Crux (#5-6 May-June 2020)

Legal Digest

The UJBL editorial team spent last month monitoring recently adopted legislation and new initiatives. We asked experts to comment on NEURC Resolution No. 725, which increases green tariffs for electricity for household producers, Draft Memorandum of Understanding, Resolution No.580 in the sphere of land management, Draft Law No. 2571- aiming to amend certain acts regulating banking activities and others.

On 1 April NEURC Resolution No. 725, which raises green tariffs for electricity for household producers, was adopted. What were the reasons for this and what will be the consequences of this decision?

Marina Ryashchenko, Senior Associate, EVERLEGAL

In Ukraine the green tariff rate is determined by the Procedure for establishing, reviewing and terminating the green tariff for electricity for business entities, customers, including energy cooperatives and household producers of electricity. According to this Procedure the green tariff rate will be calculated and revised by the National Energy and Utilities Regulatory Commission (NEURC) on a quarterly basis at the official EUR/UAH exchange rate set by the National Bank of Ukraine. The primary objective of this approach is to protect developers from inflation and to promote investment into renewables.

NEURC Resolution No. 725 of 25 March 2020 revised the existing green tariff for households given the current EUR/UAH exchange rate, which increased significantly over the past few months. This measure is supposed to provide additional support to household producers of electricity. While NEURC Resolution No. 725 provides for an increase of the green tariff in UAH, in fact, if calculated in EUR, the green tariff rate is lower compared to the rate set by NEURC Resolution No. 3006 of 24 December 2019. Thus, household electricity producers may not benefit from such an increase in the green tariff given the current rate of inflation.

However, the primary concern of household producers of electricity remains whether the state will pay for the produced electricity and discharge the existing indebtedness due for recent periods. Unlike commercial developers who receive the green tariff payments from the State Enterprise Guaranteed Buyer, the household producers sell the produced electricity to regional power distribution companies the universal service provider. A number of household producers were not able to receive payments with the lower green tariff rate and there are serious concerns whether universal service providers will cope with the rates introduced by NEURC Resolution No. 725.

How grounded are the plans of the Ministry of Energy and Environment of Ukraine to reduce the green tariff? What are the provisions of the Draft Memorandum of Understanding, presented to investors?

Marta Halabala, Senior Associate, Asters

  1. Due to the current crisis in the energy sector, both investors and governmental officials understand the need for change. To resolve the crisis the Ministry of Energy and Environment of Ukraine proposes to reduce the green tariff for existing projects, set a new green tariff for projects under development and a number of other novelties. If the proposed amendments is agreed and the relevant new Law is adopted, it would mean retrospective change of the Law.

If such Law were to be adopted the retrospective reduction of the green electricity tariff would violate one of the most important generally-recognized principles of law, which state that laws and other regulations shall not be retroactive in effect. In addition, the revision of the tariff violates Ukraines international commitments to investors regarding the stability and protection of their investments.

The proposed amendments may resolve the crisis in the energy sector, but it may cause negative economic impact, as investors will exit Ukraine.

  1. The Draft Memorandum of Understanding foresees state bodies of Ukraine ensuring full and timely payment by the Guaranteed Buyer to RES producers for the electricity in future, and the existing debt for the electricity already supplied to be paid by 31 December 2021.

Under consideration is the possibility of allowing RES producers to freely sell electricity on the market, creating their own balancing groups, retaining the right to receive compensation under the respective conditions from the Guaranteed Buyer as the difference between the established green tariff and the price of electricity sold on the market.

The Memorandum proposes to set maximum limits of the green tariff to be paid for existing projects. For all energy facilities that produce electricity from the RES, a green tariff maximum limit is to be set at the level of the tariff for solar power plants, whose capacity exceeds 10 MW and which are commissioned by 31 March 2013, reduced by 20%.

Reductions in the green tariff are proposed as follows:

for solar power plants which are commissioned by 31 December 2019 by 20%;

for wind power plants which are commissioned by 31 December 2019 - by 10%;

for solar and wind power plants commissioned from 1 January 2020 - by 2.5%.

  1. One of the barriers for investors to enter Ukraine is the rule of law compliance.

The above-mentioned retrospective changes would be shortcoming in the application of the rule of law in Ukraine. The legal acts shall not be changed on a regular basis, in particular retrospectively. The fundamental principle of legality, meaning that all law be clear, ascertainable and non-retrospective, is to be breached. Any retrospective change in laws and regulations, including those reducing the green tariff, will have a negative effect and may lead to an outflow of foreign investors in the RES sector, which is one of the possibilities of increasing the countrys energy independence.

On 17 April 2020 a group of Ukrainain MPs registered Draft Law No. 3357. What are the main changes of the Draft?

Yevgen Filonenko, Counsel, Equity

On 17 April 2020 a group of Ukrainain MPs registered under No. 3357 a Draft Law On Making Changes to the Law of Ukraine on the Basic Principles of Implementation of State Financial Control in Ukraine.

The given Draft intends to make changes only to Article 10 of the Law. In particular, it is proposed that state financial control bodies (controlling bodies) be given unimpeded access to:

information with restricted access, which any state body, local self-government body, or any legal entity has;

personal databases held by state bodies and local self-government bodies without obtaining the consent of a data subject.

Despite few changes introduced by the Draft, these developments, by their legal effects, imply a high risk of abuse of powers by controlling bodies, which may lead to violations of the rights and interests of both individuals and legal entities.

Proposing the aforementioned changes, lawmakers point out only to the public procurement sphere where introduction of such powers of controlling bodies is expedient. At the same time, under the Law the controlling bodies are not limited only to the public procurement sphere, which, in its turn, will lead to exercising the said powers in other spheres of their activities.

The aforementioned powers are rather wide and significant. The information with restricted access is known to comprise confidential, secret and insider information (for example, bank-client privilege, attorney-client privilege or doctor-patient privilege, etc.). Access to such information without any restrictions and /or restraining mechanisms (for example, court permission) is the violation of constitutional rights, freedoms and interests of an individual that may lead to gross violations on the part of the controlling bodies.

Thus, to achieve the aims specified by the Law, the said changes, by their essence, are expedient. However, their wording must be subject to drastic changes and amendments before they are put to the vote in the Verkhovna Rada of Ukraine.

On 29 April Draft Law No. 3411, which related to Arbitration Courts, was registered by the Cabinet of Ministers. What are the main amendments proposed by this Draft?

Vyacheslav Sytyi, Attorney at Law, Ilyashev & Partners

Draft Law No. 3411 proposes amendments to the procedure of registration for Arbitration Courts. It sets additional requirements to the founders who wish to establish a new court, while founders of existing Arbitration Courts will be obliged to re-register their courts in order to comply with new requirements. Draft Law No. 3411 also proposes to extend powers of self-governing bodies the Ukrainian Convention of Arbitration Courts Judges and Arbitration Courts Chamber.

Due to the number of illegal decisions issued by Arbitration Courts, in 2009 the Verkhovna Rada deprived Arbitration Courts of hearing cases in respect of immovable property. Now, Draft Law No. 3411 proposes to bring back the jurisdiction of Arbitration Courts over cases related to immovable property. It is planned that such jurisdiction will be extended in three years.

Extending the jurisdiction of Arbitration Courts will certainly help to decrease the number of cases to be heard by Ukrainian courts, but it is not clear how to stand against a possible number of illegal decisions, which is what happened before 2009.

On 1 May Amendments to Government Resolution No.580 came into effect. What are these amendments, and what are they caused by?

Mykola Voitovych, Attorney, Gramatskiy and Partners

Amendments to Government Resolution No.580, which came into effect on 1 May 2020, extended the types of documents under a pilot project in the sphere of land management. This pilot project was initially launched on 1 October 2016 and introduced the extraterritorial principle for approving a land allocation plan (a type of land management documentation). The pilot project was highly praised, and so was developed further to now cover, due to the stated amendments, all types of land management documentation.

An extraterritorial principle is an important tool in fighting corruption in the land sphere and improving state services. Prior to the pilot project and recent amendments, all documentation had to be approved by regional authorities where the land was located. In some cases, it could lead to (1) formation of some connections between applicants or their consultants with state officials or (2) the possibility of some unofficial influence on officials or (3) disproportion of the workload on authorities in different regions.

To tackle those problems, the amendments set out the procedure according to which (1) land management documentation can only be submitted electronically via the website of the State Cadastre Service; (2) the system then randomly selects any regional state authorities for the examination of documentation; (3) the result, upon examination, is also presented electronically.

Provided the system cannot be manipulated or corrupted, it fully eliminates contacts between applicants and state officials (who may be in different parts of Ukraine), thereby facilitating in an impartial and transparent study of documentation. The system also estimates the workload of regional authorities, which may solve the problem with failure to comply with deadlines for consideration of documentation in the most active regions.

In conclusion, the pilot project is a temporary undertaking. However, the initiative responds fully to the modern trend for digitalization and depersonalization. Moreover, the first stage proved to be quite successful and resulted in the recent developments discussed here. Given this, it is expected that the updated procedure will operate on a permanent basis.

The Draft Law On Amending Ukrainian Legislation on Placing Corporate Rights into Management is under review in the Ukrainian Parliament. What are its main points, and what are the arguments put forward for the necessity of these amendments?

Oksana Daskaliuk, Senior Associate, Sayenko Kharenko

On 6 May 2020, Parliament received for review the Draft Law On Amending Ukrainian Legislation on Placing Corporate Rights into Management. Its purpose is to facilitate compliance by public officers with anti-bribery policies on holding stocks.

Currently, Article 36 of the Law On Corruption Prevention requires the highest public officers and selected public sector staff to move their corporate rights to an independent manager within 30 days of assuming public office. The rule generally reflects OECD recommendations on management of conflicts of interest in the public sector, and is a significant step towards a sensible regulation (the previous valid legislation prohibited officers from holding shares).

Under the law, transfer of the shareholding into management can be done vi either 1) conclusion of an asset or securities management agreement or 2) a venture fund managed by a licensed asset manager.

In practice, Option 1 is unavailable to public officers holding shares of low value. A licensed securities trader, a required party to a securities management agreement, cannot by law manage securities with a value of less than 100 minimum wages, which currently stands at UAH 470,230.

If the Draft is passed, th limit will not apply to parties concluding a securities management agreement to comply with anti-bribery laws. Given that a securities management agreement is a simpler tool compared to a joint venture fund, adoption of the draft law should encourage compliance with Article 36.

The Draft also extends the deadline for placing into management shares restricted for transfer. This would reduce technical violations of Article 36 by the owners of such restricted shares.

Still, the Draft Law solves a rather narrow problem, leaving other Article 36-related issues beyond its scope. For instance, the complexity of the venture fund option is practically inaccessible for owners of low-value shares, and the absence of tailored regulation of management agreements in anti-bribery compliance have to be dealt with.

On 13 May Parliament adopted the infamous so-called bank law (Draft Law No. 2571-). What are its main ideas, and what changes should the banking sector get ready for?

Anastasiya Voronova, Senior Associate, AVELLUM

On 13 May 2020 Parliament adopted the widely-discussed Draft Law No. 2571- with the aim of amending certain acts regulating banking activities. It generated enormous publicity due to numerous attempts to amend it and block it. Despite such attempts, on 21 May 2020, Ukrainain President Zelensky signed the Draft Law. Below is a summary of some major changes effected by the Draft Law.

Problem banks

The Draft Law provides that banks declared problematic would have a shorter period to remedy violations resulting in such a status. The current version of the Draft Law reduces such a period from 180 to 120 days (the Remedy Period). Under certain circumstances, a problem bank can be declared insolvent even before expiry of the Remedy Period.

Transfer of assets to a transition bank

The Draft Law simplifies the procedure for the transfer of assets from an insolvent bank to the transition or accepting bank. In particular, the Draft Law provides for a clear procedure for re-registration of the relevant assets of the insolvent bank and steps to be taken for completion of the procedure for the transfer of assets.

Bankrupt banks

The Draft Law prohibits the return of insolvent banks to their shareholders and prevents courts from adopting such decisions. The Draft Law also forbids insolvent banks from returning to the market. If a court cancels the decision of the National Bank of Ukraine on the withdrawal of a bank from the market, the respective court decision should not affect the procedure for liquidation of the insolvent bank.

The Draft Law also provides for the procedure for compensation applicable to the shareholders of insolvent banks. If a shareholder proves in court that the NBUs decision on the withdrawal of the bank from the market was illegal, such shareholder has the right to claim only monetary compensation.

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