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Maksym Kopeychykov: Most often courts are taking the banks’ side


Maksym Kopeychykov, attorney, partner of Ilyashev & Partners Law Firm
Source: The Liga

– Maksym, tell us about litigation practice with bank loan agreements: what are the most “popular” requirements of banks, borrowers and the results of such disputes?

– We all know the ultimate goal of the banks – they want their money back. The most popular requirement of the banks is foreclose of loan amount, interest, fines and penalties. The second most popular requirement is foreclosure on collateral/mortgage. Unfortunately, granting of claims and initiation of enforcement proceedings according to effective decisions not always result in actual recovery of money. Thus, sometimes it is more promising to impose enforced collection on some of the borrower’s assets. In such cases, it refers to imposition of enforced collection on pledged or mortgaged property. This can be done in several ways. Earlier court decisions usually provided only for the sale of pledged property at auctions. However, after the Supreme Court found that the ways to meet the requirements of pledge and mortgage holders provided in the out of court settlement agreement can be used in court, the judicial mechanism for protection of the banks’ violated rights became more efficient.

With regard to the borrowers’ requirements, they often try either to obtain invalidation of the loan agreement (to avoid the accrual of interest or change the loan currency), or try to challenge the agreement securing the loan agreement.

Most often, the borrowers either try to invalidate the loan agreement (to avoid the accrual of interest or change the loan currency), or try to challenge the agreement securing the loan agreement.

– Tell us about the high-profile cases in this regard.

– There is much to tell, because the lion’s share of the largest disputes between banks and borrowers comprise disputes where Ilyashev and Partners provided legal advice. These are primarily the cases related to Nadra Bank and BTA Bank (in the latter case – recovery of debt on loans granted when Mukhtar Ablyazov managed the bank).
In the case of Nadra Bank, I mean disputes with the companies associated with the former shareholders of the bank, who owe vast amounts of money to the bank. I will not go into details, because the majority of these processes are still pending.

We also provided legal advice in many less high-profile cases for other Ukrainian and foreign banking institutions. Among the major cases, which the lawyers of Ilyashev & Partners did not counsel or counseled only at a certain stage are the disputes between Ukrsotsbank and Puzata Khata, ISA Prime Developments Group. It is also worth mentioning disputes between banks and AIS Group of Companies and claims of different banking institutions against Hekro Pet Ltd. The ups and downs of the majority of these cases were described in detail in the media.

– Tell us about the court decisions prohibiting to sign a loan agreement without a written consent of the husband/wife and a guarantor.

– The guarantor’s consent to signing the loan agreement is not required. Guarantor usually accepts the terms of the loan agreement as a given. Another thing is that the variation of the principal agreement resulting in increase of liabilities without the guarantor’s consent causes termination of guarantee.

Regarding the spousal consent the Higher specialized court found already in 2012 that although Article 65 of the Family Code requires the spousal consent to carry out property-related transactions, the loan agreement does not comprise such a transaction. Accordingly, the spousal consent for entering into loan agreements is not required. However, what is important and what was set forth by the Higher Court – it is assumed that the transaction is made by one spouse for the benefit of both spouses. Accordingly, if a bank wants to recover the amount of debt from both spouses, it must prove that the funds were used for the benefit of both. Though some lower courts use this decision very restrictedly – only the part envisaging that spousal consent for credit transaction is not required. Thereto, the courts often ignore the creditor’s obligation to prove that the funds were used for the benefit of both spouses.

– What decision is usually approved when it comes to collection of debt and collateral from debtor or guarantor after liquidation of a debtor – individual entrepreneur or a debtor – legal entity?

– It has been already clarified not only by the High Specialized, but also by the Supreme Court. The essence of decisions is simple: no debtor – no penalty, all obligations terminate.

We always recommend our clients-banks to increase the limitation period to at least five years.

– Tell us about the practice of judicial decisions regarding accrual of interest on loan after the expiration of the loan agreement.

– There are many such disputes. As usual, the devil is in the details, namely in the wording of the treaties. The loan agreement may envisage a certain percentage for the use of borrowed funds after the expiration of the treaty itself. There were precedents when courts satisfied the creditors’ claims regarding accrual of additional interest at the rate set by the loan agreement, as the treaty itself explicitly provides that interest accrues until actual payment.

Another position is that upon expiration of the loan agreement, pursuant to the Civil Code, interest at the NBU discount rate is accrued for the use of other people’s money.

We have had some significant cases where wordings of the agreements were quite miserable, saying that accrual of interest under the agreement is terminated within the period envisaged in the relevant clause of the agreement, i.e. the day of suspension of interest was clearly determined. The courts took the borrower’s side. Thus, a bank customer avoided accrual of interest from the date of expiration of the agreement until the actual foreclosure.

– Does a law envisage any limitation periods with regard to loan and deposit litigations?

– There is a general rule that the statute of limitations is three years, unless it is extended by mutual agreement. Many banks apply this rule. We always recommend our clients-banks to increase the limitation period to at least five years. Although now banks have become more disciplined, and their lawyers almost never forget to file a suit. There are almost no problems with regard to the special statute of limitations established by the Civil Code for the requirements for a penalty. However, there were some precedents when courts applied Article 232(6) of the Commercial Code, which limits the period of limitation for additional charge of interest and debt recovery to six months. Further, higher courts have repeatedly emphasized that in such cases the rules of the Civil Code shall apply.

The situation gets settled gradually – lenders begin to feel more secure.

– What are the main risks of borrowers and guarantors in the courts?

– They have the same problem – and it is outside the court room: they cannot or do not want to meet their financial obligations to the bank. They have assumed risks either when entering into the loan or guarantee agreement. Thus, what happens in courts is due to the risk occurrence. Both borrowers and guarantors knew about such risks long before they occurred. Another thing is that they might have not taken into account all the factors possibly affecting the actual situation.

As for the purely judicial risks of borrowers and guarantors, I would note that some banks, also with the assistance of some law firms, try to find a criminal element in civil legal responsibility. Given that after approval of the new Code of Criminal Procedure it has become easier to initiate criminal cases (although it is an outdated term and now we are talking about initiation of criminal proceedings), many banks use it. Actually, they used it under the old Code of Criminal Procedure. Criminal procedures quite often involve purely civil, commercial processes when banks claim commitment of fraud by borrowers and guarantors. I cannot say that it is always untrue. There are cases, when borrowers’ fraudulent motives are obvious.

– In your opinion, what are the prospects of dispute resolution between debtors and creditors in 2014?

– Now things are changing greatly in favor of banks. It began already in 2010. Moreover, it is connected with the current trend of acquisition of collection companies owning large credit portfolios, and banks with significant amount “bad”, but collateralized debt. This, in my view, suggests that the professionals close to daily legal practice felt the change in the attitudes of the courts, which increasingly take the side of the banks in disputes with borrowers. I would not treat so single decisions of the Supreme Court, which are widely interpreted as an obvious fight with banks. In my opinion, the situation gets settled, and the lenders begin to feel more secure.
Professionals close to daily legal practice felt the change in the attitudes of the courts, which increasingly take the side of the banks in disputes with borrowers.

– What must be done at the legislative level to make resolution of credit and deposit disputes more successful?

– Talking about what must to be done at the legislative level, you must decide how detailed laws shall be. It is worth remembering that law is a legal act of higher legal force, which regulates only the basic relations in a particular industry. Legal practice gives specific meaning to legislative rules. Therefore, the Supreme Court and the Higher Specialized Court are actually filling law with the content.

Perhaps it would be expedient to make some editorial changes in law on mortgages, law on securing creditors’ claims and registration of encumbrances.

– How serious these changes should be?

– Let’s return to what has been said. For example, the use in court of extrajudicial dispute settlement instruments to collect credit debt is actually legalized only by the Supreme Court. In terms of law on mortgages, debt collection as part of execution of the judgment is carried out through the sale of the mortgaged property at public auction. While another article of the same law envisages that judgment defines recovery method. However, if there is only one recovery method, what’s the point of rule on the possibility of determining such method by court?

Court approached the interpretation of these rules comprehensively. It would be foolish, if the court, which jurisdiction covers all legal relations in the state, did not have the right to satisfy the claim on debt recovery by conversion of collateral into the ownership of pledge holder and it would be possible out of court.

Further, it would be good to improve the rules of the Law on securing creditors’ claims and registration of encumbrances governing foreclosure methods for various types of security.

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