The Verkhovna Rada (Parliament) of Ukraine adopted on 13 May 2020 Draft Law No. 2571-д on Amendments to Certain Legislative Acts of Ukraine to Improve Specific Mechanisms for Banking Regulation (so called “Anti-Kolomoisky Law”) (the “Law”). The President came to the Session Hall of the Verkhovna Rada just before the voting to stress personally how important its adoption was.
However, not so long ago, on 2 April 2020, Ihor Kolomoisky said that, if such Law was adopted, he would have to resort to the European Court of Human Rights (“ECHR”) to appeal against the violation of his rights guaranteed by the Convention for the Protection of Human Rights and Fundamental Freedoms (the “Convention”).
So, being intrigued who is ultimately right, we have decided to scrutinize this Law. Considering that it deals with lots of issues related to the operation of the Ukrainian banking system, in this article we turn our attention to an analysis whether former owners of banks that have been already nationalised would be able to restore their rights.
Does the right to resort to the ECHR exist?
In the first place, we should find out whether such issues fall within the ambit of the Convention and whether the bank owner may file the relevant complaint with the ECHR.
Pursuant to the ECHR case law, both a banking license (Capital Bank AD v. Bulgaria, paras 130 to 131) and shares in the company (Sovtransavto Holding v. Ukraine, para 91; Shesti Mai Engineering OOD and Others v. Bulgaria, para 77) are “possessions” within the meaning of Article 1 of Protocol No. 1 to the Convention (“Protection of Property”). Moreover, shares are not only the property representing a share in the company’s assets but also the authority (controlling interest) vested in their holder to manage the company (Sovtransavto Holding v. Ukraine, para 91).
Therefore, if a bank is deprived of its license and its owners – of their shares, such actions amount to a serious interference with the rights guaranteed by Article 1 of Protocol No. 1 to the Convention (Cıngıllı Holding A.Ş. and Cıngıllıoğlu v. Turkey, para 49). For the same reasons, such actions may be good grounds for the former owners to file relevant complaint with the ECHR.
May the ECHR potentially find a violation of Article 1 of Protocol No. 1 to the Convention?
The “interference” with rights guaranteed by the Convention as such does not automatically amount to a violation of such rights. The interference would meet the requirements of the Convention if it (1) is lawful; (2) pursues a legitimate aim; and (1) is necessary and proportional in view of such aim. If at least one of these conditions is not met, there is a violation of the Convention.
Certainly, the final answer to the question of whether the bank was wound up in line with the Convention provisions may only be given after it is possible to analyse how the courts applied and interpreted the Law. However, even now it appears that some key provisions of the Law might encroach on the rights of former bank owners, guaranteed by Article 1 of Protocol No. 1 to the Convention. We are going to focus specifically on the analysis of the such provisions.
We will also avoid analysing whether the possible interference with the owners’ rights pursues legitimate aim, since it seems very unlikely that the ECHR questions its existence. Instead of this we will focus on analysing whether the measures of interference provided by the Law meet the criteria of “lawfulness” and “proportionality.”
Regarding the lawfulness of the interference
To be lawful, an interference should not only follow the “letter of the law”, but the law as such should be clear, foreseeable and provide sufficient guarantees against the risk of abuse and arbitrariness.
First of all, we should note that the Law introduces a brand new legal regulation of the disputes as to the lawfulness of the decision to withdraw a bank from the market and setting an amount of compensation if such withdrawal is found to be unlawful. Furthermore, the Law is to be applied retrospectively to the circumstances that took place 3 to 5 years ago. For example, according to the “new” rules, when deciding whether the decision to declare the bank insolvent was lawful, the court should consider not only information available at the time the relevant decision was made, but any information that was discovered subsequently, i.e. after government representatives actually took charge of the bank and put all its activities under a magnifying glass. Such an approach raises significant concerns in terms of foreseeability of the applicable law, as well as its proportionality (see below).
In addition, the Law contains a provision, under which, when considering whether it was lawful to declare the bank insolvent or to nationalise it, the court should rely upon “quantitative and qualitative figures and conclusions” made by the relevant government bodies (National Bank of Ukraine, etc.), and should not question those figures, save for “manifest” errors and discrepancies. As a result, courts are actually permitted solely to examine the compliance with the decision-making procedure, rather than the substance of the decision. Such approach significantly restricts the possibility of challenging decisions aimed at withdrawing a bank from the market and puts an aggrieved party in a disadvantageous position as compared to the respondent state authorities (the National Bank of Ukraine, the Deposit Guarantee Fund and other institutions involved).
Moreover, no one conceals that the key purpose of this Law is to prevent Privatbank from being returned to the former owners, which fact itself is contrary to the rule of law principle. In the case of Baka v. Hungary, the ECHR noted that any interference should be based on generally formulated legal provisions and that the laws aimed against a specific person are contrary to the rule of law.
In view of the aforementioned remarks, we may suggest that a number of provisions in the Law do not meet the “quality of law” requirement and might cause a violation of Article 1 of Protocol No. 1 to the Convention if applied.
As regards the proportionality of interference.
As regards the prospects of reclaiming the bank. Pursuant to the Law if the bank’s withdrawal from the market is found unlawful by the courts the only potential implication is an award of compensation. The Law excludes any prospects of reclaiming the bank by the previous owners.
In view of this, we should note that the ECHR adheres to the position that the state should take all necessary actions to restore the violated right as fully as possible. In this context, the first remedy is restitutio in integrum, i.e., restoring the parties to the position that existed before their rights were violated (Papamichalopoulos and Others v. Greece, para 34). However, in terms of restitutio in integrum, the return of the bank is not the only option. Depending on the extent of the damage caused to the owners, it may be about giving a share in or participation in the management of the new bank, etc. (Cıngıllı Holding A.Ş. and Cıngıllıoğlu v. Turkey, para 43). The latter options may be acceptable if, for example, the bank whose shares were withdrawn still exists.
Certainly, there might be situations when the award of compensation is the only option. However, restitutio in integrum should always remain as an available option whilst the full ban on reclaiming an asset is absolutely disproportional measure (see, in this context, Capital Bank AD v. Bulgaria (paras 135 to 140).
As regards the award of compensation. If full or at least partial restitution in integrum is impossible, a compensation for the value of the confiscated or expropriated property is, from the perspective of the ECHR, an integral element of remedying the violation. The mere fact that no compensation has been awarded may as such give rise to a violation of the rights guaranteed by Article 1 of Protocol No. 1 to the Convention (Kryvenkyy v. Ukraine (para 42) and Svitlana Ilchenko v. Ukraine (paras 73 to 75).
Moreover, the compensation amount does matter here. A compensation below the market value of the property may be awarded under exceptional circumstances only. Such exceptional circumstances may exist when the confiscation or expropriation pursues the aim “of economic reform,” or is designed “to achieve greater social justice,” is carried out “for the purposes of fundamental changes of a country's constitutional system” or in the context of a “change of political and economic regime” (see, for example, judgment in the case of Urbárska obec Trenčianske Biskupice v. Slovakia). Usually, it is a full compensation that is deemed to be “reasonably related” to the value of the property (see judgment in the case of The Holy Monasteries v. Greece», para 71 and Scordino v. Italy (no. 1), paras 99 to 104).
It’s worth noting in this context two cases considered by the ECHR, Cıngıllı Holding A.Ş. and Cıngıllıoğlu v. Turkey and Reisner v. Turkey. These cases were about compulsory withdrawal from the market of Demir Bank – one of the major banks in Turkey, which was initially transferred into possession of the state and subsequently sold to HSBC. The applicants, majority (Cıngıllı Holding A.Ş. and Cıngıllıoğlu v. Turkey) and minority (Reisner v. Turkey) shareholders of the bank challenged the decision to declare the bank insolvent and its subsequent nationalisation. The courts (after the bank had already been sold to HSBC) found that the above decisions were unlawful. After this, the applicant in one of the above cases (Cıngıllı Holding A.Ş. and Cıngıllıoğlu v. Turkey) also filed a claim to invalidate the agreement under which the bank was sold to HSBC. The courts allowed this claim as well. However, nothing was done with the view to enforcing the above judgments and restoring the applicants’ rights.
In its judgments, the ECHR stated that, since the Turkish courts found that the actions of the state authorities were unlawful, they were unlawful in the light of the Convention as well. As a result, it found violation of Article 1 of Protocol No. 1. In the case of Reisner v. Turkey, the ECHR also added that withdrawing the bank from the market without any compensation imposed an excessive burden on the applicant i.e. it was disproportional measure from the Convention perspective.
Due to complicated calculations of the compensation amount, the ECHR decided to tackle separately the issue of just satisfaction. In the case of Reisner v. Turkey, the Court ordered compensation for the value of the shares owned by the applicant at the time the bank was withdrawn from the market.
The judgments concerning just satisfaction in the case of Cıngıllı Holding A.Ş. and Cıngıllıoğlu v. Turkey has been delivered only in 2020. Since Turkey came up with a new remedy the ECHR struck off the case from the list of cases and proposed the applicant to exhaust thit first. The court noted that, if such a remedy turned out to be ineffective, it could resume examination of the applicant’s case. In view of the Court’s findings in the above cases, there remains no doubts that the applicant may claim compensation for pecuniary damage for the value of the shareholding withdrawn from him \ her.
In view of the above, the mechanism proposed in the Law to determine the amount compensation raises serious concerns as to its fairness:
- In order to evaluate the shares and calculate the actual amount of compensation, the court is obliged to engage exclusively an international audit firm that meets requirements of the National Bank of Ukraine;
- The valuation of shares is based on an extremely doubtful principle, saying that “if the bank’s assets are less than the liabilities, the shares are worth nothing; if the assets are bigger than the liabilities, this still means nothing”;
- For valuation of shares, it is the court’s findings whether government bodies acted lawfully that will be taken into account, while such findings are to be based fully on the data provided by the same government bodies (see above);
- The valuation of shares should rely also on the information procured by government bodies after nationalisation or liquidation of the bank.
Therefore, an amount of compensation may be determined exclusively by the company with which the defendant will be pleased and based on the data furnished or – what is even worse – created by the defendant.
We should note again that all these rules will apply retrospectively to banks withdrawn from the market some years ago, at which time such rules were not even contemplated. Such a retrospective application of laws has been one of the compelling arguments for the ECHR to find a violation (N.K.M. v. Hungary (para 74).
Therefore, in view of the above provisions of the Law, there may be a situation when, in spite of the courts’ findings that the bank was unlawfully withdrawn from the market, such bank (share or controlling interest therein) may be neither reclaimed, nor its former owners may receive an adequate compensation for it. If so, the only thing left for them to do will be to prove the amount of compensation in the ECHR. Eventually, the state may pay for the ECHR’s more than the IMF’s tranche, for obtaining of which the Law was originally adopted.
Summarizing the above-mentioned facts, we recommend to all of those who still believe that the ECHR does not award large amounts of compensation to review the judgment concerning just satisfaction rendered in the case of OAO Neftyanaya Kompaniya Yukos v. Russia. It is the case in which ECHR awarded to the company’s shareholders a compensation of EUR 1,866,104,634.
Published: Lexology, 12 May 2020
Authors: Markiyan Kuchytskyy, Markiyan Bem