The category of cases on cancellation of decisions by the National Bank on recognizing banks as insolvent and their liquidation is new for Ukrai-nian practice. It emerged as a response for massive liquidation of banks which was carried out by the NBU as a part of the system’s purification in 2014 and during which the regulator violated its own procedures
According to the Deposit Guarantee Fund (DGF), 94 banks of 180, i.e. more than 50%, ceased their operations in the last three years and 90 banks are in the process of liquidation. Temporary administration was appointed in three other banks (among them Unison and Financial Initiative in respect of which the courts prohibited the DGF to adopt a decision on their liquidation). Astra Bank was sold to an investor.
A section of shareholders and other interested parties did not accept the regulator’s position and started to fight for their assets, property and banking licenses.
As a result, the courts reversed the decisions on liquidation/insolvency of 12 banks: Ukrinbank, Soyuz, Veles, Premium, Capital, Radical, East Industrial Bank, KSG, Kyivska Rus, Khreshchatyk, Financial Initiative and TK Credit. These decisions came into force. In most cases, courts of all three instances took the side of the shareholders.
The NBU called these decisions iniquitous and appealed against them in the Supreme Court of Ukraine (SCU), accusing the courts of corruption and refused to execute them. The governor of the NBU even allowed herself to approach the head of the SCU with a letter where she called all court decisions a threat to the banking system.
Over the past few months, the SCU has reviewed the cases of four banks. The decisions adopted in these cases were not easy ones. Consideration of each of them lasted several months, and dozens of court hearings were held.
After the cases of Soyuz and Premium banks were reviewed, they were returned for new proceedings to a court of first instance. The shareholders of the Capital and Ukrinbank banks were denied defense of rights. Other cases await consideration.
Thus, the courts have already formed a certain practice, which allows us to analyze these cases.
GROUNDS FOR LIQUIDATION OR RECOGNITION AS INSOLVENT
In 90% of cases the liquidation of a bank is carried out in accordance with the following algorithm: 1) recognizing a bank as problematic (this is not published since it is banking secrecy); 2) recognizing a bank as insolvent; 3) liquidation.
After the bank is recognized insolvent, the DGF shall appoint temporary administration for the bank and, within two months, withdraw it from the market. There are five ways to do this, but, in general, the bank is liquidated.
However, in some cases, the NBU can liquidate the bank without recognizing it as problematic or insolvent, having found a systematic breach in the area of financial monitoring (Premium, Soyuz, KSG, Veles).
The legal elements of such violation are provided for by NBU regulations and not by the law which allows the regulator to change it when necessary. For example, during the inspection at Premium bank, the NBU changed the elements of violation three times.
As it follows from practice, while appealing against the NBU’s decisions a number of questions arise, as to whether a shareholder has the right to file a lawsuit, grounds to cancel an NBU decision, whether it is real to execute a court decision and recover a bank’s activities. Let’s consider some practical aspects connected with the aforementioned.
A SHAREHOLDER’S RIGHT TO CLAIM FOR THE ANNULMENT OF NBU DECISION
In general, shareholders file claims for the annulment of decisions in respect of the bank. In fact, they are the only ones who can do it: the bank's management is dismissed, the liquidator/temporary administrator is appointed and depositors are protected by the special law on the Deposit Guarantee System.
The issue on whether the shareholder has the right to file such a claim was thoroughly considered by the SCU in the cases of the Premium and Soyuz banks.
The NBU argued that a shareholder cannot file a claim as such a claim is aimed at protecting the rights of the bank and not of shareholders. The main argument is the decision of the Constitutional Court of Ukraine (CCU), dated 1 December, 2004 (on interests protected by law). Through this decision the CCU established that the interests of a joint-stock company shall not be equal to a shareholder's interests.
And although the SCU returned all cases for the new proceedings, it agreed with our opinion: the shareholder possessing a significant share (more than 10%), can protect his/her rights by annulling the decision of the NBU on the bank’s liquidation. The SCU confirmed that liquidation of the bank violates the rights of shareholders.
In October 2017, the SCU confirmed this position when it considered the cases of Ukrinbank and Capital bank. The SCU canceled the decisions of three instances in favor of shareholders and denied claims. However, it limited itself to consider only the issue as to whether the shareholder has the right to file a claim (in each case, the complainant had stakes of less than 10%) and did not analyze violations committed by the NBU.
The European Court of Human Rights also confirms that the shareholder shall have this right (for example, the case of Capital Bank AD versus Bulgaria).
Despite the fact that the courts stated that the shareholder has no right of protection in several cases involving banks and denied claims (USB, Green Bank), the position of the Supreme Court is mandatory and cannot be ignored in future.
Thus, we proved and the court confirmed the right of the shareholder to be protected from unlawful actions by the NBU.
GROUNDS FOR CANCELING NBU DECISIONS
A section of decisions in cases on canceling NBU decisions were not published since they contain information covered by banking secrecy. But we can outline the following general positions on the basis of open cases and our own practice:
1. Inadequacy of sanctions applied to the banks. The special law provides for more than ten types of sanctions. In this case, the NBU shall take into account the conformity of sanctions to the committed violation. Unfortunately, this is not always the case and the regulator liquidates the bank instead of imposing a penalty.
In addition, the existence of a threat for depositors and other creditors of a bank is the essential condition for the application of sanctions.
The courts agreed with the position of shareholders that there are no grounds for liquidating a bank when there are only technical infringements without a threat to the creditors and this sanction is inadequate (for example, the cases of Soyuz, KSG, Premium and Radical banks).
2. Qualifying a bank as insolvent until the expiry of 180 days from when it was recognized as a problem bank. If a bank did not adjust its activities in accordance with NBU requirements within 180 days of it being recognized as a problem one, the NBU shall recognize it insolvent.
According to the regulator, this term is the maximum possible one and it can recognize the bank as insolvent even before the expiry of the aforementioned term.
In particular, Ukrinbank was declared insolvent after 85 days, Kyivska Rus – after 14 days, Khreshchatyk – after just one day.
The courts assess the NBU’s position differently: in some cases, they agree with the regulator's opinion, in others they consider the term as a guarantee for the bank since it gives them an opportunity to eliminate violations over a period of at least 180 days.
In the cases of the aforementioned three banks, the courts decided that the application of sanctions before the expiry of 180 days was a violation and canceled the decisions on recognizing these banks as insolvent.
PROBLEMS OF EXECUTION
Despite the fact that decisions with regard to more than ten banks came into force, the NBU did not allow any of them to resume their activities.
The regulator has said publicly that there is no mechanism to return a bank to the market and that it is impossible to execute the decision. According to the NBU, a bank can only obtain a new license after all approvals have been received and cannot restore the revoked license.
In other words, the force of a court decision is leveled by the NBU’s inaction.
Such inaction is unlawful since the decision of the court is binding. The absence of a procedure for execution of a decision cannot be grounds to ignore it.
We managed to establish the key position in judicial practice: a shareholder who owns a substantial stake (more than a 10% shareholding) has the right to file a claim to a court to cancel a decision adopted by the NBU against the bank. This position can be used in all similar cases.
The regulator, rushing in the midst of massive liquidations, committed violations of its very own procedures, which became grounds to cancel a number of decisions on the liquidation of banks.