects who implement property rights of the state. Bearing in mind the fact that the state is a legal subject of the right to property of the state, while the economic owner of state property is society, in that case the right to property of the state must be accomplished in the general (public) interest. In this regard, an exclusive role falls upon the representative body of state authority—the Seimas—which establishes procedures concerning the management, utilisation, and disposal of state property by passing laws. The competence of the Government in this sphere is defined by law.

2.2. Item 5 of Article 21 of the Law on Government prescribes: the Government shall hold, use and dispose of the state property according to the procedures and situations established by law. This norm of a blanket character directs to the laws regulating corresponding relations of state property.

The petitioner points out that the impugned government resolution should be assessed bearing in mind the Law on State Treasury, too. In his opinion, the decision of the Government consolidated in the said resolution as regards the use of the borrowed funds which became state property contradicts the stipulation of Paragraph 2 of Article 1 of the Law on State Treasury which provides that the money resources which are disposed of by the Government may only be used for financing the needs established by law.

In assessing the impugned government resolution from this standpoint, the Constitutional Court notes that, as a rule, financing is understood as allocation of finances for no consideration. Meanwhile, the government resolution ordered the Ministry of Finance, which accomplishes the functions of state treasury, to deposit with the Vakarų Bankas up to 30 million litas received for selling government bonds on the condition that the latter shall guarantee the returning of the deposit with its building, while it was ordered to deposit the remaining portion of the funds with the Aurabankas. The said government resolution establishes that the funds shall be deposited with the said banks for the term not exceeding 4 months, receiving no less than 27 per cent of annual interest. According to the said government resolution, the uppermost margin of annual interest under which claims had to be satisfied constituted 26 per cent.

The depositing of state funds with a commercial bank is not the financing of that bank, i.e. the allocation of finances for no consideration. Therefore, the impugned government resolution should not be assessed on such grounds. There also exist no legal grounds for deciding the question of the compliance of the said government resolution with Paragraph 2 which is of a blanket character of Article 128 of the Constitution.

Taking account of these arguments one should conclude that the impugned government resolution is in compliance with Paragraph 2 of Article 1 of the Law on State Treasury, and Item 5 of Article 21 of the Law on the Government.

Conforming to Article 102 of the Constitution of the Republic of Lithuania and Articles 53, 54, 55 and 56 of the Law on the Constitutional Court of the Republic of Lithuania, the Constitutional Court of the Republic of Lithuania gives the following

ruling:

1. To recognise that the Resolution of the Government of the Republic of Lithuania (No. 1169-22) “On the Special Auction of Government Securities” of 31 August 1995 contradicts Paragraph 1 of Article 128 of the Constitution and Article 4 of the Republic of Lithuania’s Law “On Approving the 1995 State Budget of the Republic of Lithuania and the Specifications of Deductions into Budgets of Municipalities and Their Subsidies”.

2. To recognise that the Resolution of the Government of the Republic of Lithuania (No. 1169-22) “On the Special Auction of Government Securities” of 31 August 1995 is in compliance with Paragraph 2 of Article 1 of the Republic of Lithuania’s Law on State Treasury, and Item 5 of Article 21 of the Law on the Government of the Republic of Lithuania.

This ruling of the Constitutional Court is final and not subject to appeal.

The ruling is pronounced in the name of the Republic of Lithuania.

Justices of the Constitutional Court:

 

Egidijus Jarašiūnas     Kęstutis Lapinskas      Zigmas Levickis

 

Augustinas Normantas      Vladas Pavilonis     Jonas Prapiestis

 

Pranas Vytautas Rasimavičius      Teodora Staugaitienė      Juozas Žilys