How Ukraine can get back 30 billion euros in unpaid court-ordered debts

May 29, 2020
A quarter of Ukraine's annual GDP equals outstanding court decisions. To change this situation, Ukraine needs to create a better regulatory framework. It is important to allow technological innovation to dictate the content of national legislation. The courts, in turn, must understand that they are supposed to help, not hinder the execution of judgments, to stop any discrimination between debtors and creditors. Read more about how to facilitate enforcement of decisions below.
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Even if the case is lost in court, there is no need to be upset. After all, in Ukraine enforcement of court decisions often does not work; this is especially true of government agencies. In fact, this not only causes distrust towards the justice system, but also leaves significant monetary debts unpaid in Ukraine. The situation can be changed only by way of a legislative approach.

Let's start with numbers, on the basis of officially available statistics: almost UAH 900 billion, or roughly some EUR 30 billion, are locked in the form of unenforced court-ordered debt in Ukraine.

Almost UAH 900 billion, or roughly some EUR 30 billion, are locked in the form of unenforced court-ordered debt in Ukraine. This is more than one-fourth of Ukrainian annual GDP.

This is more than one-fourth of Ukrainian annual GDP.

This is not ordinary debt. It is unpaid debt, unacceptable debt, where the defaulted debtor has failed to deliver on his court-ordered obligations. Yet this EUR 30 billion do not include other losses related to the non-performance of justice: namely non-enforced of non-monetary claims, lack of action by administrative authorities, absence of the ability to claim interest, and the loss of employment or business opportunity.

The justice system of Ukraine must understand that it is responsible for this locked EUR 30 billion in particular, and the lack of decency in private and public relationships in general. Add to this that Ukraine is an unparalleled "champion" among the 48 Council of Europe states in being found in violation of the right to a fair trial and property rights by ECHR by reason of the non-enforcement of court judgements.

Ukraine is an unparalleled "champion" among the 48 Council of Europe states in being found in violation of the right to a fair trial and property rights by ECHR by reason of the non-enforcement of court judgements

There are various reasons for this unacceptable situation, including the moratoria by Parliament to protect some privileged (State) debtors, lack of transparent and effective bankruptcy process, insufficiently independent and incentivised enforcement system etc. Now let's focus on one main reason only - the role of courts in general, and their position on blocking debtor bank accounts in particular. 

First of all, all court judgments must be enforced. Without enforcement, there is no purpose in the existence of courts. Is this principle of "practical and effective" nature of rights, including the right to a fair trial, fully understood by Ukrainian courts? The role of courts in overseeing enforcement in all advanced European jurisdictions - which score high in economic and social development, and have no problems in this respect in Strasbourg - is to enable, and not to prevent, enforcement.

Unfortunately, the case is rather the opposite in Ukraine right now, and the courts are unfortunately a major contributing factor for non-enforcement through their over-zealous oversight of the work of Enforcement Officers (both the State Enforcement Service (DVS) and Private Enforcement Officers, PEOs), which more frequently than not punishes the winning party of the court decision, creating privileged positions for some debtors and creditors while discriminating others. 

First, the courts need to understand that they are called to help, and not prevent enforcement, discontinuing any discrimination among the debtors and creditors, disallowing the dishonest debtor from playing the system

The courts need to understand that they are called to help, and not prevent enforcement, discontinuing any discrimination among the debtors and creditors, disallowing the dishonest debtor from playing the system

What can the Ukrainian courts do, based on best European practices? First, the courts need to understand that they are called to help, and not prevent enforcement, discontinuing any discrimination among the debtors and creditors (especially, discrimination in favour of State entities), disallowing the dishonest debtor from playing the system. One of the best ways to do that is through automated bank account blocking and write off solution (ABABS), which already exists in a number of advanced European jurisdictions. One push of a button - and all bank accounts of the debtor are blocked, and moreover the money due as ordered by court are written off instantly. What is wrong with this approach - other than its really making the court decision a real and inevitable power? 

First of all, in order to start creating better regulatory framework for the people and business, the Ukrainian policy makers need to understand that each and every detail - especially each and every technical detail - does not necessarily need to be written in the legislation, or enshrined by way of prescriptive written rules. It is important to allow technological innovation to dictate the content of the domestic law, rather than refer to statutory obstacles or the legal tradition to prevent innovation and progress.

It is important to allow technological innovation to dictate the content of the domestic law

Whatever electronic tool can help good administration of justice, should be allowed to be tested in the justice sector by reference to common sense, or at least in many cases it can be left for secondary rules and judicial practice. Currently the Ukrainian law does not (and should not) regulate whether or not a judge can write his or her decision with a particular desktop, or laptop, or phone, or peculiar software solution? Nor is it regulated whether the decision can be dictated by the judge and typed by the clerk on his computer.

So why require specifying in statute by which electronic tools and technological processes the enforcement should be better empowered? Whatever helps the speed and transparency of justice, must be allowed by default, as a matter of principle.

The advanced jurisdictions in EU are trying to focus on new electronic solutions as a way to improve justice. The domestic courts in many EU countries have usually served as a facilitator of technological progress, and not the protector of the 19th century status quo.

The domestic courts in many EU countries have usually served as a facilitator of technological progress, and not the protector of the 19th century status quo.

PLAIS, the Lithuanian version of ABABS, is now considered as one of the best practices in the World, cementing Lithuania's standing as no.1 among EU countries in enforcing contracts, and no. 3 overall among EU states (only behind Denmark and Sweden) in the World Bank Doing Business Survey 2020. Merely 118 Lithuanian private enforcement officers (PEOs) collect more than EUR 200 million annually in monetary debt, which can be compared with about EUR 600 million collected by more than 5,000 enforcement officers in Ukraine (including DVS and PEOs).

One of the reasons for that productivity is the Lithuanian ABABS solution, which makes even the smallest claim easy to enforce. Moreover, hundreds of million EUR per year are collected instantly in seconds in Lithuania in VAT, customs duties, social charges of companies and other contributions in various type of debt.

Hundreds of million euros per year are collected instantly in Lithuania in VAT, customs duties, social charges of companies and other contributions in various type of debt. Neither the banks nor political players can manipulate this process

Neither the banks or the central bank - nor most importantly, political players - can manipulate this process, effectively making the timely payment of debt an inevitability and a given, which acts as a huge disciplining factor in the society as a whole. This best European practice and the common sense show that, without bank account blocking, there can be no proper enforcement. And without automation, there is no effective, efficient enforcement that protects against an arbitrary human interference.

Now, as far as the situation in Ukraine goes, some automation in blocking bank accounts of physical person debtors is already possible in alimony cases, which reduces delays from the formal decision to freeze to the moment of the actual blocking of bank account from 1 month to 1-2 days. But not all Ukrainian banks are participating in the scheme to the same scope and extent. Secondly, this scheme is merely the ability of enforcement officers to communicate with the banks by email, and this not full automation which can reduce delays to a few hours or even seconds, as in the case of Lithuania.

So Ukraine needs to expand the regulatory possibilities for enforcement officers beyond alimony dent, and implement the simple software solutions for full automation. This might require the change in the political role of the National Bank of Ukraine and a few other statutory changes - but why not, if it serves the purposes of speedy and, most importantly, non-arbitrary justice? 

As far as the Ukrainian business bank accounts go, the regulatory situation is murky, as the issue is still pending before the Supreme Court. There is an argument, upheld by some Ukrainian courts, that the debtor company will be unable to pay employee salaries if the company bank account is blocked - thereby disallowing any blocking of corporate bank accounts, not to mention automation of that blocking.

This approach is illogical from the point of view of the key rule of law principle that enforcement should be unconditional, if the courts are to play any "practical and effective" role. Moreover, if debtor bank accounts in Ukraine can already be blocked by using electronic means with regard to private persons, so why discriminate them vis a vis corporate debtors? Likewise, this approach is incompatible with EU best practices in corporate governance, given that "external" obligations of a company (enforcement of court debt, tax duties etc.) are considered as "priority debts" with regard to any "internal" company obligations (salaries, dividends etc.), as long as the company is not in bankruptcy process where some prioritisation of debtors might be warranted.

Yet even in bankruptcy, the EU countries (Germany, some other Northern countries) that make no distinction or create arbitrary "lines" between different categories of creditors and the outstanding debt - be it huge debt owed to the tax authorities or small private creditor debt - score higher in the World Bank Doing Business, GDP per capita and the socio-economic development generally.

Such a state of affairs raises questions about the general understanding of Ukrainian courts about how business works in a market economy - namely, if a company cannot pay its suppliers and creditors, how can the company continue to do business by pretending to be able to pay its employees? What is a theoretical or practical value in protecting that illusion? Moreover, what moral value has an argument that we should protect the debtor company employees, at the expense of the employees of the creditor company who would not get paid? And more generally, why are Ukrainian courts are looking for obstacles to implement a court decision that their colleagues just delivered against that debtor - isn't it like shooting yourself in the foot? In short, such an attempt at an argument by the Ukrainian courts does not stand any reasonable legal, moral, social or economic test.

Currently, the delays in reaching bank accounts of a corporate debtor in Ukraine amount to 1 month or more. These delays are absolutely unacceptable in a modern society and business, which work on the principle of "time = money". Moreover, while an enforcement officer is writing paper letters to (more than 80) Ukrainian banks trying to find out whether and how much money is on the debtor account, the moral hazard is created for a dishonest debtor to have ample opportunities to set free by hiding or redirecting the assets.

What is urgently needed is the clarification of law and courts practice to harmonise the ability of the creditor to block bank accounts in the enforcement process of a court decision, regardless of the nature of debtor (corporate or private), and secondly, to enable electronic communication and automated blocking of company bank accounts with a simple software solution. 

The 30 billion EUR in unpaid debt pending before Ukrainian enforcement officers. The bulk of that unpaid dent is owed by the Ukrainian State authorities, State-owned companies, or big private corporate instruments with their (frequently) oligarchic domestic beneficiaries.

And let's come back to where we started: the 30 billion EUR in unpaid debt pending before Ukrainian enforcement officers. Who owes it? An extensive analysis of the structure of default indebtedness (unpaid debt) carried out by our Project experts shows what has probably never been a secret - that the bulk of that unpaid dent is owed by the Ukrainian State authorities, State-owned companies, or big private corporate instruments with their (frequently) oligarchic domestic beneficiaries.

In this context, by attempting to disallow the blocking of corporate bank accounts, the Ukrainian courts are willingly or unwillingly protecting these debtors, not the weak and the underprivileged in the society. And who is owed - mostly simple Ukrainian citizens, small and medium business, and foreign investors. This state of affairs shows that, from the point of view of the enforcement as the underlying principle of practical and effective justice, the Ukrainian State has failed the citizens - first of all, by behaving as a dishonest debtor who cheats his way out on paying the debts even after losing in court. Moreover, the State continues to do so by clearly discriminating in its own favour against private individuals and smaller business, who still need to pay even where the State or its entities frequently do not (in cases of regulatory or "de facto" moratoria against enforcement or bankruptcy).

In this context, the inability of enforcement officers to block bank accounts of any legal person - including, of course, any State body or company - smacks of engineered to cement the State's dominant and discriminatory role in the country's socio-economic hierarchy. So much for the interest of "caring about company employees", advocated by some Ukrainian courts.   

And if one genuinely wants to safeguard the interests of the weak and underprivileged debtors in Ukraine with some socially-protected amounts (salaries, pensions, social payments), one must on the contrary rush to implement the ABABS solution. The aforementioned Lithuanian PLAIS system, for instance, uses software algorithms rather than a human factor to fairly, proportionately and transparently:

a) find whether or not a debtor has a bank account;

b) distribute the enforcement amount between different bank accounts of the debtor;

c) prevent opening up of new accounts or flight of the money;

d) safeguard some limited socially-protected amounts from the enforcement collection.

Right now, the status quo in Ukraine is the opposite - the lack of effective automated blocking of bank accounts mainly protects the debtor SOEs and other State-related business, not the unemployed or pensioners. Above all, if Ukraine really wants to promote more social fairness and equality in the context of the administration of justice, the first step should perhaps mean that the State should start paying its own long unpaid debts to the Ukrainian people and businesses.

Finally, if Ukraine really wants to promote business climate in order to build a proper market economy and promote economic well-being, let the State get out of business it cannot and is not even willing to do, discontinuing the constant and structural discrimination against the private sector in general, and small and medium business in particular.

Why many of the 13,000 SOEs in Ukraine are still allowed to perpetuate the illusion - with their employees, partners and customers - of being capable of continuing to be fully operational when in reality they cannot pay their court-ordered debt? Does one necessarily have to have a major political or health crisis to end that illusion? As the saying goes, when the tide go down, we see who has been swimming naked.

The analysis of the structure of the unpaid debt, conducted by our Project, shows that Ukrainian SOEs are the weakest element in the country's socio-economic motor. Will legal protections of various sorts prevent the inevitable? The practice shows that these legal protections achieve the opposite result, encouraging SOE Directors to continue on the path of the moral hazard of not paying debt or paying it very selectively.

A supervisory board of any normal company would immediately request firing of a Director who systemically fails to pay the company's suppliers or employees. Why is this not happening in Ukraine? This raises more complex questions not only about the excessive role of State in the Ukrainian economy, but also the quality of its corporate governance. But let's start from small and simple steps - just implement ABABS to prevent any dishonest debtor - State company or not - from playing the system. Let's see who has been swimming naked.

And to those who will raise the perenial point of "there is no money in the budget": ABABS will also help increase the Ukrainian budget because, finally, administrative fines will be collected, thereby also increasing the overall culture of responsibility in the society. No longer allowing improper parking would probably be the most visible sign of the improving rule of law in Ukraine?

As the best European practices show, a proper ABABS solution could eventually be scaled to be used much beyond the enforcement system, automatically generating revenue the tax, customs, social protection and other authorities.

Dovydas Vitkauskas
team leader of the EU Project Pravo-Justice, consultant on justice reform and good governance

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