FIRST SECTION
CASE OF KATONA AND ZÁVARSKÝ v. SLOVAKIA
(Applications nos. 43932/19 and 43995/19)
 
 
JUDGMENT
 
Art 1 P1 • Peaceful enjoyment of possessions • Deprivation of property • Impossibility of pursuing in legal proceedings claims against bankrupt debtor for payment of money owed on the basis of promissory notes due to legislative amendment on “debt discharge” • Absolute bar • Lack of compensation • Excessive individual burden on applicants • Fair balance between competing interests not struck
 
STRASBOURG
9 February 2023
 
FINAL
 
26/06/2023
 
 
This judgment has become final under Article 44 § 2 of the Convention. It may be subject to editorial revision. In the case of Katona and Závarský v. Slovakia,
The European Court of Human Rights (First Section), sitting as a Chamber composed of:
 Marko Bošnjak, President,
 Péter Paczolay,
 Krzysztof Wojtyczek,
 Alena Poláčková,
 Lətif Hüseynov,
 Gilberto Felici,
 Erik Wennerström, judges,
and Liv Tigerstedt, Deputy Section Registrar,
Having regard to:
the applications (nos. 43932/19 and 43995/19) against the Slovak Republic lodged with the Court under Article 34 of the Convention for the Protection of Human Rights and Fundamental Freedoms (“the Convention”) by a Hungarian national, Mr László Katona (“the first applicant), and a Slovak national, Mr Tomáš Závarský (“the second applicant”) (“the applicants”), on 6 August 2019;
the decision to give notice to the Government of the Slovak Republic (“the Government”) of the complaints under Articles 6 (access to a court) and 13 of the Convention and Article 1 of Protocol No. 1, and to declare inadmissible the remainder of the applications;
the decision of the Hungarian Government not to avail themselves of their right to intervene in the proceedings concerning application no. 43932/19 (Article 36 § 1 of the Convention);
the parties’ observations;
Having deliberated in private on 10 January 2023,
Delivers the following judgment, which was adopted on that date:
INTRODUCTION
1. The applications concern the exclusion from satisfaction in insolvency proceedings or any other proceedings of the applicants’ claims against an individual for payment of money owed on the basis of a set of promissory notes. Apart from one, all the claims were adjudicated by final and binding judgments. The exclusion occurred by operation of law, combined with the fact that the debtor had been declared insolvent and granted a “debt discharge” in proceedings to which the applicants were not a party and by way of a decision against which there was no appeal. THE FACTS
2. The applicants were born in 1955 and 1979 and live in Budapest (Hungary) and Bratislava, respectively. They were represented by Mr R. Skovajsa, a lawyer practising in Bratislava. 3. The Government were represented by their Agent, Ms M. Bálintová. 4. The facts of the case may be summarised as follows. BACKGROUND
5. The applicants hold shares in a business entity. In 2005 the first applicant transferred a part of his shares to another individual (“the debtor”) who agreed to pay the first applicant a certain amount of money in several instalments. 6. In promise of payment, the debtor issued promissory notes in favour of the first applicant corresponding to the value of the respective instalments to be paid. The first applicant subsequently transferred one of those notes to the second applicant. 7. It is uncontested that, within the said arrangement, (i) the first applicant had independent parallel claims against the debtor both under the share‑transfer agreement and under the promissory notes, and (ii) he was free to claim payment from the debtor under either or both of these titles. He also submitted, and his submission was not directly disputed by the Government (see paragraphs 44 and 48 below), that (iii) he had not asserted his rights or taken any other action in relation to his claims under the share-transfer agreement, and (iv) they had accordingly become statute-barred. 8. In the absence of payment, the applicants sued the debtor over nine of the said promissory notes, the principal amount of which was in total 74,000 euros (EUR). This resulted in four payment orders issued by the Bratislava V District Court on 24 March 2011, 17 January 2012 and 11 February and 6 May 2014, ordering the debtor to pay the applicants the amounts due. Following the dismissal of the defendant’s appeals, these orders were certified as having become final, binding, and enforceable on 30 May 2016 (the order of 24 March 2011 for the benefit of the second applicant), 22 August 2016 (the order of 17 January 2012 for the benefit of the first applicant), 6 November 2017 (the order of 11 February 2014 for the benefit of the first applicant) and 7 November 2017 (the order of 6 May 2014 for the benefit of the first applicant). A further payment order was issued by the District Court on 5 September 2014 for further amounts to be paid to the first applicant, but it was challenged and the proceedings were ultimately terminated on 23 July 2019 without a decision on the merits for the reasons explained in paragraph 15 below. 9. Between 2016 and 2018 the applicants applied for enforcement of the four final, binding and enforceable judgments and the enforcement was authorised. In respect of the claim adjudicated in favour of the second applicant (for the principal amount of EUR 20,000, plus associated sums), EUR 1,399 was seized from the debtor’s monthly income. Out of that amount, EUR 1,092.93 was paid to the second applicant and the rest was retained by the enforcement officer for his costs. Other than that, the enforcement yielded no proceeds as no sizeable assets had been identified. DEVELOPMENTS IN THE REGULATION OF INSOLVENCY
10. Insolvency and the applicable procedures are governed by the Bankruptcy and Restructuring Code (Law no. 7/2005 Coll., as amended ‑ “the BR Code”). 11. The effects of a bankruptcy order entail, inter alia, that all legal proceedings concerning the assets belonging to the bankruptcy estate are stayed (Article 47 § 1 of the BR Code) and all enforcement proceedings are terminated (Article 48 of the BR Code). 12. If the bankrupt is an individual, the BR Code provides for the possibility of a “debt discharge” (oddlženie). In its wording before March 2017, a debt discharge became possible once the bankruptcy proceedings had been terminated. It meant that, at that stage, a three-year probation period would be defined in which the bankrupt had to generate a certain amount of income and make it available for the discharge of any outstanding debts. Provided the bankrupt fulfilled the conditions, all outstanding debts would become incapable of being pursued in legal proceedings (nevymáhateľné) against the bankrupt. 13. On 1 March 2017 an amendment (Law no. 377/2016 Coll.) to the BR Code came into force. It made the “debt discharge” a part of the bankruptcy proceedings and provided, inter alia, that in the event of bankruptcy with a debt discharge any claims on the basis of promissory notes issued by the bankrupt prior to a defined date became incapable of being legally pursued. BANKRUPTCY PROCEEDINGS
14. On 24 January 2019 the Bratislava I District Court issued a bankruptcy order in respect of the debtor, appointed a bankruptcy trustee to manage his estate and, upon the debtor’s request, discharged him of his debts in the terms specified in the decision. The order was issued upon the debtor’s request and was not subject to appeal. 15. By operation of the respective provisions of the BR Code (see paragraphs 11 above and 29 below), the bankruptcy order had as an automatic effect the termination of the enforcement proceedings the applicants had instituted against the debtor. Moreover, in application of those rules per analogiam, the proceedings concerning the first applicant’s pending claim were also terminated (see paragraph 8 above). 16. In a report of 10 August 2021, the bankruptcy trustee informed the District Court, inter alia, that, except for a claim for payment of EUR 662 to the State, the only creditors who had sought to have their claims registered in the bankruptcy proceedings concerning the debtor’s estate were the applicants. 17. In a letter of 23 August 2021, the District Court confirmed to the bankruptcy trustee that the applicants’ adjudicated claims based on the promissory notes were incapable of being pursued within the meaning of Article 166b § 1 (c) of the BR Code. Accordingly, they could not be registered or considered in the debtor’s bankruptcy proceedings and no decision in their respect was called for. RELEVANT LEGAL FRAMEWORK AND PRACTICE
THE CONSTITUTION
18. Pursuant to Article 20 § 1 of the Constitution (Constitutional Law no. 460/1992 Coll., as amended), the ownership right of all persons has the same legal content and enjoys the same protection. Such protection does not, however, extend to ownership acquired in contravention of the law. 19. Under paragraph 3 of Article 20, ownership implies responsibility and it must not be abused to the detriment of the rights of others or contrary to general interests protected by law. The exercise of the right of ownership must not interfere with human rights beyond a measure determined by law. 20. Expropriation or restrictions on the right of ownership may be imposed only to the extent necessary and in the public interest, in accordance with the law and for adequate compensation (Article 20 § 4). 21. In a constitutional judgment of 3 April 1996 in case no. PL. ÚS 38/95, the Constitutional Court held that expropriation or restrictions on the right of ownership could be imposed on the basis of an Act of Parliament, but not directly by an Act of Parliament. CONSTITUTIONAL REVIEW OF LEGISLATION IN THE PROCEEDINGS ON AN INDIVIDUAL COMPLAINT
22. It has been the Constitutional Court’s long-established practice that neither Article 127, which provides for the individual-complaint procedure, nor any other provision of the Constitution provides the basis for individuals to challenge legislation as being incompatible with the Constitution or with international instruments, including the Convention (see, for example, its decision of 7 November 2007 in case no. IV. ÚS 287/07). THE BANKRUPTCY AND RESTRUCTURING CODE
23. Under Article 166 § 1 of the BR Code, as amended by Law no. 377/2016 Coll., an insolvent individual may apply for a debt discharge through bankruptcy proceedings (Articles 167 et seq.) or an instalment plan (splátkový kalendár) (Articles 168 et seq.). 24. Article 166b of the amended BR Code defines the type of claims that are “excluded from satisfaction”. Paragraph 1 (c) states that this applies to claims based on promissory notes issued by the bankrupt prior to a reference date set out in Article 166a § 1 (a) of the amended BR Code. 25. According to the explanatory report (dôvodová správa) on Law no. 377/2016 Coll., the reason for the exclusion of claims based on promissory notes from satisfaction has to do with the fact that promissory notes are used as a security for the fulfilment of an underlying obligation. The debt under the promissory note is independent of the underlying debt and they habitually co-exist, while there are no obstacles to pursuing the underlying debt in the proceedings under the BR Code. 26. A claim’s incapability of being pursued in legal proceedings is to be taken into account by courts even if the bankrupt does not invoke it (Article 166e § 4 of the amended BR Code). 27. Under Article 166f of the amended BR Code, if a creditor affected by a debt discharge can show that, through it, the bankrupt was not pursuing an honest aim (poctivý zámer), he or she is entitled to seek cancellation of the debt discharge by way of an action against the bankrupt or his or her heirs within six years of the bankruptcy order or the determination of the payment schedule. 28. In the terms of Article 166g § 1 of the amended BR Code, an honest aim is recognised if the bankrupt’s actions following the request for a debt discharge demonstrate a genuine effort to address his or her debts within his or her possibilities and abilities. Paragraph 2 of that Article gives examples of the absence of an honest aim, such as if the bankrupt has concealed some assets, has failed to include an individual in the list of his or her creditors, has based his or her request for a debt discharge on false or incomplete information, has failed to cooperate with the trustee, has deliberately brought about his or her insolvency, has pretended to be insolvent at the time of his or her request for a debt discharge, has incurred liabilities anticipating that he or she would discharge them by asking for a bankruptcy order or an instalment plan, has attempted to disadvantage some or favour other creditors, has negligently failed to respect the established instalment plan or to make certain specific payments, or has requested a debt discharge despite not having the centre of his or her main interests in Slovakia. 29. By virtue of Article 167f § 1 of the amended BR Code, enforcement proceedings must not be commenced or continued in relation to assets belonging to the bankruptcy estate. THE LAW
        JOINDER OF THE APPLICATIONS
30. Having regard to the similar subject matter of the applications, the Court finds it appropriate to examine them jointly in a single judgment. ALLEGED VIOLATION OF ARTICLE 1 OF PROTOCOL No. 1
31. Relying on Article 1 of Protocol No. 1 to the Convention and Article 13 of the Convention, the applicants complained that they had been unable to pursue their claims against the debtor in legal proceedings and that they had not had any legal protection in that connection. 32. Being the master of the characterisation to be given in law to the facts of a case (see, for example, Radomilja and Others v. Croatia [GC], nos. 37685/10 and 22768/12, § 126, 20 March 2018), the Court considers that, on the facts, the complaints are to be examined under Article 1 of Protocol No. 1, which reads as follows:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
Admissibility
33. The Government argued non-exhaustion of domestic remedies in that the applicants could and should have asserted their rights by way of an action for the cancellation of the debtor’s debt discharge under Article 166f of the BR Code and, depending on its outcome, a complaint to the Constitutional Court. The action in question enabled the cancellation of a debt discharge in the event it was tainted by a dishonest aim on the part of the bankrupt. The available statistics showed that, in practice, this was the case most frequently in situations where the presumed bankrupt was not in fact insolvent, his or her insolvency being an essential prerequisite for the debt discharge. While it was true that the applicants had no standing to challenge legislation before the Constitutional Court in abstracto, had they made use of the action under Article 166f of the BR Code and had they not been satisfied with its outcome, it would have been open to them to challenge it before the Constitutional Court. 34. The applicants responded that they were not aware of and the Government had failed to indicate any grounds on which the debtor’s debt discharge could be contested under Article 166f of the BR Code. Moreover, they had been completely excluded from the proceedings concerning the debt discharge. They had accordingly had no access to the case file and therefore to any information necessary to be able effectively to pursue the legal avenue suggested by the Government. Furthermore, they considered the statistical information relied on by the Government inconclusive and argued that, in any event, challenging the debt discharge by way of a separate action would have generated further procedural costs (on top of those of the underlying litigation and enforcement proceedings), which in reality represented a barrier to the assertion of their rights in the way proposed by the Government. Lastly, as the alleged violation of their rights had originated from the direct application of the amended BR Code, and as they as individuals had no standing to contest legal provisions before the Constitutional Court, a constitutional complaint was not capable of providing them with any redress. 35. The Court notes that the alleged violation of the applicants’ property rights came about as the direct effect of the ruling on the debtor’s debt discharge in the bankruptcy order of 24 January 2019 against him. This effect originated automatically from the application of Article 166b (c) of the BR Code, as amended by Law no. 377/2016 Coll. 36. As there has been no complaint about the interpretation or application of that provision by the trustee, the bankruptcy court or anyone else, it is clear that what is in issue is the legal provision itself. It is uncontested that there is no way for the applicants to assert their property rights in relation to it by challenging the underlying bankruptcy order before the Constitutional Court (see also paragraph 22 above). 37. In so far as the Government relied on an action for the cancellation of the debt discharge under Article 166f of the BR Code, the Court notes that the availability of this remedy depends on it being shown that the bankrupt was pursuing a dishonest aim through the debt discharge. As indicated in Article 166g § 1 of the BR Code by way of both positive and negative delineation, the content of this criterion focuses on the attitude and behaviour of the bankrupt. This is in fact consonant with the statistical information submitted by the Government to the effect that in most instances the bankrupt’s dishonest intention is demonstrated if the bankrupt pursues a debt discharge without actually being insolvent. 38. In that regard, however, the Court notes that the essence of the applicants’ grievance has nothing to do with the intentions of the debtor as such, but rather with the debt-discharge arrangement allegedly being disproportionate and providing no protection to their rights and interests. It has not been suggested by the Government or established otherwise that an action under Article 166f of the BR Code allows for the consideration of these elements. 39. In these circumstances, the Court finds that it has not been shown that the type of action indicated was available in theory and in practice at the relevant time, that is to say that it was accessible, that it was capable of providing redress in respect of the applicants’ complaints and that it offered reasonable prospects of success (see Akdivar and Others v. Turkey, 16 September 1996, § 68, Reports of Judgments and Decisions 1996-IV). This conclusion is not altered by the possibility for the applicants to challenge the outcome of an action under Article 166f of the BR Code before the Constitutional Court. This is so in particular since, as already noted, the complaint is essentially about the legal provision itself and not about its interpretation or application (see Jenisová v. Slovakia, no. 58764/00, §§ 58‑60, 3 November 2009; see also Babylonová v. Slovakia, no. 69146/01, § 44, ECHR 2006-VIII; L.G.R. and A.P.R. v. Slovakia (dec.), no. 1349/12, § 55, 13 May 2014, with further references; and contrast Orange Slovensko, a. s. v. Slovakia (dec.), no. 43983/02, 24 October 2006). 40. The Government’s objection is accordingly dismissed. 41. The Court notes that this part of the applications is neither manifestly ill-founded nor inadmissible on any other grounds listed in Article 35 of the Convention. It must therefore be declared admissible. MeritsThe parties’ submissions

(a)   The applicants
42. The applicants complained that the effects of the debtor’s debt discharge, stemming from the BR Code as amended with the effect from 1 March 2017, had made it impossible for them to pursue their claims against the debtor in legal proceedings and that they had been deprived of any legal protection in that connection. They emphasised that the promissory notes providing the basis for their claims had been issued before the entry into force of the said amendment and that, while they were in the process of pursuing those claims in judicial and enforcement proceedings, they could not have anticipated that the amendment would significantly change the framework for doing so. 43. The debtor’s bankruptcy proceedings amounted in fact to collective enforcement proceedings against him and the applicants had been completely excluded from the possibility of making any use of them, which had discriminated against them in relation to other creditors. If the purpose of the exclusion from satisfaction in the event of a debt discharge of claims based on promissory notes was to prevent double collection on the same amount under the promissory note as well as under the original contractual instrument underlying the promissory note, this objective could have been served by other means that were more proportionate to that aim. 44. In any event, in response to the Government’s argument (see paragraph 48 below), the applicants submitted that the first applicant had made no dispositions in respect of his claims against the debtor under the share-transfer agreement, that these claims had meanwhile been statute‑barred, and that the second applicant had not had any such claims. There was accordingly no risk of double collection of the same amount in their individual case. Moreover, there was no need to provide the debtor with any special protection otherwise warranted for consumers since the relationship between the applicants and the debtor was of a purely business‑law nature. 45. The applicants had been completely excluded from any possibility of pursuing their claims against the debtor in the bankruptcy proceedings or through any other legal means, without any compensation at all. The essence of their property rights had accordingly been impaired and, what was more, the arrangement interfered with the constitutionally guaranteed equality of owners and ignored the need for a fair balance to be struck between the competing interests in view of the principle of proportionality. (b)   The Government
46. The Government argued that the reason the applicants’ claims had not been satisfied was the debtor’s insolvency. The fact that one of the first applicant’s claims had in fact not been upheld by courts with final effect made no actual difference and called for no answer other than that which follows. 47. A private debtor’s insolvency was an ordinary part of the risk to be assumed by any private creditor and it involved no direct liability on the part of the State. The latter’s Convention responsibility had therefore been limited to the positive obligation to provide a framework and the availability of measures for the enforcement of the applicants’ claims. 48. The applicants’ promissory notes had served to secure the original claims under the share-transfer agreement and there had been no legal restrictions on the possibility of having the original claims pursued in the debtor’s bankruptcy proceedings or through any other means prior to those proceedings. As it was unclear what had happened to the original claims based on the share-transfer agreement, any consideration of their being statute-barred was speculative. 49. Claims based on promissory notes were among other claims that were excluded under Article 166b of the amended BR Code from satisfaction in the event of a debt discharge, with the overriding aim – linked to the insolvency context – of favouring the satisfaction of the principal amount of the original claims to accessory or parallel claims. As to claims based on promissory notes specifically, their exclusion followed a set of measures taken for the protection of consumers from abuse by means of promissory notes. Such abuse had become a common occurrence in view of the parallel existence of the original debt, the payment of which was secured by way of a promissory note, and the independently existing debt under the promissory note. 50. The purpose of the debt discharge was to address the problem of the insolvency of individuals, which was in general an important economic and social phenomenon. It was clear that it inherently involved a clash of the interests of the creditors, those of the bankrupt, and by extension also those of society. The debt-discharge arrangement sought to reconcile those interests by allowing reintegration of the insolvent individuals into economic life, and ensuring fairness in the satisfaction of creditors based on the principle of pari passu. 51. Furthermore, the Government pointed out that, prior to the debtor’s debt discharge, the applicants had been able to pursue their claims based on their promissory notes before the ordinary courts and in the ensuing enforcement proceedings and that no complaints had been made in that connection. In combination with the availability of the action for the cancellation of the debt discharge under Article 166f of the BR Code, the respondent State had fulfilled any and all of its positive obligations at play in this case.

Article of the Convention at issue: Article 1
Outcome: violation