Since the economic situation provoked an increase in the amount of bad debts held by banks, corporate debtors have strongly required a mechanism to resolve debt recovery in the out-of-court procedure.
The new Law of Ukraine On Financial Restructuring is currently being examined in practice. It is expected to be the turning point for the financial sector as there is increasing interest from both borrowers and lenders.
We asked Sergii Papernyk, head of the banking and finance practice at EVRIS Law Firm, how the new rules actually work in practice.
What kind of debtors have already used a financial restructuring mechanism? What type of indebtedness is currently under restructuring?
Sergii Papernyk: As of the end of 2017, we have 9 debtors which successfully managed to restructure debt to the total amount of over USD 300 million. The biggest debt to be restructured was about USD 100 million.
I cannot point out any specific sphere of business which is more interesting for financial restructuring than others. And that is sufficient proof that the new Law On Financial Restructuring is applicable for every company which wants to solve its debt problems.
How would you comment on the application of the new Law of Ukraine
On Financial Restructuring? Does it affect the situation in the banking sector and the financial solvency of debtors?
S. P.: Unfortunately, the Law On Financial Restructuring was adopted too late for many debtors and banks. Our business really needed this tool in 2014, at the very peak of the crisis.
As of today, many of the largest Ukrainian debtors with non-performing loans already find themselves in bankruptcy proceedings and the parties of such contracts cannot benefit from the Law. Therefore, the effect of the Law On the Banking System is not as significant as we could have expected.
But the Law On Financial Restructuring is working. It is applicable for those companies which are still facing the problem of indebtedness and for banks which want to meet the needs of business.
What new opportunities did both sides (lenders and debtors) obtain?
S. P.: The main purpose of the Law is to let debtors continue running their business and to save their reputation. Banks can, in their turn, get a solvent client and gain in the future.
Following this purpose, the Law provides lenders with a scope of legislation incentives, which allow them to meet the conditions of loan contracts that are more comfortable for borrowers. Banks received the opportunity to break statutory ratios within the financial restructuring procedure, the possibility to set the interest rate at any level, to release the reservation of funds. They can even write off the debt or a part of the debt. It their turn, debtors can get: a long-running installment, much more convenient loan conditions and tax incentives.
Lawyers complain that the law has many loopholes. What challenges do you actually face in practice? What changes should, in your opinion, be made?
S. P.: Many of the loopholes which usually non-sectoral lawyers complain about are not gaps as such. That is, only these lawyers’ own vision as to how they could likely manage the problem of non-performing loans. They just speak about a totally different procedure.
For instance, I have heard a lot of complaints that the Law should forcibly involve all creditors of a borrower in the procedure. But we already have the relevant procedure, which is called non-judicial sanation. So, if you want to involve all creditors, please use it. By contrast, financial restructuring is a completely freewill decision for the parties.
Of course, there could be some improvements on legislation regarding financial restructuring. First, we need more proper regulations on tax incentives.
As far as I know, the draft law on this topic is already being developed.
The Law envisages several methods of financial restructuring. How can the appropriate algorithm be chosen?
S. P.: The appropriate way of financial restructuring depends on the current situation with the amount of debt, the state of pledges, forecast of financial flows, etc. Here it is crucial to get support from professionals who have precise expertise in the relevant field.
Our team has a great deal of experience in financial restructuring and renders a wide range of legal services related to this procedure. But we are just good
lawyers. In some cases, a company may need expertise in the economic field, or technical audit of the business.
How would you evaluate the activity of administration and surveillance bodies over the financial restructuring procedure?
S. P.: This is an example of an excellent business approach from the authorities in whose work there is nothing except a document flow.
The main body responsible for the procedure is the Secretariat. Today, I can hardly count the number of conferences, events and meetings that the Secretariat has held since it was established. All of this time officials at the Secretariat have been trying to draw more attention to financial restructuring. Many successful cases of restructuring are their merit.
Talking about the Secretariat’s main duties, I have never heard or met with any complaint about its officials. On the contrary, the Secretariat is always ready to help parties through sound advice.
What is the role of the Arbitration Committee? As we know, there have been no disputes yet regarding the procedure. Can you tell us how it works in other jurisdictions?
S. P.: The main role of the Arbitration Committee is to appoint a sole arbitrator in case any dispute arises in the procedure. The Arbitration Committee also considers the Notice of Arbitration and other documents on the initiation of arbitration, and decides on the applicability of Arbitration Rules.
As of now, all financial restructuring procedures were held successfully without any disputes within them. In my opinion this is evidence that the new Law is acting in the proper manner and there is no party whose rights were breached.
I cannot compare with confidence our arbitration regulations with those of other jurisdictions because of our unique approach to this issue. However, it can be noted that, for example, in Turkey, where similar legislation on financial restructuring operates, there are precedents of arbitration settlement. In these cases, arbitration was very useful for resolving conflicts.
How do you see demand for financial restructuring? What is your forecast for 2018?
S. P.: Even today, we are observing increasing interest in financial restructuring. Many companies consider the new Law as a useful tool for resolving their temporary problems with debt repayment. The only thing left is to convince banking institutions to meet them.
I am sure that 2018 will be a turning point when the volumes of financial restructuring will finally be able to change the landscape of NPL in Ukraine.
EVRIS Law Firm Key facts
- Number of lawyers/partners:
Banking & Finance, Corporate and M&A, Dispute Resolution, Tax Consulting,
Tax Litigation, Restructuring, FinTech, Private Wealth, Energy, Agro & Land,
Real Estate, Investment, Enforcement