The situation in the Ukrainian economy continues to be described as complex. On the one hand, military and political aggression from the Russian Federation prevails over the country and, on the other; there is an urgent need for structural reforms in key areas of public life too.
As a result, the banking sector of the economy is going through turbulence providing a large amount of arising and ongoing legal disputes involving banks.
However, despite the general difficulties in the economy due to objective and subjective factors, there are a certain positive dynamics in the banking sector. In other words, despite the lack of dramatic positive changes and “shock therapy” in the implementation of reforms, Ukraine is slowly “drifting” towards reforms.
Moreover, the forecast of the National Bank of Ukraine for 2017 is encouraging and suggests the stabilization and strengthening of the banking sector. Here are several reasons for cautious optimism.
Firstly, judicial reform is taking place in Ukraine at the moment. In spring 2017, a new Supreme Court should start with a reshaped make-up of judges, and in the next 1-3 years, similar changes are planned in the courts of appeal and first instance throughout the country. In addition, in the near future, the Verkhovna Rada intends to adopt new procedural economic and civil codes adapted to modern realities.
It is expected that the implementation of judicial reform into life will improve the quality of Ukrainian justice. For the moment, its quality is poor, largely because of the high level of corruption.
However, the irony for Ukrainian legislators is that even fair satisfaction of the rights of the injured party via a decision adopted by a court does not mean the actual execution of this judgment. Even the existence of a judgment in the creditor’s favor may not lead to a resumption of violated rights.
Second, reform of the State Enforcement Service (bailiffs service) is taking place in Ukraine. By the Law of Ukraine No. 1403-VIII On Bodies and Persons Engaged in Enforcement of Judicial Decisions and Decisions of Other Bodies of 2 June 2016 legislators bring into legal boundaries the institution of private executors, who will enforce judgments along with state enforcement officers.
Private executors are limited in a number of categories of judgments they can enforce, but that’s what can give rise to their involvement in execution of court decisions in banking disputes: the benefits of private executors are efficiency, personal interest, and specialization. It is expected that private bailiffs will start work in spring 2017 just like the new Supreme Court.
Third, among significant changes, it is necessary to mention the introduction in Ukraine of the so-called attorney’s monopoly, enshrined in the amended Constitution of Ukraine and the Law of Ukraine No. 5076-VI On Advocacy and Legal Practice of 5 July 2012. From 2017 only attorneys will have right to represent the interests of clients in courts of cassation (from 2018 — in appeal, in 2019 — the first instance).
This innovation may contribute to an improvement in the level of legal services provided by the banks, but also will require extra expenses, as due to the introduction of the attorney’s monopoly banks will face a choice: engagement of external legal advisors, having the status of an attorney, to provide legal assistance in a dispute, or work on getting this status by in-house bank lawyers working in its legal department.
A significant factor in the consideration of banking disputes by the courts is the practice of the current Supreme Court, whose legal positions must be taken into account by lower courts. In 2016, the Supreme Court of Ukraine took important legal opinions aimed at protecting both creditors and debtors; you are invited to read below.
The Supreme Court resolved that under the bank account agreement the bank's monetary obligation to the client (account holder) within the funds deposited in the account, might only occur after the client's order on the respective sum of money. The legislation does not provide the possibility to change the account holder and as a result making only the claim assignment agreement does not give the buyer the right to claim the money to the bank. As a result, the bank was unable to com-ply with the orders of the enterprise with regard to current accounts owned by the individual, so that the company did not acquire the money claim to the bank un-der the application for money transfer and cash withdrawal.
In accordance with the Court’s findings, in case of cancellation of an illegal court decision on a mortgage’s annulment, pursuant to which the entry encumbrance was excluded’s from the State Registry of Mortgages, the mortgage force shall be subject to recovery from the date of prime entry, which has been excluded on the basis of the unlawful judgment, as the grounds for the removal of this entry became irrelevant. This means that the mortgage is valid from the moment the entry is included in the State Register of Mortgages.
The Court concluded that the fact of liquidation of the debtor under a loan agreement by including an entry of the termination of a legal entity on the relevant register, in case of the debt existing under the contract, does not constitute grounds for termination of the mortgage agreement, which is concluded for the enforcement of the loan agreement by the debtor. In itself, taking the decision to the economic court on the liquidation of the legal entity — debtor under the main obligation and its exclusion from the Unified State Register of legal entities and individual entrepreneur and civil groups do not entail the termination of the principal obligation. This is because the mortgagor has filed the claim to the mortgagee in adversary proceedings about the foreclosure of the mortgage property as he didn’t properly meet obligations regarding repayment of debt.
According to Court opinion, Article 392 of the Civil Code of Ukraine does not engender, but confirms the existing plaintiff’s right of property acquired previously on legal grounds if the defendant disclaims, denies or disputes the claimant’s right of property, as well as in the case of the plaintiff’s loss of the document confirming his ownership. In solving this category of cases the courts should find out the existence, or lack of consent, of the mortgagor to the out-of-court settlement of foreclosure of the mortgaged property by the transfer of ownership of the mortgaged property to mortgage towards performance of mortgage liabilities, as well as making the notarial writ of execution as the legal basis for registration of ownership rights of the mortgagee, if such conditions are provided by the terms of the mortgage contract.
With this decision the Supreme Court of Ukraine defended the rights of the debtor by refusing to satisfy the request of the bank (lender) for review of the Court of Cassation decision. The subject of the case was the claim to invalidate a unilateral deal on offsetting. By refusing, the Supreme Court supported the position of courts of previous instances, confirming the absence of evidence of non-compliance of set-off application with Articles 203 and 601 of the Civil Code of Ukraine.
According to the view of experts, not all banks are adapting to the new conditions of work, so we can expect the market exit of a few more banks, which, in turn, will lead to the initiation of new banking disputes.
Unfortunately, the parties to banking disputes, just like before, are faced with a high level of corruption in courts, combined with a lack of real opportunities to enforce the judgment in their favor.
However, it should be noted that since the end of 2016, there has been certain stabilization in the banking sector, and the current period of the Ukrainian banking system may be described as rebooting, or a “clearance” period.
Be that as it may, the evaluation of current changes in the banking sector, as well as in banking disputes, should be given from a perspective of the next 3-5 years, when it will be possible to notice the first results of reform of the judiciary and the State Enforcement (bailiffs) Service, as well as the gradual economic and political stabilization and recovery of Ukraine.
The material was published in the Ukrainian Law Firms 2017. A Handbook for Foreign Clients