Enforse on a Wild-Goose Chase
When analyzing the judicial practice, it seems that the principle of "beat the dog before the lion" formed the backbone for making decisions on cases on recovery of debts from the state and state enterprises. It seems that the ultimate goal of these precedents is to protect the state field of assets from claims by creditors. A foreign investor needs to think carefully before entering into contractual relations with the state
The State Administration and railway transport enterprises were reorganized in 2015 as part of reform of the railway industry,. The state enterprise of PJSC Ukrzaliznytsya was created as a result of their merger.
The statutory law and the charter of Ukrzaliznytsya explicitly provide for succession in relation to the rights and duties of the reorganized entities.
Since 2015 the courts have sustained many claims of creditors to recover debts from Ukrzaliznytsya as the legal successor to rail transport enterprises.
A large number of disputes arose due to the failure of the State Enterprise Donetsk Railway and State Enterprise Southern Railway to perform their obligations properly, with some of their assets finding themselves in temporarily occupied territory or in the ATO area.
When satisfying claims, the courts grounded their decisions based on the theory of universal succession enshrined in the provisions of the Civil Code and the Commercial Code of Ukraine: when reorganizing via merger, all rights and obligations of predecessors shall be transferred in their entirety. As a general rule, an entity gains the right of legal personality at the moment of its registration. Thus, the courts did not have doubts about the succession and validity of claims.
Later, the judicial system showed a different approach to the institution of succession in disputes involving Ukrzaliznytsya.
EVIL LAW OF SUCCESSION
In 2017, the Supreme Court of Ukraine reviewed dozens of court decisions to recover debts from Ukrzaliznytsya and formed a legal position that refuted the fact of succession for the obligations of the reorganized enterprises.
Thus, the Supreme Court of Ukraine refers in its decision dated February 8, 2017 in case No. 910/10474/16 to decision No. 200 of the Ukrainian Cabinet of Ministers "On the establishment of Public Joint-Stock Company Ukrzaliznytsya dated 25 June, 2014, and decision No. 604 "Some issues of the inventory of property of enterprises and organizations of public railway transport enterprises located in the temporarily occupied territory and the anti-terrorist operation territory" dated 12 November, 2014, and specifies that these regulations link the emergence of succession with the execution of the inventory, drafting of a transfer act and introduction of property in the authorized capital of Ukrzaliznytsya.
However, the analysis of these documents shows that they do not mention the connection of inventory with the emergence of succession.
Moreover, these regulations establish that the property and liabilities of the reorganized enterprises in the ATO area or occupied territories are included in the balance sheet and attached in terms of assets to Ukrzaliznytsya without inventory. An exception is made only for the obligations of enterprises located in temporarily occupied territories. The remarkable thing is that the ATO area is not the part of occupied territory.
The Supreme Court of Ukraine also refers to the fact that a record of the emergence of succession of PJSC Ukrzaliznytsya is included in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations in respect of Ukrzaliznytsya in the section entitled Information on the relationship with a legal entity (where the phone number is indicated).
So, it is specified in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations that succession arises on the basis of decision No. 604 of the Ukrainian Cabinet of Ministers after the transfer of property in the ATO area to the authorized capital of Ukrzaliznytsya.
An appeal was lodged against the actions of the registrar, but the final decision in the dispute has not been made yet.
The Supreme Court of Ukraine finds the main argument for refuting the fact of succession in the following: according to the Unified State Register, the activities of none of the reorganized railway transport enterprises have been halted yet. Accordingly, the reorganization procedure is not complete. The court equates the times of termination of the reorganized enterprises as legal entities, the completion of merger of the enterprises and the transfer of rights and obligations to the established enterprise of PJSC Ukrzaliznytsya. However, in our opinion, there is no reason for such a conclusion in the law.
Some creditors continue their legal battles but at a new stage of the case’s hearing. For example, PJSC TASCOMBANK, considering the case in which the Supreme Court of Ukraine did not make a decision to refuse to recover debts. On the contrary, the Supreme Court of Ukraine recommended to determine in new consideration of the case on whether the obligation to this bank was included on the list of obligations of Ukrzaliznytsya pursuant to the transfer act, and, with this consideration in mind, to resolve the dispute.
On 17 February, 2017, the Law of Ukraine On Amendments to Certain Ukrainian Legal Acts regarding Railway Enterprises with Property Located on the Anti-Terrorist Operation Territory, came into effect, providing for a moratorium on the recovery of the assets of PJSC Ukrzaliznytsya for liabilities of enterprises located on the АТО territory. In our opinion, the adoption of this law adds to the recognition on the part of the state of succession in respect of all railway transport enterprises, including the State Enterprise Donetsk Railway. After all, without succession, the announcement of moratorium would be absolutely impractical.
EUROPEAN COURT'S POSITION IN DISPUTES AGAINST STATES RESPONSIBLE FOR DEBTS OF LEGAL ENTITIES
In our opinion, the situation described above may have adverse image effects for Ukraine and lead to gross violation of the rights of creditors under the Convention for the Protection of Human Rights and Fundamental Freedoms (the Convention). We believe that future appeals by creditors to the European Court of Human Rights will inevitably lead to the adoption of decisions against Ukraine because of violation by the state of the rights of creditors established in the Convention.
First of all, it should be noted that the European Court of Human Rights repeatedly explained in its decisions the position regarding the recognition of state responsibility for the debts of legal entities de facto controlled by the state.
If we analyze the situation with PJSC Ukrzaliznytsya, then we can certainly arrive at the conclusion that the state of Ukraine is responsible for the debts of these legal entities. The state made the decision on the creation of PJSC Ukrzaliznytsya and on the transfer of all rights and obligations to this enterprise, including the State Enterprise Donetsk Railway. Consequently, the state is responsible for fulfilling the obligations of this enterprise.
We believe, with regard to the violation of the rights provided for by the Convention, that the following violations are seen in this category of disputes:
— Article 6 of the Convention (right of access to a court and fair trial);
— Article 1 of the First Protocol to the Convention (right to peaceful possession of property);
— Article 13 of the Convention (right to effective remedies);
— Article 17 of the Convention (prohibiting the state from abusing the rights provided for by the Convention).
A person can have legitimate expectations for receiving money for the property if it has the right of demand under one of the following conditions: if there is a final judgement confirming this right and if there is a sufficient legal ground in national legislation which confirms the claim.
The impossibility of having legitimate expectations for the return of debt in a court shows that Ukraine violates the obligations ensuring everyone the right of access to a court and the use of effective means for defense of violated rights.
In conclusion, we emphasize once again: if judicial practice continues to correspond at any price only to the interests of the state and to ignore the legitimate interests of creditors and investors, this will lead not only to image losses for the state, but also to additional state obligations on potential decisions adopted against Ukraine by the European Court of Human Rights.