Security Trust and Contractual Lien in Ukraine

Ukraine

Wishing to stimulate economic growth and to protect the interests of creditors, Ukrainian authorities have taken a decisive step by introducing novel legal concepts used in developed markets.  In September 2019 Ukrainian Parliament passed amendments to the Civil Code of Ukraine introducing the concept of security trust or contractual lien as a new security instrument for lenders and other creditors.  

On 11 October 2019, the President of Ukraine signed Draft Law No. 132-IX (the “Law”) that establishes security trust as a new security instrument. Security trust is aimed at minimising the security-related risks of creditors, allowing them to get around obstacles with conventional security instruments in Ukraine, such as pledges and mortgages. Upon default, a trustee may sell property under trust ownership without restrictions. Importantly, debtor property under trust ownership is not included in the estate being liquidated; thus, commencement of a debtor’s liquidation procedure must not prevent foreclosure of assets under trust ownership. The Law also provides that the moratorium on foreclosure of residential real estate does not apply to security trust.

In addition to measures introduced earlier, adoption of the Law demonstrates Ukraine’s further commitment to enhancing creditor protection. Security trust is expected to provide creditors with previously unavailable safeguards for their interests.

Nature of Security Trust in Ukraine

Under security trust agreement, the settlor of the trust (debtor) transfers its property to a trustee (creditor) to secure the principal obligation under a credit (loan) agreement. Once trust ownership has become effective, the legal title to the property is transferred to a trustee.

The following are the main features of security trust:

  • it is established until full discharge of the principal obligation;
  • only loans can be secured with security trust;
  • any privately-owned property may be transferred into a security trust (except for securities and corporate rights);
  • security trust may be transferred to a third party that has fulfilled the principal obligations;
  • the settlor of the trust can continue to enjoy the benefits and receive revenues from the property subject to security trust; and
  • the settlor of the trust may use the property but must bear the costs of maintenance and preserve it in good condition, subject to usual wear and tear.

Foreclosure Process

Unless the security trust agreement provides for additional requirements, the trustee may foreclose on the assets:

  • within 20 days from the date of the debtor’s continuing default, if none of its principal obligations have been fulfilled; or
  • within 30 days from the date of the debtor’s continuing default, if a part of a debtor’s principal obligations has not been fulfilled.

The trustee must foreclose the assets under security trust, if any of the below events (or any additional events provided for in the security trust agreement) has occurred:

  • state registration of a decision to terminate the legal entity of the debtor or the settlor of the trust;
  • court decision recognising the debtor or the settlor of the trust as bankrupt and commencing liquidation proceedings;
  • court decision recognising death/incapacity of the debtor; or
  • death of the debtor.

Foreclosure is carried out via the sale of property by a trustee to any third party. Within 30 days prior to entry into a sale and purchase agreement, a trustee must notify in writing a debtor, the settlor or another lawful possessor of the property about the decision to sell it and the minimum price.

To acquire the pre-emptive right to buy the property, a debtor, the settlor or another lawful user of property under security trust should (a) inform the trustee about its intention to buy the property and (b) place the indicated minimal sale price on the notary account. It must be made within five days after receipt of a trustee’s notification, otherwise the pre-emptive right is not provided.

The Law entered into force on 17 October 2019.

For more information on how the Law could affect your business, please contact your regular CMS source or the following local CMS experts: Ihor Olekhov, Anna Pogrebna or Kateryna Chechulina.

Legislation: Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine to Stimulate Investment Activity in Ukraine” No. 132-IX dated 20 September 2019.