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PLC Finance Handbook 2011. Country Q&A. Ukraine

1. Please give a brief overview of the main trends and important developments in the lending market in your jurisdiction in the last 12 months.

On 27 April 2010, Parliament abolished certain restrictions in­troduced by the Law On Amendments to certain Ukrainian laws to overcome the negative consequences of the financial crisis. This law established restrictions on amending loan agreements providing for early repayment of foreign-sourced loans by Ukrain­ian residents, as well as prohibiting early repayment of these loans. The measures were introduced at the height of the crisis to prevent the uncontrollable outflow of foreign currency from the domestic market, and to stop the swift devaluation of the national currency, the Ukrainian hryvnia.

A significant regulatory policy was introduced on 15 November 2010 with Letter No. 13-210/5939-20044 (Clarification) issued by the National Bank of Ukraine (NBU). Under the Clarification, payments under suretyships issued by residents not qualifying as authorised banks or financial institutions (suretyship payments) do not fall within the statutory exemption under Ukrainian cur­rency rules. Therefore, an individual NBU license must be ob­tained by a surety before the surety ship payments are made. Over the last few years the NBU issued ad hoc letters (which were not formal clarifications under Ukrainian law) stating that an individ­ual license is not required for suretyship payments. However, the Clarification changes this position. It does not technically create new binding rules, but expresses the NBU’s interpretation of the currency restrictions existing under current law. The Clarification is likely to be treated by Ukrainian banks that service suretyship payments as a mandatory requirement for the sureties, entered into both before and after the date of the Clarification.

The NBU has 30 days to review an individual licence application. If the NBU requests additional documents, it must review them within 14 days after they are provided. The NBU can only reject an application for an individual licence based on an exhaustive list of mostly formal grounds under the Regulation enacted by Resolution of the NBU's Management Board, dated 17 June 2004 No. 266 (Regulation No. 266). However, these grounds are broadly worded, which gives the NBU wide discretion.

Individual licences are only effective for up to 90 days (Regulation No. 266). Consequently, an individual license cannot generally be obtained in advance at the time when a surety agreement is executed, and must be obtained at the time of payment.

SECURITY: REAL ESTATE

2. Please briefly state what is considered real estate in your jurisdiction. What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)?

Real estate

Real estate comprises land plots and objects located on a land plot, which cannot be moved without the devaluation and change of their intended use (buildings and premises).

For practical purposes, the two key types of rights to real estate are:

- Ownership.

- Lease rights.

The law governing real estate also extends to:

- Rights to immovable assets, the construction of which is in progress (future buildings) (see Question 7, Future assets).

- Certain movable property (such as aircraft, vessels and space objects) (quasi-immovable property).

- Integral property complexes (a combination of immovable and movable assets).

Future buildings, quasi-immovable property and integral property complexes are not commonly used as secured assets.

Common forms of security

Security over real estate is created by executing a mortgage agreement between one or several borrowers (mortgagors) and a lender (mortgagee).

Formalities

A mortgage agreement (as well as all amendments to it and/or its as­signment) must be in writing and is subject to notarial certification. A mortgage of a land plot must be based on a prior market appraisal.

To secure the priority of the lender's claims under the mortgage agreement, the mortgage must be registered with the State Regis­try of Mortgages (Mortgage Registry). Registration is usually con­ducted by the notary on the closing date, based on the relevant standard form application submitted by the lender. Any contrac­tual amendment to the mortgage terms and the relevant secured obligation must be reflected in the Mortgage Registry, following the lender's application.

In addition to the registration of the mortgage in the Mortgage Registry, the notary imposes a prohibition on the secured asset's alienation, which is registered in the Unified Registry of Prohibitions of Alienation of Immovable Property. This prevents the alienation, subsequent mortgage or lease of the relevant immovable assets without the lender's prior written consent.

SECURITY: TANGIBLE MOVABLE PROPERTY

3. Please briefly state what is considered tangible movable property in your jurisdiction, for example, machinery, trading stock (inventory), aircraft and ships? What are the most common forms of security granted over it? How are they created and perfected?

Tangible movable property

Tangible movable property is property that can be freely moved, for example:

- Equipment.

- Commodities.

- Machinery.

- Vehicles.

Common forms of security

Security over tangible assets is usually taken by executing a pledge agreement between one or multiple pledgors, and usually one pledgee.

Formalities

A pledge created under a pledge agreement must be registered in the State Registry of Encumbrances over Movable Assets (En­cumbrance Registry) to secure the priority of the pledgee's claims and to make the pledge enforceable against third parties. Any amendments to the pledge or the secured obligation must be registered in the Encumbrance Registry. The pledge registration is effective for five years and must be extended by the pledgee, if necessary, before the term's expiration.

The pledge agreement for certain tangible assets (such as vehicles and certain machinery) must be certified by the notary.

SECURITY: SHARES AND FINANCIAL INSTRUMENTS

4. What are the most common forms of security granted over financial instruments, such as shares and other securities (both in certificated and dematerialised form)? How are they created and perfected?

Common forms of security

Security over dematerialised shares and other securities is taken through creation of a pledge.

Due to recent legislative amendments establishing the status of joint stock companies (Joint Stock Companies Law), shares of all newly registered joint stock companies are issued in dematerialised form. Existing joint stock companies had to ensure dematerialising of their shares by 29 October 2010. As a result, the statutory deadline devaluates pledges of certificated shares as a security instrument.

Formalities

A pledge of dematerialised securities requires a contractual blocking arrangement between a pledgor, a pledgee and a custo­dian (commonly a bank holding a custody license), which main­tains the relevant pledgor's securities account(s). The priority of creditors' claims under pledges of securities is established in the relevant files of the custodian. However, in addition, pledges of securities are registered in the Encumbrance Registry.

If security is taken over shares in a closed joint stock company (private joint stock company, if required under its charter), the pledge agreement should provide for the obtaining of waivers of other shareholders' pre-emptive rights to buy the pledged shares (if offered for sale) as a condition precedent to closing. It is unclear, however, whether these waivers can be granted in advance.

SECURITY: CLAIMS AND RECEIVABLES

5. What are the most common forms of security granted over claims and receivables (such as debts or rights under contracts)? How are they created and perfected?

Common forms of security

Security over contractual claims and receivables is based on a pledge agreement.

Formalities

A pledge of contractual claims and receivables should be sup­plemented with an assignment arrangement between the pledgor, pledgee and the pledgor's counterparty.

The relevant pledge agreement and/or the assignment agreement must be notarised if the pledged or assigned contract was executed in the notarial form.

SECURITY: INTELLECTUAL PROPERTY

6. What are the most common forms of security granted over registered and unregistered intellectual property (such as patents, trade marks, copyright and designs)? How are they created and perfected?

Common forms of security

Security over intellectual property can be created by executing a pledge agreement. Intellectual property rights (other than copy­right) are protected by registration. The registration term is for a fi­nite period. Therefore, security over intellectual property rights can also be limited by the registration term of the relevant intellectual property rights. The term of registration must be checked to ensure it matches, or extends beyond, the term of the secured obligation.

Formalities

Transfer of title to intellectual property rights only occurs where exclusive property rights are transferred in the agreement (transfer agreement). Therefore, for the purposes of enforcement of the relevant pledge, the transfer agreement may need to be executed simultaneously with the pledge agreement (if the rights are transferred to the pledgee). The pledge agreement may also need to be supplemented with a power of attorney, allowing the pledgee to enter into the transfer agreement with a third party buyer on the pledgor's behalf.

SECURITY: PROBLEM ASSETS

7. Are there types of assets over which security cannot be granted or is difficult to grant? Consider the following and give brief details of any additional requirements:

- Future assets.

- Fungible assets.

- Other assets.

Future assets

Security can be taken over future movable and immovable as­sets. However, until the title to the relevant assets is transferred to the pledgor or borrower (that is, commodities are supplied, or buildings are completed by construction and registered as real estate property), the pledge or mortgage of future assets does not constitute effective security. At the same time, creating a pledge or mortgage over future assets is likely to provide priority for the security over these assets.

A mortgage of unfinished construction or property rights to future buildings must be amended to reflect the borrower's title to immovable assets completed by construction.

Fungible assets

Pledges can be created over fungible assets (that is, over goods in circulation).

Other assets

The following are unassignable, or the enforcement of the relevant security in relation to these assets remains unclear:

- Agricultural land.

- Leasehold state-owned or municipal land (as well as unfinished constructions located on it).

- Licences or permits issued by public authorities or municipalities.

- Logos.

- Insurance proceeds.

SPECIAL PURPOSE VEHICLES (SPVs) IN SECURED LENDING

8. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the debtor's assets, rather than to take direct security over those assets? If so, please give brief details of the practice and risks associated with it.

Transactions that involve taking security over shares or a par­ticipatory interest in SPVs are common in project financing. This type of security is usually created in addition to other instruments securing creditors' claims.

The effectiveness of the relevant security largely depends on whether an SPV is created in the form of a:

- Joint stock company, where capital is divided into shares.

- Limited liability company, which has no shares issued to confirm the ownership of that company (and such ownership is confirmed solely by its charter).

For limited liability companies, security structured as a pledge must be created over the participatory interest in the SPV's capital. Agreements that allow pledges of participatory interest are subject to notarisation. If there are multiple owners of participatory interests, the pledge agreement should provide for the obtaining of waivers from the other participants' pre-emptive rights to buy the pledged interest (if offered for sale) as a condition precedent to closing. It is unclear, however, whether these waivers can be granted in advance.

Participatory interests are not as freely transferable as shares in a joint stock company. Transfer of title to participatory interests must be recorded in the relevant company's charter, which requires corporate action from the target's existing capital owners.

QUASI-SECURITY

9. What types of quasi-security structures (that is, legal structures used instead of taking security but which have a similar effect to security) are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest?

Consider the following and give brief details of the structure and risks associated with it:

- Sale and leaseback.

- Factoring.

- Hire purchase.

- Retention of title.

- Negative pledge.

- Other structures.

Sale and leaseback

Sale and leaseback (financial lease) and factoring structures are allowed and are commonly used by banking and authorised fi­nancing institutions. Contractual arrangements under relevant transactions are enforceable in Ukrainian courts without risk of them being reclassified into security interests.

At the same time, not all quasi-security structures known in other jurisdictions (such as hire purchase, retention of title and negative pledge) are developed in Ukraine, which makes enforcement of these structures uncertain (even where they are created under foreign law). Despite this, many foreign lenders use the relevant quasi-security structures in their transactions with Ukrainian counterparties with a view that applicable legislation may develop in the future.

Factoring

See above, Sale and leaseback.

Hire purchase

See above, Sale and leaseback.

Retention of title

See above, Sale and leaseback.

Negative pledge

See above, Sale and leaseback.

Other structures

There are no other relevant structures.

GUARANTEES

10. Are guarantees commonly used in your jurisdiction? How are they created?

Guarantees can only be issued by banks and financial institutions. There are banking rules outlining the standard requirements that apply to guarantees issued by Ukrainian banks.

Corporate entities, which do not qualify as banks or financial institutions, can issue suretyships, which (in contrast to guarantees) cannot be structured as absolute obligations (that is, the suretyship ceases to be effective once the underlying obligation is terminated or invalidated). Therefore, to the extent the provisions of a corporate suretyship can be viewed as an absolute obligation, a suretyship can be reclassified as a guarantee.

If upheld by a court, this can lead to either:

- Invalidation of the relevant clauses of the suretyship (if severed from other contractual provisions).

- The court's refusal to enforce, due to its incompatibility with Ukrainian public order law.

There is also a practical risk that a Ukrainian bank, as a currency control agent, can refuse to make a payment under the guarantee obligation by claiming that the payment is not proper.

RISK AREAS FOR LENDERS

11. Do any laws affect the validity of a loan, security or guarantee (or the terms on which a loan, security or guarantee are made)? For example, rules on:

- Financial assistance.

- Corporate benefit.

- Loans to directors.

- Usury.

Financial assistance

The contribution of loan amounts, and amounts secured by charge against the capital of companies, is not generally allowed. The Joint Stock Companies Law enhanced this restriction by prohibit­ing a joint stock company from providing a loan or issuing a surety­ship to a third-party's borrowing where it is provided for the pur­chase of its securities. It is unclear whether this rule applies if the securities of a common joint stock company are bought through an SPV. Banking legislation is stricter, prohibiting a bank from grant­ing a loan, both directly and indirectly, or issuing a guarantee or a surety for the purchase of securities issued by the bank.

Previously, the financing of the purchase of shares or interest in a holding company was unrestricted. New legislation applying to joint stock companies has introduced new requirements to interested party transactions, which can be deemed to extend to the financing of the purchase of holding companies' shares. Under the Joint Stock Companies Law, an interested party transaction may need to be approved by the competent body of the joint stock company (the supervisory board or the general meeting of shareholders). Otherwise, it can be invalidated by a court under a claim of an interested party. Interested party transaction rules are relatively new and there are no official clarifications or court practice. Therefore, the implementation of the relevant rules is currently unclear.

Corporate benefit

There is no concept of corporate benefit in limited liability com­panies, which falls under the scope of legislation that applies to joint stock companies. See above, Financial assistance.

Loans to directors

See above, Financial assistance.

Usury

See Questions 18 and 28 for currency exchange rules applying to cross-border loans.

Others

Banking legislation requires all transactions with related parties of a Ukrainian bank (for example, management and affiliated en­tities) to be at arm's length. The NBU enforces compliance with banking legislation.

12. Can a lender, merely by making a loan or holding or enforcing a security or guarantee, be liable under environmental laws for the actions of the borrower, security provider or guarantor?

There are no such rules in Ukraine.

STRUCTURING OF DEBT AGREEMENTS

13. Is contractual subordination of debt possible and common? If so, how can it be achieved, for example by an inter-creditor agreement between senior, mezzanine and junior creditors? Is structural subordination possible?

The contractual subordination of claims is unrecognised. Therefore, any contractual arrangement to this effect is unlikely to be enforce­able. Further, under bankruptcy law, the ranking of claims is set out statutorily, and secured claims have priority. The ranking of claims un­der bankruptcy law can therefore be different from contractual subor­dination, and is likely to take precedence in bankruptcy proceedings.

14. Is debt traded in your jurisdiction? If so, what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt?

The trading of debt is possible using factoring agreements, which can be entered into between the creditor and another bank or an authorised financial institution. Alternatively, parties can enter into an assignment agreement and amend the original loan documentation to refer to the new creditor.

A foreign-currency loan agreement assigned by a domestic lender to a foreign lender must be registered with the NBU. All foreign-sourced loans are generally subject to NBU registration. Any pay­ments under the assigned loan agreement can only be made after NBU registration takes place. Only the borrower can apply to the NBU for the registration of the assigned loan agreement. Further, the amendment of the original loan agreement also requires the borrower's direct involvement. The borrower's failure to register the assigned loan agreement with the NBU will prevent:

The borrower from making payments under the loan agreement to the new lender.

The lender from:

..enforcing under the assigned loan agreement;

..taking the benefit of the security created under the relevant security documents.

However, this should not affect the borrower's payment obligations in favour of the original lender.

Assignment of a pledge must be documented in the assignment agreement between the original lender and the new lender. There­fore, an assignment of a notarised pledge requires notarial certi­fication of the relevant loan assignment agreement. The original lender must register amendments in the Encumbrance Registry within five days from the assignment of the pledge agreement. As soon as the assignment of the pledge takes place, the borrower must be notified by the original lender.

The assignment of security under a mortgage agreement requires execution of a separate assignment agreement between the origi­nal lender and the new lender subject to notary's certification. The assignment of a mortgage must be executed simultaneously with the assignment of the loan agreement. Therefore, assignment of a mortgage must be done on the date of the NBU registration of the assigned loan agreement, or immediately after that date. The lender must notify the borrower (mortgagor) about assignment within five days from assignment of the mortgage agreement.

15. Is the agent concept (such as a facility agent under a syndicated loan) recognised in your jurisdiction? If not:

- Is an agency arrangement created under the law of another country recognised in your jurisdiction?

- Can a facility agent enforce rights on behalf of the other syndicate lenders in the courts in your jurisdiction?

The concept of a facility agent is unrecognised, unless the agent in the relevant financing transaction is acting as the lender of record, who is beneficially entitled to receive payments from the borrower under the relevant loan agreement. Although multiple creditors in a transaction can act as joint and several creditors, each of the joint and several creditors can put forward and enforce creditors' claims against the borrower to the extent it acts as the lender of record. The implementing of a relevant financing structure in cross-border lending can be more complicated, because of the requirement that agreements providing for foreign-sourced loans to Ukrainian borrowers must be NBU registered. Further, substitution of each original creditor under a syndicated loan (which is standard practice in syndicated lending transactions) is subject to NBU registration of the new creditor (unless a sub-participation structure is used).

16. Is the trust concept (such as a security trustee holding security on behalf of two or more creditors) recognised in your jurisdiction? If not:

- Is a trust created under the law of another country recognised in your jurisdiction?

- Can a security trustee enforce its rights in the courts in your jurisdiction?

The security trust concept is unrecognised. Although technically a security trustee can act on behalf of security beneficiaries, only the lender of record in the underlying obligation (and not the creditor's trustee) can act as the lender (that is, pledgee or mortgagee), and enforce security created in its favour.

A Ukrainian court would not question a facility agent or security trust structure created under, and regulated by, foreign law. However, there are no formal clarifications or court practice to provide any guidance on this point. If the facility agent or security trust structure is not respected by the Ukrainian court, the facility agent or security trustee can be prevented from enforcing the security. This also affects the beneficiaries who are not registered by the NBU as lenders. Further, it can be argued that beneficiaries who are not parties to Ukrainian law security documents, and not registered in the appropriate public registries as pledgees or mortgagees, can be prevented from enforcing the relevant Ukrainian law security documents.

17. Do the different types of security in your jurisdiction need to be documented separately or does your jurisdiction allow a single security document?

Different security instruments must be established under differ­ent procedures in relation to security taken over movable and immovable assets. Therefore, security over movable and immov­able assets must be documented separately. The same approach applies to security taken over tangible and intangible movable assets, as well as different types of intangible movable assets.

An integral property complex is a combination of company's im­movable and movable assets integrated into a single production cycle. An integral property complex qualifies as immovable prop­erty, and must be secured by the execution of a mortgage agree­ment. However, the enforcement procedure for a mortgage of an integral property complex is not specifically addressed. Therefore, enforcement can be effected on terms generally applying to the mortgage of immovable assets. However, it is unclear how a pro­cedure established to enforce against immovable property applies when execution is against movable assets comprising part of the mortgaged property under an integral property complex mortgage.

Due to the lack of clarity in relation to integral property complex­es, it is recommended that the security be structured by creating separate security interests in immovable and movable assets.

18. Are there any rules on how loans (including syndicated loans) should be documented for the loan to be enforceable?

A loan agreement must be set out in writing, and contain the following essential terms:

· Legal name, location, name and position (powers) of each party's representative.

· Principal amount.

· Statement of purpose.

· Interest rate and other charges under the loan agreement.

· Date of maturity.

· Borrower's obligation to repay the loan on the terms specified in the loan agreement.

· Details of the lender's account to which all amounts under the loan agreement must be paid.

· Reference to the borrower's servicing bank and details of the loan account with the servicing bank.

If the loan is extended to a Ukrainian borrower by a foreign lender, the loan agreement must also provide a:

· Statement to the effect that the loan agreement becomes effective on its registration by the NBU.

· Statement providing that the amount of payments for the loan utilisation cannot exceed the amount of the maximum interest rate established by the NBU.

The maximum permitted rate of interest under foreign-sourced loans is as follows:

For fixed rate interest:

- with a term less than one year: 9.8% per annum;

- with a term from one to three years: 10% per annum;

- with a term exceeding three years: 11% per annum.

For floating rate interest: three month USD LIBOR plus 7.5%.

Interest rates are viewed by NBU as inclusive of contractual inter­est, any fees, default interest and other charges provided by the respective loan agreement. The requirements concerning state­ments on NBU registration and maximum interest rates do not apply to loans extended by international finance institutions of which Ukraine is a member.

A cross-border loan agreement must be set out in Ukrainian, which is required for NBU registration and by law. The foreign language of the loan agreement can be chosen by the parties and can prevail if contractually agreed by the parties.

ENFORCEMENT OF SECURITY INTERESTS AND BORROWER INSOLVENCY

19. Please briefly state the circumstances in which a creditor can enforce its loan, guarantees or security (for example, when an event of default occurs). What requirements must the creditor comply with?

A creditor can generally enforce its loan in the event of the bor­rower's failure to pay his debt under the loan agreement. The debt generally becomes due on the loan's maturity. However, the credi­tor can accelerate the relevant payment on the occurrence of an event of default (as provided for in the loan agreement).

A creditor can demand payments under a suretyship or guarantee in the case of a violation of an obligation secured by the above in­struments. The creditor can generally put forward its claims to a surety or guarantor immediately (that is, without a prior recourse to the borrower).

Mortgage enforcement proceedings can begin in the following situations:

· The borrower's failure to fulfil its obligations under the financing documents.

· The borrower's failure to comply with requirements in the mortgage agreement.

· The commencement of insolvency proceedings against the borrower.

· The borrower's bankruptcy and liquidation.

· The commencement of enforcement proceedings by any other lender with a security interest in the same secured asset.

A pledge over movable assets can be enforced in the event of:

..The borrower's failure to fulfil its obligations set out in the financing documents.

..The borrower's failure to comply with the pledge agreement requirements.

..The commencement of insolvency or bankruptcy proceedings against the borrower.

..The decision, or passing of a resolution, on the liquidation of the borrower.

..Any third party's right to begin enforcement proceedings against the same collateral.

20. How are the main types of security interest usually enforced? What requirements must a creditor comply with (for example, a mandatory public sale of the secured asset through the courts)?

Security can be enforced judicially or out of court. Out-of-court enforcement of a mortgage is subject to giving a prior 30-day notice contemplating a demand to the borrower (and/or the mortgagor, if different) to fulfil the (unfulfilled) underlying obligation.

The borrower's failure to fulfil the underlying obligation within the prescribed 30-day period allows the lender:

..To perfect title to the mortgaged property.

..To sell it acting in its own name to third parties through public or private sale.

Out-of-court enforcement of a pledge requires:

..Prior registration of an enforcement record with the Encumbrance Registry.

..The giving of a 30-day notice to the pledgor, and other registered pledgees, comprising a demand to the pledgor to fulfil the (unfulfilled) underlying obligation.

The pledgor's failure to fulfil the underlying obligation within the prescribed 30-day period allows the pledgee to either:

..Perfect title to the pledged property.

..Sell it acting on behalf of the pledgor to third parties through public or private sale.

The out-of-court enforcement procedures can be applied by the creditor to the extent that its claims remain undisputed by the debtor. If this fails, judicial enforcement may be required. In judicial enforcement, foreclosure and sale of the collateral is vested with the state execution service.

If the security document was notarised, the creditor can elect to enforce the relevant security by obtaining a notarial writ. The state executive service conducts enforcement proceedings based on notarial writs. However, before affixing a writ, the notary re­quires documents from the creditor proving the indisputability of its claims under the security document. According to court prac­tice, indisputability is confirmed against the most recent financial statements provided by the borrower. Otherwise, an enforcement based on a notarial writ can be successfully challenged in court.

21. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? If yes, please give brief details, including voting requirements to approve such procedures. How do they affect a creditor's rights to enforce its loan, guarantees or security?

There are no rescue or reorganisation procedures other than insolvency proceedings.

22. How does the start of insolvency procedures affect a creditor's rights to enforce its loan, guarantees or security?

The courts impose a moratorium (which is effective until its termination) on the settlement of certain creditors' claims when opening insolvency proceedings. A moratorium implies that a debtor cannot perform its financial liabilities, which became due and payable before the moratorium's introduction. During the moratorium period, enforcement against the debtor's assets is suspended irrespective of whether the obligation has matured, and no default interest or any other penalties or sanctions for breaching the monetary obligations can be applied. The moratorium does not cover:

..Payment of salary.

..Indemnification for harm caused to health.

..Corporate manslaughter.

..Authors' royalties.

The moratorium also excludes liabilities which arise after its introduction. The moratorium continues until either:

..The court is satisfied the debtor is again solvent and orders that insolvency proceedings cease.

..The liquidation process is completed.

23. What transactions involving loans, guarantees, or security interests can be made void if the entity that received the loan or granted the guarantee or security becomes insolvent? Please briefly state the time limits that apply and the conditions that must be met for the transaction to be made void.

A rehabilitation manager can apply to the court to invalidate an agreement concluded by the debtor if the agreement is:

Concluded between the debtor and a related party and, as a result of the agreement, the creditors incur, or can incur, losses.

Concluded with any creditor or any third party within a six-month period before the commencement of the debtor's rehabilitation and the agreement grants preference to the creditor in contrast to the debtor's other creditors.

Related to the payment of a share out of the debtor's assets due to a redemption or repurchase of the share capital of the debtor.

Invalidation of these agreements results in bilateral restitution.

Within a three-month period from the start of the debtor's reha­bilitation, a rehabilitation manager can reject the performance of the debtor's agreements concluded before the start of insolvency proceedings, that have not yet been performed in full or in part, provided that:

The debtor incurs losses as a result of implementing the agreement.

The term of the agreement is longer than one year, or the agreement is intended to grant benefits to the debtor in the long-term.

The performance of the agreement prevents the debtor from re-establishing its solvency.

The law has been unclear as to whether all or only some of these conditions must be fulfilled before the rehabilitation manager can refuse performance of an agreement. A clarification letter from the Supreme Court confirms that these conditions can be applied alternatively.

24. Please list the order in which creditors are paid on the borrower's insolvency, assuming the security interests have been validly perfected. Consider:

· The secured creditors considered in Questions 2 to 6.

· Statutory claims.

· Unsecured creditors.

· Subordinated creditors.

Proceeds from the sale of debtor's assets are used to satisfy creditors' claims according to the following priority:

· First rank: claims secured by pledge, certain types of payments to a bankrupt's employees, and expenditures associated with insolvency proceedings.

· Second rank: remaining claims of a bankrupt's employees (except for fifth rank claims, see below), claims arising as a result of harm caused to the life or health of individuals, and mandatory pension and social security contributions.

· Third rank: taxes and other mandatory payments.

· Fourth rank: claims not secured by pledge.

· Fifth rank: claims for repayment of employee contributions to the charter capital of the bankrupt.

· Sixth rank: all other claims.

The ranking of the security of creditors in bankruptcy proceed­ings is unclear. Secured claims can be discharged as first-ranking claims from foreclosure proceeds from the security. Therefore, it should be argued in court that the foreclosure proceeds must be first used to recover the claims of a creditor with higher ranking security. An asset administrator must include secured claims in the register of claims of creditors on the basis of information taken from the pledge register (which should provide for the rank­ing of security). Therefore, it is presumed (although there are no formal clarifications or court guidance on this point) that the ranking of security is recognised in bankruptcy proceedings.

If the sale proceeds from the bankrupt's assets are insufficient to satisfy all claims ranking pari passu, then these claims are paid pro rata. The creditors' claims that are not satisfied during the liquidation procedure due to the insufficiency of a debtor's funds are regarded as discharged in full.

25. If more than one creditor holds the same security interest over the same asset, how is priority between them determined? Please briefly set out any specific ranking rules that apply.

The ranking of security is determined by the time information regarding the security is registered in the Mortgage Registry and the Encumbrance Registry. There is no mechanism to secure pari passu ranking of multiple creditors' claims in relation to the same secured asset.

An immovable asset can only be subject to a subsequent mortgage with the consent of existing lender(s) (mortgagee(s)), unless provided otherwise by the existing mortgage agreement(s). An earlier mortgage always has priority over a subsequent mortgage. The claims of a second-ranking lender must only be satisfied after full satisfaction of claims of a first-ranking lender.

A first-ranking lender can enforce the mortgage if a respective secured obligation is not yet due, but a second-ranking lender has begun enforcement procedures on the second-ranking mort­gage. If the first-ranking lender opts not to enforce at the relevant stage, the mortgage remains until the first-ranking lender's se­cured claim is fulfilled in full and the mortgage follows any title transfers in relation to the mortgaged property. By filing a written application, the first-ranking lender can stop the enforcement of a second-ranking mortgage if that enforcement would prevent full satisfaction of the first-ranking lender's claims.

There is no mandatory notification procedure for the first-ranking lender on the commencement of enforcement procedures con­cerning a second-ranking mortgage, except for the enforcement of the second-ranking mortgage through sale (for which a 30-day notice to a first-ranking lender (who has a pre-emptive right to buy) is required).

Therefore, the first-ranking lender can stop the enforcement of the second-ranking mortgage either:

- On receipt of the above notification.

- If it becomes aware of such enforcement from the other source.

If, however, the second-ranking lender obtains the title to mort­gaged property because of foreclosure, the only remedy remain­ing to the first-ranking lender would be a claim against the new owner (the second-ranking borrower) to enforce the mortgage which followed the title transfer by operation of law. If the first-ranking lender obtains title to the mortgaged property, claims of lower-ranking creditors become invalid.

A movable asset can be subject to a subsequent pledge with the con­sent of existing pledgee(s), unless otherwise agreed under the existing pledge agreement(s). A higher-ranking pledgee has priority in enforce­ment proceedings.

A first-ranking pledgee can stop enforcement by filing a written application within 30 days from the start of enforce­ment proceedings by a lower-ranking pledgee. An earlier pledge al­ways has priority over subsequent pledges, and claims of a second-ranking pledgee must be satisfied only after the full satisfaction of claims of a first-ranking pledgee. If a higher-ranking pledgee fails to stop enforcement of the pledge by the lower-ranking pledgee within the 30-day waiting period, the higher-ranking pledgee must either:

- Have the priority to satisfy its claims in full from the amounts received from the sale of the collateral by the lower-ranking pledge.

- Claim against the lower-ranking pledgee if the lower-ranking pledgee enforces the pledge by obtaining title to the secured asset.

26. If a security interest has not been validly perfected, where does the security holder rank on the borrower's insolvency?

A creditor's failure to validly perfect a security interest generally results in the relegation of its claims to the fourth rank level (claims that are not secured by pledge).

CROSS-BORDER ISSUES ON LOANS

27. Are there restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders? If yes, please give brief details, for example registration requirements.

A loan agreement that contemplates a resident obtaining of a loan from a non-resident is subject to NBU registration on the application submitted by the borrower. The legally prescribed registration term constitutes seven business days, starting from the day following the submission of the full set of registration documents. The registration of a loan agreement with the NBU is evidenced by the registration certificate issued by the NBU on a standard form letterhead. Any amendments introduced by the parties to the loan registration certificate terms must be regis­tered with the NBU. That NBU registration is confirmed by an annex to the original registration certificate issued by the NBU.

Payments cannot be made by the borrower under a loan agree­ment with a foreign lender before NBU registration. Further, a loan agreement cannot be registered if it provides for the payment of interest and other charges connected to the loan by the borrower (other than fees), before the actual disbursement of loan amounts.

28. Are there exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

See Questions 14, 15, 16 and 18. In addition, currency regulations have established restrictions affecting a foreign lender's ability to satisfy its claims under financing provided to a Ukrainian borrower, including in the following situations:

· The opening of an offshore bank account by a Ukrainian company requires notification to the NBU within three days from the date of opening. Further, the crediting of funds to the account is subject to obtaining an individual NBU licence, the procedure for which is extremely burdensome for Ukrainian companies. This is in addition to further requirements on the annual renewal of the individual licence, and reporting requirements to the NBU on the use of the offshore bank account.

· The amounts due by a Ukrainian borrower cannot be offset by the foreign lender against any disbursement to be made un­der the loan agreement, because the borrower can only repay the principal amount (plus interest and fees) to the extent of the loan principal amount received by the borrower.

· The ability of a foreign lender to receive local currency (for example, on the enforcement of security) in Ukraine is restricted. This is because even if the foreign entity has an investment account in Ukraine, the investment account regime for foreign lenders only allows payments to these accounts in restricted circumstances. Further, if the receivable or asset over which the lender has security gives rise to a local currency payment (for example, in relation to a receivable, because the receivable is payable in local currency) then the foreign lender cannot force the payer to pay in foreign currency.

· A surety can only pay foreign currency from its own currency reserves and cannot either:

o convert local currency into foreign currency to comply with an obligation under a suretyship to pay in foreign currency;

o borrow foreign currency to meet its foreign currency obligations under suretyship.

This means that unless a Ukrainian surety has sufficient foreign currency from other sources, it may be unable to pay under the suretyship. See also Question 1.

29. Is a foreign choice of law clause in a security, guarantee or loan document recognised and applied by the courts in your jurisdiction? Does local law always apply in certain circumstances?

The choice of foreign law, as the governing law of a loan, guarantee or suretyship, is valid and should be recognised by the courts. How­ever, this is subject to certain reservations, including that in relation to foreign economic activity (foreign trade), a contract can be invali­dated by the court due to its lack of compliance with Ukrainian laws or the international treaties to which Ukraine is a party. The criteria defining what constitutes a lack of compliance, which can lead to invalidation, is not entirely clear. Therefore, to avoid any associated risks (that is, on enforcement of a foreign arbitral award in Ukraine or if a dispute is heard by a Ukrainian court), parties to a foreign trade contract generally ensure compliance of the relevant contract with the mandatory provisions of Ukrainian law.

A mortgage of immovable property in Ukraine must be perfected in compliance with Ukrainian law. Further, because perfection of a mortgage requires notarisation, the compliance of a mortgage agreement with Ukrainian law is scrutinised by the relevant no­tary. The notary can refuse to certify the mortgage agreement if it is contrary to Ukrainian law.

A pledge of movable assets, its registration and enforcement is regulated by the laws of the jurisdiction where the relevant mova­ble assets are located. It is not entirely clear how this rule applies to intangible movable assets, for example, a participatory inter­est or rights to balances in bank accounts. However, it can be argued that creation, perfection and enforcement of a pledge of intangible assets must be regulated by the laws of the jurisdiction where registration of rights to the intangible assets took place, or accounts where balances accumulate are opened. This approach automatically subjects a security instrument to Ukrainian law.

TAX AND FEES ON LOANS, GUARANTEES OR SECURITY INTERESTS

30. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security? Consider the following and state the tax rates and fee amounts, if they are more than a nominal amount:

· Documentary taxes (for example, stamp duty).

· Registration fees.

· Notaries' fees.

There are no taxes, duties or fees paid on the granting and enforcement of a loan, guarantee or security, other than the registration fee and the notary's fees. Ukrainian law establishes the minimum duty for the registration of mortgages, alienation prohibitions and encumbrances over movable property at UAH34 (as at 1 November 2010, US$1 was about UAH7.8). Fees charged by the notaries for the relevant registrations can differ substantially, and are subject to negotiations with each particular notary.

31. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security?

See Question 30.

REFORM

32. Please summarise any proposals for reform and state whether they are likely to come into force and, if so, when.

Cross-border financing transactions have revealed certain conceptual gaps in applicable legislation. The overcoming of these gaps would require modification to (or where applicable, the creation of new legislative framework applying to):

· The procedure of registration of creditors' claims ranking pari passu. Without the possibility of creating and perfecting pari passu security of multiple creditors, the structuring of inter-creditor transactions in Ukraine has proved difficult. This step would require legislative action to amend the applicable laws on mortgages and encumbrances over movable assets, and the implementing rules establishing procedures of registration of lenders' or pledgees' claims. Other substantial changes would be required in currency rules allowing for the transfer of amounts abroad on the basis of an inter-creditor agreement.

· Loan and security assignment procedures to reduce the borrower's involvement in the loan and security assign­ment process. This step would require changes in currency regulations establishing procedures for cross-border loan registration with the NBU (which is currently the obligation of the borrower) and expressly allowing the new creditor to change certain technical provisions (such as previous credi­tor's details specified in the security document) of a security document by notifying the debtor accordingly.

· Pledges of intangible assets (such as participatory inter­ests and balances in bank accounts) and integral property complexes. Ukrainian law does not currently address the specifics of these security instruments, which cannot be enforced based on general rules that apply to tangible as­sets. Therefore, relevant security is usually taken with view to potential changes in applicable legislation.

There have been no signals from the government as to the possibility of introducing these changes in the near future. However, the increasing interest of foreign and domestic lenders in these security instruments may encourage the government to adequately address market demands.

Author: Iryna Pokanay and Gabriel Aslanian
Source: PLC Finance Handbook 2011. Country Q&A. - 2011