On 22 September 2011, the Parliament of Ukraine adopted Law of Ukraine No. 3795-VI “On Amendments to Several Legislative Acts of Ukraine regarding Regulation of Legal Relations between Creditors and Receivers of Financial Services” (the “Law”). The Law became effective on 16 October 2011. Although the positive impact of certain amendments is rather ambiguous at this stage, the Law is likely to reduce risks in the financial system.

The major amendments envisaged by the Law cover the following key areas:

Loans and security

The Law introduces changes to the procedure for mortgage enforcement. Whereas previously only two public auctions were available to sell mortgaged property, the Law now provides for the possibility to hold a third public auction if the mortgagee did not use its right to buy property during the previous two auctions.

The Law amends certain provisions of the Civil Code of Ukraine, dated 16 January 2003, as amended (the “Civil Code”), in particular which state definitively that the interest rate under a loan agreement may be fixed or floating and adds certain further details in relation to the same. A fixed interest rate is set for the entire term of the loan agreement and cannot be changed by the bank unilaterally. A floating rate must be calculated on the basis of an index which is published in the mass media and defined by an independent reputable institution. The Bank cannot change the mechanism of floating rate calculation without the borrower’s consent. An additional limitation applicable to a floating rate loan agreement is that the agreement must contain a floating rate increase limit. The adopted changes to the Civil Code protect the borrower from disadvantageous loan agreement terms that may be imposed by the bank.

The Law also amends certain provisions of Law of Ukraine No. 1023-XII “On Consumer Rights Protection”, dated 12 May 1991, as amended (the “Law on Consumer Protection”), the most notable being the prohibition on consumer loans denominated in foreign currency. This amendment is aimed at supporting the national currency and will reduce the currency and credit risks of Ukrainian banks and their borrowers-individuals.

Borrower’s responsibility

The Law amends the provisions of the Civil Code regulating the procedure for company reorganisation. According to the amendments, a legal entity-successor formed as a result of the division of or extraction from its legal entity-predecessor holds subsidiary responsibility for the obligations of the legal entity-predecessor, which obligations have been passed to another legal entity-successor. This will help to eliminate reorganisation schemes, which allowed indebted legal entities to evade the repayment of their financial obligations.

The Law also brings changes to the Criminal Code of Ukraine, dated 5 April 2001, as amended, by directly establishing criminal liability for illegal actions concerning pledged property, which will allow to initiate criminal proceedings against former owners/former owner’s officials of the pledged property in case they violate the bans and restrictions imposed on the use of such property when it is sold by the bank or other financial institution.

Insolvency matters

Among the other things outlined above, the Law also introduces the following key amendments to Law of Ukraine No. 2343-XII “On Restoring a Debtor's Solvency or Recognising It Bankrupt”, dated 14 May 1992, as amended:

  • the obligations of an individual entrepreneur that arose out of circumstances not connected to his/her business activities (e.g. consumer loans) are now outside the scope of his/her bankruptcy proceedings, so the termination of such obligations upon the commencement of bankruptcy proceedings will not be the case after the Law comes into effect. This will allow reducing the risks of individuals evading liability through the initiation of individual-entrepreneur’s bankruptcy proceedings. Furthermore, the pledged property securing the respective creditors’ claims cannot be seized and cannot become part of the liquidation assets.
  • the creditors in bankruptcy proceedings may obtain information from the administrator about other creditors’ claims accepted by the debtor and/or the administrator. Such creditors in bankruptcy can file an objection to the debtor and at a commercial court against the acceptance of such other creditors’ claims. This norm was adopted to prevent the practice of fictitious bankruptcy proceedings, by initiation of which many legal entities avoided performance of their obligations. However, it may adversely affect the creditor’s rights if a party related to the bankruptcy starts attacking rights of such a creditor in reliance on the above provision.
  • once the bankruptcy proceedings have been initiated against the debtor, the respective court ruling on such initiation must be published on the official website of the judicial authorities of Ukraine. This will allow for better monitoring opportunities and enhanced creditor’s awareness of the initiated bankruptcy proceedings.

Law: The Law of Ukraine “On Amendments to Several Legislative Acts of Ukraine regarding Regulation of Legal Relations between the Creditors and Receivers of Financial Services” No.3795-VI , dated 22 September 2011.