Impact of New Legislation on Ukrainian Banks
The Bankruptcy Proceedings Code came into force in Ukraine on 21 October 2019. This regulatory act was very much in demand on the part of the core community due to the urgent need to regulate the bankruptcy procedures of individuals. In addition, a year after the introduction of the Code, the Law On Moratorium on the Recovery of Property of Ukrainian Citizens Granted as Security for Loans in Foreign Currency will be abolished (paragraph 2(3) of the Final and Transitional Provisions).
Let’s focus on the personal bankruptcy procedures provided for in the Code. It is the norm that provides for the possibility for an individual to initiate a bankruptcy case only upon his/her own application (Article 115(1)) that immediately attracts attention. Thus, a bank will not be able to initiate the bankruptcy of a debtor who is an individual, but will have to expect the debtor to personally go to a court. In such a case, the bankruptcy procedure acts as a “lifeline” for a person who has not calculated their financial capabilities. The requirement for the debtor to advance the remuneration to the restructuring manager for three months of the execution of powers in the amount of five subsistence minimums for each month of fulfilling the powers of the restructuring manager (~UAH 29,040.00 as of 1 July 2019) is also quite interesting. This provision, of course, protects the property interests of the restructuring manager, but the issue here is that of the debtor’s financial capabilities. After all, a situation may arise where the debtor does not have the financial resources, and this will constitute an obstacle to filing an application for opening a case and will, as a result, exclude the possibility of application of bankruptcy proceedings.
Another interesting provision is a court’s right to temporarily restrict a debtor from leaving the country at the request of the restructuring manager or at its (the court’s) own initiative. Such a situation would save the debtor from the desire to personally file an application for opening bankruptcy proceedings. In addition, the Code imposes a number of restrictions on persons who underwent bankruptcy proceedings. For a period of five years after the recognition of an individual as bankrupt, such a person is obliged to notify other parties in writing of his/her insolvency prior to the conclusion of loan agreements, surety agreements or pledge agreements. The draft version of legislation proposed to completely deprive the bankrupt of the right to take loans and become a guarantor for a certain period. But legislators decided in a more humane but, not necessarily more correct, way. All of the above norms of the law make the bankruptcy procedure sufficiently “unattractive” for the debtor and, moreover, creditors have no right to appeal to a court. It is worth noting that in the Law of Ukraine On Restoring the Debtor’s Solvency or Declaring it Bankrupt, the creditors had the right to file an application in respect of individual entrepreneurs (Article 90(3)). The reason why legislators decided to restrict the rights of creditors in the new Code remains unclear.
Based on the proposed bankruptcy procedure for individuals, it can be concluded that banking institutions will not resort to it in relation to their debtors, since the application is submitted personally only by the debtor. They can only hope and wait for the debtor to apply to a court himself/herself. Perhaps legislators will introduce the relevant amendments to the Code in future, which will enable the creditors to apply to a court and initiate bankruptcy proceedings against their debtors.
A more promising point is the abolition of the moratorium on the recovery of property of Ukrainian citizens granted as security for loans in foreign currency. A moratorium is a cause that does not allow bodies and officials responsible for the enforcement of judgments on foreclosure of the mortgaged property and specific executive actions to take measures aimed at enforcing such judgments as related to a particular category of debtors or mortgagors falling within the moratorium for a period of its action. Court judgments regarding the foreclosure of mortgaged property for the duration of the Law are not enforceable.
All banks are looking forward to the abolition of this moratorium, which will enable them to finally get an opportunity to at least get partial repayment of loans that they issued. This news is unfavorable for borrowers; it is likely that many citizens will await 21 October 2020 with a shudder. Yet, this moratorium was adopted as a temporary measure only and will be canceled sooner or later. That much is certain.
At the same time, the Final and Transitional Provisions of the Code (paragraph 5) provide for the following. Within five years from the day the Code came into force, the debt of an individual arising before the day the Code came into force on a loan in foreign currency, which is secured by a mortgage of an apartment or housing estate being the sole place of residence of the debtor’s family, shall be restructured in accordance with the insolvency procedure of an individual under the restructuring plan or a settlement agreement, taking into account the features established by this paragraph.
The composition and amount of monetary claims of a secured creditor for obligations arising from a loan in a foreign currency, secured by the mortgaging of an apartment (or housing estate), which is the only place of residence of the debtor’s family, are determined in the national currency at the exchange rate set by the National Bank of Ukraine on the date of commencement of insolvency proceedings of an individual. The sum of claims of such secured creditor does not include penalties and interest.
The claims of a secured creditor recognized by the commercial are repaid by the debtor in the amount of the market value of the apartment or apartment building, which is established by the surveyor identified by the creditor. The balance of the debt to such a creditor shall be forgiven (written off). The timing and interest rate under the restructuring plan are set in accordance with paragraph 5 of the Final and Transitional Provisions of the Code and depend on the floor space of the apartment (housing estate). The debt repayment periods can vary from 10 to 15 years.
At the same time, if the debtor does not have the financial ability to repay the claims of the secured creditor under the terms and conditions provided for in paragraph 5, the court will, at the request of the debtor, refuse to approve the restructuring plan and so terminates the insolvency proceedings. Following that the creditor will have an opportunity to foreclose the mortgaged property.
It is worth mentioning that even today banks are not deprived of the opportunity to foreclose a mortgaged property, since it all depends on the terms and conditions of the mortgage agreement that was concluded. This statement is confirmed by the legal position set out in the Resolution of the Supreme Court of 13 June 2018 in case No. 645/5280/16-c1.
Oleksandr Kamsha is an attorney at law, insolvency receiver at Ilyashev & Partners