CMS Expert Guide for taking security in Ukraine

Yes, although if governed by Ukrainian law, only in the form of suretyship (which is a secondary obligation dependant on the validity of a principal obligation, with surety and principal debtor being join and several obligors), since a guarantee (being independent of the validity of a principal obligation) can only be issued by a financial institution. If governed by a foreign law, then the guarantee’s specific terms and conditions need to be assessed to verify if issuing the same would be within the capacity of a Ukrainian guarantor. 

Yes.

No regarding suretyship; yes regarding guarantee. 

Yes, but please see the comments in section 4.

Yes, but please see the comments in section 4.

Yes, but please see the comments in section 4.

Financial assistance: a limited liability company (LLC) and joint stock company (JSC) may not provide loans to its participants/shareholders for the purposes of paying any participant's contribution to this company’s charter capital/purchasing of shares during their placement by an existing/new shareholder or granting suretyship securing its participant’s/shareholder’s obligations under a loan to such participant for that purpose from any thirdty party. 

Transfer pricing rules: require that transactions between related parties be conducted on arm’s-length terms, i.e. consistent with what unrelated parties would agree to in a similar transaction. Non-compliance with transfer pricing regulations can lead to tax adjustments and penalties. 

Interested parties’ transactions & major transactions (with a value over 10% of a company’s assets as per the most recent annual financial statement): for LLCs and JSCs subject to limitations and special approval procedures: for LLCs, if any provided in the charter; for JSCs, provided by law subject to deviations provided in the charter. 

If adopted in breach of the set requirements, a transaction may be ratified by a relevant management body following relevant procedure, otherwise it will be at risk of invalidation. 

The written form is mandatory, otherwise a suretyship agreement is void (i.e. invalid from the moment of execution).  

Yes:

• for a suretyship, based on the general principle of civil law of freedom of contract;
• for security (pledge or mortgage), it can secure the monetary claims that may arise in the future, provided there is an agreement between the parties on the maximum amount of secured obligations.

Yes, the validity of a suretyship/security is dependent on the validity of a principal obligation, except for a bank guarantee (or guarantee of another financial institution). If an agreement on a loan from a financial institution is invalidated, while securing it pledge/mortgage agreement would also be invalid, a collateral thereunder may be seized by a court at a lender’s request and used towards amounts awarded by court to be payable by a borrower to a lender following the loan’s invalidation. It is also recommended to have such amounts secured by a pledge/mortgage immediately. 

The indemnity (in the meaning provided under English law) is not foreseen in the legislation but may be recognised if established under a foreign law- governed document.

Yes, but recommended to have a definite term. 

A suretyship terminates on the expiration of its term specified in the suretyship agreement.

If no term is specified, the suretyship terminates on the earlier of full performance of the principal obligation and in three years after the term for the performance of the principal obligation has expired, if the creditor does not bring a lawsuit against the surety. 

If the performance term of the principal obligation is not specified or is determined by the presentation of a creditor’s demand, the suretyship terminates if the creditor does not bring a lawsuit against the surety within three years from the date of the suretyship agreement.

NB: the term of suretyship if determined as being until full performance of principal obligation may be treated as not set, thus it is recommended setting the term of suretyship be reference to a specific date.

Yes, but please note the currency control limitations (section 13) and restrictions regarding ownership of land by foreigners (section 17(k).

These structures are not regulated by law and not expressly recognised, but are commonly used in cross-border transactions, where the same are established under foreign law-governed documents and, given existing court practice, so far have not been challenged successfully.

Unless otherwise provided in the relevant security agreement, a general rule is that security follows the principal obligations and no consent of the debtor is required for a change of the creditor. 

A creditor’s creditor is subject to registration with the relevant register (State Register of Proprietary Rights to Immovable Property (the “Immovable Property Register”) or the State Register of Encumbrances over Movable Property (the “Encumbrances Register” and together with Immovable Property Register “Registers”) as may be done based on debt assignment agreement, although it is recommended (but not required other than regarding mortgage) to sign am amendment agreement to the relevant security agreement to reflect the change of creditor.

General changes to guaranteed/secured obligations – whether or not amendments to or confirmation of guarantee/security is needed depends on scope and nature of changes to the principal obligation and on terms of guarantee/security, including on how broad or specific the description the guaranteed/secured obligations is and what “savings” the provisions state.

Amendments resulting in an increase in a surety’s liability require the surety’s consent, otherwise are covered by the suretyship. The surety’s express prior consent to any increase can be included in the suretyship from the start.

If amendments relate to the terms reflected in the Registers, the latter need to be updated.    

The priority ranking of claims to any excess over the amount of secured obligations reflected in the Registers will be determined when the increase in the secured obligation is registered, based on the then existing records in the Registers.    

Changes to the obligors – if a principal obligor is changed, suretyship/security granted by a third party terminates unless agreed by it, but the security granted by a principal obligor stands.    

Amendments to a notarised security agreement must also be notarised.

The novation of the principal obligation may lead to the termination of the security and needs to be assessed on a case-by-case basis depending on the nature and terms of novation.

Mortgages must be Ukrainian law governed.

Other security agreements may be governed by a foreign law, whose choice: (i) should be recognised and enforced in Ukraine to the extent such foreign law is not contrary to public policy of Ukraine and does not apply to procedural matters or to the choice of remedies to protect or enforce in Ukraine a party’s rights under the relevant agreement BUT (ii) does not limit the effect of any mandatory rules of Ukrainian law, including security enforcement procedures which would apply. In practice, most security documents over assets in Ukraine are Ukrainian law governed.

The submission to foreign courts of disputes concerning a private legal relationship, provided the said legal relationship involves a foreign element (i.e. a non-resident as a counterparty), is not contrary to Ukrainian law and should, in principle, be enforceable in Ukraine. 

The jurisdiction of the Ukrainian courts is, however, mandatory if the dispute is within the exclusive or special jurisdiction/competence of the Ukrainian courts, e.g. relates to real estate property, insolvency of a Ukrainian party or issuance or destruction of securities issued in Ukraine. 

Submission to arbitration is valid and enforceable. In practice, however, proceedings may still be initiated in a Ukrainian court and the other party would need to file a motion to leave the claimant’s court claim without consideration in the Ukrainian court proceedings and refer the dispute to arbitration.

In the absence of a treaty on the mutual recognition and enforcement of court judgments between Ukraine and a relevant foreign jurisdiction, a court judgment obtained in such foreign jurisdiction can be recognised and enforced by a court in Ukraine on the reciprocity basis (in accordance with the Ukrainian rules of procedure; reciprocity is presumed unless proved to the contrary).

Recognition and enforcement of a foreign arbitral award or a foreign court judgment in Ukraine is subject to compliance with relevant enforcement procedures under Ukrainian law and ratified by Ukraine international treaties (including the 1958 New York Convention).

Yes.  

1. Payments from Ukraine abroad by Ukrainian residents are subject to:
   1. an annual limit of EUR 2,000,000 (for businesses and EUR 50,000 for non-business) subject to certain exemptions, including:
      1. performance of debt obligations toward non-resident lenders under loans;
      2. export-import transactions;
      3. performance of obligations under guarantee, suretyship or pledge agreements to the extent payment under secured obligation are also exempted;
   2. special restrictions apply during martial law [link to CMS law-now relevant article to be included]
2. Cross-border loans are subject to (i) notification to the National Bank of Ukraine and recording in its database, which is a pre-requisite to any cross-border payments thereunder; and (ii) compliance with market conditions regarding interest rates and other lending costs, except for cross-border loans from international finance institutions (IFIs);

A contract/deal entered into within  three years before the start of bankruptcy may be invalidated on the following grounds:

• early performance of an obligation;
• undertaking of an obligation that led to bankruptcy or full or partial insolvency;
• a purchase or sale of assets at a below/above price, provided at that time the debtor did not, or ceased to, have enough assets to satisfy its creditors’ claims;
• a purchase (or acceptance in exchange for discharge of obligations) of assets from a creditor at the time when the total sum of the creditors’ claims against the debtor exceeded the value of those assets;
• granting a pledge to secure monetary claims.

On successful invalidation, the relevant creditor must return the debtor’s assets or provide compensation at a fair market price.

Within three months of the start of the debtor’s sanation, the trustee has “cherry-picking” right to refuse to fulfil agreements of the debtor undertaken before insolvency proceedings started, if debtor’s obligations thereunder damage the debtor, or are for more than 1 year or envisage benefits for the debtor only for the long-term, or fulfilling them would prevent rehabilitation. 

The description of collateral must be sufficient for its clear identification. Mortgage is a pledge over immovable property

Yes technically, but only if formalisation/perfection requirements mandatory for any of the assets within the collateral are fulfilled. It’s not common practice. No concept of a floating charge exists, other than pledge of inventory (goods in turnover).

Yes, subject to the same considerations as discussed in section 4 above.

Only a mortgage and pledge of receivables under a notarised contract.

Mandatory for a mortgage, no renewal is required.

Registration of pledges is not mandatory for the validity but required (and recommended) for enforcement against third parties and for setting the ranking and priority determination. Renewal is needed each five (5) years. Unless renewed, the record on encumbrance will be deemed expired and will be removed from the Encumbrances Register in six months after such expiry.

For both mortgages and pledges, amendments to registration are needed if any changes to the information contained in the relevant public register.

Any notarised security must be executed in Ukrainian (and may also be executed in any other language). For non-notarised security, a translation may be needed in practice for registration and will be needed if a security agreement is submitted as evidence in court. A common practice in cross-border transactions is to have Ukrainian law governed security executed in Ukrainian and English (or another foreign language).

Executed in writing and containing mandatory terms provided by law.

Yes. 

Registered security has priority over unregistered encumbrances (even if registered security is created later than unregistered), except for: (i) a pledge a seller has by virtue of law over movables sold on deferred payment terms, which have priority over other earlier registered encumbrances over such movables, if registered within 5 days from the sale and notified by the pledgee to all other registered encumbrancers’ holders; (ii) securities in documentary form transferred to a security holder – the latter has priority over other, even earlier registered, security holders.

The retention right provided by law has priority over other non-registered encumbrances.

The priority of registered encumbrances is determined by the date/time of the registration. The priority of encumbrances over non-documentary securities is determined according to the registration of the encumbrance in custodian system.

Any later changes in the register on the security do not affect its priority, except if the amount of the secured liabilities is increased, so that different priority may be for the claims of amount of increase. A debtor has the obligation to inform a creditor about any prior security over the collateral, otherwise it is liable for compensation. 

The ranking of encumbrances over goods in international turnover is established according to the law of the state where the goods were located at the time of encumbrance’s creation. If the law of such state does not establish requirements for registration of the encumbrance, the encumbrance is deemed to be registered in Ukraine from the moment of its creation provided that it is registered in Ukraine within 30 days from the moment of goods entering the territory of Ukraine.

Establishment of security and level of security regulation is generally:

Security easily established and encumbrances easily checked 

No, in the case of a mortgage and other security agreements required to be notarised.

Ukrainian law governed security agreements (for which a simple written form is sufficient) can be signed in electronic form with qualified electronic signatures (“QESs”) and are deemed equal to written agreements signed with a wet-ink signature. Using standard electronic signature, scanned versions of the wet-signed agreements, click-on agreements is acceptable only if the parties have explicitly agreed to this in writing in any earlier executed agreement and attached the example of their handwritten signatures, with some exceptions.

The market practice is to have the security documents executed by handwritten signatures. 

Yes. The Immovable Property Register and the Encumbrances Register are publicly available and accessible online. Any interested person can obtain information from the registers online or via a notary/registrar.

A security holder or a person duly authorised by it.

Quick, normally within several hours. NB: the operation of the state registers may be disrupted during martial law (restricted access or technical disruptions from time to time). 

Low, notary’s services (usually, up to EUR 50 per extract) + state fee (up to EUR 2 per extract from the Encumbrances Register and EUR 2 per page for the extract from the Immovable Property Register).

Quick, one business day. 

Low, notary’s services (usually, up to EUR 100 per registration) plus state fee (up to EUR 2 per extract from the Encumbrances Register and EUR 2 per page for the extract from the Immovable Property Register).

Low to medium. The fees of a private notary are agreed on a case-by-case basis but usually are around 0.01% of the collateral’s value, which is a fixed fee for state notaries.

N/A.

Yes.

Yes, any non-performance of the principal agreement, as agreed by the parties. 

Yes, any non-performance of the security agreement, as agreed by the parties.

Mortgage- yes:

• on opening of bankruptcy/insolvency proceedings regarding a mortgagor;
• if regarding the debtor (under the principal obligation) the restructuring plan within insolvency proceedings was approved and the mortgagee voted against such plan.

Pledge - yes, on the opening of a bankruptcy/insolvency proceedings of a debtor (ether principal debtor or security provider)

• any other security holder starts enforcement against the same collateral;
• liquidation of a legal entity – security provider (owner of the collateral).  

for mortgage - 30 days from the date of a mortgagee’s notice to a mortgagor & debtor of a breach

for pledge agreements - 30 days, unless a different cure period is agreed by the parties in the security agreement, after the date of the pledgee’s notice on a breach to the debtor (and other security holders regarding the collateral) and registration of such notice with the Encumbrances Registry. Such cure period must be at least: (i) 30 days if an individual (non-entrepreneur) is a debtor or security provider; and (ii) the cure period set by a security holder with higher priority.

Yes. Notarial writ or agreement between the parties (if not already included in a security document), depending on the enforcement method.

Yes, if the parties agreed in a security document or separate agreement.

For a mortgage, the collateral’s value is determined at the time of title transfer based on the independent valuation. The mortgagee is also obliged to compensate to the mortgagor 90% of the excess of the collateral’s value over the secured obligations amount. Title is transferred based on the mortgage agreement as of the moment of state registration. 

For a pledge, the collateral’s value (or the procedure for its determination) for the purposes of enforcement is to be agreed in the pledge agreement. If not agreed, in case of title takeover, the secured obligation is deemed discharged in full (irrespective of whether the collateral value covers the amount of secured obligation). The physical transfer of collateral to a pledgee is required before this enforcement method can be used, unless otherwise provided by law or the pledge agreement.

If title transfer to the collateral is objected by another security holder or debtor the enforcement shall be by way of collateral sale, unless the objecting security holder’s claim is satisfied by the enforcing security holder; or if by a debtor – then title transfer can be though court.

Yes, if parties agreed in a security document or separate agreement.

For a mortgage, the collateral’s value is determined on agreement of mortgagee and mortgagor or based on the independent valuation, otherwise the mortgagee would be liable to other security holders in respect of the difference between the actual sale price and market price. 

For a pledge, the law does not regulate the determination of the price for the sale of collateral, it is therefore recommended to agree the collateral’s value or the procedure for its determination for the purpose of enforcement in a security agreement.

Yes, for notarised security documents only and provided that: (i) the submitted documents evidence the indisputability of the debt; and (ii) no more than three years have passed since the date of the right of claim.

For a pledge of bank accounts, enforcement can be done by way of contractual debiting of the funds by a servicing bank.

Yes, sometimes.

In practice getting physical access to the collateral, including for arranging independent valuation, may be problematic, if the security provider actively prevent the enforcement.

Specific performance (including based on a court ruling) is problematic in practice.

Various practical difficulties due to war in Ukraine. 

Fairly easy, balanced, average (but quick for some types of security, e.g. bank account pledge, receivables). 

No. The laws in this area are rarely changed, and if they are then only to the extent necessary to improve the regulation and remove or regulate properly unclarity/inconsistency revealed during the practical implementation.