Loan disputes update: the most notable Supreme Court decisions from the first half of 2016

The economic crisis that hit Ukraine in 2014 predictably caused a surge in loan disputes and those related cases involving mortgage, pledge and guarantee obligations. Unfortunately, the Ukrainian courts initially failed to provide a uniform interpretation of the relevant legislation and often delivered contradictory decisions.

The situation has improved, however, with new legislation, which increased the Supreme Court’s powers to review the decisions of lower courts and to provide final judgements, as well as binding interpretations of the applicable law. As a result, the Supreme Court’s caseload has increased tenfold over the last year, and extensive new case law has been created.

In this update, the CMS team offers a selection of the positions made known by the Supreme Court in the first half of 2016. These may be useful for any specialist involved in the finance, banking and restructuring fields in Ukraine.

1. Disputes between a bank and a physical person (consumer) cannot be resolved by arbitration (third-party courts). This stems from amendments to the Law “On Third-Party Courts,” which became effective on 12 March 2011. The Supreme Court established that the rule covers not only new loan contracts, but also contracts entered into before 12 March 2011. Accordingly, any third-party court decisions made after this date cannot be enforced by the courts. This means that these disputes are now subject to re-litigation in courts. This decision may have a considerable impact on the portfolio of many Ukrainian banks, which previously included the arbitration clause in their loan agreements by default (SCU decision in case No. 6-2630tss 15 dated 03 February 2016).
2. A creditor is entitled to request, in one single claim, enforcement of the principal obligation under the loan agreement (i.e. payment of the debt) and collection of the mortgage. Before this, Ukrainian commercial courts had developed a doctrine whereby ordering enforcement of the principal obligation and collection of the mortgage by one court decision and through one court order would constitute so-called “double collection” and therefore could not be granted. This doctrine substantially delayed enforcement proceedings, as the creditors had to go through two consecutive litigation procedures claiming separate enforcement of the principal obligation and collection of the mortgage. The Supreme Court’s decision put an end to this doctrine and therefore streamlined court proceedings involving mortgages (SCU decision in case No. 6-1080tss 15 dated 03 February 2016).
3. Termination (dissolution) of a debtor company under a loan agreement does not terminate the mortgage agreement with a third party mortgagor, provided that the creditor filed its claim for collection of the mortgage before debtor termination occurred. As a general rule a mortgage agreement is, just like almost any other agreement, terminated due to the dissolution of a party to the agreement. Consequently, the mortgage agreement, as a secondary agreement to the loan agreement, is terminated upon dissolution of the principal loan agreement. However, the Supreme Court stated that, in cases where a court procedure for collection of the mortgage has been initiated before a debtor under the original loan agreement was terminated, the third party mortgagor’s obligations towards the creditor survive the dissolution of the original creditor (SCU decision in case No. 6-216ts s 14 dated 10 February 2016).
4. Where the amount in a loan agreement between a Ukrainian bank and a Ukrainian borrower is denominated in foreign currency, the bank may claim conversion of the debt into national currency (Hryvnia) as of the day of the court decision. Some courts, including cassation courts, had previously stated that the conversion had to be calculated as of the day of payment given in the loan agreement. As Ukrainian local currency fell three-fold during 2014 and 2015, the difference between the Hryvnia amount collectable and the amount defined according to the date given in the loan agreement could become quite substantial. This Supreme Court position reflects its continuing pro-bankers policy in favouring loans denominated in foreign currency, following on from the famous 2011 decision whereby the Supreme Court overturned a cassation court’s decision on the invalidity of loans between Ukrainian residents denominated in foreign currency (SCU decision in case No. 6-1680tss15 dated 10 February 2016).
5. Claiming complete early repayment of the loan triggers the running of the term of limitation. Payments made to the creditor in the course of liquidation proceedings against the borrower cannot be used as grounds for extension of the term of limitations (in contrast to cases where debtors make such payments voluntarily). SCU decision in case No. 6-1707ts15 dated 02 December 2015.
6. The issuance of a writ of execution by a court does not stop the running of the term of the loan agreement, and, accordingly, does not stop accrual of interest. A defaulting borrower is obliged to pay the principal amount of the loan, the regular interest on the loan amount and all penalties and compensations calculated as of the date of actual payment/collection of the principal amount. Until the SCU decision, some courts treated a court judgement on collection of the loan amount as the event that terminates obligations under the loan agreement (SCU decision in case No. 6-157ts s 16 dated 25 May 2016).

It is important to remember that the Supreme Court’s decision to overturn previous cassation court case law enables parties to request re-consideration of the previous decisions made in similar cases (within a certain time limit). Accordingly, even if your loan dispute in Ukraine has been concluded by a “final” decision from a cassation court, it is advisable for you to review the case to identify options where unfavourable decisions can be reconsidered or to indicate where there is a risk that favourable ones could be reversed.

To discuss how the recent Supreme Court’s decisions affect your pending or potential loan enforcement proceedings in Ukraine, please contact Anna Pogrebna or Taras Tertychnyi.