Press Release No: Individual Application 22/16
05.05.2016

PRESS RELEASE CONCERNING THE JUDGMENT OF HALİS TOPRAK AND OTHERS ON THE RIGHT TO PROPERTY

On 23/3/2016, the First Section of the Constitutional Court held with regard to the individual application lodged by Halis Toprak and others (application no. 2013/4488) that there had been no breach of the right to property guaranteed in Article 35 of the Constitution.  

The Facts

The applicants are shareholders of Toprakbank A.Ş. which was liquidated after having been seized (“the Bank”). Before their transfer to the Savings Deposit Insurance Fund (“the TMSF”), 95% of the bank shares were belonging to the applicants and the Toprak Companies Group owned by the applicants. By the decision of the Banking Regulation and Supervision Agency (“the BDDK”) dated 11/12/2000, the Bank was decided to be closely monitored on the ground that their assets became frozen due to the loans supplied to the companies belonging to the Toprak Group (“the Group”) and due to income-expense disequilibrium and insufficiency of capital structure. In the course of the close monitoring period, the BDDK recommended that the Bank would increase its capital; the loans supplied to the Group companies would be re-paid; cash inflow to the bank would be immediately ensured; the structure of the organization would be rendered efficient and profitable; and that Toprak Off-Shore’s activities would be terminated and its accounts would be transferred to the Bank. The BDDK issued such warnings: this situation impaired the income-expense balance of the Bank; a deficit in the equity had been caused; and that the facilities supplied to the Toprak Off-Shore had exceeded the loan limits.  The BDDK also suggested the Bank to find fund through a strategic partner or the sale of Group firms; to settle the Group loans through cash proceeds or to secure such loans on collateral. 

The BDDK decided that the partnership rights, except for the dividend, and management and control of the Bank, which failed to comply with the warnings and recommendations, be transferred to the TMSF. The Fund Board of the TMSF decided that 45,5 million Turkish liras, the part of the Bank’s loss corresponding to the paid-up capital, be taken over in return for the payment at the same amount to be made to the Bank; and that the share certificates be requested to be registered in the Bank’s stock register in the name of the TMSF. The Bank’s Board of Directors were replaced by the TMSF. Upon its transfer to the TMSF, the Bank was subject to an independent audit with a view to establishing its real financial status. It was accordingly revealed that the loss of the Bank of which size of assets was 1,905 million Turkish Liras was approximately1.306 million Turkish Liras; and that the long-term loans supplied to the Group firms were approximately 678 million Turkish Liras. Pursuant to the decisions dated 26/3/2002 of the BDDK and the Fund Board of Directors, the Bank was merged with the Bayındırbank, and its banking license was revoked on 30/9/2002.

The real estate properties included among the Bank assets and its subsidiaries were sold by the TMSF, and it was especially tried to collect the Bank’s losses by means of signing a protocol at the amount of 453 million USD with the applicants who were controlling shareholders of the Bank with a view to collecting the debts owed to the Bank due to the loans of the Group firms. Y.P., who was the holder of the 1.000 lot share certificates, brought an action for annulment before the Thirteenth Chamber of the Supreme Administrative Court in 2005 and requested annulment of the transfer of the Bank to the TMSF. The Thirteenth Chamber of the Supreme Administrative Court decided to dismiss the case, and the appellate review was also dismissed by the Plenary Session of the Chambers for Administrative Cases. Thereafter, a request for rectification of the judgment was made. While the process of rectification of the judgment was pending, the defendant Y.P. transferred 1.000 lot share certificates of the Bank to the applicants for a total amount of 1,000 Turkish Liras by virtue of the Share Certificates Transfer and Assignment Letter. The parties were accepted to become a party to the proceedings at the stage of rectification of the judgment due to the transfer and assignment in question; however the Supreme Administrative Court decided to reject the request for rectification of the judgment.

The Applicants’ Allegations

The applicants maintained that seizure of Toprakbank A.Ş., of which they were controlling shareholders, by the BDDK had constituted interference in their properties; that as the relevant evaluation principles required to be determined by the BDDK as per the statutory provision had not been established explicitly, the Bank had been transferred to the TMSF; that if the balance of the Bank’s real assets had been revealed, it could be observed that its assets covered its debts; and that the interference in their properties consequently failed to meet the criteria of lawfulness and proportionality. They also alleged that there had been tangible data indicating that this interference had been effected not for public interest but upon the imposition of the International Money Fund (“the IMF”); that according to the statistics published just after the period when the Bank had been seized, the Bank’s profit had constituted 26% of the total profits of thirty three banks operating in Turkey at that time; that an interim injunction had been imposed on their assets upon the decision on seizure of the Bank, and they had been subject to a ban on leaving the country; that they had been deprived of founding a bank in future; and that therefore, the interference in their properties had been disproportionate. They further maintained that although they had tangibly proven that the Supreme Administrative Court had conducted insufficient examination in the course of the proceedings concerning the seizure of Toprakbank A.Ş., their founded allegations had not been examined, and necessary steps had not been taken in line with the allegations raised by them. The applicants accordingly alleged that there had been a breach of their rights to a fair trial and to property and the principle of equality.

The Court’s Assessment

In brief, the Constitutional Court made the following assessments within the scope of this allegation.

There is no dispute concerning the fact that the Bank was operating in the banking sector before its transfer to the TMSF. Banks have certain circle of customer and license for establishing and operating a bank as well as its movable and immovable properties, and all of these assets must be considered to fall into scope of the “goods and properties” within the scope of the right to property which is under the joint protection of the Constitution and the Convention. The applicants were the shareholders of the Bank which undoubtedly involves the terms of goods and properties within the right to property.

Moreover, as it has been understood that the applicants had 1.000 lot bank shares which were a matter before the Supreme Administrative Court and they were accepted, by the judgment of the Plenary Session of the Chambers for Administrative Cases of the Supreme Administrative Court dated 1/10/2012, to be a party to the proceedings, the applicants had the right to property, which is restricted to 1.000 lot bank share certificates in the instant case. It has been therefore revealed that the applicants, in the present application, had an interest required to be protected by being limited to 1.000 lot bank share certificates. As it has been understood that the actions performed by the BDDK and the TMSF had an influence on the right to property provided by the shares owned by the applicants, who were former controlling shareholders of the Bank and that the shares completely lost their value, it is obvious that there was an interference with the applicant’s right to property. Pursuant to the Constitution, this right may be restricted only by virtue of public interest and by law, and the restriction imposed must be proportional.  

The Bank was merged with the Bayındırbank pursuant to the decisions and actions performed by the BDDK and the TMSF, and the banking license of the Bank was revoked as of 30/9/2002. As a result of these actions, the Bank was ceased to exist, and through the subsequent actions performed, its assets, debts and accounts receivable were settled. The applicants were deprived of their assets at the end of the above-defined process. On the other hand, the assets of the Bank were not expropriated for public interest; or nor was the Bank nationalized and caused to be turned into a State bank. The actions performed by the BDDK and the TMSF were carried out within the scope of the regulatory and monitoring duties vested in these institutions by law in order to ensure that the banking sector operates in a safe and stable manner and the loan system operates in an effective manner, as targeted by Article 167 of the Constitution and the abolished Law no. 4389 and in order to protect rights and interests of the account owners.

The applicants maintained that the interference in their properties did not meet the requirement of lawfulness. It must be primarily noted that the differences in jurisprudence in respect of similar matters among judicial authorities of the same instance due to the particular circumstances of the present incident cannot be alone accepted to be a breach of right. Moreover, the difference in interpretation of the inferior courts or the appellate courts with respect to the parties’ requests and evidence pertaining to the disputes cannot be alone regarded as a breach of right. 

In the Demirbank case which was set as a precedent by the applicants, the Plenary Session of the Chamber for Administrative Cases of the Supreme Administrative Court held that although it had been recommended in the report drawn up by the banks sworn auditors before the transfer that the State’s securities should be removed from the Bank portfolio through exchange for improvement, the act of exchange had not been performed; that following the transfer, the practice of voluntary exchange was introduced for all banks and the banks were thereby ensured to relieve; that it was specified in the report and financial structure reports of the State Supervisory Council that if the act of exchange had been performed, the Bank would not have experienced any profit or liquidity problem; that moreover, the total amount of risky loans of the Bank had not been very high compared to the total amount of loans and the  quality of the current assets of the Bank had been high; and that accordingly the decision of transfer, which had been taken within the scope of Article 14 § 2 of the abolished Law no. 4389 without researching options which would ensure the liquidity balance of the Bank, had not been lawful.

In the incident subject-matter of the application, the grounds for transfer of the Bank to the TMSF were shown, in the BDDK’s decision of 30/11/2001, as Articles 14 § 3 and 4 of the abolished Law no. 4389. It was specified in the study prepared by the TMSF that the basic grounds for the seizure of the Bank were the facts that the Bank’s resources had been mainly supplied as a long-term loan to the Toprak Group firms (approximately 678 million Turkish Liras); that the Bank’s resources in the foreign depositories (Toprakbank Offshore) had been supplied to the Group firms as a loan; and that although there had been no profit between the years of 1998 and 1999, the profit had been shown higher (approximately 25 million and 60 million Turkish liras) and profit shares were distributed to the partners.

In the letter of the Legal Affairs Department of the BDDK dated 31/12/2015, it was specified that several instructions that loans supplied to the Group firms must be secured and must be settled by means of being collected; that the capital must be increased; that the Toprak Off-Shore deposits must be closed; that fiduciary transactions must be terminated; and that profit must not be distributed had been given to the Bank on various dates following its being subject to close monitoring with the decision of 11/12/2000. There were also findings in this letter that as such instructions had not been abided by, the Bank’s financial structure had been weakened in a manner which could not be improved.

It was established in the BDDK’s decision of 30/11/2001 that the main reason for the seizure of the Bank had been the extensive supply of loans for the Group firms; and it was specified in the above-mentioned study performed by the TMSF that the loss incurred had been mainly resulted from the default in re-payment of the loans supplied to the Group firms. As alleged by the applicants, it has been understood that even the real estate properties belonging to the Bank had much higher values than those shown in the balance sheet, it was not revealed how the loss at the amount of 1,306 million Turkish Liras would be covered. Within this framework, it has been observed that the studies carried out by the TMSF for the settlement of the Bank’s loss had continued for years, and the applicants acknowledged their debts resulting from the Group loans; and that they had signed a protocol at the amount of 453 million USD and could repay their debts in long term.

The explicit arrangements cited-above were published in the Official Gazette and on the web-sites of the relevant institutions and were accessible and comprehendible at the date of their publication. It has been accordingly concluded that legal basis of the impugned action was comprehendible and its possible results were foreseeable; and that consequently, the impugned action had a legal basis.

The applicants alleged that according to the statistics published just after the period when the Bank had been seized, the Bank’s profit had been considerably high; and that the problem could have been solved with a less severe interference instead of being transferred to the TMSF. The applicants accordingly maintained that the interference in their properties had been disproportionate.

In the impugned incident, the less severe interference prescribed for the Bank was tried with the decision on close monitoring dated 11/12/2000, and accordingly several recommendations, instructions and suggestions were provided for the Bank on various dates for improving of the current situation. The applicants did not take the necessary measures for strengthening the financial status of the Bank in the course of the close monitoring period lasting for approximately one year; nor did they make an explanation as to how such a bank of which financial structure had deteriorated to such degree in an environment where economic crisis prevailed could continue performing its activities without causing damage to the financial markets, economy and depositors thanks to what kind of measures without being transferred to the TMSF. Although the applicants alleged that their own assets and those belonging to the Group companies would suffice for covering of the losses incurred by the Bank, they have not explained why they did not make such sales and pay the loan debts of the Group and thereby improved the Bank’s financial status during the close monitoring period lasting for approximately one year in spite of the instructions and recommendations of the BDDK. It has been also revealed from the implementation of the protocol, which was signed between the applicants and the TMSF for partial collection of its losses resulting from the Group loans of the Bank, in a manner to be lasted for years that it is not possible to improve the financial status of the Bank through simple methods, such as the sale of real estate properties and subsidiaries and to indemnify the losses in a short period.

Moreover, after the banks are transferred to the TMSF, the obligation to cover the deposits of the depositors and the debts and losses suffered by the banks is also transferred to the TMSF. The deposits, other debts and losses of the Banks taken over are covered by specially arranged government domestic debt securities issued by the Treasury and transferred to the TMSF as the TMSF does not have sufficient resources. As a result, the TMSF becomes indebted to the Treasury. TMSF subsequently pays it debt to the Treasury by means of selling the assets of the Banks and collecting their amounts receivable. However, the existing official resources indicate that the payments made due to the banks taken over have caused cost which is fairly higher than the incomes obtained as a result of the liquidation of these banks.

In such case, when the interference with the applicants’ right to property and the public interest to be ensured in the transfer of the Bank to the TMSF after the applicants had been warned to take the necessary measures and for the public interests of preventing the Bank from causing much more harm to the financial markets and for the protection of the rights of the depositories are compared, it has been concluded that the fair balance required to be paid regard was not impaired.

Consequently, it has been held by the Constitutional Court that there was no breach of the applicants’ right to property guaranteed in Article 35 of the Constitution.

This press release prepared by the General Secretariat intends to inform the public and has no binding effect.

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