EU Project Pravo-Justice held a round table on how Ukraine’s sanctions policy impacts bankruptcy procedures and enforcement proceedings

On December 15, EU Project Pravo-Justice held a round table “Nationalizing assets of the aggressor state and sanctions: impact on bankruptcy procedures and enforcement proceedings.” The event was attended by Members of Parliament, representatives of the Ministry of Justice of Ukraine, NACP, ARMA, Independent Association of Banks of Ukraine, National Association of Bankruptcy Trustees of Ukraine, Association of Private Enforcement Officers, and advocates.

The event started with a welcome speech by Iryna Zharonkina, Component Lead on Property Rights Protection and Enforcement, EU Project Pravo-Justice.

“According to the information available, today there are about 20,000 companies whose ultimate beneficiaries or founders are citizens of Russia and Belarus operating in Ukraine. Only a small share of such companies is subject either to sanctions or nationalization and confiscation. Today, everyone is concerned about legal consequences of these mechanisms and procedures, how to challenge them and how it will be possible to use the property of these companies and the Russian Federation to compensate for the damages our state and citizens have suffered and still suffer,” said Iryna Zharonkina.

Next, Oleksii Movchan, Member of Parliament and representative of the Committee of the Verkhovna Rada of Ukraine on Economic Development took the floor. He covered MPs’ plans and efforts to further improve current legislation on sanctions. The MP reported that there have been outlined “three streams” for nationalizing the Russian Federation’s assets – sovereign assets; assets belonging to persons subject to sanctions who directly participated in inciting armed aggression (oligarchs); assets of persons that have not been proven to have participated in inciting armed aggression against Ukraine or to have made respective legislative decisions, but they are residents of the Russian Federation and cause some negative influence on the situation in Ukraine through their assets.

“Having analysed current legislation on sanctions, we have made several conclusions. The first is that the forced sale of sanctioned assets should be applied after the HACC has made its decision. We provide for clear mechanisms in the draft law. The second one is to strengthen ARMA’s institutional capacity and active position in searching for assets. The third one is to introduce tools to enable transparent identification of the manager and the transparent sale of confiscated assets. After confiscation, such assets must be sold immediately. The state does not need numerous cars or estates of the persons subject to sanctions. The state needs the funds collected from their sale,” Oleksii Movchan said.

In his speech, Oleksandr Oliinyk, Director of the Directorate of Justice and Criminal Justice, said that since 2014, national courts have issued more than 150 decisions on compensation for damages caused by the Russian Federation. They have all entered into force and are at the stage of enforcement. However, these judgments cannot be enforced at this stage since Russia as a state enjoys judicial immunity.

“International law was not ready for such blatant disregard for all the principles of jurisprudence. Therefore, there is now sort of a legal vacuum on how to set up a mechanism for effective enforcement of these judgements,” said Oleksandr Oliinyk. He added that for more than a year, the Ministry of Justice has been analysing international experience, jurisprudence of foreign and international courts, looking into the opinions of leading Ukrainian academia representatives and practitioners regarding enforcement of judgments in cases where the Russian Federation is a defendant. We have monitored this issue and drawn up a report in which we offer 4 ways for debt collectors to collect the damages they have incurred because of the Russian Federation. For each respective option, we have set out the possible risks. We are now discussing which of the options to choose with the Ministry of Justice,” said Oleksandr Oliinyk. He mentioned that the presentation is tentatively planned for the end of January-February 2023.

Iryna Serbin, Head of the Sanctions Policy Department at the Ministry of Justice of Ukraine, covered practical aspects of implementing sanctions policy, in particular, in bankruptcy cases. “The state’s sanctions policy is primarily aimed at protecting national interests and not harming the economy,” said Iryna Serbin.

According to her, it would be feasible to create a single official register of persons subject to sanctions and ensure information exchange with other state registers. She also voiced the opinion that the regulator should develop a general clarification for bankruptcy trustees, public and private enforcement officers on how they should act to comply with current and legislation on sanctions.

“Here it should be borne in mind that in each individual case, for example, regarding the actions taken by bankruptcy trustees, the commercial court which regulates the respective disputed relations, must have a final say,” added Iryna Serbin. In the future, such jurisprudence could be taken into account by MPs when amending legislation.

In his intervention, Serhii Demchenko, Member of Parliament and representative of the Committee on Legal Policy of Verkhovna Rada of Ukraine, emphasized that it is necessary to think of the consequences if mistakes are made while implementing the state’s sanctions policy.

Serhii Demchenko drew the attendants’ attention to a challenge, “It is necessary to think about the possible consequences if certain procedures regarding the assets of persons subject to sanctions are challenged in national courts and in the ECHR. We need to think about how to compensate damages caused because a state made a mistake by selling property subject to sanctions quickly.”

Andrii Pasichnyk, Head of the Department on Full Background Checks of the NAPC, covered potential risks of implementing some sanction mechanisms that are already in place, namely the ones under the Law on the Nationalization of Property of the Aggressor State and the Criminal Procedure Code of Ukraine. At the same time, he noted that sanction mechanism provided for in the Law “On Sanctions” is the most balanced option.

“It takes into account ECHR jurisprudence and does not contradict our legislation. There are reasons to believe that it is quite probable that HAAC judgments that are now being adopted and that will be adopted will be upheld in the ECHR, if challenged. Of course, the Law can and should be improved in terms of statutes of limitations, case consideration, and evidence,” Andrii Pasichnyk said.

He also advised that when working on amendments to the law “On Sanctions”, legislators should set forth a mechanism limiting the possibility of placing the corporate rights of the enterprise subject to sanctions that has been sold in the jurisdictions that do not provide information about the owner of the property.

Dmytro Zhoravovych, Acting Head of ARMA spoke about legislative initiatives under martial law – the ones that have already been implemented and the ones in the pipeline. He covered in detail draft law No. 8184 which should enable ARMA to manage corporate rights more effectively in cases where citizens of Russia or Belarus are the ultimate beneficial owners of corporate rights.

“During the war, ARMA is authorized to manage not only assets in criminal proceedings, but also via the sanctions mechanism. Currently, respective rules are contained in the law on sanctions, they are not set forth in our special law on ARMA. Therefore, it is necessary to synch the legislation with the detailed rules on our powers,” Dmytro Zhoravovych noted.

Olena Korobkova, Head of the NABU Council, covered the challenges faced by representatives of the banking community that arise from the state implementing its sanctions policy. She reported that NABU appealed to the Government in view of the need to partially unblock the sale of property suspended by Resolution 187 “On ensuring the protection of national interests in future lawsuits by the state of Ukraine because of military aggression.”

“The thing is that Ukrainian banks, in particular, state banks, having started the debt collection procedure, cannot satisfy their claims from property belonging to persons associated with the aggressor state. The intention was to hurt the aggressor state, but the banking system of Ukraine is the one got hurt,” said Olena Korobkova. She informed the amendments NABU proposed to make to the aforementioned resolution.

Vladyslav Filatov, Director of the Bankruptcy Department of the Ministry of Justice of Ukraine, said that today there are discussions on what to do with the debtor’s property in bankruptcy cases where the debtor himself suffered from armed aggression.

“Different concepts are voiced, but a unified position has not yet been developed,” said Vladyslav Filatov.

Oleksandr Bondarchuk, Head of the National Association of Bankruptcy Trustees of Ukraine, voiced the point that it is not necessary to introduce extra moratoria and there is no need to suspend bankruptcy procedures.

Olena Volianska, national expert of EU Project Pravo-Justice, highlighted the challenges in applying the legislation on sanctions, moratoria and nationalization in bankruptcy procedures that involve persons related to the Russian Federation. She presented the jurisprudence on this issue.

Vitalii Chepurnyi, the Head of the APVU, drew the participants’ attention to the fact that today the law “On Enforcement Proceedings” does not govern the actions the enforcement officer should take if the enforcement documents are presented or enforcement proceedings are opened where debtor or the debt collector is the person subject to sanctions.

“There are a number of issues that need to be clarified. For example, who should close enforcement proceedings if the judgement cannot be enforced due to sanctions? Should the funds collected by the enforcement officer be transferred to the account of the debt collector, the person against whom sanctions have been imposed?” Vitalii Chepurnyi said.