One good bargain deserves another
"From mass disputes related to invalidation of transactions by liquidators, the market shift is now towards disputes related to bids in the sale of assets of liquidated banks"DENIS MIRGORODSKY, MANAGING PARTNER AT DYNASTY LAW FIRM, SAYS ABOUT LATEST TRENDS
— Has the process of removing insolvent banks from the market reached its peak? How would you describe the actions of the Deposit Guarantee Fund (the Fund) and the National Bank of Ukraine (NBU) in all procedures on removing insolvent banks from the market?
— It is still too early to talk about the peak. In 2014–2016, the process of removing insolvent banks from the market went smoothly from one stage to the next. From mass disputes related to invalidation of transactions by liquidators (on the basis of Article 38 of the Law of Ukraine "On the Deposit Guarantee System for Individuals"), the market shift is now towards disputes related to bids in the sale of assets of liquidated banks. Well, serious court battles over recovery of damages from the owners of liquidated banks loom ahead. At the same time, there is the feeling that the inefficiency of the state-run Deposit Guarantee Fund itself and its authorized persons (bank liquidators) in assets management lies behind the incriminations of "damages" made against former owners and top managers.
We already have a number of examples when the deliberate loss of documents, unreasonable termination of collateral agreements, sale of bank assets at ridiculously low prices and lengthy inactivity of liquidators against the active judicial protection of borrowers became the real reason for the insufficiency of the bank’s assets for reimbursement to the Deposit Guarantee Fund for the funds allocated by the latter to them for paying guaranteed deposits. But there is no doubt that the Fund will hold the very people who lost their business, i.e.former owners of banks, accountable for such insufficiency.
And finally, the first disputes between the owners of liquidated banks and the regulator have reached international courts, particularly the European Court of Human Rights. But a tremendous threat for our country lies in this. The Ukrainian section of the European Court’s Secretariat is aware of this, trying not to allow such disputes to be considered, but that is the topic of another discussion.
The Fund turned out to be unready to manage such a number of complex processes and an array of property in terms of organization and, therefore, in general, its actions can be described as extremely inefficient.
— What are the features of judicial practice with the Fund’s participation?
— The main feature is the rampant inequality in the position of parties, of which the Fund and its representatives often take advantage. For example, if the bank liquidator has caused damages or does not fulfill current obligations under agreements (rental of premises, operating costs, license fees, IT services, etc.), it is impossible to recover damages from it in accordance with the standard procedure. These requirements are included in the liquidation mass of the bankrupt bank's property and are satisfied from this property on an eighth-priority basis in accordance with Article 52 of the Law of Ukraine "On the Deposit Guarantee System for Individuals", i.e. they are actually not satisfied at all. If a tender is subsequently declared invalid, the winners of the liquidated banks' property tender, which transferred funds under the agreement concluded on the basis of tender results, are put in the same position.
This inequality includes restrictions on the imposition of prohibitory injunctions in respect of the Fund and its authorized persons included in the procedural codes. This often deprives the Fund’s opponents of the right to efficient judicial defense in situations when the Fund deliberately takes illegal actions: for example, it executes title for mortgaged property under already repaid loans in its own name.
Such impunity often gives rise to corruption. This is clearly shown by the situation when the largest bribe in the history of Ukraine, recorded at the time of its transfer by law-enforcement agencies ($5 million), was intended specifically for an authorized person of the Fund, who liquidated one bank belonging to Group Three.
— Where do things stand today with regard to reimbursement for damages caused to bankrupt banks?
— Today, auctions for the sale of the assets of liquidated banks, which are held on electronic trading platforms under the Dutch auction principle, are the main way used to reimburse damages (losses). The transparency and efficiency of such platforms do not give rise to unfavorable criticism, but poor-quality preparation of lots by the Fund raises many issues. It is not unusual when a mortgage or claims for an already repaid loan are tendered. What is more, there is also a court ruling confirming the absence of obligations to a liquidated bank. Of course, a legal conflict between the buyer of the lot and the debtor/pledger is inevitable in such a case, but it seems that the Fund does not care.
Another typical scene is when claims, in support of which there are no documents or a significant part of them is lost, are tendered. That is, the winning bidders cannot exercise the purchased right, and this should be obvious to the Fund’s experts. But nobody tells bidders about this situation because if they did nobody would want to take part in the bidding process.
Looking from the outside, one gets the impression is that it is important for the Fund to get money from buyers at all costs, and it cares nothing about the consequences. After all, as I have already said, it is impossible to recover money from liquidated banks in an efficient way.
— Could you provide some details of the development of judicial practice in recovering damages from persons related to insolvent banks?
— We should understand that this is a new area, and the NBU, in unison with the Fund, are only just acquiring experience, and the bulk of such lawsuits are still to come. This is partly due to the fact that the exact amount of damages to be recovered can be ascertained only after termination of a bank’s liquidation procedure, but the majority of insolvent banks have a long way to go before liquidation is complete.
Such disputes today can be divided into two areas: the first one is collection of debts under the commercial banks refunding agreements from their owners under the agreements of surety signed by owners; the second one is claims based on part 6 of Article 58 of the Law of Ukraine "On Banks and Banking Activities" against persons connected to the bank. In the second case, the Fund is going to prove that damages were caused to the bank as a result of actions or, on the contrary, inaction on the part of managers, owners of the bank and other related persons (the meaning of this term is disclosed in Article 52 of the Law).
MP Vadim Novinsky, guarantor of Forum Bank, and Konstantin Zhevago, guarantor of Finance and Credit Bank, are the first public defendants in cases for the recovery of refinancing debts. The disputes are now in their active phase. As for the recovery of damages from the related parties of insolvent banks, the Fund’s claim to shareholders and top managers of Brokbusinessbank for UAH 8.9 billion is already under consideration by a court. It is known that the Fund attempted to file a similar lawsuit against related parties of Aktyv Bank to the tune of UAH 1.7 billion.
As follows from statements by Konstantyn Vorushilin, the CEO of the Deposit Guarantee Fund, made at the end of September 2018, these are only the first fruits. A significant part of the UAH 145 billion, which the Fund will return to the Ministry of Finance of Ukraine to pay off loans, is expected to be repaid at the expense of the former owners and top managers of liquidated banks.