The state constrains private enforcement officers

26 November, 2015


A private enforcement institute was introduced in Georgia in 2009 to implement the best European practices. This initiative aimed to establish alternative enforcement mechanisms that, compared to public enforcement, would be cheaper, quicker and more efficient. Yet, from the moment of its creation, the institute’s influence has been diminishing due to numerous legislative or factual limitations imposed on private enforcement officers. This blog post targets an Order of the Minister of Justice issued this August, following which private enforcement officers suddenly found their activities to be much more expensive. Further, other obstacles created for the private enforcement institute in recent years will be discussed, which illustrate that by continuing this trend, private enforcement will cease to function and be informally abrogated.

1.  Order of the Minister of Justice - fees made ten times more expensive without any preliminary consultation

On 27 August 2015, the Minister of Justice issued Order N96, following which the private enforcement officers' fee for using the online enforcement proceedings software necessary for their activities increased tenfold, from the prior annual fee of 500 GEL to 5000 GEL. The fee was increased without consulting with private enforcement officers, who had 15 days to pay the amount. The Ministry has not provided any explanation or justification for such an abrupt increase in the fee.

For more clarity, we will briefly describe the chain of developments. The law imperatively obligates private enforcement officers (there are a total of 39 private enforcement officers countrywide) to use the online enforcement proceedings software. To do so, they sign a year-long contract with the LEPL National Bureau of Enforcement annually. The law obligates the National Bureau of Enforcement to allow private enforcement officers use the online software without interruption. Pursuant to the law, private enforcement officers renewed their contracts with the Enforcement Bureau every year, and they never experienced any prior obstacles in this regard.

The validity of the enforcement officers' contracts expired in June 2015, but despite numerous telephone communications, extending the contracts was impossible for some unknown reason. During this period, private enforcement officers used the software gratuitously. On 27 August 2015, the Minister's Order was published, which increased the fee for using the software tenfold. Enforcement officers received another notification on September 2, which obligated them to appear in the National Bureau of Enforcement to execute the contract within 15 days. Otherwise, private enforcement officers would no longer enjoy the right to use the online software.

Private enforcement officers consequently challenged Article 4 of the Minister's Order, which increased the fee for using the online software, in the City Court. As an interim relief, they also requested suspension of the challenged norm until a final decision on the case could be made. In its ruling on September 17, the Court suspended increasing the fee until a final decision is rendered.

Despite the court's ruling, on September 21, the National Bureau of Enforcement terminated access to the software by referring to the expiry of the 15-day period, thus totally paralyzing the activities of private enforcement officers.

Private enforcement officers demanded a written explanation from the National Bureau of Enforcement regarding the termination of online software and non-extension of contracts. According to private enforcement officers, the Bureau's representatives claimed in oral conversations that they are unable to execute contracts because the court has suspended the Order's effect, which is an unjustified argument. The Court did not suspend the entire Order, but Article 4 only, which defines the service fee. Hence, the Bureau is still obligated to execute contracts.

According to private enforcement officers, the Enforcement Bureau fully used the statutory one-month period for responding to their letter (administrative complaint), because relevant officials of the Bureau are well aware of grave financial and legal consequences of switching the online software off for private enforcement officers. To avoid even graver consequences, private enforcement officers had to withdraw the appeal from the court. This decision was a result of a desperate situation, because the enforcement officers could no longer use the software even under the deteriorated conditions, and this inflicted huge damages.

2.  Overview of creation and limitations of a private enforcement institute

The above-described problem is not the first one experienced by a private enforcement institute from the moment of its creation. Briefly described below are legal and factual limitations that private enforcement officers claim have been applied in the past and still raise concerns.

2.1. Introduction of private enforcement

A private enforcement institute was introduced in Georgia on 1 July 2009 with the EU’s recommendation, as well as its financial and technical assistance. To avoid potential gaps, the newly created institute required observation, improvement and trust-building. Therefore, several legislative restrictions were imposed on private enforcement officers:

  • LEPL National Bureau of Enforcement enjoyed the exclusive right to hold auctions;
  • When sending encashment letters to banks, the National Bank President required private enforcement officers to notarize the execution writ, while the Bureau did not have the same restrictions.

A private enforcement institute was set up by analyzing the experiences of European states and their best practices, which logically should have been fully transferred to the country’s private enforcement services. The majority of EU states have private or mixed enforcement agencies (as with the majority of Council of Europe member states). Availability of a private enforcement institute releases the state from expenses, stimulates competition, fosters increased quality of services and cheapens these services, which is crucial for establishing a stable business environment and favorable conditions for the state's economic growth. This also complies with the principle that the state should not deliver services that the private sector can provide.

Apart from the aforementioned advantages, there is another key argument in favor of a private enforcement institute: the fee for its services is smaller than for services delivered by the National Bureau of Enforcement. In case of the Enforcement Bureau, the fee for a debt collection cases equals 7% of the collectible amount (2% for creditors), and importantly, this fee is fully deposited in the Enforcement Bureau's account. In the case of private enforcement officers, this fee is much smaller (usually 5% or lower), which is undoubtedly more profitable for a creditor as well as a debtor.

A private enforcement institute has functioned efficiently for 6 years, evidenced by the choice of thousands of creditors to use the services of private enforcement officers (an absolute majority of large financial institutes operating in Georgia, including banks, cooperate with private enforcement officers in enforcement proceedings). Nevertheless, the state started curtailing private enforcement officers and intentionally oppressing them on an increasingly larger scale.

2.2. Legal obstacles

  1. In 2010, private enforcement officers were deprived of the right to pursue enforcement proceedings on claims over 500 000 GEL, thus artificially giving an advantage to the National Bureau of Enforcement;
  2. In 2012, private enforcement officers were not granted the right to deliver statement of fact services (taken from the French enforcement system), which then fell within the exclusive authority of executors of the Enforcement Bureau. This is especially illogical considering that only private enforcement officers have this function in France;
  3. Without any justification or argument, the minimum threshold of an auction service fee rendered to private enforcement officers was doubled, which obliges a private enforcement officer to pay 200 GEL to the National Bureau of Enforcement, even if the value of the property sold is 100 GEL;
  4. A fee was introduced to the parties involved for publishing a public notification in the course of enforcement proceedings, but enforcement officers were obligated to post public notifications on the web page of the National Bureau of Enforcement. In addition, a private enforcement officer must pay 50 GEL to post a public notification on the web page, which is an inordinately high fee;
  5. In the case of withdrawing an auction application before the auction is announced, only half of the service fee paid by a private enforcement officer is reimbursed, and it is not reimbursed at all if an auction is already announced. However, in the course of civil and administrative proceedings in common courts, the state fee is fully reimbursed if the statement of claim is withdrawn even when a judge is finished considering a case;
  6. The National Bureau of Enforcement, which is a competitor of private enforcement officers, was vested with powers to issue licenses to private enforcement officers, terminate licenses, and impose disciplinary measures. This raises concerns over the Bureau's impartiality;
  7. There are different disciplinary liability measures for private enforcement officers and employees of the Enforcement Bureau. Namely, private enforcement officers first receive a warning and then their license is terminated, whereas at least 7 types of measures can be applied against the Bureau's employees before they are dismissed (as an extreme measure);
  8. By legislative amendments made, about which private enforcement officers were not informed, the National Bureau of Enforcement was granted the right to interfere in enforcement proceedings of a private enforcement officer and carry out sequestration on a case not under the Bureau's control;
  9. In 2013, a mass inspection of private enforcement officers was carried out totally groundlessly, leading to a protest by private enforcement officers. This inspection resulted in the use of warnings as a disciplinary measure against private enforcement officers, which were later appealed and found by the court as improper. In light of the lost court hearings, the Order of the Minister of Justice of 2013 authorized the Ministry's General Inspection to check the cases administered by private enforcement officers through online case proceedings software so that special basis is no longer required;
  10. As part of auction services delivered to private enforcement officers, the National Bureau of Enforcement fully keeps a guaranteed amount paid by the winner in case of a failed auction (when the winner does not pay a final amount), which is 5% of the market value of the property to be sold at auction. Hence, this amount serves the interests of neither a creditor nor a private enforcement officer.

2.3. Practical obstacles

  1. A mandatory qualification exam for obtaining a private enforcement officer's license has not been held since 2011;
  2. Private enforcement officers are deprived of the opportunity to benefit from numerous functions of an online enforcement proceedings software successfully used by the National Bureau of Enforcement (electronic arrest of assets in banks, electronic search for property in the Public Registry, electronic search for information on a debtor's financial status from the Revenue Service, limiting the information on the course and results of auctions, etc.);
  3. Private enforcement officers are not allowed to join and use the online workflow system;
  4. Contrary to the requirements of the law, the National Bureau of Enforcement not only fails to deliver auction services to private enforcement officers within a one-month period, but often does not even start holding an auction during this period;
  5. Private enforcement officers have repeatedly approached the Ministry of Justice and the National Bureau of Enforcement about potential amendments to the law, which would have enabled private enforcement officers to enjoy vacation, maternity/paternity leave or sick leave guaranteed by the Constitution and the Labor Code (similar to notaries). Despite a number of attempts, this problem still prevails;
  6. Despite a number of requests, private enforcement officers have not participated in examining any legislative amendments since 2013.

3. Recommendations

Given the above circumstances and in order to improve the enforcement legislation, in 2013 the EU Delegation in Georgia implemented the DEEP (Development of Enforcement Legislation Project in Georgia) project, which aimed to develop the Enforcement Code with the help of experts invited by the EU. The recommendations given provided the basis for full legislative equalization of private enforcement officers and the National Bureau of Enforcement.

In order to reflect the recommendations developed made by the EU Delegation, statutory acts and new practices were implemented. Further, workshops were organized with the joint participation of the Ministry of Justice of Georgia and private enforcement officers. Nevertheless, the Ministry of Justice of Georgia has ignored all recommendations striving to protect private enforcement activity and legally equalize them with the state enforcement service.

In addition, the Ministry of Justice has even ignored the recommendations of the EU Delegation, which would have secured rights guaranteed by the Constitution of Georgia, i.e., for an enforcement officer to have vacation time and maternity leave, to briefly suspend activities due to a temporary incapacity to work and to enjoy other rights granted to an employed individual by the labor legislation of Georgia.

Given the above, Transparency International Georgia urges:

  • The Ministry of Justice of Georgia to explain the reasons behind introducing legislative and practical obstacles for private enforcement officers;
  • The Ministry of Economy and Sustainable Development of Georgia and the Business Ombudsman to express interest in the reasons behind the introduction of legislative and practical obstacles for private enforcement officers as a sector of the economy;
  • To take into account the recommendations developed as part of the EU-funded DEEP (Development of Enforcement Legislation Project in Georgia) project.
Author: TI Georgia