Deliberate Choice
The period of clean-up of the Ukrainian banking sector in 2014-2015 became a serious crash test for the entire Ukrainian banking system. It revealed not only serious regulatory violations, the weak quality of loan portfolios, poor risk-monitoring procedures, political interference, but also the lack of rule of law.
The removal of banks from the market is merely a starting point, while insolvent banks have to ensure recovery of debts and the sale of assets in order to meet depositors’ commitments. We met Andrii Savchuk, litigation partner of Moris Group, to tell us the story behind the representation of insolvent banks managed by the state-run Deposit Guarantee Fund. The firm made a deliberate choice to develop this area of litigation and revealed insights from the most recent court practice.
UJBL.: Now your firm is actively working with the Deposit Guarantee Fund. Could you single out the peculiarities of litigations where an insolvent bank acts as a party?
Andrii Savchuk: We started our cooperation with the Fund in 2015 at a time when banks were actively being removed from the market. About 100 banking institutions were declared insolvent in total. There had never been such a large-scale “banking collapse” in Ukraine, so the volume of the market for banking cases has grown significantly. The Deposit Guarantee Fund could not cope with so many trials by itself, and clearly needed outside assistance. We were one of the first companies who decided to work with the Fund and represent the interests of insolvent banks. Other lawyers often laughed at us for making this choice, because it is much more profitable to represent the interests of solvent opponents of the Fund. But we made our choice and have no regrets.
Generally, our opponent is a solvent debtor, trying every possible way not to pay back money to a bank. This is where the Fund’s confidence in us as a reliable legal partner is important. I can say that we have received trust and we appreciate this a lot.
Among the achievements on this path, I would like to highlight the professional experience that our forensic specialists have acquired in four years of working closely with the Fund. We’ve seen everything. We already have an intuitive feeling about any debtor, and immediately understand how to conduct such cases. As of today, we manage about 200 court cases coming to a total value of over UAH 10 billion.
Among the challenges that were and srill remain — are the quite limited terms to collect funds from the debtor. That’s the first thing. The period to remove a bank from the market is up to 5 years. In most of these banks the liquidation period is coming to an end next year. Trials, therefore, need maximum acceleration as most of them seek to recover or preserve assets that will satisfy the claims of depositors and other creditors of the bank.
Secondly, there are special rules regulating the procedure of removing a bank from the market. In particular, the provisions of the Law of Ukraine On the System of Deposits Guarantees of Individuals, which courts must take into account when resolving such disputes. Also the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine Regarding Improvement of the System of Deposits Guarantees of Individuals and Removing Insolvent Banks from the Market, which came into effect in August 2015. A number of special rules that set certain restrictions on the actions of the court in resolving such disputes were introduced by this law. First of all, they are intended to reduce the influence of third parties (most often they are either former owners or debtors of the bank) on the procedure of withdrawal of the bank from the market and satisfaction of the claims of creditors. Unfortunately, many judges do not pay attention to these provisions of the law or instill attempts by opponents of the Fund to bypass them. We don’t leave such actions of judges without attention and always react appropriately.
It is not superfluous to mention the geography of disputes. A large number of them are considered in Kyiv. At the same time, there are many cases in other regions. Of course, the possibility of participating in meetings via videoconference greatly facilitates the accompaniment of such cases. However, the courts often reject the request for such participation. Therefore, support for this category of cases predetermines the need for a large number of long-term business trips throughout Ukraine.
UJBL.: The courts have in recent years passed a number of decisions in favor of the owners of insolvent banks, in particular, such joint stock commercial banks as Basis, Zlatobank and Capital. How would you comment on the position of courts?
A. S.: I must point out that our lawyers did not participate in these cases, and, therefore, I can evaluate them only throughout the court decisions published in the register. Some of the decisions were adopted in closed court hearings, so the motives of the court cannot be ascertained from open sources.
Generally speaking, the court decisions adopted in the cases of the mentioned banks are a vivid example of what I described above. Namely, the failure of courts to apply the features of the withdrawal of a bank from the market and not take into account the consequences that give rise to such decisions.
The Basis Bank case became an early warning among the banks, liquidation of which was cancelled by courts. However, right after Basis was “resurrected” by courts, it was re-registered in Donetsk Region and the bankruptcy procedure in the general procedure began. This calls into question the real intention to restore the bank and looks like some kind of hypocrisy on the part of stakeholders in the fight for assets.
At the same time, I find it difficult to understand those courts which, despite the situation with Basis Bank, listen to the arguments made by former owners of other banks about the further restoration of bank’s activities and repeat the same mistakes. Ukrinbank, Zlatobank, Capital — any of the mentioned banks whose liquidation was cancelled, didn’t restore their activity as a banking institution.
In my opinion, these decisions created a legal limbo. After all, banking activity can be carried out only with a license from the NBU. However, the courts leave the issue behind the parentheses of their own decisions, leaving the solution to the problem with the regulator. At the same time, the fact that during the removal of a bank from the market the Fund paid big sums to creditors of the bank is ignored.
Interesting in this regard will be the solution of the dispute that arose as a result of this between the Fund and the NBU, because in 2019 the Fund sued the regulator for compensation of almost UAH 300 million of damages caused by cancelled decisions of the National Bank.
UJBL.: How does the liquidation process of banks take place?
A. S.: As of today, there are two options in liquidation — voluntary (by a decision made by the owners) and compulsory (via a decision adopted by the NBU).
The decision to liquidate the bank in the second case is taken by the NBU — at its own initiative (in the event of documents for the license being dubious, absence of transactions during the year, systematic violations by the Bank of legislation in the field of preventing and countering the legalization (laundering) of incomes, or financing terrorism and financing arms proliferation of mass destruction) or at the suggestion of the Fund (in all other cases).
Most often the procedure for removal of banks in Ukraine looks schematically like this: the bank has problems — the NBU makes the decision on the problems of the bank and introduces the curator — the bank doesn’t eliminate shortcomings in its activity — the NBU recognizes the bank insolvent — the Fund settles temporary administration for the bank — the Fund submits the NBU’s proposal to liquidate the bank — the NBU adopts a decision on liquidation — the Fund carries out the procedure for liquidation of the bank — the bank is terminated as a legal entity.
Exceptions to this procedure are possible and they have their own place. Like the creation of a transitional bank in the case of Rodovid, and the sale of bank to an investor in Nadra’s case. However, since both banks are once again under the Fund’s management now and the liquidation process is continuing, these examples are hardly successful.
UJBL.: The liquidation of Real Bank ended on 29 July 2019. It lasted more than 5 years. What length of time in a liquidation procedure is in practice considered appropriate?
A. S.: The maximum duration of the procedure for removing a bank from the market established by the law is 5 years. As of today, the Fund has liquidated 20 banks. In 12 of these the procedure of elimination lasted the maximum possible five years, in three — 4 years, in two — 3 years. Only three small banks were liquidated in the space of one or two years.
As practice shows, the term for such procedure is too short, because it does not give the opportunity to fully sell the property (including the right to claim) of the bank for a high price which, in first, reduces the sum of reimbursement of funds to creditors of such a bank.
It is difficult to speak of an optimal duration of liquidation in the future. If we talk about today’s realities — five years is not enough to liquidate a large bank.
UJBL.: How does recognition of contracts as invalid or void by the Deposit Guarantee Fund affect the position of depositors and creditors of banks? How would you comment on existing practice?
A. S.: The identification of invalid transactions and the application of consequences is a crucial component of the Fund’s activities. After all, very often with the help of such transactions the owners of a bank have tried to withdraw property or funds, and some creditors tried to compensate deposits at the expense of the Fund, even though didn’t have the right to carry out such transactions. The latter can pay off a large number of creditors at the expense of property which is returned to the bank.
Our team took an active part in the formation of litigation practice in this area. Cases that were accompanied by us, were among the first to get to the highest judicial body at that time — the Supreme Court of Ukraine, which overturned court decisions in favor of opponents of an insolvent bank.
Successful practice continues in the current Supreme Court.
From our experience I can confirm that the resistance of opponents is crazy. In particular, we accompany banks whose cases were, due to territorial jurisdiction, closed in courts of first and appellate instances of one region. I don’t want to draw any conclusions, but the statistics speak for themselves. In one of the banks the indicator of satisfaction of full or partial cassation complaints of banks, which are prepared by our experts, reaches 90% in the Supreme Court. On the same bank within a regional court, decisions in favor of opponents are made in about the same percentage. This happens in some cases even after the Supreme Court has annulled judgments and sent the case for reconsideration. Neither will we disregard such actions on the part of judges.
Duration is one problem in the process. For a long time we had the practice that first it is necessary to identify such a transaction, then confirm its invalidity in court and only then apply the consequences of its invalidity. In parallel, in some cases the Fund’s decisions to identify such transactions were also challenged by opponents.
So, around one transaction usually there are at least 3-4 court cases before completion, which sees years pass by. During this time, the owners of withdrawn property and funds change repeatedly. Therefore, even after the successful application of the consequences of invalidity, the process of reclaiming property from new, formally bona fide owners, begins.
This practice will obviously change with the position of the Grand Chamber of the Supreme Court in the case of the possibility of nullifying void transactions. In this case our team was enlisted to represent the interests of a bank and, of course, we are proud that we managed to win it.
Practice in this matter continues to develop and it is multifaceted, given the large number of ways in which our opponents can act.
UJBL.: What normative acts or decisions adopted by the Supreme Court in recent years can be identified as having significantly influenced the future practice of consideration of this category of disputes?
A. S.: If we talk about legislation then, first and foremost, it is worth highlighting the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine Concerning Improvement of the System of Deposits Guarantees of Individuals and Removal of Insolvent Banks from the Market, which came into force in August 2015. It established new mechanisms to protect the assets of banks and the Fund from interference with the parties, including by courts.
Among the latest novels is the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine concerning the Renewal of Lending, which came into force in February 2019. This law significantly broadens the rights of creditors and reduces opportunities for abuses by debtors. Of course, the practice of applying its provisions is only just beginning. But it is already noticeable that the courts are using it insufficiently, especially with regard to extending its scope to legal relations that arose earlier, although this is explicitly stated in its final provisions.
If we discuss decisions adopted by the Supreme Court, there have been lots of interesting conclusions made by the Supreme Court in recent years. These include the conclusion on impossibility of foreclosure on the subject of mortgage by recognition of property right by a court decision; legal position on the impossibility of crediting counterclaims as different in the non-proliferation of the provisions of the law that regulate a bank account to the legal relationship of the bank deposit and others.
Of separate importance is the decision of the Grand Chamber of the Supreme Court of questions of jurisdiction in disputes between participants of legal relations (depositors, former owners, banks in liquidation and the Fund itself).
However, a number of issues that are open to dispute remain unresolved. For example, the possibility of collecting the balance of debt left after an extrajudicial appeal of foreclosure on a mortgage. Different judges have different views on this issue. They have already tried to refer several case of the panel to the Grand Chamber of the Supreme Court for consideration, but the judges of the Supreme Chamber returned these cases to the panel, rather than see enough substantial legal problems.
UJBL.: Which cases could you highlight in your practice on liquidation of banks?
A. S.: There are many such cases during the period of our cooperation with the Fund.
One of the first highlights was the case of Tavrika Bank, in which our company was able to achieve two important decisions from the Supreme Court of Ukraine for the whole market (despite the fact that the cases we got working in already had a court decision which was not in favor of the bank).
The first case is termination of obligation by uniting the debtor and the creditor into one person (in accordance with Article 606 of the Civil Code of Ukraine), when the banking system was just one step away from legalization of the new scheme of termination commitments. The second is when the courts stood on their positions that the statements on the merits of a dispute (claims, appeals and cassation appeals), signed personally by an authorized person, should be left without consideration, as the authorized person shall not be entitled to issue a power of attorney for representation of interests. If these two cases had been lost in the Supreme Court of Ukraine, I am afraid to imagine the consequences for the Deposit Guarantee System.
Another significant case, the Delta Bank case, regarding the deposit of counterclaims and failed by the bank in courts of previous instances. However, the Supreme Court of Ukraine took a decision in favor of the bank. We believe that our legal team put in sufficient efforts and expertise to attain this result.
In addition, we have been supporting a large number of court cases since 2017 in the interests of Imexbank. Among them there is the above-mentioned case with the position of the Grand Chamber of the Supreme Court on recognition of a void transaction.
It is worth mentioning the group of cases regarding Energobank, which before the introduction of temporary administration, transferred the property to a mortgage to separate investors, who then turned penalties on it and received property. Trials are actively continuing, but we have already managed to obtain a number of court decisions in favor of the bank (including by the Grand Chamber of the Supreme Court), after which the bank was able to get back some of its property and even sell it profitably.
With regard to Khreshchatyk Bank, a debtor tried to return property which was registered by the bank on account of repayment of a debt (to itself). We were able to protect the bank from these claims and the property was subsequently successfully sold.
We have supporting Delta Bank since the start of 2019 in disputes with the Galicia group of juice producers. In a short period of time we’ve managed to get a number of court decisions in the bank’s favor both in the region where the debtor is located, and in Kyiv (including in the Supreme Court). We understand that the debtor can (and should) fulfill its obligations. After all, the debt is considerable, “natural money” of debt repayment can be used to meet the requirements of one of the largest banks on the market. Therefore, a positive outcome to this case, like anyone, is a matter of honor for us and for the Fund.
UJBL.: To what extent is the Deposit Guarantee Fund able to carry out its tasks? What are the main challenges it faces in its activities?
A. S.: The simultaneous fall of about 100 banks in Ukraine is a serious test, a kind of large-scale crash test for the entire guarantee system. In general, the Fund copes well and works faithfully in a highly-demanding environment.
However, in the media quite often we see criticism of the Fund because of the sale of bank assets at low prices. I do not share this opinion, and those who write it should understand several factors. First of all, the value of assets of all banks which are removed from the market is calculated in hundreds of billions of hryvnias. Imagine that at one moment the real estate market in Ukraine receives a huge amount of property. According to the law of the market there is an automatic increase in supply and decrease in demand. Falling demand automatically leads to a decrease in the price of goods. Second, the Fund sells its assets publicly, in open and accessible auctions. Therefore, it is rather unprofessional to criticize the Fund of selling assets at low prices.
One of the key problems the Fund now has is the initiation of legal proceedings against former bank owners and related persons for recovery of funds that were not sufficient in a liquidation bank. This possibility is provided for by the legislation of Ukraine. However, court practice on these issues is only being formed now, and quite often it is contradictory. We need the maximum attention of lawyers at every stage of such cases. After all, the filling of the Fund’s resources for repayment of its debt to the Ministry of Finance will also depend on these matters.
UJBL.: Your law firm will celebrate its 15th anniversary this year. What challenges have you faced in the development of your company? What goals have you set yourself for the future?
A. S.: There are always many challenges in the tough work done by lawyers. It’s hard to list all the challenges we have faced in those 15 years. Perhaps the biggest challenge for us was transforming the company from an Ivano-Frankivsk based regional company to a law firm of national significance in Kyiv. Entering the legal market of Kyiv, Ukraine and occupy its niche there seemed something very difficult for us. But we didn’t stop then, and we succeeded.
We started the transformation process with a small company and several clients. We now have more than 60 employees and about 500 clients who trust us. That is why we believe that by putting enough effort and expertise everything is possible. Today, we are a synergy of young and experienced lawyers inspired by confidence in the professionalism and quality of our services.
We are definitely happy that our colleagues recognize us as the one of the leading litigation firms. Through years of practice, we have also developed our specialization and are closely engaged in banking litigation in 80% of cases. Moreover, over the years we have built a comfortable atmosphere of employment relations and created a team of multi-faceted professionals. This is our value, which we truly cherish.
It seems to me that the challenge not only for us, but also for every law firm, is strict observance of the highest standards of ethics and moral values. This is the basis of any profession, not only the legal one.
We’re definitely looking to the future with confidence. In the short term we will discover new practices, invest in business projects and support pro bono cases. We are not ashamed of looking back and certainly not afraid of looking forward.
Key Facts
Moris Group
Year of establishment: 2004
Location:Kyiv, Ivano-Frankivsk
Number of partners/lawyers: 5/43
Core practice areas
- Dispute Resolution
- Corporate and M&A
- Tax law
- Banking and Finance
- IT law
- Government Relations
- Bankruptcy and Restructuring
- Antitrust and Competition
- Real Estate and Construction
