The Constitutional Court declared about Act XXXIX. of 2015, based on the claim settlement of Quaestor Financial Consulting Ltd[1]'s more than 30.000 claimants, that the government has the right to establish the institutional system of claim settlements based on public interest. However it cannot specify who is eligible or what conditions they should meet, without taking into account the equality before the law, non-discrimination, and the balance of debit against financial institutions liable for settling claims.
In its Decree of November 2015, the Constitutional Court decided on the legal fate of the institutional system of claim settlements regarding the major financial abuse. After the insolvency of the company that impaired assets of over 1 billion US dollar for approximately 32.000 clients, the proceedures for compensation started. Investors could expect financial aid of up to a 20.000 euro threshold from the Investor Protection Fund (later on IPF), that would not have covered even slight of the caused damage. The government would have ensured the amount of compensation up to a 100.000 euro threshold based on political, administrative, and legal reasons, and established a fund with the Act XXXIX of 2015 to conduct and administer the compensations. This law set the proceedure and terms of the compensation in great detail. The IPF members were charged for the financial liabilities. This norm was attacked by constitutional complaints of three IPF representative, who argued against the law and certain sections of it, claiming that the Quaestor law specified surplus liabilities for them with uncertain conditions. In addition to this, the aggrieved parties of Buda-Cash Ltd., another brokerage firm that went bankrupt in 2015, also attacked the Quaestor law, especially its first paragraph of Article 1. They thought, that the compensation stated for the aggrieved parties of Quaestor is subject to discrimination, and as a result, it would be detrimental for them.
The Fundamental Law of Hungary
(1) Hungary shall be an independent, democratic rule-of-law State.
(2) Hungary shall ensure the conditions of fair economic competition. Hungary shall act against any abuse of a dominant position, and shall protect the rights of consumers.
Freedom and Responsibility
The rules for fundamental rights and obligations shall be laid down in an Act. A fundamental right may only be restricted to allow the effective use of another fundamental right or to protect a constitutional value, to the extent absolutely necessary, proportionate to the objective pursued and with full respect for the essential content of such fundamental right.
(1) Everyone shall have the right to property and inheritance. Property shall entail social responsibility.
(1) Everyone shall be equal before the law. Every human being shall have legal capacity.
(2) Hungary shall guarantee the fundamental rights to everyone without discrimination and in particular without discrimination on grounds of race, colour, sex, disability, language, religion, political or other opinion, national or social origin, property, birth or any other status.
Act XXXIX. of 2015 on establishing a claims management foundation for the debt settlements of the Quaestor insolvency.
"1. § (1) The scope of the law affects those transactions, where the disclaimer of client was intended to purchase bonds issued by QUAESTOR FINANCIAL HRURIRA Management Consultancy Limited Liability Company, or intended at the purchase of bonds issued by Quaestor Securities Private Limited Company or by its affiliate, and the
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client settled its liability concerning the payment of consideration, irrespectively of the fact whether the privity came off as valid or fully succeeded.
(2) Those private or legal person and other organizations are eligible for compensation, who as a result of the bond issues mentioned in paragraph (1) have a claim against the business associations mentioned in paragraph (1) on the day this law comes into effect."
"2. § (1) In order to settle the demands regarding the claims originating from Section 1. §, this law establishes the Compensation Fund of the Quaestor Aggrieved Parties (from later on: Fund).
(2) The transferring of the claims to the Fund in exchange for consideration does not affect the compensation process written in Section 213 of Act CXX of 2001 on the capital market."
"4. § (4) To ensure the continuity of the Fund - with the government as the third party guarantor - it can issue bonds for a maximum of 10 years duration, can borrow from credit institutions with maturity of maximum 10 years, and from the Hungarian National Bank - with the government as the third party guarantor - can ask for bridging loan with a maturity of maximum 3 months.
(5) The directorate of the Fund can demand refundable cash advances from the Investor Protection Fund members (from now on: IPF) in order to pay the instalments of the loan mentioned in paragraph (4), in order to supplement its own resources, with the liability of repayment.
(6) IPF members are liable to pay the advances in the calendar year of 2014 as a proportion of their annual payments. When calculating the ratio for the annual assessment of advances
a) the annual liability towards the IPF should be neglected by those members,
aa) who defunct without successor,
ab) whose liquidation is legally ordered,
b) in case of IPF membership after the 10th of April, 2015 the annual membership payment liability of these members should be considered as the annual liability of 2014.
(7) According to this law, any business is also considered to be IPF member, that was yet an IPF member on the 10th of April, 2015, as well as the successors of those organizations that were IPF members from the 10th of April, 2015.
(8) Annually paid advances must be assessed once before the due calendar year, until the 15th of December at the latest. Advance paid in the calendar year of 2015 must be assessed at maximum 150 days after this law comes into effect. In case of IPF membership after the assessment of the annual advance payment, only the advances of the new member must be assessed - within 60 days of the memberhsip -, the already assessed advances (of other members) shall not be modified.
In Chapter 3 of its decree the Constitutional Court first examined the content and formal terms and conditions. The constitutional complaints conformed to the conditions specified in Paragraph (1) and (1/B) of Section 52 of the Constitutional Law and they contained the elements defined in Paragraph (2) of Section 26. However, a proposal was dismissed based on Section 64/B of the Constitutional Law, that requested to overrule the Quaestor law without specifying and referencing the related regulations. Afterwards the Constitutional Court examined the claim and entitlement of the claimant themselves. According to the Court, the concerns of IPF promisors regarding the discrimination of submissions of the aggrieved parties are not justified. The Court assessed, that it is irrelevant for proposals to specify the substantive scope of Quaestor or the terms and conditions of the compensation. The Court rejected their proposals based on Point d) of Section 64 of the Constitutional Law. The Constitutional Court accepted most concerns of the proposers, however it rejected those regarding the provisions of the Quaestor compensation fund and IPF members.
Analysing the content of the submissions the Constitutional Court made the following decisions. First of all it declared, that since its functioning it has seen the constitutional requirement of preparation time as the main building block of legal certainty. According to the Court, legal certainty is not a fundamental right. However, with regards to the legal changes, the preparation time for those obligated must be clearly and fully specified.
If the adjustment time related to the new law is too short, comes with exceptional difficulties, the adjustment would be impossible, or if the law does not provide such opportunity at all, then the case is against the Fundamental Law. The Court determined, that the advance payments for financial institutions is not an extra liability directly resulting from their IPF membership. This measure of the Quaestor law is inexact, because it merely defines that advance payments of members have to be met as proportion to their general liabilities. The law does not define a more precise calculation method. For the obligated parties this meant such a
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legal uncertainty, that ran counter to the constitutionally required preparation time. According to the Court, the Quaestor law required IPF members to keep an amount at disposal not defined in advance, which made the planning of their financial year harder and literally impossible for the year of 2015. The Court understood, that the advance payments set by the Quaestor law did not result from the normal liabilities related to the IPF membership. Members of the Constitutional Court agreed on the fact, that the date, amount and method of payment of these extra liabilities should have been specified more precisely. Due to this inaccuracy of Section 4 Paragraph (8) of the Quaestor law, the annual financial plans of IPF members were subject to uncertainty, and due to the lack of necessary preparation time this paragraph of the legislation is against the Fundamental Law.
Secondly, the Constitutional Court examined the probability for incidental discrimination among aggrieved parties. It took stand on the fact if the law specified reasons, based on which besides the 20.000 euro maximum compensation treshold of the IPF rules, affected people could apply for the exceptional and extraordinary compensation proceedings of 100.000 euros. According to the Court, no investor has the subjective right for compensation, since it is based on equity, the separate decision and ex gratia solution of the government. The Court seeked whether there is any objective reason for this positive differentiation, or it is arbitrary. It defined, that restraining discrimination did not mean the restraining of principled differentiation, only that "every legal person must be treated as equally dignified individual".[2] Based on Section 15§ Paragraph (1) of the Fundamental Law, unlawful act can determined when the legislator makes unreasonable difference between members of the same group, and this different regulation have no rational and cogent reason, therefore arbitrary. The Court examined if the aggrieved parties possess further rights for special treatment compared to other investors also receiving compensation from the IPF.
The Constitutional Court did not accept the opinion of the Quaestor law legislators, which stated that the discrimination is based on the purchase of Quaestor bonds functioning similarly as in a bank, therefore they were wrong and unaware of the risk involved in the privity. According to the Court, these reasons could only hold for the purchase of bonds issued by Quaestor, but do not justify the different and special treatment. Since the Court did not see the treatment justitifed, it labelled Section 1§ of the Quaestor law as unlawful and repealed it based on Paragraph 1 of Article 15 of the Fundamental Law.
Thirdly, the Court examined the proposal of investor services, that presumed offence to their property rights. It found that the temporary charge on the IPF members' properties could mean the restriction of property rights ensured by Paragraph (1) of Section XIII § of the Fundamental Law. The reason is that the right to property as a basic human right is also given to a legal person as well. However, this right can be proportionately limited based on public interest if necessary. The judges of the Constitutional Court analyzed in the Quaestor case whether the restrictions laid on the IPF members were in align with the targeted community objective. In this privity, public interest was meant to be stable and predictable in the financial sector. The fact that the Quaestor clients received favorable treatment did not exclude this objective to be realized. Even the interests of a smaller community can evoke effects on the society with which public interest can materialize. The Quaestor insolvency created a social mistrust against the financial sector which caused further disturbance in the economy. In this process the financial soundness of the IPF members can help in restoring the faith and trust towards the financial markets. Even though the compensation of the aggrieved parties of the Quaestor case could possess public interest, the Constitutional Court did not regard the property restrictions of IPF members to be fairly aligned with the implementation. Financial institutions would have had to take part in an uncertain compensation system that could have had to last 10 years, in which even the role of the government as guarantor was unclearly specified. The property restirctions of members were described in a precarious way without any consideration or repayment guarantee. This regulation was not aligned with realizing public interest, because it would overburden the property of IPF members. Due to the restriction on property rights, as a fundamental right, the Constitutional Court set aside Sections 5-9 §, Point d) of Section 6§ and Section 13 § of the Quaestor law.
It reflects the complexity of the Constitutional Court's decree that it required two parallel justification and involved six minority reports from judges. There was a consensus among the judges that the government can freely advertise ex gratia compensation programs. This however is not a fundamental right, as supported by several constitutional court decree.[3]
The judges agreed on the fact, that the biggest problem of the Quaestor compensation fund is that it further invoices its financial consequences on to
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the IPF members without clear and proper regulation.
In addition to this, several other minority reports were issued regarding this decree. The most outstanding from these is the opinion of Constitutional Judge László Kiss, who suggested applying the Lex Rhodia responsibility, loss-distribution system, which is followed by the Hungarian, Austrian, German and South-African trading practices.[4] Judge Mr. Kiss thought, that the state itself can be part of sharing the liabilities. The governmental organisation responsible for controlling failed its basic duty to effectively supervise, identifying the occurring negative outcome during the process.[5] Judge István Balsai saw the state's role differently. According to him, the state ultimately bears the liability and responsibility of the compensation process, therefore its fulfillment should be assumed. The debate can take a political shape from this point on, as the hungarian government played a controversial role regarding its public finance affairs in the past 5 years. It solved the contract modification of foreign currency loanees, however it did not fulfill its promise it took while nationalizing private pension funds.
The compensation of the aggrieved parties can further raise debates from a consumer protection viewpoint. Legislators defined in the Fundamental Law[6] that Hungary takes steps against abuse of power and protects the rights of consumers.
This argument was never seen in the Constitutional Court's justification. If we take into account the information asymmetry between the small investors, financial institutions and the financial supervisory regarding financial contracts, we can conclude that the government should take a bigger role in order to protect the rights of financial consumers in a legal situation that proves to be unbeneficial for small investors.
The statement of the Constitutional Court on the undue property damage for the sake of protecting the investors is also disputable. The Court has yet to define the appropriate measures and extent of proportioning. During the assessment it did not take into account the former role of financial institutions as realizing significant social interest in public financing. The same institutions also played a big bankroller part in the termination and modification of foreign currency loan contracts. Referring to social solidarity, they were willing to make extraordinary payments for the public interest and well-being. We also have to keep in mind, that after the 2008 financial crisis the Hungarian financial institutions also received a significant, multibillion dollar support from public money in order to maintain and soundly function the financial system. These privities provide another viewpoint and put a different light on the short statements of the Constitutional Court on proportioning. ■
NOTES
[1] Quaestor Securities Plc. was founded in 1990 by private individuals to provide financial services, trading of marketable securities and investor fund management. Within 10 years the company expanded into a corporate group, with new activities ranging from tourist services to property development and other. The recorded number of clients reached 200.000, and became a market leader in financial consulting in Hungary. Quaestor Hruria, the issuer of securities of the corporate group announced insolvency on the 8th of March, 2015 at short notice, and as a result they dismissed all financial claims from their clients.
[2] Decree 16 of 1991. (IV.20.) of the Constitutional Court and Decree of 1991, 58, 62.
[3] The decree 800/B of 1993 of the Constitutional Court, together with the decree 376/B of 2003 adjudge, that the right for compensation is not a fundamental right.
[4] Parallel justification of Constitutional Judge László Kiss, [130.]
[5] Parallel justification of Constitutional Judge László Kiss, [137]
[6] Second Paragraph of Article M
Lábjegyzetek:
[1] The Author is associate professor, head of department Department of Financial Law, Faculty of Law, University of Pécs.
Visszaugrás
