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On the realisation of financial collateral in the event of either the bankruptcy or restructuring of an enterprise

Case No. 135/2010

 THE CONSTITUTIONAL COURT OF THE REPUBLIC OF LITHUANIA

IN THE NAME OF THE REPUBLIC OF LITHUANIA

 RULING

ON THE COMPLIANCE OF CERTAIN PROVISIONS OF THE REPUBLIC OF LITHUANIA’S LAW ON FINANCIAL COLLATERAL ARRANGEMENTS, THE REPUBLIC OF LITHUANIA’S LAW ON THE RESTRUCTURING OF ENTERPRISES, AND THE REPUBLIC OF LITHUANIA’S ENTERPRISE BANKRUPTCY LAW WITH THE CONSTITUTION OF THE REPUBLIC OF LITHUANIA

 24 May 2013

Vilnius

 

The Constitutional Court of the Republic of Lithuania, composed of the Justices of the Constitutional Court Egidijus Bieliūnas, Toma Birmontienė, Pranas Kuconis, Gediminas Mesonis, Ramutė Ruškytė, Egidijus Šileikis, Algirdas Taminskas, Romualdas Kęstutis Urbaitis, and Dainius Žalimas

The court reporter—Daiva Pitrėnaitė

The Constitutional Court of the Republic of Lithuania, pursuant to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Articles 1 and 531 of the Law on the Constitutional Court of the Republic of Lithuania, on 25 April 2013, at the Court’s sitting, considered under written procedure constitutional justice case No. 135/2010 subsequent to the petition (No. 1B-148/2010) of the Supreme Court of Lithuania, the petitioner, requesting to investigate whether Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the Republic of Lithuania’s Law on Financial Collateral Arrangements (wording of 15 April 2004), as well as the provisions of Paragraph 6 (wording of 20 April 2006) of Article 1 of the Republic of Lithuania’s Law on the Restructuring of Enterprises and Paragraph 4 (wording of 20 April 2006) of Article 1 of the Republic of Lithuania’s Enterprise Bankruptcy Law, under which the Enterprise Bankruptcy Law and the Law on the Restructuring of Enterprises apply to financial collateral arrangements, parties to which are the subjects indicated in Item 9 of Paragraph 2 of Article 3 of the Law on Financial Collateral Arrangements, to the extent that these laws do not contradict the Law on Financial Collateral Arrangements, are not in conflict with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution of the Republic of Lithuania and the constitutional principle of a state under the rule of law.

The Constitutional Court

has established:

I

The petition of the Supreme Court of Lithuania, the petitioner, is substantiated by the following arguments.

  1. Under Paragraph 8 of Article 9 of the Law on Financial Collateral Arrangements (hereinafter also referred to as the LFCA), one of the parties to a financial collateral arrangement—the collateral taker has the right, upon the occurrence of an enforcement event, to realise financial collateral unilaterally even in the cases where either a bankruptcy or restructuring case has been instituted against the other party to the said arrangement—the collateral provider. Under Item 9 of Paragraph 2 of Article 3 of the LFCA, a party to a financial collateral arrangement may be any legal entity provided that the other party to such an arrangement is a state institution or financial establishment. Such legal regulation grants a creditor who is a party to a financial collateral arrangement—the collateral taker—an unjustified advantage over other creditors of an enterprise in either bankruptcy or restructuring proceedings: the said creditor has the right to have his claim satisfied prior to other creditors not in keeping with the general procedure for the satisfaction of creditors’ claims, which is established in the Enterprise Bankruptcy Law (hereinafter also referred to as the EBL) or in the plan for the enterprise’s restructuring, and not taking into account the interests of other creditors. In addition, the LFCA does not apply to natural persons, which means that they may never acquire the status of the financial collateral taker and may never exercise any exceptional rights consolidated by law with respect to other creditors. Thus, the impugned legal regulation violates Paragraph 1 of Article 29 of the Constitution, which consolidates the principle of the equality of persons before the law.
  2. The impugned legal regulation also does not comply with the requirement, stemming from Paragraph 3 of Article 46 of the Constitution, that economic activity be regulated so that it serves the general welfare of the nation, nor with the principle of the protection of legitimate expectations and the principles of legal clarity, legal certainty, and legal security, which arise from the constitutional principle of a state under the rule of law, since the prohibition against the discharge of financial obligations, as well as the establishment of a certain order of priority of creditors, is not an end in itself in the event of either the bankruptcy or restructuring of enterprises; these means are aimed at achieving goals important for the public, inter alia creating the conditions for the legal entities facing financial hardships but continuing their economic commercial activities to secure and develop those activities, as well as ensuring the protection of and balance between the interests of all creditors of a relevant enterprise and the interests of a relevant enterprise itself. In addition, the petitioner maintains that the laws regulating the relations of financial collateral arrangements do not provide for any legal mechanism by means of which the fact of a financial collateral arrangement should be made public; therefore, potential creditors have no possibility of assessing what impact such an arrangement concluded by an economic subject will have on their interests inter alia in the event of either the bankruptcy or restructuring of a relevant enterprise.
  3. On the basis of the same arguments, the petitioner maintains that Paragraph 6 (wording of 20 April 2006) of Article 1 of the Law on the Restructuring of Enterprises (hereinafter also referred to as the LRE) and Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL are also in conflict with the Constitution, since they establish that the said laws, inter alia the provisions thereof consolidating the prohibition against the discharge of financial obligations in the event of either bankruptcy or restructuring and providing for a certain order of priority of creditors, which are binding upon other creditors, do not apply to the extent that they contradict the provisions of the LFCA.

II

In the course of the preparation of the case for the Constitutional Court’s hearing, written explanations were received from the former representative of the Seimas, the person concerned, who was Petras Luomanas, the then Member of the Seimas, in which it is maintained that the impugned legal regulation is not in conflict with the Constitution, as well as a letter from the representative of the Seimas Antanas Nesteckis, a Member of the Seimas, which upholds the position set forth in the explanations of P. Luomanas. The position of the representative of the party concerned is substantiated by the following arguments.1. The provisions of the LFCA must be assessed in the light of the purpose of the provisions of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (hereinafter also referred to as Directive 2002/47/EC), which is implemented through the said law. The said directive was adopted in order to establish a sound common legal framework for payment and securities settlement systems in the European Union, to limit risk inherent in such systems, and to guarantee the stability of the financial system in the Community. Financial collateral arrangements, which are regulated by the said directive, as well as by the LFCA (the provisions whereof are impugned by the petitioners), are concluded between the subjects participating in a financial market. Therefore, it should be emphasised that a stable activity of subjects operating in a certain financial system is a significant and important objective of a legal system, and the said subjects should be assessed as specific if compared to other subjects who can be characterised by analogous features, but whose activities are not related to any financial systems. Thus, those creditors of an enterprise who are a party to a financial collateral arrangement may not be equated with other creditors of that enterprise where such an enterprise is in either bankruptcy or restructuring proceedings.2. Neither is the equality of the rights of the creditors of an enterprise in either bankruptcy or restructuring proceedings ensured under the provisions of other legal acts. For example, both the LRE and the EBL prescribe that the creditor’s claims secured by a pledge and/or mortgage are satisfied first. Thus, other creditors may not aspire for the same priority rank in the order of the satisfaction of claims if compared to certain other creditors, although the only difference between them, where their status and activities coincide, is that one group of them are mortgage creditors, whereas the other group are not. A security financial collateral arrangement is, in substance, a pledge agreement, and although, according to their substance, the said institutes may not be equated, because of the obvious similarity between them, a creditor who is a party to a financial collateral arrangement is granted the right to have his claim satisfied first. The only difference is that in the event of either bankruptcy or restructuring the satisfaction of the creditor’s claims takes longer, whereas, under the provisions of the LFCA, collateral may be realised without any delay. Attention, however, should be drawn to the fact that the values of financial instruments on capital markets tend to vary over a particularly short period of time; therefore, where financial collateral is not immediately realised, its value on the respective capital markets may decrease and may no longer serve the function of security. The final outcome of the satisfaction of the claims of the mortgage creditor and those of the collateral taker is the same—the secured claims are satisfied first, and only then—the claims of other creditors.3. In those cases where financial collateral is used in the operations between financial establishments, not only the risk in relation to a creditor, but also the systemic risk in the entire financial market may increase. The impugned provisions of the LFCA are aimed at reducing the risk run by creditors in financial transactions. The trust in the subjects operating in any financial system has a direct influence on the stability of the respective financial system. Therefore, such legal regulation which is aimed at ensuring the stability of the financial market and reducing the risk run by certain creditors participating in that financial market, i.e. such legal regulation that enables the relevant subjects to safely borrow and to grant a loan with a minimum administrative burden, while making them at the same time aware that the relevant financial obligations will be fulfilled, is exactly in line with the requirement, stemming from Paragraph 3 of Article 46 of the Constitution, that economic activity be regulated so that it serves the general welfare of the nation.4. In all cases, upon entering into a financial collateral arrangement, the collateral provider delivers financial collateral to the collateral taker; therefore, this should be reflected in the accounting records maintained by the collateral provider as well as in its accounts, so that potential creditors, when seeking to assess the possible risk of the financial obligations of another economic subject, have the possibility of becoming aware of the existence of such a risk after analysing the records maintained by that economic subject. Thus, there is no ground to believe that the impugned legal regulation is not in line with the principles of legal certainty and the protection of legitimate expectations.

III

In the course of the preparation of the case for the Constitutional Court’s hearing, written explanations were received from Ingrida Šimonytė, the then Minister of Finance of the Republic of Lithuania, Vilius Šapoka, the Chairman of the Securities Commission of the Republic of Lithuania, and Stasys Kropas, the President of the Association of Lithuanian Banks.

The Constitutional Court

holds that:

I

  1. On 15 April 2004, the Seimas adopted the Law on Financial Collateral Arrangements, which came into force on 1 May 2004.

1.1. The Law on Financial Collateral Arrangements regulates financial collateral arrangements and the peculiarities of their enforcement (Paragraph 1 of Article 1). In the context of the constitutional justice case at issue the following provisions of the LFCA should be mentioned:

– financial collateral arrangements secure the performance of the relevant financial obligations, which are discharged by cash and/or financial instruments (Paragraph 2 of Article 2); financial collateral arrangements must indicate the aforesaid relevant financial obligations; the said arrangements may be concluded as separate agreements or may be part of the master agreement that gives rise to the main obligation (Paragraph 8 of Article 2);

– “financial collateral arrangements” may mean financial collateral arrangements that involve no transfer of the right of ownership, as where the collateral provider delivers financial collateral to the collateral taker thus securing the performance of the relevant financial obligations but where the full ownership of the financial collateral remains with the collateral provider (the security financial collateral arrangement), or financial collateral arrangements that entail the transfer of the right of ownership, as where the collateral provider delivers financial collateral to the collateral taker in order to secure the performance of the relevant financial obligations owed to the collateral taker and where the full ownership of the financial collateral is transferred to the collateral taker (Paragraphs 9 and 10 of Article 2);

– “financial collateral” means cash and financial instruments that are used to secure the performance of relevant financial obligations under a financial collateral arrangement (Paragraph 11 of Article 2);

– “enforcement event” means an event of default on obligations or any similar event as agreed between the parties, upon the occurrence of which, the collateral taker is, under the conditions of the respective financial collateral arrangement or by operation of law, entitled to unilaterally realise financial collateral (Paragraph 23 of Article 2);

– the provisions of Chapter XII of Book 4 of the Civil Code, which regulate pledge transactions, apply mutatis mutandis to security financial collateral arrangements (Paragraph 4 of Article 3 (wording of 25 October 2007));

– in the event of a dispute, the delivery of financial collateral must be proved by written evidence, which must allow for the identification of relevant financial collateral; the crediting of financial instruments provided as financial collateral into the relevant account (or such collateral forming a credit in that account) or the crediting of cash provided as financial collateral into the designated account (or such collateral forming a credit in that account) is recognised as written evidence (Paragraph 5 of Article 4).

While summing up the foregoing provisions of the LFCA, one should note that financial collateral arrangements secure relevant financial obligations, which are discharged by cash or financial instruments; in all cases, financial collateral arrangements entail the delivery of financial collateral established by law; in the event of a dispute, the delivery of financial collateral must be proved by written evidence; and financial collateral may be realised by the collateral taker unilaterally upon the occurrence of an enforcement event, i.e. when the debtor defaults on his assumed financial obligations.

1.2. Article 3 of the LFCA, Item 9 of Paragraph 2 whereof is impugned by the petitioner, inter alia prescribed:

“1. The provisions of this Law shall apply to financial collateral arrangements under which the collateral provider and the collateral taker are the entities specified in Paragraph 2 of this Article, provided that the activity of the entities specified in Items 3 to 6 of Paragraph 2 of this Article is subject to supervision. <...>

  1. The collateral provider and the collateral taker must each belong to one of the following categories:

1) a public authority (excluding publicly guaranteed enterprises unless they fall under Items 2 to 9 of this Paragraph), including public authorities of Member States of the European Union charged with or intervening in the management of public debt or authorised to hold accounts for customers;

2) a central bank, the European Central Bank, the Bank for International Settlements, the International Bank for Reconstruction and Development, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the Council of Europe Development Bank (formerly the Council of Europe Resettlement Fund), the Nordic Investment Bank, the Caribbean Development Bank, the European Bank for Reconstruction and Development, the European Investment Fund, the Inter-American Investment Corporation, the International Monetary Fund, and the European Investment Bank;

3) a financial establishment, including a credit establishment and a financial brokerage firm;

4) an insurance enterprise;

5) an investment company with variable capital;

6) a management enterprise;

7) a central counterparty, settlement agent, or clearing house, including similar establishments regulated under the legal acts of the Republic of Lithuania and operating in the markets of futures, options, and other derivatives to the extent not covered by the Law on Settlement Finality in Payment and Securities Settlement Systems;

8) a person, other than a natural person, who acts in a trust, authorised, or representative capacity on behalf of any one or more persons that include any bondholders or holders of other forms of securitised debt or any institution as defined in Items 1 to 7 of this Paragraph;

9) a person other than a natural person provided that the other party is a subject as defined in Items 1 to 8 of this Paragraph. <...>”

Thus, Paragraph 2 of Article 3 of the LFCA consolidated a finite list of subjects entitled to enter into financial collateral arrangements: Items 1 to 8 enumerate special subjects—public authority institutions, international financial institutions, or financial establishments whose activity is subject to supervision, i.e. subjects directly operating in a financial market: carrying out financial activity and/or providing financial services; Item 9, which is impugned by the petitioner, establishes that any legal entity engaged in an activity other than a financial economic activity may also be a party to a financial collateral arrangement provided that the other party to such an arrangement is one of the aforementioned special subjects (a public authority, an international financial institution, or a financial establishment whose activity is subject to supervision) carrying out financial activity and/or providing financial services.

While elucidating the impugned Item 9 of Paragraph 2 of Article 3 of the LFCA, one should note that a legal entity engaged in an activity other than a financial economic activity may be a party to a financial collateral arrangement only in the cases where the other party to such an arrangement is one of the aforementioned special subjects. This means that legal entities engaged in an activity other than a financial economic activity may not conclude any financial collateral arrangements between themselves, as at least one party to such an arrangement must be a subject directly operating in a financial sector and carrying out financial activity and/or providing financial services.

It should be noted that through the Republic of Lithuania’s Law Supplementing Article 3 of the Law on Financial Collateral Arrangements, which was adopted by the Seimas on 25 October 2007 and came into force on 1 March 2008, Paragraph 2 of Article 3 of the LFCA was supplemented with Item 10, under which closed-type investment companies may also enter into financial collateral arrangements. The legal regulation impugned by the petitioner was not changed.

1.3. Article 9 of the LFCA, which regulates the enforcement of financial collateral arrangements and Paragraph 8 whereof is impugned by the petitioner, inter alia prescribes:

“<...> 2. According to a financial collateral arrangement, the collateral taker (creditor) shall have the right, where the debtor defaults on his relevant financial obligations secured by financial collateral, to satisfy his claim from the financial collateral or its value prior to other creditors.

  1. Upon the occurrence of an enforcement event, the collateral taker shall have the right, subject to the conditions agreed in the respective security financial collateral arrangement, to unilaterally realise the financial collateral, provided under the said security financial collateral arrangement, in the following manners:

1) to sell or appropriate financial instruments or apply their value in discharge of the relevant financial obligations;

2) in relation to cash, to set off the amount against or otherwise apply it in discharge of the relevant financial obligations. <...>

  1. The manners of realising financial collateral specified in Paragraph 3 shall, subject to the conditions agreed in the relevant security financial collateral arrangement, be without any requirement to the effect that:

1) prior notice of the intention to realise must have been given;

2) the conditions of the realisation be approved by a court, other institution, or other person;

3) the realisation be conducted by public auction or in any other manner established in the legislation;

4) any additional time period must have elapsed.

  1. If, upon the occurrence of an enforcement event, financial collateral is realised according to a unilateral statement of the collateral taker, the collateral taker shall, not later than on the next day after such an event, submit in writing to the debtor and the collateral provider the information on the discharged claims and their amount. <...>
  2. A financial collateral arrangement shall come into effect in accordance with its terms notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of the collateral provider or collateral taker. <...>”

Thus, under Article 9 of the LFCA, upon the occurrence of an enforcement event, i.e. where the collateral provider defaults on his relevant financial obligations, which are secured by financial collateral, the collateral taker has the right, unilaterally and without any delay, to realise the financial collateral prior to other creditors in the manners prescribed by law and without any separate notice of the intention and any additional administrative measures (i.e. there is no requirement that certain conditions of the realisation of financial collateral be approved by a court or other institution, nor that certain manners of realisation be applied).

The impugned Paragraph 8 of Article 9 of the LFCA establishes the conditions of the enforcement of a financial collateral arrangement: such arrangements take effect notwithstanding the institution or continuation of either winding-up or reorganisation proceedings in respect of the collateral provider or collateral taker. This means that, upon the occurrence of an enforcement event, the financial collateral taker may, prior to other creditors of the relevant enterprise in either bankruptcy or restructuring proceedings, realise collateral unilaterally and without any delay and any additional administrative measures (e.g., prior notice, authorisation by a court) even in the cases where either winding-up or reorganisation proceedings have been instituted against the collateral provider. The provisions of a financial collateral arrangement equally apply in the cases where either winding-up or reorganisation proceedings have been instituted against the collateral taker, i.e., even though a reorganisation or bankruptcy case has been instituted, the collateral taker has the right to realise collateral under the terms and conditions provided for in the respective financial collateral arrangement (inter alia without any additional administrative measures).

1.4. The LFCA, the provisions whereof are impugned in the constitutional justice case at issue, was adopted with a view to implementing Directive 2002/47/EC, which lays down the uniform rules applicable in all Member States of the European Union in relation to the provision of financial collateral, thus seeking to facilitate the realisation of such collateral.

1.4.1. In the Preamble to Directive 2002/47/EC it is indicated that it was adopted with the intent to contribute to the integration and cost-efficiency of the financial market as well as to the stability of the financial system in the Community, thereby supporting the freedom to provide services and the free movement of capital in the single market in financial services (Item 3), to improve the legal certainty in the area of the use of financial collateral, as well as to reduce the risk of the participants in the market (inter alia Item 14); in seeking to achieve the said objectives, Member States should ensure that certain provisions of insolvency law do not apply to financial collateral arrangements, in particular, those that would inhibit the effective realisation of financial collateral (Item 5). The directive at issue also provides that Member States may not require that the creation, validity, perfection, or enforceability of a financial collateral arrangement or the provision of financial collateral under a financial collateral arrangement be dependent on the performance of any formal act (Paragraph 1 of Article 3).

1.4.2. Article 1 of Directive 2002/47/EC inter alia prescribes:

“2. The collateral taker and the collateral provider must each belong to one of the following categories:

  1. a) a public authority (excluding publicly guaranteed undertakings unless they fall under points (b) to (e)) including:
  2. i) public sector bodies of Member States charged with or intervening in the management of public debt, and
  3. ii) public sector bodies of Member States authorised to hold accounts for customers;
  4. b) a central bank, the European Central Bank, the Bank for International Settlements, a multilateral development bank <...>, the International Monetary Fund and the European Investment Bank;
  5. c) a financial institution subject to prudential supervision including:
  6. i) a credit institution <...>;
  7. ii) an investment firm <...>;

iii) a financial institution <...>;

  1. iv) an insurance undertaking <...>;
  2. v) an undertaking for collective investment in transferable securities <...>;
  3. vi) a management company <...>;
  4. d) a central counterparty, settlement agent or clearing house, as defined respectively in Article 2(c), (d) and (e) of Directive 98/26/EC, including similar institutions regulated under national law acting in the futures, options and derivatives markets to the extent not covered by that Directive, and a person, other than a natural person, who acts in a trust or representative capacity on behalf of any one or more persons that includes any bondholders or holders of other forms of securitised debt or any institution as defined in points (a) to (d);
  5. e) a person other than a natural person, including unincorporated firms and partnerships, provided that the other party is an institution as defined in points (a) to (d).
  6. Member States may exclude from the scope of this Directive financial collateral arrangements where one of the parties is a person mentioned in paragraph 2(e).

If they make use of this option, Member States shall inform the Commission which shall inform the other Member States <...>.”

Thus, Paragraph 2 of Article 1 of Directive 2002/47/EC establishes what subjects may be parties to a financial collateral arrangement: points (a) to (d) of the said paragraph specify special subjects who carry out financial activity and/or provide financial services and who are allowed to make the said arrangements; under Paragraph 2(e) of Article 1 of the directive, a party to a financial collateral arrangement may also be any legal entity provided that the other party belongs to one of the aforementioned categories of special subjects. It should be pointed out that the provisions of the directive in question were implemented through Paragraph 2 of Article 3 of the LFCA, Item 9 whereof is impugned by the petitioner. It should also be noted that, under Paragraph 3 of Article 1 of Directive 2002/47/EC, Member States were not obliged to establish that any legal entity may be a party to a financial collateral arrangement in cases where the other party to such an arrangement belongs to one of the specified categories of special subjects (Paragraph 2(e) of Article 1); this was left to the discretion of the legislator of each Member State. Namely the aforesaid provision is consolidated in Item 9 of Paragraph 2 of Article 3 of the LFCA, which is impugned by the petitioner.

In this context it should be mentioned that from the Evaluation Report (COM/2006/0833) from the Commission to the European Parliament and the Council of 20 December 2006 on the Financial Collateral Arrangements Directive 2002/47/EC it is clear that the option consolidated in Paragraph 3 of Article 1 of Directive 2002/47/EC, permitting Member States not to establish that any legal entity, mentioned in Paragraph 2(e) of Article 1 of the directive, may be a party to a financial collateral arrangement, has fully been used only by Austria; five Member States have applied a partial opt-out—their legislator has established that enterprises of a certain size (legal entities) may be a party to financial collateral arrangements where the other party to such an arrangement belongs to the subjects prescribed in the directive, or that financial collateral arrangements are used to secure only certain financial obligations. Ten Member States, while implementing the provisions of Directive 2002/47/EC, have widened its scope of application—by establishing that also entities not mentioned in the directive may be parties to financial collateral arrangements. Thus, it should be held that the majority of Member States of the European Union have consolidated such legal regulation under which any legal entity engaged in economic activity may be a party to a financial collateral arrangement where the other party to such an arrangement is one of the special subjects carrying out financial activity, as prescribed in points (a) to (d) of Paragraph 2 of Article 1 of Directive 2002/47/EC.

1.4.3. Paragraph 5 of Article 4 of Directive 2002/47/EC prescribes: “Member States shall ensure that a financial collateral arrangement can take effect in accordance with its terms notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of the collateral provider or collateral taker.”

It needs to be noted that the said provision of Directive 2002/47/EC was implemented through the impugned Paragraph 8 of Article 9 of the LFCA, which lays down an analogous legal regulation.

1.5. On 7 June 2011, the Seimas adopted the Republic of Lithuania’s Law Amending the Law on Financial Collateral Arrangements, which came into force on 30 June 2011 and through which the LFCA was set forth in its new wording; however, the legal regulation consolidated in Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA, which is impugned in the case at issue, was in substance not changed.

  1. It has been mentioned that the compliance of Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE, to the extent specified by the petitioner, with the Constitution is also impugned in the constitutional justice case at issue.

On 20 March 2001, the Seimas adopted the Law on the Restructuring of Enterprises, which came into force on 11 April 2001. This law regulates the process of the restructuring of enterprises and public establishments that face temporary financial difficulties and seek to avert bankruptcy (Paragraph 1 of Article 1).

2.1. Item 1 of Paragraph 1 of Article 9 of the LRE inter alia prescribed that from the day when a court’s ruling to institute restructuring proceedings against an enterprise had become effective it was prohibited to discharge all monetary obligations not discharged prior to that day, to recover debts from the said enterprise by either judicial or extrajudicial means, to impose a forced mortgage, servitudes, usufruct, to set off claims, to pledge, to sell or transfer in any other way the assets of the enterprise that were necessary for the continuation of its activities. Thus, the LRE consolidated the imperative legal norms, which applied in the cases where restructuring proceedings had been instituted against an enterprise, and under which the said enterprise was prohibited from discharging any financial obligations.

2.2. Following the adoption of the LFCA, by means of the Republic of Lithuania’s Law Amending Article 9 of the Law on the Restructuring of Enterprises, which was adopted by the Seimas on 15 April 2004 and came into force on 1 May 2004, the relevant provisions of the LRE, inter alia Item 1 of Paragraph 1 of Article 9 thereof, were amended and aligned with the provisions of the LFCA. In Item 1 (wording of 15 April 2004) of Paragraph 1 of Article 9 of the LRE it was additionally established that the prohibition imposed on an enterprise in restructuring proceedings against the discharge of any financial obligations not discharged prior to the day a court’s ruling to institute restructuring proceedings against that enterprise had become effective as well as against the recovery of debts did not apply in the cases provided for by the LFCA.

2.3. The LRE has been amended and/or supplemented on more than one occasion, inter alia by means of the Republic of Lithuania’s Law Supplementing and Amending Articles 1 and 9 of the Law on the Restructuring of Enterprises, which was adopted by the Seimas on 20 April 2006 and came into force on 6 May 2006. The latter law supplemented Article 1 of the LRE with a new Paragraph 6 and respectively amended Items 1 and 3 of Paragraph 1 of Article 9 of the LRE.

2.3.1. Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE, which is, to the extent specified by the petitioner, impugned in the constitutional justice case at issue, prescribed: “This Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements and the Law on Settlement Finality in Payment and Securities Settlement Systems.”

Thus, Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE prescribed that the provisions of the LRE did not apply inter alia in the cases where they contradicted the legal regulation consolidated in the LFCA. While construing Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE in the aspect impugned by the petitioner, one should note that it established an exception to the application of the provisions of this law with respect to inter alia the enforcement of financial collateral arrangements and the subjects entitled to enter into such arrangements.

2.3.2. Item 1 (wording of 20 April 2006) of Paragraph 1 of Article 9 of the LRE still contains the prohibition imposed on an enterprise in restructuring proceedings against the discharge of any financial obligations not discharged prior to the day that a court’s ruling instituting restructuring proceedings against that enterprise becomes effective.

2.3.3. While construing the legal regulation established in Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE in conjunction with the one established in Item 1 (wording of 20 April 2006) of Paragraph 1 of Article 9 of the LRE, one needs to note that certain imperative provisions of the LRE, inter alia the prohibition imposed on an enterprise in restructuring proceedings against the discharge of any monetary obligations not discharged prior to the day that a court’s ruling instituting restructuring proceedings against that enterprise becomes effective, do not apply in the cases where financial collateral arrangements are enforced by subjects of financial collateral arrangements (either the collateral provider or collateral taker).

While construing Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE in conjunction with the provisions of the LFCA, inter alia Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 thereof, one should note that the prohibition against the discharge of any financial obligations does not apply in the cases where restructuring proceedings have been instituted against a legal entity that is engaged in an activity other than a financial economic activity and is a party to a financial collateral arrangement under the conditions established by law: under Paragraph 8 of Article 9 of the LFCA, upon the occurrence of an enforcement event, a party to a financial collateral arrangement—the collateral taker has the right, unilaterally and without any delay and any additional administrative measures, to realise the provided collateral under the terms established in the arrangement, irrespective of the fact that restructuring proceedings have been instituted against the collateral provider and regardless of the aforementioned prohibition, imposed on an enterprise in restructuring proceedings, against the discharge of any financial obligations. The foregoing means that the interests of creditors who are parties to financial collateral arrangements are satisfied by following the provisions of a special law rather than applying the procedures consolidated in the LRE.

2.4. On 2 July 2010, the Seimas adopted the Republic of Lithuania’s Law Amending the Law on the Restructuring of Enterprises, which came into force on 1 October 2010 (with a certain exception), and through which the LRE was set forth in its new wording; however, the legal regulation relevant to the constitutional justice case at issue remained in substance unchanged.

  1. It has been mentioned that the compliance of Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL, to the extent specified by the petitioner, with the Constitution is also impugned in the constitutional justice case at issue.

On 20 March 2001, the Seimas adopted the Enterprise Bankruptcy Law, which came into force on 1 July 2001 and was designed to regulate the enterprise bankruptcy process (Paragraph 1 of Article 1).

3.1. Item 3 (wording of 5 June 2003) of Paragraph 7 of Article 10 of the EBL consolidated the prohibition imposed on an enterprise in bankruptcy proceedings against the discharge of any financial obligations not discharged prior to the institution of bankruptcy proceedings as well as against the recovery of debts from the said enterprise either by judicial or extrajudicial means; it was also established that the said prohibition did not apply in the cases provided for in the Republic of Lithuania’s Law on Settlement Finality in Payment and Securities Settlement Systems. Thus, the EBL consolidated the imperative legal norms (with certain exceptions), which applied in the cases where bankruptcy proceedings had been instituted against an enterprise and under which the said enterprise was prohibited from discharging any financial obligations.

3.2. Following the adoption of the LFCA, by means of the Republic of Lithuania’s Law Amending Articles 10 and 14 of the Enterprise Bankruptcy Law, which was adopted by the Seimas on 15 April 2004 and came into force on 1 May 2004, the relevant provisions of the EBL, inter alia Item 3 (wording of 5 June 2003) of Paragraph 7 of Article 10 thereof, were amended and aligned with the provisions of the LFCA. The said Item 3 (wording of 5 June 2003) of Paragraph 7 of Article 10 of the EBL additionally established that the prohibition against the discharge of any financial obligations not discharged prior to the institution of bankruptcy proceedings as well as against the recovery of debts did not apply in the cases provided for by the LFCA.

3.3. The EBL has been amended and/or supplemented on more than one occasion, inter alia by means of the Republic of Lithuania’s Law Supplementing and Amending Articles 1, 10, and 14 of the Enterprise Bankruptcy Law, which was adopted by the Seimas on 20 April 2006 and came into force on 6 May 2006. The latter law supplemented Article 1 of the EBL with a new Paragraph 4 and respectively amended Articles 10 and 14 of the EBL.

3.3.1. Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL, which is, to the extent specified by the petitioner, impugned in the constitutional justice case at issue, prescribes: “This Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements and the Law on Settlement Finality in Payment and Securities Settlement Systems.”

Thus, Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL prescribes that the provisions of the EBL do not apply inter alia in the cases where they contradict the legal regulation consolidated in the LFCA. While construing Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL in the aspect impugned by the petitioner, one should note that it establishes an exception to the application of the provisions of this law with respect to inter alia the enforcement of financial collateral arrangements and the subjects entitled to enter into such arrangements.

3.3.2. Item 3 (wording of 20 April 2006) of Paragraph 7 of Article 10 of the EBL still prohibits an enterprise in bankruptcy proceedings from discharging any financial obligations not discharged prior to the institution of the said proceedings.

3.3.3. While construing the legal regulation established in Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL in conjunction with the provisions of Item 3 (wording of 20 April 2006) of Paragraph 7 of Article 10 of the EBL, one needs to note that certain imperative provisions of the EBL, inter alia those prohibiting an enterprise against which bankruptcy proceedings have been instituted from discharging any financial obligations, do not apply in the cases where financial collateral arrangements are enforced by subjects of financial collateral arrangements.

While construing Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL in conjunction with the provisions of the LFCA, inter alia Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 thereof, one should note that the prohibition against the discharge of any financial obligations does not apply in the cases where bankruptcy proceedings have been instituted against a legal entity that is engaged in an activity other than a financial economic activity and is a party to a financial collateral arrangement under the conditions established by law: under Paragraph 8 of Article 9 of the LFCA, upon the occurrence of an enforcement event, the other party to a financial collateral arrangement—the collateral taker has the right, unilaterally and without any delay and any additional administrative measures, to realise the provided collateral under the terms established in the arrangement, irrespective of the fact that bankruptcy proceedings have been instituted against the collateral provider and regardless of the aforementioned prohibition, imposed on the collateral provider, against the discharge of any financial obligations. The foregoing means that the interests of creditors who are parties to financial collateral arrangements are satisfied by following the provisions of a special law rather than applying the procedures consolidated in the EBL.

3.4. The EBL has subsequently been amended and/or supplemented on more than one occasion; however, the legal regulation relevant to the constitutional justice case at issue has not changed.

  1. While summing up the foregoing legal regulation, one needs to hold that, under the legal regulation consolidated in Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA, when construed in conjunction with the relevant provisions of the LRE and the EBL, in the event of either the bankruptcy or restructuring of any legal entity that is a party to a financial collateral arrangement under the conditions established by law, the creditor who is the other party to the financial collateral arrangement does not lose the right, unilaterally and without any delay and any additional administrative measures, to realise the financial collateral provided by the said entity even though, under the relevant provisions of the LRE and the EBL, upon the institution of either a bankruptcy or restructuring case against an enterprise, such an enterprise is prohibited from discharging any financial obligations.
  2. In the context of the constitutional justice case at issue one should also mention the legal regulation regulating the duty of legal entities to provide accounting and financial statements, which is related to the impugned legal regulation.

5.1. Under the Republic of Lithuania’s Law on Accounting, legal entities are obliged to keep accounts, which must cover inter alia all economic transactions related to inter alia the change of assets, equity, and amount of liabilities (Paragraph 2 of Article 6); data about economic transactions are registered in accounting registers (Paragraph 1 of Article 16); financial statements of an enterprise are prepared on the basis of the data in the accounts (Article 17 (wording of 3 July 2008)).

5.2. Under the Republic of Lithuania’s Law on Financial Statements of Entities (wording of 26 June 2008), financial statements must be drawn up to give a true and fair view of an enterprise’s assets, equity, liabilities, income and expenditure, as well as its cash flows (Paragraph 1 of Article 4); where the data provided in financial statements of an enterprise are insufficient, additional information must be supplied in the explanatory notes, which are part of the set of financial statements of the enterprise and which clarify the amounts indicated in the statements as well as provide additional material information (Paragraph 6 of Article 3, Paragraph 13 of Article 15, Item 5 of Paragraph 1 of Article 22); financial statements of enterprises, inter alia the explanatory notes to such statements, are published in the Register of Legal Entities (Paragraph 1 of Article 21); the relevant responsible persons are held liable for the failure to comply with the duty to prepare and submit the financial statements of the respective enterprise (Article 27).

5.3. The duty of an enterprise to submit to the Register of Legal Entities the set of its annual financial statements is also established in Paragraph 4 of Article 2.66 of the Civil Code of the Republic of Lithuania.

5.4. The preparation of a financial statement of a legal entity is specified in detail in the Business Accounting Standards (hereinafter also referred to as the Standards), which are approved by orders of the Director of the public enterprise “The Authority of Audit and Accounting”. The said legal acts inter alia prescribe that financial obligations, which must be disclosed in financial statements, also cover contractual obligations to pay cash or deliver another financial asset (Items 14 and 28 of the 18th Standard). When a financial statement of an enterprise is produced and it includes the financial obligations of the enterprise, the explanatory notes to the statement must provide the data on inter alia the amount of the debts for which the enterprise has pledged its assets, also the type, nature, and book value of the collateral (Item 28.2 of the 6th Standard). Disclosures in annual financial statements must be provided in a clear and understandable manner so that their users are able to make sound decisions (Item 20 of the 1st Standard).

 5.5. While summing up the foregoing legal regulation, one needs to note that the legal acts regulating the preparation of financial statements, inter alia the Law on Accounting, the Law on Financial Statements of Entities, and the Business Accounting Standards, establish the duty of a legal entity to prepare and submit to the Register of Legal Entities publicly available annual financial statements, disclosing inter alia the financial obligations assumed by an enterprise, as well as the explanatory notes to such financial statements, specifying the information inter alia on the type, nature, and value of the collateral provided by the respective enterprise.

When the impugned legal regulation laid down in the LFCA is construed in conjunction with the aforementioned legal regulation, it should be noted that any legal entity entitled, under Item 9 of Paragraph 2 of Article 3 of the LFCA, to be a party to a financial collateral arrangement, after having entered into a financial collateral arrangement and having secured the assumed financial obligations by financial collateral, is obliged in a produced financial statement and the explanatory notes thereto, which are submitted to the Register of Legal Entities and are publicly available, to specify the assumed financial obligations and the type and value of the assets provided as collateral and to indicate that the financial obligations have been secured by financial collateral in accordance with the LFCA.

II

  1. In the constitutional justice case at issue the petitioner requests investigation into whether the legal regulation under which in the event of either bankruptcy or restructuring the prohibition against the discharge of any financial obligations does not apply to parties to a financial collateral arrangement, inter alia to any legal entity that is, under the conditions established by law, entitled to be a party to such an arrangement, is not in conflict with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.
  2. Paragraph 3 of Article 46 of the Constitution provides that the state regulates economic activity so that it serves the general welfare of the nation. The said provision consolidates the constitutional principle that outlines the objectives, directions, ways, and limits of the regulation of economic activity (inter alia the Constitutional Court’s rulings of 6 October 1999, 6 January 2011, and 21 June 2011). Paragraph 3 of Article 46 of the Constitution clearly prescribes the direction of the legal regulation of economic activity: economic activity must serve the general welfare of the nation (the Constitutional Court’s rulings of 13 February 1997, 13 May 2005, 31 May 2006, 30 June 2008, and 3 February 2010).

2.1. The Constitutional Court has held that the provision of Paragraph 3 of Article 46 of the Constitution, under which the state regulates economic activity so that it serves the general welfare of the nation, implies that the state as well as state institutions implementing state power and other state institutions are obliged, while heeding the norms and principles of the Constitution and taking account of the situation in the national economy, as well as the variety and changes in the economy and social life, to establish such legal regulation of economic activity that would serve the general welfare of the nation (the Constitutional Court’s ruling of 30 June 2008). The Constitution (inter alia the provision of Paragraph 3 of Article 46 thereof, under which the state regulates economic activity so that it serves the general welfare of the nation) gives rise to the legislator’s constitutional duty to lay down such legal regulation that would ensure, in keeping with the resources and material and financial possibilities of the state and society and other important factors, the general welfare of the nation (the Constitutional Court’s ruling of 2 March 2009).

2.2. The Constitutional Court has pointed out that the state, while regulating economic activity so that it serves the general welfare of the nation, may establish differentiated legal regulation determined by the specificity of certain economic activity; the state, while taking account of the specificity of certain economic activity, may use different means of legal regulation (the Constitutional Court’s rulings of 2 March 2009 and 3 February 2010); the legal preconditions of the differentiated legal regulation of economic activity (when account is taken of the importance and nature of the regulated relations) stem from the Constitution itself (inter alia the Constitutional Court’s rulings of 31 May 2006, 26 September 2006, 2 March 2009, and 21 June 2011).

The Constitutional Court has also noted that the establishment of certain exceptions to certain general legal regulation may be constitutionally justifiable if, through this, one seeks to ensure a constitutionally grounded and universally important interest, and only to the extent to which this is sought. The said exceptions must be proportional to the sought constitutionally grounded objective and must not restrict the rights of the subjects concerned more than it is necessary to ensure the said constitutionally grounded and universally significant interest (the Constitutional Court’s rulings of 12 December 2005 and 2 March 2009).

2.3. In the context of the constitutional justice case at issue it needs to be noted that the economic activity carried out in the area of finances, inter alia the provision of financial services, constitutes one of the specific types of economic activity; the said activity is characterised inter alia by the fact that one, while carrying it out, directly influences the national system of finances as well as the entire national economy. The stability and efficiency of the financial system constitute a significant public interest and an essential condition for the functioning of the market, which determines the growth of the national economy. Therefore, while regulating, in accordance with the Constitution, inter alia Paragraph 3 of Article 46 thereof, the financial economic activity so that it serves the general welfare of the nation, the legislator is obliged to establish such legal regulation that would ensure the security, stability, and credibility of the financial system functioning in this country. When establishing the said legal regulation, the legislator must heed the imperatives stemming from the Constitution, inter alia from the constitutional principle of a state under the rule of law.

  1. Under the Constitution, the state, while regulating economic activity, must heed the constitutional requirement that economic subjects have equal rights, which is directly linked to the principle of the equality of rights of all persons, consolidated in Article 29 of the Constitution; since otherwise the regulation of economic activity could not be regarded as serving the general welfare of the nation (the Constitutional Court’s rulings of 13 May 2005, 31 May 2006, and 2 March 2009).

3.1. Paragraph 1 of Article 29 of the Constitution provides that all persons shall be equal before the law, the court, and other state institutions and officials. The constitutional principle of the equality of all persons before the law requires that in law the main rights and duties be established equally to all (inter alia the Constitutional Court’s rulings of 24 December 2008, 2 March 2009, 22 December 2011, 29 March 2012, and 4 June 2012). The said principle would be violated if certain persons or groups of such persons were treated in a different manner, even though there are not any differences of such a character and to such an extent between the said groups of persons so that their uneven treatment could be objectively justified (inter alia the Constitutional Court’s rulings of 28 May 2010, 22 December 2011, 6 February 2012, 27 February 2012, and 4 June 2012).

3.2. The Constitutional Court has held that the constitutional principle of the equality of rights of persons (in the case at issue—economic subjects) does not, in itself, deny the opportunity to establish, by law, diverse and differentiated legal regulation with respect to certain persons (economic subjects), who belong to different categories, if between these persons (economic subjects) there exist differences of such a character that objectively justify such differentiated regulation. Differentiated legal regulation, when it is applied to certain groups of persons, which are distinguished by the same signs, and when it strives for positive and socially meaningful goals, or when the establishment of certain limitations or conditions is linked to the peculiarities of the regulated social relations, should not, in itself, be regarded as discriminatory (the Constitutional Court’s rulings of 11 November 1998, 13 May 2005, 31 May 2006, and 9 March 2009). The differentiated establishment of the legal situation of separate economic subjects (where an account is taken of the importance and nature of the regulated relations) should be linked to the objectives raised by the state in the respective area of economy, as well as the striving to arrange the economy of the country in a corresponding manner (inter alia the Constitutional Court’s rulings of 31 May 2006, 26 September 2006, 21 December 2006, 2 March 2009, and 21 June 2011).

While assessing whether a certain established different legal regulation is a grounded one, one must take into account concrete legal circumstances. First of all, differences in the legal situation of the subjects and objects to which the different legal regulation is applied must be considered (inter alia the Constitutional Court’s rulings of 4 July 2003, 24 December 2008, and 2 March 2009).

  1. The constitutional values upon which the national economy is founded are tightly linked to other constitutional values (the Constitutional Court’s ruling of 13 May 2005), inter alia the constitutional principle of a state under the rule of law (the Constitutional Court’s rulings of 4 December 2008 and 2 March 2009).

The Constitutional Court has held on more than one occasion that the constitutional principle of a state under the rule of law is especially capacious; it comprises a range of various interrelated imperatives. The protection of legitimate expectations, legal certainty, and legal security are inseparable elements of the constitutional principle of a state under the rule of law. If the protection of legitimate expectations, legal certainty, and legal security were not ensured, a person’s trust in the state and law would not be ensured either (the Constitutional Court’s rulings of 23 February 2000, 12 July 2001, 25 November 2002, 24 January 2003, 4 March 2003, and 24 December 2008).

One of the elements of the principle of legitimate expectations is the protection of the rights acquired under the Constitution and under the laws and other legal acts that are not in conflict with the Constitution. It should be noted that, under the Constitution, in the relations of a person with the state only those expectations of the person are protected and defended that arise from the Constitution itself or from the laws and other legal acts that are not in conflict with the Constitution. Only the said expectations of a person in his relations with the state are deemed legitimate (the Constitutional Court’s rulings of 4 July 2003, 3 December 2003, and 13 December 2004).

III

On the compliance of Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the Law on Financial Collateral Arrangements with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.

  1. It has been mentioned that in the constitutional justice case at issue the petitioner impugns inter alia the compliance of Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.
  2. The petitioner’s doubts as to the compliance of the impugned legal regulation with the Constitution are substantiated by the fact that, under Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA, a creditor who is a party to a financial collateral arrangement—the financial collateral taker, where the other party to such an arrangement may be any legal entity, is granted an unjustified advantage over other creditors of the related enterprise in either bankruptcy or restructuring proceedings—natural and legal persons: the creditor who is a party to the aforesaid arrangement has the right to have his claim satisfied prior to other creditors, not in keeping with the general procedure for the satisfaction of creditors’ claims, which is established in the Enterprise Bankruptcy Law or in the enterprise’s plan for restructuring, and not taking into account any interests of other creditors. Thus, such legal regulation violates the constitutional principle of the equality of rights of persons. The said legal regulation is also not in line with the imperative legal provisions regulating bankruptcy or restructuring process, which are not an end in themselves, but are rather designed to satisfy the interests of the creditors of an enterprise in bankruptcy proceedings. The petitioner maintains that the laws regulating the relations of financial collateral arrangements do not provide for any legal mechanism by means of which the fact of a financial collateral arrangement should be made public; therefore, potential creditors have no possibility of assessing what impact such an arrangement concluded by an economic subject will have on their interests inter alia in the event of either the bankruptcy or restructuring of a related enterprise. Therefore, the legal regulation in question is in conflict with Paragraph 3 of Article 46 of the Constitution, under which the state is obliged to regulate economic activity so that it serves the general welfare of the nation, as well as the constitutional principles of the protection of legitimate expectations, legal certainty, legal security and clarity.
  3. It has been mentioned that, under Item 9 of Paragraph 2 of Article 3 of the LFCA, inter alia any legal entity engaged in an activity other than a financial economic activity may be a party to a financial collateral arrangement provided that the other party to such an arrangement is a special subject directly operating in a financial sector and carrying out financial activity and/or providing financial services—an institution of public authority, an international financial institution, or a financial establishment whose activity is subject to supervision.

It has also been mentioned that, under Paragraph 8 of Article 9 of the LFCA, upon the occurrence of an enforcement event and the failure of the financial collateral provider to comply with the assumed financial obligations secured by financial collateral, the financial collateral taker may, unilaterally and without any delay and any additional administrative measures, realise the provided collateral even in the cases where either winding-up or reorganisation proceedings have been instituted against the collateral provider.

Thus, the provisions of Paragraph 8 of Article 9 of the LFCA consolidate such legal regulation that makes it possible not to apply to the subjects who are parties to a financial collateral arrangement those imperative provisions of the LRE and the EBL that are mandatory for other creditors and debtors and that impose on an enterprise, upon the institution of either a restructuring or bankruptcy case against that enterprise, the prohibition against inter alia the discharge of any financial obligations not discharged prior to the said institution of either a restructuring or bankruptcy case. In this way, the position of the creditors who are a party to a financial collateral arrangement, and who, under Paragraph 2 of Article 3 of the LFCA must be special subjects directly operating in a financial sector and carrying out financial activity and/or providing financial services (institutions of public authority, international financial institutions, or financial establishments whose activity is subject to supervision), becomes more favourable if compared to the position of other creditors of another enterprise that is, under Item 9 of Paragraph 2 of Article 3 of the LFCA, the other party to the said arrangement and against which either restructuring or bankruptcy proceedings have been instituted: the claims of the former creditors are, in the event of either the bankruptcy or restructuring of the related enterprise, satisfied prior to the claims of other creditors from the financial collateral, taking into account the conditions and terms established in the respective financial collateral arrangement and not in keeping with the provisions of the LRE and the EBL that are mandatory for other creditors.

  1. When deciding whether Item 9 of Paragraph 2 of Article 3 of the LFCA, under which any legal entity may be a party to a financial collateral arrangement under the conditions established by law, as well as Paragraph 8 of Article 9 of the same law, under which, upon the occurrence of an enforcement event, the financial collateral taker may, unilaterally and without any delay and any additional administrative measures, realise the provided collateral prior to other creditors of the related enterprise, regardless of either the bankruptcy or restructuring proceedings instituted against the collateral provider, was not in conflict with Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law, one needs to note that, as mentioned:

– under Paragraph 3 of Article 46 of the Constitution, the state, while regulating economic activity, must follow the principle of the reconciliation of the interests of a person and society and must ensure the interests of both a private person (a subject of economic activity) and society; the state, while regulating economic activity so that it serves the general welfare of the nation, may establish differentiated legal regulation, determined by the specificity of certain economic activity; to this end, the state may use different means of legal regulation; the establishment of certain exceptions to certain general legal regulation may be constitutionally justifiable if, through this, one seeks to ensure a constitutionally grounded and universally important interest;

– the economic activity carried out in the area of finances, inter alia the provision of financial services, constitutes one of the specific types of economic activity; the said activity is characterised inter alia by the fact that one, while carrying it out, directly influences the national system of finances as well as the entire national economy;

– the stability and efficiency of the financial system constitute a significant public interest and an essential condition for the functioning of the market, which determines the growth of the national economy; therefore, while regulating, in accordance with the Constitution, inter alia Paragraph 3 of Article 46 thereof, financial economic activity so that it serves the general welfare of the nation, the legislator is obliged to establish such legal regulation that would ensure the security, stability, and credibility of the financial system functioning in the country; when establishing the said legal regulation, the legislator must heed the imperatives stemming from the Constitution, inter alia from the constitutional principle of a state under the rule of law;

– the constitutional values upon which the national economy is founded are tightly linked to other constitutional values, inter alia the constitutional principle of a state under the rule of law.

4.1. As mentioned before, under Item 9 of Paragraph 2 of Article 3 of the LFCA, at least one party to a financial collateral arrangement must always be a special subject directly operating in a financial sector and carrying out financial activity and/or providing financial services.

Thus, financial collateral arrangements are entered into in the course of carrying out economic activity in the area of finances, which, as mentioned before, is a specific type of economic activity, directly influencing the national financial system and national economy. The legislator, while seeking to ensure such an important public interest as the stability and efficiency of the financial system, may use different means of legal regulation, inter alia establish certain constitutionally justifiable exceptions to certain general legal regulation, inter alia the one consolidated through imperative legal norms in laws.

4.2. Consequently, the legislator, by establishing in Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA such legal regulation under which the interests of the creditors who are a party to a financial collateral arrangement are ensured by means of special measures, inter alia by providing in Paragraph 8 of Article 9 of the LFCA the possibility in the event of either the debtor’s bankruptcy or restructuring to realise financial collateral unilaterally and without any delay and any additional administrative measures, regardless of the imperative legal norms regulating restructuring or bankruptcy proceedings, was seeking to regulate the financial economic activity of this country so that it would serve the general welfare of the nation, inter alia was seeking to maintain the security, stability, and credibility of the financial system as well as the effective functioning of this system, to reduce the systemic risk in the financial sector, and thus to ensure not only the protection of the interests of certain creditors, but also the interests of the entire society to have a stable and reliable financial system.

If the claims of the collateral taker that are secured by financial collateral were satisfied according to the general procedure together with the claims of other creditors and in keeping with the terms established in either the LRE or the EBL, i.e. if no exception were established to the general legal regulation consolidated in the LRE and the EBL, and upon the occurrence of an enforcement event, the financial collateral taker could not, without any additional administrative measures, immediately, realise the provided collateral prior to other creditors of the related enterprise, the stability of the entire financial system could be disturbed, and the threat of systemic risk in the financial sector would arise with a possible negative impact on the entire national economy.

4.3. It has been mentioned that, according to the petitioner, the laws regulating the relations of financial collateral arrangements do not provide for any legal mechanism by means of which the fact of a financial collateral arrangement should be made public; therefore, potential creditors have no possibility of assessing what impact such an arrangement entered into by an economic subject will have on their interests inter alia in the event of either the bankruptcy or restructuring of a related enterprise.

It needs to be noted that, as mentioned before, any legal entity entitled, under Item 9 of Paragraph 2 of Article 3 of the LFCA, to be a party to a financial collateral arrangement, after having entered into a financial collateral arrangement and having secured the assumed financial obligations by financial collateral, is obliged, in a produced financial statement and the explanatory notes thereto, which are submitted to the Register of Legal Entities and are publicly available, to disclose the assumed financial obligations as well as the type and value of the assets provided as collateral and to indicate that the financial obligations have been secured by financial collateral in accordance with the LFCA.

Thus, contrary to what is maintained by the petitioner, the legal regulation consolidated in the legal acts regulating the preparation of financial statements, inter alia the Law on Accounting, the Law on Financial Statements of Entities, and the Business Accounting Standards, lays down the requirement that financial collateral arrangements must be made public, thus ensuring the protection of the interests of other persons, inter alia other creditors; therefore, the principles of the protection of legitimate expectations, legal certainty, and legal clarity, which stem from the constitutional principle of a state under the rule of law, are not violated.

4.4. Consequently, there is no ground to maintain that the legal regulation consolidated in Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA, under which, upon the failure of the financial collateral provider to comply with the assumed financial obligations, the collateral taker may, in the event of the institution of either bankruptcy or restructuring proceedings against the collateral provider, realise, unilaterally and without any delay and any additional administrative restrictions, the collateral provided by the other party to the arrangement (which may be also any legal entity engaged in an activity other than a financial economic activity), was not in line with the imperatives stemming from Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.

  1. While assessing whether the impugned legal regulation established in Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA was not in conflict with Paragraph 1 of Article 29 of the Constitution, one needs to note that, as mentioned before, the state, while regulating economic activity, is obliged to pay heed to the constitutional requirement that economic subjects must have equal rights, which is directly linked to the principle of the equality of rights of all persons, which is consolidated in Article 29 of the Constitution, since otherwise the legal regulation of economic activity could not be regarded as serving the general welfare of the nation; the principle of the equality of rights does not in itself deny the opportunity to establish, by law, diverse and differentiated legal regulation with respect to certain economic subjects, who belong to different categories, if between the said economic subjects there are differences of such a character that objectively justifies the said differentiated regulation; the differentiated establishment of the legal situation of separate economic subjects (where an account is taken of the importance and nature of the regulated relations) should be linked to the objectives raised by the state in the respective area of economy as well as the striving to arrange the economy of this country in a corresponding manner.

5.1. It needs to be noted that, as mentioned before, under the provisions of Item 9 of Paragraph 2 of Article 3 of the LFCA, at least one party to a financial collateral arrangement is a special subject directly operating in a financial sector and carrying out financial activity and/or providing financial services. Consequently, the legal entities engaged in an activity other than a financial economic activity, which are referred to in the impugned Item 9 of Paragraph 2 of Article 3 of the LFCA, may enter into financial collateral arrangements only with those participants of the financial market who carry out financial activity and/or provide financial services, and whose activity exerts influence on the entire financial system, inter alia the stability of that system as well as the stability of the entire national economy.

Thus, the legislator, taking account of the special legal situation and status of the subjects directly operating in a financial sector and carrying out financial activity and/or providing financial services (who may be parties to financial collateral arrangements) as well as the nature of the arrangements they may enter into, has singled out these subjects as a separate group of creditors, whose claims in the event of either the bankruptcy and restructuring of enterprises are satisfied in accordance with the provisions of a special law.

5.2. It should be held that those creditors of enterprises in either bankruptcy or restructuring proceedings who are the parties to the financial collateral arrangements entered into with the said enterprises and other creditors of the same enterprises belong to different categories of subjects: the essential difference between the categories of the said subjects is determined by the nature of the economic activity carried out by those creditors of enterprises in either bankruptcy or restructuring proceedings who are parties to financial collateral arrangements as well as the significance of that activity for the stability of the financial system, inter alia due to the fact that in the event of the insolvency of the subjects who are parties to the said arrangements the threat of systemic risk in the financial sector arises with a possible negative impact on the entire national economy.

It should also be held that, in the event of either the bankruptcy or restructuring of an enterprise, all creditors that are parties to a financial collateral arrangement—institutions of public authority, international financial institutions, or financial establishments whose activity is subject to state supervision—are treated equally: to all these subjects the same conditions and terms provided for in the provisions of the LFCA for the realisation of financial collateral apply upon the occurrence of an enforcement event.

5.3. Thus, having established, through the impugned legal regulation consolidated in Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA, that, differently from other creditors, the interests of the creditors who are a party to a financial collateral arrangement, in the event of either the restructuring or bankruptcy of the collateral provider, which inter alia may be any legal entity, are ensured by special measures, inter alia by providing in Paragraph 8 of Article 9 of the LFCA for the possibility of realising financial collateral unilaterally and without any delay and any administrative restrictions, regardless of either the bankruptcy or restructuring proceedings instituted against the collateral provider, the legislator did not violate Paragraph 1 of Article 29 of the Constitution.

  1. In the light of the foregoing arguments, the conclusion should be drawn that Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA were not in conflict with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.

IV

On the compliance of Paragraph 6 (wording of 20 April 2006) of Article 1 of the Law on the Restructuring of Enterprises and Paragraph 4 (wording of 20 April 2006) of Article 1 of the Enterprise Bankruptcy Law with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.

  1. It has been mentioned that in the constitutional justice case at issue the petitioner impugns inter alia the compliance of Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE and Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL, insofar as the Enterprise Bankruptcy Law and the Law on the Restructuring of Enterprises apply to financial collateral arrangements, the parties to which are the subjects indicated in Item 9 of Paragraph 2 of Article 3 of the LFCA, to the extent that these laws are not in conflict with the Law on Financial Collateral Arrangements, with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.

1.1. In this ruling the following has been mentioned:

– Item 9 of Paragraph 2 of Article 3 of the LFCA provides that any legal entity engaged in an activity other than a financial economic activity may be a party to a financial collateral arrangement provided that the other party to such an arrangement is a special subject—an institution of public authority, an international financial institution, or a financial establishment whose activity is subject to supervision;

– Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE prescribed: “This Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements and the Law on Settlement Finality in Payment and Securities Settlement Systems.”

– Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL prescribes: “This Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements and the Law on Settlement Finality in Payment and Securities Settlement Systems.”

1.2. Thus, in the constitutional justice case at issue, subsequent to the petitioner’s petition, the Constitutional Court will investigate whether the provision “this Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements” of Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE and the provision “this Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements” of Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL, which apply to any legal entity that is engaged in an activity other than a financial economic activity and has entered into a financial collateral arrangement under the conditions established by law, are not in conflict with the Constitution.

  1. The petitioner’s doubts with regard to the compliance of the impugned provisions of the LRE and the EBL with the Constitution are substantiated by the same arguments as with regard to the constitutionality of the provisions of the LFCA, i.e. by the fact that, upon the institution of either restructuring or bankruptcy proceedings against an enterprise as a result of its failure to comply with financial obligations, the creditors who are the parties to the respective financial collateral arrangements—the financial collateral takers—are given, by means of the exception established in the LRE and the EBL, an unjustified advantage over other creditors of the said enterprise in either bankruptcy or restructuring proceedings: such creditors have the right to have their claims satisfied prior to other creditors, not in keeping with the general procedure for the satisfaction of creditors’ claims, which is established in the Enterprise Bankruptcy Law or in the enterprise’s plan for restructuring, and not taking into account the interests of other creditors.
  2. It has been mentioned that the impugned Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE established an exception to the application of the provisions of this law with respect to inter alia the enforcement of financial collateral arrangements and the subjects entitled to enter into such arrangements, i.e. the provisions of the LRE did not apply in the cases where they contradicted the legal regulation consolidated in the LFCA. It needs to be noted that the said provision inter alia means that inter alia the prohibition imposed on an enterprise against the discharge of any monetary obligations not discharged prior to the day a court’s ruling to institute restructuring proceedings against that enterprise becomes effective does not apply to subjects of a financial collateral arrangement, a party to which, as mentioned before, under the conditions established by law, may be any legal entity: under Paragraph 8 of Article 9 of the LFCA, upon the occurrence of an enforcement event, the financial collateral taker has the right, unilaterally and without any delay and any additional administrative measures and under the terms established in the arrangement, to realise the provided collateral, irrespective of the institution of restructuring proceedings against the collateral provider and regardless of the aforementioned prohibition, imposed on an enterprise in restructuring proceedings, against the discharge of any financial obligations.

It has also been mentioned that the impugned Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL establishes the exception to the application of the provisions of this law with respect to inter alia the enforcement of financial collateral arrangements and the subjects entitled to enter into such arrangements, i.e. the provisions of the EBL do not apply in the cases where they contradict the legal regulation consolidated in the LFCA. As pointed out, the said provision inter alia means that inter alia the prohibition imposed on an enterprise in bankruptcy proceedings against the discharge of any financial obligations not discharged prior to the institution of these proceedings does not apply to subjects of a financial collateral arrangement, a party to which, as mentioned before, under the conditions established by law, may be any legal entity: under Paragraph 8 of Article 9 of the LFCA, upon the occurrence of an enforcement event, the financial collateral taker has the right, unilaterally and without any delay and any additional administrative measures and under the terms established in the arrangement, to realise the provided collateral, irrespective of the institution of bankruptcy proceedings against the collateral provider and regardless of the aforementioned prohibition, imposed on an enterprise in bankruptcy proceedings, against the discharge of any financial obligations.

  1. It needs to be noted that Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE, under which the provisions of the LRE, inter alia the prohibition imposed on an enterprise against the discharge of any financial obligations upon the institution of a restructuring case against that enterprise, do(es) not apply inter alia to parties to a financial collateral arrangement, and Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL, under which the provisions of the EBL, inter alia the prohibition imposed on an enterprise against the discharge of any financial obligations upon the institution of a bankruptcy case against that enterprise, do(es) not apply inter alia to parties to a financial collateral arrangement, consolidate the legal regulation that is aligned with the legal regulation consolidated in the LFCA, inter alia Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 thereof, under which financial collateral arrangements may be enforced regardless of the institution of winding-up proceedings or the application of reorganisation measures with respect to either the collateral provider or the collateral taker.

One should also note that the impugned provisions of Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE and Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL are related to the implementation of the obligations, assumed by the state as a result of Directive 2002/47EC, to ensure that certain provisions of the legal acts concerning insolvency do not apply to financial collateral arrangements, in particular, those that would inhibit the effective realisation of financial collateral (Item 5 of the Preamble).

  1. In this ruling it has been held that Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA, under which a creditor who is a party to a financial collateral arrangement has the right, unilaterally and without any delay and any additional administrative measures, to realise financial collateral even in the cases where either winding-up or reorganisation proceedings have been instituted against the other party to the financial collateral arrangement—the collateral provider, who in the cases provided for by law may be a legal entity engaged in an activity other than a financial economic activity, were not in conflict with the Constitution in view of the fact that, by establishing such legal regulation, the legislator sought inter alia to reduce the systemic risk in the financial sector, to maintain the security, stability, and credibility of the financial system as well as the effective functioning of that system, and thus to ensure not only the protection of the interests of certain creditors, but also the interests of the entire society to have a stable and reliable financial system.
  2. Having held that Item 9 of Paragraph 2 of Article 3 and Paragraph 8 of Article 9 of the LFCA, under which it was permitted not to apply the imperative provisions of the LRE and the EBL, inter alia those imposing, upon the institution of either a restructuring or bankruptcy case against an enterprise, the prohibition against the discharge of any financial obligations not discharged prior to the institution of the said proceedings, inter alia to a legal entity that is engaged in an activity other than a financial economic activity and who is a party to a financial collateral arrangement, was not in conflict with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law, on the basis of the same arguments, one should also hold that the legal regulation consolidated in Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE and Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL, under which the provisions of the said laws apply to the extent that they do not contradict the LFCA, inter alia to the extent that the imperative prohibition, imposed on an enterprise in the LRE and the EBL, against the discharge of any financial obligations where either a reorganisation or bankruptcy case has been instituted against that enterprise does not apply to legal entities that are a party to a financial collateral arrangement, was (is) not in conflict with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.
  3. In view of the foregoing, the conclusion should be drawn that the provision “this Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements” of Paragraph 6 (wording of 20 April 2006) of Article 1 of the LRE and the provision “this Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements” of Paragraph 4 (wording of 20 April 2006) of Article 1 of the EBL were (are) not in conflict with Paragraph 1 of Article 29 and Paragraph 3 of Article 46 of the Constitution and the constitutional principle of a state under the rule of law.

Conforming to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Articles 1, 53, 531, 54, 55, and 56 of the Law on the Constitutional Court of the Republic of Lithuania, the Constitutional Court of the Republic of Lithuania passes the following

ruling:

  1. To recognise that Item 9 of Paragraph 2 of Article 3 of the Republic of Lithuania’s Law on Financial Collateral Arrangements (Official Gazette Valstybės žinios, 2004, No. 61-2183) was not in conflict with the Constitution of the Republic of Lithuania.
  2. To recognise that Paragraph 8 of Article 9 of the Republic of Lithuania’s Law on Financial Collateral Arrangements (Official Gazette Valstybės žinios, 2004, No. 61-2183) was not in conflict with the Constitution of the Republic of Lithuania.
  3. To recognise that the provision “this Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements” of Paragraph 6 (wording of 20 April 2006; Official Gazette Valstybės žinios, 2006, No. 50-1800) of Article 1 of the Republic of Lithuania’s Law on the Restructuring of Enterprises was not in conflict with the Constitution of the Republic of Lithuania.
  4. To recognise that the provision “this Law shall apply to the extent that it does not contradict the Law on Financial Collateral Arrangements” of Paragraph 4 (wording of 20 April 2006; Official Gazette Valstybės žinios, 2006, No. 50-1799) of Article 1 of the Republic of Lithuania’s Enterprise Bankruptcy Law is not in conflict with the Constitution of the Republic of Lithuania.

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

Justices of the Constitutional Court:                                     Egidijus Bieliūnas

                                                                                                         Toma Birmontienė

                                                                                                         Pranas Kuconis

                                                                                                         Gediminas Mesonis

                                                                                                         Ramutė Ruškytė

                                                                                                         Egidijus Šileikis

                                                                                                         Algirdas Taminskas

                                                                                                         Romualdas Kęstutis Urbaitis

                                                                                                         Dainius Žalimas