Protection strategy: what options does the “Arcada”’ investors have

Protection strategy: what options does the “Arcada”’ investors have 150 150 Esquires

A few weeks ago, the National Bank recognized the bank “Arkada” as a bankrupt. Earlier, the construction of several residential complexes in Kiev, in which the bank acted as a developer, was stopped. Due to this situation more than 12,000 investors were left with almost nothing. In addition, last week the court applied a preventive measure in the form of detention for a period of 60 days against the president of Arkada JSCB, Konstantin Palivoda, with the alternative of paying a bail in amount of UAH 21 million.

The latest news about the withdrawal of Arkada Bank from the market shook the entire construction industry, which was just beginning to recover after the situation with UkrBud. This news came as a big blow to the investors of construction financing funds (CFF), which are managed by Bank Arkada.

What the defrauded investors can do now and how can they return their investments, ESQUIRES lawyer Bogdan Pavlyuk told to Mind.

It is not yet clear why the funds raised for the construction of three residential complex “Evryka”, “Patriotyka” and ” Patriotyka on the Lakes” were not enough. However, on September 4, a preventive measure in the form of detention was applied to the president of JSC AKB “Arkada” Konstantin Palivoda. He is suspected in embezzling of UAH 50 million from the Construction financing fund (part 5 of article 191 of the Criminal Code of Ukraine).

An acute question arose: how to be the principals of the Construction financing fund (CFF)?

Let’s conditionally distinguish two groups of principals:

  1. invested in construction by lending in Arkada Bank.
  2. paid their own funds.

Both have options – termination of participation in the FSF or waiting for completion of construction.

Termination of participation in the CFF

This scheme may be more relevant for persons who received a loan from “Arcada” to invest in apartments in the bank’s construction projects. The easiest way to get out of troubled construction is for investors who did not make large investment payments and loan payments.

Those who decide to quit from construction with minimal losses may consider the feasibility of a number of the following actions:

  1. apply to the manager (bank “Arcada”) with a statement of refusal to participate in the CFF (its obligatory to indicate the reasons provided in clause 25 of the agreement on participation in the CFF, to avoid writing of the manager’s remuneration, and the requirement to credit funds that must be returned to pay off their obligations on a loan
  2. to calculate the difference between the funds paid by the property and the loan debt;
  3. to go to court with a claim to terminate the loan agreement and recover the difference specified in clause 2.

It is important to note that such a mechanism is possible only before the start of the bank’s liquidation procedure, because the clause 8, part 2 of Art. 46 of the Law of Ukraine “On the system of guaranteeing deposits of individuals” prohibits the offset of mutual claims in this case.

This position is confirmed, in particular, by the decision of the Economic Court of Cassation within the Supreme Court of February 13, 2018 in case No. 916 / 4737/14.

This algorithm may be useful to principals who have not paid significant amounts, because it is not justified to expect that Arcada will return the difference in funds or that the decision will be enforced if there are no reasonable grounds.

For principals who have invested their own funds in construction, the option of quitting the CFF is not recommended, since it is difficult to count on a refund. To leave the CFF, you should apply with a similar statement to “Arcade”.

In the future, one should ask in a claim to the court to collect not the difference, but the full amount of funds deposited in the CFF, due to the manager's failure to fulfill his obligations under the agreement (clauses 28, 32, 33 of the agreement on participation in the CFF ).

Taking into account the provisions of clause 37 of the agreement (on the return of funds after the full implementation of the investment object and a ban on attracting new investors), such a process will take more than one year and may be accompanied with paper and judicial red tape.

Construction completion expectations

The option with the expectation of the  construction completion seems more realistic, because, as was already mentioned, the process of a real return of funds, even if a positive court decision is received, is hardly probable.

Depending on which scenario for the withdrawal of an bankrupt bank from the market is implemented, you can count on a change of the manager of the CFF and the developer.

It is precisely the change of the manager and the developer with the transfer of all obligations to new parties of the CFF will effectively promote the renewal of the violated rights of the fund’s trustees.

So, Art. 23 of the Law of Ukraine “On Financial and Credit Mechanisms and Property Management in the Construction of Housing and Real Estate Operations” provides that by a court decision that has came into legal force, adopted at the request of the principals of the CFF or the relevant body that supervises and regulates the activities of the manager, in connection with the violation of the financial services legislation by the manager, the CFF may be transferred to the management of another financial institution that meets the requirements of this law, in the manner determined by the National Commission on Securities and Stock Market.

All the rights and obligations of the principals of this CFF and the corresponding developer are transferred to the new manager.

In the event of liquidation of the CFF manager, the funds on the CFF account are not included in the liquidation estate of the CFF manager and are aimed exclusively at meeting the requirements of the principals to the CFF manager in accordance with the CFF Rules.

Currently there is nothing to satisfy the creditors’ demand, but it is realistic to change the manager of the CFF due to the misuse of funds by the previous ones. To do this, you should start with an appeal from the CFF principals.

For his part, the manager of the CFF in accordance with the requirements of Art. 10 of the law, has the right to foreclose on the subject of a mortgage in case that the developer fails to comply with the terms of the contract.

The subject of the mortgage to ensure the fulfillment of the developer’s obligations under the contract to the fund manager are property rights to real estate, which is the object of construction. The manager also has the right to attract a new developer.

A positive thing is the assistance of the city authorities in resolving the situation. According to the mayor of Kiev Vitalii Klychko, ” Kyivmiskbud” was commissioned to conduct an audit with the development of proposals for the completion of construction. The principals of the CFF, without waiting for the completion of this audit, have the right to initiate the process of replacing the manager (with the assistance of the NBU), as one of the steps to meet the renewal of construction.

The experience of “Ukrbud” shows that the completion of construction without additional payments by investors who have already contributed money for apartments is possible. However, in case of a change in the manager of the FSF, his principals need to control and insist that this time the manager of the CFF and the developer do not belong to the same structure, but can properly control each other, as provided by law.

This article is not a legal advice and cannot be interpreted as a call to take legally significant actions without a detailed analysis of the investor’s documents.


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