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What exactly should a foreigner do, if his obligor is a state enterprise on the territory of Ukraine

Ukraine, after obtaining independence in 1991, has took the path of development of market economy. However, the influence of the former communist party official clerks had been so great that many of economic reforms were not put into action. Also, people with title of “red director” (person who been a manager in time of existing of Soviet Union state) were not interested in economic reforms, they put all forces to oppose the privatization of their companies to continue the usage of state entities in their own purposes. There are still a lot of state enterprises in Ukraine, as a result of those cases. The name state enterprise, in the broadest sense of the word, refers to a large range of entities: unitary enterprises, public enterprises, commercial enterprises with a share of the Ukrainian government in the authorized capital of more than 50%, municipal enterprises. These state enterprises have so broad and diverse sphere of activities, that it can be a state enterprise-monopolist with multibillion turnovers, such as “Naftogaz Ukraine”, and a small local company with minimum turnover like tens of thousands euro per year.

Many of state enterprises provided international economic activities, such as buying some equipment abroad, borrowing from foreign bank institutions and investment companies, ordering work or services. Due to the nature of its management of state enterprises, they really are not fair and binding payers on their debts, and as a result foreign contractors have to go to courts or arbitrations to protect their legitimate rights and interests. And even with the decision of the competent Ukrainian court or tribunal, foreign contractor sometimes cannot receive appropriate monetary satisfaction. There are a few reasons for it: a debtor has no property, improper work of state executive body, which obligates for execution of court decisions, putting this entity in the lists of not possible to privatization (in this case, we cannot inflict a punishment upon the debtor’s property, even in bankruptcy proceedings), etc .

All factors of this situation belongs to the inability of the state of Ukraine to ensure observance of an Article 6 (Right to a fair trial),  Article 13 (Right to an effective remedy) and Article 1 of the First Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms. So, foreign contractors can expect for protection of their rights and legitimate interests in the European Court of Human Rights (“ECHR”). While the adjudgment proceeding in the ECHR takes a long time, we cannot discard such way to protect the rights and interests.

Ukraine belongs to five countries with the highest number of complaints to the ECHR, that’s why Ukrainian lawyers have extensive experience in drawing up such complaints and further their support in the ECHR. Moreover, Ukrainian lawyers are ready to accompany the case to the ECHR concerning the non-enforcement of Ukrainian court’s decisions on debt payments by state enterprises (unitary, public, municipal enterprises, enterprises with the state share in the authorized capital of more than 50%) under the conditions of the success fee, in other words, lawyers will get a remuneration only in cases of success. This approach allows foreign contractors to begin defense of their rights with minimum cash expenditures and because of this such conditions are very interesting.

Separately, I want to say about the existence of other effective instrument to protect the rights and legitimate interests of foreign investors in Ukraine. This is the Convention on the Settlement of Investment Disputes between States and Nationals of other States. Ukraine is a participant of it. According to the Convention, It was established the International Centre for Settlement of Investment Disputes (ICSID, Washington), which considered investment disputes between Contracting States and natural or legal persons of other Contracting States. Not every foreign entity or person with the right to seek a debt from Ukrainian entities (private or state, it doesn’t matter) can take advantage of this legal instrument, but only those individuals whose injections in Ukraine’s economy shows real investment, not trade or financial transactions. It does not matter whether investments have been injected to private or state sector of the economy; the protection includes both of them. This method of protection of foreign investments is not popular among investors due to certain legal complications and expensive of procedures, but there is a tendency to increase protection of foreign investment exactly in such a way. It is due to the fact that the ICSID is generally accepted international institution for Investment Disputes, whose authority is supported by the International Monetary Fund.

Summing up, we can say that if you are a foreign company and your obligor is a state enterprise in Ukraine, you have already used all legal methods of debt collection, it is necessary to use available procedures and possibilities to defend your interests in international courts.

Author: Kydalov Igor

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Kydalov & Partners
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Publication Date: 27.07.2015
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