Date of publication: 13 July 2018
Vadym Kizlenko, Attorney at Law, Insolvency Receiver
Source: Dzerkalo Tyzhnia
What is an escrow account?
Escrow accounts have been long used in economically advanced countries such as the United States of America, Great Britain, Sweden and Denmark.
In May 2017, Chapter 72 of the Civil Code of Ukraine was supplemented with a new paragraph on escrow agreement. Thus, according to Article 1076-1 of the Civil Code of Ukraine such agreements provide that the bank undertakes to accept and credit to the escrow account, opened in the name of the client (the account holder), money received from the account holder and/or from third parties, and transfer such funds to the person(s) (beneficiary or beneficiaries) indicated by the account holder, or return such funds to the account holder on the grounds stipulated in the escrow agreement.
The Resolution of the Board of the National Bank of Ukraine On Approval of Amendments to Certain Regulatory Acts of the National Bank of Ukraine No. 133 dated 18 December 2017 regulates the issues of operation of such accounts, defines the list of documents required for their opening and sets forth the list of operations that can be carried out on escrow accounts.
Pursuant to the current legislation of Ukraine the escrow agent may be the banking institution only. As to the advantages and disadvantages of escrow accounts I would like to note the following.
Firstly, such agreements will reduce the cash settlements between the buyer and the seller, and therefore will be useful in the context of counteracting the legalization of proceeds from crime within the framework of the current banking regulation. At the same time, banks can impose their own versions of escrow agreements (by analogy with loan agreements, mortgage agreements, etc.).
Secondly, the development of such agreements will allow the attraction of funds to the banking sector. Banks will receive remuneration for the aforementioned transactions, and the sellers or beneficiaries will get more guarantees that they will receive their money, as compared with the direct settlements with the seller.
Additional guarantees for the escrow accounts’ users lie in the fact that the law does not allow the foreclosure and/or seizure of funds kept on escrow account under the obligations of the bank, the account holder or the beneficiary (including in the event of their liquidation). At the same time the foreclosure and/or seizure of the account holder’s or beneficiary’s right of claim against the bank on the basis of the escrow agreement, including the right to claim payment of money (or part thereof) kept on escrow account on the grounds established by the relevant escrow agreement, is allowed.
The escrow agreement may be at any time terminated upon the application of the account holder and only after obtaining the beneficiary’s written consent to terminate such agreement. In the event of termination of escrow agreement upon the application of the account holder and with a written consent of the beneficiary, the account holder and the beneficiary may jointly indicate in the relevant application and written consent that the funds (or part thereof) should be transferred to the account holder and/or the beneficiary or any other person specified by them regardless of the occurrence of circumstances established by the escrow agreement.
In general, the introduction of escrow agreements in Ukraine, including in the field of real estate purchase and sale, is a quite progressive step towards improving the investment climate within the State.