Supreme Court’s Grand Chamber Confirms Unlawfulness of Siphoning Off Assets from the UPB
The Grand Chamber of the Supreme Court examined an “exclusive legal issue” of the application of consequences of the invalidation of void transactions under Article 38 of the Law of Ukraine “On Deposit Guarantee System” in the case of the unlawful siphoning-off of assets pledged by TDV Meblevyi Kombinat Stryi from the Ukrainian Professional Bank (“UPB”).
On January 11, 2022, the Grand Chamber of the Supreme Court examined precedent case No. 910/10784/16. It ruled to satisfy the cassation claims of Investohills Vesta Financial Company and the Deposit Guarantee Fund against the Resolution of the Northern Commercial Court of Appeal of January 19, 2021, and the Decision of the Commercial Court of the City of Kyiv of November 20, 2019, on the case based on a claim by the Ukrainian Professional Bank against FC Aurum Finans, Gurman 2014 LLC, with Investohills Vesta Financial Company, the Deposit Guarantee Fund, the National Bank of Ukraine, and TDV Meblevyi Kombinat Stryi as the third parties, with regard to the application of consequences of the invalidation of void transactions to the claim assignment contracts between the Ukrainian Professional Bank and Aurum Finans in respect of liabilities of TDV Meblevyi Kombinat Stryi.
Also, the ruling reversed the decision of the Commercial Court of the City of Kyiv dated November 20, 2019, and the Resolution of the Northern Commercial Court of Appeal dated January 19, 2021, and issued a new decision. Therefore, the Ukrainian Professional Bank’s claim was partially satisfied.
The exclusive legal problem consisted in the existence of divergent case law in the Commercial Court of Cassation and the Civil Court of Cassation as a part of the Supreme Court with regard to the application of legal rules governing the consequences of the invalidation of a void transaction entered into between a bank and the bank’s client during the period from the date of the bank’s categorization as a problem bank and the date of the bank’s categorization as an insolvent bank, as well with regard to the settlement of accounts under the contract through the bank’s internal account, while a resolution of the Board of the National Bank of Ukraine requires banks to settle accounts in domestic currency solely via the correspondent account held with the NBU during the period of the special control regime.
On July 25, 2022, the Grand Chamber of the Supreme Court issued a full text of the court’s resolution on this case, together with the descriptive and rationale section of the court’s decision.
For instance, the court resolution finds that “Adjusting a bank’s balance sheet structure (changing the accounting for monetary liabilities by transferring funds from one account to another account within the same bank without receiving real funds and without posting the funds to the correspondent account if the relevant restriction has been imposed) demonstrates the absence of payment under the transaction (the settlement of accounts under a contract) and, together with other circumstances of this case, is a sign of the invalidity of the assignment contract based on Article 38(3)(1) of Law No. 4452-VI. This contention is supported by Resolution of the National Bank of Ukraine No. 293/BT finding the Ukrainian Professional Bank a problem bank; it restricts the bank requiring it to settle accounts solely via its correspondent account; it is also supported by item 1.12 of the Instruction on Application of the Chart of Accounts for Banks of Ukraine approved by NBU Resolution No. 280 of June 17, 2004.
Thus, considering the restrictions imposed by NBU Resolution No. 293-BT categorizing the Ukrainian Professional Bank as a problem bank and imposing the regime of special control over operations of the bank, the transactions of the problem bank and its clients should have been carried out using the bank’s correspondent account held with the NBU. The transactions should have been posted as debits/credits from/to the client’s account and credits to the bank’s own account. The lack of postings reflective of the existence of funds owned by the assignee of claims on the bank’s correspondent account held by the NBU and the failure to post the contentious banking transaction to the said account is indicative of the lack of funds on the correspondent account; making a payment using such accounts outside the correspondent account is indicative of the free-of-charge basis of the contract irrespective of the availability of a payment order to transfer funds.
Items 8.26 and 8.27 of the court’s resolution find that “the transfer of funds under the contract took place by debiting Aurum Finans’ current account on the date of entry into the claim assignment contract (May 27, 2015), instead of using the correspondent account held with the NBU. This manner of payment, contrary to the resolution prohibiting the settlement of accounts in this manner, made it impossible for the NBU to control the transaction in question and gave Aurum Finans preference versus other creditors. Having received the claim upon the mortgaged and pledged property comprising a furniture factory as an entire business unit and having paid an amount that equals the balance of the said account, Aurum Finans effectively obtained preference in terms of the compensation for its potential losses caused by categorizing the bank as insolvent by foreclosing the property in question, being treated preferentially in comparison with other creditors of the bank that have not been granted the right in question.
Thus, the Grand Chamber of the Supreme Court has examined all circumstances of the case in question and presented a legal stance that confirms the unlawfulness of siphoning off the liquid assets from the Ukrainian Professional Bank on the eve of the appointment of the temporary administration to the bank by entering into free-of-charge claim assignment contracts that grant preferences to some creditors versus others, resulting, inter alia, in the insolvency of the financial institution.
In fact, the Grand Chamber confirmed the unlawful and void nature of transactions performed by many Ukrainian banks employing unlawful intrabank postings just before the appointment of their temporary administrations by the DGF.
The legal stance in this case has precedence for other similar cases and must be considered by courts of all instances and jurisdictions while examining such cases.
According to the earlier media reports, as specified in the instrument of the indictment, a meeting of the Supervisory Council and the Management Board of the Ukrainian Professional Bank took place on May 26, 2015, and decided to enter into a contract with Aurum Finans. Under this contract, the Ukrainian Professional Bank assigned its claims under loan agreements with various legal entities to the firm in question.
The National Bank of Ukraine found the Ukrainian Professional Bank insolvent on May 28, 2015. On May 29, 2015, the DGF appointed temporary bank administration. Most assets were siphoned off from the bank on the eve of this appointment. At that time, Oleksii Karhapolov was the Ukrainian Professional Bank’s CEO.
The DGF invalidated transactions entered into before the appointment of the temporary administration. According to the DGF, an amount of UAH 3.1 billion was siphoned off unlawfully from the Ukrainian Professional Bank by selling its portfolio of loans with liquid collaterals, debiting its correspondent account with a foreign bank, etc.). Currently, the Ukrainian Professional Bank is under liquidation.