Civil Liability of Banks’ Shareholders and Related Parties: Practical Considerations
27 November 2020
The article is published in The Ukrainian Journal of Business Law
During 2014-2016, the National Bank of Ukraine (the “NBU“) has carried out the “great bank cleansing” that resulted in the withdrawal of 103 banks from the Ukrainian banking market. Since the assets of some of the insolvent and liquidated banks were insufficient to cover all debts, claims against the banks’ related parties and shareholders whose actions contributed to the insolvency are regularly considered by creditors that have suffered losses. Pursuant to the data published by the Deposit Guarantee Fund of Ukraine (the “DGF“), 49 banks in Ukraine remain in the process of liquidation as of 08 September 2020. Consequently, lawsuits on collection of damages against banks’ related parties may remain an effective mechanism for creditors attempting to recover their losses.
1. Criteria for determining bank’s related parties
As a rule, shareholders are not liable for their company’s obligations and their possible liability is limited to the value of shares owned by them. However, special rules apply to the personal liability of a bank’s related parties. In accordance with Article 58 of the Law of Ukraine “On Banks and Banking Activity”, banks’ related parties could bear civil liability, as well as administrative and criminal responsibility for violating laws or NBU regulations, carrying out risky activity that threatens creditors’ and depositors’ interests, or making the bank insolvent.
According to Article 52 of the Law of Ukraine “On Banks and Banking Activity”, banks’ related parties include direct controllers, persons with significant control (more than 10% of the bank’s share capital), banks’ top management, affiliated individuals and entities (including shareholders and management).
The bank is obliged to inform the NBU about all of its related parties. The decision to recognize a legal entity or an individual as a bank’s related party is made by the NBU’s Committee on Banking Supervision and Regulation, Oversight over Payment Systems if one of the following criteria is met:
- transactions between the bank and its counterparty are economically unreasonable;
- economic dependence between the bank and related person that could be demonstrated if any problems connected with the activity of a specific bank would lead to deterioration of the related party’s activity or vice versa;
- common infrastructure, for instance, when a related person has the same operational structural elements (e.g. IT or accounting system) as the bank or its related parties;
- lack of transparency that could be demonstrated by unreasonably complicated ownership structure or if the ownership structure hides the identity of the ultimate beneficial owners.
Besides applying the two-step test on identifying bank’s related parties, the national courts typically also examine whether an indirect owner of a bank’s assets that did not participate in the bank’s activity could be considered a related party. For instance, the Appeal Court of Ivano-Frankivsk region in the case No. 344/10563/16-ц dated 06 March 2018 revoked the first instance court decision on collection of damages from a bank’s related party that had been in a depositor’s favour, because although the defendant was an indirect owner of the bank’s assets (defendant owned 89,9% of the bank’s shares through another company), it did not take part in the bank’s activity. The panel of judges concluded that in order to claim damages from a bank’s owners or managers, the claimant should have initially proven the fact of damages committed by the defendants, the sum of damages, evidence of a breach of obligations and the causal link between the related parties’ actions, or lack of actions, and the damage caused.
2. Practical considerations regarding civil liability of bank owners and related parties
Article 1166 of the Civil Code of Ukraine envisages general grounds of liability for causing damages to an individual or legal entity’s property. A person who has caused proprietary damages will have to compensate them if they were triggered by unlawful decisions, actions or omissions.
Considering that banking legislation envisages liability of banks’ related parties for causing damages to the bank, an insolvent bank’s creditors and depositors may file civil lawsuits for damages arising from subsidiary liability against the bank’s related parties that have personally contributed to the bank’s insolvency. In such a case, the DGF or third parties with proprietary interest (an insolvent bank’s creditors and depositors) are authorized to prepare and submit claims on damages collection against the bank’s related parties.
Under paragraph 5 of Article 51 of the Law of Ukraine “On Households Deposit Guarantee System”, if the insolvent bank’s assets are insufficient to cover all of its liabilities, the DGF addresses the bank’s related party with a complaint on damages recovery. If the bank’s related parties do not satisfy the DGF’s demands, it is authorized to pursue a civil lawsuit. Such a claim could be filed on one of the following grounds: (i) actions or omissions of a bank’s related party that have caused damages to depositors, creditors and/or the bank; or (ii) a bank’s related party has directly or indirectly received proprietary gain from the related party’s actions or omissions.
As relevant court practice shows (for instance, the Resolutions of the Supreme Court dated 20 September 2018 in the case No. 753/23222/15-ц and dated 16 May 2018 in the case No. 757/34878/15-ц, Resolution of the High Specialized Court of Ukraine for Civil and Criminal Cases dated 10 May 2017 in the case No. 753/23222/15-ц), courts commonly dwell on the following circumstances:
- whether a related party at fault in the circumstance that led to the bank’s insolvency;
- did actions or omission of a related party lead to the bank’s insolvency;
- did the related party’s unlawful actions or omissions cause damages to the claimant;
- is there a causal link between the wrongful conduct and damages;
- is there a record on the completion of the bank liquidation in the Unified State Register of Legal Entities and Individual Entrepreneurs.
Moreover, as it was concluded in the Resolution of the Supreme Court dated 19 June 2018 in the case No. 757/75149/17-ц, the DGF can submit a claim on collecting damages from a bank’s related party only if the bank’s property was insufficient to meet the creditors’ demands
Therefore, since all elements of civil corpus delicti must be met simultaneously for the collection of damages, typically national courts refuse to satisfy the DGF’s claims on collection of damages from the bank’s related parties due to lack of duly proven causality as it is provided for in Article 1166 of the Civil Code of Ukraine (for example, in the Ruling of the Higher Specialized Court of Ukraine for Civil and Criminal Cases dated 29 March 2017 in the case No. 761/3002/15-ц the judges have concluded that the claim against the banks’ related parties must be rejected, because the causality of damages had not been proven with admissible evidence).
To restore depositors’ and creditors’ rights, the latter, as well as the DGF may submit claims for damages directly against related parties, which have contributed to the bank’s insolvency. However, according to applicable court practice, such cases may face several procedural obstructions and pitfalls. First of all, it is necessary to demonstrate that the bank and its counterparty involved in a null and void transaction are related parties under the Ukrainian law. Secondly, if a bank becomes insolvent, banks’ related parties are not subject to civil liability automatically. In such a case, in order to collect damages from the bank’s related parties the DGF will have to initially prove the existence of civil corpus delicti (negative actions or omission, related party’s fault, causal link between the wrongful conduct and damages). Nonetheless, claimants in the such cases should bear in mind that their chances to obtain a positive court decision could be improved through relevant findings obtained in related criminal proceedings or litigations pursued locally or internationally.