Leave a request

Topical Issues of Case Law on Securing Performance of Obligations

Date of publication: 18 March 2016

Andriy Lytvyn, Attorney at Law

Source: Jurist & Zakon

In the past two years, Ukraine has experienced significant political and economic turmoil that influenced financial and banking systems of our country very much. As a result, to date liquidation procedure has been applied to 65 banks. Each debtor must realize that introduction of temporary administration or liquidation procedure of the bank is not an escape from recovery of its debts as banks, which are subject to these procedures, will try to return the money, which was used to extend credit, by all means.

It is worth recalling that the temporary administrator or liquidator of most banks is the Deposit Insurance Fund, which usually delegates its powers to the authorized person of the Fund. One of the purposes of application of such procedures and appointment of authorized persons is minimization of expenses of the Fund and at least partial refund of money used for making payments to the depositors of insolvent banks. Under these conditions, a great number of legal issues regarding practical application of types of collateral, such as pledge and surety, remains valid.

1. Considering the above, quite interesting seem the conclusions made by the Supreme Court of Ukraine regarding security of property rights to the deposit and assignment of the right of claim in the resolutions No. 3-669гс15 of 04.11.2015, 3-670гс15 of 21.10.2015, 3-198гс15 of 03.06.2015, especially because the mortgagee in these cases was an insolvent bank.

Thus, in the above resolutions the Supreme Court of Ukraine noted that in the case where the mortgagee in credit legal relationship did claim invalidity of the agreement on assignment of the right of claim under the deposit (assignment) agreement, the conclusion of the court on violation of terms of the pledge agreement with alienation of the right of claim under the deposit agreement is wrong, because it contradicts the principle of optionality. In case of alienation of a pledged item, its transfer for use to another person, or its disposal in other way the right of the mortgagee becomes violated. Therefore, it is the mortgagee who has the right to appeal to the court against the acts committed with the pledged item without his consent according to the grounds envisaged in Articles 203 and 215 of the Civil Code of Ukraine. If a pledge agreement is available, a person may file a claim on invalidation of the agreement on assignment of the right of claim only it he it did not know or could not know that the property, the right of claim to which is assigned, is pledged.

Thus, lack of awareness of the pledgee of transfer by the debtor of the pledged item under the assignment agreement to another person is not the grounds for invalidation of the assignment agreement. Such agreement may be declared invalid on the basis specified only if the claim is filed by the pledgee, whose rights were violated. Thus, if you were in a similar situation or know about such a possibility, I advise you to make sure that the pledgee does not cease its existence, and if possible to establish contact with him and ascertain that there is no possible conspiracy between him and the “assignor” (initial creditor).

2. Regarding mortgage of property rights to the construction in progress, taking into account resolutions of the Supreme Court of Ukraine No. 6-1502цс15 of 02.12.2015 and No. 6-1732цс15 of 02.12.2015, you should pay attention to the date of mortgage of property rights to such object. Property rights to the construction in progress were classified as the mortgaged property pursuant to the Law of Ukraine “On prevention of influence of the global crisis on development of construction industry and housing construction” of 25.12.2008, which introduced the relevant amendments to the Law of Ukraine “On mortgage”.

If the agreements on mortgage of property rights to the real estate construction in progress were concluded before introducing the above amendments in the Law of Ukraine “On mortgage”, they will be considered concluded in breach of the law, and, thus, the relevant paragraphs of such agreements shall be declared invalid.

3. Regarding such type of securing performance of obligations as surety, especially important is the question of term of filing a claim to the surety as a possible position in defending his interests in a loan dispute, because banks have problems with monitoring of such terms. Resolutions No. 6-53цс14, 6-125цс14 and 6-6цс14 of 17.09.2014 the Supreme Court of Ukraine made a legal conclusion that in the second sentence of part 4 of Article 559 of the Civil Code of Ukraine the phrase “filing a claim” to the surety within six months from the date of maturity of the principal obligation as a condition of validity of surety should be understood as filing by the creditor in the manner prescribed by law within the specified term of the claim, and not any other demand, to the surety. However, the said provision does not exclude the possibility of filing by the creditor to the surety of another written demand for repayment of debt for the debtor, but even in this case, the creditor may file such a claim to the court within six months from the due date of performance of the principal obligation.

Considering the above and conclusions of the Supreme Court of Ukraine in its resolution No. 6-48цс11 of 21.05.2012 that the condition on termination of surety after a full performance by the borrower of its obligations under the credit agreement (and in due time quite many surety agreements with this particular wording regarding the term were concluded) can not be considered as the set term of termination of surety agreement, there is a real opportunity to apply the above conclusions of the Supreme Court of Ukraine to a large number of surety agreements.

4. As you can see, in matters of term of the surety agreement legal practice is on the side of the surety. However, some judges of the Supreme Court of Ukraine in the dissenting opinions presented logical objections to the legal position stated in the above resolutions. In particular, they reasonably noted that pursuant to the articles of the Civil Code governing surety it is clear that the meanings of the concepts of “claim” and “lawsuit” are different and can not be identified, and that the Civil Code of Ukraine does not envisage a reduced term of limitation of action for filing claims to the surety in case of default of loan liability by the debtor if its term is not set forth in the surety agreement.

Unfortunately, the procedural law sets forth the duty of courts to take into account only the conclusions stated in resolutions of the Supreme Court of Ukraine, rather than those made by the judges in dissenting opinions. Although, if you are lucky, a useful provision of the law will be the provision stipulating that the court has the right to withdraw from the legal position stated in the conclusions of the Supreme Court of Ukraine with simultaneous indication of the appropriate reasons (part 1, Article 11128 of the Code of Commercial Procedure of Ukraine).

An interesting quote from the dissenting opinion of S.V. Shevchuk, a judge of the Constitutional Court of Ukraine, to the conclusion 1-в/2016 of 20.01.2016: “Dissenting opinion of a judge who agrees with the decision of the majority, but believes that his position shall be stated in a dissenting opinion, is an important instrument of dialogue about the pressing issues in a democratic society”.

5. In addition to the above, it is worth mentioning the cases when “surety” is identified with “the property surety provider”, and the parties try to apply to the property surety agreements provisions of the legislation regulating the relations of surety. In this regard, attention should be paid to the conclusion of the Supreme Court of Ukraine in its resolution No. 6-109цс14 of 17.09.2014, where the court clearly stated that pledge (mortgage) and surety are different types of security of performance of obligations, so the rules governing surety (Article 553-559 of the Civil Code of Ukraine) do not apply to legal relations between the creditor and the property surety provider.


Summarizing the above, it should be noted that the practice of applying types of security of performance of obligations in Ukraine does not stand still, develops and reflects legal relations that become relevant depending on political and economic processes in Ukraine.