Liability for Acquisition of Unjustified Assets: Signs of Unconstitutionality

Mykola Melnyk

Doctor of Law, Professor,

In recent years, the institute of recognizing assets as unjustified and their recovery to the state revenue (Chapter 12 of the Civil Procedure Code) has been actively applied in civil legislation.

At the same time, despite a fairly specific legal definition of the grounds, procedure for initiating and considering cases on recognizing such assets, many questions arise in practice regarding both the understanding of the signs of unjustified assets and the procedure for their establishment.

Some of these questions relate to the compliance of legislative provisions on recognizing assets as unjustified with the Constitution of Ukraine. These questions, once hypothetical, have already become a legal reality – the Constitutional Court at the end of the year before last opened proceedings and is reviewing the constitutionality of Articles 290 and 291 of the Civil Procedure Code.

Therefore, it makes practical sense to look at this institute through the prism of constitutional provisions. After all, the unconstitutionality of a certain legal provision means nothing other than its unlawful (unconstitutional) application – both in terms of the activities of state bodies tasked with identifying unjustified assets and recognizing them as such, and in terms of holding a person legally liable by depriving them of their constitutional right to private property.

Necessary Excursion

When analyzing and evaluating the institute of recognizing unjustified assets and their recovery to the state revenue for constitutional and legal soundness, one should not forget that it appeared in Ukraine forcibly, hastily, and was implemented at the legislative level not entirely correctly.

This happened in 2019 after the Constitutional Court declared Article 368-2 of the Criminal Code unconstitutional, which provided for criminal liability for illegal enrichment.

This article established criminal liability for a person authorized to perform state or local government functions who acquired assets of significant value without evidence confirming the legality of their acquisition, as well as for transferring such assets to any other person.

The Constitutional Court concluded that the key feature of illegal enrichment as a crime was the absence of evidence of the legality of acquiring such assets. The lack of evidence under this formulation of the norm's disposition allowed recognizing the presence of the objective side of such a crime in the person's actions. Essentially, this obliged the subject to prove the legality of acquiring the assets.

Based on this, the Constitutional Court justified its decision on the unconstitutionality of Article 368-2 of the Criminal Code primarily because its provisions contradicted the constitutional principle of the presumption of innocence and violated the constitutional right not to testify against oneself and close relatives. They obliged a person, contrary to Article 62 of the Constitution, to prove their innocence in the alleged crime and, contrary to Article 63 of the Constitution, to give testimony or explanations about themselves, family members, or close relatives to prove their innocence. Moreover, the construction of Article 368-2 allowed law enforcement and courts to interpret doubts about the legality of asset acquisition against the person, although according to Article 62(3) of the Constitution, it should be the opposite.

After declaring Article 368-2 unconstitutional, the legislator "restored" criminal liability for illegal enrichment in a modified form (current Article 368-5 of the Criminal Code) and also introduced civil liability for acquiring unjustified assets (Chapter 12 of the Civil Procedure Code in its current version).

Essentially, the civil liability for acquiring unjustified assets was based on the provisions of the now unconstitutional Article 368-2 of the Criminal Code. The transfer of this article's construction into civil law was due to the fact that, unlike criminal law, a person could no longer rely on the presumption of innocence and the right not to testify against themselves or close relatives. Moreover, under civil law (Article 81 of the Civil Procedure Code), the burden of disproving the unjustified nature of assets lies with the defendant.

Thus, currently, domestic legislation provides for two types of legal liability for acquiring unjustified assets – criminal (Article 368-5 of the Criminal Code) and civil-law (Chapter 12 of the Civil Procedure Code). The difference essentially boils down to two main points: the size of the acquired assets and the procedure for proving their unjustified nature.

Constitutional Grounds and Method

of Deprivation of the Right to Private Property

By establishing the rule that no one can be unlawfully deprived of the right to property and that the right to private property is inviolable, the Constitution (Article 41) provides for two cases of forced alienation of private property objects: 1) forced alienation with prior and full compensation of their value; 2) confiscation of property.

The recovery to the state revenue of assets recognized as unjustified has the characteristics of confiscation but is not such in the legal sense. This directly follows from Articles 346 and 354 of the Civil Code.

According to Article 346 of the Civil Code, which defines grounds for termination of ownership rights, confiscation and recognition of assets as unjustified and their recovery to the state revenue are different grounds for termination of ownership rights.

Civil-law confiscation as deprivation of ownership by court decision in cases established by law is a sanction for committing an offense (Article 354 of the Civil Code).

Recovery of assets to the state revenue as grounds for termination of ownership is a legal consequence of the court recognizing assets as unjustified according to Article 292 of the Civil Procedure Code. Unlike confiscation, recognition of assets as unjustified and their recovery to the state revenue is applied without recognizing guilt in committing any offense. Moreover, this type of forced alienation can be applied even when the assets were acquired by a person in a completely lawful manner.

Thus, confiscation and recovery of assets to the state revenue due to their recognition as unjustified are different legal institutes, different types of grounds for termination of ownership rights, and are regulated by different laws (Civil Code and Civil Procedure Code).

At the same time, as noted, unlike confiscation, the Constitution does not provide for deprivation of private property by recovery of assets to the state revenue based on recognition of them as unjustified.

Therefore, the question arises about the existence of constitutional and legal grounds for depriving a person of private property by recovering such assets to the state revenue on the grounds and in the manner provided by Chapter 12 of the Civil Procedure Code.

"Another Person"

The law (Part 2 of Article 290 of the Civil Procedure Code) establishes that a claim in this category of cases is filed regarding assets "if the difference between their value and the lawful income of the person authorized to perform state or local government functions" exceeds the amount established by law.

At the same time, according to the law (Part 4 of Article 290 of the Civil Procedure Code), "a claim for recognition of assets as unjustified and their recovery to the state revenue may be filed against a person who, being authorized to perform state or local government functions, acquired the assets specified in Part 2 of this article, and/or against another physical or legal person who acquired such assets on behalf of the person authorized to perform state or local government functions, or if the person authorized to perform state or local government functions can directly or indirectly perform actions regarding such assets equivalent in content to the exercise of the right to dispose of them".

Signs of unconstitutionality of the provisions of Part 4 of Article 290 of the Civil Procedure Code are seen in the combination of circumstances concerning the status of "another person," the grounds, and legal certainty of their "linkage" to the assets of the person authorized to perform state or local government functions.

Firstly, the provisions of Parts 2 and 4 of Article 290 contain an internal contradiction that calls into question the legality of filing a claim against "another person."

Part 2 of Article 290 refers only to the assets and lawful income (difference between them) of the person authorized to perform state or local government functions.

Meanwhile, Part 4 of Article 290 allows filing a claim against "another person" without requiring establishing their lawful income and the difference between it and the assets acquired by them.

It should be noted that practice follows a different path – the plaintiff and the court determine the lawful income of "another person" and include it in the total amount on the basis of which the difference between the value of disputed assets and lawful income of the person is calculated.

On one hand, this may benefit the defendant(s), but on the other hand, it raises a legitimate question about the legal basis for this if the law (Part 2 of Article 290) provides for establishing the difference only for the person authorized to perform state or local government functions.

Secondly, "another person" is not "authorized to perform state or local government functions," and therefore cannot be subject to the same restrictions and obligations imposed on persons authorized to perform such functions. These two categories of persons with completely different legal statuses cannot bear the same responsibility.

In this regard, it is appropriate to cite the Constitutional Court's decision of June 6, 2019, No. 3-r/2019, which declared unconstitutional the provisions imposing on anti-corruption civil activists the obligation to declare their income and expenses by submitting electronic declarations.

In this decision, the Constitutional Court noted that imposing such a declaration obligation on a person not authorized to perform state or local government functions may be considered interference in the private (personal) and family life of that person, and financial control over such persons cannot be excessive or allow unjustified interference in their private life.

Thirdly, the phrases used in Part 4 of Article 290 such as "on behalf of a person" and "actions equivalent in content to exercising the right to dispose of them" contradict the principle of legal certainty, which is part of the rule of law – they give grounds for ambiguous interpretation of these provisions in law enforcement practice, which is indeed observed in the practice of the Specialized Anti-Corruption Prosecutor's Office and the High Anti-Corruption Court.

Fourthly, violation of the principle of legal certainty is seen in the use of the term "power of attorney" in Part 4 of Article 290. The Civil Code defines the conditions and procedure for concluding a civil contract of power of attorney. However, the wording of this provision of the Civil Procedure Code, as well as the provisions of the entire Chapter 12, leaves open the question of the legal meaning of this term – whether the power of attorney mentioned in Part 4 of Article 290 must comply with the Civil Code requirements or whether it should contain entirely different features for the purposes of recognizing assets as unjustified and recovering them to the state revenue.

It is obvious that the legislator did not provide a definition of "power of attorney" in the Civil Procedure Code for the purposes of recognizing assets as unjustified and recovering them to the state revenue, as it did for several other terms (including assets, acquisition of assets, etc.). Instead, the Specialized Anti-Corruption Prosecutor's Office and the High Anti-Corruption Court apply their own understanding – different from that provided by the Civil Code – equating power of attorney with the consent of a person and also using the institute of joint ownership. This, among other things, confirms the legal uncertainty of the term "power of attorney" in the construction of recognizing assets as unjustified, which results in ambiguous application of Article 290 of the Civil Procedure Code.

Fifthly, legal uncertainty is also inherent in the provisions of Part 3 of Article 290, according to which the valuation of disputed assets is applied as "the minimum market value of such or similar assets at the date of acquisition".

Current legislation does not define the concept of "similar asset," so the criteria for establishing "similarity" of assets for the purpose of determining the monetary value of disputed assets remain undefined. Such a legislative approach complicates and even makes it impossible in practice to determine the value of some assets that may be recognized as unjustified and recovered to the state revenue. Moreover, different criteria for selecting and evaluating "similar" assets are applied, which significantly affects the determination of the minimum market value of disputed assets and, consequently, the grounds for filing a claim to recognize them as unjustified.

Added to this is the uncertainty of the procedure for establishing the "minimum market value" of disputed assets and the inadmissible use by prosecutors and courts of various substitutes for this legislatively fixed concept – such as market value, average market value, minimum value, real value, approximate market value, etc.

Procedural Law with Substantive Law Norms

The legal uncertainty of the norms of Chapter 12 of the Civil Procedure Code is also revealed in their legal content, namely uncertainty about: 1) what kind of norms they are – procedural or substantive; 2) whether among these norms there are substantive law norms; 3) whether these norms are a new type of law norms for Ukrainian law – substantive-procedural norms.

This uncertainty is caused by the fact that Chapter 12 of the Civil Procedure Code, along with norms establishing the procedure for considering civil cases of this category, contains norms defining the essence of the legal institute of acquiring unjustified assets, signs of such assets, grounds for civil liability for their acquisition, legal consequences (type of liability) of recognizing assets as unjustified (in particular, Parts 2 and 3 of Article 290, Article 292 of the Civil Procedure Code).

These issues cannot be regulated by the Civil Procedure Code, since there is a special codified law for their regulation – the Civil Code, which defines the grounds for the emergence of civil rights and obligations, exercise of civil rights, acquisition of ownership rights, principles of civil liability, and elements (signs) of civil offenses.

Including substantive law norms in a procedural law (Civil Procedure Code) contradicts the purpose, tasks, and subject of regulation of the Civil Code (Article 1) and the Civil Procedure Code (Articles 1, 2), introduces chaos into the legal regulation of civil-law and civil-procedural relations, destroys constitutional foundations of the legal order, creates legal uncertainty regarding the exercise of rights and fulfillment of obligations by subjects of legal relations. Ultimately, it complicates or makes it impossible for even specialists – lawyers, including advocates – to clearly understand the situation, which may negatively affect the realization of the constitutional right to defense.

The point is that such a situation may negatively affect the administration of justice, since, for example, grounds for canceling a court decision in whole or in part and adopting a new decision or changing the court decision are violations of procedural law or incorrect application of substantive law (Article 376 of the Civil Procedure Code of Ukraine).

Therefore, when Chapter 12 of the Civil Procedure Code contains both procedural and substantive law norms, the appellate court may reasonably ask what exactly the court of first instance "did" – violated procedural law or incorrectly applied substantive law.

A similar problem may arise in the activities of the cassation court (Article 412 of the Civil Procedure Code).

Way Out of the Situation

Doubts about the constitutionality of the law are finally "removed" by the Constitutional Court. Therefore, the sooner it considers the case concerning the compliance of Articles 290 and 291 of the Civil Procedure Code and delivers the final legal word, the better.

Depending on its decision, the institute of recognizing assets as unjustified in its current form will either cease to exist or constitutional and legal certainty will arise in its application: law enforcement agencies will be confident that they act lawfully, courts – that their decisions are based on the Constitution, and defendants in such cases will no longer be able to refer to the unconstitutionality of the procedure for recovering their assets to the state revenue as unjustified.

For now, we have to be content with the current state of affairs.

It obliges state authorities and their officials to be guided by the principle of the rule of law and to carry out their activities primarily on the basis, within the powers, and in the manner provided by the Constitution (Articles 8, 19 of the Constitution). For the court, the principle of the rule of law in administering justice is fundamental (Article 129 of the Constitution, Article 10 of the Civil Procedure Code).

This means that when filing claims and considering cases on recognizing assets as unjustified and recovering them to the state revenue, the plaintiff (prosecutor) and the court must apply the provisions of Chapter 12 of the Civil Procedure Code through the prism of the Constitution.

If the court concludes that a certain provision of Chapter 12 contradicts the Constitution, it cannot apply these provisions but must apply the norms of the Constitution as directly applicable norms. This is required not only by the constitutional provisions cited but also by procedural law norms – Article 10 of the Civil Procedure Code.

Part six of Article 10 of the Civil Procedure Code provides that in such a case, after making a decision in the case, the court refers to the Supreme Court to resolve the issue of submitting to the Constitutional Court a request regarding the constitutionality of the law it did not apply.

However, as far as is known, the High Anti-Corruption Court as a court of first instance and its Appeal Chamber have not done this in any of the cases they have considered. Nor has the cassation court done so.

From this, one can conclude that judges of these courts have no doubts about the constitutionality of all provisions of Chapter 12 of the Civil Procedure Code. Or they simply do not want to "venture into constitutional thickets" and rely exclusively on the norms of the Civil Procedure Code, referring to the Constitution, so to speak, for formality's sake (unfortunately, this approach predominates in domestic law enforcement practice).

However, considering the provisions of Articles 8, 19, 129 of the Constitution and Article 10 of the Civil Procedure Code, courts cannot justify their "passive" position by applying norms (including those provided by Articles 290, 291 of the Civil Procedure Code) that have not yet been declared unconstitutional. Because this directly contradicts the principle of the rule of law, which they must follow in administering justice.

Defendants and their representatives have no choice but to "dispel" their well-founded doubts about the constitutionality of the Civil Procedure Code norms applied to them by using the procedural means provided – raising before the court the issue of giving preference to constitutional norms over "ordinary" procedural law norms, as well as the use of powers provided by Part 6 of Article 10 of the Civil Procedure Code.

The court cannot ignore such appeals/motions. At the very least, the court will have to justify its chosen position and approach the application of certain provisions of Chapter 12 of the Civil Procedure Code more thoroughly, as well as the examination and evaluation of evidence from both parties. Justice will only benefit from this.

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