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New rules for taking and enforcement of security in Ukraine

Over the last year the legal regime for the taking and enforcement of security in Ukraine to ensure performance of debtors' obligations in cross-border finance transactions has been significantly changed. Below we provide a brief overview of the most important points.

Encumbrances over immovable property shall be recorded in the new register

Under Ukrainian law, a mortgage agreement must be notarised to become effective. If so provided by the mortgage agreement, a Ukrainian notary issues a prohibition on the alienation of the mortgaged assets and registers such prohibition in the Uniform Register of Prohibitions on Alienation of Immovable Property Objects (the 'Uniform Register'). Upon a mortgagee's request a Ukrainian notary may also register the mortgage in the State Register of Mortgages (the 'Mortgage Register'). The registration of a mortgage in the Mortgage Register results in the mortgagee's priority at the foreclosure. Ukrainian notaries issue extracts from the Uniform Register and the Mortgage Register evidencing existence of mortgage. At the same time, starting from January 1 2013 new mortgages should be registered only in the recently created State Register of Proprietary Rights to Immovable Property (the 'Proprietary Rights Register') and will no longer be registered in the Uniform Register and the Mortgage Register. Information on existing mortgages registered in these registers will be transferred to the Proprietary Rights Register upon registration of any new proprietary right to the relevant assets. Notably, registration of mortgages over aircraft, sea and river vessels and aerospace objects is expressly excluded from the Proprietary Rights Register and thus creates a grey area in these circumstances.

Ukraine benefits from the Cape Town Collateral System in Aviation Financing

On June 6 2012 the Ukrainian Parliament ratified the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment, both dated November 16 2001 (together the 'Cape Town Convention'). The Cape Town Convention introduces an internationally recognised collateral system in aviation financing that enables security interests to be created over the aircraft and related equipment, upon registration with an electronic international aircraft registry in order to guarantee the priority of creditors' claims against other parties. In this manner, the creditors are better protected against any debtor's default and insolvency risks, including the ability to request the removal of an aircraft from the national civil aircraft register and export it, as the existence and effectiveness of their collateral is assured by the registry system. Consequently, entities involved in aircraft financing will have more confidence in transactions and the resulting reduction in risk will permit discounted finance costs. Debtors are in turn protected from the unwarranted seizure of the assets by creditors, provided they have properly maintained their financial obligations. Despite its obvious advantages, the ratification of the Cape Town Convention may not have an instant tangible impact on Ukraine's aviation market as it does not apply retrospectively. In other words, the existing financing agreements would have to be amended in order to benefit from the international aircraft registry.

Ukrainian parliament facilitates fights against fraud in mortgage lending

A ban on mortgage of land plots without cadastral numbers has been recently introduced in Ukraine. From now on, the land plot's cadastral number is one of the essential provisions of a land plot mortgage agreement. The ban is likely to enhance lenders' protection against abuses from unfair borrowers and mitigate their risks associated with perfection of mortgage over non-existent land plots as well as perfection of mortgage by mortgagors which do not have valid title to the land plot. At the same time, the system of land cadaster in Ukraine is not fully operational at the moment and many land plots legally owned by the potential borrowers still do not have cadastral numbers.

Additional guarantees to ensure enforcement of mortgages over sea-going ships

On May 16 2012 the International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-Going Ships (1952), known as Brussels Convention, along with implementing amendments to the procedural legislation entered into force in Ukraine. To secure enforcement of mortgages in maritime claims, the provisions of the Convention allow precautionary arrests of both foreign and Ukrainian-flagged vessels. An application to arrest a vessel can be submitted to the district court of the Ukrainian port where the ship is located or alternatively to the district court of the port of vessel's registration.

Currency control rules for surety payments relaxed

The National Bank of Ukraine (the 'NBU') exempted payments by Ukrainian sureties to foreign lenders from the licensing regime. Previously the NBU's individual license was required for each such payment. The exemption applies, if a payment is made by a surety provider to fulfil Ukrainian borrower's obligations under a loan agreement registered by the NBU. However, an individual license of the NBU will still be required in the event when a surety from a Ukrainian surety provider secures obligations of a non-Ukrainian borrower - traditional security structure for Eurobond offerings by Ukrainian business groups.

In addition, Ukrainian borrowers may receive financing from lenders, which are not banks or financial institutions, only in the form of 'borrowings', but not 'loans'. Borrowings and loans are similar but still different types of transactions in Ukraine. 'Borrowings' are frequently used as financing instruments between affiliated foreign entities (which would normally be corporate loans in other jurisdictions). However, the exemption appears to apply only to surety's payments in connection with loans, but not 'borrowings'. Consequently, payments under such surety with respect to borrowings appear to remain subject to obtainment of an NBU's individual license. Further clarifications of the NBU may help to finalise this matter.

Author: Armen Khachaturyan, Oleksiy Demyanenko
Source: IFLR1000. The Guide to the World's Leading Financial Law Firms. – 2012