This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
The restructuring of outstanding debts requires amendments to security documentation.
The current financial conditions have altered the plans of many Ukrainian businesses. Now, when ambitions for rapid economic growth and high revenues are suspended, Ukrainian borrowers and lenders should prepare themselves for a complex but important time of outstanding debt restructuring. Failure to agree on new terms of debt repayment could trigger unfortunate outcomes for all parties involved.
Two main ways of restructuring
While a number of ways of debt restructuring are available in Ukraine, the most common are postponing the final maturity date and altering the interest rate under the loan agreement. Postponing the maturity date and changing the interest rate both require the introduction of amendments to a document containing primary obligations (e.g. a loan agreement). Amendments of related security documents are also required in order to ensure their validity and full effect in Ukraine.
Amendments to loan agreements
Pursuant to Ukrainian law1, amendments to an agreement must be done in the same form in which such agreement was executed. Based on this requirement, in most cases, changes to the maturity date of a loan agreement should be in writing. Further, Ukrainian financial regulations2 establish that agreements on granting cross-border loans to Ukrainian borrowers should be registered with the NBU. Similarly, amendments of the maturity date or interest rate under a registered loan The current financial conditions have altered the plans of many Ukrainian businesses. Now, when ambitions for rapid economic growth and high revenues are suspended, Ukrainian borrowers and lenders should prepare themselves for a complex but important time of outstanding debt restructuring. Failure to agree on new terms of debt repayment could trigger unfortunate outcomes for all parties involved.
Two main ways of restructuring
While a number of ways of debt restructuring are available in Ukraine, the most common are postponing the final maturity date and altering the interest rate under the loan agreement. Postponing the maturity date and changing the interest rate both require the introduction of amendments to a document containing primary obligations (e.g. a loan agreement). Amendments of related security documents are also required in order to ensure their validity and full effect in Ukraine.
Amendments to loan agreements
Pursuant to Ukrainian law1, amendments to an agreement must be done in the same form in which such agreement was executed. Based on this requirement, in most cases, changes to the maturity date of a loan agreement should be in writing. Further, Ukrainian financial regulations2 establish that agreements on granting cross-border loans to Ukrainian borrowers should be registered with the NBU. Similarly, amendments of the maturity date or interest rate under a registered loan agreement require further registration with the NBU. The registration procedure can usually be accomplished within seven business days.
Amendments to security agreements
Ukrainian law does not provide a straightforward answer to the question of whether changing a secured liability (e.g. changing the maturity date or interest rate in a loan agreement) should entail amendment of security documents. Detailed analysis of Ukrainian laws and available practice shows that execution of amendments and their registration in the appropriate state registers leaves less room for risks associated with validity and enforceability of security interest by lenders (banks). This assertion is supported by the following.
Article 13 of the Law on Securing Creditor's Claims3 provides that amendments to information on registered encumbrances must be registered if they refer to, inter alia, change of essence or amount of secured obligation. The amount of secured obligation changes if the interest rate is changed. Although the law does not specifically construe the essence of a secured obligation, the maturity date, as an important condition of a loan agreement, would likely qualify as the essence of a loan agreement. In view of this, security documents must be amended in order for them to secure an amended obligation. Otherwise, if amendments to the maturity date and interest rate are not reflected in an additional agreement and are not registered in the respective register, the risk arises that the Ukrainian law security documents lose their effect.
Conflict amongst the courts
The above conclusion is even more recommended due to the absence of a unanimous court position on the respective issues. Currently, the main issue raised in courts is whether the main obligation in each particular case is "amended" or "replaced". Based on Ukrainian law, an obligation is terminated, in particular, under agreement of its parties to replace an old obligation with a new one4. At the same time, a security interest is terminated if the secured obligation is terminated5. Unfortunately, no clear guidelines exist to determine the criteria distinguishing amendment and replacement. Therefore, there is a risk of termination of a security interest should the change of maturity date or interest rate be treated as a replacement of the secured obligation.
According to the Highest Commercial Court of Ukraine6, a secured obligation is replaced if its essential conditions (in particular, amount and term of performance) are amended. There exists a risk that, based on the applicable regulations, a court may similarly decide that a secured obligation is replaced with a new obligation and that, therefore, a security interest securing an old obligation terminates.
There are several ongoing court cases where security providers concluded amendments to security documents in a different form from the original security documents. For example, mortgagors under notarised mortgage agreements agreed to an amendment of secured liabilities in a simple letter without concluding a notarised amendment. There are considerable risks connected with a successful suit on (i) termination of security documents due to termination of secured obligation, (ii) failure to conclude amendment agreements and failure to register amendments and (iii) failure to comply with form requirements. In view of this, amending security documents to reflect changes in the secured obligation, and proper registration of such amendments in the state registers, appear to be the only sure approach to protect against deficiencies of the law.
Amending security documents to reflect changes in the secured obligation, and proper registration of such amendments in the state registers, appear to be the only sure approach to protecting against deficiencies of the law.
This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
Footnotes
1 Article 654, Civil Code of Ukraine, 16 January 2003, No. 435-IV, as amended.
2 Procedure of Obtaining Foreign Currency Loans by Resident Borrowers from Non-Resident Lenders and Granting of Foreign Currency Loans by Resident Lenders to Non-Resident Borrowers, approved by the Resolution of the National Bank of Ukraine, 17 June 2004, No. 270, as amended.
3 Article 28, Law of Ukraine on Securing Creditors' Claims and Registration of Encumbrances, 18 November 2003, No. 1255-IV, as amended.
4 Article 604, Civil Code of Ukraine.
5 Law of Ukraine "On Pledges", 2 October 1992, No. 2654-XII, as amended.
6 Ruling of the Highest Commercial Court of Ukraine on termination of real estate pledge agreement, 12 October 2004, Rulings of the Supreme Court of Ukraine and of the Highest Commercial Court in Commercial Cases, 2005, 00, No. 7.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
