Insight

Return the Favor When Bidding

Denys Myrgorodskiy, the managing partner of Dynasty Law Firm, looks at the process of withdrawing insolvent banks from the market in Ukraine and its potential consequences.

New Bank Fraud Laws in Ukraine
Denys Myrgorodskiy

Denys Myrgorodskiy

May 21, 2019 09:00 AM

Has the process of withdrawing insolvent banks from the market reached its climax? How could you characterize the actions of the fund of guaranteeing deposits of individuals and the National Bank of Ukraine (NBU) in all procedures of removing insolvent banks from the market?

It’s too early to speak on the climax. The process of withdrawing insolvent banks from the market from 2014 to 2016 has gone smoothly from one stage to another. Starting from the mass disputes related to the recognition of transactions as insignificant by official receivers (on the basis of Article 38 of the Law of Ukraine, “On the System of Guaranteeing Individuals’ Deposits”), the market has shifted toward disputes with regard to bidding for the sale of assets of liquidated banks. Going forward, there looms a serious court battle over the recovery of damages from owners of liquidated banks. This raises the question of whether the alleged “losses” are a crime to the former owners and top managers, as inefficiencies in the activities of the fund and its authorized persons (liquidators of banks) in asset management are often hidden.

We already know a number of issues that may have led to the insufficiency of assets in the Guarantee Fund: the intentional loss of documents; unjustified termination of security contracts; the sale of the bank’s assets at ridiculously low prices; and prolonged inactivity of the official receivers on the background of active judicial protection of borrowers. There is no doubt that the fund will pronounce those who have grabbed assets to be guilty of this failure. Including the former bank owners.

The first of the disputes between owners of liquidated banks and regulatory parties have finally reached international courts, including the European Court of Human Rights. In Ukraine, this development could pose problems. The Ukrainian section of the secretariat of the European Court is aware of this danger and is trying to prevent such disputes from being heard, but this is a separate topic.

Ultimately, the fund was not prepared on an organizational level to manage such as many complex processes and assets as it did. Its actions can, therefore, be characterized as extremely inefficient.

What are the features of judicial practice with participation of the fund?

The main feature is the rampant inequality in the position of the parties, which the fund and its representatives often absorb. For example, if a bank liquidating agent caused damage or did not fulfill current obligations under its contracts (including rental of premises, operating costs, license fees, or IT services), the recovery of damages by enforcement becomes impossible in a general manner. These requirements are included in the liquidation estate of the bankrupt bank and are satisfied from this property in the eighth line, according to Article 52 of the Law of Ukraine. That is, they are not actually satisfied at all. The winners in bidding for the sale of property of liquidated banks, which transferred funds under the agreement concluded at the end of the bidding, turn out in the same position if the bidding is subsequently declared invalid.

The inequality includes the restrictions on the imposition of court injunctions with respect to the fund and its authorized persons included in the procedural codes. This often deprives the fund’s opponents of the right to effective judicial protection in situations where it takes deliberately wrongful actions, as it issues ownership of mortgage property on already repaid loans.

This impunity often breeds corruption. The following situation clearly illustrates this fact—the largest bribe in the history of Ukraine, registered at the time of being transferred to law enforcement agencies (5 million USD), was intended for an authorized member of the fund, carrying out the liquidation of one of the banks of the third group.

How does this case relate to the damage that is caused by the banks going bankrupt today?

Compensation is mainly provided through the auction of assets of the liquidated banks and are conducted on electronic trading platforms, following the principles of a Dutch auction. At the moment, there are no complaints about the transparency and efficiency of such platforms, but poor quality preparation of lots by the fund gives rise to plenty of problems. The typical situation is related to the cases of the auction of the mortgage or claim rights based on repaid loans. Often, there is a court decision confirming the obligations to the bank under liquidation missing. Of course, the judicial conflict between the lot buyer and the debtor/mortgagor, in this case, is inevitable, but the fund does not seem to be worried.

Another typical pattern arises when bidding rights are put out to tender, for which a significant part of the documents has not been preserved. In this case, the winner of the bidding cannot realize the purchased right, and this should be obvious to the fund’s specialists. But no one informs bidders about the situation that has arisen, because in that case, no one will want to take part in the bidding.

It seems to onlookers that it is important for the fund to get money from buyers at all costs, and its consequences are not interesting. After all, it is impossible to effectively recover the money back from liquidated banks, as I have already said.

Tell us in detail about the development of judicial practice in regards to recovering damages from related parties of insolvent banks.

This practice is lacking but we do understand that this is a new trend, and the National Bank of Ukraine and the fund are just gaining experience. The bulk of such claims is still ahead. This is partly due to the fact that the exact amount of damage subject to be recovered can be ascertained only after the termination of the bank’s liquidation procedure, but until the completion of the majority of insolvent banks, liquidation is still a long haul ahead.

Today, such disputes can be divided into two trends: The first one is the collection of debts under refinancing contracts of commercial banks from their owners on the basis of surety signed by the owners. The second one claims on the basis of paragraph 6 of Article 58 of the Law of Ukraine “On Banks and Banking Activities” against persons associated with the bank.

The first public defendants in claims for the recovery of debts on refinancing were Vadim Novinsky, a guarantor of Forum Bank, and Konstantin Zhevago, a guarantor of Finance and Credit Bank, and more often the disputes are now underway. As for the recovery of losses from related parties of insolvent banks, the fund’s claim to shareholders and top managers of Brokbusinessbank for 8.9 billion UAH is already pending in court. It is also known about the Fund’s attempt to file a similar lawsuit against Active Bank related persons in the amount of 1.7 billion UAH.

As follows from the statements of the Managing Director of the Fund Konstantin Vorushilin, announced in late September, they are only the first fruits. A significant part of the 145 billion UAH, which the Fund shall return to the Ministry of Finance of Ukraine to recover borrowings, is expected to be paid off by former owners and top managers of the liquidated banks.

---------

Dynasty Law Firm became the first law firm in Ukrainian history to represent the Client's interests in the Administrative Board to review the decisions of the European Central Bank. On 25th May 2018 a managing partner of the firm, Denys Myrgorodskiy, participated in hearing on the claim of shareholders of Estonian Versobank AS against ECB decision on license withdrawal of the bank.

Related Articles

Too Good to Fail


by Best Lawyers

Sandro Abegglen discusses new regulations after financial crises, corruption, and more.

An Interview With Niederer Kraft Frey

A Message From Best Lawyers Regarding Ukraine and Russia Listings


by Best Lawyers

Best Lawyers is pausing all research efforts in Ukraine and Russia for 2023.

Ukraine and Russian Research Update

Announcing the 2022 Best Lawyers in Ukraine


by Best Lawyers

The results include an elite field of top lawyers and firms.

Announcing the 2022 Best Lawyers in Ukraine

Guidelines for Acquisitions of Infrastructure Assets


by Posse Herrera Ruiz

A Colombian firm gives merger and acquisition insights to assess risks in the purchase of potentially tainted assets.

Acquisitions of Infrastructure Assets

Solving Insolvency


by Best Lawyers

Markus Fellner discusses emerging trends in insolvency and reorganization law and the work his firm has done with the visually impaired.

An Interview With Fellner Wratzfeld & Partner

How This Firm Is Shaping the Economic Future of Ukraine


by Best Lawyers

Denis Lysenko discusses how AEQUO has helped build a new business environment.

An Interview With AEQUO

An Interview With Sayenko Kharenko


by Best Lawyers

Ukraine's 2020 “Law Firm of the Year” winner in Capital Markets Law

An Interview With Sayenko Kharenko

An Interview With Norton Rose Fulbright


by Best Lawyers

Australia’s 2020 “Law Firm of the Year” in Insolvency and Reorganization Law

An Interview With Norton Rose Fulbright

A Globalized Sprint: How Japan’s Insolvency Practice Is Expanding and Preparing for the Future


by Best Lawyers

Emerging legal trends are a relished opportunity for reorganization, while natural disasters present an opportunity for innovation.

Interview with Nishimura & Asahi Law Firm

How PLMJ's Unique Structure Shapes Its Insolvency Practice


by Best Lawyers

A leading attorney with the 2019 "Law Firm of the Year" winner for Insolvency and Reorganization Law in Portugal speaks to Best Lawyers CEO Phillip Greer.

PLMJ "Law Firm of the Year" Interview

How AEQUO Is Embracing Legal Tech


by Best Lawyers

Anna Babych discusses AEQUO's 2019 Ukranian "Law Firm of the Year" award in Mergers & Acquisitions Law with Best Lawyers.

AEQUO "Law Firm of the Year" Interview

Staying Competitive in Competitions and Antitrust Law


by Best Lawyers

Igor Svechkar of Asters talks with Best lawyers about his firm's 2019 Antitrust "Law Firm of the Year" award for Ukraine.

Asters Q&A Law Firm of the Year

An Interview With Eberhard Braun of Schultze & Braun


by Best Lawyers

The 2019 "Law Firm of the Year" winning firm was recognized in Germany for Restructuring and Insolvency Law.

Eberhard Braun Interview

Olga Prosyanyuk of Aver Lex on Her Criminal Defense Practice


by Best Lawyers

Aver Lex won the 2019 "Law Firm of the Year" award for Criminal Defense in Ukraine.

Meet Viktor Yanukovych's Lawyer

Well-Managed Insolvencies Usually Make a Difference


by Gelu Maravela, Mirela Metea, and Dana Rădulescu

From both a legal and business perspective, the critical period in any insolvency proceeding is the observation period, which is the period between the opening of the insolvency and the approval and implementation of a reorganization plan.

Well-Managed Insolvencies

Special Aspects for Attracting Investments into Ukrainian Agribusiness


by Dmytro Alexandrov

Attracting Investors Ukraine

Trending Articles

Presenting The Best Lawyers in Australia™ 2025


by Best Lawyers

Best Lawyers is proud to present The Best Lawyers in Australia for 2025, marking the 17th consecutive year of Best Lawyers awards in Australia.

Australia flag over outline of country

Best Lawyers Expands 2024 Brazilian Awards


by Best Lawyers

Best Lawyers is honored to announce the 14th edition of The Best Lawyers in Brazil™ and the first edition of Best Lawyers: Ones to Watch in Brazil™.

Image of Brazil city and water from sky

The Best Lawyers in Mexico Celebrates a Milestone Year


by Best Lawyers

Best Lawyers is excited to announce the 15th edition of The Best Lawyers in Mexico™ and the second edition of Best Lawyers: Ones to Watch in Mexico™ for 2024.

Sky view of Mexico city scape

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

Announcing The Best Lawyers in New Zealand™ 2025 Awards


by Best Lawyers

Best Lawyers is announcing the 16th edition of The Best Lawyers in New Zealand for 2025, including individual Best Lawyers and "Lawyer of the Year" awards.

New Zealand flag over image of country outline

Presenting the 2024 Best Lawyers Family Law Legal Guide


by Best Lawyers

The 2024 Best Lawyers Family Law Legal Guide is now live and includes recognitions for all Best Lawyers family law awards. Read below and explore the legal guide.

Man entering home and hugging two children in doorway

Announcing The Best Lawyers in Japan™ 2025


by Best Lawyers

For a milestone 15th edition, Best Lawyers is proud to announce The Best Lawyers in Japan.

Japan flag over outline of country

The Best Lawyers in Singapore™ 2025 Edition


by Best Lawyers

For 2025, Best Lawyers presents the most esteemed awards for lawyers and law firms in Singapore.

Singapore flag over outline of country

Canada Makes First Foray Into AI Regulation


by Sara Collin

As Artificial Intelligence continues to rise in use and popularity, many countries are working to ensure proper regulation. Canada has just made its first foray into AI regulation.

People standing in front of large, green pixelated image of buildings

Commingling Assets


by Tamires M. Oliveira

Commingling alone does not automatically turn an otherwise immune asset into an asset subject to marital distribution as explained by one family law lawyer.

Toy house and figure of married couple standing on stacks of coins

How Much Is a Lawyer Consultation Fee?


by Best Lawyers

Best Lawyers breaks down the key differences between consultation and retainer fees when hiring an attorney, a crucial first step in the legal process.

Client consulting with lawyer wearing a suit

Presenting the 2024 Best Lawyers Employment and Workers’ Compensation Legal Guide


by Best Lawyers

The 2024 Best Lawyers Employment and Workers' Compensation Legal Guide provides exclusive access to all Best Lawyers awards in related practice areas. Read below and explore the legal guide.

Illustration of several men and women in shades of orange and teal

The Hague Convention and International Custody Battles


by Alexandra Goldstein

One family law lawyer explains how Joe Jonas and Sophie Turner’s celebrity divorce brings The Hague Convention treaty and international child custody battles into the spotlight.

Man and woman celebrities wearing black and standing for photo

Filing For Divorce in North Carolina


by Melody J. King

Family law lawyer Melody King answers some of the most important questions individuals may have about filing for divorce in North Carolina.

Illustration of man and woman on paper that has been torn apart

Things to Do Before a Car Accident Happens to You


by Ellie Shaffer

In a car accident, certain things are beyond the point of no return, while some are well within an individual's control. Here's how to stay legally prepared.

Car dashcam recording street ahead