During the process of blocking and withdrawal of sanctioned Russian assets, many legal problems arise. In the previous material, we considered the issues related to the blocking of assets. In this publication, we want to touch on the issue of protecting the rights of third parties who are co-owners of such assets.
The position of HACC (Higher Anti-Corruption Court of Ukraine) in the case regarding the confiscation of Mykhailo Shelkov’s assets
For the first time, the Court had to face a similar situation in the decision of the Appeals Chamber of HACC in case No. 991/6606/22 regarding the withdrawal of the assets of the Russian oligarch Mykhailo Shelkov. In it, the corporate rights to three Ukrainian companies, including Demurynskyi Mining and Processing Plant LLC, belonged to the Cypriot company Limpieza Limited. At the same time, 75 % of the authorized capital of Limpieza Limited belonged to companies controlled by Mykhailo Shelkov, and 25 % was owned by Bolatico Limited. The latter belonged to a citizen of Ukraine who purchased corporate rights in the form of 1,250 shares (25 % of the authorized fund of Limpieza Limited) in 2019 for approx. USD 4.2 million.
According to the decision of the Appeals Chamber of HACC, neither the value of the specified transaction nor its legality was questioned. Moreover, establishing the nullity and fictitiousness of the deed regarding the alienation of corporate rights by Mykhailo Shelkov’s company in the form of 3,750 shares (corresponding to 75 % of the authorized fund of Limpieza Limited) on February 20, 2022, the courts assumed that the transaction price (EUR 3,750) was underestimated, based on the value of the deal dated 6/24/2019.
The Appeals Chamber of HACC decided to collect 100 % of the shares in the authorized capital of all Ukrainian companies owned by Limpieza Limited as state income. Thus, in addition to assets owned by a sanctioned oligarch, assets owned by a non-sanctioned person – a citizen of Ukraine – were collected as state income.
For the sake of justice, it should be noted that on the eve of the full-scale invasion, on February 20, 2022, Mykhailo Shelkov tried to fictitiously alienate 75 % of the authorized capital of Limpieza Limited to that person. Therefore, there is a high probability that the specified person could play the role of an oligarch’s tool. However, neither the specified circumstances nor the issue of the legality of interference with the property rights of a third (non-sanctioned) person was investigated by the HACC Appeals Chamber.
At the same time, the indicated situation raises a broader problem – compliance with the rights of third parties during the collection of assets of sanctioned persons as state income.
Returning to the decision of the HACC Appeals Chamber, it should be noted that the Court still expressed its position on the specified issue more specifically in the decision in the Shelkov case:
“42. At the same time, for the correct resolution of the case, the exact indirectly controlled asset (assets) the claimant asks the court to withdraw are important: exclusively corporate rights (shares in the company’s authorized capital) and/or the company controlled by such a company. If the claimant proves the influence (connection) of the defendant exclusively on decision-making by another participant (shareholder) of the company without the possibility of deciding the fate of the assets controlled by such a company, only the share of such other (controlled) participant will be subject to withdrawal. If the claimant proves the existence of an indirect (through direct or indirect ownership of a share in the authorized capital of the company) influence of the defendant on the actual and legal fate of the assets of such a company (including enterprises), such assets shall also be subject to withdrawal. The key issue during such an inspection should be establishing the procedure for decision-making by the company’s management bodies according to the law and statutory documents.
- The interests of other persons (in particular, minority shareholders), which may be violated as a result of the application of a sanction in the form of a collection of assets as the state income, may be defended outside the administrative proceedings on the application of this sanction by means of private law.”
It can be briefly summarized as follows: if the beneficial owner owns a share in the company and has a decisive influence on “the actual and legal fate of the assets of such a company,” all the property of such a company is subject to withdrawal. If other shareholders have objections in this regard, they can protect their rights outside the administrative case “by means of private law.”
It is obvious from the decision of the Appeals Chamber, among other sources, that such shareholders can be not subject to sanctions and not have any significant connections with the Russian Federation. This may include the citizens of Ukraine against whom sanctions cannot be applied, except for involvement in terrorist activities (see Part 2, Article 1 of the Law of Ukraine “On the Sanctions”).
It should be noted right away that this approach, unfortunately, is conditioned by the provisions of the current legislation, namely, the Law of Ukraine “On the Sanctions.” Thus, by Part 7 of Article 283-1 of the Code of Administrative Proceedings of Ukraine, in cases related to the collection of state income based on the results of consideration of the claim, the High Anti-Corruption Court adopts one of the following decisions:
1) on the application of the sanction provided for in Clause 1-1 of Part One of Article 4 of the Law of Ukraine “On the Sanctions” to a natural or legal person;
2) on refusal to satisfy the claim.
Thus, the Court does not have sufficiently broad powers: it can either collect property into state income or not. If the sanctioned person influences the property’s fate, for example, in the case of ownership of 50 %+ of the company’s shares, the Court has no choice but to collect all 100 % as income.
For now, it is worth noting that this approach has two obvious drawbacks.
First, the court noted that third parties “can defend themselves outside the administrative case on applying this sanction by means of private law.” At the same time, the meaning of “by means of private law” is unclear. Currently, there is no defined judicial or non-judicial procedure for compensating losses caused by collecting assets as state income through sanctions. When deciding to collect an asset as state income, the court de facto states that the asset is controlled by a sanctioned person. Under such conditions, when assessing the damages caused by such a decision, another court will review the HACC’s conclusions, which is not good from the point of view of the principle of “finality” of the court decision. Generally, it seems unlikely any court would resort to such a review.
Secondly, there is an inherently incorrect approach in which the burden of finding effective means of protecting one’s rights, initiating some separate legal proceedings, and proving one’s non-involvement in the activities of sanctioned persons rests on the property owner. Moreover, this approach contradicts the approaches of the ECHR in cases concerning the collection of property of bona fide owners as state income, which will be presented below.
HACC’s practice in other cases
Perhaps the case regarding the confiscation of Mykhailo Shelkov’s assets is not the best example (there are doubts about the nominal status of a minority owner), but it provides insight into the difficulties the state may encounter in using the recovery mechanism in the future.
However, there are positive developments in this direction. In case No. 991/1914/23 regarding the assets of the Rotenberhs and others, the sanctioned persons owned a majority stake in the Ukrainian company that owned the Ocean Plaza shopping center. A third of the shares in the specified company were owned by a non-sanctioned citizen of Ukraine. Based on the provisions of national legislation and the position outlined in the decision of the Appeals Chamber in the case regarding the confiscation of Mykhailo Shelkov’s assets, the HACC could collect 100 % of the company’s corporate rights as state income: both the share of sanctioned persons and non-sanctioned persons.
Apparently, that was originally planned, as 100 % of the corporate rights were seized under related legislation. However, in the future, the arrest was lifted from the share of the Ukrainian businessman, and the Ministry of Justice of Ukraine filed a claim to collect only the share of the sanctioned persons as state income.
However, it was possible only because the shares of the sanctioned and non-sanctioned owners were divided at the national level. If the distribution was carried out at the level of a Cypriot company, the events would most likely develop similarly to case No. 991/6606/22.
The publication was prepared with the support of the International Renaissance Foundation as part of the project “#Compensation4UA/Compensation for war losses for Ukraine. Phase II: ensuring the effectiveness of mechanisms at the national and international level” project.
Author: Markiyan Bem, Partner at Nazar Kulchytskyy & Partners.
Published: Dnistrianskyi Centre, May 2024