Crux (#12 December 2018)

Legal Digest

There was a portion of legislative novelties from Parliament this month, which prompted lots of questions for consideration. In this section the UJBL editorial team has enlisted the help of experts to comment on some of them. Our latest digest includes economic sanctions on Ukrainian business imposed by the Russian Federation; draft laws Amendments to Certain Laws of Ukraine Regarding Improvement of Financial Restructuring Procedure;Ensuring Principles of Procedural Justice and Increasing Efficiency of Proceedings in Cases on Violations of Legislation on the Economic Competition; methodical recommendation on using the term control. Our team also enquired about the law On Electronic Trust Services; draft laws On Changes to the Law of Ukraine On the Ukrainian Parliament Commissioner for Human Rights; On Protection of Employees Rights in Case of Employers Insolvency and more.

On 1 November 2018 the government of the Russian Federation imposed economic sanctions on Ukrainian business. What consequences should we expect?

Alina Plyushch, Partner, Sayenko Kharenko

I would not overemphasise the effect of Russian sanctions, even though they target numerous Ukrainian companies and their UBOs. The scope of sanctions is limited. It includes freezing assets situated in Russia and bans on the transfer of money (extraction of capital) out of Russia. No prohibition to deal with Ukrainian companies has been introduced. Our now-sanctioned clients express no particular concerns. Some of them said that they were proud to find their names in the sanction lists.

However, the sanctions do invoke issues that any sanctioned person should be aware of!

Firstly, sanctions may impede sanctioned businesses from receiving payments from Russian counterparties.

Secondly, sanctioned persons may be parties to contracts with so-called sanctions clauses. Parties to such contracts often represent and warrant that they are not subject to any Government sanctions. Such representations and warranties are usually repeated on each occasion (i.e. disbursement dates). Imposition of sanctions by any country may be treated as a breach of contractual terms and thus constitute a technical default.

Thirdly, sanctions generally have the effect of being a deterrent on third parties. Russian sanctions will certainly complicate dealings with foreign banks and financial institutions (FI) for targeted businesses and their UBOs. FIs are usually reluctant to work with sanctioned persons and require additional information from clients under sanctions. Failure to explain persuasively why a client is subject to sanctions can lead to the closure of accounts in most cases.

It is possible to mitigate adverse sanctions effects

The list of anti-sanctions pills typically includes changing payment logic, renegotiating specific contractual terms, making relevant disclosures and building mutually acceptable communication with FI compliance departments. To assess risks, sanctioned persons should review, quickly but carefully, all their contractual engagements (including personal ones, e.g. UBOs personal guarantee agreements). It is advisable to enlist external advisors to mitigate specific risks. As is often the case, time is the number one priority. The first to react is the first to adapt to the new sanctioned reality.

The Government submitted Draft Law No. 9236. How would you assess the proposed amendments?

Sergii Papernyk, Partner, Head of Banking & Finance and FinTech, EVRIS

The Law of Ukraine On Financial Restructuring came into force more than two years ago. During its use by many market players, a number of defects of this regulatory act were noted, which should be eliminated. These comments relate to both the imperfections of the procedure itself and the insufficient number of benefits that would encourage the parties to participate in it.

Regarding the procedure itself, the uncertainty of the date of the independent business review (IBR) can, for example, be noted. Thus, according to the Law, the IBR report should be implemented after the submission of the application to the Secretariat. At the same time this report is, in fact, necessary for the bank to be able to adopt a decision on its consent to participate in the procedure.

As for benefits, today all debtor company debts, which the bank agrees to forgive, will be considered an additional benefit and subject to payment of corporate income tax. This does not look very fair in conditions when the debtor is unable to service his debts.

Unfortunately, Draft Law No.9236 does not solve any of these problems.

Some of the problems raised in the Draft Law are of a purely technical nature (for example, the situation with the transfer of rights to mortgage property), while other theses of the draft law, on the contrary, actually create, and not solve, problems.

In particular, the proposal to shift responsibility for the conditions of restructuring from state-owned banks to the Cabinet of Ministers of Ukraine only adds excessive regulation to a situation where the parties could agree independently. At the same time, less than a year is left until the end of the Law, and it remains unknown whether the Cabinet of Ministers of Ukraine will have time to develop and adopt relevant resolutions in time.

The proposal to authorize sole arbitrators to impose administrative and economic sanctions on the parties is contrary to other laws of Ukraine.

Thus, Draft Law No.9236 is unlikely to significantly affect the situation with problem loans in Ukraine.

Parliament has returned to consideration Draft Law No. 6746 On Amendments to Certain Legislative Acts of Ukraine on Ensuring the Principles of Procedural Justice and Increasing Efficiency of Proceedings in Cases on Violations of Legislation on Protection of Economic Competition. How would you assess this initiative?

Nazar Chuchak, Associate, Asters

The Draft Law is highly significant and urgent for at least the following reasons:

1) It ensures a higher level of protection to the undertakings under the investigation of the Antimonopoly Committee of Ukraine, allowing them to rely on the impartiality of the authoritys decisions, as their rights and corresponding obligations of the AMCU will be set out in the law to the fullest extent.

Unfortunately, some important initiatives, envisaged in the original Draft, have not survived. For instance, requirements that (i) the AMCUs decision cannot be based on evidence to which the defendant did not have access(in particular because it was marked as confidential) and that (ii) hearings must be held by an officer who is unrelated to the investigation (similar to the rules applicable in proceedings before the European Commission and some European competition authorities). These issues will require further attention.

2) The Draft Law may finally put an end to the lengthy duration of investigations. Currently, legislation does not set time limits and even non-complicated cases may be investigated for five years or more. Although it can be justified in cartels investigations, in the majority of cases it is too burdensome and unreasonable. It only creates legal uncertainty with regard to potentially prohibited (or rather permissible) market behavior, abridges the freedom of entrepreneurship and distorts the functioning of markets. For example, this is the case with the assessment of potential antitrust concerns regarding distribution of pharmaceuticals. The same applies to unfair competition cases the legal mechanism against the unfair use of a trademark cannot be considered as efficient if an applicant needs to wait years to receive a decision.

The Draft establishes the time limit of 1 year for unfair competition cases and 2 years for all other case categories, with the only exception being cartel cases, where the review is limited to 5 years due to likely complications with respect to collection of relevant evidence.

3) The Draft Law sets out new rules that are expected to ensure more efficient evidence collection in cartel cases by improving the leniency procedure and introducing the settlement procedure. The extent of effectiveness of these rules will depend on AMCU enforcement practices.

The Antimonopoly Committee of Ukraine approved guidelines on application of the concept of control, which replaced the methodology of determining the relationship of control, approved in 2002. How will this affect the work of the competition authority and field-oriented associates?

Alexander Tretiakov, Senior Associate, Antika Law Firm

On 1 November 2018 the AMCU published new Methodical Recommendations on using the term control (hereinafter the Recommendations). This is the latest clarifying document of importance to have been published by the AMCU in recent years.

The term control is one of the most important concepts in antimonopoly regulations as it establishes the nature of links and connections between the business entities which enable them to be considered as a single company group. This term affects almost all actions in the antimonopoly sphere from calculating the market share of the company/company group to deciding whether mergers and acquisitions should be treated as concentration.

Before approving the Recommendations, the only description of the term used in Article 1 of the Law of Ukraine On Protection of Economic Competition was stipulated in the Regulations on concentration. However, the mentioned description was quite vague and was hard to use even for specialists in the field. On practice, only lawyers with extensive practice in the antimonopoly matters, well aware of the Committees own approach on the term interpretation were able to more or less definitely describe how the company group will be considered by the AMCU.

The newly published Recommendations should make the matter clearer for both practicing lawyers and business entities. The high quality of the published act should be noted it is easy to understand with well-defined and described principles used for deterring the connection between companies. Moreover, the act also includes examples of some of the more complex cases of control from the AMCUs practice, which makes understanding the term easier.

Its clear that the Committee has carried out substantial work on compliance with the Recommendations. It should be noted that for a specialist in the antimonopoly field the Recommendations, though they will be helpful, will not have significant impact. Most specialists are well aware of the concepts and principals described in the document. Nevertheless, for internal lawyers and compliance departments of companies this will provide an important document as both reference and justification for a companys compliance with antimonopoly policies and drafting of M&A transaction models.

On 1 November President Petro Poroshenko signed the Law On Making Amendments to Certain Legislative Acts of Ukraine Concerning Restoration of Lending dated 3 July 2018. How will its provisions affect loan and mortgage legal relations?

Oleksandr Vygovskyy, Attorney at Law, Ilyashev & Partners, LL.M., PhD in Law

The Law of Ukraine On Making Amendments to Certain Legislative Acts of Ukraine Concerning Restoration of Lending dated 3 July 2018 is aimed at facilitating access to loans for companies and individuals by reducing their value and stepping up lending. It grants a greater level of protection to lenders and loosens the debt burden borne by debtors.

In particular, it facilitates a procedure for out-of-court settlement of debt by the lenderacquiring title in mortgaged property. Such title may be acquired and registered on the basis of an agreement for the satisfaction of claims of mortgagee or the mortgage agreement containing such reservation providing for acquiring title in mortgaged property by the mortgagee in the event of default. Such procedure will be more flexible and sensible from the creditors perspective, as compared to enforcement of mortgage by court proceedings. In the event that the mortgaged property has been reconstructed or re-built, then all reconstructed or newly-built real estate objects will be deemed as mortgaged property pursuant to the mortgage agreement.

This Law also relates to the application of a floating interest rate in loan agreements. If such a rate is applied, the lender will be entitled to increase it and be obliged to decrease it pursuant to the terms and conditions of the loan agreement. In the event that the borrower does not agree with the raising of the interest rate it must settle the debt under the loan agreement in full within 30 calendar days from the date of receipt of the notification on the increase in the interest rate. The obligations of the parties to the loan agreement will be extinguished from the date of such settlement of the debt. More significantly, during the period for settlement the previous amount of interest rate shall apply.

In general, this Law is more directed at protecting the interests of the lender, not the borrower. Yet, it can still be argued that in terms of the current situation in the Ukrainian banking sector, where distressed debt in loan portfolios of Ukrainian banks officially stand at 57%, such legislative measures would hardly reverse the trend.

On 7 November 2018 the Law On Electronic Trust Services came into force. How will this affect operations with registries?

Dmitriy Makiyan, Associate, ADER HABER

The most discussed issue with regard to full enactment of the Law On Electronic Trust Services was and still is the launch of mobileID and bankID. But the question of the Laws impact on interactions between companies, citizens and Government registries remains an open one.

We note that this kind of Law is intended to fully enable e-government in Ukraine, if it will be used according to the Estonian model. In addition, mobileID and bankID provides Ukrainians with an opportunity to be officially identified in order to use online services in future without any restrictions. But electronic identification doesnt cover issues of electronic sign and seal which will be used when applying to registries (e.g. to register the right to property for the real estate). For example, bankID gives an opportunity to be identified during receipt of certain kinds of bank services, but not the right to sign any types of documents like contracts, acts, etc.

We admit that the new Law provides us with some levels of protection for electronic trust services. The most protected level for electronic signs and seals is qualified electronic sign/seal. Just using this type of most protected electronic service enables us to apply for e-government and official registrar services with an electronic sign and seal. But in order to use them properly you technically need to attach to the signed document your own electronic certificate, which shall be duly stored on your device (e.g. computer). Kyivstar, as a mobile operator, already provides us with a solution to this problem. It issues new SIM-cards, which are able to store such certificates, and their clients are granted with the possibility to use e-government with their mobile phone or tablet. Moreover, this way is fully in line method the new Law.

E-government services are currently available on these official web-sites: https://online.minjust.gov.ua; https://kap.minjust.gov.ua; https://poslugy.gov.ua; https://hsc.gov.ua. However, some types of e-government and registrar services are still limited due to the need for notarization of attached documents. Nevertheless, the new Law grants even this opportunity, and were sure a solution for electronic notarization is coming soon too.

The new Draft Law On Changes to the Law of Ukraine on the Ukrainian Parliaments Commissioner for Human Rights envisages an increase in the effectiveness of the complaint resolution procedure by way of clarifying, simplifying and harmonizing the legal provisions for investigating complaints submitted by an individual. How would you assess the proposed initiative?

Dmytro Melnikov, Paralegal, EQUITY

One of the key novelties in the Draft Law On Changes to the Law of Ukraine On the Ukrainian Parliaments Commissioner for Human Rights (hereinafter Draft) is the introduction of a separate administrative procedure for consideration of petitions submitted by individuals.

Thus, Article 17 of the Law of Ukraine On the Ukrainian Parliaments Commissioner for Human Rights, which is into force, prescribes that the Commissioner accepts and considers petitions from citizens of Ukraine, foreigners, stateless persons or agents of those in accordance with the Law of Ukraine On the Petitions of Citizens.

However, the Draft proposes to establish a separate clear procedure for submission and consideration of petitions to the Ombudsman without any reference to other general acts of law, particularly the Law of Ukraine On Petitions of Citizens.

The Draft, inter alia, provides that anonymous petitions will not be investigated unless the Commissioner makes a decision to the contrary.

It also provides for a list of specific grounds to deny investigation of the petition, as well as the 20-business-day term for reviewing these grounds. The decision to deny institution of the proceedings must be grounded. The accepted petitions must be considered immediately upon the institution of the proceedings in the case, and the answer must be given to the petitioner within a reasonable period of time necessary for the expedient adoption of the resolution on the petition.

In addition, the Draft introduces a new type of legal instrument called the resolution of the Commissioner, which is a motivated demand to a specific body of state power, body of local self-government, non-governmental organization, enterprise, institution, organization, of whatever form of ownership, or their officials and officers for the purpose of taking measures required by the Commissioner or the Commissioners representative, and which is aimed at eliminating the revealed violation of rights and freedoms of human beings and citizens in the domain of the right of access to public information and protection of personal data.

Thus, the Draft significantly increases the effectiveness and productiveness of the institute of Parliaments Commissioner for Human Rights, expands the range of the available instruments, improves the administrative procedure, setting clear provisions regarding formalities for submission of, and requirements to, a petition, thereby enhancing the principle of legal clarity.

The Draft Law On Protection of Employees Rights in Case of Employers Insolvency introduces a number of important changes. What should employers prepare themselves for?

Mariana Marchuk, Counsel, Baker McKenzie

This Draft Law will have limited practical impact on preventing delays in the payment of salaries to employees, although it does envisage certain new rights for them.

In spite of the title, the Draft Law contains provisions that will apply equally to solvent employers. In particular, a delay in paying salaries of 15 days entitles employees to stop work (with 2 days' written notice), including to be away from ones place of work until the payment is made. Importantly, "delay in payment" is defined as non-payment of 50% or more of the amount due for the relevant month.

The Draft prescribes some unnecessary mandatory bureaucracy both for the employer and for employees. For example, the employer is obliged to notify employees in writing that the payment of salary has been made (even though each employee may check his/her bank account or will be automatically notified by the bank). Also, employees will notify the employer in writing, about the decision to resume work (although they could simply turn up and start working). Such requirements do nothing to ensure regular payments of salaries to employees, but failure to comply with them may be viewed as violation of formal requirements of labor laws and trigger an administrative fine on the employer or its managers.

In addition to the provision requiring the employer to remit the back pay for the entire period of delay, there is a provision obligating the employer to pay compensation (effectively, a fine) as prescribed by the collective agreement and which cannot be less than 2/3 of the employee's basic salary. The current wording of these provisions is such that both payments must be made, although it can be assumed that legislators intended to prescribe payment of the compensation in lieu of the average salary. In addition, interest (at the rate of the National Bank of Ukraine) will accrue and the Inflation Index should be applied to the amount owed by the employer.

The Draft Law is detrimental to employees in that it requires them to file their claims with the relevant court, and to ensure that they are included in the Registry of Creditors if non-payment of salaries is caused by insolvency of the employer. This will require additional efforts (and legal expenses, which very few can afford) from employees in order to receive back wages owed. Therefore, this Draft law does not improve protection for employees from non-payment of salaries but actually creates new obstacles.

On 26 November 2018 the Ukrainian Parliament adopted a Law that approves the Presidential Decree on the imposition of martial law in Ukraine for 30 days. How could it affect business operations?

Andriy Nikiforov, Counsel,Kinstellar

The new Law, which comes into effect on 28 November 2018, imposes martial law until 2 p.m. on 26 December 2018 in of Vinnytsia, Luhansk, Mykolayiv, Odessa, Sumy, Kharkiv, Chernihiv, Donetsk, Zaporizhzhia and Kherson Regions as well as the territorial waters of Ukraine in the Sea of Azov.

According to the Decree, within the territories that come under martial law, certain rights and freedoms of individuals as well as the rights and lawful interests of legal entities may be restricted to the extent required to implement martial law in accordance with the Law of Ukraine On the Legal Regime of Martial Law (No. 389-VIII of 12 May 2015).

Under this Law, the military command, in unison with bodies of executive power and bodies of local self-governance may require privately-owned businesses to comply with certain measures of the martial law legal regime, including:

introducing tightened security and a special operations regime at facilities (including those that are privately-owned) which satisfy the basic needs of the population according to the list approved by the Cabinet of Ministers of Ukraine;

requiring employees of privately owned businesses to work for defence purposes or in the event of an emergency, or to do community service work to support the Armed Forces of Ukraine or law-enforcement authorities;

using the facilities and personnel of privately-owned businesses for defence purposes and changing the regime of their operations;

the compulsory acquisition of private property for state purposes;

establishing special entry and exit rules and limits to the movements of transportation vehicles;

searching transportation vehicles, baggage and cargo as well as offices and other premises;

regulating the operations of telecommunication companies and prohibiting radio and computer network data transmissions;

the seizure of chemical and toxic materials;

the obligation to house troops; and

dismissing the management of privately-owned business entities for non-compliance with the requirements of martial law and appointing acting management at such entities.

The introduction of these martial law measures must be carried out on the basis of the standard martial law introduction plan approved by the Cabinet of Ministers of Ukraine.

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