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Improvement of the Protection of the Creditors’ Interests in View of the Novelties Introduced by the Civil Code of Ukraine: Issue of the Guarantors’ Liability

01.02.2019

Oleksii Khrystoforov, Attorney At Law

Source: Lawyer and Law

On 04 February 2019 by virtue the Law of Ukraine On Introduction of Amendments to Certain Legislative Acts of Ukraine Regarding Restoration of Lending (hereinafter – Law No. 2478-VIII) amendments to the Civil Code of Ukraine entered into force. Among the significant legislative novelties introduced by the Law (which the Civil Code has undergone) are the amendments into the volume of a guarantor’s liability and the termination of pledge as a way of securing the obligation.

In particular, pursuant to the provisions of the updated norm of Article 599 of the Civil Code of Ukraine should an obligation be changed without the consent of the guarantor, as a result of which the debtor’s liability will increase, such a guarantor shall be liable for violation of the obligation by the debtor to the extent that existed before such a change of obligation.

Pursuant to the new version of Article 599 of the Civil Code of Ukraine, should the guarantee agreement fail to mention the term of the main obligation or should such the moment be the moment of filing the claim, the guarantee shall be terminated only if the creditor fails to lodge a claim against the guarantor within three years from the day of conclusion of the guarantee agreement. And if the obligation is fulfilled in parts, the guarantee period shall be calculated separately in relation to each part.

The term for lodging a claim by the creditor against the guarantor has been increased six-fold (from six months to three years accordingly).

As is known, the provision on “automatic” termination of the guarantee as a result of a change of the obligation secured by the guarantee without the consent of the guarantor and/or the creditor’s failure to lodge a claim against the guarantor within six months from the date of maturity of the principal obligation that had existed prior to the introduction of the amendments by Law No. 2478-VIII, allowed the guarantors to absolutely legitimately avoid fulfillment of their assumed obligations, object against the claims put forward by the banks, or “go on the offensive” by lodging a claim to the court for recognition of guarantee agreements and guarantee commitments to be terminated.

Interesting and strong in the context of the question raised is the opinion voiced by some civil scholars regarding the incorrect nature of the said legislative novelty in the part of the guarantor’s liability, considering for the fact that the increase in the debtor’s obligation leads to a deterioration of its paying capacity and, therefore, the likelihood of engagement of the guarantor to the execution of the obligation (which secured by the guarantee) towards the lender, will respectively increase.

However, at the moment it can be stated that with the entry into force of the new version of the Civil Code of Ukraine the situation for guarantors has become more complicated. However, we are not inclined to share the joy of bankers and debt collection agencies about simplification of the collection of the indebtedness through the legislative novelties because certain provisions of the law are contradictory.

In particular, paragraph 2 of Section II “Final and Transitional Provisions” of Law No. 2478-VIII stipulates that the Law shall apply to relations that arose after its entry into force, as well as to relations that arose prior to its entry into force and continue to exist after its entry into force, except for Article 36 (4) of the Law of Ukraine On Mortgage, which applies only to contracts and agreements concluded after the entry into force of this Law.

Thus, it goes about the retroactive effect of the law, and it is difficult to understand the logic used by the legislator (the reasons are not discussed) in this issue. For example, this provision directly contradicts the provisions of Article 58 of the Constitution of Ukraine according to which laws and other normative-legal acts do not have a retroactive effect in time, unless they mitigate or nullify the responsibility of a person.

In its decision in the case No. 1-7/99 upheld on 09 February 1999 under the constitutional motion lodged by the National Bank of Ukraine regarding the official interpretation of the mentioned provision of the Constitution (case on retroactive effect of laws and other regulatory legal acts) stated, in particular, that:

“Towards the regulation of social relations different methods of operation of regulatory legal acts in time are used. The transition from one form of regulation of social relations to another can be carried out, in particular, immediately (direct action), through the transitional period (ultra-active form) and by through the reverse effect (retroactive form).

According to the generally accepted legal principle, laws and other regulatory legal acts have no retroactive effect in time. This principle is stipulated by Article 58 (1) of the Constitution of Ukraine, according to which the effect of a legal act in time should be understood as starting from the moment of its entry into force and terminating with the loss of its validity, that is, towards certain event or fact applies that law or other normative legal act which was valid when such event or fact occurred or took place”.

The above is fully in line with the provisions of the current Civil Code of Ukraine, Article 5 “Validity of Civil Legislation in Time” of which stipulates that:
– acts of civil law regulate relations that occurred after the moment when they entered into legal force;
– the act of civil law has no retroactive effect in time, unless it mitigates or nullifies the responsibility of a person;
– if civil relations originated before and were regulated by the civil legislation act which lost its legal effect, the new act civil law shall apply to the rights and obligations that originated after its entry into force.

The above suggests that a properly devised legal position will enable the guarantors (under their existing obligations) to effectively handle the courts cases involving the said legislative novelties.

 
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