New Mechanisms Adopted to Protect Banks from Unfair Debtors

On 5 July, 2018, the Verkhovna Rada of Ukraine passed the Law of Ukraine “On Amending Some Legislative Acts of Ukraine on Recovery of Lending” (hereinafter the “Law”). This Law introduces amendments to a number of laws and regulations, including the Law of Ukraine “On Banks and Banking Activity”, “On the Pledge”, “On the Mortgage”, the Civil Code of Ukraine (hereinafter the “CC of Ukraine”).

The Law is already being prepared to be signed by the President and currently the text of Draft Law 6027-d is available for review. According to the clauses of the Draft Law, it introduces very important changes aimed at protecting interests of lenders and mortgagees. However, some of them are also positive for debtors/mortgagors.

Thus, the important amendments provided for by this Law, include the following:

Regarding the Guarantee

1. The guarantee termination rules have changed.

A guarantee used to be terminated in case the scope of the debtor’s liability was increased without the guarantor’s consent, but these rules are going to be changed.

In particular, if the obligation is changed without the guarantor’s consent, which has resulted in an increase in the scope of the debtor’s liability, the guarantor is liable for the debtor’s breach of the obligation to the extent existing before the change of the obligation.

Herewith, the guarantee will be terminated in case of assignment of a debt to another person unless the guarantor has agreed to guarantee fulfilment of the obligation by the other debtor in the guarantee agreement or upon assignment of debt.

It has been established that liquidation of the debtor being a legal entity does not terminate the guarantee if the lender has filed a claim against the guarantor to the court in connection with breach of the obligation by the debtor before the respective entry is made in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organisations.

2. The term for lodging the claim against the guarantor has been extended.

This term is six months now, and lenders often lose their right to lodge a relevant claim against the guarantor upon expiration of this term.

The Law has extended the term during which the lender will be entitled to lodge its claims against the guarantor; in particular, the term will be three years upon the due date of the principal obligation.

It is also prescribed that if the due date of the principal obligation is not established or is established as the date when the claim is lodged, the guarantee is terminated unless the lender files a claim against the guarantor within three years upon the date of the guarantee agreement.

It is also directly stated that when it comes to the obligations fulfilled by parts, the term of the guarantee runs for each separate part, starting from the day of expiration of the term or the due date of the respective part of such obligation.

When lenders file a claim to court now, they determine the date from which the term of the guarantee starts to run in a different manner, especially when payments under the loan agreement are to be made by the debtor monthly. In their turn, these amendments are consistent with the established judicial practice on this issue.

Regarding the Mortgage and Its Termination

One of the common patterns used by unfair debtors to release the real property from the mortgage is reconstruction of the mortgaged property.

It is prescribed by the Law that in case the mortgagor has reconstructed the mortgaged property, or has carried out unauthorised construction thereon (including but not limited to construction of new buildings, structures etc. on the land plot owned or used by the mortgagor), all the reconstructed, newly created real property items are deemed to be the mortgaged property in accordance with the mortgage agreement.

These amendments are aimed at preventing release of the real property from the mortgage as unfair debtors’ attempts to “save” their property from the mortgage by means of its reconstruction are quite common, unfortunately. In such cases, mortgagees are forced to defend their rights in court, and it should be noted that courts mostly satisfy their claims. Therefore, upon entry of these amendments into force, the number of such “unpleasant surprises” for mortgagees is supposed to decrease as it will now be prescribed by the law that all the reconstructed, newly created real property items are deemed to be the mortgaged property.

Regarding the Mortgage Reservation in the Agreement

New requirements to the agreement on satisfaction of the mortgagees’ claims or respective reservation in the mortgage agreement are established. In particular, the following shall be set out:

• Terms and conditions upon occurrence of which the mortgagee may exercise its right to out-of-court foreclosure;
• Procedure for determining the cost at which the mortgagee acquires the mortgaged property;
• Acceptable and adequate methods for exchanging notices between the parties to the agreement.

Such amendments will finally put an end to the category of disputes where the debtor evades receipt of the lender’s notice of foreclosure on the mortgaged property, which allows the debtor to subsequently appeal from such foreclosure in court.

Regarding the Effect of the Lender’s Claims upon Foreclosure on the Mortgaged Property

It is clearly prescribed by the Law that upon completion of the out-of-court settlement any subsequent claims of the mortgagee regarding fulfilment of the:

• principal obligation by the debtor being an individual are invalid unless otherwise provided for by the mortgage agreement or loan agreement or agreement on satisfaction of the mortgagee’s claims;
• principal obligation by the debtor being a legal entity or an individual entrepreneur are valid unless otherwise provided for by the mortgage agreement or loan agreement or agreement on satisfaction of the mortgagee’s claims.

If the mortgagee’s claims are secured with several mortgaged pieces of property (including under several mortgage agreements), and out-of-court foreclosure is carried out at the expense of the specific mortgaged item, the mortgagee may demand (including by means of out-of-court settlement) from the debtor or mortgagor to fulfil the obligation to the extent in which it has remained unfulfilled upon the out-of-court settlement with regard to the specific mortgaged piece of property.

These amendments are aimed at putting an end to many years of the controversial case law regarding validity of the mortgagee’s claims upon the out-of-court foreclosure on the mortgaged property. Furthermore, these amendments will have a positive impact on both debtors being individuals and mortgagees in case unfair debtors being legal entities that have received the loan in quite a large amount and are not eager to pay it back almost depreciate the mortgaged property and agree to give it away to the mortgagee freely.

Regarding Attachment of the Mortgaged Property

Unfortunately, there are numerous cases when unfair debtors that do not want to return the borrowed funds and their property try to have their property attached in any manner (attachments within criminal proceedings are especially common) or to prevent foreclosure on the mortgaged property.

It is provided for by the Law that any data in the State Register of Property Rights to Real Property on any encumbrances, restrictions, attachments or other bans on the mortgaged property upon the state registration of the mortgage are not a basis for denial of state registration of title to the real property in the name of the mortgagee being a bank, mortgagee being a bank in the process of liquidation or mortgagee being the National Bank of Ukraine, as prescribed by the Law of Ukraine “On the Mortgage”.

These amendments will finally unable lenders to foreclose on the pledged property with no hindrance and without having to waste years in courts revoking to numerous artificial attachments of the mortgaged property by the unfair debtors.

Positive Amendments for Borrowers

It is prescribed by the Law that in case the variable tax rate is applied, the maximum applicable interest rate is indicated in the loan agreement.

Now only the maximum amount of an increase in the interest rate has to be established. These amendments are positive for borrowers as they will know in advance what interest rate may be applied in the future.

It is also provided for by the amendments that in case the borrower objects to an increase in the interest rate, it shall repay the debt under the agreement in full within thirty calendar days upon receipt of the notice of the increase in the interest rate. The parties’ obligations under the agreement are terminated upon repayment of the debt under the loan agreement in full. In this case, the previous interest rate is applied until the debt is repaid in full, yet for no more than thirty calendar days upon receipt of the notice of the increase in the interest rate.

The Law will enter into force on the day following the day of its publication and will be brought into action in three months upon its entry into force.

An important aspect is that this Law will apply not only to the relations occurring after it is brought into force, but also to the relations occurring before it is brought into force and continuing to exist after it is brought into force, except for the new requirements on the agreement on satisfaction of the mortgagee’s claims or respective reservation in the mortgage agreement.