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On the payment of financial liabilities after the institution of bankruptcy proceedings by a court

Case No. 30/99

 

 

THE CONSTITUTIONAL COURT OF

THE REPUBLIC OF LITHUANIA

 

R U L I N G

 

On the compliance of Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by the 20 April 1993 resolution (No. 276) of the Government of the Republic of Lithuania with the Constitution of the Republic of Lithuania and Item 2 of Paragraph 7 of Article 6 of the Republic of Lithuania’s Law on Enterprise Bankruptcy of 15 September 1992 (together with the amendments and supplements of 19 May 1994)

 

Vilnius, 26 April 2001

 

The Constitutional Court of the Republic of Lithuania, composed of the Justices of the Constitutional Court: Egidijus Jarašiūnas, Egidijus Kūris, Zigmas Levickis, Augustinas Normantas, Vladas Pavilonis, Jonas Prapiestis, Vytautas Sinkevičius, Stasys Stačiokas, and Teodora Staugaitienė

The court reporter—Daiva Pitrėnaitė

Vitas Vasiliauskas, Director of Tax Department of the Ministry of Finance of the Republic of Lithuania, acting as the representative 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, on 18 April 2001, in its public hearing, considered case No. 30/99 subsequent to the petition submitted to the Constitutional Court by the Higher Administrative Court, the petitioner, requesting an investigation into the compliance of Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by the 20 April 1993 resolution (No. 276) of the Government of the Republic of Lithuania with Article 5, Item 2 of Article 67, Item 2 of Article 94 and Paragraph 3 of Article 127 of the Constitution of the Republic of Lithuania and Paragraph 7 of Article 6 of the Republic of Lithuania’s Law on Enterprise Bankruptcy.

The Constitutional Court

has established:

I

The petitioner—the Higher Administrative Court—was considering an administrative case. The said court suspended the consideration of the case and applied to the Constitutional Court requesting an investigation into the compliance of Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure (Official Gazette Valstybės žinios, 1993, No. 14-365; hereinafter also referred to as the Procedure) as approved by the 20 April 1993 resolution (No. 276) of the Government of the Republic of Lithuania with Article 5, Item 2 of Article 67, Item 2 of Article 94 and Paragraph 3 of Article 127 of the Constitution of the Republic of Lithuania and Paragraph 7 of Article 6 of the Republic of Lithuania’s Law on Enterprise Bankruptcy of 15 September 1992 (together with the amendments and supplements of 19 May 1994) (hereinafter also referred to as the Law).

II

The petition of the petitioner is based on these arguments.

Item 2 of Paragraph 7 of Article 6 of the Law provides that in the event that bankruptcy proceedings are instituted by court, the payment of all financial liabilities, including interest and taxes, as well as their exaction by suing for claims or without suit shall be prohibited; the distribution or other allocation of the assets of the enterprise without a special court order shall also be prohibited, with the exception of current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case.

Item 1 of the Procedure provides that in cases when the enterprise continues its economic activity after the institution of bankruptcy proceedings it must fulfil all current payments linked with the said activity.

In the opinion of the petitioner, there is a conflict between these legal norms. The notion “current payments which are necessary for the enterprise to continue the process of its activities” is in essence narrower than “current payments linked with its economic activity”. The petitioner maintains that the fine for overdue taxes arising out of the enterprise activities after the institution of bankruptcy proceedings are current payments linked with activities of the enterprise, however, they are not current payments which are necessary for the enterprise to continue the process of its activities.

In the opinion of the petitioner, by its resolution the Government extended the extent of the payments which are necessary for a bankrupt enterprise, therefore, there are the grounds to presume that Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 conflicts with Article 5, Item 2 of Article 67, Item 2 of Article 94 and Paragraph 3 of Article 127 of the Constitution as well as Paragraph 7 of Article 6 of the Law on Enterprise Bankruptcy.

III

In the course of the preparation of the case for the Constitutional Court hearing, a written explanation was received from the representative of the party concerned—the Government—V. Latvienė who then was Vice-Minister of Finance.

In the opinion of the representative of the party concerned, Item 2 of Paragraph 7 of Article 6 of the Law regulates payment of tax arrears which are a type of financial liabilities. One distinguishes two categories of tax arrears: first, tax arrears that occur prior to the institution of bankruptcy proceedings (under the Law on Enterprise Bankruptcy, the payment of all financial liabilities, including taxes, as well as their exaction, shall be prohibited); second, tax arrears that occur after the institution of bankruptcy proceedings (the Law singles out current payments which are necessary for the enterprise to continue the process of its activities).

Item 2 of Paragraph 7 of Article 6 of the Law establishes the prohibition on exacting or paying tax arrears of the first category. This is understandable, as Article 29 of the Law provides for the sequence of and procedure for fulfilling creditors’ claims that occurred prior to the institution of bankruptcy proceedings, meanwhile, the legislature singles out current payments which are necessary for the enterprise to continue the process of its activities. The aforementioned prohibition is not applied to the said payments, as they belong to the second category of tax arrears.

The representative of the party concerned maintains that taxes are a necessary condition of the activity of any enterprise (including a bankrupt one). Taxes are inseparable from the activity of an enterprise: it is an objectively existing consequence of any activity. If after the institution of bankruptcy proceedings the enterprise continues its activities, it must pay all the taxes to be paid connected with this activity. This is best shown by income tax of natural persons which is an element of the salary paid to the employees of the enterprise. The enterprise, on the basis of the Provisional Law on Income Tax of Natural Persons must, by paying salaries, deduct this tax from the employees’ salaries and transfer it into the budget. These statements are also indirectly confirmed by the Enterprise Bankruptcy Law of 17 June 1997 wherein the legislature clearly establishes that the enterprise engaged in business activity must pay all the taxes connected thereto (Item 4 of Paragraph 6 of Article 14). Thus, the notion “current payments which are necessary for the enterprise to continue the process of its activities” encompasses all the taxes which are to be paid after the institution of bankruptcy proceedings.

In the opinion of the representative of the party concerned, another important aspect is that the notion “current payments which are necessary for the enterprise to continue the process of its activities” includes the fines calculated for not paid taxes or taxes paid overdue after the institution of bankruptcy proceedings. Fines, according to their nature, are a sanction for improper fulfilment or not fulfilment of a liability(in this case, non-payment of taxes or their payment overdue), therefore, they are not necessary for the enterprise to continue its activity. Taking account of this, it is possible to assert that the notion “current payments which are necessary for the enterprise to continue the process of its activities” does not include the fines linked with the taxes which are to be paid but which in fact are not paid or paid overdue.

The representative of the party concerned maintains that Item 1 of the Procedure covers only the taxes to be paid after the institution of bankruptcy proceedings, therefore, it is in compliance with Article 5, Item 2 of Article 67, Item 2 of Article 94 and Paragraph 3 of Article 127 of the Constitution as well as Item 2 of Paragraph 7 of Article 6 of the Law.

IV

In the course of the preparation of the case for the court proceedings, written explanations were received from K. Glaveckas, Chairperson of Seimas Budget and Finance Committee, G. Rainys, Vice-Minister of Economy, Director of the Enterprise Bankruptcy Management Department under the Ministry of Economy of the Republic of Lithuania, D. Bublienė, Acting Director of the Law Department of the Ministry of Justice of the Republic of Lithuania, M. Strumskis, Head of the State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania, and S. V. Jurna, Chairperson of the board of the joint-stock company “Turto bankas”.

V

At the Constitutional Court hearing, the representative of the party concerned—the Government—V. Vasiliauskas, Director of the Tax Department of the Ministry of Finance, noted that if the notions employed in the Law and the Procedure are construed by linguistic way only, it is evident that these notions are different. The notion “current payments which are necessary for the enterprise to continue the process of its activities” employed in the Law does not include, differently from the notion “current payments linked with its economic activity”, certain payments, e.g. fines. Alongside, the representative of the party concerned pointed out that, while one takes account of the intention of the legislature, the said notions are identical with respect to taxes. Therefore, in his opinion, Item 1 of the Procedure is in compliance with Paragraph 7 of Article 6 of the Law on Enterprise Bankruptcy of 15 September 1992.

The Constitutional Court

holds that;

I

On the compliance of Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 with Item 2 of Paragraph 7 of Article 6 of the Law on Enterprise Bankruptcy.

1. Item 1 of the Procedure provides: “After the court has adopted a ruling to institute enterprise bankruptcy proceedings or the meeting of creditors has adopted a decision to carry out extrajudicial bankruptcy proceedings, the debtor enterprise shall have the right to continue its economic activity and must fulfil current payments linked with the said activity.”

The petitioner doubts if Item 1 of the Procedure is in conformity with Paragraph 7 of Article 6 of the Law.

1.1. It needs to be noted that although the petitioner requests an investigation into the compliance of Item 1 of the Procedure with Paragraph 7 of Article 6 of the Law, however, the reasoning is presented in its petition concerning the conflict of Item 1 of the Procedure with not whole Paragraph 7 of Article 6 of the Law but only its Item 2 of Paragraph 7 of Article 6.

1.2. On 15 September 1992, the Law on Enterprise Bankruptcy (Official Gazette Valstybės žinios, 1992, No. 29 (1)-843) was passed. Item 2 of Paragraph 6 of Article 6 of the said law provided that in the event that bankruptcy proceedings are instituted by court, the payment of all financial liabilities, including interest and taxes, as well as their exaction by suing for claims or without suit shall be prohibited; the distribution or other allocation of the assets of the enterprise without a special court order shall also be prohibited, with the exception of current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case. On 19 May 1994, the Law “On Amending and Supplementing the Republic of Lithuania’s Law on Enterprise Bankruptcy” (Official Gazette Valstybės žinios, 1994, No. 43-774) was adopted Part 3 whereof provided that Article 6 of the Law on Enterprise Bankruptcy shall be supplemented with Paragraph 4, while the former Paragraph 6 shall be considered Paragraph 7.

On 17 June 1997, the Seimas passed a new Enterprise Bankruptcy Law (Official Gazette Valstybės žinios, 1997, No. 64-1500) which went into effect on 1 October 1997. Paragraph 2 of Article 43 of the said law provides that the Law on Enterprise Bankruptcy shall be effective and regulate bankruptcy procedures only in respect of the enterprise against which bankruptcy proceedings have been instituted or extrajudicial bankruptcy process has been commenced prior to the entry into force of this Law.

On 20 March 2001 a new Enterprise Bankruptcy Law (Official Gazette Valstybės žinios, 2001, No. 31-1010) was passed Article 37 whereof provides that the said law shall be effective as of 1 July 2001.

The petitioner requests an investigation into the compliance of Item 1 of the Procedure with Item 2 of Paragraph 7 of Article 6 of the Law on Enterprise Bankruptcy of 15 September 1992 (together with the amendments and supplements of 19 May 1994).

1.3. Subsequent to the petition of the petitioner, the Constitutional Court will investigate whether Item 1 of the Procedure is in compliance with Item 2 of Paragraph 7 of Article 6 of the Law on Enterprise Bankruptcy of 15 September 1992 (together with the amendments and supplements of 19 May 1994).

2. In its rulings, the Constitutional Court has held that a government legal act is a substatutory legal act, that it may not conflict with a law, nor change the content of norms of the law, that it may contain no legal norms which would compete with those of the law (the Constitutional Court’s rulings of 19 January 1994,16 March 1994, 15 July 1994, 26 October 1995, 29 May 1997, 3 December 1997, 6 May 1998, 15 March 2000, and 5 April 2000).

3. When one compares the content of the norms established in Item 2 of Paragraph 7 of Article 6 of the Law and Item 1 of the Procedure, it should be emphasised that under Item 2 of Paragraph 7 of Article 6 of the Law, the enterprise against which bankruptcy proceedings are instituted by court is permitted to fulfil only the current payments which are “necessary for the enterprise to continue the process of its activities during the consideration of the case”, while under Item 1 of the Procedure, the debtor enterprise which continues its economic activity after the court has adopted a ruling to institute enterprise bankruptcy proceedings must fulfil “current payments linked with the said activity”.

The notion “current payments linked with the said activity” as employed in Item 1 of the Procedure includes not only “current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case” pointed out in Item 2 of Paragraph 7 of Article 6 of the Law but also other payments linked with the economic activity of the enterprise. Thus, the notion “current payments linked with the said activity” as employed in Item 1 of the Procedure is wider than the notion “current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case” established in Item 2 of Paragraph 7 of Article 6 of the Law. Thus, Item 1 of the Procedure establishes a greater extent of current payments which the bankrupt enterprise must fulfil than that provided for by the Law.

4. On the grounds of the arguments set forth, it should be concluded that Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 to the extent that it provides that after the court has adopted a ruling to institute enterprise bankruptcy proceedings, the debtor enterprise must not only fulfil current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case but also fulfil other current payments linked with the economic activity of the enterprise conflicts with Item 2 of Paragraph 7 of Article 6 of the Law on Enterprise Bankruptcy of 15 September 1992 (together with the amendments and supplements of 19 May 1994).

II

On the compliance of Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 with Item 2 of Article 94 of the Constitution.

1. The petitioner doubts if Item 1 of the Procedure is in compliance with Item 2 of Article 94 of the Constitution.

2. Item 2 of Article 94 of the Constitution provides that the Government shall implement laws and resolutions of the Seimas concerning the implementation of laws, as well as the decrees of the President of the Republic.

3. It has been held in this Ruling that Item 1 of the Procedure to the extent that it provides that after the court has adopted a ruling to institute enterprise bankruptcy proceedings, the debtor enterprise must not only fulfil current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case but also fulfil other current payments linked with the economic activity of the enterprise expanded the extent of the current payments, established in Item 2 of Paragraph 7 of Article 6 of the Law on Enterprise Bankruptcy of 15 September 1992, which the bankrupt enterprise must fulfil. The Government, establishing in Item 1 of the Procedure a greater extent of payments which the bankrupt enterprise must fulfil than that provided for by the Law, overstepped its constitutional powers.

4. On the grounds of the arguments set forth, it should be concluded that Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 to the extent that it provides that after the court has adopted a ruling to institute enterprise bankruptcy proceedings, the debtor enterprise must not only fulfil current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case but also fulfil other current payments linked with the economic activity of the enterprise conflicts with Item 2 of Article 94 of the Constitution.

III

On the compliance of Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 with Article 5 of the Constitution.

1. The petitioner doubts if Item 1 of the Procedure is in compliance with Article 5 of the Constitution.

2. Article 5 of the Constitution provides:

In Lithuania, the powers of the State shall be exercised by the Seimas, the President of the Republic and the Government, and the Judiciary.

The scope of powers shall be defined by the Constitution.

State institutions shall serve the people.”

It is clear from the reasoning set down in the petition that the petitioner assumes that Item 1 of the Procedure conflicts with the principle of the separation of powers entrenched in Article 5 of the Constitution.

It needs to be noted that the constitutional principle of the separation of powers is established not only in Article 5 of the Constitution, but also other articles of the Constitution that is an integral act. Under this principle, the legislative, executive and judicial powers must be separated, sufficiently independent, but there must also be a balance among them. The competence corresponding to its purpose is assigned to every state institution. The concrete content of the competence of an institution depends on the place of the institution among other state institutions as well as the relation of its powers with those of other institutions. After the powers of a concrete state institution have been established in the Constitution, no other state institution may take over, transfer or waive such powers. Such powers may neither be changed nor limited by law (the Constitutional Court’s rulings of 19 January 1994, 26 October 1995, 6 December 1995, 29 May 1997, 10 January 1998, 21 April 1998, 20 April 1999, 3 June 1999, 9 July 1999, 23 November 1999, 21 December 1999, 10 February 2000, 18 October 2000, and 6 December 2000).

3. It has been held in this Ruling that Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 to the extent that it provides that after the court has adopted a ruling to institute enterprise bankruptcy proceedings, the debtor enterprise must not only fulfil current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case but also fulfil other current payments linked with the economic activity of the enterprise conflicts with Item 2 of Article 94 of the Constitution and that the Government, establishing in Item 1 of the Procedure a greater extent of payments which the bankrupt enterprise must fulfil than that provided for by the Law, overstepped its constitutional powers. Alongside, Paragraph 2 of Article 5 of the Constitution, wherein it is established that the scope of powers shall be defined by the Constitution, as well as the constitutional principle of the separation of powers was violated.

4. On the grounds of the arguments set forth, it should be concluded that Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 to the extent that it provides that after the court has adopted a ruling to institute enterprise bankruptcy proceedings, the debtor enterprise must not only fulfil current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case but also fulfil other current payments linked with the economic activity of the enterprise conflicts with Article 5 of the Constitution.

IV

On the compliance of Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 with Paragraph 3 of Article 127 and Item 2 of Article 67 of the Constitution.

1. The petitioner doubts if Item 1 of the Procedure is in compliance with Paragraph 3 of Article 127 and Item 2 of Article 67 of the Constitution.

Paragraph 3 of Article 127 of the Constitution provides: “Taxes, other budgetary payments, and dues shall be established by means of laws of the Republic of Lithuania.”

This constitutional provision consolidates both the prerogative of the Seimas to establish taxes and the form of a legal act by which taxes are established: they may be established by the Seimas and by law only.

As mentioned before, Item 1 of the Procedure provides as to what current payments the debtor enterprise must fulfil after the court has instituted bankruptcy proceedings. It needs to be noted that Item 1 of the Procedure does not establish any new taxes, nor any other budgetary payments nor dues.

On the grounds of the arguments set forth, it should be concluded that Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 is in compliance with Paragraph 3 of Article 127 of the Constitution.

2. Item 2 of Article 67 of the Constitution provides that the Seimas shall enact laws.

Item 1 of the Procedure does not contain any legal norms that would deny or restrict the powers of the Seimas to enact laws.

Taking account of this, it should be concluded that Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by government resolution No. 276 of 20 April 1993 is in compliance with Item 2 of Article 67 of the Constitution.

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 Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by the 20 April 1993 resolution (No. 276) of the Government of the Republic of Lithuania to the extent that it provides that after the court has adopted a ruling to institute enterprise bankruptcy proceedings, the debtor enterprise must not only fulfil current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case but also fulfil other current payments linked with the economic activity of the enterprise conflicts with Article 5 and Item 2 of Article 94 of the Constitution of the Republic of Lithuania.

2. To recognise that Item 1 of the Procedure of Payment of Financial Liabilities by Enterprises during the Enterprise Bankruptcy Procedure as approved by the 20 April 1993 resolution (No. 276) of the Government of the Republic of Lithuania to the extent that it provides that after the court has adopted a ruling to institute enterprise bankruptcy proceedings, the debtor enterprise must not only fulfil current payments which are necessary for the enterprise to continue the process of its activities during the consideration of the case but also fulfil other current payments linked with the economic activity of the enterprise conflicts with Item 2 of Paragraph 7 of Article 6 of the Republic of Lithuania’s Law on Enterprise Bankruptcy of 15 September 1992 (together with the amendments and supplements of 19 May 1994).

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     Egidijus Kūris     Zigmas Levickis

 

Augustinas Normantas      Vladas Pavilonis      Jonas Prapiestis

 

Vytautas Sinkevičius      Stasys Stačiokas     Teodora Staugaitienė