There are a number of principal problems associated with the
creation and enforcement of collateral provided as security to
non-residents in Ukraine. To begin with, there are special
problems with taking pledges over funds in bank accounts in
Ukraine. Prior to January 1 2004, when the Ukrainian law on the
securing of creditor claims and the registration of
encumbrances No.1255-IV, dated November 18 2003 (the
Encumbrances Law) took effect, a charge over a bank account was
possible only as a pledge over the property rights of the
account owner to demand payment from such account, and not over
the funds themselves.
The Encumbrances Law made charges directly over the funds in
a bank account possible. Thereafter, in practice, pledges of
bank accounts in Ukraine have usually covered (in separate
clauses) both a pledge over the funds on deposit and a pledge
over the property rights attached to them. This distinction
remains especially relevant for pledges of foreign currency
because, as explained in the National Bank of Ukraine (NBU)
letter No.18-211/1697-3597, dated June 2 2000, a pledge of the
property rights to currency should not be subject to the NBU's
licensing requirement for pledges of foreign currency funds,
referred to below.
Under Ukrainian exchange control rules, any transfer of
currency from Ukraine abroad may only be made after obtaining
an individual NBU licence, unless an exemption from such
requirement is provided by law. The most common exemptions
apply to transfers that constitute payments by a Ukrainian
resident to a non-resident abroad (1) for property, services or
certain rights based on an agreement between them, or (2) under
a loan agreement registered by the NBU.
Ukrainian exchange control rules do not provide any express
exemptions from this NBU licensing requirement for the transfer
abroad of proceeds from the enforcement of a pledge or
mortgage. This is an issue when a Ukrainian resident gives a
pledge or mortgage to secure its obligations to a non-resident
to pay for property, rights or services under a foreign
commercial agreement or a registered loan agreement,. The
transfer of the proceeds from the enforcement of this
collateral, arguably, should be possible without a special NBU
licence on the basis that the transfer is made in respect of
the resident's outstanding contractual obligations for payments
that should be able to be made without a special NBU licence.
This conclusion seems stronger because of the NBU position on
suretyships, as discussed below.
It should be noted that if collections under mortgages and
pledges used to secure a non-resident borrower's obligations to
a non-resident lender result in Ukrainian currency proceeds, it
appears doubtful under Ukrainian exchange control rules that a
Ukrainian bank would have any legal basis to convert them into
foreign currency in order to pay them abroad.
Similar exchange control issues exist for payments abroad
under sureties and guarantees. In particular, such an issue on
whether a licence is required arises where a Ukrainian
resident, acting as a surety (ie like a guarantor, but under
Ukrainian law only licensed banks can act as financial
guarantors), secures the obligations of a non-resident obligor
to a non-resident obligee, for example where a Ukrainian
subsidiary company's plant expansion is being financed by loans
to its foreign parent.
To respond to this issue, on June 8 2007, and July 6 2007
the NBU issued two letters (the NBU Letters) confirming that no
individual NBU exchange control licence is required to effect
payments abroad in foreign currency under such a suretyship.
These private NBU Letters, although not having any force as
legal acts, are widely known and relied upon in Ukraine.
However, there are serious problems in the legal rationale they
express, and it is therefore unclear whether the NBU will
continue to hold this view.
Under applicable Ukrainian regulations, a Ukrainian resident
may only pay its obligations under such a suretyship, as
described above, from its own funds held in foreign currency if
the funds were not borrowed or purchased in the interbank
It could be argued that the principles of the NBU Letters
similarly apply for the making of payments abroad in respect of
the enforcement of mortgages and pledges in Ukraine.
Bank account pledges
Under bank account pledges, enforcement can in principle be
accomplished extra-judicially by the direct debiting of funds
from the pledgor's bank account at the pledgee's request.
However, if the Ukrainian bank refuses for some reason (such as
its interpretation of Ukrainian exchange control rules) to
transfer the funds to enforce the pledge, then a court decision
would have to be obtained to authorise the transfer.
There will always be a risk that the NBU licensing issue
could be raised in such a Ukrainian court proceeding by the
Ukrainian borrower, and that, in the particular litigation
context, the Ukrainian court might rule that the funds may not
be transferred from Ukraine where the transfer abroad is not
specially licensed by the NBU. Ukrainian courts have a
reputation for favouring Ukrainian parties over foreigners.
Therefore, it should be expressly agreed, when a pledge over a
bank account in Ukraine is created, that the account holding
bank will actually transfer funds from the account in response
to the non-judicial enforcement of the pledge by the secured
One weakness in the Ukrainian pledge system for bank
accounts is that account holders can freely withdraw funds
irrespective of any pledge or other contractual commitments up
until enforcement occurs. There is the possibility, however,
that they will incur some contractual liability for doing
The use of foreign currency for pledges in Ukraine falls
within the licensing requirement of the NBU. It should be
possible for a Ukrainian pledgor to instead pledge the foreign
currency it holds in a bank account outside of Ukraine without
having to obtain an NBU licence. However, the crediting of
funds to such an account abroad is itself subject to obtaining
an NBU licence, and the funds should be repatriated upon the
expiration of the term of this licence.
By Bate C Toms and Svitlana Petrenko of