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ST turns down promissory notes deal

When Austrian businessman Gunter Schuster presented himself on April 2 at the Bratislava headquarters of Slovenské telekomunikácie, the Slovak telecoms monopoly, he was hoping that a long-running court battle between his CDI radio firm and ST could finally be brought to an end.
Holding a promissory note for 500 million crowns ($10 million), allegedly signed by a former ST director named František Eke, Schuster expected that the legal 'IOU' would bring ST executives to the bargaining table over a 2.5 billion crown ($50 million) debt Schuster claims ST owes CDI for cutting off the Austrian radio station's broadcasts in 1996. CDI claims to own another 24 billion crowns in ST promissory notes, but has indicated it will return them to ST if the telecom firm settles its suit.


CDI's Gunter Hasller (left) takes advice in Bratislava earlier this month. ST has refused to deal with him.

When Austrian businessman Gunter Schuster presented himself on April 2 at the Bratislava headquarters of Slovenské telekomunikácie, the Slovak telecoms monopoly, he was hoping that a long-running court battle between his CDI radio firm and ST could finally be brought to an end.

Holding a promissory note for 500 million crowns ($10 million), allegedly signed by a former ST director named František Eke, Schuster expected that the legal 'IOU' would bring ST executives to the bargaining table over a 2.5 billion crown ($50 million) debt Schuster claims ST owes CDI for cutting off the Austrian radio station's broadcasts in 1996. CDI claims to own another 24 billion crowns in ST promissory notes, but has indicated it will return them to ST if the telecom firm settles its suit.

But ST senior management was not willing to deal, or even to meet Schuster. The same day, CDI laid criminal charges against ST for media articles it had published disclaiming the promissory notes, and threatened to sell its promissory notes to interested parties in Austria in order to recover its damages. ST has said it too will lay criminal charges against those handling the promissory notes.

"I think the time for agreement has almost passed," said Bratislava lawyer Jan Kotlík, who represents CDI in its case against ST. "The courts aren't acting, ST is pretending it is nothing to do with them, and [new ST majority owner] Deutsche Telekom hasn't responded to us... Perhaps the Slovak side feels that CDI will lose interest if the case drags on much longer."

The battle between CDI and ST illustrates the many faults that still exist in the Slovak business environment. Conflicting court verdicts have emphasised how little can be predicted in the legal system; laws that were hastily amended and then thrown out by the courts have caused chaos in business dealings; bizarre and disadvantageous contracts signed with state firms in the early 1990s continue to harass firms today; finally, the confidence of ST that its legal disputes would be definitively settled in its favour has proven unfounded, as witnessed by CDI's determination to see its debts finally paid.

Dragging

That the time for deals had passed between ST and CDI had been made clear on March 22 when lawyer Milan Hrbek, acting for ST, sent a letter to Schuster saying the firm was "not prepared to discuss with you any matters relating to the ongoing dispute regarding Radio CDI", and advising that ST "are currently taking the necessary legal steps against all persons involved in the fraudulent and illegal activities regarding the promissory notes" allegedly issued by Eke.

Hrbek added that ST asked Schuster to "cease sending any letters to [ST]", and that if Schuster in fact did have any promissory notes, that he take them to Bratislava police. "Slovenské telekomunikácie a.s. request that you refrain from your contacting of [ST] in respect of the documents presented as promissory notes. [ST] consider such activity as illegal and reserve all its rights to take the necessary legal steps available to it under Slovak and Austrian law."

"Mr. Schuster felt very hurt [by this letter]," said lawyer Kotlík. "He offered them a deal, and they threatened him with criminal action. He has nothing to do with the person who issued the promissory notes."

Hurt feelings aside, the two companies remain miles apart on resolving their decade-long dispute.

The case began in 1993, when state-run Slovak Radio (SRo) inherited a contract between its predecessor and an Austrian firm named CDI Holding. Under the terms of the deal, SRo rented one of its channels to CDI, which used it to broadcast in German to northern Austria and Vienna. SRo profited from the advertising revenues CDI brought in, while CDI was able to circumvent an Austrian law forbidding private firms from broadcasting on Austrian territory.

However, the Slovak Council for Radio and Television Broadcasting, according to then-office head Jarmila Grujbárová, was unhappy that SRo and CDI were breaking Slovak law, which said that the SRo channel should be reserved for public service broadcasts in Slovak.

"Both CDI and SRo knew very well they were broadcasting illegally, and they were warned of it several times by the Council", said Grujbárová. "Tell me, in what state can some firm come from abroad and sign such a contract with a public station? This has no precedent in any European country. No Austrian body would have permitted them to broadcast in such a way."

However, according to a former ST top management source who preferred to remain anonymous, the Council's opposition was checked by politicians who were excited by the money CDI was putting into Slovak state radio. "The money they got for it was evidently more than they would have received from following the law," the source said.

Nevertheless, CDI was taken off the air twice in 1993, and then for good in 1996 as the Council finally won the day. "Our fight with SRo lasted from 1992 to 1996," remembered Grujbarová. "It's irrelevant that SRo got money for it [contract with CDI]. But we got no political support from any Slovak government, we had to fight everyone on this. Our decision was not at all political - we just wanted the frequency to be used by Slovak state radio for Slovak citizens, and not on some strange contract for Austrian citizens."

Damaged

For CDI, however, the decision of the Council to take them off the air on September 3, 1996, and the subsequent compliance of SRo and ST with this order, meant having to lay off 80 workers in Austria, as well as forego the advertising revenues that had been contracted.

"Normally, if one wanted to end a contract, one would ask the other party what they had invested and give them compensation. But in this case, the button [disconnecting Radio CDI] was pushed from one day to another," said CDI lawyer Kotlík.

Since then, he continued, CDI's initial damages, calculated at 200 million Austrian schillings (about $13 million), had multiplied to 800 million schillings through penalties and lost profits. It was exactly this sum, almost five years later, that CDI, now in bankruptcy, was trying to recover from ST to repay its creditors.

"It's been in court four years [CDI versus SRo began in 1998, while CDI versus ST started in 1999 - ed. note], and the courts haven't even heard the cases yet," said Kotlík. "The judges on the cases have been changed, part of ST has been privatised, but the problem has been postponed as if it didn't exist. There's no interest in resolving the matter."

Given this lack of interest, Kotlík explained, a frustratred CDI had resorted to purchasing the 24.5 billion crowns in ST promissory notes from a firm called Herold Tele Media, which owned about 40 billion in such notes allegedly signed by former ST director Eke. While CDI had hoped the notes would force ST to bargain seriously in its suit with the Austrian firm, it had never expected to collect the whole 24.5 billion.

In purchasing the promissory notes, however, CDI became involved in Herold's dispute with ST, one which telecom insiders say has been bizarre even by Slovak standards.

The case began when ST, which had a contract on the provision of phone books with a Slovak firm named IMCO, in 1995 ceased to fulfil the terms of the contract, thus bringing into effect contractual sanctions that increased the penalty owed to IMCO by five-fold every three months. By 1996, these sanctions had risen to 550 million crowns, and Ivan Matušík, the owner of IMCO-successor Herold Business Data, filed for bankruptcy to be called on ST.

In accordance with the 1991 Bankruptcy Law, Matušík formed a council of ST creditors, which in November 1996 recalled then-ST President Peter Valent and installed František Eke in his stead. The changes were duly written into the business register by the Bratislava Regional Court on January 28, 1997, and remained there until March 31, 1999. In April 1998, Eke issued the promissory notes.

In the meantime, however, parliament passed an amendment to the Bankruptcy Act, according to which 'strategic' state firms (of which ST was one) could not be taken to bankruptcy court. Furthermore, the court required that bankruptcy proceedings that were in effect against state firms be called off by the courts in question.

In October 1996, just over a week after the Bankruptcy Law amendment took effect, Bratislava City Court stopped Herold's bankruptcy case against ST, a decision which was upheld by the Supreme Court on March 26, 1997. While the Constitutional Court ruled almost a year later that the bankruptcy amendment had violated the constitution, the annulment of the Herold bankruptcy case stood, with the Supreme Court decision taking effect July 24, 1998.

Each side clearly feels it still has strong shots in its locker, as the fight over the promissory notes continues. ST says that the courts have ruled Eke never had any right to sign the promissory notes, as the bankruptcy proceedings were invalid; the firm also says it doesn't owe Matušík anything, because he had absorbed IMCO into Herold in 1993 without notifying or obtaining permission from ST.

But according to Kotlík, the Constitutional Court verdict proved that Herold's bankruptcy case against ST had been valid, and that Eke, written into the business register, had been empowered to sign the promissory notes.

For some, Matušík cannot be considered a serious threat to ST, given the astronomical penalties he has demanded. Herold claims that the phone company owes it between 400 and 500 billion crowns, or over half of the Slovak gross national product.

"It's irrelevant if this debt is in the tens or hundreds of millions of crowns," said former Telecom Minister [1998-1999] Gabriel Palacka. "It's out of the question that it be paid."

Others believed that some troublesome contracts signed with state firms in the early 1990s were the work of clever business minds out to bilk the state of funds. "It seems to me that during the early 1990s, there were several of these bizarre contracts signed that called for outrageous penalties or strange conditions," said the former ST source.

But those on the side of the injured parties say that Herold never really intended to wrest over 500 billion crowns from ST, just as CDI doesn't intend to seek full payment of its 24.5 billion in promissory notes.

"The Herold debt is really just an accounting figure," said Kotlík. "They were damaged, and can prove it, but not to the full extent listed as damages. But then Herold has never said it intended to demand the whole sum, which is one reason it had promissory notes issued to cover only one tenth of the debt. They have always wanted a fair settlement for damages, which is what the Austrian side has insisted on too."

While Herold and CDI may not be insisting on payment in full, the case has attracted other creditors who soon may sue ST on their own behalf. One of these is financier Jozef Majský, whose Sipox Holding firm in 1996 bought about 112 billion crowns worth of Matušík's ST debt: "The part we bought has nothing to do with these promissory notes," said Majský. "We will go through the courts to recover this debt. We have a chance to get it back, but we must start our court fight at the right moment. Now is not the right time, but the right time will come before the end of this year certainly."

Will Majský, Matušík or CDI eventually be successful? According to the former ST source, the amounts involved are so highthey might as well try.

For backers of ST, such as former Minister Palacka, there is no legal reason for the courts to rule in favour of applicants such as CDI. "This Mr. Eke, or whatever his name is, who supposedly replaced the ST director, was never ST's formal director, and therefore could not have signed anything in ST's name," Palacka said. "Now, CDI has pulled out some promissory notes which were signed by Eke as ST director. But we have several court decisions declaring the whole thing invalid, and I think it's pointless to take up the matter."

But given the conflicting rulings which have so far been produced in ST's court cases, Palacka agreed that it would be imprudent to dismiss the suits out of hand. "It's true that in Slovakia we get court decisions which are incomprehensible, unfounded and which make you wonder why courts deliver such verdicts," he said. "This danger can't be ruled out in future."

ST representatives were unable to comment as The Slovak Spectator went to press April 11.

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