Insolvent Bank –

Stakeholders and Directors are to Be Overtaken

Deposit Guarantee Fund Has Gained an Advantage in Disputes against Insolvent Bank Former Stakeholders and Directors

The so-called “bankfall” that took place in previous years has triggered new genres in banking disputes. The Deposit Guarantee Fund (DGF) is making attempts at recovering damages caused to banks and their creditors from bank directors and stakeholders. On the other hand, bank stakeholders have sued the DGF and National Bank of Ukraine with demands regarding invalidation and cancelation of revocation of a bank license decision, as a result, with demands to recover assets in kind, specifically to recover the bank as it is which obtains a bank license.

And while numerous cases regarding recovery of damages from bank directors are in court proceedings for now, the issue of recovering bank assets to return them to former owners was resolved by the legislator. And that is something new. The DGF and National Bank of Ukraine discovered that if it is complicated to succeed in a court case against former stakeholders and bank directors it is not fatal. There is always the path of legislative amendments. Taking into account the fact that finding funds for the State Budget of Ukraine is essential and a high-priority issue, legislators are always glad to endorse an initiative of this kind.

The Law of Ukraine On Introducing Amendments to Certain Legislative Acts Regarding Improvement of Regulation of Banking Activity Mechanisms No 590-IX came into legal force on 23 May, 2020 (Law No 590-IX), which acted as a key event for the numerous disputes between former bank stakeholders on one side, and the DGF and the National Bank of Ukraine on the opposite side. We will not go into detail as to provisions of the named law, but we’ll just mention that according to the provisions of Law No 590-IX, the procedure for a bank’s liquidation cannot be canceled or put on hold in the event of cancelation by a court of decisions adopted by the National Bank of Ukraine on revocation of a bank license. In such a case former stakeholders can only count on recovery of damages caused by illegal decisions and/or actions of the DGF or the National Bank of Ukraine, but not to get back the legal entity which has a bank license.

The first result of the adoption of Law No 590-IX, namely dismissal of cases as per demands made by stakeholders in a former bank, concerned putting on hold or closing the bank liquidation procedure and recovering control of the insolvent bank to the former beneficiary.

It should also be mentioned that at the time of adoption of Law No 590-IX there had already been several cases when stakeholders in an insolvent bank recovered control of it. In this event the participants of the case faced the legal capacity issue of a legal entity, which was recovered by the stakeholders. That is so because due to the cancelation of the decision regarding revocation of the bank license and the decision on bank liquidation the legal entity does not automatically recover the bank license of the National Bank of Ukraine for conducting banking operations. Due to the provisions of Law No 590-IX the liquidation procedure cannot be put on hold or wound up, there is a kind of uncertain legal capacity of the legal entity as the entity was recovered for the benefit of stakeholders (which cannot be considered as a bank due to the absence of a license from the National Bank of Ukraine). However, the bank liquidation procedure, as initiated by the DGF, is not completed and will continue.

Moreover, before Law No 590-IX came into legal force there were cases in court proceedings under the statements of claim of insolvent banks, which were recovered for stakeholders, against the DGF and the National Bank of Ukraine regarding recovery of damages.

However, the transitional provisions of Law No 590-IX obliged former stakeholders to give back documents, seals and other valuable assets of the bank to the DGF. Thanks to that, the DGF, getting back control of a bank, conducted actions aimed at closing court procedures initiated on behalf of a bank by former stakeholders demanding recovery of damages. In the same way, a bank which was recovered for the benefit of stakeholders, saw the issue of legal capacity resolved because control of the bank was returned to the DGF and the latter dealt with lawsuits filed against it by former stakeholders on behalf of the legal entity, which was a bank prior to its liquidation.

According to the provisions of Law No 590-IX, former stakeholders of the insolvent bank, the decision on liquidation of which was declared to be illegal, can only protect its rights by filing a damage recovery lawsuit in monetary form. In this event, the sum of damages caused should be defined as the value of that particular bank’s shares on the day on which the decision to liquidate the bank was adopted. It is interesting, that the provisions of Law No 590-IX set out demands regarding establishment of the said value. The law provides that it is obliged to take into account the fact that this refers to a bank’s shares “without outlook”. And this is not all — a conclusion on the value of a bank’s shares should be stipulated in an audit report on a bank’s financial activity, which should be issued by auditors who meet the criteria of the National Bank of Ukraine. Technically, the claimant is obliged only to pay the court fee and to deposit expenses on gathering certain stipulated evidence and its evaluation.

Everyone Will Be Responsible

The DGF, on the basis of Article 52 of the Law of Ukraine On the Deposit Guarantee System for Individuals sues an insolvent bank’s associated persons with demands to recover damages caused to the bank. There are currently 64 similarly filed statements of claim for a total amount of more than UAH 97.2 billion.

For now, proceedings within most of the cases relating to recovery of damages caused from former stakeholders are on hold till commercial case No. 910/11027/18 is considered. This means that commercial case No. 910/11027/18 can be a leading case for deciding on damages (payable) to a bank and its creditors. Within the said case the Grand Chamber of the Supreme Court is considering the cassation of the DGF against the decision of the court of first instance and appeal courts in a case on recovering damages caused from persons associated with the UKOOPSPILKA bank.

Within the confines of the case the DGF insisted that directors (members of the board, supervisory council) have caused damages to UKOOPSPILKA and its creditors by concluding a bond sale and purchase agreement. The defendants, in their turn, insist that there is no set of elements of a civil offense.

After reviewing the case for more than a year and a half the Grand Chamber of the Supreme Court granted the DGF’s statement of claim and ordered recovery by management of the UKOOPSPILKA bank of approximately UAH 75 million in inflicted damages as per the decision of 25 May, 2021. The Grand Chamber of the Supreme Court has not yet drafted and published the full text of the decision, but several arguments of the Supreme Court are already known.

The Grand Chamber of the Supreme Court has come to the conclusion of directors’ and stakeholders’ joint responsibility for damage recovery regardless of whether or not such persons take direct part in the making of any decisions on bank deals and assets. The Grand Chamber of the Supreme Court points to the obligation of bank directors and stakeholders to act in the best possible way for the benefit of the bank, its creditors and clients. Such a conclusion creates a threat of responsibility for those directors who did not vote in favor of certain deals and for subsequent directors who, in the opinion of the Grand Chamber did not take actions to evade insolvency of the bank after the deal (in question) is made.

Moreover, the Grand Chamber has not linked the fact of infliction of damages to a bank’s creditors with invalidation of challenged deals, which could be indicative of its non-conformity with law, but the Grand Chamber has connected the named with the shortage of insolvent bank assets to satisfy all the demands of creditors. Actually, this refers to introducing the principle under which a bank’s associated parties are, by default, responsible. This is a dangerous precedent for the directors and stakeholders of every bank being liquidated, because it is known that disposal of assets usually proceeds after several opening price reduction stages and differs not only from the book value of such assets but also from the real amount of claim owned by the bank.

Coming Threats

On 19 May, 2021 the Verkhovna Rada of Ukraine adopted at the first reading stage the Draft Law On Introducing Amendments to Certain Legislative Acts of Ukraine Regarding Banks Liquidation and Improvement of Mechanisms for Satisfaction of Creditors Demands, No. 4546 (Draft No. 4546). It contains provisions that widen the scope of persons who can be sued by the DGF to recover damages caused to a bank being liquidated. Draft No. 4546 proposes to entitle the DGF to sue any other persons who are parties:

•  of deals, which have been invalidated by the DGF;
•  of deals that contain terms not complying with prevailing market conditions;
•  of loan agreements, loan debtor under which doesn’t spend the money in accordance with the lending purposes;
•  who has gained postponement of payment, reduction or exemption from interest or penalty payments;
•  of deals, regarding which the guarantee was halted or changed (mortgage, pledge);
•  who received assets of the bank as a guarantee (pledge, mortgage, guarantee, trust);
•  who has received loans in contravention of the National Bank of Ukraine’s requirements;
•  of deals concerning the purchase by the bank of non-state bonds, and the issuers of the bonds.

In addition, Draft No. 4546 stipulates that the basis for compensation of damages caused to the bank’s creditors by the bank’s directors and stakeholders will be the decisions or actions, inactivity of such persons or in connection with improper and dishonest performance of their duties, or without taking into account the interests of the bank and / or its creditors, or without complying with the limits of usual business risk, or with obvious negligence or waste. Obviously, such normative consolidation actually means the principle of responsibility of the directors and stakeholders of the bank by default, which allows the courts to satisfy the claims of the DGF.

The biggest threat of Draft No. 4546 is already familiar from Law No. 590-IX. That is negligence of the principle of inadmissibility of the retroactive effect of the law. It is assumed that all the procedures will be applicable for creditors’ claims satisfaction of those banks whose liquidation was initiated before the law came into legal force.

No doubts, there is a whole era of mass recover from the directors and stakeholders of liquidating banks, and under such circumstances there are almost no opportunities for procedural maneuver and rights protection. In fact, the amount at stake is equivalent to 10% of all revenues of the State Budget of Ukraine.