For banks to note: the foreclosure on mortgaged property may require a permit for concentration

General legal framework of concentration

The antitrust laws of Ukraine authorize the bodies of the Antimonopoly Committee of Ukraine (“Antimonopoly committee”) to control the concentration of economic entities (“concentration”).

In particular, this includes the provision of permits for concentration in cases where it is obligatory. Such cases are clearly defined by the Law of Ukraine “On protection of economic competition” (“the Law”). Broadly speaking, the permit for concentration is required when:

• certain operation falls under the term “concentration” and is not covered with exclusions and
• the parties of the operation meet the criteria of total value of assets, total sales of the goods, established by the Law.

One of the concentration’s types is acquisition of the ownership of assets in the form of integral property complex. The term “integral property complex” may under certain circumstances refer to a factory, plant, workshop, elevator for grain storage and handling etc.

What interesting is that the Law does not limit the ways of how the ownership of the integral property complex shall be acquired for the purposes of concentration (purchase or any other). So, the necessity in permit for concentration may appear even in a case of foreclosure on mortgaged integral property complex if all requirements for obligatory obtaining of the permit are met.

Here should be mentioned that the permit to be obtained by the person which takes the ownership. In the event of concentration without the required permit, such a person may be fined by the Antimonopoly Committee in the amount of up to 5 percent of its income from sale of products (goods, works, services) for the last reporting year, preceding the year in which the fine is imposed.

What happened to Oschadbank?

On September 16, 2021 the Antimonopoly Committee issued a decision on imposition of a fine on the Joint-Stock Company “Oschadbank” (“Oschadbank”) for failure to obtain the permit for the concentration for the foreclosure on the mortgaged property. The amount of such a fine is approximately 14 millions UAH.

The matter was that in 2017 Oschadbank foreclosed on mortgaged integral property complex (logistic center) without obtaining the permit for concentration. In short, the Antimonopoly Committee came to conclusion that there were no grounds for Oschadbank to be released from obtaining the permit as far as:

• the operation could not fall within the cases which are not concentration under then effective Law;
• the parties met the criteria of total value of assets, total sales of the goods, established by the Law.

Thus, the Antimonopoly Committee demonstrated the application of general (conservative) rules regarding the necessity in obtaining the permit for concentration to banks regarding the foreclosure procedures.

Here to be noted that earlier the Antimonopoly Committee has not tended to fine banks for the foreclosure on mortgaged property without permit for concentration. But after the case of Oschadbank, new similar cases may potentially appear with other banks.

What should be done by the banks?

Before taking the ownership of any “essential” real estate in the result of foreclosure (for instance, industrial or storage complexes), it is recommended to carefully analyze the documents and factual background in the context of necessity to obtain the permission for concentration.

In particular, the bank should check whether the particular foreclosure may be treated as the case which is not concentration under the Law or not. For instance, starting from 2019 and as of today the Law establishes that no concentration appears in taking the ownership by the bank or other financial institution of assets in the form of unified property complex (includes integral property complex), shares (stocks, units) of economic entity if:

• this is provided for by the restructuring plan, approved under the Law of Ukraine “On financial restructuring”,  in the form of foreclosure on the collateral (mortgaged property) or other security encumbrance, and
• they are further sold to economic entities not related to the bank or financial institution with control relations within 2 years from the day of taking the ownership.

Additionally, it should be mentioned that there is another no-concentration case which may be relevant for the banks in the context of foreclosure on shares. The Law establishes that no concentration appears in the purchase of shares (stocks, units) of an economic entity by a person whose major type of activities is the performance of financial operations or operations associated with securities if the purchase is made for the further resale of the shares (stocks, units), provided that the mentioned person does not participate in voting at the higher board of management or at other boards of management of the economic entity. In a case like that the further resale shall be carried out within 1 year from the date of the purchase of shares (stocks). The Antimonopoly Committee of Ukraine may extend this period upon request of the abovementioned persons, which contains a justification for the impossibility of further resale.

As a conclusion we recommend analyzing each situation of foreclosure on assets of the borrower very carefully before the actual transfer of title to the financial institution happens.

If you have any questions on possible concentration with regard to the foreclosure on the collateral by the financial institution, GOLAW attorneys will be delighted to assist.