Ukraine
Lending
Generally, lending is a regulated activity only in relation to consumer lending. Lending made available to borrowers by financial institutions at the expense of attracted funds are also regulated. The lender (being a bank or financial institution) must be authorized by the National Bank of Ukraine or Financial Authority. Corporates and individuals may rely on statutory exemption.
Borrowing
Borrowing is generally not a regulated activity but note that consumer borrowers are afforded more beneficial legal protection than other borrowers.
Are there any restrictions on giving and taking guarantees and security?
Some of the key areas affecting the giving of security are as follows.
Capacity
It is important to check the constitutional documents of a company giving security to ensure it has power to do so and there are no restrictions on the directors' powers. Ukrainian law does not recognize the 'corporate benefit' concept. Under corporate law, certain transactions (including the granting of security) are subject to corporate approval by a company's shareholders/participants or the board of directors at a general meeting.
Insolvency
Security may be at risk of being set aside under Ukrainian insolvency law if the security is granted by a company within a certain period of time prior to the onset of insolvency. This would be the case if the company giving the security received considerably less consideration, and as such, the transaction was at an undervalue. For such transactions to be set aside, certain statutory criteria needs to be met, including the requirement that security has been given within three years prior to the onset of insolvency of the affected company. Security may also be challenged on other grounds relating to insolvency.
Financial assistance
This applies to certain types of legal entity including banks and joint-stock companies. For example, banks are not allowed to extend loans to third parties for the purposes of acquiring the bank's shares or any third party bank's shares (this includes subordinated loans to banks). Joint-stock companies are also not allowed to lend funds (including the granting of security) for the purposes of acquiring their shares or securities.
What are common types of guarantees and security?
Common forms of guarantees
Ukrainian law distinguishes between guarantee (garantiya) and suretyship (poruka).
A guarantee is a security which can only be granted by a regulated entity (a bank or other financial institution), whereby the guarantor is under a primary obligation to the creditor to pay upon a debtor's default. A guaranteeing obligation is independent to the validity and existence of the principal obligation.
A suretyship can be provided by corporates or individuals. Under suretyship a surety undertakes to perform the principal obligation secured by suretyship, for and instead of the defaulting debtor. Under Ukrainian law a suretyship is a secondary obligation, meaning that its validity and existence is entirely dependent on the validity and existence of the principal obligation.
Common forms of security
There are three basic types of security interest that can be created under Ukrainian law:
- a pledge;
- a suretyship; and
- a mortgage.
Different types of security are suitable for securing different types of assets.
Under Ukrainian law it is possible to grant security over all of the assets of an Ukrainian company or individual assets. Granting security over all of a company's assets will tend to be achieved by way of mortgage over a business unit (an integral property complex) which will include:
- a mortgage over real estate; and
- a mortgage over fixed assets and equipment (except for movable equipment).
Are there any other notable risks or issues around giving and taking guarantees and security?
Giving or taking guarantees
To be valid, a guarantee needs to be in writing and signed by the guarantor.
Giving or taking security
A security document may need to be executed as a notarial deed if it contains:
- a mortgage over land;
- a mortgage over immovable property; or
- a mortgage over space facilities.
Parties may elect to have any security contract notarized. Generally, notarization gives the lender:
- additional comfort in terms of the counterparty's capacity to enter the contract; and
- additional enforcement benefits (a notary writ may be an out-of-court remedy available to the lender).
Certain types of assets cannot be pledged or mortgaged. For example, assets which have a cultural heritage cannot be pledged. Agricultural land can only be mortgaged to banks.
Perfection and registration requirements
- Encumbrance of immovable property with a mortgage is subject to a mandatory registration with the State Register of Proprietary Rights to Immovable Property.
- Encumbrance entries recording ranking and priority against third parties' claims over pledged movable assets, and prohibiting the disposal of pledged (movable) assets, shall be registered at State Register of Pledges over Movable Properties.
- An absence of state registration affects the validity of a mortgage.
Failure to comply with perfection and registration requirements means that the ranking or enforceability of the movable pledge can be undermined and the creditor's claims will rank alongside unsecured creditors.
Security is at risk of being set aside in certain circumstances under insolvency laws. For more information, see Giving and taking guarantees and security – restrictions.