Practice of Securing Creditors Rights in Ukraine
In response to the keen demand for borrowed finance, and with regard to the current world financial crisis and thereby common practice of credit default, security is gaining significant importance in the area of economic legal relations as the guarantee of protecting creditors rights.
Ukrainian legislation envisages the following types of security: forfeit, suretyship, guarantee, pledge, down payment. In Ukrainian (as well as international) practice the most commonly used securities in the sphere of economic legal relations are suretyship, guarantee and pledge.
Suretyship
Under a suretyship agreement, in case of a debtor failing to fulfil an obligation secured by suretyship, a debtor and a surety are accountable to the creditor as joint debtors.
In other words, the creditor is entitled to demand the total sum of indebtedness (including interest) from both the debtor and the surety. However, the agreement can also provide subsidiary responsibility of the surety.
The surety can pledge his own property to the lender/creditor in order to secure the obligations of the debtor — such type of suretyship is referred to as "Property surety", and requires security and pledge agreement.
The law does not provide any restrictions in terms of the range of persons who can act as sureties. However, there are some restrictions regarding the term of validity of suretyship and its relation to the principle obligation.
Therefore, the validity term of suretyship ends when the principal obligation is fulfilled (as well as if the principal obligation is recognized by a court as invalid). Moreover, the suretyship terminates after the validity term foreseen by the suretyship agreement expires. In the event that a term of validity is not provided, suretyship terminates, if a creditor within a six-month term from the moment the principle obligation was fulfilled does not place any demands on the surety. If the principle obligation term is not established or established at the moment the demands are specified, the suretyship ends if a creditor does not sue the surety within a period of one year from the moment of signing the suretyship agreement.
Guarantee
The law envisages severe restrictions as to the range of people who can act as guarantors, a factor which also distinguishes guarantee from suretyship. Only a financial institution can act as a guarantor — a legal entity whose sole activity extends to the provision of financial services, which holds the appropriate license to provide certain types of financial services, and which is placed in the state register of financial institutions. Financial institutions include, in particular, banks, credit unions, pawn shops, leasing companies, trust institutions, insurance companies, investment funds and companies.
As distinguished from suretyship, a guarantee does not depend on the principle obligation even in case of its termination or invalidation. The validity term of the guarantee is stipulated in the text of the guarantee and does not depend on the principal obligation term.
Guarantees are most commonly issued to the banks and created by a letter of guarantee. (written registration of the guarantee as well as any other type of security is obligatory). A guarantee can secure the whole obligation or only a part of it. In this case, a guarantor is liable only within the sum set out in the guarantee (guarantee letter).
The following types of guarantees can be available: revocable and irrevocable, as well as conditional and unconditional. Under a revocable guarantee its terms can be changed at any time. Such a guarantee can be called off by the bank-guarantor upon an application of the debtor without advance notice from the creditor. Unlike the latter, an irrevocable guarantee envisages the invariability of terms and can’t be called off by the guarantor.
Under the conditional guarantee, if a debtor fails to fulfil his obligation the bank-guarantor disburses funds to the creditor on condition that the latter met all the necessary requirements or provided documents foreseen by the guarantee. An unconditional guarantee means that a creditor’s requirements are satisfied at his first request (without conditions and documents). That is why in the context of risk minimization irrevocable and unconditional guarantees appear to be the most advantageous for a creditor to secure fulfillment of an obligation.
Pledge
In order to secure the principal obligation (under a loan agreement, bank credit contract, etc.) both a principal debtor and a surety can sign a pledge agreement with a creditor. Then a debtor (surety) becomes a pledgor, and a creditor is referred to as the pledgee.
Movable property pledge
Enforcement of an obligation via a movable property pledge agreement can be carried out in two ways. Under the first type of movable property pledge, the property which is subject to the pledge is transferred by the pledgor into possession of the pledgee (to define such type of pledge legislation provides and uses the term "pawn"). Pursuant to the second traditional type, a pledged item remains in the possession of the pledgor. This method of movable property pledge is more suitable for the borrower-pledgor, who reserves his right of property use until the termination of a pledge.
A movable property pledge is clearly distinguished from a mortgage. Particularly, the right of the so-called "subsequent" pledge is allowed without the consent of a preceding pledgee, except and to the extent when the opposite is provided by the pledge agreement or such a ban is stipulated by special laws regarding certain types of property.
Let’s dwell at length on pledge of securities, which is one of the most interesting types of pledges. The pledge of securities is carried out pursuant to the terms of a pledge agreement that is concluded in a common written form.
Pledged securities must be restricted in circulation by means of making corresponding entries in the share register. Restricted circulation of securities is implemented through their blocking on the personal account of the owner performed by the registrar. To carry out such blocking the owner has to submit a written direction to the registrar on blocking of securities due to their pledge; the original pledge agreement or a copy if it certified by a notary; pledgee’s application executed in compliance with legislative requirements.
Enforcement of recovery over pledged securities causes termination of a pledge put in action by the registrar by making an entry in the system of registration on termination of a pledge on the grounds of supplying the relevant documentation: direction on cease of securities blocking signed on behalf of the pledgee, original or notarially certified copy of the document confirming termination of the registered securities pledge.
As regards the pledge of a member’s share in the limited liability company, as of now legislation does not provide strict regulations in terms of the procedure on enforcement of recovery over the member’s share in the authorized capital of the limited liability company
Mortgage
Ukrainian legislation identifies mortgage (immovable property pledge) as a separate type of pledge.
A pledge agreement of both movable and immovable property must be concluded in written form.
A mortgage agreement requires compulsory notarial certification. In the event that a mortgage agreement is not notarially certified, it is considered as void and cannot be taken into consideration.
Apart from notarial certification, legislation also envisages state registration of a mortgage in the State mortgage register and State register of prohibitions on alienation. In event of the mortgage being notarially certified but not registered the mortgage agreement is valid. However, the requirement of a mortgagee does not gain any priority regarding registered rights or requirements of third persons upon mortgaged immovable property. Entries into the State mortgage register and State register of prohibitions on alienation are made by the same notary.
An item of immovable property shall meet certain requirements to be the subject of a mortgage, that include:
1) be specified as a separate, individually defined item of immovable property, in particular, to be registered at the local technical inventory bureau as an individually defined unit;
2) belong to the mortgagor on the basis of the right of ownership (and if a mortgagor is a state body or public utility company — Ukrainian legislation allows to a mortgagor possess a mortgage object not on the grounds of the right of ownership but on the basis of the right of "complete operating control" — the term used exclusively on post-Soviet territory);
3) an object cannot be pledged if it is already burdened with obligations, for instance, an object has already been pledged, or if the sum of an obligation is equal or exceeds the value of the pledged object. However, legislation envisages the so-called "subsequent" mortgage — mortgaging of immovable property that has already been pledged under a previous mortgage agreement. In such a case the value of a mortgaged object must theoretically be sufficient to satisfy the requirements of all the mortgagees, as each following mortgagee can meet his/her demands only when the requirements of the proceeding mortgagee are satisfied in their entirety. Therefore, to diversify the risks of mortgagees, legislation foresees that the subsequent mortgage comes into effect only with the compulsory consent of the proceeding mortgagee.
Legislation also provides certain methods by virtue of which a creditor can satisfy personal demands at the expense of the value of a mortgaged object. Such methods can be judicial or non-judicial. Non-judicial practice include:
— transfer of ownership over the mortgaged object to the mortgagee;
— the sale of a mortgaged object by the mortgagee to the third party;
— enforcement of recovery over the mortgaged object on the grounds of an endorsement legalized by a notary.
Legal methods include sale of the mortgaged object (in particular, at public bidding, auctions) under a court decision.
With the aim of protecting the rights of a debtor legislation provides a detailed regulation of the procedure for each separate type of recovery enforcement over the mortgaged object. It also envisages that a creditor must notify the debtor in advance about his intention to enforce recovery over the mortgaged object indicating the method of recovery enforcement, and only over 30 days after such a notification, if a debtor still fails to fulfill undertaken obligations the creditor is entitled to start the procedure for recovery enforcement over the mortgaged object.