The problem with the cancellation of property registration based on "manual" decisions of the Ministry of Justice may destroy the business lending market and worsen the investment climate in Ukraine.
In recent years, the Ministry of Justice of Ukraine has not only substituted itself for the court, but also violated the law in doing so. In particular, we are talking about the actions of the Anti-Raider Board, which was once established under the Ministry to respond promptly to various conflicts arising over property rights. After all, while litigation between companies is ongoing, a valuable asset can be literally destroyed - sawn up, stolen, etc. Therefore, the idea of creating a Board under the Ministry was to block such precedents.
In practice, however, the opposite is true. Often, it is the Board that hinders the peaceful settlement of corporate conflicts, illegally cancels property ownership registrations and, in fact, facilitates raider attacks on companies.
For example, back in 2021, Nashi Hroshi, referring to the disgraced former Deputy Minister of Justice for Registration Olga Onishchuk, wrote that 7-10% of the Ministry of Justice's orders are recognized by the court as illegal. And this is despite the fact that the courts have been considering cases against the Ministry for years.
"There is a problem with the cancellation of property registration based on "manual" decisions of the Ministry of Justice. And this topic is very toxic. That is, everyone in the market knows about it, but no one can do anything about it. No court counter-processes help. It seems that there is a decree from above, according to which the Ministry of Justice is fulfilling certain orders in favor of certain individuals. It is enough to open the court register and see the number of court cases against the Ministry of Justice. And they are either inactive or have been going on for years,"a banking market representative said in a comment to Hubs.
Recent example
A recent example of such arbitrariness on the part of officials is the cancellation of the state registration of the Sunolta agricultural group's ownership of the grain terminal in the Odesa Commercial Sea Port, which was reported by almost all agricultural and business publications in Ukraine.
In February, Sunolta filed a lawsuit with the Kyiv Commercial Court seeking to have the orders of the Ministry of Justice to cancel the registration of the group's rights to the acquired property declared illegal. Moreover, the court has already decided to suspend the execution of the orders until the case is considered on the merits.
"State officials have grossly violated the principles of the rule of law, and their actions have all the hallmarks of corruption offenses in favor of the raiders," Sunolta made an official statement.
Let's try to figure out what the company's statements are based on and what illegal actions the Ministry of Justice has taken.
As you know, a year ago Sunolta invested in the acquisition of technological capacities for transshipment of grain crops for export at the terminal in the port of Odesa. The company acquired part of the port's logistics facilities and equipment owned by GNT Group (the Olympex Coupe International grain terminal) and pledged by Ukrainian banks Pivdennyi and Vostok for debt obligations.
In December 2022, a public corporate dispute erupted between GNT Group and its creditors, Argentem Creek Partners (ACP) and Innovatus Capital Partners. The parties announced possible disruptions in the operation of the Olympex Coupe International grain terminal, which jeopardized the shipment of Sunolta's agricultural products, which used its services. Therefore, the group decided to invest in a grain terminal and expand its export potential using its own logistics facilities.
Almost a year later, after all possible deadlines had expired, the Ministry of Justice accepted two complaints from ACP representatives to cancel the registration of rights to the acquired property for Sunolta Group companies.
"Officials of the Ministry of Justice, completely disregarding the requirements of the laws of Ukraine and the relevant conclusions of the Supreme Court, considered the complaints in favor of ACP," Sunolta said.
According to the company, first, the officials had no right to consider these complaints. After all, a lawsuit brought by Argentem's representatives (through the fund's agent, Madison Pacific Trust Ltd) is still pending, in which they are challenging the banks' foreclosure of Olympex Coupe International's assets under mortgage agreements. Thus, the Ministry of Justice has substituted itself for the courts by canceling transactions that are already being challenged in court proceedings.
Secondly, the Ministry of Justice justified the decision to cancel Sunolta's rights to the legally acquired property by the fact that it was under court arrest. At the same time, and this is officially recorded, at the time of registration of the rights to the grain terminals, there were no additional encumbrances on this property in the State Register.
By the way, the financial company "Dostupni Finansy" was also forced to go to court against the decision of the Ministry of Justice. It acquired from PJSC Bank Vostok the rights to claim loans from the GNT Group and the pledge/mortgage agreements that secured the loans. "Accessible Finance sold the property of the grain terminal Olympex Coupe International to Sanolta OOO (Sunolta Group). This property, as in the case of Pivdenny Bank, was mortgaged by Vostok Bank as collateral for the loan obligations of GNT Group companies.
In its statement to the court, the company also pointed out that the State Register of Property Rights did not have any seizures on the grain terminal at the time of notarization.
Moreover, even if such a record of seizure had been made in the SRRP, this fact does not in any way prohibit banks from recovering the pledged property in accordance with the Law on Mortgage and similar decisions of the Grand Chamber of the Supreme Court.
Therefore, the decision of the Ministry of Justice, which was made on the basis of the conclusion of the relevant Complaints Review Board, according to the company, "is meaningless and by its nature is legal nonsense", and the content of the order of the Ministry of Justice "suggests the corrupt nature of the actions of officials in favor of the raiders".
It should be noted that the decision of the Ministry of Justice was also a surprise for the banks that sold the collateral for the loan obligations of GNT Group companies.
Thus, Pivdenny Bank, commenting on the situation to the media, noted that it had foreclosed on the property it had pledged since 2020 due to systematic default under loan agreements and receipt of information about the possible bankruptcy of Olympex Coupe International. At the same time, according to the bank, all transactions were made in full compliance with the laws of Ukraine.
"The decision of the Ministry of Justice, which unreasonably canceled previous transactions, contradicts the logic of Ukrainian legislation, threatens the interests of bank depositors and the stability of the banking system. Such decisions of the executive authorities have signs of administrative arbitrariness and may have a negative impact on the banking sector as a whole, the bank lending market and the investment attractiveness of Ukraine, as the resolution of disputes between legal entities on the basis of the law is the prerogative of the judiciary", - the press service of the bank emphasized.
Bank Vostok also expressed concern about the consequences of the decision of the Ministry of Justice for the banking market.
"Protecting the interests of depositors, in early February 2023, Vostok Bank began repaying its loan claims to the companies of the GNT Group holding. This is a standard practice, the bank acted in favor of the interests of depositors. The decision of the Ministry of Justice to cancel the registration of transactions despite the established judicial practice may have negative consequences that will affect banking activities, as public authorities are obliged to act only on the basis, within the powers and in the manner provided for by the Constitution and laws of Ukraine. We believe that such a precedent could create an unfavorable investment climate in Ukraine and have a serious impact on the bank lending market", - the bank's press service commented on the situation.
It should be noted that both Pivdenny Bank and Bank Vostok are currently acting as third parties in lawsuits regarding the illegality of the Ministry of Justice's orders and intend to defend their case.
What does the conflict between GNT and ASP have to do with it
There is no doubt that the Ministry of Justice is not acting independently, but on instructions from above. For the second year in a row, the foreign creditor ASR has been making a powerful "attack" on the Ukrainian holding company GNT Group, which failed to repay its obligations to it on time.
In particular, in December 2022, DIA announced that it was forcibly collecting the debt on a loan issued to GNT Group in 2019 and explained its move by the lack of transparency in the holding's activities.
In turn, the Ukrainian side accused Argentem of raiding and trying to take the company's assets and resell them to a pre-interested buyer. GNT also stated that it was ready to pay off the loans to ACP, but, according to them, the foreigners did not meet the agreement.
As a result, the case is currently being considered by the London Court of International Arbitration...
However, resolving the issue in the judicial sphere clearly does not suit the DIA. With the help of lawyers from Hillmont Partners, a law firm that has been repeatedly linked by the media to MPs from the Servant of the People party, the foreign fund is using a standard set of "raider methods" that could help them seize the company.
For example, even before the conflict began, in November 2022, the RDA met with the chairman of the Supervisory Board of UkraineInvest and MP from the Servant of the People party, David Arakhamia, in Vienna.
As the MP told Ukrainska Pravda at the time, the main purpose of his visit to the Austrian capital was to meet with Argentem Creek Partners, which has invested more than $150 million in Ukrainian assets.
However, doesn't it seem strange that in November Arakhamia met with Argentem, and in December the American company, which had previously been negotiating a debt restructuring, began seizing assets.
Recently, John Patton, the regional director of the ACP Foundation, frankly stated in an interview with the media that "the Ukrainian authorities are aware of our case and are interested in helping. In particular, I see that there is interest from the Office of the President. We have had numerous meetings during which the leaders of the Office expressed their clear support".
Of course, all of these facts, as well as Patton's latest statement, were noticed by Sanolta, which is now defending its position in court. The company believes that the actions of the fund's management may indicate that the DIA is using administrative pressure against its opponents.
"All these events give grounds to assume that the foreign company ACP, with the corrupt assistance of officials of the Ministry of Justice, is trying to seize property belonging to the Sunolta group by raiding", the company said.
Single solutions or a system?
Unfortunately, the story of Sanolta is not the only one. There are many more relatively recent examples in the public domain where the Ministry of Justice illegally overturns decisions of registrars or notaries. Moreover, it makes orders in the area of registration of property subject to mortgage, which is not within the competence of officials at all.
For example, in March 2023, the Central District Court of Mykolaiv issued a decision in case No. 490/1281/22, which declared unlawful the order of the Ministry that canceled the decision of the state registrar regarding mortgaged property. Delta Bank acted as a third party in this case.
One of the main violations of the Ministry of Justice, as in the case of the Sanolta agricultural group, was the consideration of the complaint at a time when there was already a court dispute over real estate. And this was already a sufficient independent ground for the Ministry to dismiss the complaint (the conclusion of the Supreme Court set out in the decision of August 31, 2021 in case No. 910/16115/20).
The court also drew attention to the fact that the Commission for consideration of complaints in the field of state registration of the Ministry of Justice "has the right to consider complaints only against decisions, actions or inaction of the state registrar, the subject of state registration, concerning real estate that is not the subject of a mortgage and is not a security under mortgage agreements concluded in accordance with the Law of Ukraine "On Mortgage", which defines a special (separate) way to protect the violated right - judicial procedure".
The fact that the Ministry of Justice and its territorial bodies do not have the right to review the decisions of the state registrar if there is a legal dispute over the subject matter of the complaint is also stated in the opinion of the Supreme Economic Court in case No. 910/574/22 of March 16, 2023, and in the decision of the Supreme Economic Court in case No. 320/7192/22 of August 2 of the same year.
But does this stop the Ministry of Justice? It seems that "manual" management of the Anti-Raider Board by the Ministry of Justice and Minister of Justice Denys Maliuska himself, when any laws are ignored, has long been the norm.
You may recall that back in the fall of 2021, Nashi Hroshi journalists wrote that Malyuska could manually change the decisions of the Anti-Raider Board to completely opposite ones. He may agree or disagree with its conclusion. If he disagrees, the conclusion is not made public, and the complaint is considered anew. This allows the Ministry of Justice to hide the fact that the Anti-Raider Panel has made two completely opposite conclusions in the same case.
Today is already 2024. The country has been at war for more than two years. And the cart with the "manual" decisions of the Ministry of Justice is still there.
According to insider information, the banking market is trying to reach the Ministry of Justice and the government through the National Bank. And maybe there will even be some result. But it is not a fact. And it is not known when.
Critical consequences
In the meantime, experts predict that the actions of the Ministry of Justice may negatively affect the market of "large" lending in Ukraine and once again undermine investor confidence in the state.
"Situations like the one with Sunolta send a very bad signal to the market as a whole. If banks cannot control or at least predict legal risks, they are unlikely to increase lending to large projects. After all, as we can see, even the presence of normal liquid mortgage collateral does not always protect the creditor's rights", - commented Hubs on the possible consequences of the Ministry of Justice's actions for the banking sector Vadym Berezovyk, Director of Profin Consulting.
The expert noted that the banking sector is not very active in lending to businesses, especially in terms of investment loans. Many borrowers complain about the high rate of rejections when applying for loans. Banks have enough of both military and macroeconomic risks. And when such precedents arise, it further cools lending activity. And if banks see that state registration of ownership of collateral can be canceled with a stroke of a pen, they will seriously consider whether to get involved in long-term lending projects.
Another danger for the financial market, as pointed out by lawyers, may be related to the blocking of mortgage agreements through the Ministry of Justice by means of artificial criminal cases. The Ministry is still trying to cancel the registration of property under Sunolta a year later on the grounds of arrest in criminal proceedings.
"If we are discussing the imposition of artificial encumbrances with the help of law enforcement agencies (which requires the joint participation of the investigator, prosecutor and investigating judge), this in itself is a much greater threat to the credit market than the cancellation of decisions of the state registrar by the Ministry of Justice. However, the above does not mean that hypothetical illegal decisions of the Ministry of Justice of Ukraine to cancel state registration may not be a problem",- emphasized Vladyslav Martynchuk, attorney of litigation practice at De Jure Law Firm.
In turn, Viktor Shulyk, Director of the project management department of the IBI-Rating agency, believes that the negative interference of the state in the work of business will once again harm the investment climate of Ukraine.
"If we look at the substance rather than the form, there is not much difference in how the state interferes with business - through law enforcement agencies, court decisions based on laws specifically adopted for specific actions, or through other mechanisms. The rules (the legislation that was relied on at the time of property acquisition/investment) are often violated during the war, and this is unlikely to attract market investors (without special guarantees). This did not appear yesterday and is unlikely to end tomorrow,"he said in a commentary to the media.
Thus, the business agrees that the problem of manual management at the Ministry of Justice needs to be addressed. On the one hand, the legislation should work in such a way that there is no need for Anti-Raider Commissions at all. After all, the executive branch will always be tempted by corruption to make biased decisions. And to substitute itself for the judicial system. But developing an adequate legislative system is a long process.
Therefore, on the other hand, it is possible to insure financial market players more reliably against the arbitrariness of the executive branch. To do this, the rights of mortgagees should be clearly defined in the law, taking into account court practice. Banks should have the priority right to dispose of the mortgaged property in case of default by the debtor.