Date of publication: 7 August 2015
Maksym Kopeychykov, Partner
Banks continue to experience a shortage of liquidity and experts predict that they will get hard on their debtors, especially large corporate ones. In anticipation of a new wave of conflicts between creditors and large borrowers Kontrakty consulted Maksym Kopeychykov, Partner at Ilyashev & Partners Law Firm, how to resolve protracted disputes with minimum losses for both parties.
K: The priority of many banks in the next six months is to work with troubled corporate debt. How often do clients-banks address you on such issues?
Maksym Kopeychykov: In the current economic conditions, it is a quite natural focus in the work of the bank. Such resorts to Ilyashev & Partners have been permanent for the last 7 years. It proves that work on collecting of bad debts is conducted regularly. Careful attention of financial institutions to corporate debtors is most likely caused by the fact that very often formally secured corporate debt actually turns to be a “dummy”, when the value of the borrower’s assets that serve as collateral for the loan is obviously overestimated, or there are no assets at all.
K: You want to say that banks grant loans not quite correctly?
Maksym Kopeychykov: Formally – correctly, informally –corporate borrowers are often given loans for ridiculous collateral. Thus, bankers often underestimate the problem of inadequate collateral not only when reporting to the regulator, but also for themselves. Therefore, a prerequisite for effective work with corporate bad debt is not only the correct application of penalties provided by the legislation, but also an adequate assessment of corporate debt portfolio.
K: Is extrajudicial resolution of corporate debt related issues possible? If so, do you have a successful experience of such resolution? What do you recommend to your clients?
Maksym Kopeychykov: Issues of bad debts are often settled out of court. It happens when there is an understanding between the borrower and the bank. Often, pre-trial settlement takes place on the initiative of the borrower, because it is profitable for the bank not to change the conditions of lending, keeping things as they are, getting the same amount of interest and changing nothing in the financial statements. With regard to the citizens some banks periodically announce “repayment holiday”, offer various restructuring programs. With respect to corporate borrowers, as a rule, the conditions are negotiated individually.
Fortunately, our clients meet their obligations, including to the banks, and I do not remember any of them to attempt to challenge loan or guarantee agreements. In addition, most banks are able to conclude agreements, and it is much better and cheaper to come to a mutually beneficial solution.
K: What percentage of cases of return of bad debts is resolved out of court?
Maksym Kopeychykov: Such statistics is not available, and probably it cannot be available in the general sense. Each financial institution has own percentage of pre-trial settlement. Generally speaking, it depends on the policy of the bank. If a bank adhered to a conservative lending policies, the number of disputes is generally lower, and the probability of pre-trial settlement is much higher. If bankers were chasing the pace and volume, the corresponding figure is many times lower. The correctness of statistics there may be only in the context of individual banks, but bankers disclose such statistics quite rarely.
K: How often do banks resort to such solution of the problem as bankruptcy of the borrower-legal entity? Is it the only correct decision, or the bank and the borrower can still find a compromise?
Maksym Kopeychykov: From the point of view of classical banking activity it is not beneficial for the financial institutions to initiate bankruptcy of the enterprise-debtor, bankruptcy is a tool to protect the borrower. However, there are precedents of initiation of bankruptcy of borrowers-legal entities in the Ukrainian market, and there are a lot of them.
As a rule, the bank and the borrower can find common ground and agree on restructuring, especially if the debtor’s business activity is not terminated, and it has a steady cash-flow. However, I will not open a big secret if I say that there are banks that are part of FIGs with aggressive policy against debtors, and in this case compromise is virtually impossible. In such cases, a bank will prefer to gain control of the assets through imposition of enforced collection.
Financial institutions, which carry out classic banking activities, initiate the process of bankruptcy of debtor-legal entity only in cases of emergency, when the possibility of repayment or restructuring of bad debts is completely lost, or the borrower took the position: “I will not agree with anyone about anything”. The reason is simple – in most cases it is quite problematic to gain estimated value for the pledged or mortgaged assets, especially considering the decline of the market and business activity.
Bankruptcy of a borrower is an extreme measure for banks with foreign capital, while banks with the Ukrainian or Russian capital are less sensitive to borrowers, but this is due not only to the peculiarities of the domestic banking business, but also by a lower quality of borrowers and willingness to use questionable instruments to withdraw property from the pledge and avoid execution of obligations to banks.
K: Court decides in favor of the lender and requires the borrower to return the collateral and a certain amount. How complicated it is to gain ownership. Why many court decisions remain unperformed?
Maksym Kopeychykov: Bank receives ownership of the debtor’s assets from the date when the court decision comes into force, with the exception of rights to real estate, which arise from the moment of state registration. This legal re-registration of the right of ownership does not always guarantee a de facto control over the debtor’s assets. Lawyers are rarely engaged in such matters – as a rule, it is taken on by bank “bad debt specialits” or collectors. The banks, which are clients of Ilyashev & Partners, experience no great difficulty in obtaining effective control over the assets subject to enforced collection.
K: What can a bank do if a bankrupt has insufficient collateral to repay debt?
Maksym Kopeychykov: Cases when collateral is insufficient to meet the requirements of the bank are very common. Naturally, the bank as the lender has the right to satisfy its claims on a par with other creditors for other assets of the borrower, but it often happens that there is no other property, and some claims remain outstanding.
K: Some borrowers are surprised: I took loan for construction of a building and upon the security of other three buildings; I did not finish the building, but returned it to the bank. However, the bank takes all the property. Who is right in this case?
Maksym Kopeychykov: In case of default the bank has the right to recover the pledged property of the debtor. And if value of the collateral does not cover the amount of debt, the bank can satisfy its claims by any other assets of the debtor. Currently, some deputies propose to adopt the law stipulating that the borrower must be responsible to the bank only by the pledged assets. It means that the bank must take the collateral and not to make any claims to the borrower. The only pity is that the guardians of the borrowers do not specify where the banks should get the money to cover losses if such law is approved. Probably, as usual, they count for “the rich Pinocchios” – owners of substantial shareholding in the banks.
As regards application of the said rule to the loans and collaterals that will be granted after the law enters into force may be such practices may strengthen discipline. Banks will be interested in more serious determination of the list of pledged assets and its actual value.
Application of such innovations to the effective loan agreements will lead to collapse of the market. If someone wants to kill the banking system of Ukraine, it is the best way.