On 7 August 2011, the Law of Ukraine No. 3614-VI “On Amendments to the Budget Code of Ukraine and Several Other Legislative Acts of Ukraine” (the “Law”) came into force. Among other changes to the Budget Code of Ukraine, the Law introduced amendments to Article 17 which deals with state and municipal guarantees (i.e. guarantees issued by the Cabinet of Ministers of Ukraine (the “CMU”), the Supreme Council of the Autonomous Republic of Crimea (the “Council of ARC”) and/or city councils, to secure obligations of Ukrainian resident borrowers).

The most important amendment to Article 17 changes the terms and conditions for granting state (municipal) guarantees, as follows:

Counter-guarantee requirement abolished. There is no longer a requirement for a borrower to provide a counter-guarantee as security to the state/municipal guarantor.  Previously, as a condition for such guarantee, borrowers were required to provide an irrevocable and unconditional guarantee issued by a bank that has been in compliance with the mandatory economic standards of the National Bank of Ukraine for three years preceding the guarantee. Instead, according to the Law, borrowers must now provide “collateral or other security” for the discharge of their obligations. Moreover, if the borrower has state or municipal property in its economic management (in other words, is a state or municipal enterprise), it is up to the CMU, the Council of ARC or the respective city council to decide on the necessity of providing the collateral security, its type and amount;

Form and substance requirements clarified. The Law now lists certain mandatory requirements as to the written form of the guarantee as well as to its substance (i.e. subject matter of the guarantee, full name and residence of the borrower and creditor, amount of a loan, scope of guaranteed obligations and the order of their fulfilment, events when payment under the guarantee becomes due and the term of the guarantee); and

Compensation contract requirement imposed. The Law also introduces a new mandatory requirement for granting guarantees, according to which the borrower must enter into a contract with the Ministry of Finance of Ukraine (or the relevant municipal finance authority as the case may be) regarding compensation by the borrower of state/municipal budget expenses related to fulfilment of the guaranteed obligations. Other mandatory provisions of such contract include collateral or other security to be given to the guarantor, a guarantee issuance fee and default interest to be payable to the guarantor, and contractual debiting (write-off) of funds from the borrower’s bank accounts in favour of the guarantor.

Law: The Law of Ukraine No. 3614-VI “On Amendments to the Budget Code of Ukraine and Several Other Legislative Acts of Ukraine", dated 7 July 2011.