Release of pledged property in Ukraine became more complicated

Impressive number of lawsuits about recognition of credit contracts as void scared the banks and other financial institutions so much that they lobbied the adoption of the Law "On amendments to some legal acts of Ukraine on fulfillment of business obligations" (hereinafter - the Law). This document stipulates new consequences of credit agreements being recognized as void which significantly complicate the ability to recover property which serves as a pledge. Now recognition of credit agreement as void will not be beneficial for all debtors.

The main innovation of the Law is that if a credit agreement is recognized as void a court can decide to seize pledged property of a debtor or guarantor upon petition of a creditor. The court will be able to stop the property seizure if a debtor returns money that belongs to a lender. The amount of money that is to be returned to lender will be determined by the court which ruled a credit agreement to be void. If money is not returned within 30 days from the date of entry into force of a court decision about recognition of credit agreement as void lender can file a claim about foreclosure of seized property.

The same approach is applied to cases of pledge agreements being recognized as void. In this case the court can decide to seize assets that are pledged until the obligation of a debtor to return the money to lender under a credit agreement is fulfilled.

The adoption of these changes should prevent selling property to relatives or subordinate persons immediately after the pledge or credit agreement is recognized as void. One can argue about how fair is a measure of response to a credit agreement being recognized as void (on the one hand such seizure limits the right of a debtor (the pledgor) to manage his property which was released from the encumbrance, on the other - the debtor is still obliged to return money to the lender). But the law was passed and its stipulations should be taken into consideration.

And most likely the legislative innovations will also be applied to those credit agreements which were signed before the date of their entry into force (November the 4th, 2012). According to Art.5 of the Civil Code acts of civil law are applicable to the rights and obligations arising from the date of their entry into force. Recognition of a credit agreement as void creates new rights and obligations for the parties which are not related to those that were stipulated in a contract and therefore provisions of the law are quite applicable to them.

However even with these changes some categories of debtors will benefit from credit agreements being recognized as void. Firstly it will be beneficial for those borrowers whose obligations are not secured by collateral. And secondly for those whose fines and penalties for non-compliance with credit agreement substantially exceed the amount of the loan itself.

Based on general rule stipulated in Part 1 of Art. 216 of the Civil Code if an agreement is recognized as void each party shall return all it got from the implementation of this agreement to the other side in kind. When credit agreement is recognized as void this means that the borrower is obliged to return the loan itself and pay interest for the period until it was return in the amount of double discount rate of the national Bank of Ukraine and compensate the inflation losses of the bank. And a bank shall return (to consider as repayment of the loan and / or interest) the amount of commissions paid when taking the loan, the amount of penalties, fines and other sanctions paid by the borrower as well as interest paid in the amount which is greater than double discount rate of the National Bank of Ukraine . And those for whom banks levied penalties in an amount that exceeds the amount of the loan will benefit from the recognition of the credit agreement as void despite the risk of collateral being taken. However in order to recognize the credit agreement as void you must find the appropriate grounds.

Publication date: 27/11/2012

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