Shall we wait for the next one?
Even after eight years of litigation, 50 court decisions, and the final verdict of the Supreme Commercial Court rendered in February 2013, Ukrsotsbank, part of Unicredit Group (Italy), was twice attacked by corporate raiders in 2016. Taking advantage of the expanded powers of notaries, who, thanks to the new version of the Law "On State Registration of Property Rights to Real Estate and Their Encumbrances," can now perform state registration of real estate, the raiders twice re-registered the bank's property—a non-residential building at 12 Amosova Street in Kyiv (the Horizont Park business center)—to Proekt-A LLC. Twice, the Ministry of Justice was forced to urgently cancel the illegal registration of a private notary in order to return the property to the foreign investor.
Defenseless investor…
In July alone, three major foreign investors in Ukraine suffered from corporate raids: the American Bunge, the Italian Unicredit, and the Lithuanian NOVUS. The culprits were little-known regional notaries, who, following the reform of state property registration, have been granted nearly unlimited powers. For example, the Obukhiv (in the case of Unicredit) and Baryshev (NOVUS) notaries re-registered property worth tens of millions of dollars.
"The problem is a lack of protection and the inability to defend one's right to justice," Roman Shpek, head of the Independent Association of Ukrainian Banks, fumed at a press conference at Interfax-Ukraine dedicated specifically to protecting the rights of property owners and creditors. "After 50 court decisions, is it impossible to put an end to a country that considers itself democratic and rule-of-law? Is this really the only case? Bunge, NOVUS, UkrInBank..."
Naturally, bankers are concerned about the current precarious situation in Ukraine regarding the protection of investors' and owners' property rights. "Resolving this problem is important not only for individual companies but is also crucial for the country's overall economic development. Unicredit Bank and others have repeatedly encountered illegal actions by dishonest borrowers who have tried in every way to avoid fulfilling their obligations," says Tamara Savoshchenko, Chair of the Board of Unicredit Bank. "The most telling example is the repeated attempt to seize the Gorizont Park business center."
…and the all-powerful notary
"In October 2015," says Tamara Savoshchenko, "based on a forged court decision, the Kyiv registration service cancelled the bank's ownership of the Gorizont Park business center and registered it in the name of Project-A LLC. However, an expert examination confirmed the forgery of the documents, and the bank managed to defend its ownership rights to the property." However, in February 2016, the attack on the property was repeated. Despite prohibitions on any registration actions regarding the business center, Oleg Shchur, a private notary of the Obukhiv Notary District, cancelled the bank's ownership of the property and registered it in the name of Project-A. The bank was only able to regain its rights to the business center after appealing to the Ministry of Justice, which cancelled all registration actions by Oleg Shchur, blocking the notary's access to the registry for three months. After this, the bank's rights to Gorizont Park were reinstated, and the Kyiv District Administrative Court prohibited any registration actions regarding the business center.
However, the registration story didn't end there. On July 2, 2016, the very first day after access to the registry was restored, the notary we already know, O. Shchur, lifted the ban on registration actions based on the District Administrative Court's ruling of July 1, 2016. The investigator will likely determine the origin of this ruling (a criminal case has been opened based on the notary's actions), as the judge hearing the case was on vacation on July 1 and was unable to make any rulings.
On the same day, O. Shchur, based on the Kyiv City Commercial Court's decision of November 3, 2015, and a certificate that had lost its legal force after the courts recognized the bank's ownership of the asset, registered ownership of the business center in the name of the company "Project A." He was unfazed by the fact that the aforementioned court decision had never entered into legal force, as it had been overturned by an appellate court ruling on May 18, 2016.
Manual justice restoration mode
The Ministry of Justice deserves credit for its prompt response to Ukrsotsbank's complaint. On July 21, 2016, the Ministry's Appeals Commission defeated a second attempt at corporate raiding of the Gorizont Park Business Center, and Unicredit Group was returned the property. But was there any punishment for the corporate raiding?
"If a state registrar makes a mistake, we can block their access to the registry, for example, for one month, so they can learn the laws," explains Pavlo Moroz, Deputy Minister of Justice of Ukraine for State Registration. "We block some for six months if the violation is significant. If the violation is serious, we simply permanently revoke the notary's access to the registry. If a notary acting as a state registrar makes a specific error, it is legally impossible to revoke their notarial license."
Thus, a situation is developing in which notaries, having received the legal authority to perform the full range of real estate registration actions, can engage in illegal property fraud with virtual impunity. Manual error correction through the Ministry of Justice's Appeals Commission is unlikely to provide a serious guarantee of justice in this case. After all, by the time the Commission reviews a case (since the beginning of the year, only 150 out of 1000 cases have been reviewed), the property may have already been transferred several times to other companies and individuals. Therefore, market participants are insisting on: 1) criminal liability for notaries; 2) the abolition of extraterritoriality in property registration; 3) increased Ministry of Justice oversight and sanctions against notaries, including private ones. Paradoxically, notary O. Shchur, who twice attempted to carry out illegal registrations worth more than $25 million, has not even been disconnected from the electronic property rights registry system as of the date of this article's preparation. One can only guess how much longer he'll be able to re-register other people's property. Market participants and international organizations are convinced that for even one such violation, notaries should be stripped not only of access to the registry but also of their notarial certificate, which is also issued by the Ministry of Justice, and subject to criminal liability. Only such strict measures by the Ministry and law enforcement agencies will prevent a wave of property fraud.
Investors and property owners believe that this problem should be addressed not only manually but also systematically. Only after real positive changes in property rights protection can Ukraine expect an influx of investment.
The Ministry of Justice also recognizes the danger of the situation. They are currently working on increasing criminal liability for state registrars and corporate raiders. The Ministry has already proposed legislation to strengthen criminal liability for corporate raiders. P. Moroz asserts that after the parliamentary vote on Bill No. 4216, the possibility of corporate raids will no longer be as prevalent as it is now. And in September, the Ministry of Justice will come up with new proposals for legislative amendments. Furthermore, he stated, the Ministry intends to sign a memorandum with the National Police and "jointly pursue a series of high-profile cases, so that state registrars who commit crimes will not only have their licenses revoked but also be jailed."
Let's hope that officials will be able to improve the country's investment climate with their operational innovations, and that foreign investors will not have to resort to the extreme measure of protecting their investments—the withdrawal of capital from the country.
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