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Supreme Court Forbids Companies under Ihor Kolomoiskyi’s Control to Avoid Responsibility to NBU

Supreme Court Forbids Companies under Ihor Kolomoiskyi’s Control to Avoid Responsibility to NBU

On 2 July 2019, the Grand Chamber of the Supreme Court of Ukraine upheld the NBU’s position, refusing to treat the state’s participation in PrivatBank’s capital as material circumstances for terminating the mortgage agreements concluded with Ihor Kolomoiskyi’s property surety providers. The Supreme Court made this ruling in case No.910/15484/17, where the NBU is the defendant and PrivatBank is a third party.

In particular, the Supreme Court dismissed the cassation appeal of Erlan PJSC (Biola TM), which sought to terminate the mortgage agreement with the NBU in an attempt to avoid the fulfillment of its obligations under it. Pursuant to said agreement, Erlan PJSC pledged to the NBU UAH 3 billion in property as security for the refinancing loan provided to the bank prior to the nationalization. The plaintiff believed that the state’s participation in PrivatBank’s capital had resulted in a material change in circumstances whereby the creditor (the NBU) and the debtor (PrivatBank) became a single entity.

“The Supreme Court upheld the NBU’s legal position and thus created a precedent for similar cases.  At present, property surety providers under PrivatBank’s refinancing loans are trying to terminate the mortgage agreements through court procedure, referring to a material change in circumstances.  In general, courts of first instance and courts of appeal have already made over 50 rulings in favor of the NBU, and said decisions have already come into force. However, the decision of the Grand Chamber of the Supreme Court dated 2 July is the first decision in this case category that has been delivered in favor of the NBU by the highest instance court and that is not subject to appeal,” noted Viktor Hryhorchuk, Head of the Office for Litigation at the NBU Legal Department.

The NBU would like to highlight specific arguments on which the court grounded this decision.

1.    The change of PrivatBank’s owners has not changed the scope of rights and obligations of the parties to the mortgage agreement.  Therefore, this cannot influence the materiality of the change of circumstances in the legal relationship between the creditor (the NBU) and the property surety provider (Erlan PJSC).

2.    At the time the mortgage agreement was concluded between the parties, the law provided for the possibility to change the bank’s shareholder.  The then applicable legislation stipulated no prohibition against the sale of the bank’s shares, particularly the redemption of 100% of the bank shares, including by the state. Thus, during the conclusion of the agreement under dispute, the parties had no objective grounds to assume that the bank’s shareholder composition would not change or that the bank would not become insolvent.

3.    PrivatBank’s violation of its obligations under the loan agreement shall not be deemed material change in circumstances either. After all, the mortgage agreement was concluded for the very purpose of securing these obligations.

In addition, the Grand Chamber of the Supreme Court confirmed the absence of grounds for concluding that the state arbitrarily interfered with the ownership of Erlan PJSC, as the company voluntarily and on its own initiative restricted its ownership of the mortgage property under the legally established procedure and accepted, inter alia, the risk of the respective adverse effects in the event of the debtor’s failure to fulfill its principal obligation. The institution of security is legally established for the very purpose of ensuring the fulfillment of loan obligations.

In addition, the court rejected the arguments of Erlan PJSC that the NBU had violated Article 73 of the Law On the National Bank of Ukraine, that it allegedly refused to accept PrivatBank’s obligations under the loan agreement from a third party, and that it failed to write off the bank’s debt after its nationalization.

For reference:

In 2015, Kolomoiskyi, one of the then owners of PrivatBank, signed personal surety agreements with the NBU under which he guaranteed the repayment of five refinancing loans PrivatBank took out in 2008–2014. In effect, he took personal responsibility to repay PrivatBank’s debts to the NBU, which now stand at UAH 9.2 billion. Kolomoiskyi has not fulfilled any of these obligations to the NBU.

To collect PrivatBank's debts on the refinancing loans, the NBU filed four lawsuits with Ukrainian courts and one lawsuit with the Geneva Court of First Instance against Kolomoiskyi in 2018. On 19 March 2019, the Supreme Court granted the NBU’s appeals in cassation and canceled the rulings of the Commercial Court of Dnipropetrovsk Oblast and the Dnipropetrovsk Commercial Court of Appeal that had dismissed the NBU’s lawsuits. Consequently, the Commercial Court of Dnipropetrovsk Oblast opened proceedings in lawsuits to collect funds from Ihor Kolomoiskyi.

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