Origin and aim of changes
The reform of Ukraine's court system took another step forward on March 8 2011 when amendments to the Law on Enforcement Procedure came into force. The changes have significant implications for the enforcement of foreign arbitral awards.
The procedure for enforcing foreign arbitral awards in Ukraine is governed by the New York Convention, the European Convention on International Commercial Arbitration and the Law on International Commercial Arbitration. However, the Law on Enforcement Procedure governs the process to be followed once a court decision on recognition and enforcement of an award has been issued. Commentators have identified numerous problems with enforcing arbitral awards under the law, including:
- the protracted enforcement process;
- difficulties in recovering funds in a foreign currency;
- difficulties in transferring funds to a foreign creditor's account;
- the inability to hold debtors liable for non-enforcement of foreign awards;
- the inability of state enforcement officers to ensure enforcement of court recognition of awards;
- contradictions in the law and implementing regulations regarding enforcement actions;
- the inability to enforce awards against state-owned companies in practice;
- the inability to hold state enforcement officers liable for negligence or non-performance of their duties;
- the absence of expedited enforcement procedures for urgent matters; and
- the availability of numerous procedural mechanisms that can be exploited to delay enforcement proceedings.
Some of these problems are addressed in the new version of the law.
The financial crisis has proved a catalyst for change to enforcement procedures in Ukraine, as it has brought a dramatic increase in litigation and enforcement and in the value of the claims at issue. Although no reliable statistics are available on the number of cases relating to the enforcement of arbitral awards, the overall trend has had an impact in this field. Some authorities estimate that around 70% of final court judgments remain unenforced, and the percentage of unenforced awards is likely to be similar.
The Law on Enforcement Procedure 1999 proved inadequate, as it contained a number of loopholes and inconsistencies which allowed debtors to abuse the process. In view of the sheer number of complaints against Ukraine about the state's failure to enforce final judgments and awards, the European Court of Human Rights was forced to exercise its rarely used powers of pilot judgment. In Yuriy Nikolayevich Ivanov v Ukraine(1) it asked Ukraine to remedy the situation by January 2011, although this deadline was later extended to June 2011.
Until now, the success of enforcement proceedings in Ukraine has depended largely on the cooperation of the debtor; where the latter refused to comply, it could employ a number of instruments to avoid payment or challenge the actions of the creditor and the state enforcement officers. Most strategies used by debtors involve challenges at various stages of enforcement. Under the previous legislation, such challenges could be brought internally (ie, through the state enforcement service), as well as through the courts. Such challenges generally stayed the enforcement, making it impossible to proceed until the challenge was resolved.
The new law aims to:
- limit opportunities to challenge the enforcement procedure;
- expedite enforcement;
- increase debtors' liability for non-compliance; and
- consolidate and unify the applicable legislation, thereby removing loopholes and differences in interpretation.
The new legislation introduces the following improvements:
- The actions of a state enforcement officer cannot be challenged in administrative proceedings before the state enforcement authorities; rather, such challenges must be brought before a competent court.
- The previous version of the law expressly stated that monetary awards could be recovered only in hryvnia. This caused obvious difficulties for award creditors, and foreign parties found this restriction particularly illogical. Now, court decisions that recognise a foreign award can be enforced for payment in the foreign currency of the award, using a foreign-currency account held by the state enforcement service.
- Moneys in a debtor's accounts may be attached; previously, this issue was unclear and was a constant source of abusive practices. The right to attach such funds also applies to accounts opened after enforcement proceedings have started.
- Time limits apply to the execution of a state enforcement officer's duties - for example, he or she must commence an enforcement procedure no more than one day after the expiry of a time limit for voluntary execution.
- The state enforcement authorities have direct access to databases containing confidential information about a debtor's property. This may raise issues in relation to bank confidentiality and personal privacy, but will undoubtedly facilitate the enforcement of awards.
- New provisions on ascertaining the price of property sold in enforcement proceedings involve both the debtor and the creditor. The new law distinguishes between the 'determination of the value of the property', as performed by the state enforcement agent, and the 'valuation of property' by a special licensed body.
- State enforcement officers have been given broader powers, including the right to prohibit a debtor(2) from leaving the country if the latter fails to cooperate. They may also demand confidential information from any state body or organisation in the course of enforcement.
- The new law increases the debtor's administrative and criminal liability for non-compliance with court orders. Until now, such provisions of the criminal law had 'dead letter' status. In spite of chronic non-enforcement of judgments and awards, the number of persons charged - let alone punished - was minuscule.
The new law introduces many significant changes that are designed to make enforcement more efficient; however, it remains to be seen whether they are effective against the underlying problems in the legal system and a general culture of avoidance that still obstructs the enforcement of arbitral awards in Ukraine.
Certain rules, such as those which give the state enforcement officers power to limit foreign travel or access confidential information, could be seen as infringing human rights and presenting opportunities for abuse by bad-faith creditors.
Unfortunately, a number of serious problems in legislation and practice have not been addressed. In particular, it is still impossible in practice to enforce an award against a state-owned company - especially entities in the energy sector, as the law explicitly prohibits the seizure of their assets. Despite Ukraine's acknowledged corruption problems, state enforcement officers effectively remain immune from liability in respect of omissions or misconduct in the course of enforcement proceedings. Debtors frequently use delays in enforcement actions - especially in the initial stages - to conceal assets, often exploiting the fact that Ukrainian legislation has no provisions on piercing the corporate veil. As such, the absence of a fast-track option is a serious shortcoming in enforcement proceedings.
For further information on this topic please contact Andrey Astapov or Ivan Lishchyna at Astapov Lawyers International Law Group by (+38 044 490 7001), fax (+38 044 490 7002) or email ([email protected] or [email protected]).
(1) 40450/04, Sections 35 to 37, ECHR 2009.