Ukraine has recently seen some developments affecting the
structuring of foreign secured lending in Ukraine.
Concerning syndicated credits, the practice of having a
single security agent acting in Ukraine on behalf of a group of
foreign lenders forming a lending syndicate is no longer
advisable. A number of lawyers in Kyiv have recently written
articles claiming that only a single lender securing
obligations owed to itself, such as a lender under a loan
agreement, can be a pledgee or a mortgagee. They have argued
that an agent, even if it is also a lender, cannot be a
mortgagee or pledgee for other lenders in a transaction to
secure obligations to them.
The relevant Ukrainian legislation is very poorly worded.
Although counter-arguments based on Ukrainian agency law are
possible, in Ukraine having multiple mortgagees and pledgees
under a single pledge or mortgage agreement through a security
agent is not advisable, especially now that this issue has
become so public.
There are many such issues under Ukrainian law, as the legal
system has largely been developed over only the past 10 years.
These issues are slowly being corrected, and usually they
remain as largely unknown academic concerns until they are
addressed. However, when prominent lawyers call attention to
them by describing such problems in the Ukrainian legal press,
the judiciary often takes note. This can cause a genuine legal
Payments under pledged cross-border contracts
The structuring of secured lending based on foreign
receivables is also complicated in Ukraine because payments for
exports, which are required to be made within a 180-day period
from the receipt of an export, must be made only to the
exporter's Ukrainian bank account, irrespective of whether the
right to receive the payment is pledged or assigned.
When the pledge over such a receivable is enforced, payments
can therefore not be made to the secured lender, but only to
the original exporter. If the original exporter is not paid,
then when the 180-day period expires, if the payment is not
made, substantial fines will begin to accrue, which can equal
up to 100% of the amount involved.
There are a number of ways to resolve this problem. It could
be done by effectively assigning rights over a designated bank
account in the exporter's name (although in legal theory, this
will not be complete protection, as the named owner of an
account can always cancel such arrangements at any time, in
practice it can work, with the purchase moneys subject to the
pledge being transferred on to the secured party as soon as
they reach the designated account and with the bank where the
account is held carefully monitoring its status for the secured
party). Alternatively, it can be resolved by restructuring the
export transaction so that, while keeping the money flows
identical, it becomes characterised as a financing of the
purchaser that secures the lender.
Limitations on pledges of bank accounts
Pledges of funds in bank accounts and rights to them
continue to raise issues because of the existing ambiguities in
Ukrainian law. To begin with, under Article 59 of the Law of
Ukraine On Banks and Banking Activity No. 2121-III, dated
December 7 2000, there is an express statutory prohibition on
any interference with the right of the owner of a bank account
to dispose of funds in its account, unless the account is
subject to a court ordered arrest.
While arguments can be constructed in response, Ukrainian
banks will in general not prevent the owner of a bank account
from withdrawing funds in a pledged bank account until a court
arrests the account after proceedings, even despite any use of
contract clauses prohibiting any such disposal of the pledged
property by the account holder (the disposal of pledged
movables is generally allowed by the Law of Ukraine On Pledge
No.2654-XII, dated October 2 1992, unless otherwise provided by
law or an agreement).
There are, however, practical ways to get around this
problem based on creating structures involving direct debiting
and powers of attorney to dispose of funds. Although subject to
certain legal issues, as a practical matter such structures can
be effective with proper documentation.
Bate Toms and Svetlana Petrenko