November 2012
NEWSLETTER

Ukrainian Law Improves Protection of Banks against Dishonest Borrowers

On 4 November 2012 the Law of Ukraine "On Amendments to Certain Legislative Acts Regarding Performance of Commercial Obligations" (the "Law") came into effect following its adoption by the Parliament on 2 October 2012.

The Law introduces the new procedure for protection of creditors' rights against dishonest borrowers (either legal entities or individuals) in case of invalidation of loan agreements secured by mortgage or pledge agreements (the "Security Agreements"). The borrowers will no longer be able to release the mortgaged and/or pledged property (the "Collateral") by having loan agreements or Security Agreements invalidated.

Particularly, the Civil Code of Ukraine was supplemented by new article 1057-1 providing that if a loan agreement is invalidated by the court, the latter must upon the creditor's request (i) order mutual restitution of all that was received under the invalidated deal by the parties; (ii) determine the amount of funds that must be repaid to the creditor; and (iii) seize the Collateral provided by a borrower to secure the obligations under the loan agreement. Further, the court may release the property if the borrower pays the applicable amount of funds defined by the court to the creditor within 30 days after the judgment invalidating the loan agreement became effective. If the borrower delays the payment, the enforcement procedure against the seized property must be commenced by the court.

A similar procedure would apply if a Security Agreement is invalidated.

According to the Law, at the stage of enforcement procedure, the enforcement officer (bailiff) may recover the debt not only against the Collateral but also against all other assets of the borrower.

Beyond all doubt, the Law appears to be an important step towards better protection of creditors (especially banks) in Ukraine from a common fraudulent scheme of the Collateral being released and disposed off upon invalidation of loan agreements or Security Agreements.



For further information please contact senior partner Armen Khachaturyan
and associate Yuriy Radko

© Asters 2012
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