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U-I-84/09-11
2 July 2009
D E C I S I O N
At a session held on 2 July 2009 in proceedings to review constitutionality and legality initiated upon the request of the Court of Audit, the Constitutional Court
d e c i d e d a s f o l l o w s:
The first and second indents of the second paragraph of Article 29 of the Decree on the Sale and Other Forms of Disposing of the Financial Assets of the State and Municipalities (Official Gazette RS, Nos. 123/03, 140/06, and 95/07) are abrogated.
R e a s o n i n g
A.
1. The Court of Audit filed a request for the review of the legality of the first and second indents of the second paragraph of Article 29 of the Decree on the Sale and Other Forms of Disposing of the Financial Assets of the State and Municipalities (hereinafter referred to as the Decree), which determine two exceptions in which an appraisal of the value of the assets that are the subject of a sale is not necessary. In its request the Court of Audit states that in the audit procedure of the annual financial statement of the national budget of the Republic of Slovenia for 2008 it established that the Republic of Slovenia sold its 25 % equity share in the commercial company Hidrotehnik, d. d., Ljubljana, and that the subject of the sale had not been appraised, as determined by Article 80e of the Public Finance Act (Official Gazette RS, No. 79/99 et sub. – hereinafter the PFA) for the sale of capital investments. In addition, Article 29 of the Decree determines three exceptions in the event of which it is not necessary to appraise the subject of a sale, whereas in the opinion of the Court of Audit there is no basis in the Act for two of these exceptions. The Court of Audit adds that Article 80h of the PFA, on the basis of which the Decree was issued, indeed determines that the Government, on the proposal of the minister responsible for finance, is to issue a regulation that stipulates in detail the procedures and methods regarding the sale, exchange, and leasing of the physical and financial assets owned by the state or municipalities, and that it also governs cases, inter alia, in which preparatory procedures do not need to be carried out fully or at all due to a disproportionality between the value of an individual subject of a sale and the cost of these procedures, whereby an appraisal is one of these preparatory procedures (Article 80e of the PFA). In the opinion of the Court of Audit, this provision justifies the exception provided for in the third indent of the second paragraph of Article 29 of the Decree, however, not also the exceptions provided for in the first and second indents of the second paragraph of Article 29 of the Decree. Due to the fact that in accordance with Article 21 of the Government of the Republic of Slovenia Act (Official Gazette RS, No. 4/93 et sub.), the Government could allegedly issue a decree only on the basis of the explicit authority determined in a law, while in the opinion of the Court of Audit, the Government did not have the appropriate authority provided for in a law for determining disputable exceptions from the statutory obligation to appraise the subject of a sale, the decree is allegedly inconsistent with the PFA. The Court of Audit proposes that the Constitutional Court annul the challenged provisions of the Decree, as only an annulment can affect the audit of the annual financial statement of the national budget and the opinion issued by the Court of Audit, as audits are always conducted retroactively.
2. In its reply to the request, the Government dismissed the allegations of the Court of Audit and explained that the PFA also gives it the authority to adopt the exceptions provided for in the first and second indents of the second paragraph of Article 29 of the Decree, as allegedly follows from the word “also” in the second sentence of the second paragraph of Article 80f of the PFA. The Government states that in cases in which a certain situation does not fall under any of the exceptions determined in Article 80h of the PFA, this does not in and of itself entail that it is not an exception with regard to which it is not necessary to carry out an appraisal of the value of the subject of a sale. The economic inefficiency of preparatory procedures is allegedly not always bound to the disproportionality between the costs of such and the value of the assets being sold, but such preparatory procedures could also be unnecessary for objective reasons. An appraisal is allegedly objectively unnecessary in cases of securities that are traded on the organised securities market, where the market determines the market value of securities. Allegedly, similar also applies for the sale of claims. With reference to the sale of a 25 % stake in the company Hidrotehnik, the Government states that the price for a share had been set in a takeover bid, and therefore shareholders could allegedly only either accept or reject the takeover bid pursuant to the takeover price. The Government also opposes the possible annulment of the challenged provisions of the Decree, as there is allegedly no reason for such.
B.
3. On the basis of the seventh indent of the first paragraph of Article 23a of the Constitutional Court Act (Official Gazette RS, No. 64/07 – official consolidated text – hereinafter referred to as the CCA), the Court of Audit may file a request provided that a question of constitutionality or legality arises in connection with a procedure it is conducting. In accordance with the established constitutional case-law, the Court of Audit must file a request prior to the termination of the audit procedure it is conducting (cf., Constitutional Court Order No. U-I-28/08, dated 20 March 2008, Official Gazette RS, No. 36/08). The Court of Audit filed the request at issue with reference to the audit procedure regarding the annual financial statement of the national budget of the Republic of Slovenia for 2008, which is not yet terminated, and therefore the Constitutional Court recognised the Court of Audit the position of an applicant in accordance with the seventh indent of the first paragraph of Article 23a of the CCA.
4. First of all, the Constitutional Court establishes that, inter alia, in the part which regulates the sale of the physical assets of the state and municipalities, the PFA was repealed by the Act on Physical Assets of the State, Regions, and Municipalities (Official Gazette RS, No. 14/07 – hereinafter referred to as the APASRM). Article 37 of the APASRM thus determines that also Articles 80a, 80b, 80c, 80č, 80d, 80f, 80g, and 80h are repealed. However, the above-mentioned repeal does not influence the decision in the case at issue, as the PFA still applies in the part which refers to the sale of the financial assets and capital investments of the state and municipalities.
5. In accordance with the second paragraph of Article 80e of the PFA, prior to the sale of an individual capital investment, the authorised appraiser referred to in the first paragraph of Article 63 of the Auditing Act (Official Gazette RS, No. 11/01 et sub.) must appraise its value, and in cases in which the state’s capital investment amounts to more than 50% of the capital assets of the company, a due diligence of the company must be carried out.
6. Article 80h of the PFA determines that the Government, on the proposal of the minister responsible for finance, is to issue a regulation that stipulates in detail the procedures and methods regarding the sale, exchange, and leasing of the physical and financial assets owned by the state or municipalities. In accordance with items one through three of this article, the regulation also governs cases in which the preparation of an individual programme of sale provided for in Article 80d of the PFA is not required due to the low value of the individual subject of sale, cases in which preparatory procedures do not need to be carried out fully or at all due to the disproportionality between the value of an individual subject of sale and the cost of carrying out these procedures, and cases in which the subject of the sale can be sold or leased on the basis of a direct contract if the implementation of the methods referred to in the second paragraph of Article 80f of the PFA (i.e. a public tender, a public auction, a call for public tenders) would be unjustified due to the disproportionality between the costs of the procedure with respect to the value of the subject of the sale or lease.
7. On the basis of Article 80h of the PFA, the Government adopted the Decree, which, inter alia, provides for exceptions in which an appraisal of the subject of a sale as a preparatory procedure with reference to the sale of individual assets does not need to be carried out – the first through third indents of the second paragraph of Article 29 of the Decree.
8. In accordance with the second paragraph of Article 120 of the Constitution, administrative bodies perform their work, which also includes issuing regulations from within their jurisdiction, within the framework and on the basis of the Constitution and laws and may not issue regulations without a substantive basis in the law, whereas explicit authority in the law is not necessary. This entails that substantive provisions of regulations must have a statutory basis and be within the substantive frameworks which must be explicitly determined in the law or at least determinable by means of interpretation (see, Constitutional Court Decision No. U-I-285/99, dated 10 July 2002, OdlUS XI, 157). The principle of legality determined in the second paragraph of Article 120 of the Constitution is also binding on the Government (see, Constitutional Court Decision No. U-I-73/94, dated 25 May 1995, Official Gazette RS, No. 37/95 and OdlUS IV, 52; paragraph 17 of the reasoning of the Decision).
9. Article 80h of the PFA contains a so-called execution clause (i.e. a statutory provision that a regulation must be issued within a certain period of time). The applicant's claim that the Government should not issue regulations for the implementation of laws without an explicit statutory authority is not true. If the legislature determines such, this only entails that the legislature did not (entirely) leave the issuing of regulations to the discretion of the executive branch of power, but by law it imposed on the executive branch of power the requirement that it must regulate certain issues and determined a time limit for doing so (see, Constitutional Court Decision No. U-I-305/96, dated 22 April 1999, Official Gazette RS, No. 36/99 and OdlUS VIII, 82, and Constitutional Court Decision No. U-I-264/99, dated 28 September 2000, Official Gazette RS, No. 97/2000 and OdlUS IX, 226). Execution clauses can be more general in cases where they impose or authorise that regulations be issued (e.g. they do not precisely determine what needs to be regulated by the regulation) or absolutely precise (i.e. they precisely determine the subject matter which the regulation may regulate). What type of execution clause the legislature will choose in an individual case falls within the field of the legislature's discretion. Thereby, the legislature is limited only by constitutionally defined relations between the legislative and executive branches of power. Due to the fact that the principle of the separation of powers (the second paragraph of Article 3 of the Constitution) already excludes the possibility that administrative bodies or the Government amend or independently regulate a statutory subject matter, an execution clause cannot contain authority on the basis of which regulations could contain provisions for which there is no basis already in a law, and especially it must not be left to the regulation to independently determine rights and obligations.
10. The Constitutional Court establishes that the execution clause contained in Article 80h of the PFA, is absolutely precise and closed in terms of meaning, as it very precisely determines in which cases it is possible to omit the preparation of programmes of sale or individual preparatory procedures, or carry out the sale or leasing of assets directly on the basis of a contract (items one through three of the second sentence of Article 80h of the PFA). In the case at issue, the PFA in item two of the second sentence of Article 80h envisaged an omission or a limitation of the scope of the appraisal of such assets as a preparatory procedure in the sale of such assets when a disproportionality exists between the value of the individual subject of a sale and the costs of these procedures. In the second paragraph of Article 29 of the Decree, the Government regulated three instances in which the appraisal of assets that are the subject of a sale does not need to be carried out, namely: 1) if the subject of a sale are securities that are traded on the organised securities market; 2) if the subject of a sale is a claim; or 3) if a commission justifiably establishes that the costs of appraisal are disproportionate to the value of the assets to be sold or leased or if the costs of appraisal exceed one half of the book value of the assets to be sold of leased. Only the third instance refers to a situation which the legislature envisaged in item two of the second sentence of Article 80h of the PFA for the omission or limitation of the scope of the appraisal of assets.
11. Due to the fact that it follows from the principle of legality determined in the second paragraph of Article 120 of the Constitution that an explicit statutory authority for issuing a regulation is not necessary, but it suffices if the regulation is within the substantive frameworks which must be explicitly determined in the law or at least determinable by means of interpretation, the Constitution Court reviewed whether from other provisions of the PFA there follows a basis for the omission of preparatory procedures, as the Government determined in the first and second indents of the second paragraph of Article 29 of the Decree. In its reply the Government states that the omission of the preparatory procedures is not always dependant on the existence of a disproportionality between the costs of the preparatory procedures and the value of the assets being sold, but preparatory procedures could be unnecessary for objective reasons. In the opinion of the Government, such is also the situation in the cases determined in the first and second indents of the second paragraph of Article 29 of the Decree, as allegedly in cases in which securities are traded on the organised securities market or in cases of claims, the value is determined by the market value or the value of the claim. However, the above-stated is not true, as also in cases in which securities are traded on the organised securities market also their so-called intrinsic value must be considered, which does not always correspond to their market value. [1] A security can namely be underpriced (or overpriced) on the market. Certainly, the market value of a security is a better indicator of its real value than its book value is. For appraising a security, especially a share, the following factors are important: the successfulness of the business operations of the company and its potential future growth, the general level of interest rates in the economy, a premium or discount for share risk or the required profitability of an average share, and a share of net profit paid out as a dividend. Similar applies also for claims. In the case of claims on money, these do have a certain maximum value. However, as a general rule, the actual buying price of a claim is the subject of an appraisal, with reference to which the following factors are important: the time since the maturity of the claim, the debtor's credit ranking, the possible securing of the claim, in which manner the recovery is carried out, etc. Thus, the Government's statement that in such cases appraisal is not economically reasonable because the value of the securities or claims is determinable or determined does not hold true. In addition, in the PFA there is no basis for the omission of preparatory procedures because they are objectively unnecessary. All instances provided for in the second sentence of Article 80h of the PFA have one thing in common, namely, that the costs of preparatory procedures are disproportionate to the value of the assets being sold. This is particularly evident in cases in which it is possible to conclude a direct contract, when the PFA itself determines that these are the cases in which the subject of a sale can be sold or leased on the basis of a direct contract if the implementation of the methods referred to in the second paragraph of Article 80f of the PFA (i.e. a public tender, a public auction, a call for public tenders) would be unjustified. In cases of a low value of the assets being sold, such disproportionality is a consequence of precisely the low value of the assets being sold. The reason that preparatory procedures are objectively unnecessary, which in the Government's opinion justified or allowed that the challenged exceptions provided for in the first and second indents of the second paragraph of Article 29 of the Decree were determined, cannot be determined from the PFA. The Government does not state and the Constitutional Court did not establish any other substantive frameworks which were allegedly a basis for the adoption of the challenged provisions of the Decree.
12. The Constitutional Court thus establishes that by the challenged provisions of the Decree the Government exceeded the statutory framework, as the basis for their adoption cannot be found in either Article 80h of the PFA or in other statutory provisions. Therefore, the first and second indents of the second paragraph of Article 29 of the Decree are inconsistent with the second paragraph of Article 120 of the Constitution.
13. The Court of Audit proposed that the challenged provisions of the Decree be annulled. On their basis harmful consequences have allegedly already occurred, as the equity share in the company Hidrotehnik was sold without an appraisal of its value. In accordance with the second paragraph of Article 45 of the CCA, the Constitutional Court annuls regulations that are unlawful when it determines that it is necessary to remedy harmful consequences arising from unconstitutionality or unlawfulness, whereby annulment has retroactive effect. When deciding whether a regulation should be abrogated or annulled, also the rights of third persons and the principle of legal certainty must be taken into consideration. The possible annulment could namely interfere with the acquired rights of third persons, not only the rights of a buyer of the equity share of a commercial company which is the subject of an audit before the Court of Audit, but also with the possible acquired rights of (other) third persons. It must namely be considered that the challenged provisions apply already from 26 December 2003 and that the annulment might also affect other possible sales of the state's financial assets. An audit of the annual financial statement of the national budget is always carried out in the current year for the previous year. [2] The above-mentioned entails that the audit of the annual financial statement of the Republic of Slovenia for 2008 would be affected only by the possible annulment of the challenged provisions of the Decree. However, the Constitutional Court underlines that in the case at issue priority must be given to legal certainty and the rights of third persons. With reference to such, the Constitutional Court has also taken into consideration the fact that the equity share in the commercial company had been sold without an appraisal does not necessarily entail that this in fact caused harmful consequences, i.e. that the equity share had been sold for a lower price than it would have been sold for if its appraisal had been carried out. The abrogation of the challenged provisions of the Decree will ensure that in the future [3] a more correct and lawful sale of the state's financial assets will be ensured. In the case at issue, the Constitutional Court thus decided to abrogate the challenged provisions of the Decree.
C.
14. The Constitutional Court reached this decision on the basis of the third paragraph of Article 45 of the CCA and the third indent of the third paragraph of Article 46 of the Rules of Procedure of the Constitutional Court (Official Gazette RS, No. 86/07), composed of: Jože Tratnik, President, and Judges Mag. Marta Klampfer, Mag. Marija Krisper Kramberger, Mag. Miroslav Mozetič, Dr. Ernest Petrič, Jasna Pogačar, Dr. Ciril Ribičič, and Jan Zobec. The decision was reached by six votes against two. Judges Krisper Kramberger and Pogačar voted against.
Jože Tratnik
President
[1] B. Graham and D. L. Dodd, Securities Analysis, 6th Edition, The McGraw-Hill, 2009, pp. 71-72.
[2] Cf., the third paragraph with reference to the first paragraph of Article 97 of the PFA.
[3] The correction of errors in the future is also one of the objectives that the court of audits of every state should pursue. Cf., R. Allen and D. Tommasi (Editors), Managing Public Expenditure, A Reference Book for Transition Countries, OECD 2001, p. 342.
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