We have a very ambiguous situation. On one side, there's the investor, who claims he received something other than what he bought, and on the other, the State Property Fund, which claims to have conducted three audits of the company.
Marylivsky Distillery. Photo: privatization.gov.ua
More than six months have passed since the auction for the Marylivka distillery in the Ternopil region concluded. During the bidding, the starting price rose from UAH 54,7 million to over UAH 120 million, which was offered by the winning bidder, the Moldovan company Zernoff. This money could have already gone to the national budget, but in February, it emerged that the foreign investor was suing the State Property Fund.
During the company's inventory, it was discovered that the assets listed for auction and for which the investor was supposed to pay did not correspond to what was actually on hand at the plant. In January, the investor, who was already prepared to pay a substantial sum for the company, requested that the transfer of a 5% deposit (over 5 million hryvnias) to the local branch of the State Property Fund be frozen.
The scheme of a buyer receiving something other than what they paid for is far from new. It has long been used by scammers and has only flourished with the growth of online commerce. However, in this case, we're not talking about scammers from Aliexpress or OLX, but about the reputation of the state, which plans to receive approximately 6 billion hryvnias for its budget this year through large-scale privatization. The trial on this matter is still ongoing, and the next hearing is scheduled for May 5. And the interest of foreign investors in investing in our country will largely depend on how this situation unfolds.
Delo.ua tried to figure out how events in this story will unfold and how the sale of a state-owned enterprise worth 120 million hryvnias might end.
In response to Delo.ua's inquiry, the State Property Fund noted that it had conducted an inventory of the controversial enterprise three times. The first was immediately before the sale of the enterprise, and then twice after the investors filed a lawsuit.
"To protect investors' interests, an inspection of the grounds and assets of the Marylivka MPD of the State Enterprise Ukrspirt was conducted on January 21, 2021, at Ukrspirt. Based on the inspection results, the presence of all non-current assets at the Marylivka MPD of the State Enterprise Ukrspirt, including those reported as missing and/or unidentified, was confirmed, and the technical areas of the buildings declared for privatization were confirmed to be in compliance with the relevant technical documents," the State Property Fund said in a statement.
The Foundation also states that the third audit was conducted in the direct presence of representatives of the Zernoff company, but that the latter refused to sign the inventory report.
"Unfortunately, during the inspection, a representative of the Zernoff joint venture did not sign the inspection results report after all the property listed in the privatization property description had been recorded in his presence," the State Property Fund said in a statement.
The State Property Fund notes that, according to Ukrainian law, the buyer was required to pay the purchase price within 60 days of the sale of the enterprise, which was not done in this case. Therefore, by law, the transaction will be terminated, the property will be put up for re-auction, and the collateral will remain with the state.
Comments from lawyers
Director of the law firm "Saad Legal" Shaadi Saad believes that several scenarios could develop in the future.
"The most likely outcome, in my opinion, is the cancellation of the privatization results and a re-auction, taking into account the actual asset composition. A settlement agreement seems unlikely, as the State Property Fund cannot independently decide to reduce the privatization price. Reducing the price of the goods, as the investor is demanding through the courts, is also a difficult option, but possible. In this case, it would probably be necessary to involve all bidders, as their rights could be violated by a reduction in the privatization price," the lawyer says.
Moreover, if the court finds the investor correct, it will be important to determine at what stage the inaccurate information was provided. If the company's management misled the State Property Fund, and the fund subsequently provided inaccurate information in the tender documentation, there is a possibility that the manager will be held accountable.
"As a general rule, government officials in our country are effectively held accountable for nothing. In the worst-case scenario, they'll be fired," the lawyer believes.
Moreover, by purchasing properties for UAH 120 million, investors can afford consultants who can gather a wealth of information about the property. State registers provide a wealth of information.
Denis Shkarovsky, a partner at the law firm VB PARTNERS, believes that the situation with the Marylovsky distillery is ambiguous.
"Right now, we're only seeing the positions of both parties. The investor claims to have purchased a property complex for over $4 million, but it's not in the same condition as the one offered at auction. The state accuses the investor of attempting to return the security deposit (over UAH 5 million) and avoid paying the remaining transaction amount (approximately UAH 137 million). Without analyzing all the transaction documents (the information in open sources is incomplete), it's difficult to provide a legal assessment of the case. We'll see its resolution in court in a few years," says Shkarovsky.
Moreover, based on court rulings, the investor is not abandoning the purchase of the property, but is requesting a reduction in its price. This right is provided for by the Civil Code of Ukraine in the event of the transfer of goods of inadequate quality. At the same time, before the transaction, the investor had the right to inspect the property, including at its location.
"If the buyer knew the product was of poor quality and offered a price significantly higher than the starting price, it's possible that a price reduction plan through legal action was already in place," the lawyer says.
At the same time, it cannot be ruled out that the missing equipment disappeared between the inspection and the auction day. In this case, the guilty parties' actions may constitute a crime (abuse of power, fraud, theft, and others, depending on the circumstances). However, since the buyer failed to pay in full within 30 days, the state has the right to collect a penalty equal to 5% of the property's value—7,2 million hryvnias.
While the buyer's claim was being considered, the court suspended the payment deadline for the property. However, the appellate court overturned this measure, and the deadline was reinstated, presumably on March 16, 2021. (The decision has not been published at the time of writing, but data on the status of the case and subsequent actions by the parties in the courts suggests this conclusion.)
The state, in turn, filed a lawsuit to terminate the purchase and sale agreement (at the time of writing, the court had not yet opened proceedings in the case). This is formally a correct and lawful action on the state's part. If the payment deadline is missed by 60 days, the state has such a right (this is a direct provision of the law and a term of the agreement). Moreover, all formal grounds for upholding this claim exist. From a legal perspective, the case is quite simple: if the deadline is missed, the consequences follow.
If the claim is upheld and the contract is terminated, the property will be resold. Of course, numerous legal proceedings, both by the buyer and the state, may be initiated to block (and unblock) resale.
If the buyer proves illegality and fraud on the part of the state, it may be possible to recover damages, at least in the form of direct expenses (security deposit, attorneys' fees, and other legal costs). Recovery of lost profits and damage to business reputation in such a case is difficult and unlikely.
"In my opinion, the best way out of this situation is to reach a settlement agreement, under which the price of the facility will be reduced based on the missing equipment. However, I consider this option unlikely in the near future. A settlement agreement would effectively acknowledge the violations of the State Property Fund of Ukraine officials who facilitated the auction (whether through negligence or intent)," Shkarovsky believes.
The buyer has the right to appeal to international arbitration institutions in accordance with the Agreement on Mutual Protection of Investments between Ukraine and the Republic of Moldova for compensation for damages if unlawful actions by the state are proven. One thing is clear: the asset will be subject to lengthy litigation, which will benefit neither the investor (who bears the costs but is unable to begin work on the site) nor the state (which once again confirms its reputation as an unreliable and intractable partner).
The result?
While writing this article, we also sought comment from the investor in the controversial company. We managed to contact representatives of Zernoff, but unfortunately, they did not respond to our questions.
In any case, we are dealing with a rather ambiguous situation surrounding the privatization of the former property of the once-controversial state monopoly Ukrspirt. The situation is also interesting because, aside from the Marylivka distillery, there are no other similar precedents for the sale of Ukrspirt property. If Zernoff is correct, the situation looks like someone's gamble. However, for the scale of the State Property Fund, such fraud appears to be a very small game, especially before the launch of a major privatization.
Meanwhile, the State Property Fund is determined to terminate the contract with the current successful bidder and wants to announce a new tender for the enterprise. However, due to the lawsuits and scandal, finding a buyer for the Marylivka distillery will be difficult. In any case, the Fund will no longer be able to sell the distillery for 120 million hryvnias. So, if the State Property Fund is right and the Moldovan company is seeking a reduction in the enterprise's price, they have already succeeded. However, it remains unclear whether the Moldovan company will be able to purchase the plant again.
AUTHOR:
STEPAN KRYOKA
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