How to Improve the Enforcement Rate in Cases Where the State is a Debtor: EU Project Pravo-Justice Co-organized the Thematic Consultations

On October 3, 2022, the Ministry of Justice of Ukraine, with the assistance of the EU Project Pravo-Justice, held online consultations, as part of the monitoring of existing legislation, dedicated to: “Non-execution or Lengthy Execution of Court Decisions Where the Debtor Is a State Body, State Enterprise, Institution, Organization, or Legal Entity Forced Sale of Property of Which Is Prohibited in Accordance with the Law.” The event was attended by representatives of the Ministry of Justice of Ukraine, the Ministry of Finance of Ukraine, the Ministry of Economy of Ukraine, the State Treasury Service, the State Enforcement Service, bank community, and judges.

"The topic of today’s consultations is an extremely difficult issue. On one hand, it is necessary to eliminate the root cause that leads to the accumulation of indebtedness – social laws that are not supported by budget expenditures; a huge problem with moratoria. On the other hand, something needs to be done with the existing debts. We do have some developments on this issue, but we would like to hear your ideas so that we can work on them," said Oleksandr Oliinyk, Director of the Directorate of Justice and Criminal Justice of the Ministry of Justice of Ukraine, in his welcoming speech. Iryna Zharonkina, Key National Expert of the EU Project Pravo-Justice, addressed the participants to the event with a welcome speech. She noted the importance of the topic of the consultations, indicating that the Project had been looking into the state indebtedness under court decisions for a long time.

“We need to understand that today, according to various estimates, there are only about 3,000 state-owned enterprises, however one should not forget about 13 to 14 thousand enterprises owned by municipalities, which are also protected from the execution of certain types of court decisions,” said Iryna Zharonkina pointing out the existing problem.

Katilin Popov, International Expert of the EU Project Pravo-Justice, PEO (Bulgaria), spoke about the international experience of forced collection of debts in enforcement proceedings where the State is a debtor. According to him, there is no difference in the execution of decisions against state-owned or private enterprises in EU countries. The decisions must be enforced – all of them! However, when the State is a debtor, various scenarios are possible.

“Certain European jurisdictions allow enforcing judgments against the State if it is a debtor. When it comes to pecuniary claims, some countries in the Western Balkans, such as Serbia or North Macedonia, allow the execution of decisions, regardless of the form of ownership of the debtor. In other countries, for example, Belgium and France, it is forbidden to enforce a judgment if the State is a debtor. In such a case, the issue of indebtedness is settled at the budget expense, rather than through the enforcement procedure,” said Katilin Popov.

In his report, he questioned the main argument put forward by Ukraine to justify the non-fulfillment of its obligations under court decisions, which is the lack of budget funds.

“Bulgaria has no more money in the budget than Ukraine. However, when being a debtor, our country never avoided or delayed the repayment of debts to its citizens for the reason there was no money in the state budget,” stated Katilin Popov.

The EU Project Pravo-Justice International Expert explained that in Bulgaria, there are statutory measures in place which apply in case of untimely execution of property-related decisions.

"In Bulgaria, a penalty of 10% applies if the State fails to repay debts on time. Therefore, the state is interested in speedy execution of relevant court decisions,” explained Katilin Popov.

He also noted that there may be a political argument against the non-execution of court decisions or delay in debt repayment.

“The State ruins its authority and public trust if it fails to pay debts under court decisions,” says Katilin Popov.

Speaking of the execution of non-property decisions by the State, Katilin Popov underlined that the State should have procedural and institutional guarantees in place for the execution of such decisions.

“As to procedural guarantees, the provisions of draft law No. 5660 improve the procedure for the execution of such decisions. The relevant statutory norms are in line with best European practices and advanced experience,” added the Project International Expert.

Svitlana Kolesnikova, Deputy Director of the Legal Department, State Treasury Service of Ukraine, informed the participants of the online consultations about the latest data on the State’s indebtedness under court decisions which are guaranteed by the State, and decisions that have been submitted for execution to the State Treasury Service.

“As of September 10, 2022, the State Treasury Service has received 121,770 court decisions for a total amount of 6.6 billion UAH, including, 2,726 decisions for the amount of 147 million UAH of the first degree of precedence; 5,242 court decisions for the amount of 254 million UAH of the second degree of precedence; 98,610 decisions for the amount of 6.2 billion UAH of the third degree of precedence. The State Treasury Service initially envisaged 100 million UAH for the repayment of such debts in 2022, however after the state budget cutting; this amount has been decreased to 90 million UAH. That is, this year we do not even have enough money to pay off the debt of the first degree of precedence! “Since 2016, we have never repaid debts of the second and third degrees of precedence,” said Svitlana Kolesnikova.

In her report, the State Treasury Service representative spoke in detail about the composition of debtors of the third degree of precedence: 67%, or 528 court decisions for 4.21 billion UAH are cases where the debtors are state enterprises; 30% or court decisions for the amount of 1.9 billion UAH are cases where the debtors are, in particular, state authorities, and all other debts; 3% or decisions regarding 86,750 individuals for the amount of 170 million UAH are cases where the debtor is the Pension Fund, and they concern the collection of court fees.

Viktoria Molotylova, Senior State Enforement Officer of the Shevchenkivskyi Department of the State Enforement Service in the city of Kharkiv, Eastern Interregional Department of the Ministry of Justice (Kharkiv), delivered the report “Non-execution or Lengthy Execution of Court Decisions Where the Debtors Are State Enterprises during the online consultations.

"If we look at the statistics, in Kharkiv region alone in 2022, there have been 7,400 writs of execution, totaling to 665 million UAH, on the collection of debts from such state-owned enterprises. However, it is impossible to collect debts from them, as they are protected by numerous moratoria prohibiting the execution of court decisions,” said Viktoria Molotylova. The SEO also stated the problem of the protracted bankruptcy procedure.

“I know a state-owned enterprise that has been in bankruptcy since 2009 and has numerous creditors,” said Viktoria Molotova. Then the SEO voiced the idea regarding the need to audit state-owned enterprises.

“There are some very specific state-owned enterprises that we encounter when enforcing decisions. For example, I had the enforcement proceedings in respect of a state-owned enterprise that looked like a small room which served as a work space for a director, an accountant, and one researcher. Is it reasonable to keep such state-owned enterprises?” asked, rhetorically, Viktoria Molotova. According to her, the process of execution is hampered by insufficient automation of enforcement processes.

“Automation only applies to seizure of funds. In the meantime, not all banks have got connected to such an automated system. It is impossible to write off funds automatically; one needs to spend a lot of time for the exchange of paper requests and responses. It is advisable to automate the process of checking the debtor’s accounts or develop a chat-bot which will send appropriate requests automatically and inform the EO,” said Viktoria Molotova.

The Ministry of Justice of Ukraine plans continuing online consultations on improving the existing legislation in the field of enforcement in order to eliminate problematic aspects. The EU Project Pravo-Justice, in its turn, is ready to join and contribute to the development of the necessary legislative amendments to increase the quality and quantity of executed court decisions for greater investment attractiveness of Ukraine.