EHRM, 07-02-2012, nr. 41102/07

The facts of the case, as submitted by the parties, may be summarised as follows.

In July 2003 a bank filed a bankruptcy petitionbefore the Stockholm District Court (Stockholmstingsrätt) against the limited company Carina AhlströmFörvaltning AB (‘the company’). At the time, all shares in the company were owned by the applicant. The court found that the company had no duly appointed representative and served the petition and summons to the bankruptcy hearing on the company's registered auditor (registreradrevisor). At the hearing, held on 1 September 2003, the auditor appeared but no representative for the company. The District Court found that the mentioned documents had been legally served on the company through its auditor and that, therefore, there existed no impediment to proceeding with the hearing. In a decision later the same day, the District Court declared the company bankrupt and appointed an official receiver (konkursförvaltare) for the bankruptcy estate.

The company appealed against the decision to the Svea Court of Appeal (Sveahovrätt), requesting in the first place that the declaration of bankruptcy be quashed and the case be remitted back to the District Court for re-trial or, in the alternative, that the decision be reversed. It submitted,inter alia, that it was not insolvent and that the summons to appear before the District Court had not been correctly served. In the latter respect, it argued that it had been incorrect to serve the summons on the auditor since the company had a board of directors (styrelse) at the time and since the auditor had been dismissed from his mandate.

In a decision of 2 October 2003 the Court of Appeal found,inter alia, that no board of directors had been registered by the company with theregister of limited companies (Aktiebolagsregistret). Similarly, the register had not shown that the auditor had been divested of his mandate. The Court of Appeal found thatthesummons to appear before the District Court had been correctly served on the company and that it had not substantiated that it was solvent. It therefore upheld the lower court's decision in full.

In December 2003 the official receiverissued a formal report concerning the bankruptcy and the estate (förvaltarberättelse). According to the receiver, the company had been insolvent since at least February 2003. Moreover, it was noted in the report that most of the company's assets had been transferred shortly before the bankruptcy decision without accounting for and, seemingly, without receiving any compensation in return, that the company had lacked annual reports and other complete bookkeeping, that there had been no ongoing activity in the company at the time of the bankruptcy decision and that, at the same point in time, the company had had 475,000 Swedish kronor (SEK)in assets and approximately SEK 2,600,000 in debts. During the bankruptcy period, the official receiver sold the bankruptcy estate's assets and made prepayments to its creditors, including the creditor bank.

The company appealed against the Court of Appeal´s decision to the Supreme Court (Högstadomstolen) before which it maintained its claims. The Supreme Court granted leave to appeal and, in a decision of 18 March 2005 (NJA 2005 p. 175), found that it was not possible to serve a summons on a limited company without an appointed board of directors through its auditor. As, therefore, the summons to the bankruptcy hearing had not been correctly served on the company, the Supreme Court quashed the declaration of bankruptcy and remitted the case back to the District Court for re-trial.

Following the decision of the Supreme Court, the company transferred its possible right to damages from the State due to the erroneous bankruptcy decision to a third party.

On 9 January 2006 new bankruptcy proceedings, at which the company was represented, were held before the District Court. In these proceedings, the creditor bank referred to the mentioned prepayments from the bankruptcy estate and submitted that, out of its original claim, only SEK 14,000remained unpaid. The company's representative declared that he personally guaranteed the alleged remaining debt. On 13 January 2006 the court rejected the bankruptcy petition on the grounds,inter alia, that the present claim concerned only a small amount and that it had been guaranteed by the representative. The court further obliged the bank to reimburse the company's legal costs and decided that its bankruptcy costs amounting to SEK 866,428should be paid by the State.

The applicant sued the State before the Supreme Court, requesting the court to declare that the State was liable for damages incurred on the company by the District Court's and the Court of Appeal's erroneous declaration of bankruptcy.The applicant claimed that the State was obliged to pay compensation, firstly, in accordance with Chapter 3, section 2 of the Tort Liability Act (Skadeståndslagen,1972:207), since the District Court and the Court of Appeal were guilty of wrongful acts or omissions in connection with the exercise of public authority. In the alternative, he requested that the Supreme Court should create a general legal principle (rättsgrundsats) giving a right to compensation in cases like the instant one. The applicant referred to,inter alia, the Convention and its protection of property rights.

The State disputed that there had been any wrongful acts or omissions in connection with the exercise of public authority which had given rise to an obligation for the State to pay compensation. It stated that the question of how to serve summonses on limited companies in cases such as the one at issue had been made clear only by the decision of the Supreme Court in 2005. There existed neither any previous case-law on the matter, nor any comments in the preparatory works that could be construed in a way that precluded the possibility of serving a summons on a limited company through its auditor. Finally, there was no guidance to be found in the doctrine. Therefore, the State argued, the decisions by the lower courts had not constituted a clear breach of the law, such as could be construed prior to the Supreme Court's decision.

In a judgment of 22 March 2007, the Supreme Court rejected the applicant's claims. It stated that now, after its decision in the case NJA 2005 p. 175, it was clear that a summons could not be served on a limited company through its auditor and that, consequently, the lower court's decisions had been wrong. However, it observed that, when the State was held liable for alleged errors concerning legal and evidential issues, a flawed assessment by a court was not sufficient for liability for damages; only manifestly erroneous assessments could constitute grounds for liability. In this respect, the Supreme Court found that the correct interpretation of the relevant provision concerning the serving had not been obvious and that no such wrongful act or omission as to cause liability had been committed. The Supreme Court also rejected the applicant's alternative request.

The company was declared bankrupt on its own request on 21 March 2007.

The Government maintained that the application was inadmissible on the grounds of incompatibility ratione personae because the company's assets, including any possible right to damages from the State due to the erroneous bankruptcy decision, had been transferred to a third party immediately after the bankruptcy decision had been quashed. Thus, the applicant did not own the right to claim compensation and the Supreme Court's decision to refuse such compensation had not affected his property rights.

The Government further maintained that the application was inadmissible as being manifestly ill-founded. They disputed that the bankruptcy decision had caused any decrease in the value of the company and referred,inter alia, to the poor financial situation of the company at the time of the bankruptcy and the applicant's failure to substantiate his claim. The Government pointed out that he had not submitted any accounts concerning the company and that he had failed to specify or account for the state of the company's assets at the time of the bankruptcy. Moreover, they pointed out that the alleged assessments of the company made by third parties included obvious errors and inconsistencies and that no credible assessment of the company could be made in light of its practically non-existent bookkeeping.

The Government recognised, however, that the company had been deprived of the right to administer and deal with its possessions by the bankruptcy order and that this interference by the State constituted a control of the use of property within the meaning of the second paragraph of Article 1 of Protocol No.1 to the Convention. The Government maintained that the interference was lawful and performed in the general interest of securing payment to the creditors and that the principle of proportionality had been observed.In particular, the Government contended that the bankruptcy decision was taken in accordance with the Bancruptcy Act and that it was correct on the merits. They also stressed that the general interest to protect the company's creditors was particularly strong in the present case.

With regard to the financial state of the company at the time of the bankruptcy, the Government pointed to the findings of the official receiver in his formal report dated December 2003.

The Government further pointed out that thecompany had had the opportunity to prove that it was solvent before the Court of Appeal but had failed to do so, as the court had upheld the insolvency assessment of the lower court. As to the subsequent court examinations, the Government noted that the Supreme Court had not assessed the company's solvency and that the bankruptcy proceedings in 2006 did not provide any evidence for a finding that the bankruptcy declaration in 2003 was erroneous on the merits.

The Government, lastly, submitted that the applicant had received sufficient redress for any interference with the company's property in the decision that the State should pay the company's bankruptcy costs.

The applicant maintained that he had an established legal interest in pursuing his claims, as the company's right to damages from the State had been transferred from a third party, who had previously acquired them, to the applicant before the ruling of the Supreme Court in 2007.

The applicant further maintained that the bankruptcy decision involved an irrevocable and permanent deprivation of the company's property.He explained that a declaration of bankruptcy always entailed a depreciation of the debtor's value. In the present case, it had caused customers who wanted to buy the company's assets to disappear, the company's on-going businesses to end and its operations to succumb to general bad-will. The applicant argued that the deprivation was unlawful, as the bankruptcy decision was later quashed, and that it did not serve a general interest.The applicant further argued that the deprivation of property, taken together with the fact that the company had been deprived of its legal guarantee to have the summons correctly served on it in the District Court, upset the fair balance required under Article 1 of Protocol No. 1. This was especially so taking into account the gravity of the procedural error committed and the fact that the company's whole existence had been at stake in the bankruptcy proceedings.

In particular, the applicant submitted that the company had had an appointed, although not registered, board at the time of the proceedings. He also argued that it should have been obvious that the summons could not be served on a company through its auditor, as an auditor was independent of an appointing company and had no reason or obligation to forward a summons to such a company. In any event, the fact that the law was unclear in this regard could not justify the State's violation of the Convention. The applicant further maintained that the bankruptcy could have been avoided if the company had known about the proceedings at issue. Following the District Court's decision, however, the financial situation of the company had significantly worsened and the possibility of proving the company's solvency before the Court of Appeal had therefore been illusory.

Concerning the quantity of his losses, the applicant submitted that the value of the company's assets amounted to SEK 10 million at the time of its bankruptcy and that the assets were subsequently sold by the official receiver for SEK 2.8 million. Consequently, the bankruptcy decision had resulted in a value depreciation amounting to SEK 7.2 million. The applicant submitted,inter alia, affidavits by himself and three third parties concerning the value of and biddings on the company as of the summer of 2003.

The applicant lastly maintained that the State's payment of the bankruptcy costs did not constitute compensation for the company's losses.

The Court does not find it necessary to make an in-depth examination of the issue of victim status in the present case, because the application is in any event manifestly ill-founded for the reasons outlined below. It notes, however, that the applicant was the sole owner of the company at the time of the bankruptcy decision at issue and that the Supreme Court accepted the applicant as the plaintiff in the subsequent proceedings concerning compensationdue to this decision. The Court will therefore proceed on the assumption that the applicant holds victim status for the purpose of the present application.

The Court reiterates that any interference with the peaceful enjoyment of possessions must strike a fair balance between the demands of the general interests of the community and the requirements of the protection of the individual's fundamental rights. The concern to achieve this balance is reflected in the structure of Article 1 as a whole. The requisite balance will not be found if the person concerned has had to bear an individual and excessive burden (see Sporrong and Lönnroth v. Sweden, judgment of 23 September 1982, Series A no. 52, pp. 26 and 28, §§ 69 and 73). In other words, there must be a reasonable relationship of proportionality between the means employed and the aim sought to be achieved (see James and Others v. the United Kingdom, judgment of 21 February 1986, Series A. no. 98, p. 34, § 50). Ascertaining whether such a balance existed requires an overall examination of the various interests in issue, which may call for an analysis of the conduct of the parties to the dispute (see Beyeler v. Italy [GC], no. 33202/96, § 114, ECHR 2000-I§).

Turning to the present case, the Court first observes that the bankruptcy decision deprived the company of the right to administer and deal with its possessions and that thus, regardless of whether or not it also caused a value depreciation in the company, it amounted to control of the use of property within the meaning of the second paragraph of Article 1 of Protocol No. 1 (see, among others,Luordo v. Italy,no. 32190/96, § 67, ECHR 2003-IX).

The Court further notes that the decision todeclare the company bankrupt was taken by the District Court and upheld by the Court of Appeal in accordance with Chapter 1, section 2 of the Bankruptcy Act, because the request for bankruptcy was made by one of its creditors andbecause the courts found the company to be insolvent. Thus, the interference with the company's possessions was based on law. The mere fact that the Supreme Administrative Court quashed the decision of the lower courts due to a procedural error does not render the measures unlawful (see,mutatis mutandis,Benham v. the United Kingdom, judgment of 10 June 1996,Reports of Judgments and Decisions 1996-III, § 42 and Simonjan-Heikinheimo v. Finland (dec.), no. 6321/02, 2 September 2008). The bankruptcy decision was moreover intended to secure payment to the company's creditors. The interference therefore pursued a legitimate aim that was in accordance with the general interest, namely the protection of the rights of others (see, among others,Luordo v. Italy,cited above, § 68).

The Court observes that the essence of the applicant's complaint is that, notwithstanding the subsequent quashing of the bankruptcy decision, he could not obtain compensation for damage alleged as a result of the decision. Whether or not the refusal by the domestic courts to order compensation to be paid to the applicant struck a fair balance between the interests of the authorities in declaring the company bankrupt and the applicant's proprietary interest must be examined in the light of the particular circumstances of the case (see,mutatis mutandis,Adamczyk v. Poland (dec.), no. 28551/04, 7 November 2006, and Simonjan-Heikinheimo v. Finland, cited above.)

The Court notes from the outset that the State's liability for damages due to the erroneous decision was examined by the Supreme Court in adversarial proceedings, during which the applicant had the opportunity to submit evidence and arguments which he though necessary to protect his interests.

In these proceedings, the Supreme Court found that the procedural error committed by the District Court, by serving the summons on the company through its auditor, was not such as to impose liability on the State under the Torts Liability Act. According to the court, the issue of whether a summons could be served on a company in such a way had not been clear at the time of the lower courts' decisions and had been clarified only by the subsequent decision of the Supreme Court. The legal assessment made by the lower courts could therefore not be regarded as manifestly erroneous.

The Court finds nothing to show that the conclusion reached by the court was arbitrary or unreasonable. In addition, the Court cannot overlook the fact that the company was found to lack a duly appointed board before the lower courts and that it thus must be regarded to have contributed to the procedural situation in which the courts found it necessary to serve the summons on its auditor.

Moreover, the Court finds nothing to indicate that the bankruptcy decision was flawed on the merits. The Government's submission show that the State had a strong interest in declaring the company bankrupt in order to protect the interest of its creditors. In this regard, the Court notes in particular the observations made bythe official receiver in his report of December 2003. According to those, the company had no ongoing business at the time of the bankruptcy and had, at the same point in time, liabilities that far exceeded its assets. Furthermore, the company lacked annual reports and other complete bookkeeping and had, shortly before the bankruptcy, sold much of its assets without accounting for them and, seemingly, without receiving any compensation in return. As concluded by the receiver, the company had been insolvent since at least February 2003.

The Court finds no reasons to question the receiver's observations. It furthermore endorses the Government's view that nothing in the subsequent court proceedings suggests that the bankruptcy decision was unmeritorious or that the State's strong interest in declaring the company bankrupt was unfounded. It particularly notes that the company had the opportunity to prove its solvency before the Court of Appeal one month after the bankruptcy declaration, but apparently failed to do so. The applicant's claim that the company's failure was due to its worsened financial situation during that month has not been substantiated and is, in light of the receiver's observations, unconvincing. The Court also notes that the final rejection of the bankruptcy request in 2006 was taken after the bankruptcy estate had made prepayments to the creditor bank and thus after the bank's claim had been practically settled. It is moreover noted that the company was declared bankrupt at its own request in March 2007.

Furthermore, the Court observes that the applicant did not submit any bookkeeping material or other evidence of equal worth to support his claims of the company's alleged value depreciation due to the bankruptcy decision. In light of this fact and the abovementioned circumstances concerning the company and its financial situation, the Court is not convinced that the company's value prior to the bankruptcy decision was such as claimed by the applicant or that it suffered the losses that he alleged.

Lastly, the Court notes that, following the quashed bankruptcy decision, the District Court ordered the State to pay the total of the company's bankruptcy costs, amounting to SEK 866,428. Thus, the company did not have an obligation to defray any of the bankruptcy costsincurred by the erroneous bankruptcy decision (see, by contrast,StockholmsFörsäkrings- ochSkadeståndsjuridikAB v. Sweden,no. 38993/97, 16 September 2003).

Having regard to all of the above, the Court finds that the refusal by the domestic courts to order compensation to be paid to the applicant in the present case was not such as to impose on the applicant an individual and excessive burden. The authorities or the courts cannot therefore be said to have failed in their duty to strike a fair balance between the applicant's proprietary rights and the general interests of the community.

It follows that the application is manifestly ill-founded and must be rejected in accordance with Article 35 §§ 3 (a) and 4 of the Convention.

Declares the application inadmissible.

Claudia Westerdiek

Registrar

Dean Spielmann

President