On 19 February 2013 the Law of Ukraine “On Agrarian Receipts” (the Law) has come into effect. The goal of this document is to fill the gap in efficient financing instruments for agribusiness. It is not a secret that this Law was drafted based on Brazil’s experience where CPR (Cedula de Produto Rural) has been successfully applied since 1994 and has become one of the factors to stimulate the active growth of the agricultural industry due to establishment of efficient mechanisms enabling agricultural producers to receive additional financing.   

The successful experience of Brazil gives hope that CPR will find its application in Ukraine as well, especially taking into account support of this idea by some major players on the market.  

According to the Law CPR is a document confirming debtor’s unconditional obligation secured by pledge to supply agricultural products or to pay money under terms set forth therein.

The Law determines two types of CPR: commodity CPR obliging to supply agricultural products, and financial CPR obliging to pay the respective amount of money.

Use of CPR has undisputable economic advantages both for agricultural producers and suppliers of fertilizers, pant protection agents, seeds, fuel etc. In particular, commodity CPR enables agricultural producers to finance agricultural production through selling the crop prior to the actual harvest and mitigates the risks of reducing the price for the crop because the obligation is indicated in the product quantity and not in money equivalent. At the same time, financial CPR allows suppliers to secure fulfilment of obligations as to commodity delivered to agricultural producers with future crop. Moreover, commodity CPR basically allows barters between agricultural producers and suppliers of goods necessary for the agricultural production.        

It should be noted that the Law does not prevent non-residents from acting as creditors under CPR and does not stipulate that obligations under financial CPR shall be fulfilled only in hryvnia. It might be presumed that the legislator does not intend to limit the sphere of CPR application only to residents of Ukraine. Still, to use CPR in foreign economic relations respective amendments shall be made to the currency legislation.

A debtor under CPR, i.e. issuer, may be any person who owns an agricultural land plot or has rights to use such a land plot for purposes of agricultural goods production.  

CPR shall be issued in writing in a special form and is subject to notarization and registration with the CPR Register.  

The key feature of CPR is that it not only stipulates a debtor’s obligation but also secures such obligations with pledge over the future crop harvested on the respective land plot indicated in such CPR. At this, information on the pledge item under CPR shall be registered by a notary who certifies such a CPR with the Register of Encumbrances of Movable Property. On harvest day the amount of agricultural products harvested becomes a pledge item under the respective CPR.  

As CPR envisages financing against pledge of the future crop the legislator made an effort to protect the rights of creditors under CPR in the maximum possible way and set forth in the Law very interesting provisions about rights to use the land plot indicated in CPR. Thus, transfer of title to or rights to use a land plot does not lift the pledge over the future crop according to CPR and does not forfeit the right of the debtor and the creditor under CPR to use the land plot prior to harvest of the respective crop but only till the end of the respective marketing year. It shall be noted that the current legislation does not provide a definition of a “marketing year”, respectively this provision may cause some disputes in practice. 

Another nuance in respect to securing obligations under CPR is that the future crop is used as the security. In my opinion, words “future crop” do not quite exactly reflect the legislator’s idea as the future crop is not always the following (next) crop. It creates a certain ambiguity as to the security item. It is, of course, judicial casuistry, but taking into account peculiarities of the Ukrainian judicial system and law application practice this provision requires some clarification.           

If the debtor fails to fulfil its obligations under CPR, the creditor is entitled to satisfy his claims against the future crop pledged, including through transfer of title to such crop, provision of the right to complete the growing of such crop, to harvest it, to take it in possession or to sell it. The Law provides a simple and efficient mechanism for enforcement of the pledge under CPR. Transfer of the pledge under CPR is carried out by a public enforcement officer within seven days based on a notary’s writ on such a SPR. At this, the legislator has taken into account practical difficulties in using such instrument as notary’s writ and has envisaged that CPR without a note about its fulfilment shall be considered as a sufficient proof that creditor’s claims are indisputable. This deprives notaries of grounds to refuse a writ with reference to the lack of proof that creditor’s claims are indisputable.

If the harvested crop is insufficient for fulfilment of obligations under CPR in full, the pledge under such CPR extends to the future crop of any agricultural products grown or to be grown by the debtor under CPR on the land plot indicated in such CPR.  At first glance, this provision ensures fulfilment of obligations under CPR in full. Nevertheless, in practice it will be quite easy for the debtor to avoid fulfilment of obligations against the future crop. The case is that if the land plot in question changes its owner or legal user, the pledge under CPR will not cover the crop grown by such third person. It means that it would be sufficient for the debtor just to introduce a new company as a lessee and the pledge of the future crop may be avoided.

It is commonly known that compliance of the quality of agricultural products with declared criteria is a very sensitive issue in practice. Authors of the Law tried to solve this problem stipulating that a commodity CPR shall indicate the quality of the products to be delivered and a formula for adjustment of the product’s quantity should the quality differ. At this, the parties are advised to agree from the very beginning upon an expert organization to examine the product’s quality for its compliance with the quality declared in case of any disputes.  

Suretyship from a bank may additionally raise the value of CPR in the eyes of creditors. Procedure for provision of a surety is similar to promissory note avalization and, pursuant to the Law, shall be carried out in the same way as stipulated for the promissory note avalization.

The Law also provides that it is possible to transfer rights under CPR, which considerably expands its application sphere. Such transfer is made with an endorsement on the CPR in question and is subject to notarization.

It is obvious that the Law will bring some changes to the algorithm of work for the agricultural market players. The point is that obligations under each CPR referring to the same agricultural products shall be performed in the order of their issuance. Thus, one crop may be pledged under several CPRs. Respectively, creditors under subordinated CPRs have higher risks of non-fulfilment, at least, in the current year.

Besides, enforcement of the pledge under CPR is carried out in the order of their issuance as well.

It shall be taken into account that pledge of the future crop under CPR gives the respective creditor under CPR the priority right to satisfy his claims against the pledge compared to other creditors of the respective borrower.

Moreover, prior to acquisition of the title or rights of use (lease) to a land plot, it will be necessary to check whether there is any open CPR that imposes pledge on the crop grown on the land plot in question. Otherwise, the new user/owner of the land plot takes a risk to be limited in the right of use of such a land plot and disposal of the crop from such a land plot.

Moreover, when a creditor accepts CPR is it very important to check whether there are other encumbrances on the future crop, as on the day of CPR issuance future crop may not be pledged otherwise than under CPR. It means that if there is such other pledge, it influences the legality of the CPR issuance which may be used against the creditor’s interests in the future.            

In conclusion it shall be noted that for successful introduction and use of CPR it is required to establish a CPR Register and to bring the current legislation in line with the provisions of the Law.