Blind Themis: how Ukrainian courts help fugitive oligarch Zhevago

Blind Themis: how Ukrainian courts help fugitive oligarch Zhevago

In rulings favorable to Kostiantyn Zhevago, liquidated companies “come back to life,” and business owners change based on printouts.

Only about two months have passed since the scandalous arrest of the former head of the Supreme Court, Vsevolod Knyaziev, on bribery charges and the exposure of a criminal group that allegedly helped resolve court disputes in favor of oligarch Kostiantyn Zhevago. Yet Zhevago’s name is again at the center of events. Judges in various courts are issuing astonishing decisions that contradict not only Ukrainian but also international practice, “raising from the dead” long-liquidated firms and transferring companies to Zhevago that never belonged to him. Those who dare to make rulings against the “mainstream” receive a personal negative mention on the air or on a website owned by the entrepreneur’s son from the Espreso channel, whose journalists attend almost every court hearing. Read more about this in the Apostrophe piece.

Kostiantyn Zhevago has been hiding abroad for quite some time. He is pursued by a number of criminal cases related to the withdrawal of billions of hryvnias from the bank he controlled, Finance and Credit. After the arrest of the former Supreme Court head Knyaziev, the businessman is also accused of giving a bribe for a favorable resolution in the dispute over the Poltava GOK (Zhevago’s stake there is sought by either Russians from VS Energy or structures of Ihor Kolomoyskyi). The oligarch also has a number of assets that he initially used as channels for siphoning funds and is now trying to regain through dubious court rulings. An example of such assets is the triangle of companies Rosava, Bila Tserkva CHPP, and Premiorri LLC.

Rosava — once the largest tire manufacturer in Ukraine — actively developed and grew until 2015. But when its owner, Kostiantyn Zhevago, began having problems, the plant essentially declined. As a result, due to over 20 billion UAH of artificial debts, the company went bankrupt. Management created an alternative company, Premiorri LLC, which in addition to its own production assets rented industrial capacities from Rosava and produced products under the Premiorri trademark. Zhevago’s conglomerate also included the Bila Tserkva CHPP. Besides supplying electricity and heat to the population, it was also an integral link in the tire production chain.

Rosava’s and the CHPP’s assets were pledged at the Finance and Credit bank and to the National Bank as collateral for refinancing loans to Zhevago’s bank, Finance and Credit. So when liquidation proceedings opened for Finance and Credit, the Deposit Guarantee Fund put part of the bank’s claims to Rosava and the CHPP up for sale, which brought other creditors into Zhevago’s business. As for Premiorri — that is a new business in which the entrepreneur had no involvement.

Courts are now considering a number of cases somehow connected with corporate rights to the listed companies, in which Zhevago, through his representatives, is trying to gain control over the assets, in particular the Bila Tserkva CHPP and Premiorri LLC. The oligarch wins the vast majority of courts either at first instance or on appeal. However, very often the arguments judges use to support his defenders’ positions look, to put it mildly, strange.

The Premiorri case. Property that didn’t exist

A short summary of case No. 911/266/22, heard in the Commercial Court of the Kyiv region by Judge Andrii Chernoguz, is as follows. The founder of the Ukrainian company was the British Premiorri LTD, registered in Bristol. Since 2018, the sole beneficiary and director of the company was Oleksandr Merzliakov. In 2020 he decided to expand the capital of Premiorri LLC and attracted an investor — Leonid Hlynianyi. He intended to invest $5 million over the next 5 years. Shares in the authorized capital were distributed as 80 to 20 in favor of Hlynianyi.

Around the same time, Zhevago decided to gain control of the company. For this, the British register first replaced the director and then the beneficiary of Premiorri LTD, who became a certain Terry Lee Rose, who allegedly acted on behalf of Zhevago. After that, the company disputed the legality of Hlynianyi’s involvement and tried to “roll back” the deal.

A key argument of Zhevago’s side is that it legitimately changed the owner of Premiorri LTD and that Merzliakov allegedly transferred his rights to Rose. But opponents question that fact.

A feature of the British Companies House is that the information entered is not actually verified for authenticity. That is, the mere fact of an entry in the register does not, for example, prove a change of director or shareholders. For that, additional documents with signatures and stamps are required. New shareholders must receive a corresponding certificate. Zhevago’s side did not provide such documents to the court, and those it did provide look very dubious, as explicitly noted in the case materials.

In particular, as proof of the transfer of corporate rights from Merzliakov to Mr. Rose, an incompletely filled-out form was provided, as well as an unsigned minutes of a meeting at which Merzliakov was allegedly present (though he was at that time not in London but in Ukraine). The court did not react to these circumstances despite obvious signs of forgery. The new certificate confirming Rose’s ownership, the board resolution appointing him, or declarations of meeting participants (if any) of Premiorri LTD were not provided either.

Even stranger is the court’s willingness to consider as admissible evidence PDF files of unknown origin containing alleged correspondence intended to confirm the actual ownership rights of Kostiantyn Zhevago or his son Ivan or a third person (variously across files) over Premiorri LTD. According to the case materials, the court examined not the correspondence in witnesses’ mailboxes but PDF files with screenshots from other mailboxes (allegedly correspondence from 2020), forwarded by an unknown person to an email address created by an unknown person in 2022, i.e., already during the court proceedings. It is odd that the court, first, did not note that Premiorri LTD’s representatives could not determine who the beneficiary actually was, and second, that the allegedly unknown-origin correspondence was effectively accepted as admissible evidence confirming ownership of a foreign company without any evaluation or doubt about their authenticity by the court.

The most unexpected part was the court’s ultimate reasoning — effectively recognizing Zhevago’s structures as the owner of Premiorri LTD. As motivation, the judge used circumstances that were not even part of the claim, namely deciding to determine whether the authorized capital of Premiorri LLC had been formed by two individuals who founded the company in 2015 (they later sold their shares in Premiorri LTD). The judge decided that since evidence confirming the formation of the authorized capital was absent (they simply were not submitted because they were not the subject of the case), all subsequent actions to attract new capital are void. Interestingly, the judge reached such conclusions after additionally examining evidence (the registration file of Premiorri LLC) in the deliberation room, which is expressly prohibited by procedural law. Thus, the judge not only went beyond the scope of the issue under review but also did not give the parties the opportunity to present arguments regarding the authorized capital.

Another problem with this decision is that it lacks internal logic. If the authorized capital was not properly formed and, accordingly, an investor could not, in the court’s view, be involved — then how did Premiorri LTD acquire the rights of a participant in Premiorri LLC? Failure to form the authorized capital should have the same effect on both the investor and Premiorri LTD. If the investor could not obtain the right to a share, then Premiorri LTD could not obtain rights to a share either. Despite this, the court recognizes the rights of Premiorri LTD but refuses to recognize the investor’s rights. According to lawyers, this is an absolute legal novelty and a complete legal nonsense.

How the court could apply the law this way is unclear. The question remains unanswered. The case will be heard by the appellate instance — the Northern Commercial Court of Appeal — already on 4 July.

The Bila Tserkva CHPP cases. “Raised from the dead”

For several years after Kostiantyn Zhevago fled abroad, the management of the Bila Tserkva CHPP could not hold any reporting or election events required by law. The reason is the ownership structure. There are two legal entities — PJSC Bila Tserkva CHPP (30664834), which actually owns the power plant complex that until recently generated electricity and supplied heat to residents, and JSC Bila Tserkva CHPP (05407737), a legal entity that is one of the numerous shareholders of the PJSC. Besides the JSC, Rosava and several offshore companies registered in the UK and the British Virgin Islands were part of the PJSC’s ownership structure. These were controlled by Kostiantyn Zhevago.

However, after the oligarch began having problems with law enforcement, the offshore firms—which appeared in a number of criminal cases about the withdrawal of funds—simply decided to liquidate. They “forgot” to reassign their shares in the CHPP to someone else. Thus a legal vacuum formed: the JSC and Rosava, which together held less than 50% of shares, could not hold full shareholder meetings because they lacked a quorum.

And then at the end of 2021, according to case materials, the offshore shareholders literally began to “resurrect.” On behalf of the companies, their representatives began to bombard PJSC management with demands to hold shareholder meetings to change the director and the supervisory board, declaring their work ineffective. Under Ukrainian law, if shareholders cannot secure the holding of a meeting, under certain conditions they can hold meetings themselves.

The offshore companies did just that. Moreover — at the end of 2021 they held not one but several meetings with identical agendas, identical resolutions, and identical results: declaring the previous management’s work unsatisfactory and electing Ihor Vyhularnyi as director. He is a lawyer without experience managing an energy enterprise, which is critically important for a strategic infrastructure object like a CHPP, especially amid the risks of constant missile strikes and the need to restore production capacities, and also ahead of preparation for a difficult heating season. There is a version that Zhevago is deliberately promoting the appointment of such a manager so that in the event of a collapse in the city’s utilities and an increase in social tension he could exert pressure on his political opponents as well as on law enforcement and judicial bodies regarding the criminal cases.

Why hold several meetings with identical agendas? So that parties who did not participate could endlessly challenge each separate meeting, while the new manager close to Zhevago could relatively unimpededly carry out his duties. The shareholders who missed these meetings of course challenged their legitimacy. The main argument: “dead,” i.e., liquidated companies do not have the right to participate in shareholder meetings, and the powers of the proxies of “alive” companies extend only to representing interests but do not give the right to convene meetings. In addition, JSC BilaTETs and Rosava were not properly informed about the meetings and therefore could not exercise their shareholder rights.

A number of different judges are now considering these cases, and their approaches to the same arguments of the complainants differ radically.

For example, in case No. 911/231/22, Judge Pavlo Horbasenko of the Commercial Court of the Kyiv region ruled on the “meetings” of 18 January 2022. He recognized that liquidated companies cannot make decisions and therefore the meetings actually took place without a quorum. The other side appealed the decision; the appeal hearing is set for 8 August. Interestingly, after the decision was issued in favor of Zhevago’s opponents, and after Horbasenko was re-elected as head of the Commercial Court of Kyiv region, where other cases in the oligarch’s interest are heard, an “investigation” about allegedly “astronomical wealth” and a “sham divorce” of Horbasenko was aired on the Espreso channel. Espreso belongs to Zhevago’s son Ivan, and its journalists are regular attendees at hearings concerning the entrepreneur’s assets. From this it can be concluded that Zhevago directly uses his TV channel to pressure judges.

Under similar circumstances, with the same participants but regarding the meetings of 28 December 2021, Judge Taras Karpechkin of the Commercial Court of Kyiv region issued a diametrically opposite decision in case No. 911/172/22. In that case, representatives of the offshore companies provided certificates that their firms had “resurrected” as of the second half of 2022, i.e., at the time of the proceedings. However, that does not in any way confirm that they were “alive” at the time the meetings were held (UK law allows restoring records in the register, but upon deregistration a company loses its rights). As for the British Virgin Islands company, the judge rather strangely interpreted international law, stating that liquidation under BVI law does not necessarily mean liquidation for Ukraine, since BVI laws do not apply to Ukraine. Needless to say, this is a legal nonsense, because under such circumstances millions of companies liquidated in one jurisdiction could operate freely as “alive” in others. That would lead to chaos. The judge also did not take into account that Rosava and JSC BilaTETs were not properly informed about the timing of the meetings. Karpechkin’s decision was appealed to the Northern Appellate Court, which, in a panel of judges Serhii Buravliov, Viktor Shapran, and Volodymyr Andriienko, on 13 June confirmed that decision in favor of Zhevago’s companies.

A third case No. 911/184/22, heard by Judge Anton Lopatin, concerns meetings of 29 December 2021, which, under a similar scheme, were initiated by shareholders close to Zhevago (PJSC ASK Omega and JV LLC FTAC Leasing) — but this time regarding JSC Bila Tserkva CHPP rather than the PJSC. They presented the company’s management with at least seven separate demands with a similar agenda and intent to hold meetings to change the director and the supervisory board. As a result, they held meetings themselves, including the already familiar liquidated BVI offshore company, which, as in previous cases, was also a shareholder of the JSC. At the meetings, they elected Ihor Vyhularnyi as director, as in the PJSC.

The court found that Rosava’s right to propose candidates for the new director of JSC BilaTETs was violated. In addition, the court emphasized that the quorum was insufficient because a “dead” firm participated in the meetings. Unlike his colleague Karpechkin, Judge Lopatin did not arbitrarily interpret international law and confirmed that a “dead” BVI offshore company could not cast votes. Accordingly, the suit was granted.

However, on 28 June the Northern Appellate Court, in a panel of Olena Kopytova, Serhii Sotnikov, and Oleh Ostapenko, overturned this decision. The text of the ruling is not yet available, so the court’s reasoning is unknown. But that same evening the Espreso channel ran a triumphant segment titled “Themis struck back at criminals!”.

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Different judges’ approaches to interpreting the same facts and circumstances, ignoring documents of dubious origin, and greater sympathy toward one party on procedural issues are nothing new for the judicial system. This is one of the reasons why judicial reform and increased transparency of justice are among the top demands of investors who want to work in Ukraine. Still, the anticorruption efforts that led to the arrest of the former head of the Supreme Court just two months ago show that the situation is gradually improving and that making decisions under external pressure is not the only possible outcome — and it is quite dangerous. Therefore, the more judges who are ready to call things by their names and issue rulings based on law rather than alternative arguments, the sooner Ukraine will have a chance at a true European future.

Mykola Tkachuk

apostrophe.ua