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Financial Restructuring: Ukrainian Recipe

Financial Restructuring: Ukrainian Recipe

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An unfavorable global financial crunch has affected the Ukrainian banking system. The continued growth of the share of distressed loans in portfolios of Ukrainian banks in recent years ultimately resulted in a number of sonorous bank defaults and, eventually, in the unprecedented nationalization of the largest Ukrainian national bank, Privatbank. According to the National Bank of Ukraine, in August 2017 over 60% of loans in the Ukrainian banking system were non-performing. This resulted in a permanent crisis in liquidity for Ukrainian businesses and a large number of significantly overdue loans. In response to this situation, in 2016 a unique dispute settlement mechanism for creditors and debtors was implemented to provide for financial restructuring of bad assets. 

This dispute settlement mechanism is unique since it combines the elements of mediation and arbitration, recovery possibilities for the claims of several lenders, short review timeline, and more ways to find a restructuring model that satisfies all parties. The specifics of the procedure involve three bodies (the Secretariat, the Supervisory Board, and the Arbitration Committee) empowered with control over the restructuring and each acting, at different phases of the proceedings, as sole intermediary between banks and borrowers. 

The financial restructuring procedure consists of a number of legal instruments: (1) the  financial restructuring procedure will be initiated based exclusively on a debtor’s application and upon consent of defined (involved) creditors and will be based on the agreement with the financial  institutions where the amount of claims before the debtor amounts to not less than 50% of the total amount of claims of the financial institutions; (2) debtor’s receivables that can be restructured are rather broad and include the principal amounts of debt, financial sanctions that have arisen both on a contractual basis and under current legislation, including taxes, fees and other obligatory payments to the state; (3) no minimum amount of the debtor’s obligations it required to initiate a financial restructuring procedure, as submission of information on the full scope of the debtor’s obligations in the context of key creditors and/or their groups is mandatory; (4) automatic implementation of a moratorium – effective from the day the financial restructuring procedure is initiated through its completion (up to 90 days, maximum not more than 180 days) – that will be effective for any claims submitted by persons related to the debtor and will not apply against the claims of creditors that are not the involved creditors; and (5) during the financial restructuring procedure an independent expert is engaged to inspect the debtor’s financial and economic activities and provide a report which will serve as a guarantee of objectivity in determining the debtor’s financial condition. While checking the operational, financial, legal, and other aspects of the debtor’s activities, an independent expert can draw a conclusion that the debtor’s economic activities will improve. In this case, the financial restructuring procedure will be completed.

It is worthwhile to highlight the speed of decision-making that is a significant advantage of the financial restructuring procedure. The total performance period of the financial restructuring procedure may not exceed 180 days.   

The law also states that the creditors will be allowed to develop and approve a financial restructuring plan. In case of no unanimity in the review of this plan, a special arbitration mechanism is foreseen, which will come into force within a maximum short timeline: a resolution will be made available within 14 days. 

During the financial restructuring procedure the debtor’s tax debt will be restructured as well, but special rules will be employed to determine the tax base for debtors and creditors where tax differences will be applied. Therefore, certain loans will be classified as non-performing loans and written off by the controlling bodies. 

The financial restructuring is aimed at those businesses that actually remain at the bankruptcy stage in connection with a current NPL portfolio with banks. The importance of financial restructuring for such entities is related to the opportunity to reissue the majority of overdue loans and formulate the methods for improving the efficiency of doing business and obtain a higher market value of assets.

By Yulia Atamanova, Counsel, LCF Law Group, Ukraine

This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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