Development of Newly-Discovered Circumstances Institution to Effectively Restore Rights Violated by Illegal Sanctions

New sanctions legislation, a lack of experience and positive judicial practice all give rise to a distorted notion of unrestricted state intervention in individual rights and freedoms. There is an urgent need for efficient judicial protection (by the Supreme Court of Ukraine) of individual rights from interference by the state which neither pursues a legitimate aim nor is properly justified.

In 2020, the Supreme Court, for the first time ever, invalidated and revoked in some cases Presidential Decrees imposing sanctions on business entities.

The Law of Ukraine On Sanctions defined the purpose, grounds and principles for applying these temporary restrictive measures. However, neither this piece of legislation nor case law have so far determined the legal consequences of invalidating sanctions.

The state should ensure the right of a person to an effective means of restoring violated rights. Therefore, the consequences of invalidating sanctions should be determined in the light of international law, Ukraine’s obligations under the European Convention on Human Rights, case law of the Supreme Court and ECtHR, and the rule of law.

Let’s consider the situation and case law.

In 2018, an extraordinary general meeting of a joint stock company was held, convened and held by a majority shareholder owning a shareholding of 60+% in shares. Another shareholder, a foreign company (EU), owns a 25+% stake.

The Law of Ukraine On Joint Stock Companies and Commercial Code of Ukraine enshrines the right of a shareholder to participate in the management of a joint stock company, which provides, inter alia, a shareholder’s right (authority) to submit proposals and vote at general meetings.

Prior to the imposition of sanctions, the foreign company had its representatives in the Supervisory Board and Audit Commission through the cumulative voting procedure, and had guaranteed influence over the decisions requiring a qualified majority, particularly on making amendments to the Articles of Association.

A representative of the foreign company arrived at the venue of an extraordinary general meeting and was registered to participate in the meeting. However, the List of Shareholders stated that the number of his voting shares is “0 ***.” The relevant note referred to the decision as taken by the National Security and Defense Council of Ukraine, whereby such sanction as “asset blocking and temporary restriction of a person’s right to use and dispose of property as owned by it” was imposed.

Accordingly, the shareholder did not receive ballot papers and was unable to vote on the agenda. Moreover, the blocked shares were not taken into account to determine the qualified majority on the issue of amending the company’s Articles of Association. As a result, the majority shareholder with a stake of 60+% voted in favor of amending the above articles of association, reducing the number of members of the Supervisory Board and liquidating the Audit Committee. The foreign company’s proposals on candidates and Articles of Association were not considered at all, and the Supervisory Board was formed entirely of representatives of the majority shareholder.

The Law On Joint Stock Companies sets a reduced three-month limitation period for appealing against decisions adopted at a meeting of a joint stock company. The shareholder appealed to the Commercial Court against the decision taken by the General Meeting on approving the amended and restated Articles of Association and electing members of the Supervisory Board. However, courts of all instances dismissed the claim solely on the basis of imposed sanctions.

At the same time, the shareholder appealed to the Supreme Court against Presidential Decrees imposing sanctions. Despite simplified proceedings, the trial lasted for more than a year. The initiator of the imposed sanctions was involved in consideration of the case.

In 2020, the Administrative Court of Cassation of the Supreme Court found the Decrees illegal and invalid in terms of imposing sanctions on company-shareholder, since it did not establish such circumstances that could serve as a basis for imposing sanctions on the plaintiff, and concluded that the Decrees did not meet the criteria of legitimacy.

According to legal conclusions, as made by the Supreme Court, the fact of recognition of the acts as illegal and invalid testifies to the illegality of such acts from the moment of their adoption (Clause 60 of the Resolution of the Chamber for Land Relations and Property Rights of the Commercial Court of Cassation of 28 April 2020 in case No. 904/164/19, Clauses 23, 88 of the Resolution of the Administrative Court of Cassation of 10 March 2020 in case No. 160/1088/19).

Subject to the foregoing, the shareholder filed an application for reviewing the Commercial Court’s decision on the general shareholders’ meeting taking into account newly-discovered circumstances. Such newly-discovered circumstances are illegality of the Decrees of the President of Ukraine, which imposed sanctions on the Company and, accordingly, the illegality of sanctions resulting in violation of the foreign company’s rights to put forward proposals and vote at shareholders’ meetings.

The illegality of Presidential Decrees and sanctions has existed throughout their validity, including when convening shareholders’ meetings and the commercial court of first instance when adopting its decision, but it could not be established by a court, since in accordance with procedural law Presidential Decrees may be invalidated only by the Supreme Court (Article 266 of the Code of Administrative Proceedings of Ukraine). Consequently, only a decision of the Supreme Court could be and is a substantive legal expression and admissible proof of the fact that the newly-discovered circumstances mentioned above actually exist.

The Commercial Court of First Instance refused to review its decision on the general shareholders meeting. In the meantime, the Court referred to the fact that the decision, as taken by the Supreme Court, is new evidence, and Presidential Decrees are acts related to particular persons and, therefore, their invalidation determines their illegality only “for the future.”

However, it is impossible to agree with the above justification.

Firstly, newly-discovered circumstances are the illegality of Decrees issued by the President of Ukraine, whereby sanctions were imposed on a foreign company, and, accordingly, the illegality of sanctions. The Supreme Court’s decision is only proper and admissible evidence of their existence.

Secondly, the reference to the fact that invalidated Presidential Decrees are acts related to particular persons is unfounded and, therefore, they determine the consequences only in perspective, but not retrospectively. Since there were no grounds for this at the time the sanctions were imposed, they are illegal from the moment of their imposition and remain illegal during the entire period of their validity, regardless of the nature of the act whereby they are imposed.

Another approach leads to the impossibility of restoring the rights of a shareholder against whom sanctions have been illegally applied for more than two years, which does not comply with Article 13 of the European Convention and Article 1 of the First Protocol.

In particular, the ECtHR concluded in its judgment in Stebnytskyi and Comfort v. Ukraine that the fact of recognition of the claimant company as bankrupt by a court resolution which was later annulled by the court as unlawful, showed that the company’s business restrictions were unlawful throughout the entire validity period of the respective Resolution (clauses 62 to 65 of the Decision of 3 February 2011).

Similarly, the fact of imposition of sanctions on a company in the absence of grounds, as confirmed by the Supreme Court, indicates the illegality of restrictions as imposed on shareholder rights due to the imposition of sanctions. A company should have access to an effective procedural remedy of restoring its rights, and the only way to restore them is to annul the decisions taken by the General Meeting in 2018.

It should be noted that the Supreme Court has already broadly interpreted the newly-discovered circumstances and ascribed to them not only the facts of objective reality, but also other facts affecting proper dispute resolution, including legal assessment.

In particular, the Civil Court of Cassation recognized as a newly-discovered circumstance the fact of invalidity of the insurance certificate forged by the defendant to avoid civil liability (Resolution of 21 October 2020 in case No. 726/938/18):

“The Court of Appeal did not take into account that the newly-discovered circumstance, being a legal fact that is important for the case, but was not and could not be known at the time of the challenged court decision, which the claimant refers to in the application for review, is the invalidity of the Green Card Insurance Certificate, which existed when considering the case, and the court’s decision, which it requests to review, but not the documents themselves, whereby the circumstance of the invalidity of such Insurance Certificate was established.”

Moreover, the Commercial Court of Cassation recognized the fact of the agreement’s invalidity as a newly-discovered circumstance (Resolution of 12 November 2020 in case No. 910/23892/16).

“Newly-discovered circumstances are, by their legal nature, the factual data refuting the facts that were the basis of the court decision and give rise to procedural consequences, affect the legality and validity of the court decision adopted without taking them into account. Newly-discovered circumstances include facts of objective reality, on which the parties’ claims and objections are based, as well as the other facts being important for the proper resolution of dispute.”

Subject to the foregoing, conservative understanding by the courts of lower instances of provisions of procedural law with respect to newly-discovered circumstances leads to the impossibility of restoring the rights of a person which were violated during the period of validity of illegal sanctions.

Therefore, it is necessary to further develop the institution of reviewing cases based on newly-discovered circumstances, and transit from a superficial conclusion “court decision=new evidence” to the understanding that the illegality, as established by the court decision, is a newly-discovered circumstance. The above understanding does not contradict the provisions of procedural law, but is organic awareness of the fact that newly-discovered circumstances are not only facts of objective reality, but also other facts that are important for proper dispute resolution.