One of these days the Supreme Court of Canada is to consider the claim filed by the Aviation Research-and-Design Complex named after Antonov against the Newfoundland sheriff who distrained AN-124-100 "Ruslan" airplane at a military base in Labrador. Depending on the court decision, the plane will either be sold by auction to pay off Ukraine’s debt to the Cyprian company TMR Energy Ltd., or will return to Ukraine. Thus an important precedent is being established: the judges are to decide if Ukrainian state-owned companies are liable with their property for the state debts, which are often debts of other state-owned entities. Should the Canadian authorities’ decision to seize the plane be deemed valid, similar sanctions can be taken against any other Ukrainian state property abroad.

Ukraine’s state debt is estimated at about USD 14 billion. This figure covers the debt recognized by the Ukrainian state. As for the unrecognized debt, like the one that affected the plane in Canada, nobody knows exactly how big it is. None of the state institutions in Ukraine has complete and reliable data on how much Ukrainian enterprises owe and whom. Amazingly, none is eager to have these data. Even the Ministry of Finance and the National Bank, with relevant units in their structure, support only "their" debts related to IMF, EBPD and WB programmes or to bilateral interstate agreements. Yet the threat, evidently, comes from elsewhere.

Several historical facts first. AN-124-100 "Ruslan" airplane, state registration number UR-82007, serial number 19530501005, property of the state enterprise Aviation Research-and-Design Complex named after Antonov (ARDC), was attached in the Canadian Goose Bay Airport on 28 June. It had delivered there a cargo of ammunition and equipment for Italian Air Force carrying out annual military exercises in Canada. The plane was seized by Canadian authorities executing the respective decision of the Arbitration Institute of Stockholm Chamber of Commerce dated 30 May 2002 in the case brought by TMR Energy Ltd. Company against the State Property Fund of Ukraine. Pursuant to the court decision, the Ukrainian party is to pay the debt of USD 42.3 million. In mid July, the ARDC filed a complaint against the Newfoundland Sheriff who arrested the plane, with the Supreme Court of Canada. The trial is scheduled for 27 August. According to some information agencies, pending the court decision, the auction, at which the plane was to be sold, has been put off.

The complaint lodged with the Supreme Court of Canada is based on a number of arguments. One of them is that the ARDC, the owner of the distrained plane, is a state-owned enterprise that cannot be privatized, under Ukrainian law. It is managed by the Ministry of Industrial Policy of Ukraine and, therefore, its property cannot be considered security for a claim against the State Property Fund. Another arguments of the defence is that according to the ARDC Statute registered in 1993, its property is in the collective ownership of the enterprise employees, and the ARDC, as well as other state-owned enterprises, is not liable under the obligations of the state and the Ministry of Industrial Policy, under whose management it operates.

The Ukrainian party has prepared to respond to the unfavourable court decision, too. On 30 July 2003, Holosiyivsky District Court in Kyiv issued a ruling prohibiting "any natural persons or legal entities to take any measures aimed to alienate the distrained AN-124 plane belonging to the company". The court also ruled to forbid the State Department of Aviation Transport of Ukraine to "make any changes in the State Register of Civil Aircraft of Ukraine regarding this plane", in particular to remove it from the Registry, unless authorized by the ARDC. The company attorneys say that even if the AN-124-100 "Ruslan" plane is sold by auction, it cannot, according to the Holosiyivsky court ruling, be used for a designed purpose, i.e. as an airplane. However, it is a big question if the Supreme Court of Canada will take the Ukrainian court’s decision into consideration.

Yet the plane recovery is a tactical objective. In order to resolve the problem, it is necessary to appeal and reverse the judgment of the Arbitration Institute of Stockholm Chamber of Commerce dated 30 May 2002 at the suit brought by TMR Energy Ltd. According to sources in the State Property Fund, the appeal was filed last August and is to be heard in the autumn. TMR Energy Ltd. also filed actions to validate the decision of the Stockholm Court of Arbitration with the judiciary in Belgium, France and the USA. Should it happen, Ukrainian property can be distrained in those countries, too.

Over the last month, the press has discussed every detail of the debt, for which the "Ruslan" plane was seized, but there still are several inconsistencies in the story. In 1992, the state-owned enterprise Lysychansk Oil Refinery and Swiss Маrc Rich & Refining АG (one of the group of companies belonging to a notorious millionaire Marc Rich) incorporated a Joint Venture Lysmarc. In 1993, the company was restructured (part of the millionaire’s assets was purchased by his partners and renamed into Glencore Inc.), and his share in the joint venture’s authorized fund was referred to a Cyprian subsidiary of Rich’s holding called TMR Energy Ltd., while the joint venture was re-registered as Limited Liability Company Lysoil. The Lysychansk Oil Refinery and Lysoil concluded a contract on the enterprise modernization and operation, which was never fulfilled (the reasons should be discussed separately). Prior to privatization, in 1994, the Lysychansk Oil Refinery was corporatized into a Public Joint-Stock Company LyNOS. According to the effective legislation, the State Property Fund was an assignee of all long-term investments of the enterprise under corporatization, including its debts and shares in the authorized fund, such as a 50% share of the Lysychansk Oil Refinery in the Limited Liability Company Lysoil. In July 2000, the TNK-Ukraine [Tiumen Oil Company] bought 67% of the Public Joint-Stock Company LyNOS for USD 53 million, after which TMR Energy Ltd. filed a claim for USD 42.3 million with the Arbitration Institute of Stockholm Chamber of Commerce.

It was a multi-defendant claim against three assignees of the Lysychansk Oil Refinery: Public Joint-Stock Company LyNOS, the state of Ukraine and the State Property Fund of Ukraine. In the course of trial TMR Energy Ltd withdrew its claim against Ukraine. The LyNOS attorneys (or, rather, the TNK ones) managed to prove that the enterprise has nothing to do with the Limited Liability Company Lysoil and is not liable under its obligations. The State Property Fund turned out to be the only defendant left, and the Stockholm Court found the case against it proven. According to the managers of the State Property Fund, they lost because at that time they did not have qualified lawyers (other sources argue that the Fund’s lawyers were highly qualified, but they were not timely paid). In making their decisions, both courts - Swedish and Canadian - relied on the expert opinion by a well-known Ukrainian lawyer Professor of Kyiv Taras Shevchenko University, Director of Ukrainian Centre for Legal Studies Anatoliy Dovhert who advised them that the property of state-owned enterprises is, in fact, the property of the state of Ukraine.

According to some analysts, the "Ruslan" plane seizure in Canada is a manifestation of fierce competition on the market of cargo transportation by air. They mention, first and foremost, the so-called "NATO contract" for the strategic airlift of military contingents, equipment and munitions of the member-countries. Our readers might remember that on 12 June 2003 Ukraine and 12 NATO countries signed a protocol of intention to use a fleet of cargo aircraft AN-124 "Ruslan" for this purpose. However the contract has not been signed yet, and the Ukrainian plane attachment is likely to question the Ukrainian party’s ability to fulfill its contractual obligations (especially given that Canada, which has recognized the Stockholm Court’s decision, is a trans-shipment point for AN-124 aircraft flying from Europe to North and South America). This version is corroborated by the fact that the Cyprian company had not been taking any steps to enforce the Stockholm Court’s decision for over a year, but demanded that the plane should be distrained right after the above protocol was signed, and just at the time when the plane was delivering the NATO cargo. The fact that Marc Rich is behind the TMR Energy Ltd Company is also suggestive in itself. This man has very good connections in the White House and sponsors quite a few American politicians, thanks to which he has been recently pardoned by the US President, upon being accused of concealing USD 48 from taxation, for which he could have been sentenced to 325 years in jail. In the early 2001, Rich negotiated with the Russian Alfa-Group (that controls TNK and already owned LyNOS at the time of negotiations) the sale of his Russian assets - Marc Rich & Со Investment AG Company - to the Alfa-Group’s trader structure called Crown Resources AG for USD 100 million. Yet the negotiations ended in a deadlock in the summer of that same year.

Of course, it is easy to blame American "hawks", wishing to use their own C-17 to transport NATO cargoes, for trying to do harm to the Ukrainian pride - the "Ruslan" plane. Now that the Ukrainian plane suffered this disgrace, the patriotic feelings in this country are sharpened, but we would like to remind our countrymen and countrywomen about several unpleasant things. First, about the disrespect of law innate in our state institutions managing the state property. The Stockholm Arbitration Institute’s decision has been in force for over a year now. No matter whether we like it or not, it is a legitimate court judgment, and the judicial enforcement is one of the pillars of the civilized world. Many in this country, though, think that court decisions do not always have to be executed. This must have been the reasoning behind Ukrainian officials’ inaction - until it became too late and an enterprise having nothing to do with this story fell prey to their carelessness. As well as the country’s reputation on one of the most prestigious and lucrative markets.

Our media may publish countless articles about the State Property Fund’s refusing to recognize the Stockholm decision, but it will not become less binding because of that. At the same time, the decisions of Holosiyivsky District Court and Kyiv City Commercial Court will hardly be recognized in Canada and Sweden, since the "impartiality" of our courts is ill-famed throughout the world. It is most unlikely that they will be considered in the course of proceedings in Canada.

Second, the developments with the "Ruslan" plane are linked to another issue - that of state enterprises’ debts, which the civilized world considers part of the state debt, as we see. If the decision of the Supreme Court of Canada creates the precedent, the amount of Ukraine’s state debt will grow far beyond the figure of USD 8 billion the country has recognized as of now. The situation with the state enterprises’ debts is an absolute havoc: the state recognizes some of them while refusing to recognize the others.

Thus, from 1992 till 1999, the government of Ukraine issued 140 loan guarantees worth USD 2.6 billion. The loans were extended to 77 enterprises, of which as few as 10 served their loans in full. Yet nobody seizes foreign property of the other 67 firms, since the state undertook to serve their debts.

Officially “the gas debt” of Ukraine is considered merely a corporate debt of Naftogas Ukrainy to Gasprom but not a state debt. However there is information that the intergovernmental Ukrainian-Russian agreements provide for certain commitments of the Ukrainian state that in the case of the financial disability of Naftogas of Ukraine (which is a 100% state-owned enterprise) the entire amount and interest are to be paid from the state budget of Ukraine. Whereas the intergovernmental protocol with Turkmenistan signed in 1995 in fact recognized as a state debt the debts of all the companies that had bought the Turkmen gas for 700 million dollars. So, the State Property Fund could have recognized the debt to TMR and serviced it in the following year from the state budget.

However, who can tell off-hand how much does Ukrtelecom owe and to whom? Even its vice directors are scared of this question asked even informally… In 2001, the debt made up 921.5 million hryvnias. These were mostly the loans for the purchasing of digital equipment to increase the investment attractiveness of the company. Whereas the "green light" to the mass loan-taking was given by the top state officials, but this, of course, is not documented. Yet up ahead is the sale of 43% in Ukrtelecom’s stake and there might appear some strategic investor, who has consolidated these debts, and who is ready to acquire state property in exchange for them.

Unfortunately, the management of state debt in Ukraine is "manually controlled". Every year the MPs responsible for the approval of the State Budget are presented with a fait accompli: how much the state must pay for the debt services and discharge of the debt. Yet they could have adopted a law on state debt and act in accordance with it. The problems of state debt are the responsibility of the Finance Ministry, which has the appropriate department, the National Bank of Ukraine, through which most of the loans go, and directly the Cabinet of Ministers… Of course, they cannot do without Bankova Street [the presidential administration], which, however, does not formally participate in the decision making… But generally, nobody is responsible for the strategy of debt management.

Most of the relevant regulations are a secret and are not available for control. Maybe the reason is that debt management is globally considered to be a very profitable business? Whereas under Ukrainian conditions it is much more profitable to do any business in the shadow. Nevertheless, we would like to hope that this incident with "Ruslan" will make Ukraine bring its liabilities in order.

Comments by Serhyi KOSIAKOV, law firm "Serhyi Kosiakov and partners":

The suit of TMR Energy Limited against the State Property Fund of Ukraine has in fact revealed more serious problems that it seemed in the beginning. The key problem is revision of the immunity of state in private deals made by state bodies. For the 12 years of Ukraine’s independence, no legislative solution has been found for these problems. Based on the interview of the chief Ukrainian participants in this case, we can conclude that there are at least two legal standpoints on this matter. The first, which is that of the representatives of SPF and ARDC is that the state owned enterprises are not responsible for the state debts incurred by the state bodies that have established them and visa versa. The second standpoint is that the state, nevertheless, bares the responsibility for the violations of the agreements by its bodies with all of its property, including the one on the balance and under complete management of state enterprises!

In their interviews, ARDC representatives hail Professor Dovhert, who dared to express his own view. I would like to stand up for my colleague. He only expressed his opinion as an expert. Nobody prevents the other side from communicating the opinion of their experts to court. By the way, for some reason the opponents do not pay attention to very similar opinions of other Ukrainian experts published as early as 2000.

"…In our opinion it is quite possible to distrain the property of a legal entity, which property is owned by the state or community, under the liabilities of the owner (state or community). It is implied that it is the state or community who is the debtor but not the legal entity established by them! (D.N.Prityka, V.Ya.Karaban, V.G.Rogan. (Scientific-practical comments to the civil legislation of Ukraine. Editor first deputy speaker of the Verhovna Rada of Ukraine V.V.Medvedchuk. 4 volumes, volume 1, paragraph 12, page 294). This is the comment on Article 32 of the Civil Code of Ukraine "Responsibility of a legal entity". And there is also comment on article 33 "Delimitation of responsibility of the state and state organizations" next to it: "Possible withdrawal of the property of a state (communal) enterprise, agency or organization in order to impose penalty under the liabilities of the state (community) must not be regarded as the responsibility of a legal entity for the debts of the state (community) as this is the property right of the state which is being exercised!" (p.296).

The above quote as well as the opinion of Professor Dovhert and statements of other experts are only their own understanding of the problem. Any other lawyer can have a different opinion. It is the court that decides. According to the Civil Code of Quebec, the court can be informed about the law of any other foreign state if there was a reference to it. The court can also require proofs of this law, the statements of experts or evidence of the law-consul being two of them. In this view, any opinion expressed in mass media is currently only of theoretical importance. The Canadian court will take into account only those evidences that were provided by the sides in a proper manner including similar decisions of Ukrainian courts In similar cases.

I would like to emphasize the following. If the Canadian court is convinced by the arguments of the Cyprus company and it deems the decision to seize the aircraft valid, which will be followed by its auction sale, then, having the knowledge of the arguments used in this case in Canada, interested parties (even those who are not the participants of this case) will get a new and a cheap scheme of privatization of state property. The scheme will be the following: a private company (not necessarily a foreign one) makes an agreement with the State Property Fund of Ukraine or any other state body. The state body fails to fulfill this agreement. The company files an appeal to court, which is followed by arrest of the property belonging to, for example, the Yuzhny machine-building plant, the management of which has never seen this agreement. Everything is very simple after that. Yet to implement this scheme not only the wish of the company but also the agreement of the SPF is needed as well as the ability of the interested parties to ensure qualified representation in the Ukrainian court.

Judging by the statements of Ukrainian representatives, they do not yet know what the decision of the Canadian court might be. If this case were in the Ukrainian court, there would be little doubt about the name of the future winner, wouldn’t there? Maybe that is why there is no statistics on how many decisions of foreign arbitrary courts were recognized in Ukraine?

I believe that the order issued to the Foreign Ministry of Ukraine to give the Canadian Ambassador to Ukraine an official note regarding the arrest of a state cargo aircraft carrier "Ruslan" in Canada is just a reflection of common Ukrainian practice of exercising influence of executive bodies over course. The reaction of the Canadian embassy explaining the truism that a court in Canada is independent of the embassy and of the government was quite natural and predictable.

And one last thing. I, as a taxpayer, am strongly convinced that regardless of what the decision in this case will be, it is high time for every official concerned with state property to have a plate on their tables that would read the well known Roman adage PACTA SUNT SERVANDA - Agreements must be fulfilled. Then perhaps the state would not have to spend millions to recover losses and pay costs.