JUDGMENT OF THE COURT

12 May 1998 (1)

(Company law — Public limited liability company in financial difficulties —Increase in the capital of the company by administrative decision — Abusiveexercise of a right arising from a provision of Community law)

In Case C-367/96,

REFERENCE to the Court under Article 177 of the EC Treaty by the Efetio —Athinon for a preliminary ruling in the proceedings pending before that courtbetween

Alexandros Kefalas and Others

and

Elliniko Dimosio (Greek State),

Organismos Ikonomikis Anasinkrotisis Epikhiriseon AE (OAE),

intervener: Athinaiki Khartopiia AE and Others,

on the interpretation of Article 25 of the Second Council Directive 77/91/EEC of13 December 1976 on coordination of safeguards which, for the protection of theinterests of members and others, are required by Member States of companieswithin the meaning of the second paragraph of Article 58 of the Treaty, in respectof the formation of public limited liability companies and the maintenance and

alteration of their capital, with a view to making such safeguards equivalent (OJ1977 L 26, p. 1), and on the abusive exercise of a right arising from a provision ofCommunity law,

THE COURT,

composed of: G.C. Rodríguez Iglesias, President, C. Gulmann, H. Ragnemalm andM. Wathelet (Presidents of Chambers), G.F. Mancini, J.C. Moitinho de Almeida,P.J.G. Kapteyn (Rapporteur), J.L. Murray, D.A.O. Edward, J.-P. Puissochet,G. Hirsch, P. Jann and L. Sevón, Judges,

Advocate General: G. Tesauro,

Registrar: H.A. Rühl, Principal Administrator,

after considering the written observations submitted on behalf of:

—    Mr Kefalas and others, by A. Tegopoulos and D. Livieratos, of the AthensBar,

—    the Greek Government, by M. Stathopoulos, of the Athens Bar, andV. Kontolaimos, Deputy Legal Adviser in the State Legal Department,acting as Agent,

—    Organismos Ikonomikis Anasinkrotisis Epikhiriseon AE (OAE), byK. Kerameos and I. Soufleros, of the Athens Bar,

—    Athinaiki Khartopiia AE and others, by S. Felios and M. Manolas, of theAthens Bar,

—    the Commission of the European Communities, by D. Gouloussis, LegalAdviser, acting as Agent,

having regard to the Report for the Hearing,

after hearing the oral observations of Mr Kefalas and others, represented byA. Tegopoulos and D. Livieratos, of the Greek Government, represented byM. Stathopoulos, V. Kontolaimos and P. Mylonopoulos, Legal Assistant in theDepartment for Community Matters of the Ministry of Foreign Affairs, acting asAgent, of Organismos Ikonomikis Anasinkrotisis Epikhiriseon AE (OAE),represented by K. Kerameos and I. Soufleros, of Athinaiki Khartopiia AE andothers, represented by S. Felios and M. Manolas, and of the Commission,represented by D. Gouloussis, at the hearing on 18 November 1997,

after hearing the Opinion of the Advocate General at the sitting on 4 February1998,

gives the following

Judgment

1.

    By judgment of 6 June 1996, received at the Court on 21 November 1996, theEfetio — Athinon (Court of Appeal, Athens) referred to the Court for a preliminaryruling under Article 177 of the EC Treaty two questions on the interpretation ofArticle 25 of the Second Council Directive 77/91/EEC of 13 December 1976 oncoordination of safeguards which, for the protection of the interests of membersand others, are required by Member States of companies within the meaning of thesecond paragraph of Article 58 of the Treaty, in respect of the formation of publiclimited liability companies and the maintenance and alteration of their capital, witha view to making such safeguards equivalent (OJ 1977 L 26, p. 1), and on theabusive exercise of a right arising from a provision of Community law.

2.

    Those questions were raised in proceedings between, on the one hand, Mr Kefalasand others, shareholders in the public limited liability company Athinaiki KhartopiiaAE ('Khartopiia‘), and, on the other hand, the Greek State and OrganismosIkonomikis Anasinkrotisis Epikhiriseon AE (Organisation for the Restructuring ofUndertakings, hereinafter 'the OAE‘), in which the plaintiffs are contesting thevalidity of the increase in the capital of Khartopiia effected under the schemeprovided for by Greek Law No 1386/1983 of 5 August 1983 (Official Journal of theHellenic Republic, 107, of 8 August 1983, p. 14), which was applied to Khartopiiaby decision of the Minister for the National Economy of 30 March 1984.

3.

    The OAE is a public body set up by Law No 1386/1983. Its legal form is that ofa public limited liability company and it acts in the public interest under the controlof the State. According to Article 2(2) of that Law, the object of the OAE is tocontribute to the economic and social development of the country by means of thefinancial reorganisation of undertakings, the importation and application of foreignknow-how, the development of national know-how and the formation and operationof nationalised and mixed-investment undertakings.

4.

    Article 2(3) of Law No 1386/1983 lists the powers conferred on the OAE for thepurposes of attaining those objectives. These include the power to assume theadministration and day-to-day management of undertakings undergoingreorganisation or nationalised undertakings, participate in the capital ofundertakings, grant, issue or take out certain loans, acquire bonds and transfershares, particularly to workers or to organisations representing them, to local

authorities or to other legal persons constituted under public law, charitableinstitutions, social organisations or individuals.

5.

    According to Article 5(1) of Law No 1386/1983, the Minister for the NationalEconomy may decide to apply the scheme set up by that law to undertakings inserious financial difficulties.

6.

    Article 7 of Law No 1386/1983 provides that the competent Minister may decideto transfer to the OAE the administration of an undertaking subject to the schemeestablished by that law, to reschedule its debts in such a way as to ensure itsviability or to take steps to place it in liquidation.

7.

    Article 8 of Law No 1386/1983 contains provisions relating to the transfer of theadministration of the undertaking to the OAE. Article 8(1), as amended by LawNo 1472/1984 (Official Journal of the Hellenic Republic A, 112, of 6 August 1984,p. 1273), lays down the detailed rules governing such transfers and regulates therelationship between the persons appointed by the OAE to administer theundertaking and its organs. Thus it provides that the powers of the administrativeorgans of the undertaking are to cease upon publication of the ministerial decisionplacing the undertaking within the scheme established by that law, and that thegeneral meeting of the company is to subsist but that it may not remove membersof the board of directors who have been appointed by the OAE.

8.

    Article 8(8) of Law No 1386/1983 provides that the OAE may decide, in the courseof its provisional administration of the company concerned, to increase the capitalof that company by way of derogation from the legislation in force relating topublic limited liability companies. The increase must be approved by thecompetent minister. The former shareholders retain their preferential right andmay exercise it within a period prescribed in the ministerial decision approving theincrease.

9.

    Following the application to Khartopiia of the scheme provided for by LawNo 1386/1983, the OAE took over the management of that company and decidedon 28 May 1986 to increase its capital by DR 940 million. That increase wasapproved, in accordance with Article 8(8) of Law No 1386/1983, by DecisionNo 153 of 6 June 1986 of the Minister for Industry, Research and Technology.

10.

    That decision shows that the former shareholders retained an unlimited preferentialright to acquire the new shares which was to be exercised by them within onemonth from publication of the decision in the Official Journal of the HellenicRepublic. The plaintiffs in the main proceedings did not avail themselves of thatright.

11.

    In the plaintiffs' view, the increase in capital decided upon by the OAE is contraryto Article 25(1) of the Second Directive, which provides that 'Any increase incapital must be decided upon by the general meeting‘. Consequently, they brought

an action before the Polimeles Protodikio (Court of First Instance), Athens, whichdismissed their application.

12.

    The plaintiffs in the main proceedings therefore appealed against that judgment tothe Efetio — Athinon. The Greek State considered that the plaintiffs' applicationfor a declaration of invalidity was abusive, and raised an objection of abuse ofrights based on Article 281 of the Civil Code, which provides that 'the exercise ofa right is prohibited where it manifestly exceeds the bounds of good faith, moralityor the economic or social purpose of that right‘.

13.

    In its judgment making the reference, the national court considers that Article 281of the Civil Code may be applied in order to preclude the exercise of rights arisingfrom provisions of Community law where such exercise would be abusive. In thepresent case, the national court considers that to allow the plaintiffs' claim underArticle 25(1) of the Second Directive for a declaration that the OAE's decisionauthorising an increase in capital was invalid would manifestly exceed the boundsof good faith, morality and the economic or social purpose of the right.

14.

    The national court based its conclusion in that regard on various findings of fact.

15.

    First, at the time when it was made subject to the scheme provided for by LawNo 1386/1983, Khartopiia was heavily indebted to banks and other creditors, it hadan acute liquidity problem and it no longer possessed its own capital resources, sothat its assets were no longer sufficient to cover its liabilities and its shares wereworthless.

16.

    In addition, the increase in capital effected by the OAE and the subsequentconversion of debt into equity led to the financial recovery of Khartopiia. Theeconomic value of the shareholders' equity was secured, the risk of job losses forthousands of workers was averted and trading with numerous suppliers couldcontinue, all with beneficial effects on the national economy. If, by contrast, theincrease in capital had not been effected, Khartopiia would have been declaredinsolvent and its assets would have been liquidated at the request of the creditors,with the result that all the company's assets would have been lost to the detrimentof the shareholders, the workers would have been laid off and the nationaleconomy would have been deprived of an important undertaking.

17.

    Lastly, when the capital was increased, the shareholders were given a preferentialright to acquire shares, but declined to avail themselves of that right.

18.

    The national court decided, with reference to the judgment in Case C-441/93 Pafitisand Others v TKE and Others [1996] ECR I-1347, paragraphs 67 to 70, to stayproceedings and to refer the following questions to the Court for a preliminaryruling:

'1.    Can the national court apply a provision of national law (in this case Article281 of the Greek Civil Code) in order to assess whether a right granted bythe Community provisions at issue is being exercised abusively by the partypossessing it, or are there other Community law principles, and if so which,to be found in legislation or settled case-law, on which the national courtmay, if need be, base itself?

2.    If the reply to Question 1 is in the negative, if, that is, the Court of Justicereserves such competence for itself, for reasons relating, for instance, to theuniform application of Community provisions, may the specificcircumstances as formulated by the defendant-respondent State as anobjection, which constituted the issue of proof in judgment No 5943/1994 ofthis court, and which were set out succinctly in the previous paragraph ofthis judgment, or certain of them and if so which, prevent an action foundedon infringement of Article 25(1) of the Second Council Directive 77/91/EECfrom succeeding?‘

19.

    By those questions, which it is appropriate to examine together, the referring courtessentially seeks to ascertain, first, whether a national court may apply a provisionof domestic law in order to assess whether the exercise of a right arising from aprovision of Community law is abusive, or alternatively whether that assessmentmust be made on the basis of Community law and, second, whether, in the light ofthe facts of the case as established in the main proceedings, the right arising fromArticle 25(1) of the Second Directive must be regarded as having been exercisedin an abusive manner.

20.

    According to the case-law of the Court, Community law cannot be relied on forabusive or fraudulent ends (see, in particular, regarding freedom to supply services,Case 33/74 Van Binsbergen v Bedrijfsvereniging Metaalnijverheid [1974] ECR 1299,paragraph 13, and Case C-23/93 TV 10 v Commissariaat voor de Media [1994]ECR I-4795, paragraph 21; regarding the free movement of goods, Case 229/83Leclerc and Others v 'Au Blé Vert‘ and Others [1985] ECR 1, paragraph 27;regarding freedom of movement for workers, Case 39/86 Lair v UniversitätHannover [1988] ECR 3161, paragraph 43; regarding the common agriculturalpolicy, Case C-8/92 General Milk Products v Hauptzollamt Hamburg-Jonas [1993]ECR I-779, paragraph 21; and regarding social security, Case C-206/94 Brennet vPaletta [1996] ECR I-2357, paragraph 24).

21.

    Consequently, the application by national courts of domestic rules such as Article281 of the Greek Civil Code for the purposes of assessing whether the exercise ofa right arising from a provision of Community law is abusive cannot be regardedas contrary to the Community legal order.

22.

    Although the Court cannot substitute its assessment for that of a national court,which is the only forum competent to establish the facts of the case before it, itmust be pointed out that the application of such a national rule must not prejudice

the full effect and uniform application of Community law in the Member States(Case C-441/93 Pafitis and Others, cited above, paragraph 68). In particular, it isnot open to national courts, when assessing the exercise of a right arising from aprovision of Community law, to alter the scope of that provision or to compromisethe objectives pursued by it.

23.

    In the present case, the uniform application and full effect of Community lawwould be prejudiced if a shareholder relying on Article 25(1) of the SecondDirective were deemed to be abusing his right on the ground that the increase incapital contested by him resolved the financial difficulties threatening the existenceof the company concerned and clearly enured to his economic benefit.

24.

    It is settled case-law that the decision-making power of the general meetingprovided for in Article 25(1) applies even where the company in question isexperiencing serious financial difficulties (see, in particular, Joined Cases C-19/90and C-20/90 Karella and Karellas [1991] ECR I-2691, paragraph 28, andCase C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others[1992] ECR I-2111, paragraph 35). Since an increase in capital is, by its verynature, designed to improve the economic situation of the company, to characterisean action based on Article 25(1) as abusive on the ground mentioned in paragraph23 of this judgment would be tantamount to a declaration that the mere exerciseof the right arising from that provision is improper.

25.

    It would mean that, in the event that the company found itself in a financial crisis,a shareholder could never rely on Article 25(1) of the Second Directive. Consequently, the scope of that provision would be altered, whereas, according tothe case-law cited above, the provision must remain applicable in such a situation.

26.

    Similarly, the uniform application and full effect of Community law would beprejudiced if a shareholder relying on Article 25(1) of the Second Directive weredeemed to be abusing the right conferred on him by that provision because he didnot exercise his preferential right under Article 29(1) of the Second Directive toacquire new shares issued on the increase of capital at issue.

27.

    By exercising his preferential right, the shareholder would have shown hiswillingness to assist in the implementation of the decision to increase the capitalwithout the approval of the general meeting, whereas he is in fact contesting thatvery decision on the basis of Article 25(1) of the Second Directive. Consequently,to require a shareholder, as a condition of his being able to rely on that provision,to participate in an increase in capital adopted without the approval of the generalmeeting would be to alter the scope of Article 25(1).

28.

    However, Community law does not preclude a national court, on the basis ofsufficient telling evidence, from examining whether, by bringing an action underArticle 25(1) of the Second Directive for a declaration that an increase in capital

is invalid, a shareholder is seeking to derive, to the detriment of the company, animproper advantage, manifestly contrary to the objective of that provision, whichis to ensure, for the benefit of shareholders, that a decision increasing the capitalof the company and, consequently, affecting the share of equity held by them, is nottaken without their participation in the exercise of the decision-making powers ofthe company.

29.

    In the light of the foregoing, the reply to the questions referred must be thatCommunity law does not preclude national courts from applying a provision ofnational law in order to assess whether a right arising from a provision ofCommunity law is being exercised abusively. However, where such an assessmentis made, a shareholder relying on Article 25(1) of the Second Directive cannot bedeemed to be abusing the right arising from that provision merely because theincrease in capital contested by him has resolved the financial difficultiesthreatening the existence of the company concerned and has clearly enured to hiseconomic benefit, or because he has not exercised his preferential right underArticle 29(1) of the Second Directive to acquire new shares issued on the increasein capital at issue.

Costs

30.

    The costs incurred by the Greek Government and by the Commission, which havesubmitted observations to the Court, are not recoverable. Since these proceedingsare, for the parties to the main proceedings, a step in the action pending before thenational court, the decision on costs is a matter for that court.

On those grounds,

THE COURT,

in answer to the questions referred to it by the Efetio — Athinon by judgment of6 June 1996, hereby rules:

Community law does not preclude national courts from applying a provision ofnational law in order to assess whether a right arising from a provision ofCommunity law is being exercised abusively. However, where such an assessmentis made, a shareholder relying on Article 25(1) of the Second Council Directive77/91/EEC of 13 December 1976 on coordination of safeguards which, for theprotection of the interests of members and others, are required by Member Statesof companies within the meaning of the second paragraph of Article 58 of theTreaty, in respect of the formation of public limited liability companies and themaintenance and alteration of their capital, with a view to making such safeguardsequivalent, cannot be deemed to be abusing the right arising from that provisionmerely because the increase in capital contested by him has resolved the financial

difficulties threatening the existence of the company concerned and has clearlyenured to his economic benefit, or because he has not exercised his preferentialright under Article 29(1) of that directive to acquire new shares issued on theincrease in capital at issue.

Rodríguez Iglesias        Gulmann        Ragnemalm Wathelet Mancini        Moitinho de Almeida            Kapteyn Murray Edward        Puissochet            Hirsch            Jann Sevón

Delivered in open court in Luxembourg on 12 May 1998.

R. Grass

G.C. Rodríguez Iglesias

Registrar

President

1: Language of the case: Greek.