Nationalisation of PrivatBank. What will Supreme Court consider?
On Tuesday, 26 November, the Commercial Court of Cassation of the Supreme Court will consider one of the key cases challenging the nationalisation of PrivatBank. This is a case filed by the bank’s former owners, Ihor Kolomoyskyi and the Cypriot company Triantal Investments Ltd.
The plaintiffs are seeking to invalidate the agreement with the state on the sale and purchase of the bank's shares and to regain ownership of such shares, insisting that they were allegedly illegally confiscated. In turn, the lawyers of the financial institution emphasise the legality of the nationalisation.
How the bank's depositors were rescued
As a reminder, on 18 December 2016, the National Bank of Ukraine decided to declare PrivatBank insolvent and subsequently remove it from the market with the participation of the state and addressed the government with a proposal to acquire ownership of the bank's shares. This decision, according to the NBU, was based on the reduction of the regulatory capital to a negative value. The lack of capital of PrivatBank was confirmed, among other things, by the audit firm Ernst & Young. The bank's shareholders did not fulfil their obligations to rehabilitate the bank.
On the same day, the Cabinet of Ministers of Ukraine supported the decision on the state's entry into the capital of PrivatBank. The transfer of the financial institution to state ownership took place in accordance with the Law of Ukraine "On the Individual Deposit Guarantee System".
As explained by the Ministry of Finance and the NBU, the nationalisation of PrivatBank was a necessary step to save the bank and ensure financial and economic stability in Ukraine. After all, the removal from the market of the largest bank in the country, where more than 20 million Ukrainians kept their funds and through which a large number of retail payments were made, could have destabilised the country's financial system and had a significant negative impact on the economy as a whole.
At the same time, the Ministry of Finance published a letter from the former owners of the bank, Ihor Kolomoyskyi and Hennadii Boholiubov, which they sent to the government asking it to purchase the bank's shares and make a positive decision on its further capitalisation to avoid bankruptcy.
Nationalisation took place in several stages. First, Individual Deposit Guarantee Fund introduced a temporary administration to the bank, carried out a bail-in procedure (exchange of unencumbered liabilities of the bank to related parties for shares of an additional issue), and then sold the shares to the Ministry of Finance for a nominal one hryvnia. In order to cover the capital gap of almost UAH 150 billion, the Ministry of Finance issued domestic government bonds worth UAH 116 billion. In addition, as part of the bail-in procedure, the interim administration converted liabilities to related parties worth UAH 29 billion into equity.
The bail-in procedure, as stated on PrivatBank's website, was recognised by the Bank of England and confirmed by the London Court of Arbitration.
However, the former owners of the bank decided to challenge the nationalisation in court and regain the shares they had previously owned. Although, commenting on this possibility, Deputy Governor of the NBU Kateryna Rozhkova said in an interview with "Business Censor": "I believe that the nationalisation was carried out quite legally, and therefore the bank cannot be returned to its previous owners. I would like to emphasise once again that they will not be able to do so under the law." And when asked whether they could receive compensation from the state, she explained: "There are no grounds for compensation. Moreover, the state has recapitalised Privatbank by UAH 138 billion. This means that its capital was negative at the time of nationalisation. Who should pay extra in this case and to whom?"
Nevertheless, the former owners and the state-owned bank have been suing for a long time. Some of the lawsuits are filed by the ex-owners and their associates to try to influence the processes in other countries, while others are filed to challenge the nationalisation and bail-in procedure.
In particular, to challenge the nationalisation, in 2017, Ihor Kolomoyskyi filed a lawsuit with the Kyiv District Administrative Court. In 2019, Ihor Kolomoyskyi, together with Triantal Investments Ltd, filed a lawsuit with the Kyiv Commercial Court challenging the sale and purchase agreement for Privatbank shares concluded during the nationalisation procedure and demanding the return of the shares to their ownership. In May 2024, taking into account the fact that the Claimants had made claims that could not be satisfied by virtue of the Law "On the Deposit Guarantee System for Individuals", as the investor, in this case the state, cannot be deprived of ownership of the bank's shares by law, and taking into account the provisions of the Law "On Amendments to Certain Legislative Acts of Ukraine on Improving the Mechanisms for Regulating Banking Activities" No. 590-IX, the court of first instance closed the proceedings in this case.
The Northern Commercial Court of Appeal confirmed the lawfulness of the first instance court's actions to close the proceedings on the basis of Law 590-IX.
The plaintiffs appealed these court decisions in cassation. And among the numerous cases initiated against the bank, the lawyers of the financial institution call this one of the most important. They add that it carries the greatest risks for the state, as it could lead to the state losing ownership of the bank, which, as originally intended, was invested heavily.
This case is also to a certain extent a lifeline for ex-owners from proceedings for the withdrawal of bank capital initiated by the bank against ex-owners in other countries. After gaining control of the bank that initiated the lawsuits abroad, they can stop these lawsuits with the help of the bank.
According to PrivatBank's lawyers, in the courts of first and second instance, where the hearings were held mainly in private, the plaintiffs' arguments boiled down to the fact that their shares in the bank were allegedly seized without compensation. "In other words, in their opinion, a confiscation procedure was carried out without a court decision, which is contrary to the law and the Constitution of Ukraine. They also point to certain shortcomings that, in their opinion, exist in the law on the deposit guarantee system and claim that the actions of the bodies and persons who carried out or participated in the nationalisation of PrivatBank were illegal," Viktor Tarasenkov, the bank's lawyer, told "Censor.NET".
He also added that the confiscation procedure is clearly set out in the law. And in this situation, it did not exist. "In this case, there is a clear mechanism for removing a bank from the market with the participation of the state, regulated by a special law," he stressed. - "And this law provides for special actions to be taken by the authorities in order to withdraw a bank from the market. In other words, first, certain decisions are made, the bank enters into certain agreements on behalf of shareholders and related parties, an additional issue of bank shares is carried out, etc.
This is a clearly defined and regulated procedure that has nothing to do with confiscation. After all, confiscation is a free-of-charge seizure of property based on a court decision in criminal proceedings. Confiscation is essentially a form of punishment. Instead, the withdrawal of a bank from the market with the participation of the state is a way to save this bank so that the bank remains afloat and depositors do not lose their money.
His colleague, lawyer Andrii Pozhydaev, noted that the plaintiffs asked not only to reclaim the shares and declare the sale and purchase agreement invalid, but also to oblige the custodian banks to make the appropriate technical operations to transfer the shares from the state's accounts to the custodian accounts owned by Kolomoyskyi. In addition to the bank, the defendants named a number of government agencies, and the lawsuit also sets out what needs to be done.
"This lawsuit is not a horror story to scare anyone, it is quite detailed in terms of its possible further execution if it were to be satisfied," the lawyer explained.
No amount of damages was claimed by the former owners
According to him, the banking business is regulated all over the world. And Ukraine is no exception. He also stressed that the bank as such belongs to shareholders only to the extent of the funds they had directly invested (authorised capital). "All other funds operated by the bank do not belong to shareholders or management. These are the funds of ordinary people who have cards, deposits, and the funds of businesses that keep their operating accounts in PrivatBank," he says. "All over the world, there are certain procedures by which such businesses are closed. Our law on the deposit guarantee system borrowed a lot from the European directive on withdrawing banks from the market. That is, it is not something unique, super tough, etc."
He reminded that, according to the law, a bank can cease to operate by a decision of the bank's owners. Then it pays off all its creditors and surrenders its licence. Anything left after that goes to the shareholders.
Alternatively, there is another way to resolve troubled banks. A bank is withdrawn from the market by the regulator if its activities are threatening or do not meet certain standards. In this case, there are several options. For example, certain assets can be sold to another financial institution. Or it can be sold to an investor. "Under Ukrainian law, an investor can be a private person who meets the NBU's criteria or the state. And the investor's duty is to save the business and the savings of those who have trusted this bank. "In this case, the investor did not receive the property of Kolomoyskyi and Boholiubov for free, but invested a lot of money to close the hole so that the bank could continue to fulfil its obligations to people and businesses that kept their money in the bank," Andrii Pozhydaev says. "What do any approaches to bank resolution say? That it should be fair. How is the fairness of the termination assessed? First of all, you have to pay off all creditors in turn (individuals within the limits of guaranteed deposits, liabilities to the state, other amounts that are not guaranteed, liabilities to legal entities). The money of those people and legal entities who were associated with the bank's management or owners is in the penultimate place. And the owners - in the last place. In other words, when assessing any mechanism for its fairness, you have to compare what the owner would get in the event of a complete liquidation of the bank and in the event of another path chosen by the state in the event of the bank's withdrawal from the market. We understand that even depositors would not have received anything with the hole that existed in PrivatBank at the time of nationalisation. The state would have covered all these payments to individual depositors. The shareholders or related parties would not have received anything at all. Thus, we cannot say that this is confiscation. This is one of the mechanisms that is legal and not unusual. It is provided for in the legislation of other countries. As an example, we can recall the crisis in Cyprus, when depositors became shareholders of banks. In our case, the state became a shareholder of the bank. And this method is fair, because if we compare it with liquidation, the shareholders would have received nothing."
Interestingly, the plaintiffs have not claimed any amount of damages. They want to get the bank back.
The bank's representatives state that according to Law No. 590, proceedings in cases that have not been considered at the time of its adoption are subject to closure. In other words, the proceedings are closed without consideration of the case on the merits.
As noted by lawyer Viktor Tarasenkov, the case has not yet resolved the dispute on the legality or illegality of nationalisation. After all, the method of defence chosen by the plaintiffs is ineffective and actually contradicts the law. Law No. 590, adopted in 2020, on the basis of which the proceedings were closed, did not in fact introduce new prohibitions to reclaim the bank's shares by the former owners, as such a ban existed at the time of the bank's nationalisation in 2016 and was enshrined in the law on the deposit guarantee system. At the same time, Law No. 590 determined the method of defence that can restore the rights of the former owners of the bank in case of their violation - compensation for damages in cash. Ex-owners cannot demand the return of their shares or invalidate any agreements entered into during the nationalisation process. "The law stipulates that proceedings in cases in which the Claimants have chosen ways to protect rights that do not comply with the law are subject to closure. And the case of Ihor Kolomoyskyi and Triantal Investments Ltd is not the first case in which proceedings were closed on the basis of Law No. 590. Back in February 2023, the Grand Chamber of the Supreme Court ruled on the case brought by Dubilet (one of the former shareholders of the bank - ed.), in which it made binding conclusions for other courts on the need to apply Law No. 590 and close proceedings in similar cases. This issue will now be decided again by the Commercial Court of Cassation, which is obliged by law to take into account and apply the findings of the Grand Chamber.
Svitlana Tarasenko
