The Supreme Court of Ukraine allowed signing of guaranty and contract of loan by the same person

Situation in which the same person signs mortgage agreement with a bank on behalf of an enterprise the management board of which is headed by him and loan contract fulfillment of which is secured by the mentioned agreement on behalf of another enterprise in which this person holds an office of general director cannot result in recognition of these agreements as void. Such legal position of the Supreme Court of Ukraine is stated in its resolution number 3-31gs11 and from now on it is obligatory for all courts of Ukraine that is confirmed by the letter of the High Specialized Court of Ukraine for Civil and Criminal Cases dated 08.06.2011.

Such conclusion was made by the Supreme Court of Ukraine after reviewing the Resolution of the High Commercial Court of Ukraine number 19/87-10 dated 28.12.2010 which concluded that entry in such agreement contradicts Section 3 of Article 238 of the Civil Code of Ukraine. The latter prohibits a representative to perform legal actions on behalf of a person he represents if such actions are of his own interest or interest of other person that is represented by him at the same time.

But the Supreme Court of Ukraine thinks that the mentioned prohibition is applied only to cases when a representative simultaneously acts on behalf of a few counterparties. If an agreement is entered into in the interest of one of enterprises that is directed by the person but at the same time parties of agreement are represented by another enterprise in which the person heads the management board and a bank then there are no legal grounds for recognition of agreement as void.

Additionally the same decision of the Supreme Court of Ukraine provided that transfer of property under mortgage in the interest of third party that is performed free of charge is lawful. The Supreme Court of Ukraine points out that parties are free to enter into agreement, chose counterparty and define terms of agreement with consideration of legislation requirements, business customs, requirements of fairness and reasonableness. Therefore if a charter provides that a legal entity can enter into free agreements or provide guaranties for third parties such agreement cannot be defined as non-commercial and without economical sense as it was done by courts of previous instances based on Article 1 of the Law “On companies” and Article 79 of the Commercial Code of Ukraine.

Such conclusions of the Supreme Court of Ukraine may have significant consequences. For example they may be used by directors of enterprises in order to enter into loan contracts with themselves as individuals along with simultaneous entry into mortgage agreement under which an enterprise that is directed by him will provide its assets as security for the loan. At the same time this mortgage agreement can easily be free of charge and there is no need for contract of guaranty between a mortgagor and a person that receives the loan.

However cases related to loans that were received by unfair directors and secured by property of their enterprises still can be argued based on other circumstances of a case. On contrary cases in which one person signed agreements with a bank on behalf of guarantor and debtor that were legal entities will not result in different decision. It is due to the fact that Article 34 of the Law “On judicature and status of judges” and Article 360-7 of the Civil Code of Ukraine provide that decisions of the Supreme Court of Ukraine are obligatory for all courts of Ukraine.

This comment on legislation was prepared by lawyers of law firm “Pravova Dopomoga”.

It is related to practice of Problem loans and service of Legal representation.

Publication date: 22/09/2011

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