Dispute Resolution

Valentyn GVOZDIY,

Valentyn Gvozdiy specializes in the area of taxation law and resolution of court disputes. He also has experience of resolving criminal law cases of an economic nature. This practice is focused on provision consultation on a broad spectrum of taxation legislation issues, including tax planning and structuring, in unison with representing the interests of local and foreign companies in their dealings with the tax authorities. Valentyn Gvozdiy’s experience in litigation includes supporting clients at all stages of a court dispute. Valentyn heads the team of the firm’s attorneys in the processes of drawing up a legal position and strategy for defense of clients’ property rights and interests in disputes with the involvement of Ukrainian and international companies, foreign investors and state authorities. His competencies include support during investment, corporate, economic and administrative disputes. Another focus area of Valentyn’s practice is counseling clients on compliance management and internal investigations. He also heads the team of lawyers for assessment of clients’ internal procedures and monitoring of potential risks of corruption. Education: Chernivtsi National University, diploma in law; ICA Professional Postgraduate Diploma in Governance, Risk & Compliance.

Protective shield

«One of the most effective ways to protect the rights of foreign investors in Ukraine is to file the relevant claim with the competent judicial bodies», says Valentyn Gvozdiy, Managing Partner at Gvozdiy & Oberkovych Law Firm

— How would you describe the main novelties for legislation which regulates dispute settlement in Ukraine?

— Today, the European integration process is very active in Ukraine, accompanied by reforms in all key areas.

Efficient judicial reform is one of the key elements in establishing rule of law in Ukraine, as an impartial and independent judiciary is a prerequisite for a democratic society.

The first and extremely important step in the process of judicial reform in Ukraine has already been taken. So, on February 12, 2015 the Ukrainian Parliament adopted the Law of Ukraine “On Ensuring the Right to a Fair Trial”, the main purpose of which is to create an efficient judicial system.

This law, in particular introduced amendments to certain legislative acts concerning the judicial organization and legal proceedings in Ukraine. Among all the novelties introduced by the Law of Ukraine “On Ensuring the Right to a Fair Trial”, special attention should be paid to the right of direct appeal on judgment of the higher courts to the Supreme Court and expansion of the grounds for such an appeal.

The above novelty provides real powers to the Supreme Court of Ukraine as the highest judicial body of general jurisdiction. Now, the question of availability of the grounds for review of cassation court judgments will not be decided by the court that adopted the contested judgment, but by the Supreme Court of Ukraine directly. This innovation will ensure objectivity in the resolving of the issue of cases admission to be reviewed by the Supreme Court of Ukraine and will provide trial participants with a real chance for a fair review of all disputes already considered by the higher courts of Ukraine.

In addition, the Law created favourable conditions for renewal of the judiciary and provided for the provisions aimed at uniform application of substantive and procedural law rules by the courts in resolving lawsuits.

Therefore, judicial reform in Ukraine has been given a fresh start and has already moved to the stage of practical methods of its implementation. But we should not forget that in addition to judicial reform, reform of the tax system is also in its active stage in Ukraine.

— What is your vision of lawmaking progress for tax disputes?

— The current laws of Ukraine provide for two ways for resolving disputes with the tax authorities: administrative (in a higher body) and judicial. However, as practice shows, the judicial procedure is a more efficient and effective mechanism for protecting violated rights on tax-related matters.

In Ukraine, tax disputes are considered by courts of administrative jurisdiction.

The most common categories of lawsuits are: appeal of additional accruals of liabilities with respect to income tax, value added tax, personal income tax, appeal of the decisions on cancellation of registration of VAT payers. 

The feature of legal proceedings in tax matters is the principle of good faith on the part of taxpayers. That is, the tax authority itself is obliged to prove the legality of the imposed penalty. However, in practice, taxpayers must themselves prove the illegitimacy of the decision adopted by a tax authority as well as their acts or omissions and, accordingly, prove the absence of legal grounds for penalties in court.

However, every type of tax dispute has its own particularities. For example, in cases of appeal of tax liabilities in connection with fictitious business transactions, taxpayers must provide the court with all duly executed original documents that prove the reality (marketability) of a business transaction. Additionally, all possible pieces of evidence should be used to prove the actual movement of assets in the course of a business transaction, and not only the one declared on paper.

— What is typical for challenging the decisions of antimonopoly authorities? 

— The practice of disputes with the Antimonopoly Committee of Ukraine (hereinafter - the Committee) is widespread. On the one hand, this is due to the quite active position of the Committee in dealing with violations of laws on protection of economic competition, and also due to the significant rise in the sum of penalties applied to offenders compared with previous years.

Increased attention of the Committee is focused on those markets which have the greatest impact on the welfare of citizens: housing and utilities sector, fuel and energy complex, agro-industrial complex, as well as services for the organization of food and pharmaceutical retail.

The majority of disputes with the Committee involve an appeal against decisions to impose a fine for the offense in the form of abuse of the dominant position and anti-competitive concerted actions of economic entities on the market.

The lawsuits of this category are subject to the jurisdiction of both economic and administrative courts of Ukraine.

The reasons for modification, reversal or invalidation of decisions adopted by the Committee can include: incomplete clarification of circumstances relevant to the case; failure to prove the circumstances relevant to the case and recognized as established; inconsistency present in conclusions set out in the decision with the circumstances of the case; violation or incorrect application of substantive or procedural law.

As for appeals proceeding from decisions adopted by the Committee on anti-competitive concerted actions, it should be noted that most of them involve violations in the form of falsification of the trading, auctions, contests, tenders results and similar acts committed by business entities that resulted in, or may result in the prevention, elimination or restriction of competition.

The peculiarity of this category of disputes is that during the trial the court should establish, and the Committee should prove, that the situation in the market showed: (1) coordination of competitive behaviour of business entities, and (2) the absence of objective reasons for committing anti-competitive concerted actions.

Court practice shows that qualification of actions as concerted actions does not require obligatory establishment of the formal fact of their coordination, in particular through the conclusion of the appropriate agreement. Instead, the courts should establish the presence of “tacit collusion” of business entities based on analysis of circumstances, which in economic terms can affect the possibility of such actions, including the lack of competitors not involved in concerted action, but capable of expanding sales in response to the increase in (maintenance of) prices above the competitive environment level; the presence of high barriers to market entry, stable demand for products.

As for appeals emanating from decisions made by the Committee that business entities should cease abusing their monopolistic position, the most common type of offenses in this category of cases is the establishment of economically unreasonable prices for goods and services.

The appeals from such decisions adopted by the Committee should take into account that when considering disputes of this category the courts may not set trade, territorial (geographical), or time limits for certain commodity markets and, on this basis, come to the conclusion on the presence or absence of a monopoly position, as this function belongs exclusively to the Committee. Courts should only validate the application of the Committee’s Methods for Determination of Monopoly Position of Business Entities on the Market.

To sum up, it should be noted that the statistics of consideration of cases as to the protection of economic competition by the Antimonopoly Committee of Ukraine show that in 98% of cases courts do not decide in favour of business entities. Therefore, for the effective protection of rights of a company it is very important in the early stages of communication with the Committee to determine all the bottlenecks properly form the evidential base and determine the defense strategy.

— Are there any further traps for investors arising from corporate disputes?

— One of the most effective ways to protect the rights of foreign investors in Ukraine is to file the relevant claim with the competent judicial bodies. The vast majority of such disputes arise between stakeholders (shareholders, founders) of a company and the company in connection with the exercise and protection of corporate rights. According to the economic legislation of Ukraine, disputes involving corporate relations between members of companies and/or the company are classified as corporate disputes.

Pursuant to the current procedural laws of Ukraine, consideration of corporate disputes comes within the exclusive competence of economic courts.

According to the consolidated practice of economic courts, the most common claim in corporate disputes involves invalidation of resolutions of general meetings of a company’s members.

The laws of Ukraine established an exhaustive list of grounds for invalidation of resolutions adopted by general meetings, including, but not limited to: a) non-compliance of the general meeting with current laws; b) adoption of a resolution by an incompetent general meeting or by a general meeting whose competence cannot be established; c) resolving an issue by a simple majority of votes that by virtue of law must be resolved by a ¾ majority of shareholders present at the general meeting; d) a decision taken on an issue other than those on the agenda of the general meeting; e) resolution to change the amount of the company’s authorized capital adopted in violation of the obligation to provide shareholders with information in the manner prescribed by law, or provision of shareholders with false or incomplete information; f) adoption of a resolution by the general meeting of shareholders, whose convening and holding did not comply with laws or articles of association of the company, thus causing material violation of the plaintiff’s rights; g absence of minutes of general meeting signed by the chairman and secretary of the meeting.

The distinctive feature of these disputes is that even if a shareholder can prove the presence of the above reasons, this does not guarantee the court will decide in his/her favour. Thus, according to pp.18, 21 of the Resolution of the SCU No.13 in resolving the issue of invalidity of resolutions adopted by the general meeting due to violations committed during the convocation and holding of the general meeting, the economic court should assess whether these violations could affect the relevant resolution of the general meeting or could the absence (or presence) of the plaintiff-shareholder at a meeting have a significant effect on the disputed resolution.

Therefore, if the trial establishes that the resolution of general meeting was adopted by a majority of votes of members and no vote of a minority shareholder-plaintiff could affect the outcome of the vote, the chances are good that the economic court will not rule in favour of such a shareholder. Moreover, the evidence of violations of the rules for holding general meetings will have no meaning for the court.

The Supreme Economic Court of Ukraine, however, recommended that commercial courts of lower instance, despite the very negative position of the Supreme Court of Ukraine, not deny the claims of shareholders challenging decisions adopted by general meetings of shareholders only on the grounds of insufficiency of votes to change the voting results, as the influence a shareholder may have on the adoption of a resolution by the general meeting is not only limited to voting.

Furthermore, disputes regarding illegal actions of minority shareholders for the purpose of destabilization of a company are common. Thus, cases are quite common when members actually destabilize the activities of the company through systematic failure to participate in general meetings of shareholders, the convening of which is necessary for the operation of the company, approval of local regulations, entry into significant transactions, etc.

At the same time, shareholders are acting within their powers as, according to Article 25 of the Law of Ukraine “On Joint Stock Companies”, participation in the management of a joint-stock company, including participation in and voting at the general meeting, is a right, but not an obligation, of shareholders. There are no legal ways to influence such shareholders. As a result, today there is an urgent need for economic courts to form common practice as to this category of corporate disputes.

— Has the situation with the recognition and enforcement of foreign court judgments in Ukraine changed for the better?

Pursuant to Article 81 of the Law of Ukraine “On International Private Law”, Ukraine may recognize and enforce judgments made in foreign courts in cases arising out of civil, labour, family and economic relations sentences of foreign criminal courts to the extent related to compensation for damages and losses caused, as well as awards of foreign tribunals and other bodies of foreign states, competent in civil and economic cases that have entered into force.

Foreign or international arbitration awards are enforced in Ukraine in civil proceedings.

As a general rule, a foreign judgment may be enforced within three years from the date of its coming into force through the relevant request filed with the local court at the place of residence (stay) or at the debtor’s location.

The procedure for enforcement of judgments of the courts of general jurisdiction and arbitration courts in Ukraine is only determined by the relevant international treaties ratified by the Verkhovna Rada (Parliament) of Ukraine.

However, there are cases when international treaties do not list the documents that are to be enclosed to a claim filed with court or no such treaties exist at all. For example, when a court judgment is enforced on the basis of the principle of reciprocity subject to an ad hoc agreement.

In such cases it is necessary to use the provisions of the Civil Code of Ukraine. In particular, Article 394 contains the list of documents enclosed to the petition for permission to enforce a judgment made by a foreign court.

Due to the complicated process of appeal to a Ukrainian court, problems arise already at the stage of submission of documents. This is particularly so when it appears that the foreign business entity has no written contract with the Ukrainian counterpart, which should contain an arbitration clause or the award itself states that it should be enforced in the state of action.

This is because when a claimant goes to the competent court he/she should not only ask for recognition of the foreign arbitration award, but also for its enforcement. Therefore, if the case is resolved positively, a writ of execution for further enforcement of the award shall be issued.

Thus, we recommend that foreign business entities, prior to going to international arbitration,  verify whether there is a bilateral agreement with Ukraine with respect to such a judgment and which set of documents is required for enforcement.

To sum up, high-quality and effective consideration of cases by courts is complicated by several factors, which include, in particular, the large workload of judges, lack of appropriate legal means to ensure uniformity of court practices, inadequate legal regulation of judicial proceedings, chronic underfunding of the judiciary and the absence of an effective mechanism for holding judges accountable for violations of law committed by them.

Many problems present in the field of justice are due to reasons whose elimination is beyond the competence of the judiciary and requires the appropriate legal, organizational, logistical and financial measures to be taken by other bodies of state power, including Parliament and the Government.