The problem of compensation for losses shareholders of banks incurred in connection with the rehabilitation of banks is highly important, in the present economic environment, since the number of credit institutions filing for bankruptcy steadily increases. At the same time, the Bank of Russia is introducing new bankruptcy prevention procedures.
Noteworthy, for this reason, is case number A40-51672/2015, which considered the requirements of the shareholders of LLC Flagman and LLC Hermes for damages resulting from the wrongful acts of leadership at JSCB BTA-Kazan (now the PJSC Timer Bank). The specific charge was that the bank management had made false statements. Flagman, in 2012, and Hermes, in 2013, respectively purchased 9.33 percent and 9.99 percent of the BTA-Kazan Bank.
On 27 May 2014, the Bank of Russia, began temporarily administering the BTA-Kazan Bank through the Deposit Insurance Agency (GC DIA).
In the course of rehabilitation procedures that involved reducing the equity capital of the credit institution of up to RUB 1, regulators “blurred” the stake of the shareholders, in the authorized capital of the bank, to a few thousandths of a percent, since shareholders, by virtue of the law, do not have the right to purchase additional shares.
The Arbitration Court of Moscow, guided by Articles 309, 310, and 393 of the Civil Code, satisfied the demands of the shareholders of the bank to recover more than RUB 400 million from their losses. The shareholders convinced the court of first instance that, when the plaintiffs were buying the bank shares, the public financial statements of the bank guided them. Later, however, the Deposit Insurance Agency, a state corporation, declared the banks’ statements unreliable and found that the bank had distorted information about its financial status.
The court of first instance rejected the arguments of the defendants about the relations between the former management of the bank to the shareholder-claimants, and, consequently, about their knowledge of the actual financial position of the bank, as not based on definitions contained in the law.
On 9 March 2016, the Ninth Arbitration Court of Appeal overturned the trial court’s decision on the case regarding the satisfaction for claims.
What guided the appellate court was the fact that there was no causal relationship between the actions of the bank and the reduction of the cost of the shares because the decrease in the value and interest of the plaintiffs in the authorized capital of the bank had occurred as a result of the Bank of Russia’s decision to reduce the share capital of the BTA-Kazan Bank. The subsequent increase in the authorized capital of the bank then took place because of the bank’s financial recovery and was independent of the actions of the bank’s management. The participation of the shareholders in further shares of the bank was impossible because of an outright ban, in Paragraph 13, Article 7, of Federal Law No. 175-FZ, of 27 October 2008, On additional measures to strengthen the stability of the banking system in the period up to 31 December 2014.
In addition, the Ninth Arbitration Court of Appeal pointed out that the court of first instance had incorrectly applied the general rules of the Civil Code regarding the bank’s improper fulfillment of its obligations to the shareholders.
The bank was not a party to the agreements to purchase the shares that the plaintiffs had acquired to gain their portion of the authorized capital of the bank. The poor financial condition of the credit institution, which the plaintiffs did not know, could serve as the basis for demanding changes to or termination of contracts regarding the purchase and sale of shares, rather than the recovery of damages from the bank, based on the decrease of the market value of their shares. This is especially true because any shareholder risks losses.
In addition, the court of appeal noted that the requirement to recover losses that had incurred in connection with a legal person’s disclosure of false information must be presented to the management bodies of the legal entity in question. Otherwise, the losses of the bank’s shareholders will be reimbursed at the expense of other shareholders.
The appellate court also stated that the shareholders had failed to take all necessary action to check the quality of bank assets when they had acquired the shares.
In addition, the Ninth Arbitration Court of Appeal concluded that the plaintiffs, having been shareholders for several years, had the opportunity to participate in the management of the bank, to make decisions regarding the appointment of its executive officers, as well as to become acquainted with the bank’s internal documents.
The appellate court’s position is debatable because the plaintiffs were minority shareholders and could not have made a major impact on the formation of the bank’s governing bodies or their decisions. Furthermore, the bank could have hidden complete information on the financial situation of the bank from any minority shareholder with less than 25 percent of the voting shares.
The decision of the appeal court also stated that compensating the stockholders of a rehabilitated bank for their “depreciated” shares is contrary to the bankruptcy legislation.
A legislative and enforcement problem arises when there is no mechanism for the economic protection of minority shareholders who have invested in a credit institution and who subsequently lost their assets as a result of rehabilitation.
In this regard, the decision of the Arbitration Court of Moscow was, in fact, true, because the court protected the minority shareholders, who did not have the right to acquire shares in the additional issue that took place under the rehabilitation procedure. Furthermore, the bank’s management had violated their interests. However, the grounds for cancelling the decision in the case is reasonable since the shareholders had selected the improper means of protecting their rights and sued the improper defendant.