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The European, Middle Eastern and African Arbitration Review 2016

Ukraine

When an arbitral award or judgment needs to be enforced, the creditor will usually go to the countries where the defendant has assets. Though this seems to be primarily the creditor’s concern, certain jurisdictions, including Ukraine, even subject the right of the creditor to seek enforcement of the award upon availability of debtor’s assets in its territory. There are usually no problems when the assets in question are money, real estate or movable property. The situation, however, might be different if the assets of the defendant are its property rights (eg, receivables or corporate rights in a company).

One can easily imagine a situation where a claimant obtains an award against a defendant that is the owner of a company incorporated in Ukraine. If the latter operates some profit-generating business, it would be logical for the claimant to enforce the award through getting possession of shares in that company. Usually, this would require recognition and enforcement of the award in Ukraine, which may appear to be problematic.

The root of the problem

Ukrainian procedural law expressly provides for the courts that may consider applications to have arbitral awards or judgments recognised and enforced in Ukraine. In particular, according to the Civil Procedure Code of Ukraine, the court at the place of the debtor’s location shall have jurisdiction to hear such applications.1 If the judgment debtor is located outside Ukraine – as is the case for non-Ukrainian debtors – such applications shall be considered by the courts at the place where the debtor’s property is located in Ukraine.2

This is where the notion of ‘property location’ comes into play. At first glance this notion seems quite simple and straightforward, which is true for real estate or regular movable property. However, one may run into difficulties when determining where shares in a company are located.

At this point we should have a brief look at Ukrainian corporate law. Historically, there are two popular forms of legal entities incorporation in Ukraine: joint stock company (JSC) and limited liability company (LLC). Without going into too much detail, when joint stock companies are incorporated, equity securities (shares) are issued by it.3 A shareholder in a JSC in fact owns the equity securities, and such ownership gives rise to a range of corporate rights of the shareholder.4 According to the Civil Code of Ukraine, such securities are the self-standing object of civil rights.

The shares of JSCs and their turnover are subject to detailed regulation. For a creditor seeking the enforcement of an arbitral award or court judgment against the shares of JSC, the most important peculiarity is that such securities shall be kept at the securities accounts in depositary institution in Ukraine. Thus, a judgment creditor will have a valid argument that the court at the place where such securities are deposited shall have jurisdiction over the enforcement application.

The most popular type of company in Ukraine is the limited liability company (LLC). When such company is incorporated, it does not issue securities. A participant of a limited liability company holds corporate rights in it directly. Under Ukrainian civil law, such corporate rights also qualify as property.5 However, as they are not a part of the material world, it is difficult finding their location. As a result, it is also difficult establishing jurisdiction of Ukrainian courts to hear enforcement applications.

Jurisprudence to date

The question of whether the Ukrainian court has jurisdiction over enforcement application when the only debtor’s property in Ukraine is its share in the Ukrainian LLC has already arisen on several occasions. However, jurisprudence is not consistent; furthermore, there are no jurisprudence of the higher courts on this question so far.

This question was considered for the first time in 2010 by the Pecherskyi district court in Kyiv,6 in which the creditor sought to enforce an ICC award against a company in the British Virgin Islands, a participant in a Ukrainian LLC registered in Kyiv. The creditor argued that the judgment debtor owned a share in the charter capital of the Ukrainian LLC and thus the court at the place of the LLC’s registration is competent to consider the application for recognition and enforcement of the arbitral award.

The court, however, rejected the applicant’s arguments. It pointed out that the debtor did not own a share in the charter capital itself, as the latter was a property of the LLC from the moment of its incorporation. Instead, the judgment debtor only held corporate rights in the LLC, such as the right to receive dividends or participate in the management of the company. The court concluded that it was impossible to determine the location of these rights as they were not part of the material world, and thus declined its jurisdiction to consider the application.7

A similar conclusion was recently reached by the Volyn region appellate court. Though the case did not relate to the recognition and enforcement of foreign judgments, it may also be helpful in understanding how Ukrainian judiciary treats corporate rights in LLCs. In that case, two Icelandic individuals filed a claim against a UK company to the Ukrainian court on the basis that the defendant was a participant in the LLC incorporated in Ukraine, and thus, in the claimants’ view, had property in the territory of Ukraine. In the order dated 16 April 2015, the court found that the debtor’s property in question consisted of property rights only (corporate rights in the LLC), which have no particular territorial location. Based on this finding, it declined jurisdiction and terminated the proceedings.8

There is, however, an alternative line of jurisprudence. In particular, as a part of the BTA Bank litigation saga, several Kyiv courts came to the opposite conclusion when recognising and enforcing English court judgments. For example, Pecherskyi district court of Kyiv, in the order dated 3 June 2013, enforced an English court judgment against one of the defendants, whose only property in Ukraine consisted of corporate rights in a local LLC.9 Somewhat surprisingly, the court did not go into too much detail substantiating its jurisdiction to consider the application. It only mentioned that the defendant was a participant in the LLC registered in the Pecherskyi district of Kyiv without analysing what exactly kind of property the defendant owned.

Similarly, the order of the Holosiivskyi district court of Kyiv recognised and enforced an injunction issued by the English court against one of the defendants that was a participant in the Ukrainian LLC.10 In this case, however, the court did not discuss the grounds for its jurisdiction at all.

The last piece in this line of jurisprudence was recently rendered by the Lviv region appellate court.11 In the case brought against a foreign defendant, the court found that it had jurisdiction because Ukrainian LLC was registered in that region and the defendant was a participant in it. Again, in its order, the court did not discuss in detail what particular kind of property the defendant owned in Ukraine.

Recommendations

Though case law to date is not consistent, in our opinion, the line of jurisprudence finding that the possession of corporate rights the Ukrainian LLCs is not sufficient to establish jurisdiction over enforcement applications is well founded – at least from a purely legal point of view. Thus, unless procedural law is amended, there is significant risk that awards against foreign debtors will be unenforceable in Ukraine if the latter has no property in Ukraine other than corporate rights in the Ukrainian LLC.

To avoid the deadlock, there are several recommendations to follow. The creditor should take care of potential enforceability of the award as early as possible, preferably at the stage of structuring the transaction. In particular, it is advisable to build such a structure in which the Ukrainian LLC would be one of the parties to the relevant contracts. Should the dispute arise, it would allow for an arbitral award or judgment to be rendered against the LLC as co-defendant. In such case, the Ukrainian court will have jurisdiction over the enforcement matter on the ground that one of the defendants is based in Ukraine.

If this option is not feasible, one will have to avoid Ukrainian judiciary and use legal instruments available at the place of the judgment debtor’s incorporation, such as receivership, in order to get possession of the disputed share in the LLC.

One of the draft laws currently developed by the Ukrainian arbitration community may partially solve this drawback of Ukrainian procedural law by eliminating the link between property location and jurisdiction of the court to consider enforcement applications. However, until this draft is adopted by the parliament, one should bear in mind the risks described above.

Notes

  1. Paragraph 1 of article 392 of the Civil Procedure Code of Ukraine.
  2. Paragraph 2 of article 392 of the Civil Procedure Code of Ukraine.
  3. See, for example, article 9 of the Law of Ukraine No. 514-VI dated 17 September 2008 “On Joint Stock Companies”.
  4. Paragraph 8 of Article 2 of the Law “On Joint Stock Companies”.
  5. Article 190 of the Civil Code of Ukraine.
  6. Order of the Pecherskyi district court of Kyiv city dated 17 May 2010 in case No. 2-k-5/2010.
  7. Ibid.
  8. Order of the Volyn region appellate court dated 16 April 2015 in case No. 161/19152/14c.
  9. Order of the Pecherskyi district court of Kyiv city dated 3 June 2013 in Case No. 757/4478/13c.
  10. Order of the Holosiivskyi district court of Kyiv city dated 5 August 2013 in Case No. 2601/17062/12.
  11. Order of the Lviv region appellate court dated 9 April 2015 in case No. 465/7706/14.