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On opening bankruptcy proceedings against a natural person and writing off claims at the end of the bankruptcy process

The ruling of the Constitutional Court of the Republic of Lithuania of 19 May 2017

ON OPENING BANKRUPTCY PROCEEDINGS AGAINST A NATURAL PERSON AND WRITING OFF CLAIMS AT THE END OF THE BANKRUPTCY PROCESS

Summary

In this ruling, having examined the case subsequent to the petitions of the Supreme Court of Lithuania and the Joniškis District Local Court (Joniškio rajono apylinkės teismas), the Constitutional Court declared unconstitutional Paragraph 7 of Article 29 of the Law on Personal Bankruptcy (LPB) insofar as, at the end of the personal bankruptcy process, claims for compensation for damage inflicted by intentional criminal acts are written off. Item 4 of Paragraph 8 of Article 5 of this law, under which bankruptcy proceedings may be opened against a natural person punished for crimes other than the crimes against the economy and business order that are specified in Articles 206–209 of the Criminal Code (CC) and other than the crimes against the financial system that are specified in Articles 216, 222, and 223 of the CC, was ruled to be not in conflict with the Constitution.

The Constitutional Court noted that, in general, under the Constitution, the legislature is under no obligation to establish the bankruptcy institute of a natural person as one of the possible ways of deciding the insolvency problems of a natural person. Having chosen to establish this institute in the Lithuanian legal system, the legislature, in order to strike a balance between the interests of an insolvent natural person and his/her creditors, has wide discretion to regulate the bankruptcy relations of a natural person: to choose a model of the bankruptcy institute of a natural person, to define a circle of persons that may go bankrupt, to establish the grounds for opening bankruptcy proceedings against a natural person, as well as the situations when such proceedings may not be opened, to regulate personal bankruptcy procedures, to establish the conditions of relief from debt obligations, and to lay down other essential elements of the bankruptcy institute of a natural person. In doing so, the legislature must pay regard to the norms and principles of the Constitution.

The choice of the legislature to consolidate by means of laws one or another model of the bankruptcy institute of a natural person may depend on the specific objectives of the legislature. In addition, the judicial or extrajudicial personal bankruptcy process may be provided for. The legislature may also establish such a model according to which a court is granted broader powers in the personal bankruptcy process to decide on opening bankruptcy proceedings against a natural person and/or on release from the remaining outstanding debt obligations at the end of the bankruptcy process, taking into account the circumstances of a specific case and considering the situation of a natural person seeking bankruptcy.

In assessing the constitutionality of Paragraph 7 of Article 29 of the LPB, under which, at the end of the personal bankruptcy process, the claim for compensation for damage caused by the criminal act is written off together with the other outstanding claims of the creditors, the Constitutional Court referred to the official constitutional doctrine, formulated in its previous acts, on compensation for damage, which is based on the essential provision that the necessity to compensate for the material and moral damage inflicted upon a person is a constitutional principle, the consolidation of which is aimed to ensure that persons who have suffered material or moral damage will be compensated. The Constitutional Court noted that, in order to strike a balance between the interests of an insolvent natural person and his/her creditors by means of the bankruptcy institute of a natural person established in the law, the legislature must not deny the requirement, which arises from the Constitution (from the principle of compensation for damage laid down in Paragraph 2 of Article 30 thereof, as well as from the constitutional principles of justice and a state under the rule of law), that a person who sustained material and moral damage must be compensated fairly. Consequently, when determining the conditions of releasing bankrupt natural persons from debt obligations, the legislature must not establish any such legal regulation whereby persons would be able to avoid the obligation to compensate for material and/or moral damage caused by them when committing a criminal act, and whereby a person who sustained the said damage would not be able to receive fair compensation for it.

As stated in the ruling, a claim for compensation for damage caused by a criminal act is fundamentally different from claims of other creditors arising from contractual civil legal relations, among other things, because the creditor entitled to claim compensation for damage has not made a prior choice to participate in the relations with the debtor. The personal bankruptcy process is designed to attain a fair balance between the interests of the debtor and his/her creditors; therefore, it would be unfair to establish such a legal regulation under which the interests (such as the desire to return to an active economic activity) of a person who has caused damage by committing a criminal act would enjoy better protection than the rights of a person who has sustained the said damage, i.e. his/her right to receive fair compensation for sustained damage, which, at least in part, would restore the situation as it existed prior to the commission of the criminal act. Thus, according to the Constitutional Court, not only the insolvency of a person who has committed an intentional criminal act, but also the insolvency of one who has committed a negligent criminal act is not a constitutionally justified ground for releasing such a person from the obligation to compensate for damage that he/she has caused. Furthermore, such a legal regulation when, at the end of the personal bankruptcy process, the remaining outstanding claims for compensation for damage caused by a criminal act are written off creates the preconditions for a person who has caused the said damage to benefit from the criminal act that he/she has committed.

In view of the above, the Constitutional Court held that the impugned legal regulation laid down in Paragraph 7 of Article 29 of the LPB had disregarded the principle of compensation for damage, which is established in Paragraph 2 of Article 30 of the Constitution, as well as the constitutional principles of justice and a state under the rule of law.

In assessing the constitutionality of Item 4 of Paragraph 5 of Article 8 of the LPB, under which bankruptcy proceedings are not opened against a natural person provided that he/she has been imposed a penalty for any of the crimes against the economy and business order (i.e. credit fraud, the dishonesty of a debtor, or criminal bankruptcy) that are specified in Articles 207–209 of the CC, or for any of the crimes against the financial system (i.e. the legalisation of property obtained by criminal means, the fraudulent management of accounts, or the negligent management of accounts) that are specified in Articles 216, 222 and 223 of the CC if he/she has become insolvent for this reason and his/her conviction has not expired, the Constitutional Court noted that, under Article 29 of the Constitution and the constitutional principle of a state under the rule of law, the legislature, when regulating the bankruptcy relations of a natural person, must equally treat all persons who are in the same (similar) situation and establish the grounds and procedure for opening personal bankruptcy proceedings where such grounds and procedure would be equally applicable to all natural persons. In this ruling, the Constitutional Court held that the criminal acts specified in the impugned provision differ in their object from other criminal acts, i.e. the criminal acts specified in the impugned provision encroach on the specific good protected by law – the state economy, the order of business, or the financial system; in addition, the said criminal acts are aimed at avoiding the fulfilment of credit obligations or at inflicting property damage upon creditors otherwise; therefore, the persons who have committed these criminal acts and those who have committed other crimes or criminal misdemeanours are not in the same (similar) situation from the viewpoint of the personal bankruptcy process and their unequal treatment is objectively justified. At the same time, the Constitutional Court also noted that the legislature, when exercising, under the Constitution, its discretion to regulate the bankruptcy relations of a natural person, may also establish other cases where personal bankruptcy proceedings are not opened and, among other things, may decide that personal bankruptcy proceedings are not opened if a natural person has been imposed a penalty for criminal acts other than those specified in the impugned provision. Thus, the fact that, under the impugned provision, personal bankruptcy proceedings are not opened if a natural person has been imposed a penalty in particular for such criminal acts that are specified in the articles of the CC chosen by the legislature does not give grounds for declaring this provision to be in conflict with the Constitution.