|Bate Toms||Svetlana Petrenko|
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 risk.
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