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Despite the cessation of mass “banks slump”, litigations of shareholders and depositors of the banks being liquidated with the regulator and the Deposit Guarantee Fund of individuals (the Fund) still do not subside. The plaintiffs allege violations committed by the National Bank of Ukraine (NBU) and / or the Foundation of their property rights and interests. However, it should be recognized that in most cases such claims by the initiators of the proceedings are groundless. However, this does not indicate that a strong legal standpoint of the plaintiffs in some disputes is missing; on the contrary, a number of trials appear to be very promising for bank shareholders, as evidenced by ambiguous court practice.
The main obstacle to judicial protection of the rights of a shareholder of an insolvent bank is legislative restrictions on his rights and powers, taking into account introducing temporary administration or liquidating a bank. Thus, part 1 of Article 36 of the Law of Ukraine “On the System of Guaranteeing Deposits of Individuals” (the Law) prescribes that from the day of the commencement of the procedure for withdrawing the Bank from the market by the Fund, all powers of the bank’s management bodies (general meeting, supervisory board and the board of directors) and inspection bodies (Audit Commission and Internal Audit). At the same time, the Fund acquires all the powers of the bank’s governing bodies and inspection bodies from the day on which the temporary administration’s commencement of business and until its termination. A similar prescription is contained in clause 1 of part 2 of article 46 of the Law regarding the powers of the Fund from the date of the commencement of the bank liquidation procedure.
It is obvious that the representative of the Fund, authorized for temporary administration or liquidation of the bank, will not appeal to the regulator on behalf of the bank, which indicates a conflict of interest. Yes, and similar precedents are basically missing in practice.
Despite the existing relevant provisions of the law, the shareholders of banks had to go a long way to the Supreme Court of Ukraine (SCU) while liquidation process was going on. On October 24, 2017, the Supreme Court of Ukraine, following its judgment on the case No. 21-3926a16, concluded that, if one of the measures of influence applied to a party, the bank itself or its shareholder, who own a substantial stake, providing a decisive degree of influence on the bank’s activities, may appeal against the decisions of the NBU or its officials in court, if the decision taken by NBU had a negative impact on the property or other rights of such a shareholder.
The standpoint of European Court of Human Rights
It stands to reason, this standpoint of the Supreme Court of Ukraine is a compromise: by allowing the shareholder of the bank to defend his rights in court, the Supreme Court of Ukraine limited the circle of plaintiffs to majority shareholders. This standpoint of the Supreme Court of Ukraine has an extremely weak regulatory framework and contradicts the conclusion of the European Court of Human Rights (ECtHR), set out in the decision in the Knik case (“Knik against Turkey” – the complaint no. 53138/09), in which the ECtHR indicated that the decision to declare a takeover and sale of “D” as illegal led to consequences for both major shareholders and nonoperating (minor) shareholders, regardless of whether they were parties to the cancel proceedings or not. It is obvious that the applicant received financial damage, regardless of the number of its shares.
The European Court of Human Rights indicated that the applicant had a substantial stake with regard for the case of Camberrow MM5 AD v. Bulgaria case (complaint No. 50357/99): due to a conflict of interests between Camberrow MM5 AD and its special managers and bankruptcy managers, it was impossible for the bank itself to file a lawsuit. Moreover, the ECtHR recalls that the applicant owned a substantial interest in the amount of 98% of the total shares. He was a valid bank manager and had a direct personal interest in the consideration of this complaint. Thus, the court found that, taking into account the particular circumstances of the present case, the applicant can be considered as a victim of the alleged violations of the Convention for the Protection of Human Rights and Fundamental Freedoms (Convention), which affected the rights of Camberrow MM5 AD.
Moreover, the ECtHR reminds that the applicant owned a substantial interest in the amount of 98% of the total shares. He was a valid bank manager and had a direct personal interest in the consideration of this complaint. Thus, the court found that, taking into account the particular circumstances of the present case, the applicant can be considered as aggrieved person of the alleged violations in the sense of the Convention for the Protection of Human Rights and Fundamental Freedoms (Convention), which affected the rights of Camberrow MM5 AD.
However, this decision does not mean that the minority shareholder does not have the right to judicial protection. In a number of other decisions, the ECtHR states that a shareholder of a bank has a right to trial with a view to protect his rights from unlawful actions of the state towards the bank itself: “Provided that the procedure established by law does not provide for the possibility of the shareholder’s participation in appealing the regulator’s decision on liquidation, and the bank is actually under the control of the liquidation commission, there is a violation of the right of access to the court … Moreover, interference with the ownership of the bank’s property was not ensured by adequate safeguards against arbitrariness, and therefore, is not legal …” (“Feldman against Ukraine” (complaint No. 76556/01 and No. 38779/04).
Moreover, in the case of “The Credit and Industrial Bank versus the Czech Republic (complaint No. 29010/95), the court found that “in the interests of the company, its shareholders (members) can appeal to court, and they keep it almost completely under control, if the company itself does is not able to protect their interests through bodies acting on the basis of statutory documents, and in case of liquidation or bankruptcy – due to liquidators or arbitration managers.” It follows from this that the ECtHR actually recognized the right of the majority shareholder to represent the issuer of shares in court, if this is beyond reach to the issuer due to the inaction of its bankruptcy trustees.
This standpoint is also applied in the Court of Justice of the European Union, which on September 12, 2017 stated the following based on the order No. T-247/16 in a dispute between the Libyan bank and the European Central Bank: In this case, since the contested decision entails the revocation of the permission of the bank and, accordingly, it impedes the achievement of its goal and economic activity, it directly affects the legal status of applicants-shareholders … the decision will certainly affect the nature and extent of their rights. Firstly, the right to receive dividends from the profits of a commercial company, that is no longer authorized to conduct its commercial activities, necessarily becomes illusory. Secondly, exercising the right to vote or the right to participate in the management of the company becomes essentially formal, since the result of the decision being challenged is to prohibit the bank from achieving its goals. ”
At the same time, there is no doubt that the shareholder of the bank has the general right to recover damages caused to him by the regulator as a result of the court’s invalid decision to classify the bank as insolvent, or to open a liquidation procedure. The grounds for such a claim are the illegality of the relevant decisions established by the court and the proven amount of damages, for example, in the form of the market value of the shares owned by the plaintiff.
At the same time, recovery of multimillion-dollar losses from the National Bank of Ukraine no longer seems so fantastic – on March 4, 2019, the Economic Court of Kiev made a decision on case No. 910/9095/18, which charged UAH 129 million to the shareholder of PJSC “R”.
In this regard, the outcome of disputes with the regulator still cannot be reckoned a foregone conclusion, which is considered good news.