Legal Overview of the Draft Law “On Amending Laws of Ukraine for Improving Certain Mechanisms of Banking Activity Regulation” No. 3260 / 2571-д (the “Draft Law No. 3260 / 2571-д”)
On 24 March 2020, in order to meet the requirements of the International Monetary Fund (“IMF“), the Prime Minister of Ukraine Mr. Denys Shmygal has submitted Draft Law No. 3260  to the Parliament.
According to its Explanatory Note, Draft Law No. 3260 is designed to improve the quality and efficiency of functions performed by the National Bank of Ukraine (the “NBU“), the Deposit Guarantee Fund (the “DGF), the Cabinet of Ministers of Ukraine (the “CMU“), the Ministry of Finance of Ukraine (the “MFU”) in the field of banking regulation and supervision. Specifically, the Draft Law No. 3260 intends to expand the powers of the NBU in terms of the liquidation of banks, as well as to optimize the court procedures for appealing the state regulators’ decisions related to winding up banks.
- Banks cannot be returned to previous owners
- Compensation for damages suffered due to an unlawful decision
- Retrospective application of the Draft Law No. 3260
The substantive provisions of the Draft Law No. 3260 can be divided into three blocks, aimed at:
- improving banking activity regulation, in particular by providing the NBU with instruments, necessary to influence processes in the banking sector;
- establishing new procedural mechanisms when appealing NBU decisions on bank’s insolvency recognition, revocation of banking activity license or bank’s liquidation;
- improving bank liquidation procedures, mechanisms for compensation of losses (damages) incurred by a bank and its creditors, and mechanisms of the state’s participation while winding up banks.
On 25 March 2020 four alternative draft laws were submitted to the Parliament:
- Draft Law No. 3260-1 (submitted by the people’s deputy Mr. Ihor Palytsia); 
- Draft Law No. 3260-2 (submitted by the people’s deputy Mr. Oleksandr Dubinskyi); 
- Draft Law No. 3260-3 (submitted by the people’s deputy Mrs. Olha Vasylevska-Smahliuk); 
- Draft Law No. 3260-4 (submitted by the people’s deputy Mr. Oleh Dunda). 
As of 27 March 2020 the Draft Law No. 3260 and its four alternatives are under consideration of the Ukrainian Parliament’s Committees.
On 30 March 2020, Draft Law No. 2571-д, which is identical to Draft Law No. 3260, has been submitted to the Verkhovna Rada of Ukraine. The single difference between the draft laws is their initiator – Mr. Denys Shmygal in Draft Law No. 3260 or Mr. Danylo Getmantsev in Draft Law No. 2571-д. On the very day, the Draft Law No. 2571-д was adopted as a basis and was submitted under the expedited procedure for the second reading (decreased from 14 to 7 days).
The Draft Law No. 3260 / 2571-д intends to expand the powers of the NBU in terms of the liquidation of banks, as well as to optimize the court procedures for appealing the state regulators’ decisions related to winding up banks.
Main Developments of the Draft Law No. 3260 / 2571-д
1. Banks cannot be returned to previous owners
The Draft Law No. 3260 / 2571-д prohibits returning banks to their previous owners even if the respective insolvency/liquidation decision will be recognized by the courts as unlawful. Moreover, the Draft Law No. 3260 / 2571-д amends the provisions of the Civil and Commercial Procedural Codes on possible remedies that courts could apply to when resolving disputes with banks and their creditors. In particular, the Draft Law No. 3260 / 2571-д provides for a single and exclusive remedy available for former bank owners, whose rights were violated based on illicit individual acts of the NBU, the DGF, the MFU, the CMU or the National Securities and Stock Market Commission (the “NSSMC“) – monetary compensation for damages. Furthermore, according to the Draft Law No. 3260 / 2571-д , the recognition of the above individual acts as unlawful does not automatically trigger the invalidity of decisions or acts adopted during the bank’s insolvency and liquidation procedures.
The Draft Law No. 3260 / 2571-д incorporates significant amendments to the Code of Administrative Procedures of Ukraine. In particular, it suggests introducing new Article 266(1) that will regulate the procedure of challenging state authorities’ decisions on winding up banks. Pursuant to Article 266(1), courts will use as a basis for their consideration and will rely on quantitative and qualitative assessments and conclusions made by the NBU, the DGF, the MFU, the NSSMC and the CMU, which served as a basis for the decisions taken (with some exceptions).
Apart from that, the Draft Law No. 3260 / 2571-д clarifies that the recognition of an individual act made by the NBU as unlawful fully or partially will not:
- restitute the bank’s legal status that existed before the adoption of the challenged act/ decision and will not restore the rights of previous shareholders of such a bank;
- serve as a legal ground for invalidity and cancellation of decisions, transactions or other actions / inactions taken, committed or allowed during bank’s insolvency or liquidation;
- create any remedies for previous owners of liquidated banks, except for the right of getting monetary compensation of damages.
In addition, the Draft Law No. 3260 / 2571-д envisages that already commenced bank liquidation procedures cannot be suspended or terminated, even if the respective individual acts of the NBU and/or the DGF were recognized as unlawful and were cancelled. A similar rule will also apply to already commenced liquidation procedures.
The bank’s share value will be indicated in the report on financial and economic activity of the bank, which must be prepared by an internationally recognized audit firm that meets the criteria defined by the NBU. Such an audit firm must be appointed by the court.
2. Compensation for damages suffered due to an unlawful decision
The Draft Law No. 3260 / 2571-д introduces Article 79(1) to the Law of Ukraine “On Banking and Banking Activity”, which sets out rules for compensation of damages suffered by a bank’s owner due to unlawful introduction of insolvency procedure, bank license revocation or bank liquidation. It stipulates that the burden of proof for damages will be put on the bank owners. Meanwhile, any compensation for lost profit will be made in the amount that the bank owner could actually receive, and it will be possible only if the decision (individual act) of the NBU became the sole and sufficient reason for the owner of a bank to lose profit.
The direct damages, in turn, will be defined based on the fair market value of the shareholding of the bank’s owner as of the date of the NBU decision on recognizing the bank as insolvent, revoking the banking license or liquidating the bank. The share value will be indicated in the report on financial and economic activity of the bank, which must be prepared by an internationally recognized audit firm that meets the criteria defined by the NBU. Such an audit firm must be appointed by the court. The audit firm’s report is considered as the expert’s opinion and shall be published on the official website of the NBU.
The value of the bank’s shares is determined by the amount of money that a buyer, with all the necessary information and data, would pay for the bank’s shares on the day of settlement, considering the future prospects of the bank, the actual financial condition of the bank (including its regulatory capital, liquidity and quality of assets), the bank’s business model and structure, and market conditions (particularly the availability of liquidity and cost of financing), as well as the general macroeconomic situation. The value of bank’s shares shall be based on reasonable and realistic valuation made in accordance with international valuation standards, considering the profile of the banks’ operations (including regulatory capital requirements, which are required to continue the bank’s activity).
Compensation for damages cannot be made in any form other than monetary compensation, and any types of compensation in kind are strictly prohibited.
3. Retrospective application of the Draft Law No. 3260 / 2571-д
According to final and transitional provisions of the Draft Law No. 3260 / 2571-д , legislative and other legal acts adopted before the entry into force of this Law will apply only to the extent that they do not contradict the provisions of this Law. In other words, the Draft Law will have the highest legal force governing the relations related to compensation of damages to former shareholders of insolvent / liquidated banks in Ukraine.
The newly submitted Draft Law No. 3260 / 2571-д introduces a complex set of legal norms that will regulate the procedure of compensating damages to shareholders of insolvent / liquidated banks in Ukraine. In particular, the Draft Law No. 3260 / 2571-д prohibits any compensations “in kind” and allows only monetary compensations of direct and indirect losses, which must be calculated based on the report of an internationally recognized audit firm.