RESPONSE TO THE REQUEST TO REMEDY LAW INFRINGMENT

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1 COMMISSION FOR BANKING SUPERVISION CHAIRMAN LESZEK BALCEROWICZ ul. Świętokrzyska 11/ Warsaw phone: (22) fax: (22) NB-BLB-WOA/LB-I-530-6/06 Letter Ref.: 955/06 Warsaw, 7 April 2006 Minister of the Treasury ul. Krucza 36/Wspólna Warsaw RESPONSE TO THE REQUEST TO REMEDY LAW INFRINGMENT Referring to the request of the Minister of the Treasury (hereinafter referred to as the MT), delivered on 15 March 2006, to remedy law infringement by way of repealing the resolution of the Commission for Banking Supervision No. 17/KNB/06 of 8 March 2006, filed under Art of the Proceeding Before Administrative Courts Act of 30 August 2002 (the Journal of Laws [Dziennik Ustaw] No. 153 item 1270, with later amendments), please find the following response thereto presented below. A repeated analysis of the whole case, including the arguments set forth in the said request to remedy law infringement (hereinafter referred to as the request), does not provide grounds for taking account of such a request and repealing or amending the decision adopted by the Commission for Banking Supervision (hereinafter referred to as the CBS) in its resolution No. 171KNB/06 of 8 March In item I of the request, the MT states that "none of the provisions of the administrative proceedings code constitutes the ground to issue a separate administrative act stating whether a given person is or is not a party to administrative proceedings". Therefore, in the MT's opinion, "the resolution concerning the refusal to admit the Minister of the Treasury as a participant to the proceedings was issued without any legal grounds, and thus in breach of the rule of the organs of public authority functioning on the basis of, and within the limits of, the law, stipulated in Art. 7 of the Constitution and confirmed in Art. 6 of the Administrative Proceedings Code". The MT's opinion referred to above is wrong. It is true that the Administrative Proceedings Code does not contain any regulations that would instruct or permit an administrative authority to adjudicate on whether a given entity is a party to proceedings or not. The attribute of a party is an inseparable and immanent feature of a given entity and, as an objective criterion (objectively existent or nonexistent) shall not be subject to settlement in the form of an administrative act. Hence, where an entity does not have the attribute of a party, such an attribute may not be assigned thereto under an administrative act. On the other hand, where it has such an attribute, it is a party of proceedings and holds all rights related thereto (resulting from the law, and not from an administrative act). However, it should be noted that the said decision of the CBS does not, by its nature, constitute an administrative act stating that the MT is not a party to the proceedings initiated at the motion of UniCredito Italiano S.p.a. for granting permission to exercise the voting rights at the General Shareholders Meeting of BPH S.A. The decision is an administrative act in 1

2 reply to the MT's request to deem the State Treasury a party to the administrative proceedings. In its decision, the CBS states only that the MT's motion cannot be taken into consideration due to the objective fact that the State Treasury does not hold the attribute of a party to the aforementioned proceedings. In principle, provisions of the Administrative Proceedings Code do not provide for an entity deeming itself a party to file a request to join proceedings already initiated. An exception is Art. 31 thereof relating to entities having the rights of parties and chapter IV Participation of the Prosecutor (Art. 182 to Art. 189). The code only provides for the possibility of joining the proceedings by a social organization (Art item 2 thereof) and the Prosecutor (Art thereof). The difference in regulations consists in the fact that the Prosecutor's will is final, and administrative authorities may not refuse the Prosecutor to join the ongoing proceedings. Whereas, in the case of social organizations (that are to be admitted as participants to the proceedings), the request to be admitted as participant is considered by a public administrative authority, which, where the request is accepted, issues a decision to admit a given organization as participant to the proceedings. Otherwise, a decision is issued refusing the social organization to be admitted as participant to the proceedings, which is subject to an appeal under Art of the Administrative Proceedings Code. It should be noted that the reasoning adopted in the request disregards the diversity of legal cases arising from the submittal of a request to initiate administrative proceedings by an unauthorized entity and the submittal, by such an entity, of an application to be admitted as participant to the ongoing proceedings initiated at the request of another entity. In the first case, the legitimization of court proceedings is examined in the course of the ongoing procedure relating to the initiated proceedings, which means that the proceedings must be formally closed, i.e. a court decision must be issued. Pursuant to Art of the Administrative Proceedings Code, a decision shall settle the case with regard to its merits or finalize the case otherwise at a given instance. A special example of finalizing an administrative case differently than by way of its factual settlement is the discontinuance of proceedings due to their pointlessness, e.g. due to the fact that the attribute of a party has not been recognized (Art. 105 of the Administrative Proceedings Code). The other of the said situations (in the case of which an unauthorized entity files a motion for being admitted as participant to the proceedings initiated at the request of another entity as a party thereto) is fully regulated by the arrangements adopted by the Supreme Administrative Court in its judgment of 20 December 2001 (Ref. II SA 2645/01), issued in a case corresponding to the one in question. In its judgment, the court remarked that a decision concerning the participation of another entity in the ongoing proceedings as a party thereto shall be made in the form of a decision. Such a decision shall be based on Art. 123 of the Administrative Proceedings Code under which, in the course of the proceedings, a public administrative authority shall issue decisions referring to particular issues arising from the proceedings, but shall not decide on the merits thereof unless the provisions of the Administrative Proceedings Code state otherwise. The Supreme Administrative Code indicated that the provisions of the Administrative Proceedings Code clearly provide only for a situation only where an application to be admitted as participant to the ongoing proceeding is filed by a social organization (Art thereof). In such a case, a refusal is made in the form of a decision. In the Court's opinion, in the case of other entities, a refusal to admit them as participant to the ongoing proceeding shall be also made by way of a decision, i.e. not subject to appeal. A decision shall be made since this is an issue arising from the proceedings. The Supreme Administrative Court pointed out to the analogy with Art of the Administrative Proceedings Code and referred to opinions presented in the literature (J. 2

3 Nowacki, "Analogia legis", Warsaw 1966, pp , by the same author "Praworządność a analogia legis", PiP 1967, v. 3, p. 394 and further, and E. Smoktunowicz, "Analogia w prawie administracyjnym", Warsaw 1970, pp ) that allow the application of such an analogy. The decision is not subject to appeal since the code does not provide for that, and it is neither a settling nor a final decision in the proceedings. It may be, however, appealed against to the Supreme Administrative Court. The thesis that judicature and doctrine allow public administrative authorities to issue decisions also in a situation where there is no explicit regulation authorizing them to do so is presented in the work by M. Jaskowska, A. Wróbel, Kodeks postępowania administracyjnego. Komentarz. Zakamycze 2005 (thesis 5 to Art. 123). There is also a reference to Comments by J. Borkowski. Given the reference to the Administrative Proceedings Code in Art. 11 section 1 in fine of the Banking Law, this is Art. 123 of the Administrative Proceedings Code in relation to Art. 28 thereof that constituted the fundamental legal ground for the CBS's decision, which, according to the provisions of the Administrative Proceedings Code, has been referred to in the very decision. Summing up, the MT's request to admit the State Treasury to take part in the proceedings as the party thereto submitted in the course of the proceedings initiated by UniCredito Italiano S.p.A. to receive a permission to exercise the right of vote at the General Shareholders Meeting of BPH S.A. shall be considered as an issue arising from the proceedings and subject to the decision referred to in the aforementioned Art. 123 of the Administrative Proceedings Code. Referring to the fundamental issue concerning the legal interest of the State Treasury represented by the MT in the proceedings initiated upon the motion filed by UniCredito Italiano S.p.A. to have a permission granted to exercise the right of vote at the General Shareholders Meeting of BPH S.A., as mentioned in items II and III of the MT s request, we have to agree with the opinion expressed therein that the existence/non-existence of a legal interest shall be adjudicated using the substantive law regulations. This is a commonly accepted opinion (also by the administrative judicature) and it has also been confirmed in the justification to the CBS's decision in question. The legal interest is a substantive and legal issue, it is an objective category, i.e. it must result from an explicit regulation of the substantive law establishing an authorization to grant a right or impose a duty by way of issuing an administrative decision. At all times this is a personal, own, individual and current not potential interest (capturable, related to existing, and not hypothetical legal aspects of a specific entity). Another undisputable statement (also referred to in the request) is that the legal interest must have its grounds in a regulation of commonly applicable law, based on which a given entity may effectively demand given actions of a public administrative authority. In other words, such a regulation must establish a verifiable claim on the public administrative authority. In consideration of the above, we cannot share the opinion, presented in the request, that "the legal interest may be evidenced by reference to any commonly applicable legal regulation of the substantive law, under which a person interested in the result of the proceedings finds its participation in the proceedings required". On the contrary, the justification of one's participation in the proceedings as a party thereto (and not, as adopted in the request, "a person interested in the result of the proceedings") should have its legal ground in a regulation of the substantive law explicitly referring to the addressee's situation, i.e. determining its legal status. Obviously, these may also be regulations of the civil law, provided that they subject a certain category of cases to the restrictions imposed by the public administration (e.g. certain cases relating to ownership issues, tangible limited rights or compensations). It should be noted here that in such cases these regulations are, at the same time, components of the substantive administrative law. Such arguments induce a question whether, for 3

4 example, contractual provisions, including the provisions of privatization agreements, may be the source of the so-construed (i.e. under Art. 28 of the Administrative Proceedings Code) legal interest. The answer is explicitly negative. Any infringement to the provisions of such agreements constitutes the grounds for filing claims under the civil law and allows for claiming the contractor's responsibility following from the agreements, thus in accordance with a procedure different from the one applied in administrative proceedings. The reference to the provisions of the Civil Code that regulate the issues of performance of obligations and the results of nonperformance in the cases subject to Art. 25 of the Banking Law (i.e. cases relating to granting permissions to exercise voting rights from shares) should be considered as a result of confusing the terms and ignoring the difference between protection arising from the public and the private law. Contractual provisions are not regulations of commonly applicable law, therefore any reference in order to evidence the existence of legal interest in a case subject to an administrative decision to "commitment relations" resulting from the agreements, the adherence to which should be ensured by the Civil Code regulations, must be considered a misunderstanding. The approval of a different opinion would blur the term "legal interest" and impair its sense and raison d'être. In such a context, each entity that would refer to any commonly binding legal regulation to justify its request to be admitted as participant to the proceedings would potentially become a party. Decisions issued under Art. 25 of the Banking Law do not adjudicate on the authorizations of the State Treasury arising from privatization agreements and, all the more, they are not a form of administrative and legal sanctions applied to respect the provisions thereof. In wording of the said article, the legislator established a peculiar balance between the public interest and individual interests, granting a specific degree of freedom to the authority applying the law CBS as to the assessment of its premises for refusing the permission or the selection of legal consequences of the actual state of things found. Given the above, we shall support as fully justified the opinion presented in the decision of the CBS questioned by the MT, in the light of which the legal interest shall be established under Art. 25 section 1 of the Banking Law. This provision comprises regulations typically restrictive, aiming at the protection of the banking trade security through the administrative control of material changes to bank ownership structures. Only entities specified in sections 1, 2, 3 and 5 thereof shall have a verifiable legal interest as construed in Art. 28 of the Administrative Proceedings Code. Given the existing legal status, it is difficult to indicate other entities which could deduce the attribute of a party from the potential infringement of the lawfully protected aspects of their interest by the decision of the CBS. The consequences of that decision may refer at most to specific actual interests that are not subject to protection under administrative proceedings. The provision of Art. 25 of the Banking Law does not by any means refer to the State Treasury or the MT representing it. Neither is there another regulation of the substantive administrative law from which a legal interest of the MT could be deduced that would authorize the MT to be deemed a party of the ongoing proceedings before the CBS. Given the above, we cannot share the MT's opinion presented in item IV of the request, in the light of which potentially granted permission to UniCredito Italiano S.p.A. to exercise its right of vote at the General Shareholders Meeting of BPH S.A. "would undoubtedly have an impact on the scope and possibilities of exercising rights and performing obligations of the company's shareholder, stipulated in Art of the Commercial Companies Code, by the State Treasury". It would be the case if the rights and obligations of the shareholders were reduced in any way. Whereas, the very granting of the permission does not change the legal position of particular shareholders other than the applicant, although it is, of course, a circumstance of key 4

5 importance for the adoption of resolutions by the General Shareholders Meeting. To be consistent, we would have to assume that, according to the MT's concept, every shareholder is a party to proceedings related to permissions concerning the exercise of rights of vote arising from shares. As such, the proceedings would be a variant of the "open procedure", applied in some legal systems. Neither the provisions of the Banking Law nor of other acts stipulate the procedure for this type of proceedings (detailed principles concerning deliveries and notices, representation and proxies, administrative trials or access to case files). From the practical point of view, in the case of dispersed ownership, conducting such proceedings would be impossible or would come across serious obstacles. The result of such proceedings could be also easily questioned, leveraging, for example, the argument that a party has not taken part in the proceedings unintentionally (has not been admitted as participant to the proceedings), and such charges would provide grounds for continual resumption of the proceedings ended up with a final decision. Maintaining of such a state of things would constitute a threat to secure legal trading, as well as to cautious and stable bank management, and it would be in contradiction to the objectives of the administrative and legal restrictions enforced under Art. 25 of the Banking Law. At the same time, it should be noted that the contents of the permitting clause (establishing a link between a potential refusal to grant a permission to exercise the right of vote arising from shares and occurrence of with one reservation negative premises) included in Art. 25 of the Banking Law instructs to consider the potential refusal of the CBS as an exception to the rule. Since, even where the premise of Art. 25 section 7 o the Banking Law is fulfilled, the CBS is not obliged to refuse the permission, as follows from the expression "the Commission for Banking Supervision may refuse to grant a permission" used in Art. 25 section 7 ab initio of the Banking Law. Thus not the granting, but the refusal to grant a permission depends upon the administrative decision. In the light of such an observation, the issue of a permission shall constitute an authoritative realization of a statutorily defined right, which is accompanied by the transformation of the legal interest of a person applying for the permission into a right acquired. Such a permission does not interfere (as in the case of construction permits, which may result in entering a legally protected interest of a neighbour of a given investor) with rights of other entities taking advantage of the protection under the administrative law, and only in such a case one may consider whether the interest of such entities has been upgraded to the category of legal interest. Leaving aside the interpretation of the term of legal interest in the administrative proceedings, one should focus on certain important consequences of the grammatical (literal) interpretation of the very provision of Art. 28 of the Administrative Proceedings Code. Containing in its wording the expressions "the proceedings refer to a legal interest or an obligation" and "request activities in consideration of the legal interest or obligation", this provision clearly indicates that in order for an entity to have the attribute of a party, the relation between its legal interest or obligation and the proceedings or activities of the authority, as requested by such entity, should be direct. As follows from the arguments raised by the MT, there is no such a direct relation between the proceedings relating to the issue of a permission to exercise the right of vote arising from shares in BPH and the authorizations and obligations of the State Treasury arising either from privatization agreements or from the fact that the State Treasury is the bank's minority shareholder. As shown above, this is not a legal interest as construed in Art. 28 of the Administrative Proceedings Code. This is not a legal interest under the proceedings initiated by UniCredito Italiano S.p.A. to obtain a permit to exercise its right of vote at the General 5

6 Shareholder Meeting of BPH S.A. The proceedings do not refer to the "legal interest" and they are not directly related to it in any way, either based on the subject matter of the proceedings or through any activities performed in the course of the proceedings. The subject matter of the proceedings is neither the said nor any other civil and legal relation between the MT and UniCredito Italiano, whereas the CBS does not adjudicate on such a relation in the course of the proceedings. Showing the lack of legal interest of the State Treasury in the cases related to permissions to exercise rights of vote arising from shares discards the discussion about the representation of this entity in the administrative or court and administrative proceedings. Nevertheless, referring to the constitutional duty of the Government (the MT) to protect the interest of the State Treasury, as referred to in item III of the request, it should be noted that the constitutional standard has not been quoted precisely by the MT. Pursuant to Art. 146 section 4 of the Constitution of the Republic of Poland, this obligation shall be fulfilled to the extent and on the terms and conditions specified in the Constitution of the Republic of Poland and in statutory acts. Without making deep constitutional and legal considerations herein, it must be stated that the said regulation reminds of the obligation, also of the Government (including the MT) and also when protecting the interest of the State Treasury, to function on the basis of, and within the limits of, the law, as stipulated in Art. 7 of the Constitution of the Republic of Poland. This means that such protection shall not be provided without an explicit legal ground, defined in the competence standard for the Government (the MT) and setting forth the scope and principles of the protection. Thus, if MT derives its court legitimization concerning the said case from the aforementioned constitutional standard, he/she should indicate relevant provisions of the Constitution of the RP or statutory acts that, within the framework of defining the scope and principles for protecting the interest of the State Treasury, grant the competences to the Government (the MT) to act as a party to this type of administrative proceedings. Continuing the analysis of the constitutional context of the MT's actions hereunder, one must refer to the principle of equality before the law and the right to equal treatment by public authorities, as expressed in Art. 32 of the Constitution of the Republic of Poland. This principle instructs, in particular all public authorities, including but not limited to the Commission for Banking Supervision, to treat everyone in the same and equal manner, and is expressed in prohibited both discrimination and favouring by public authorities of particular entities or groups, in particular due to certain features of these entities or groups. This means that the CBS cannot deem any entity (including the MT) exceptionally or specially authorized to participate as a party in the administrative proceedings before the CBS due to its specific features or duties (e.g. representation of interests of the State Treasury). The provisions of the Administrative Proceedings Code relating thereto are clear and explicit. Art. 28 thereof sets forth the criteria that determine whether a given entity has the attribute of a party to the administrative proceedings. The request pf the MT, to which this response refers, has been submitted under the procedure specified in the instructions to the questioned decision of the CBS. The instructions stipulate that the decision is final and not subject to appeal; however, the applicant shall be entitled to make a complaint with the provincial administrative court, with the reservation that prior to the filing of the complaint with the court, the applicant shall turn to the Commission for Banking Supervision with a request to remedy a law infringement. As decided by the Supreme Administrative Court in the said judgment of 20 December 2001 (Ref. II SA 2645/01), this type of decision is not subject 6

7 to appeal by way of complaint, since the code does not provide for such an option. It neither adjudicates nor finalizes the case the proceedings refer to. The court stressed, however, that in the case of refusal, such a decision "terminates [ ] the proceedings for a person or entity that has filed a motion to be admitted as participant to the proceedings. Therefore, in spite of the fact that the decision may not be appealed against, it may be sued before the Supreme Administrative Court under Art. 16 section 1 item 2 of the Supreme Administrative Court Act of 11 May 1995". The Court added that the claim might be filed based on "a prior request to remedy the law infringement under Art. 34 section 2 of the Supreme Administrative Court Act". It shall be assumed that this position has retained its validity under the applicable Proceedings Before Administrative Courts Act. Of course, the assessment of the justification for this position in the case the MT files a complaint against the decision of the CBS remains at the provincial administrative court s discretion. At the same time, it should be noted that the fact that the CBS is in favour of the possibility of appealing against the decision refusing the entity not being a party to be admitted as participant to the proceedings concerning the permission to exercise the right of vote arising from shares does not in any way impair the legal situation of such an entity, and on the contrary, it allows for a more comprehensive and effective protection thereof and supports legal trading security. The assumption that such an entity could pursue its rights only by way of questioning the decision factually settling the case would certainly put it in a less convenient position in the trial, depriving it of the court control initiated in incidental proceedings. Summing up, the above comments and explanations, as well as the analysis of arguments presented in the Minister of Treasury's request to remedy law infringement, do not constitute grounds for taking such a request into consideration and voiding or amending the decision of the Commission for Banking Supervision of 8 March 2006 (Ref. 71/KNB/06). Pursuant to the instructions thereto, the State Treasury, under Art. 50, Art. 52, Art and 2 and Art of the Proceedings Before Administrative Courts Act (the Journal of Laws No. 153 item 1270, with later amendments), shall be entitled to appeal against the decision to the provincial administrative court. The appeal shall be filed via the Commission for Banking Supervision within thirty days as of the delivery of this response to the request to remedy law infringement. Leszek Balcerowicz Chairman of the Commission for Banking Supervision Copies: 1. Minister of Justice General Prosecutor 2. UniCredito Italiano S.p.A. 7