Insolvency against the Law/ Legal Risks of Crediting in Foreign Currency
Introduction
During the period of sustainable development of the Ukrainian economy, the issue of loans in foreign currency became widespread because of relative stability on the foreign currency exchange market and much lower interest rates for such credits. At that time, when everyone was confident of stability in the economy and in personal income, the issue of lawfulness of crediting in foreign currency was not raised.
However, measures have been widely taken recently to reduce the debt burden as a result of a fall in the purchasing capacity of both people and the vast majority of companies.
All the negative consequences of such actions have an impact on creditors which, as a rule, are banks, and which mostly face the necessity of defence in court of their rights for the return of loan funds and interest payment. Therefore, it can be said that today the risk of review of the reliability of all credit agreements entered into as well as agreements stipulating performance of obligations by the debtor, in particular, mortgage agreements, which requires carrying out detailed analysis of all potential risks and ways of their minimization, exist.
Basics of Legal Regulation of the Field
The main laws in the credit field are the Constitution of Ukraine, the Civil and Economic Codes of Ukraine, the Decree of the Cabinet of Ministers of Ukraine On Currency Regulation and Currency Control System (hereinafter — the Decree) On Banks and Banking Activity Act of Ukraine and the On Mortgages Act of Ukraine. Relevant orders of the National Bank of Ukraine governing the procedure for giving consent and licenses to banks and the procedure for use of foreign currency on the territory of Ukraine are also of great importance.
Nevertheless, of late, considering the crisis in the world economy, drafts as well as legislative instruments by which new rules in the field are stipulated, the initiators of which are also the Verkhovna Rada (Parliament) of Ukraine, the National Bank of Ukraine and the Ukrainian Ministry of Justice are appearing more and more often. As a rule, such initiatives are aimed at prohibiting the issue of giving credits in foreign currency and hindering the procedure of imposing a third-party lien on the debtor’s property. To some extent the judicial authorities are also making their own corrections to crediting practices.
Key Issues
For today one of the biggest risks in the credit field is the high risk of invalidating credit agreements which stipulated crediting and repayment of credit funds in foreign currency.
Pursuant to a number of similar cases, the reason for invalidating credit agreements concluded into in foreign currency is their non-compliance with the requirements of the law which envisage that liability shall be stated and performed in hryvnyas, the national currency of Ukraine, which is the only lawful instrument of payment on the territory of Ukraine (the mentioned norms are set in the Economic and Civil Codes, the Constitution of Ukraine, the On the National Bank of Ukraine Act of Ukraine).
At the same time, the possibility of carrying out foreign currency transactions on the territory of Ukraine is stipulated by current legislation. However, in order to carry out such transactions, it is envisaged by the Decree that individual licenses are obtained from the NBU either for granting or receipt of credits in foreign currency by residents or for use of foreign currency on the territory of Ukraine as an instrument of payment.
It is worth stating that creditors’ reference to their availability of the bank license or written consent for carrying out transactions with foreign currency as to the basis of creditors’ availability of the right to carry out crediting activities in foreign currency is mostly disregarded by courts. This is because they take into account the contents of Article 5 of the Decree under which general licenses are issued to financial institutions of Ukraine for carrying out foreign currency transactions which do not require an individual license.
The unlawfulness of making credit payments in foreign currency also follows from the contents of the Rules of use of cash in foreign currency on the territory of Ukraine under which individual residents can use foreign currency as an instrument of payment when paying for goods and services in a duty free area, paying duty, taxes, charges and penalties under the customs legislation of Ukraine and making payments for security and escorting of excisable and transit goods by customs bodies.
At the same time, current Ukrainian legislation does not enable an unambiguous conclusion related to the unlawfulness of crediting in foreign currency to be drawn.
Thus, it is stipulated by the Decree that the receipt of obtaining individual licenses is essential for granting or receipt of credits in foreign currency by residents, if the terms and amounts of such credits exceed the limits determined by legislation. At the same time, current legislation did not determine such limits, which release one from the necessity to obtain a license. The National Bank of Ukraine is also of the same opinion, as expressed in its Letter of 29 May 2001.
Under the Decree, the making of credit payments in a foreign currency is also subject to licensing. However, the exception to the stated provision is Article 1.5 of the Regulation about the procedure of issue of individual licenses for use of foreign currency as an instrument of payment on the territory of Ukraine by the National Bank of Ukraine under which use of the foreign currency as an instrument of payment without licence available is allowed if the beneficiary is a bank under the foreign currency transaction.
The consequence of invalidating the credit agreement will be to invalidate all security agreements (mortgage, suretyship agreement), thereby enabling the debtor to alienate the mortgaged property and liabilities of the parties under the agreement to return everthing received under the agreement. It is worth stating that there is an option possible under which the court will compel the debtor to return the received amount of credit in hryvnyas at the exchange rate which was in effect on the day of issue of the credit (i.e. at a rate lower than on the day of repayment) with deduction of all interest, penalties and payments on the principal paid.
Latest Legal Trends in the Field
Notwithstanding the large number of statements by politicians and officials, real changes in the area of the credit legal relationship are not, in reality, actually taking place.
However, one antidollar law was adopted. Thus, on 24 November 2009 the On introduction of Changes to Some Legislative Instruments of Ukraine Aimed to Overcome the Negative Consequences of the Financial Crisis Act of Ukraine became effective, which stipulated that financial institutions shall be entitled to grant credits, loans in the foreign currency to individuals — residents and non-residents, who do not carry on entrepreneurial activities, only for payment for services to non-residents for treatment and education abroad.
The Act also stipulated that granting (receipt) of credits, loans in foreign currency on the territory of Ukraine and repayment (payment) of the principal debt and interest under credits, loans granted after coming into force by this Act, shall be done by bank transfer. Apart from that, the stated Act prohibits the early repayment of the credits in hard currency to non-residents and it is also prohibited for banks to carry out the enforced relocation from the property in which the physical person, the mortgagee, is registered and this property is the only one of the mortgagor, in the case if the interest under the mortgage real estate credit agreement is paid in a timely manner or with maximum delay up to two months and only the issue of restructuring of the debt is settled by documents on conditions agreed with the bank.
In turn representatives of the Central Bank say that the National Bank of Ukraine intends to completely prohibit crediting in foreign currency in Ukraine so as to reduce pressure on the hryvnya’s exchange rate. However, as of October 2009 no resolution related to this matter had been adopted.
To the latest legal trends in the law-enforcement practice of courts one can include precedents under which credit agreements entered in foreign currency without individual licenses of the National Bank of Ukraine (Order of the Donetsk Economic Court of Appeal of Ukraine of 14 September 2009 in court case No.9/70pd refers to this in particular) being obtained were invalidated.
Changes were also made concerning mortgage legal relationship. Thus, the Ministry of Justice of Ukraine prohibited notaries from making an execution order on mortgage agreements if the debtor breached conditions of the credit agreement up to the moment of expiry of the credit agreement. Therefore, should significant delay in payment by the debtor occur, banks had every time to seek judicial defence or wait for the expiry of the credit agreement for satisfaction of their requirements using the mortgaged property without legal proceedings. However, the aforementioned introduction was cancelled by Order of the Ministry of Justice of Ukraine of 17 November 2009.
Conclusions
Taking into account that said above, it can be stated that Ukrainian legislation is not perfect and even variable in the field of crediting in foreign currency, thereby enabling courts to give an ambiguous appraisal to the same legal relationship.
Therefore, considering new trends in legislation and recent court practice, and also for the purpose of minimization of risks in the field of credit, it is recommended to enter into credit agreements exclusively in national currency with the equivalent of all amounts in foreign currency.