Crux (#10 October 2016)

Legislative Update

The UJBL editorial team has monitored the current significant changes in legislation as well as new draft bills. Among the recently issued regulations for analysis are the Resolution of the National Bank of Ukraine that introduced zero liability principle for cardholders, governmental one that ordered notaries and other subjects of registration to verify court decisions on the possibility of counterfeiting before making registration procedures, and more. In october issue we`ve asked our experts to look deeper at the recent draft acts on assessment of environmental impact, creation of special register of persons who have lost their impeccable business reputation, shareholders participation in joint stock company management.

Kateryna Levytska,

legal assistant, Pavlenko Legal Group

In July 2016 the Ukrainian Parliament adopted the Act On Amendments to Some Legislative Acts of Ukraine Regarding the Settlement of the Legal Regime on Radioactively Contaminated Territories by the Chernobyl Disaster, No.1472-VIII. What opportunities for business are provided by the new act?

It has been more than 30 years since the terrible tragedy at Chernobyl and during this period of time great efforts have been made to manage the consequences of the disaster and minimize them. In July, Parliament adopted the Act that regulates the issues of the legal regime of the territory. Through the Act all objects of the natural reserve fund and biosphere reserves are supposed to preserve the natural state of the most common natural systems of the biosphere. The main aim of the Act of the exclusion zone is: implementation of the policy of openness to the public, creation of conditions for the development of investment potential, development of infrastructure for researchers and creation of conditions for safe visiting the exclusion zone. In future the Chernobyl Biosphere Reserve, a solar energy park with efficient use of existing energy networks, international research center will open many opportunities for attracting investment into the area. The Act will give the right to obtain special permits and use of water in the exclusion zone as well as use of the land in the area for developing the infrastructure. A major step forward for investors will be the possibility of scientific and technical activity in fundamental and applied research. The Act aims to provide business opportunities for this area and with the professional approach it can become a territory for positive change.

Ario Dehghani,

counsel, Redcliffe Partners

Draft Act No.2009- On Assessment of Environmental Impact was adopted in its first reading. What are the expected changes resulting from the Draft for Ukrainian industrial companies?

Draft Act No.2009- On Assessment of Environmental Impact (the Draft) aims to replace the effective On Environmental Expertise Act of Ukraine of 9February1995 (the Effective Act).

Contrary to the broad language of the Effective Act, the Draft appears to be a clear and elaborate piece of legislation. Stepping in place of the Effective Act, the Draft would install a greatly improved regulatory framework, which also enables a clearer risk assessment for the industry. Two specific points notably differentiate the Draft from the Effective Act.

Firstly, the Draft sets out liabilities for a number of specific offences to be introduced to the Code of Administrative Offences of Ukraine of 7 December1984. One example is a fine of up to UAH 3,400 payable by company officers for improper consideration or unreasoned dismissal of public suggestions made in the course of assessment of environmental impact.

Moreover, the Draft provides a clear timeframe for the assessment of environmental impact. The Effective Act indicates an overall limit of up to 120 days for evaluation. By contrast, the Draft indicates specific limits for each stage of assessment (cf. public discussion of the project at issue up to 60 business days, issue of a final decision by the competent authority up to 25 business days). This enables companies to make a more definite appraisal of the time and costs needed for the procedure of assessment.

Volodymyr Volianskyi,

associate, Spenser & Kauffmann

President Petro Poroshenko vetoed the Act on Resorting to Levying Fines for District Heating Companies for Gas and Electricity Debts (Act No. 2706). How do you evaluate this decision, and how can adoption of the act affect the utility companies?

Act No. 2706 did not solve problems in the industry. Its aim is to freeze the current situation and to prevent deterioration. An expected positive effect from the enactment of the draft is rather short-term, while in the long-term perspective its rules could cause much more negative consequences.

It is worth keeping in mind that the conditions of Act No. 2706 contradict the agreement between Ukraine and IMF which aim to restructure Naftogaz of Ukraine in order to increase efficiency and improve governance. Naftogaz is the main creditor of companies, covered by the moratorium in Act No. 2706. On the eve of receipt of the IMF tranche, the President could not sign the act releasing Naftogaz the possibility of returning its debt of about UAH 20 billion.

Passing Act No. 2706 would not dramatically affect the economic activity of companies in the industry. The arrest of companies accounts, imposed during enforcement proceedings initiated by creditors, do not cover special accounts protected by law. The majority of settlements are made through these accounts. That is why courts, considering these companies complaints against state enforcement officers (bailiffs) attachments, conclude that these arrests do not block the possibility of companies to do business.

By Act No. 2706, no forfeit shall be calculated for existing debt of companies in the industry. It seems to be an equitable decision seeing the cause of this debt objectively independent on the debtors and the amount of the penalty in some cases is more than half of the main debt. However, despite the fact that Act No. 2706 was not passed, I expect the problem to be solved in another way in the near future.

Bohdan Dmukhovsyy,

senior associate, AEQUO

Draft Act No.4993 which envisages the creation of special register of persons who have lost their impeccable business reputation has been registered in Parliament. How could such a registry help to improve the performance of the Ukrainian banking system?

In July 2016 Draft Act No.4993 was registered with the Ukrainian Parliament. The Act authorizes the National Bank of Ukraine (NBU) to compile and hold the register of persons who have lost their perfect reputation. In particular, if the Draft is passed into law the NBU will be authorized to include in the register shareholders and managers of banks who do not meet reputational criteria as set forth by the On Banks and Banking Activity Act of Ukraine and the NBUs regulations.

The Draft continues reforms started in 2014 by Parliament and the NBU to clear the Ukrainian banking sector from weak or dishonest banks. The Draft will improve the NBUs effectiveness in providing prior approvals for appointment of bank managers and change of shareholders and will keep dishonest or unprofessional managers or shareholders away from the banking business. Currently, the NBU already controls appointment to the highest managing positions and change of significant shareholders in banks by way of gathering, verifying and monitoring information on the candidates reputation, professional and management skills prior to any appointment or shareholder transaction. Information received by the NBU, however, is not consolidated into one source, and the current law does not require such consolidation. The Draft, thus, will equip the NBU with the instruments to avoid appointment by the banks of unprofessional managers even for temporary positions (i.e. which a manager can occupy before it gets approval or refusal from the NBU). Also, if the register is made publicly available, it will help the remaining banks to avoid any relations with unprofessional managers.

Mykola Voitovych,

attorney, Gramatskiy & Partners

On 8 September Parliament approved in principle Act No. 4194 On Amendments to Certain Legislative Acts on Use of Seals by Legal Entities and Individual Entrepreneurs. What kind of new opportunities and risks may arise for business with the adoption of this Act?

Draft Act No.4194 and its aim are not something revolutionary as many may think. In 2014, the transition from the obligatory usage of seals to the optional was implemented, but the main goal has not been achieved because of some omissions which conserved the necessity of corporate seals. So Draft Act No.4194 is directed at elimination flaws in the existing legislation on corporate seals.

These amendments were just a matter of time; they fully correspond to a practice of developed countries. Todays technology rapid evolution has opened possibilities for electronic documents circulation, which is much faster, cheaper, and more comfortable alternative to present paperwork. Ukraine tries to keep up with the times and introduces plenty of electronic services. However, many of these services are available only for individuals and work in the test mode for business as a company stamp must be present on applicable documents. Cancellation of obligatory use of seals will provide business with access to a modern type of cooperation with state bodies and contracting partners.

Still, there is a popular opinion that non-obligatory use of seals creates favorable preconditions for falsification of documents. Here must be noted a seal has never been a guarantee against forgery, especially lately when it could be produced without any permits. Besides, commercial parties retain the right to establish the necessity of seal usage within their relations as an auxiliary evidence of the authenticity of documents.

Igor Reutov,

head of department, Gramatskiy & Partners

The Draft Act purports to simplify the conduct of business activity in Ukraine. If the Draft is enacted, the seals will become an insignificant element of any document issued by a business entity and so Ukrainian document exchange will be similar to the one that all civilized countries have. On the one hand, such amendments will make issuance of business documents more flexible and easier for businesses. On the other hand, the Draft increases the risks of forgery in corporate and business spheres; likewise, it facilitates the dishonest appropriation of business and assets, belonging to others.

It should be observed that forgery is a criminal offense. Although the punishment for forgery in business sphere is harsh enough in Ukraine (it can be punished by imprisonment of up to ten years), such cases are difficult to investigate; thus, dishonest appropriation of businesses and assets remains lucrative. Therefore, the amendments could further instigate fraudsters to deprive owners of their businesses and assets, unless Parliament adopts certain defensive mechanisms securing shares and assets against dishonest appropriation.

Artur Avetyan,

associate, Trusted Advisors

On 8 September 2016 the Cabinet of Ministers adopted a decree that ordered notaries and other subjects of registration to verify court decisions on the possibility of counterfeiting prior to executing of registration procedures. How will these changes affect the fight against corporate raids in Ukraine?

On 8 September the Cabinet of Ministers of Ukraine adopted Regulation No.594, which amended the State Register of Proprietary Rights to Immovable Property and their encumbrances. According to the amendments, the state registrar or notary officer is required, before making any changes, to verify the court judgment in terms of its presence in the Unified State Register of court decisions.

However, it is known that one of the fraudulent practices of deprivation of rights is a forgery of a court judgement according to which the state registrar or notary officer, having no knowledge of the origin of the document, makes amendments to the Register and the legal owner loses his right to ownership of such property. Such innovation is definitely expected and logical because there are many cases of use of fake court decisions, and these changes will help to prevent illegal encroachment frauds (raiders) against property owners.

Anyway, there is the other side of the coin. Despite the fact that the law establishes the obligation to enter a court judgment into the Unified State Register on the day following its adoption, this obligation is often neglected and the relevant judgment can appear about a week or more after its issuance. In such a case, having the courts judgment, which came into force, the notary officer or state registrar will refuse the applicant to amend the State Register of Proprietary Rights to Immovable Property on the basis of these decisions because of their absence in the United State Register of court decisions.

Vasiliy Sheretko,

senior associate, Antika

On 9 September 2016 Resolution of the Board of the National Bank of Ukraine of 6 September, No. 382 that introduced the principle of zero liabilityfor cardholders came into force. How can this novelty affect the work of banks?

The possible risks for business connected with the full abolition of the necessity to use the seal in day-to-day business activity of the company, are just as much as they were when the seal was considered as an obligatory part of documents.

We evaluate the initiative of seal liquidation itself positively, moreover the usage of seals in the 21st century sounds somehow ridiculous.

Despite the established opinion that a legal entity affixing a seal confirms (gives guarantees for) the legitimacy of one or another document in the field of business, from the moment of adopting norms on optionality of their usage, abolishment of permitting procedures, connected with seals production, this approach is quite risky. After all, exactly the signature of the authorized person on the document is the main requisite, the lack or non-authenticity of which deprives the document of its status.

The Draft clarifies and puts things right, removing legal ambiguity in the use of seals, particularly their status. The provision proposed in the draft law saying that the seal cannot be considered as an obligatory requisite of a document should promote the achievement of the object in view.

We should also understand that with the adoption of this document and prior to the adjustment of subordinate legislation (regulations, decrees, instructions), the situation with the use of seals will not fundamentally change.

As to the provisions on the liability of representatives of the authorities for requiring the affixing of a seal or refusal to accept documents without seal, this is hard to predict. However, it is unlikely that there will be many cases connected with bringing officials to responsibility for this breach, understanding that the act of breach should be accurately documented, and the position should be defended in court. By the way, it is proposed to set the sum of administrative liability of the officials for the described breach at UAH 850-1,700.

Yulia Spolitak,

senior associate, Eterna Law

The Draft On Amendments to Some Acts of Ukraine regarding the Settlement of the Issue of Shareholders Participation in a Joint Stock Company Management, No. 5043, has been registered in Parliament. How would the proposed measures help to solve the problem of sleeping shareholder, as well as improve the level of corporate governance in the JSC?

The On Depositary System of Ukraine Act established the requirement for shareholders of dematerialized shares to execute services agreements with depositary within one year from the date the mentioned law became effective. Due to non-compliance with requirements, a number of shareholders were limited in their corporate rights and became dormant.

Suggested by the Draft period for remedy of shareholders rights to the shares would give an opportunity for the dormant shareholders to consider their corporate activity. By restoring ownership rights to the shares, the dormant shareholders will be able to show their interest on the JSC participation and corporate management.

However, in case the dormant shareholders miss or ignore the opportunity within the suggested term to restore their ownership right to the securities, the right will be lost and the shares shall be deemed purchased by the joint-stock company. The latter shall sell or annul the shares within the established period. Thus, in this way the Draft establishes an automatic termination of dormant shareholders rights providing the opportunity for the active persons to participate in the management of the JSC instead.

Maxim Salii,

associate, FCLEX

On 20 September 2016 Parliamnt approved the Draft Act On Electronic Trust Services that should replace the effective Draft Act On Amendments to the Act of Ukraine On Electronic Digital Signature Act of Ukraine. How will these changes affect cross-border certification services?

The Verkhovna Rada of Ukraine has approved the Draft Act On Electronic Trust Services which is proposed to replace the Draft On Amendments to the Act of Ukraine On Electronic Digital Signature drafted earlier with a view to making the provisions of this Act as close as possible to the provisions of Regulations (EU) No.910/2014 of the European Parliament and European Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market, as well as repealing Directive 1999/93/EU.

Respective changes will make it possible to adapt Ukrainian legislation to the requirements of the European Union, which will have a positive impact on the development of cross-border certificationservices and will ease Ukraines entering the digital market of the European Union.

The Draft envisages unification of the key components of cross-border digitalservices, introduction of unified terminology and the taking of measures to provide compatibility of electronic services with European services.

The adoption of the given Act will undoubtedly have a positive influence on the current situation, though it should also be taken into account that Ukraine is not quite ready morally for such changes. It is very difficult for us to leave Soviet customs and focus on computerization. Therefore, it will be necessary to make tremendous efforts that will not be limited only to adoption of the respective law but will also be directed at preparing society for new trends and changes.

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