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Particularities of Protection of Assets in the Agrarian Sphere

23.06.2016

Iryna Kuzina, attorney at law, Head of Kharkiv office of Ilyashev & Partners
Source: Jurist&Zakon

The principal task of protection of all types of assets is not to allow “illegal takeover” of a company, i.e. re-registration of corporate rights in it and seizure of official executive positions by outsiders. Assets of an agricultural enterprise are represented by the resources controlled by such enterprise and exploitation of which will lead to economic benefits in the future. These assets are represented not only by land, monetary assets, vehicles, constructions, technological equipment and agricultural products, but also by biological assets (plants, animals), unfinished production (deferred expenses, including the lands prepared for sowing), objects of intellectual property rights (rights under the license agreements on exploitation of species of plants and breeds of animals, marks for goods and services etc.) and many other things.

The second task is to protect the company from unnecessary increased attention of law-enforcement agencies which tend to introduce information about crimes into the Unified Register of Pre-trial Investigations under the following articles of the Criminal Code of Ukraine: 110-2 (financing of activities committed with the aim of dismantlement of constitutional statehood or takeover of the state power, change of the borders of the territory or of the state Ukrainian borders), 258-5 (financing of terrorism) or more trivial as 212 (evasion of payment of taxes and dues, other obligatory payments). However, the mentioned point will not be analyzed by this publication due to lack of particularities related to the agricultural sphere.

Protection of assets in the agricultural sphere has its own special particular features which are mainly related to specific objects of rights and legislative regulation of their circulation. Dealing with this sphere a lawyer gains quite a good insights into the manufacturing technologies, logistics etc. Hence, what are the particularities of the agrarian assets?

Land
By virtue of ownership or lease – a land bank of any agrarian enterprise fully defines the limits up to which its business may grow. This is why agrarian companies may feel a “land hunger” during their growth period which makes them look round to their neighbors and weave plans similar to military operations.

Traditional categories of cases under the conditions of moratorium on sale and purchase of land are represented by invalidation of lease agreements, land assets, disputes related to unauthorized seizure of land, obligations to remove obstacles in the right of use etc. These are the disputes of private legal nature.

However, unfortunately, public legal disputes may also arise in relation to land – either in the process of waging “land wars” or upon “evil” initiative of the official state or local self-governing authorities.

For example, widespread is the category of cases on invalidation of the agreements on lease of land plots exploited by farming enterprises on the claims lodged by prosecutors.

In most cases such claims are substantiated by insufficient performance of bureaucratic requirements towards the documents in the process of conclusion of the lease agreements, but not by serious violations.

As an example we may refer to the case reviewed by the Supreme Court of Ukraine No. 6-2902цс15 (the Judgment as of February 03, 2016).

In its legal conclusion the Supreme Court of Ukraine draws attention that Article 7 of the Law of Ukraine “On farmer’s enterprise” contains a special norm in relation to Article 123 of the Land Code of Ukraine and, this is why, an application of a citizen regarding provision of a land plot for farming must be governed by the special law. At the same time a corresponding official body (as well as the court) must give estimation to the circumstances and facts indicated in the application, verify arguments of the applicant provided in substantiation of the area of the land plot with consideration for the perspectives of the development of the farmer’s enterprise, including the information on labor and material resources.

Similar situation was reviewed in the case №6-2903цс15 as of May 11, 2016.

We have analyzed the practices of application by the European court for human rights of Article 1 of the Protocol to Convention for the Protection of Human Rights and Fundamental Freedoms. In particular, substantiated was unsuitability of the practices of the European court for human rights through evaluation by the Supreme court of Ukraine of the criteria of “proportionality” and “fair balance” with reference to the judgment “Raimondo v. Italy” (as of February 22, 1994), “Phillips v. United Kingdom” (as of July 05, 2001), “Arkur and others v. Italy” (as of July 05, 2001), “Riel and others v. Italy” (as of September 04, 2001), and “Ismailov v. the Russian Federation” (as of November 06, 2008).

However, in its Judgments the Supreme Court ignores the “principle of due and proper administration” applied by the ECHR in the case “Rysovskyi v. Ukraine” (29979/04, §70-72 as of January 20, 2012) and others according to which risks of errors of the state official body are placed upon such official body but not upon the individual person.

This is why I consider the approaches used by the Supreme Court of Ukraine to be subject to discussion and the ones that, in general, demonstrate all the bureaucratic nature of the state system in which the priority was given to the form, but not the essence, to the letter of the law, but not its spirit.

It needs to be added that the Law 1067-VIII as of March 31, 2016 to Article 7 of the Law of Ukraine “On farmer’s enterprise” introduced amendments and now the corresponding norms make reference to the Land Code of Ukraine.

So, what kind of disturbance of the balance of the state and private interests was considered by the courts? Because, at the opinion of the state, everything was fair as it turned out to be.

Agricultural equipment
Tractors, self-propelled toolbars, self-propelled agricultural, road-building and ameliorative machines, agricultural vehicles and other mechanisms are subject to special registration pursuant to the decree of the Cabinet of Ministers of Ukraine No. 694 as of July 08, 2009. It ensures their identification and, this is why, the agrarians have to protect such equipment more often from the creditors, including lease providers under the lease agreements (but not from mere embezzlement).

By virtue of the essence of Article 292 of the Economic Code of Ukraine, leasing is a type of economic activities directed at investment of own or borrowed financial costs and is represented by provision under a lease agreement by one party (lease provided) into exclusive exploitation to the other party (lease holder) for a certain fixed period of time of the property which is owned by the lease provider or is acquired by it into property (operating control) under authorization or permission of the lease holder from a corresponding supplier (seller) subject to settlement by the lease holder of periodical lease payments.

Pursuant to Article 1 of the law of Ukraine “On financial leasing” under the financial lease agreement the lease provider is obliged to obtain an object from the seller (supplier) according to the terms and specifications established by the leaseholder and transfer it into use to the leaseholder for a certain period of time for the established fee (lease payments).

Based on the Article 7(2) of the Law of Ukraine “On financial leasing” the lease provider has the right to withdraw from the lease agreement and claim return of the leased asset from the leaseholder under unobjectionable procedure on the basis of an executive inscription made by a notary if the leaseholder failed to settle lease payment in full or in part and the payment delay exceeds 30 days.

It means that the question of mutual settlements under such agreements is directly related to protection of assets of an enterprise.

As an example under such categories of cases – Decree of the Supreme Economic Court of Ukraine as of April 26, 2016 in the case No. 902/823/15.

As soon as financial leasing agreements related to agricultural equipment (as subject matter) are often preferred by farmers as individual persons we would like to shed some light onto practices of cassation courts and of the Supreme Court of Ukraine in relation to this matter.

Analyzing the financial lease agreements the courts started to establish that such agreements contain unlawful provisions. In particular, in legal conclusions in cases No. 6-3020цс15 and No. 6-65цс16 (both related to LK ETALON LLC, the Decrees as of May 11, 2016) the Supreme Court of Ukraine, based on the provisions of the Law of Ukraine “On protection of consumers’ rights” established that unlawful are the provisions of financial leasing agreement which introduce significant disbalance of contractual rights and obligations in prejudice of the consumer, in particular contain the terms on changes in expenses, including in relation to payment for its premature termination.

Agricultural products
Under the Article 189 of the Civil Code of Ukraine products, issues and profits means everything which is produced, explored, obtained from an item or is brought by an item.

By virtue of the fact that agricultural products is represented by unascertained items and partly is time-sensitive, as well as in view of the storage and processing techniques, such category of assets is usually referred to the category of goods in circulation or under processing.

In spite of the fact that “goods under processing” is an economic category, legal regulation of operations with them relies onto this term and not “products”.

For example, the Law of Ukraine “On pledge” devotes a whole section III to particularities of pledge of goods in circulation or under processing.

Keeping goods in circulation or under processing (usually in control of third persons) determines particularities of protection of such goods.

The main particular feature and danger for the owner is that the goods may exist on paper but be not exist actually in connection with improper warehouse inventory control or through other reasons. It is hard to verify availability of the products because it has unascertained characteristics and it is difficult to differ it from the products of another owner (of supplier of raw materials for processing). A grain warehouse or a processing agent may violate contractual obligations and fail to return the products or processed products.

In particular, the rules of accounting and registration of operations with grain and results of its processing are primarily regulated by the Law of Ukraine “On grain and grain market in Ukraine”, Instruction on accounting and registration of operations with grain and results of its processing at grain reception and grain processing enterprises (approved by the Order of the Ministry of agrarian policy of Ukraine No. 661 as of October 13, 2008), the Regulation on circulation of warehouse grain documentation (approved by the Order of the Ministry of agrarian policy of Ukraine No. 198 as of June 27, 2003).

The criteria of disputes under this object are related to: establishment of the quality of the goods (class, quality degree) in the process of taking the goods for storage, agreements related to the goods (including the agreements on recovery of indebtedness, reimbursement of the goods in kind, – see, for example, the Decree of the Supreme Economic Court of Ukraine as of April 24, 2008 No. 33/180-07), on reimbursement of the losses in connection with violation of grain storage agreement etc.

Crops and other goods in progress
The question which has not been solved so far is the question of title to crops (as well as unfinished production in the form of preparation of land to sowing) when the right to own/use the land was terminated, for example, when the term of the land lease agreement has expired.

Pursuant to Article 189 of the Civil Code of Ukraine products, issues and profits means everything which is produced, explored, obtained from an item or is brought by an item.

According to Article 95(1)(b) of the Land Code of Ukraine a land user holds the title to the crops and plants of agricultural and other cultivated crops, as well as for the products made.

There are two types of subjects of claims relating to the said problem:

– acknowledgment of title to the crops (unfinished production) of agricultural plants at certain land plots;
– recovery of losses inflicted by unlawful actions on taking possession of crops in the form of los of profit from sale of crops.

The practice of resolution of such disputes is miscellaneous.

The Appellate court in Kyrovohrad Region in its judgment as of February 17, 2015 in the case 22ц/781/19/15 (unchanged) stated that the claimant – the first lease holder incorrectly chose the method of defense of its violated right by lodging a claim against the respondent – new lease holder on establishment of title to crops (unfinished production), but not the claim on recovery of losses inflicted as a result of unlawful actions of new lease holder directed at gaining possession of such crops.

In its Judgement the Supreme Economic Court of Ukraine November 30, 2011 in the case 15/241-08 under the claim FG AURUM against PSP Obriy came to conclusion that, upon the absence of complaints of the land owners – individual persons (former owners of land shares), the former owner had not lost its title for its sowed crops (even in the absence of registered lease agreements). And as soon as the new lease holder did not prove its title to the crops his claim on vacation of the land plot is not subject to be sustained till the moment of harvesting the crops (winter wheat) in 2008. By reason of absence of dispute with individual persons (land owners) the counter claim on acknowledgement of title to crops lodged by the former lease holder is also not subject to be sustained. This is an interesting example of how the court prioritized the rights to the derivative item – crops, over the right to the primary object – land plot.

In its judgment as of March 09, 2010 in the case No. 8/365-37/248-08 the Supreme Economic Court of Ukraine emphasized that at the moment of lodging the claim the claimant – new lease holder must have due and appropriate status, i.e. hold effective registered lease agreements. With consideration for the fact that registration of lease agreements may be lengthy in time the crops may be harvested by the former lease holder and the problem with the crops will be solved by itself.

Objects of intellectual property rights

There are specific objects of author’s right related to varieties of plants and breeds of animals.

There is the Law of Ukraine “On protection of rights to varieties of plants” Article 39-1 of which establishes that proprietary intellectual property right for distribution of varieties of plants is the right of its owner to distribution of a certain type of plant and to the permit or prohibition of distribution of such type by other persons.

The right to the permit or prohibit distribution of types of plants means that the following actions (relating to planting materials of a certain types of plants) must not be performed without the permit of the owner of proprietary intellectual property right:

a) offering for sale;
b) sale or another commercial circulation;
c) storage for any of the said aims.

This is why, for the purpose of trading in seeds the parties also enter into license agreements and the plant-breeding enterprises (acting as license holders or licensors with exclusive agreements) must track violations of their rights. This is the essence of protection of their assets which may be fairly expensive.

It is possible that because of the existing culture of treatment of intellectual property in our country there are not many cases reviewed by Ukrainian courts which are related to intellectual property law. As an example see the Judgment of the Supreme economic Court of Ukraine No. 912/3176/14 as of February 24, 2015.

Unlike protection of types of plants protection of intellectual property rights to breeds of animals is complicated by reason of insufficient legislative regulation. Articles 445-448 of the Civil Code of Ukraine, though declaring protection of such object upon the state registration and/or provision patent, have not led to creation of the special mechanism of realization of such protection.

Conclusions

Protection of assets in agricultural sphere has its individual features mainly related to specific objects of title and legislative regulation of their circulation. Working in this sphere lawyers have to go deep into the details of production, logistics etc., which is very interesting in its own right.

 
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