Crux (#03 March 2014)

Judicial Practice: Revising Remedies and Opportunities

Since the situation in our country is undergoing dramatic changes on a week to week and day to day basis, the credibility of the court system is extremely low. Professional and social demands for changes have crossed the point of no return. We asked several experts to share their views on recent judicial practice.

Anton Molchanov, senior associate, Arzinger

Anton Molchanov, senior associate, Arzinger

What types of cases are considered by Ukrainian courts in recent years most often? What is it related to? What is your prediction regarding clients’ demand for representation for various types of disputes?

For last three years Ukrainian litigation field has definitely formed a geometrical model of sinusoid where all indexes are subject to constant traveling from their lowest to the highest. From 2010 Ukrainian Themis was often requested for administrative disputes where in the vast majority of cases business entities and ordinary people fought with the government for tax, social and land benefits. In contrast to this huge administrative caseload, commercial litigation significantly ceased, most likely because of court fees incommensurate with the quality of Ukrainian commercial justice. Nevertheless, commercial courts examined sufficiently large number of property claims, leaving also some considerable place for bankruptcy, which in Ukraine’s economic realities is increasingly being used by unfair debtors as a universal remedy for any creditor’s claim. It is worth to note that the market survived a noticeable decrease of investment disputes due to deteriorating investment attractiveness of Ukraine from 2011 to the present time. The fall of V. Yanukovich’s government as a result of Euromaidan protests will most likely open the broadest opportunities for another wave of property claims, e. g. concerning redistribution and reprivatisation. The process has already been started by the Verkhovna Rada by adopting a decree on restitution of the infamous Mejihirya residence — and this seems to be only a first step on the road where hunters for property all in all become the hunted.

Oleksandr Denysenko, attorney at law, Ilyashev & Partners

Oleksandr Denysenko, attorney at law, Ilyashev & Partners

What issues are currently most urgent in terms of administration of justice?

One of the key problems of the justice administration in Ukraine is the absence of civil society control over judges. This is the main reason why there are strange or even extraordinary decisions in Ukrainian courts. The judge who is adjudicating such a decision is confident of his impunity. In Ukraine the main authorities responsible for disciplinary liability of judges are the High Qualification Commission of Judges (in relation to judges of local and appeal courts) and the High Council of Justice (in relation to judges of high specialized courts and the Supreme Court of Ukraine). These bodies should react to petitions from anyone, who is aware of any fact of undue behavior of a judge. According to the previous years’ statistics, less than 1% of petitions lead to disciplinary sanctions for judges. Taking into account a matter of common knowledge about the level of Ukrainian justice, such a low percentage rate proves that there are problems in exercising of their functions by the above mentioned bodies. The existing analysis highlights problems in this sphere such as imperfect legislation, political pressure, contradictions in the disciplinary proceeding practices and overloading due to numerous petitions. Resolving these problems should become an integral part of Ukrainian judicial system reform.

Alexey Pokotylo, senior associate, Konnov & Sozanosvky

Alexey Pokotylo, senior associate, Konnov & Sozanosvky

What is the way to solve the issue of dual jurisdiction of disputes (when one dispute is concurrently considered by courts of different jurisdiction)?

In Ukraine if a dispute is brought entirely or partially before two different courts, and both courts determine that they are competent to try the case, then it is likely that the situation will not resolve until one of these courts ultimately renders judgment on the merits of the case, or until the case is reviewed by the Supreme Court of Ukraine. Through the example of a number of cases where there was such a conflict of jurisdiction (primarily between commercial courts and administrative courts), it can be said that, once jurisdiction is taken and a case is set for hearing, neither commercial nor the administrative courts tend to dismiss the case on the basis that it is tried by another court. With inconsistent legislation and no effective way for a court administration to check if a similar dispute is brought before a court of another jurisdiction, there is no universal remedy for a conflict of jurisdiction in Ukraine.

Maxim Korchagin, senior associate, Antika Law Firm

Maxim Korchagin, senior associate, Antika Law Firm

How does the practice of litigation to collect debts form?

Recently the general trend in Ukraine has been aimed at reducing the number of court disputes due to the lack of stability in the economy and failure of trust to the court system, which is why the market participants preferred the out-of-court mechanisms to protect their rights. Therefore, the number of disputes related to debt recovery has decreased.

However, as stated trends appeared in all types of cases, the number of disputes related to debt recovery, along with disputes related to property rights as well as disputes with government authorities participation, remained almost unchanged.

Also, in recent years the trend to submit disputes related to debt recovery to arbitration, including foreign ones, has been becoming more active. Again, this is taking place due to the possibility to consider the case quicker and to pay more attention not only to legal provisions but to evaluation of dispute participants’ behavior as well as with respect to principles of good faith and reasonableness.

Moreover, the number of applications to the court from government authorities that is connected with the aggressive financial policy of the government aimed at budget replenishment may be mentioned.

It is very difficult to predict any further perspectives taking into account recent events in Ukraine. Nevertheless, if the economy is liberalized and shows positive trends, trade transactions are supposed to be activated and, respectively, the number of court cases between private persons.

Andriy Pozhidayev, senior associate, Asters

Andriy Pozhidayev, senior associate, Asters

What is the situation with corporate disputes?

Ukrainian law fixes strict rules on, firstly, the possibility to adjudicate corporate disputes in non-Ukrainian forum, and, secondly, the possibility to subject corporate relations to foreign law. However, corporate regulation is rather fractionary. Questions arise when dividing a line between corporate and not so corporate disputes.

One category of such disputes is related to assignment of corporate rights. Still there is no consistency on qualification of such disputes, especially when both parties to an assignment’s agreement are shareholders of the same company. However, an assignment agreement is to be considered as a civil contract on transfer of title to shares/part in the company’s interest (if without prejudice to rules on right of priority). Such objects of assignment in this case should be considered as proprietary rights rather than corporate rights emanating from them.

Therefore, disputes relating to assignment contracts do not fall within exclusive competence of commercial courts. Depending on who the parties to the dispute are, it can be adjudicated in general courts (if at least one of the parties is private person) or in commercial courts (if both parties are legal entities/entrepreneurs). Furthermore, such disputes involving non-residents (foreign element) can be adjudicated in non-Ukrainian forums, for instance, by virtue of arbitration.

Another question of not so corporate disputes relates to the following. Ukrainian law establishes that agreements aimed at subjecting corporate relationships to foreign law should be deemed as null and void ab initio (since such agreements are acts of evasion of law). This idea is rather good but not devoid of loopholes. Ukrainian law and the court system are formalized. The courts are not expected to pierce the corporate veil and it leaves space to think about.

Vitaliy Kornev, associate, Asters

Vitaliy Kornev, associate, Asters

How did the judicial practice change in bankruptcy cases in view of the new version of the On Bankruptcy Act?

The amended On Bankruptcy Act has been in operation for a little more than one year. Therefore it is not probably accurate to conclude that court practice in bankruptcy cases has changed drastically or significantly. It still needs to be worked out and “polished”. One year is not a sufficient period of time to establish a new and consistent court practice. Generally, court bankruptcy proceedings stay the same in nature. However, it is worth naming certain positive changes introduced by the amended On Bankruptcy Act. Such changes are already in operation and are believed to be in efficient and fully-fledged application in the near future. Firstly, a liquidator, receiver or administrator of debtor’s assets is to be appointed via a computerized automated system. Such a “random-choice” approach excludes, to some extent, the possibility for appointment of liquidator, receiver or administrator “loyal to creditor or a debtor”. However, “loopholes” for loyalty are not totally closed. Secondly, debtor’s assets are to be sold via electronic public bidding. Theoretically, such scenario of electronic auctions should ensure that disposal of debtor’s assets to be “independent”, simple, transparent and impartial. There is another innovation effective from the January of this year that concerns announcements on bankruptcy proceedings. All announcements/notifications on commencement of court bankruptcy proceedings are to be published on the official website of the Higher Commercial Court of Ukraine. This step enables creditors to monitor debtor’s financial soundness in the most simple and effective way. Furthermore, such a system of notification minimizes the  chances to default on the 30-day period for submission of creditors’ claims. To conclude, the amended On Bankruptcy Act has been in force for a rather short period of time. Court practice is at the stage of development and there are some positive changes. At the same time, certain provisions of the amended On Bankruptcy Act require further revision.

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