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Partner, Alekseev, Boyarchukov
During last year many significant events took place in the judicial system and related legal institutions. Constitutional changes in the justice sector were adopted and came into force, changes have been made to procedural legislation, and the implementation of other conceptual directions of judicial reform has begun which, to a certain extent, has also influenced existing judicial practice.
In could be observed in general in 2017 that the number of litigations between the banks and borrowers fell compared to previous years, as did the number of bankruptcy cases in which banks participated.
Banking disputes are one of the most popular categories of litigation discussed in the legal community. At the same time, these disputes are among the most complicated in legal practice, since they are connected with the ambiguity of court practice, which in the first place is formed by the courts of cassation instances.
Although the precedent and case law of cassation courts are not a source of law for the Ukrainian system, they have clear influence on the formation of legal positions and it is safe to say that Ukraine is moving towards the precedent system of law. This statement is also confirmed by the introduction of amendments to procedural codes that establish the duty of a court to choose and apply the rules of law taking into account conclusions set out in decisions of the Supreme Court.
Particularly interesting are the findings of the Supreme Court of Ukraine in 2017, formed during consideration of disputes with participation of banking institutions, which have a clear impact on existing judicial practice.
Case No. 6-2311цс16 of 22 March 2017
When analyzing the provisions of Articles 525, 526, 599, 611, 625 of the Civil Code of Ukraine, the Supreme Court concluded that the existence of a court decision on debt recovery under a loan agreement, which the debtor failed to fulfill, does not terminate the legal relations of the parties under such agreement, does not relieve the debtor of liability for non-fulfillment of a monetary obligation stipulated by Article 625 of this Code.
Case No. 6-786цс17 of 15 May 2017
Having analyzed the provisions of Article 17 of the Law of Ukraine On Mortgage in connection with the articles of the Civil Code of Ukraine, the Supreme Court of Ukraine drew the conclusion that the expiry of the limitation period of the main and additional claims of the creditor on debt recovery under a loan agreement and on foreclosure on the mortgaged property (in particular, in the presence of a court decision refusing this claim based on the expiry of the limitation period) does not by itself terminate the main obligation under a loan agreement and, accordingly, cannot be considered a ground for termination of a mortgage.
Such a position taken by the Supreme Court is quite progressive in terms of protecting the rights of creditors (the banks), but raises many questions about the methods of its implementation since it is, to some extent, declarative.
Case No. 6-1718цс17 of 15 November 2017
The Supreme Court of Ukraine concluded that a suretyship agreement is not an agreement to purchase, order or use products for personal needs, not related to entrepreneurial activity, performance of duties of a hired employee or an intention agreement to perform such actions. Consequently, the surety in a suretyship agreement cannot be considered a consumer of bank services. Therefore, in this legal relationship it is not subject to the Law of Ukraine On Consumer Rights Protection.
Thus, if a surety agreement contains an arbitration clause, the dispute between a bank and the surety for debt recovery under a consumer loan agreement, for the fulfillment of obligations under which the latter stood surety for, is subject to the jurisdiction of an arbitral court.
Case No. 3-788гс17 of 9 August 2017
The Supreme Court of Ukraine has made it impossible to delay the recovery of debts from an individual entrepreneur and possible manipulations with termination of obligations due to the termination of an individual entrepreneur.
Considering the aforementioned case, the Supreme Court of Ukraine clarified that in the event that change in the status of the debtor occurred after initiation of the proceedings, it does not entail consequences in the form of changes in jurisdiction of such case and, accordingly, termination of proceedings in it, since at the time of initiation of such proceedings by an economic court they were subject to the jurisdiction of that court. The court also pointed out that in case of termination of an individual entrepreneur, its economic obligations under concluded agreements are not terminated, as the individual him/her does not disappear and is liable for such obligations by all his/her property on general grounds.
Taking into account the use of extrajudicial mortgage recovery procedures by the banks, disputes related to appeals against these procedures were also common, including through the Commission for State Registration Complaints under the Ministry of Justice of Ukraine, as well as subsequent appeals against the orders of the Ministry.
At the same time, disputes regarding appeals against decisions of the National Bank of Ukraine and the Deposit Guarantee Fund regarding the withdrawal of insolvent banks from the market, as well as controversies related to disputes regarding appeals of depositors against decisions of the Fund regarding the non-return of funds were also very popular in 2017.
The position taken by the Supreme Court formed in consideration of this category of cases is quite controversial with regard to the right to appeal against the decisions of the National Bank of Ukraine and the Deposit Guarantee Fund by a bank’s shareholders. The court indicated that the decisions appealed by them relate in a certain way to a bank’s shareholders, but since the latter are not the owners of substantial participation, they have no right to appeal. This position of the court was justified by the fact that since the sanctions of the National Bank of Ukraine were directed against the bank, it is only the bank or a shareholder, who under certain criteria may be recognized a victim of the actions or decisions of the National Bank of Ukraine, can challenge them in court under the law and are subject to the consideration of law-enforcement practice. Since the decision of the National Bank of Ukraine on including a bank in the insolvent category in fact, directly or significantly, does not affect the rights of such shareholder, at least enough to gain the right to appeal (resolutions of 24 October 2017 in Case No. 21-3926а16). In the context of this issue, we should mention the dispute in the Feldman and Bank Slavyansky vs. Ukraine case, in which the European Court of Justice adopted its decision on 21 December 2017. Although the court dismissed the applicant’s claim for pecuniary damages, which was based on assessment of profitability, capital and growth rates of the applicant bank, due to the absence of a causal link between the violation found and pecuniary damage, at the same time the ECHR ruled that the State of Ukraine had violated Para. 1 of Article 6 of the Convention with respect to the applicant bank and Article 1 of Protocol No. 1 regarding the interference by the National Bank of Ukraine in the ownership rights of the applicant bank. Given the circumstances of the case, in which, under similar circumstances, the shareholder of the bank was deprived of the opportunity to appeal against the decision to liquidate the bank, and property rights were violated, it is quite fair to expect that the shareholders of banks, the decisions on the liquidation of which were adopted in recent years, will address the ECtHR.
At present, the share of problem loans in Ukrainian banks is 55.75%. Taking into account the expected reduction of their share to 50% by the end of 2018, it is obvious that the number of litigations on these issues will fall further. The tendency for it to rise is only possible in the state bank sector where the level of overdue loans is 75%, while being just 25% in banks with foreign capital.
At the same time, the Law On Financial Restructuring, adopted to facilitate the restoration of economic activity and support the stability of the financial system, in fact, does not work, as debtors rarely turn to banks to conduct it. According to the website of the Secretariat of Financial Restructuring, nine restructurings were executed in 2017, with five of them were conducted with the participation of state-owned Oshchadbank.
We can also expect that, due to introduction of the monopoly on representation of lawyers in the courts, the number of personnel of the internal legal departments of banks will be reduced and the majority of cases will be transferred to outsourcing.
The declared strategy of state bodies to stimulate active use of lending and reduce the cost of credit resources to facilitate access of business entities to loans is likely to remain only a declaration due to the reluctance to introduce valid instruments to protect creditors from unscrupulous borrowers.
However, justifying the favorable investment climate in Ukraine, we are right to expect that the state will still have to improve existing legislation and implement effective and efficient instruments and mechanisms to protect the interests of foreign investors and creditors.