Returning Insolvent Banks to the Market: Court Practice Review

02 01 2018

Over the last three and a half years, the National Bank of Ukraine has made a great many decisions removing insolvent banks from the market. This, in turn, has given rise to the disputes in which clients of banks seek the recovery of their funds (deposits, working assets) that have been trapped in their bank accounts. However, considering the restrictions applicable during the establishment of provisional administration/liquidation of banks, not everyone, and not always, succeeds in achieving the desired result. Are there any prospects opening up for funds recovery from ‘rehabilitated’ banks?

Practice of reversal decisions regarding removal of bank from the market

According to the official website of the National Bank of Ukraine, courts have delivered judgments, which have become effective, regarding restoration of banks’ operations and/or reversal of the decisions regarding removal of ten (10) banks from the market.

The plaintiffs in these disputes are generally owners (shareholders) of the banks or the clients of banks as, for example, in the case with challenging NBU Decision No. 234 on declaring PJSC “Commercial Bank “Khreshchatyk” as insolvent of April 5, 2016.

Irrespective of the primary target of the lawsuits, which is to restore the operations of the bank, plaintiffs state their claims in different ways – seeking either the reversal of the NBU resolution on declaring the bank as insolvent (Case No. 826/665/16 regarding PJSC “Commercial Bank “Khreshchatyk”), or the reversal of all decisions of the Deposit Guarantee Fund (the “Fund”) and NBU resolutions associated with the liquidation of bank (Case No. 826/4275/16 regarding PJSC “Commercial Bank “Soyuz”).

In some cases, plaintiffs ask the court to compel the NBU to take all necessary actions to restore the bank’s solvency (Case No. 826/1162/16 regarding PJSC “Ukrinbank”).

However, irrespective of the different wording of claims, the reversal of the NBU resolution on declaring a bank as insolvent entails the reversal of all decisions and resolutions of the Fund and the NBU regarding the establishment of the provisional administration and the liquidation of the bank, since the latter were issued based on the NBU resolution only.

Thus, for example, in Cases No. 805/3464/15-а and No. 826/1162/16, courts reversed the Fund’s decisions on the establishment of the provisional administration in PJSC “Joint Stock Commercial Bank “Capital” and PJSC “Ukrinbank”, that were based on the NBU resolutions on declaring PJSC “Joint Stock Commercial Bank “Capital” and PJSC “Ukrinbank” as insolvent, which in turn were held unlawful and reversed by the court.

Practice of funds recovery from ‘rehabilitated’ banks

In case where a bank is seemingly no longer under liquidation, but its operations have not been restored yet, clients of banks flood courts with lawsuits for recovery (payment, transfer) of their funds, backing up their claims with arguments that the provisional administration/liquidation of the bank has been revoked and, therefore, nothing prevents the court to sustain their claims.

Thus, a great number of decisions were made by courts in favor of the clients of PJSC “Ukrinbank”. For example, the decisions of commercial courts in Case No. 750/5061/17 of the Court of Appeals of Chernihiv Region, Case No. 913/335/17 of the Commercial Court of Luhansk Region, in which courts relied on the fact that the individual legal acts adopted by the NBU and the Fund in respect of PJSC “Ukrinbank” were held unlawful by a court decision and did not entail any legal consequences. Hence, PJSC “Ukrinbank” was bound by contractual obligations to the plaintiff as a depositor.

Similar decisions were made by courts in favor of the clients of other ‘rehabilitated’ banks.

In view that the decision declaring the bank as insolvent and establishing of provisional administration was set aside, the Cherkasy Region Court of Appeal had sufficient grounds to sustain the claims in Case No. 711/10205/16-ц in the action filed by the depositors against Capital Joint Stock Commercial Bank PJSC. In Case No. 910/4216/17 the Kyiv Commercial Court of Appeal concluded that the bank can dispose of its funds since the liquidation procedure was found unlawful as of the time of the legal relationships in question, so that there was no such liquidation.

However, such court practice is contradicting.

In particular, in Cases No. 913/29/17 and No. 913/14/17 in the action filed by the PJSC “Ukrinbank”, the Donetsk Commercial Court of Appeal upheld the decision of inferior courts who rejected claims for recovering the indebtedness, having stated that the mere cancellation of the resolution of NBU for revoking PJSC “Ukrinbank” banking license and liquidation did not prove that PJSC “Ukrinbank” regained its bank status.

In the other case (Case No. 243/8557/16-ц) filed by a depositor against PJSC “Joint Stock Commercial Bank “Capital” seeking the protection of consumer rights, the Donetsk Region Court of Appeal rejected the claims for recovery of funds from the bank having stated that, according to the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations, PJSC “Joint Stock Commercial Bank “Capital” was in the process of its termination both as of the date such claim was filed with the court and as of the date the court tried the case on the merits, and that the plaintiff's claims might not be satisfied otherwise than within the liquidation procedure.

Thus, due to the different understanding of the 'rehabilitated' bank status, courts may consequently resolve similar cases differently.

Position of NBU

The National Bank of Ukraine reiterates that court decisions reviving the operation of liquidated banks give rise to risks for financial stability, because the comeback of such banks to the market negates governmental efforts to rehabilitate the domestic banking system. Furthermore, the National Bank notes at all times that the laws do not contain any mechanism to restore (including under a court ruling) activities of the bank when the National Bank has decided to revoke its banking license or to liquidate such bank.

Moreover, the NBU Ex-Chairperson addressed last year the Chairperson of the Supreme Court of Ukraine in letter No. 18-0005/101441, dated 14/12/2016, in which she described the situation mentioned above and stated that NBU believed that court decisions setting aside NBU decisions regarding the removal of banks from operating on the market were unlawful and unreasonable, in view of this, NBU Ex-Chairperson asked the Chairperson of the Supreme Court of Ukraine to "consider the Supreme Court of Ukraine taking actions aimed at courts applying in the same manner rules of the banking laws when they try cases for challenging NBU's decisions on removing banks from operating on the market."

Without going deep into the discussion and evaluating whether such addressing is an interference with the judiciary and an attempt to influence on the court, we note merely that the Supreme Court of Ukraine in June (27/06/2017) and in August (01.08.2017) upheld the decisions of inferior courts who reversed resolutions and decisions of NBU and Fund for removing PJSC “Commercial Bank “Soyuz” and PJSC “Commercial Bank “Premium” from operating on the market, and remanded such cases for new trials (resolution of the Supreme Court of Ukraine, dated 27/06/2017 and rendered in Сase No. 21-3739а16; resolution of the Supreme Court of Ukraine, dated 01/08/2017 and rendered in Сase No. 21-4054а16), having stated that the conclusions of inferior courts were misplaced.

Thus, the Supreme Court of Ukraine did not uphold the decisions made by inferior courts to "rehabilitate" “Soyuz” and “Premium” commercial banks.

However, notwithstanding that the Supreme Court of Ukraine upheld the court decisions reversing the decision of NBU on liquidation of “Soyuz” and “Premium” banks, the first instance court decided, in late November based on findings in a new trial of the case , that claims filed by one of the bank shareholders must be sustained, having reversed the NBU's decision on liquidation of the bank and having obligated NBU to return the banking license to PJSC “Commercial Bank “Premium”.

At the same time, in October the Supreme Court of Ukraine upheld the decisions of NBU regarding the removal of PJSC “Joint Stock Commercial Bank “Capital” and PJSC “Ukrinbank” from operating on the market.

Thus, in its resolutions, dated 24/10/2017 and rendered in Сase No. 21-1650а16 and dated 24/10/2017 and rendered in Сase No. 21-3926а16 accordingly, the Supreme Court of Ukraine set aside all judgments of inferior courts holding unlawful and invalidating NBU's resolutions and decisions of the Fund and rendered new judgments rejecting such bank shareholders' claims in full.

Moreover, the Supreme Court of Ukraine has given as reasons of its decisions that a shareholder who is not a holder of the significant share in the bank may not act as plaintiff in disputes related to appealing against decisions, actions or omissions of NBU.

What are the prospects for the clients of insolvent banks?

If clients and depositors of such “rehabilitated” bank have obtained a decision for revoking
the resolution of NBU on declaring the bank insolvent and for holding as invalid the removal of a certain bank from the market, they, of course, may expect the courts to deliver judgment for the recovery of funds on their bank accounts/deposits, provided that their claims are reasonable and properly substantiated.

However, since it is not finally clear what is the position of the Supreme Court of Ukraine in cases related to the removal of insolvent banks from the market, the question is what are the prospects that the court decisions will be actually enforced, and the funds will be recovered?

Furthermore, given that the judgments were first rendered and then reversed in the case for the removal of PJSC “Joint Stock Commercial Bank “Capital” and PJSC “Ukrinbank” from the market, there is another question: what will happen to the cases and decisions made in favor of the clients and depositors of temporarily 'rehabilitated' banks, which or a part of which was (were) potentially enforced during the period when the decisions invalidating the removal of such banks from the market were valid? Should they be reviewed in view of newly discovered facts? Or should the enforcement be reversed? Either way, you should agree that this is not the best perspective for a depositor or client of an insolvent bank.

It is the legislator who must answer all these and other questions, rather than the Supreme Court (as is desired by the National Bank). As long as there is no legislative regulation on
whether a bank may or may not resume its activities if there is a court ruling, courts will continue to tell fortunes and apply different interpretations to the status of the bank which is no longer under liquidation but whose operation is not resumed.

Published: Yurydychna Gazeta, #52, 26 December 2017

Authors: Oleg Kachmar, Volodymyr Chaban