At last, a legislative light has appeared at the end of the long dark tunnel of Ukraine's financial sector.
Adopted on 14 June 2016 and published on 19 June 2016, Ukraine's new law "On Financial Restructuring" No. 1414-VII (the "Financial Restructuring Law") is effective for a period of only three years from 19 October 2016 until 19 October 2019.
The Financial Restructuring Law comprises one of several pieces of legislation recently implemented in Ukraine in a bold effort by its government to rehabilitate its beleaguered financial sector. In tandem with similarly short term amendments to the Tax Code of Ukraine (the "Tax Code"), the Financial Restructuring Law is intended, amongst other things, to facilitate a prompt resolution of Ukrainian non-performing loans ("NPLs") and revive the balance sheets of Ukraine's banks and financial institutions.
In short, the Financial Restructuring Law expedites financial restructuring by empowering both debtors and creditors in a sort of carrot and stick paradigm. By introducing an out-ofcourt consensual restructuring regime, the Financial Restructuring Law reduces judicial intervention and bureaucracy and enables debtors and creditors to directly cooperate and identify mutually acceptable solutions. By imposing relatively short time frames, the Financial Restructuring Law forces debtors and creditors to act quickly to achieve such solutions. A comprehensive legislation, the Financial Restructuring Law addresses everything from waivers, grace periods, and standstills to the creation and governance of creditor committees and the ultimate negotiation and implementation of a restructuring plan.
Key provisions of the Financial Restructuring Law are as follows:
A Ukrainian debtor (other than a bank or financial institution) with a viable business plan (as presented to its creditors and corroborated by an independent expert) and outstanding financial indebtedness to at least one bank or financial institution, such as a leasing or factoring company, may avail itself of a voluntary restructuring process under the Financial Restructuring Law regime. The debtor's trade and commercial creditors also may join such restructuring process. Upon commencement of the restructuring process, the participating parties must agree a restructuring plan within 180 calendar days in conjunction with the debtor moratorium period.
Under the Financial Restructuring Law, upon commencement of a restructuring process a debtor is protected by a moratorium that prohibits its creditors and its related parties from enforcing against the debtor or its assets. Creditors and the debtor's related parties may not enter into pledge or mortgage agreements as to the debtor's assets (other than for refinancing purposes), exercise a right of set off against any of the debtor's assets, or sell or dispose of any of the debtor's unencumbered fixed assets. Additionally, the moratorium suspends the imposition of penalties and financial sanctions, the running of any statutes of limitation, and the pursuit of any bankruptcy proceedings (including pending bankruptcy proceedings) against the debtor. The moratorium runs for 90 calendar days, but with the creditors' consent, may be extended up to 180 days, after which period the participating parties are expected to conclude the restructuring process.
The Financial Restructuring Law introduces the notion of a standstill agreement for the duration of the restructuring process and the application of attendant disclosure, reporting, control, sweep, governance and other requirements on the debtor. The Financial Restructuring Law expressly states that the participating parties are liable for breach of the standstill agreement.
The contemplated outcome of the restructuring process is a restructuring plan. The Financial Restructuring Law provides that such restructuring plan requires unanimous approval of all participating creditors (the debtor's related parties are excluded from voting). However, in the event of creditor dissent such restructuring plan may be pre-approved by two-thirds (by value of claims) of the participating creditors with final approval to be granted through an arbitration proceeding. The debtor may, in fact, obtain approval of its creditors to the restructuring plan even before initiating the restructuring process. If approved, either by the creditors or by arbitration, the restructuring plan is binding on all creditors, with the exception of certain reservations which, under the Financial Restructuring Law, require individual creditor consent, such as provision of additional financing to the debtor or forgiveness of secured debt of the debtor.
The Financial Restructuring Law specifies how the restructuring process will be administered by the debtor through its Supervisory Council which is responsible for the presentation of the debtor's business viability and its Secretariat which supports the on-going activities in the restructuring process.
Overall, as a short term, highly prescriptive, remedial measure, the Financial Restructuring Law (and complementary legislation) may provide a much needed boost to Ukraine's financial sector. As announced in April 2016 by the Deputy Governor of the National Bank of Ukraine, the country's NPL ratio is a jaw dropping 40%. Even the more conservative World Bank estimates a 28% NPL ratio in Ukraine. Accordingly, any scenario where debtors and creditors are incentivised and supported towards a speedy and amicable resolution will be welcomed by both banks and financial institutions currently holding Ukrainian NPLs and investors intending to invest in Ukrainian NPLs. The Financial Restructuring Law could prove to be the bright light leading the way out of the long dark tunnel of Ukraine's financial sector.
DLA Piper will continue to monitor developments in the Ukraine and other CEE and SEE markets for legislative changes and investment opportunities.