Information of the Czech National Bank on the Revocation of the Banking Licence of the Union Bank, a.s., and the Further Course of Action after the Revocation of the Banking Licence

With regard to these objections, the Czech National Bank states in its Decision on the Appeal that it ensues from the evidence it gathered that the Union Bank breached its duty to maintain permanently its solvency in the Czech currency and in foreign currencies on an individual basis, for it ensues unequivocally from the evidence gathered that since 21 February 2003 the Bank has not enabled the depositors to dispose of their deposits under the statutory and contractual conditions and has been unable to renew its solvency. The decrease in liquid assets occurred not only as a result of the outflow of deposits, but also due to the bank's inability to acquire liquid sources in some other way (for example on the interbank market or by making other assets liquid). The closing of the Bank's branches was motivated by the fact that the Bank's Board of Directors came to the conclusion that (quoting from the letter of the Bank's Board of Directors of 20 February 2003) 'the Bank, in all probability, will become insolvent". To maintain solvency on a permanent basis means, inter alia, to ensure that a bank should be able to fulfil its mature obligations towards its creditors under the statutory and contractual conditions. The Bank breached this duty by not enabling, from 21 February onwards, its creditors to dispose of their deposits under the statutory and contractual conditions. The background materials submitted by the Bank in the course of the administrative proceedings (Proposal of the Solution of the Situation of the Union Bank, Proposal for the Renewal of the Operations of the Union Bank, Supplement to the Proposal of the Solution of the Situation of the Union Bank (hereinafter only the 'Supplement") confirmed that the Bank is unable to renew its liquidity. The Bank's inability to fulfil its obligations under the statutory and contractual conditions ensues, inter alia, from the Bank's own analyses, from its intentions to pay out only a part of the deposits to the depositors, from the plan mentioned in the Supplement, according to which the Bank relied on the pay-out from the Deposit Insurance Fund and on the capitalization of a great volume of the remaining creditor's liabilities. The proposals submitted by the Bank to the Czech National Bank for the solution of the situation, therefore, in the better case envisaged only partial satisfaction of the creditors under the conditions stipulated by the Bank. The Bank, moreover, did not submit any evidence which would prove that the procedure for the renewal of its activities proposed in the Supplement will be economically and legally realizable. The unreality of the Bank's plan for the renewal of its activities mentioned in the Supplement was further confirmed by the 'Audit of the Accounting Records and the State of Assets and Liabilities of the Company Union Bank, a.s. (as at 21 February 2003)" (hereinafter only the 'Audit") of 10 April 2003, prepared by an independent auditor. It ensues from the Audit submitted to the Czech National Bank on 14 February 2003 that the Bank 'shows symptoms of heavy indebtedness, fulfils the conditions of bankruptcy, has stopped payments and is unable to fulfil its obligations in accordance with § 1, paragraphs 2 and 3 of the Act on Bankruptcy and Composition." On 14 April 2003 the Bank, on the basis of the Audit, filed a petition proposing composition with the competent court, according to which the other creditors should receive only 30% of the nominal value of their claims. The filing of a petition proposing composition in accordance with § 46 ff. of Act No. 328/1991 Coll., On Bankruptcy and Composition, as amended (hereinafter only 'ABC"), which was done by the Bank itself, also confirms the correctness of the conclusions on the persistent loss of solvency of the Bank, as the Bank by doing this explicitly declares that it is in a state of bankruptcy in accordance with the provisions of § 1 of ABC, i.e. that it has been unable for a longer period to meet its mature obligations and that this state due to the existence of the condition of insolvency has persisted for a longer period accordance with § 1 paragraph 2 of ABC.

With respect to the Auditor's Report to the Shareholders of the Company UB of 16 August 2002, it is stated in the Appeal that the Report documented the state of the Appellant in 2001 and not its state as at 18 March 2003. The Appellant duly fulfilled the Auditor's recommendations, in spite of certain problems with the approval of the Bank's new investor.

The Auditor's Report, which was issued in August 2002, specifies unequivocally significant uncertainties with regard to the Bank's ability to continue its activities in the near future, if a strategic investor does not enter the Bank. This auditor's opinion was not changed as at the date of issuance of the Appealed Decision and it means by itself a significant reason for the distrust of the public with respect to the financial stability of the Union Bank. Neither the strategic investor, nor the Union Bank were able to submit to the public a trustworthy plan of renewal of the Bank's financial stability, which would renew the trust of the public and thereby on the one hand would stop the continuing withdrawal of deposits, on the other would enable the Bank to regain its ability to obtain financing on the interbank market.

In the Appellant's view the Restructuring Plan of 12 February reacted to the non-standard withdrawal of deposits on the part of clients of the Union Bank with the aim to ensure sufficient liquidity of the Bank.

As a matter of fact the Draftl of a Restructuring Plan of 12 February 2003 was not based on a decrease in deposits (it did not react to this decrease), but on the poor quality of the Bank's assets, which should have been partly solved by public support provided by the state and partly by a contribution provided by the strategic investor.

The Minutes of the Meeting of the Czech National Bank and the General Director of the Union Bank of 20 February 2003 document, according to the Appeal, only a subjective evaluation of the state of the Union Bank by the then General Manager of the Appellant, who according to the statement in the Appeal did not take any measures - apart from the closing of the branches - which would signalize the present insolvency of the Appellant (for example a proposal for the appointment of a conservator,, a petition in bankruptcy, et alia).

With respect to this objection, the Czech National Bank states in its Decision on the Appeal that it considers the meeting with the members of the Bank's top management, especially with its General Manager and Member of the Board of Directors as a proper source of information on the Bank. The Board of Directors holds responsibility for the fulfilment of the Bank's duties and it ought to have a clear view of the overall situation of the Bank. The respective Bank did not cast any doubt on the information on the state of the Union Bank which the General Manager communicated to the Czech National Bank at the meeting on 20 February 2003 and this information was confirmed by further evidence. As follows from the Minutes of the meeting in question, the Bank had exhausted all possibilities for maintaining solvency and the closing of the Bank's branches, therefore, was not a signal of insolvency, but its consequence. The Communication of the Board of Directors of the Union Bank of 20 February 2003, signed by all its members, confirmed that the entire Board of Directors of the Bank was agreed on the evaluation of the situation and that the Bank had hindered its clients from having access to their deposits. This fact did not change as at the date of issuance of this Decision and with regard to the facts mentioned in the Audit and to the filing of a proposal for composition with the competent regional court there is no reason to suppose that it might have changed.

The Bank's assertion that the Development of Liquid Resources (21 October 2002 - 10 January 2003) and the Daily Data on the Development of the Total Volume of Deposits do not document the state of liquid resources as at 18 March 2003 and are only a background material for certain speculations on the future development of the Appellant's solvency is misleading. The background materials mentioned are only one part of the proofs which, in aggregate and in combination, prove a breach of the Bank's statutory duty to maintain permanently its solvency in accordance with the provision of § 14 of the Act on Banks.

As regards the actual development of the Bank's balance sheet, the Decision on the Appeal states that the Czech National Bank is informed of it on a continuous basis within the framework of the performance of banking supervision. As it has been already mentioned in the Appealed Decision, the arrestation of the decrease in quick assets ensues only from the fact that the Bank does not enable its clients to have access to their deposits.

An opinion which is mentioned in the Appeal is that the administrative authority on the basis of an insufficiently ascertained actual state of the matter arrived at incorrect legal conclusions. The Union Bank considers the fact that it closed its branches in order to prevent a decrease in liquidity in the Czech currency and in foreign currencies as proven and the fact that this measure affects disagreeably the clients of the Union Bank and decreases the Bank's creditworthiness in the eyes of the public and may, therefore, have a negative effect on the Bank's management as indisputable. The mentioned Decision by itself, however, does not, in the Appellant's view, breach the Act on Banks and cannot be qualified as a shortcoming in the activities of the Bank. The Act on Banks, as the Appellant thinks, defines unequivocally the concept 'a shortcoming in a bank's activities", specifically in its § 26 paragraph 3, and at the same time mentions what remedial measures the Czech National Bank may apply (see § 26 paragraph 1 of the Act on Banks). These measures, however, do not include the right to wihdraw the permission to act as a bank.

With respect to this objection, the Decision on the Appeal states, that the Union Bank, it is true, holds the insufficiently ascertained facts of the case against the Czech National Bank, but it does not propose in its Appeal what evidence the Czech National Bank should obtain. It did not do so even on the basis of an invitation pursuant to § 33 paragraph 2 of the Administrative Procedure Code carried out by a letter of 4 March 2003, by which the Czech National Bank explicitly gave the Union Bank an opportunity to submit a proposal for the supplementation of the background materials for the Appealed Decision. However, it follows from the Minutes of the Meeting with the Chairman of the Board of Directors of the Union Bank and from the letter of the Board of Directors of 20 February 2003 that the Union Bank's decision to close its branches was the Bank's reaction to the Bank's insolvency. The Bank's decision to close its branches means that the Bank since 21 February 2003 does not maintain its solvency, because it does not enable the depositors to dispose of their deposits under the statutory and contractual conditions. The closure of the Bank's branches and the fact that the clients are hindered from having access to their deposits also as at the day of issuance of this Decision proves that this serious shortcoming still persists. The filing of a proposal for composition on 14 April 2003 with the competent regional court only confirmed the conclusions of the Czech National Bank with regard to the existence and persistence of a significant shortcoming and constitutes another of the proofs attesting to the breach of the duty of a bank to maintain permanently its solvency. It is evident from what was mentioned above that the Czech National Bank ascertained the facts of the case sufficiently and had seen to it that it should have sufficient background materials for its Decision.

The Union Bank in its Appeal further mentions that the Czech National Bank may revoke a banking licence only in the cases enumerated in § 34 of the Act on Banks with the proviso, that in the Bank' s opinion, the legislator requires in particular that this measure should be issued in the case of the ascertainment of multiple shortcomings in the bank's activities (see the plural form used - 'shortcomings") and not in the case of only one shortcoming, even though a serious one (a contrario to § 26 paragraph 1 of the Act on Banks).

The Appealed Decision was issued, because § 14 of the Act on Banks is breached. The Appealed Decision ensues from the wording of § 34 paragraph 1 of the Act on Banks. According to this provision the Czech National Bank must act, which means to revoke the banking licence (the permission to act as a bank), when a serious shortcoming in the activities of a bank persists. The Czech National Bank in the course of the administrative proceedings with the Bank never mentioned and with regard to the wording of § 34 paragraph 1 of the Act on Banks even could not mention that it would use a 'remedial measure" pursuant to § 26 paragraph 1. The revocation of a banking licence (of the permission to act as a bank) is, in terms of a system, a quite different course of action towards a bank than the imposition of a measure leading towards a remedy.

The Bank argues that the use of the singular form in § 26 paragraph 1 of the Act on Banks is a proof of the fact that in this specific case it is admissible that the Czech National Bank should accede to a remedial measure or some other course of action even when there is only one shortcoming in the activities of a bank, while in the case of § 34 paragraph 1 of the Act on Banks the plural form used is a proof of the fact that there must be multiple respective shortcomings.

This argumentation is incorrect in particular for the reason that in the provision of § 26 paragraph 1 of the Act on Banks multiple possible procedures of the Czech National Bank for the case of the ascertainment of shortcomings are governed with the proviso, that each shortcoming will have to be assessed separately in relation to the selected procedure of the Czech National Bank (a remedial measure, a fine), while in the case of the shortcomings pursuant to § 34 paragraph 1 of the Act on Banks only one procedure comes into consideration on the part of the Czech National Bank, specifically the revocation of a licence (previously designated as a permission to act as a bank). In addition, § 26 paragraph 1 of the Act on Banks also uses the plural form with respect to the shortcomings, right at the beginning, in its introductory part. In this connection it is emphasized that the criterion for the revocation of a banking licence (a permission to act as a bank) by the Czech National Bank pursuant to 34 paragraph 1 of the Act on Banks is the weightiness of a shortcoming in the activities of the bank, not the number of such shortcomings. This can be quite reliably deduced from the systematical interpretation of the Act. The provision of § 34 paragraph 1 links up quite logically with the provision of § 26 paragraph 1 of the Act on Banks. The difference is that the provision of § 26 paragraph 1 contains regulation for the case that the shortcomings are not of serious and long-term character, so that rectification is possible, while persisting serious shortcomings exclude the possibility of rectification by means of the tools governed by § 26 of the Act on Banks. The basis is, therefore, the same; the difference is only in the intensity and duration of the shortcomings. It then follows from the provision of § 26 paragraph 1 that the possibility to impose the measures or sanctions anticipated in § 26 is not bound to the fact that there must be multiple shortcomings at the same time and that merely one shortcoming suffices. This ensues on the one hand from the first part of the sentence in paragraph 1 § 26, which states explicitly that the Czech National Bank shall impose a measure or a sanction 'according to the nature of the shortcoming ascertained" (i.e. the singular), even though previously it also states: 'Should the Czech National Bank detect any shortcomings in the activities of a bank", on the other from the nature of certain measures which are linked to one specific shortcoming, as is for example a decrease in the bank's registered capital pursuant to § 26 paragraph 1 letter f) of the Act on Banks. The same logic must also hold good for the procedure of the Czech National bank pursuant to § 34. If the Czech National Bank ascertains in the activities of a bank a serious, persistent shortcoming - even though it is the only one - which makes it impossible for the bank to fulfil its basic duties and mission, the Czech National Bank must, in the interest of the stability of the banking system, revoke such bank's permission to act as a bank (its banking licence). Therefore, the Bank's argumentation, according to which as serious a shortcoming as is a breach of the duty to maintain permanently its liquidity would have to be associated with yet another shortcoming, in order that the requirements of § 34 paragraph 1 of the Act on Banks would be fulfilled, is not correct. It is clear from the provision of § 34 paragraph 1 of the Act on Banks that it is not at the discretion of the Czech National Bank when to decide on the revocation of a banking licence and when 'merely" on the imposition of a remedial measure or a sanction pursuant to § 26 paragraph 1 letters b) to g). The Czech National Bank must proceed to the decision pursuant to § 34 paragraph 1 of the Act on Banks (§ 34 paragraph 1 stipulates that the CNB shall revoke the licence, not that the licence may be revoked). The cases when a banking licence (a permission to act as a bank) may be revoked separately are governed by the following paragraph 2 of the provision of § 34 of the Act on Banks. If a critically serious shortcoming is ascertained in the activities of a bank, as it is precisely in the case of the Union Bank, the Czech National Bank must revoke the banking licence (the permission to act as a bank). The term shortcoming is used in the Act on Banks as an uncountable concept, because it may manifest itself on several levels at the same time. If a bank closes its branches and does not pay out deposits, then such bank by 'conducting" business in this manner (the clients do not have access to their deposits) quite evidently endangers the interests of the depositors. This may even lead to the conclusion that, to say the least, doubt is cast on the professional competence of the persons managing the bank who brought the bank to this situation. All of this evolves from a basic serious shortcoming, which is precisely a breach of the first sentence of § 14 of the Act on Banks. This, however, from the point of view of the application of the provision of § 34 paragraph 1 is no longer legally significant. For the sake of completeness of the mentioned argumentation on the singular or plural forms of the word shortcoming, it is mentioned that if the singular of this word were used in § 34 paragraph 1 of the Act on Banks, it would be possible, on the contrary, to object in the administrative proceedings on the revocation of a banking licence that a condition for the decision of the Czech National Bank on the revocation of a banking licence (a permission to act as a bank) is the existence of merely one shortcoming and that, if the number of shortcomings is greater, the Czech National Bank would not be authorized to decide on the revocation, but only on a sanction pursuant to § 26 paragraph 1 of the Act on Banks, which, of course, is contrary to the purpose of the provision of § 34 of the Act on Banks.

The Appellant in its Appeal objects, whether it is necessary to maintain permanently liquidity in the Czech currency and in foreign currencies on an individual basis also for the event of an unexpected, hasty withdrawal of deposits, i.e. in the event of a 'run" on a bank. This condition, in the Appellant's opinion, goes beyond the framework of the standard practice of the banking sector and is unrealistic from the technical point of view. For this reason the condition mentioned is not anchored in any Act, because, consequently, it would lead to the liquidation of all entities operating on the Czech banking market. If the Czech National Bank insisted on this condition, it would have to, according to the principle of 'equal recourse" start the proceedings on the revocation of the licence of other banks operating in the CR.

With respect to this polemics, the Czech National Bank States the following: The Measure of the Czech National Bank No. 2 of 27 April 2001, On the Standards of Managing Liquidity of Banks, stipulates, inter alia, in § 3 paragraph 8 the banks' duty to be prepared also for the solution of a liquidity crisis. Nevertheless, in the case of a financially sound bank, there is, on the one hand, no reason why a 'run" should begin or last, on the other such bank is able to maintain its solvency even in this situation. The Bank's allegation that the Czech National Bank de facto stipulates the condition that liquidity must be observed even in the case of a 'run" on a bank is misleading. The duty to maintain liquidity permanently is given by the Act on Banks. Its breach is a serious shortcoming in the activities of a bank, on which not even the Bank casts doubt. The reason for the revocation of a banking licence, however, is the persistence of a serious shortcoming. In this way it is ensured that the banking licence will not be revoked in the cases when it is possible to rectify even a serious shortcoming in the activities of a bank within a reasonably short period of time. In the case of the Union Bank, however, it has been proven that the shortcoming which consists in the breach of § 14 has not only persisted since 21 February 2003, but, as follows, inter alia, also from the above-mentioned proposal for composition, that the Bank no longer has a chance to restore its liquidity.

The Appellant further poses a question what is the role of banking supervision in the case of the occurrence of a quite purposeful and organized sudden withdrawal of deposits, i.e. in the case of a run on a bank, and concludes: 'A number of Czech banks precisely in the years 1990 to 2001 ceased to exist owing to this non-standard conduct of bank clients and the Czech National Bank as a rule confined itself only to the procedure pursuant to § 34 of the Act on Banks. The Act imposes on the Czech National Bank, inter alia, the duty to take care of the prudential operation and purposeful development of the banking system in the CR. With respect to this, see § 2 paragraph 2 letter d) of Act No. 6/1993 Coll., On the Czech National Bank, as amended (hereinafter only the 'Act on the CNB"). This duty cannot be understood in the sense that in the case of problems in the activities of a bank the bank will be eliminated from the banking market by revocation of its licence, due to, at least, three reasons: 1) by revocation of a banking licence an undesirable weakening of the competitive environment occurs, 2) by revocation of a banking licence the weakening or, as the case may be, extinction of further entrepreneurial entities (the bank's clients) occurs, 3) a slow-down in the development of the banking system occurs.'

The Czech National Bank considers the Appellant's claim as misleading and purposeful. The main reason for the fall of a number of banks during the nineties was the poor quality of their assets. If, therefore, a run on a bank occurred, which, however, was not a general case, then it represented, on the part of the depositors, mostly behaviour which could have been expected in a situation when they considered their deposits as endangered. Apart from this, the Czech National Bank within the framework of maintaining stability of the banking sector participated in the solution of the problem banks in the cases when a system crisis threatened. In this connection it is mentioned that the Union Bank co-participated in these operations. Act No. 59/2000 Coll., on Public Support, as amended, however, markedly changed the situation, when it stipulated clear rules for the possibility to provide public support to banks in difficulties. The duty of the Czech National Bank to take care of the prudential operation and purposeful development of the banking system in the Czech Republic consists in particular in the setting-up of regulatory mechanisms which are in accordance with the common international practice or, as the case may be, in well-reasoned cases take into consideration the specific Czech features, and in the control over their observance. The elimination of banks which are unable to operate properly from the sector is not at variance with the mentioned statutory duty of the Czech National Bank.

The Appellant further states that, being aware of the factual consequences of the decision on the revocation of the licence, it offered the CNB some manners of solution of the situation which has arisen, with regard to its own business activities, but in particular with regard to the potential social impacts.

According to the Czech National Bank it is not clear from the Appellant's statement what specific manners of solution offered to the Czech National Bank it has in mind. The administrative proceedings were instituted for the reason of the existence of a serious and persisting shortcoming in the activity of the Bank, when § 34 paragraph 1 of the Act on Banks imposes on the Czech National Bank the duty to revoke the banking licence (the permission to act as a bank). The background materials submitted by the Bank within the framework of the administrative proceedings were assessed by the Czech National Bank with regard to the subject of the administrative proceedings. In the course of the administrative proceedings, however, the Bank did not prove that the serious shortcoming, owing to which the administrative proceedings were instituted, was rectified. The Act on Banks, therefore, does not afford the Czech National Bank scope for any other solution than the revocation of the banking licence (the permission to act as a bank). If the proposal means the Restructuring Plan of 12 February of 2003, from which a requirement for public support ensued, then it is necessary to mention that this proposal was directed at the Ministry of Finance.

The Appellant argues that if no legal regulation stipulates the duty of banks to maintain permanently their solvency in the Czech currency and in foreign currencies on an individual basis also for the case of an unexpected, hasty withdrawal of deposits, i.e. in the case of a run on a bank, then not even an administrative authority may invoke the penalties of law for a breach of this duty which from the legal point of view is non-existent.

The provision of § 14 of the Act on Banks in its first sentence imposes on banks the duty to maintain permanently their solvency in the Czech currency and in foreign currencies on both an individual and a consolidated basis. This duty applies to the entire period during which a bank conducts its activities. This duty is without exception. This is why the Bank's allegation that 'no legal regulation stipulates the duty of banks to maintain permanently their solvency in the Czech currency and in foreign currencies on an individual basis also for the case of unexpected hasty withdrawal of deposits, therefore, also in the case of a run on a bank …' is not true. The legal regulation which stipulates so, is precisely the Act on Banks in its provision of § 14.

The Appellant in its Appeal expresses its conviction that the Czech National Bank by the Appealed Decision pursued only a single aim, which was to prevent the Appellant from litigating successfully in the dispute which the Appellant since 1998 conducts against the Czech National Bank at the Court of Arbitration Attached to the Economic Chamber of the Czech Republic and the Agrarian Chamber of the Czech Republic. The subject of the dispute is a claim of the company Union Bank on the Czech National Bank for the payment of a certain amount. The Appellant within the framework of the Appeal objects the prejudice of the employees who signed the appealed Decision and states that there was a wilful breach of § 3 paragraphs 3 and § 11 of the Administrative Procedure Code.

The Czech National Bank does not agree with the allegation on prejudice. The Union Bank by referring to prejudice de facto argues that the Czech National Bank abuses its position of the regulator of the banking sector, in order to avert its potential obligation to pay the amount which is the subject of the dispute at the Court of Arbitration attached to the Economic Chamber of the Czech Republic and the Agrarian Chamber of the Czech Republic. In accordance with § 1 paragraph 3 of the Act on the CNB, the Czech National Bank is entrusted with the competences of an administrative authority and pursuant to § 2 paragraph 2 letter d) of the same Act the Czech National Bank performs banking supervision over the activities of banks and takes care of the prudential operation and the purposeful development of the banking system in the Czech Republic. At the same time pursuant to § 1 paragraph 4 of the Act on the CNB the Czech National Bank manages independently with professional care the property which was entrusted to it by the state. It is evident from the provisions of the legal regulations quoted that the Czech National Bank is obliged, by operation of law, to perform not only a public-law role as a regulator of the banking system and an administrative authority, but also a private-law role as an administrator of the property entrusted to it by the state, which it manages independently with professional care, in order to fulfil the objectives of its activities mentioned in § 2 of the Act on the CNB. The Czech National Bank must in any case duly perform both its roles, the public-law one and the private-law one, not only because it is authorized, but also because it is obliged, by operation of law, to perform them, The Czech National Bank performs its competences (and its duties) through various organizational units (sections). In this way it is possible to segregate to the maximum extent within the framework of one organization its private-law role (Administration Department) from its public-role role (Banking Supervision Department). It is not possible to relate prejudice in accordance with § 9 of the Administrative Procedure Code to the Czech National Bank as the entire administrative authority, but only to the specific persons acting on behalf of the Czech National Bank. The Union Bank in its Appeal objects prejudice of the employees signed precisely on the basis of their employment relation to the Czech National Bank. It is, therefore, possible to deduce from this assumption that according to the Union Bank each of the employees of the Czech National Bank would be a prejudiced person in the decision-taking in the administrative proceedings against the Union Bank, and, going to extremes, the Czech National Bank would then have to resign completely from its role of a regulator towards the Union Bank, because it conducts a trade dispute against it. This is absolutely unacceptable. According to the interpretation of the Union Bank, every bank which would, even on the basis of fabricated reasons, cause a dispute with the Czech National Bank, would extricate itself completely from the performance of the banking supervision. Further it is mentioned with respect to the objection of prejudice that the proceedings on the trade dispute of the Czech National Bank with the Union Bank were started and conducted already before the institution of the administrative proceedings, and, therefore, also before the issuance of the Appealed Decision; and yet the Union Bank did not raise the objection of its doubt as to whether the employees mentioned are not prejudiced, even though their participation in the negotiating of the matter was known to it. With a view to the mentioned facts there are no reasons for the exclusion of the mentioned employees of the Czech National Bank from the negotiations and decision-taking in the given matter in accordance with § 9 paragraph 1 of the Administrative Procedure Code. At the same time it is evident that the Union Bank may conduct the dispute without regard to the instituted administrative proceedings on the revocation of its banking licence, the course of which does not influence in any way the course of the litigation. The Bank's argument that there is an attempt on the part of the Czech National Bank to push the Union Bank into a 'state of bankruptcy" is quite irrelevant. In the case of the revocation of a banking licence the Czech National Bank is obliged pursuant to § 36 paragraph 1 of the Act on Banks to submit a proposal for the liquidation of the joint-stock company and a proposal for the appointment of a liquidator. The Czech National Bank does not have any competences with respect to the bankruptcy proceedings. Apart from this, the administrator in bankruptcy has a statutory duty to proceed in accordance with the provision of § 8 paragraph 2 of ABC and, when performing his function, to proceed with professional care, on the basis of which he is obliged to apply and exact for the benefit of the bankrupt's assets any monetary claims the bankrupt has on its debtors. There is not, therefore, any legal provision which would prevent the Bank to exact any claims even after the revocation of the licence, even if it were in the bankruptcy regime.

The Appellant in its Appeal designates the fact that it was not acquainted before the issuance of the Decision with the standpoint of the Ministry of Finance, i.e. with the background material with which a participant in the proceedings must be acquainted even before the issuance of the Decision and in such a way that it might express its opinion on it duly and in time or, as the case may be, propose further evidence, as a breach of its procedural rights, by which it was deprived of the possibility to take part in the administrative proceedings to the full extent and by which its right to legal representation before a state authority was curtailed.

With respect to this objection the Decision on the Appeal states that the Czech National Bank is obliged pursuant to § 34 paragraph 1 of the Act on Banks to request the standpoint of the Ministry of Finance. The standpoint of the Ministry of Finance, however, is not a principal background material of the Czech National Bank for the revocation of a banking licence (the permission to act as a bank). Even if the Bank were not acquainted by the Czech National Bank before the issuance of the latter's Decision with the standpoint of the Ministry of Finance, no breach of the procedural rights of a participant in the proceedings, which is objected against, might occur; therefore, the participant might not be, as a result of this, deprived of the possibility to take part in the administrative proceedings to the full extent and his right to legal representation before a state authority could not have been curtailed in the sense of a breach of the right to propose supplementation of the background materials for the Decision, because the standpoint in question is not a background material for the Decision in the sense of the ascertainment of the exact and complete facts of the case through the evidentiary means pursuant to the provision of § 34 of the Administrative Procedure Code, but a procedural requirement immediately preceding the issuance of the Decision by the Czech National Bank. This is a procedural requirement of the Act requiring that the Czech National Bank should know before the issuance of its decision the standpoint of the Ministry of Finance to the matter in question or, as the case may be, to the already precisely and completely ascertained facts of the case and the complete background materials for its decision. Due to these reasons alone, but also due to the very character of the standpoint to the complete materials for the decision-taking of the Czech National Bank it is not possible to consider supplementation of the ascertained state in relation to or on the basis of this standpoint of the Ministry of Finance in accordance with the provision of § 33 paragraph 2 of the Administrative Procedure Code. The standpoint of the Ministry of Finance in question contains only a recommendation that the Czech National Bank should continue its administrative proceedings on the revocation of the banking licence. The Czech National Bank quoted this recommendation in the substantiation of the appealed Decision. For the sake of completeness it is mentioned that the standpoint of the Ministry of Finance was published in the media (in television and in the daily press, for example in Hospodářské noviny, on 13 March 2003).

The Appeal contains a formal objection against the revocation of the banking licence, when the so far existent permission to act as a bank was not changed into a banking licence pursuant to the valid wording of the Act on Banks. It is true that the Appealed Decision revokes a banking licence which so far has not been granted, while the Union Bank still operates on the basis of a permission to act as a bank. The problem, therefore, is that the Appealed Decision from the formal aspect revokes in concept, not in content, a banking licence and not a permission to act as a bank. The statement of the Appealed Decision further does not contain designation of the period in which a serious shortcoming in the activities of a bank should persist. In conclusion of the Appeal the Appellant proposes that the appellate authority should cancel the Appealed Decision of the Czech National Bank and return the case for new negotiations and decision-taking to the administrative authority which issued the Appealed Decision.

The Czech National Bank has dealt with the mentioned objections of the Appellant as follows: From the point of view of the factual content, a permission to act as a bank, or a banking licence, are analogical institutes, which is also attested to by the fact that banks still operating on the basis of a permission to act as a bank continue to operate in this area, including the fact that they perform those activities which the Act on Banks enables to perform only on the basis of a banking licence. Act No. 126/2002 Coll., by which the concept of a 'banking licence" was introduced into the Act on Banks, solves this question within the framework of common and temporary provisions in Article II item 3, where, inter alia, it is imposed on the Czech National Bank to issue banking licences to all banks operating under the so far existing legal regulations, and to do so in administrative proceedings instituted on the instigation of the Czech National Bank (without a proposal). No deadline was stipulated for the beginning or the termination of this process, as this is a purely formal procedure which should ensure only the unification of the formulations mentioned in the original permissions to act as a bank with the terminology used in the Act on Banks after the amendment carried out by Act No. 126/2002 Coll., including the very name of the document from which the authorization for banking activities ensues. In other words, the fact that a bank until the issuance of a banking licence performs its activities on the basis of a permission to act as a bank, is not at variance with the Act on Banks after the amendment carried out by Act No. 126/2002 Coll. and, therefore, if all rights of a bank (especially its right to perform banking activities) remain intact in this situation, also all the duties of a bank must be retained, including the consequences of their breach and, therefore, the potential tools which the Act on Bank gives the Czech National Bank in relation to a banking licence, must be applied by analogy also in relation to a permission to act as a bank. Any other state would be at sharp variance with the interests which are pursued by the very fact that the banking activities are a subject of strict regulation stipulated by law (of banking supervision). The background materials and serious reasons for the revocation of the permission to act as a bank or rather, according to the new terminology of the Act on Banks, for the 'revocation of the banking licence" are factually identical, start from the same factual background materials, and, therefore, even though the Act on Banks does not explicitly govern this, the same procedure should be applied, by analogy, on the revocation of a permission to act as if a banking licence were involved. The use of analogy is further supported by the fact that under the Act on Banks or the Act on the Czech National Bank the competence of the Czech National Bank to perform banking supervision did not become extinct. The Act on the CNB contains in its provision of § 44 paragraph 1 letter a) the competence (and also the duty) of the Czech National Bank to perform supervision over the activities of banks. Paragraph 2 of the same provision stipulates that the supervision comprises under letter a) the assessment of applications for the granting of licences and permissions, and under letter b) supervision over the adherence to the conditions set forth in the licences and permissions granted and under letter c) conformity with the law etc. The mentioned Article II item 3 of Act No. 126/2002 Coll. in its second sentence mentions that a permission to act as a bank becomes extinct on the day when a decision on the issuance of a banking licence comes into legal effect. It is possible to conclude from this provision that the concept of a permission to act as a bank is not supplemented with the concept of a banking licence automatically with the effectiveness of Act No. 126/2002 Coll., but that first a banking licence must be issued in administrative proceedings and only then the extinction of the permission to act as a bank occurs. In this respect the Czech National Bank in the Appealed Decision made a mistake in the legal qualification of Article II item 3 of the Act No.126/2002 Coll. With regard to the above-mentioned argumentation it is then logical that it is necessary, as a result of the change in the legal assessment, to change the Appealed Decision in such a way that from the point of view of designation it is the permission to act as a bank that is withdrawn, instead of the banking licence. In other words, with regard to the change in the legal assessment only a change relating to the designation of what was objectively revoked was carried out within the framework of the statement of the Decision of the Czech National Bank. This change in the Appealed Decision has merely the character of a different legal assessment of the fact that the Bank still operates under the permission to act as a bank, that it was not issued a banking licence. All the background data and documents, on the basis of which the Czech National Bank revokes the banking licence by the Appealed Decision, in particular the ascertainment of the facts of the case and the background materials for the Decision, remain from the factual point of view the same as those which apply to the withdrawal of the permission to act as a bank. The Czech National Bank revokes the permission to as a bank pursuant to the provision of § 34 paragraph 1 of the Act on Banks which governs the revocation of a banking licence. This provision can be used, by analogy, also in this case for the revocation of the permission to act as a bank, because, as mentioned above, the Czech National Bank still retains its competence in the area of banking supervision and no other provision of the Act on Banks than § 34 paragraph 1 of the Act on Banks, not even after its amendment by Act No. 126/2002 Coll., nor any provision of any other Act governs the withdrawal of the permission to act as a bank. With respect to this point, the Czech National Bank further mentions that the use of analogy is not an unusual procedure in the area of administrative law. In the substantiation of the Decision of the Czech National Bank on the Appeal it is then specified that the hindering the clients of the Union Bank from disposing of their deposits under the statutory and contractual conditions has persisted from 21 February 2003.

The Czech National Bank in accordance with § 41 paragraph 1 of the Act on Banks before taking the decision on the Appeal requested the standpoint of the Minister of Finance. The standpoint of 14 April 2003 recommends to reject the Appeal of the Union Bank with the proviso, that the facts by which the Appealed Decision of the Czech National Bank on the revocation of a banking licence continue to exist. The Appellate Commission discussed the Appeal against the Appealed Decision on 16 April 2003.

The Czech National Bank considers the objections of the Union Bank raised in the Appeal as refuted, except for the objection relating to the substitution of a banking licence with a permission to act as a bank. The Bank Board, therefore, decided according to the proposal of the Appellate Commission to change the Appealed Decision in such a way that it is the Union Bank's permission to act as a bank is revoked, not its banking licence. An appeal of the same content as that filed by the Union Bank was at that time also filed by the administrator of the bankrupt's assets appointed by court. The petition in bankruptcy with respect to the assets of the Union Bank was documented by a forged document and the court, therefore, cancelled the bankruptcy proceedings and recalled the administrator of the bankrupt's assets from his function. The Bank Board, therefore, rejected the appeal of the administrator as inadmissible pursuant to § 60 of the Administrative Procedure Code. No appeal is admissible against the decision of the Bank Board on appeals.

III.

Course of Action of the Czech National Bank after the Decision on the Appeal

The Decision of the Bank Board on the Appeal was delivered to the Union Bank and became legally effective on 2 May 2003.

At the present time the Czech National Bank prepares for the court a proposal for the liquidation of the joint-stock company Union Bank and for the appointment of its liquidator.

Alice Frisaufova
CNB spokesperson