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Partner, Head of Litigation practice, Integrites ILF
Senior Associate, Integrites ILF
Address: 1 Dobrovolchykh Batalioniv Street, Kyiv, 01015, Ukraine
Tel.: +380 44 391 3853
Fax: +380 44 391 3854
INTEGRITES has a solid network of operating offices in the CIS (Kyiv, Moscow, Almaty, Astana, Karaganda, Aktau, Atyrau) supported by an international office network in London, Munich, Amsterdam and Guangzhou. The firm offers its clients complex legal advice in the CIS region. In 2016 The Lawyer recognized our work in the CIS with the award “Law Firm of the Year: Russia, Ukraine and the CIS.”
We provide legal services for our world-known clients: Rabobank International, EBRD, VTB Bank, ProCredit Bank, Mitsubishi Group, Concern Toyota, Agrogeneration S.A., Credit Agricole, Nestle, COFCO Agri, LTk Capital, Dragon Capital, ADM, Louis Dreyfus Company, Soufflet Group, Сredit Agricole, Burisma, Aspen Pharmacare Holdings Ltd., Shell, DuPont, Bank of China, DHL, China Development Bank etc.
Main industries: Agribusiness, Capital Markets, Construction and Land, Energy and Natural Resources, Information Technologies, Medicine and Healthcare, Telecommunications.
Main Practices: Antitrust and Competition, Banking and Finance, Bankruptcy, Corporate, M&A, Criminal Law and White-Collar Crime, Intellectual Property, International Arbitration, International Trade and Trade Remedies, Labor and Employment, Litigation, Real Estate, Retail, Tax.
Our firm is also represented by international offices:
11 43 Bedford Street,
WC2E 9HA, London, UK
Tel.: +44 207 788 7903
Block C, Moskva-City
Moscow, 123317, Russia
Tel.: +7 495 660 50 70
SUCCESS Business Center,
1/1, Zhandossov St.,
Republic of Kazakhstan
Tel.: +7 727 352 80 83/84
80539, Munich, Germany
Tel.: +49 892 030 061 50
R&F Ying Sheng Plaza,
MaChang Road 16,
Tel.: +86 185 0204 0880
1016 BX Amsterdam
Tel.: +31 20-5219367
General Overview and Main Threats for Effective Debt Recovery
It is a well-known fact that a court victory in favor of an aggrieved party is not enough to truly restore the violated rights of the latter. The excitement of victory will soon be replaced by routine work with a view to enforce a particular court decision. Enforcement proceedings are currently of especially high interest for Ukraine as court decisions are in general not fulfilled voluntarily by the party that is in breach.
Since in Ukraine legal awareness is relatively low and access to civil remedies is open, the pressure on the court system is huge. It leads to a situation when a considerable number of decisions are supposed to be executed by compulsory means.
It is worth mentioning that the means for compulsory execution are provided mostly for recovery of debts and related issues. Court decisions with non-property mandatory provisions are binding by its nature and ensured by criminal prosecution in case of its malicious disregard.
Until recently the legal basis for the procedure was provided by the Law of Ukraine No. 606-XIV On Enforcement Proceedings, which stipulated the terms and conditions for compulsory execution, as well as powers and restrictions for authorized public officials. According to the provisions of the law, an enforcement proceeding as final stage of the delivery of justice was considered as a state monopoly and which is to be performed only by the State Enforcement (Bailiff) Service of Ukraine.
However this approach proved to be ineffective and was accompanied by an enormous amount of incoming complaints both from businesses and watchdog organizations. Statistics provided by the Ministry of Justice of Ukraine confirm that the rate of executed court decisions is lower than 30% of the total. Moreover, it is quite an optimistic estimate, since according to unofficial data it’s no higher than 10%.
This is due to a number of reasons. A part of them is quite objective. The sheer number of writs of execution, insufficient government funding and shortage of staff. Yet, a great part of the responsibility lies on the State Enforcement Service. The absence of transparency, inaction and unwillingness to meet the deadlines specified by the legislation to perform enforcement actions make an enforcement proceeding inconvenient for the creditor.
Another specific problem is dishonest ways of doing business and limited powers of the enforcement officials, which allow the hiding or transferring of assets promptly from the borrower to the affiliated entity even before the Enforcement Service is able to seize assets and impose other restrictions.
Brief Overview of Remedies in the Framework of Enforcement Proceeding
In order to initiate the enforcement proceeding, an enforcement writ of commercial court along with an application shall be filed with the Enforcement Service. A person on whose favor the court decision shall be executed is entitled to file an application within three years from the date of issue of the enforcement order.
The creditor has the right to include in the application information about the debtor’s bank account(s) and other property which belongs to it and should be arrested in order to secure an enforcement proceeding. In this case the seizure of assets and funds should be performed on the day after the above-mentioned information was obtained.
If no information about bank accounts is provided, enforcement officials shall request information about the existence of the debtor’s bank and deposit accounts from the tax authorities.
The creditor has the right to choose a place of execution of enforcement proceeding: it shall be either the place of the debtor’s location or location of the debtor’s property. The procedure itself shall be commenced on the next day after proper submission of an application in that respect.
In the event the debtor’s assets are insufficient to execute a court decision in full, the enforcement officials shall levy mandatory execution upon the debtor’s funds in hryvnias or in foreign currency, including bank accounts and deposits in the first place. Secondly, execution shall be levied upon the debtor’s moveable and immovable property. The debtor has the right to suggest which property should be collected first. As a general rule, assets that are not used directly in manufacturing shall be sold in the first place. Starting from 30 September 2016 all sales shall be performed by means of electronic auctions via web-site https://setam.net.ua/. Thereafter, real estate and equipment, principle assets, raw and other materials intended for use in production will be sold. All sales proceeds shall be directed to cover outstanding debt subject to recovery under a court decision, enforcement fees and procedural expenses.
In case property was not sold at auction, its initial price shall be reduced by 15% for real estate and 25% for movables and an additional auction shall held. If the additional auction was also unsuccessful price shall be further reduced by 15% for real estate and 25% for movables and third auction shall be held. If the property remains unsold, the creditor has the right to keep the property on account of debt repayment.
Latest Changes and Anticipated Impact on the Enforcement Procedures
On 2 July 2016, two laws aimed at improving and reforming the enforcement proceeding were adopted, namely the Law of Ukraine No. 1404-VIII On Enforcement Proceedings and the Law of Ukraine No.1403-VIII On Authorities and Individuals Carrying Compulsory Enforcement of Court Decisions and Decisions of other Authorities.
Most of the provisions of the abovementioned laws came into force on 5 Octo-
ber 2016, with some exceptions related to procedural and organizational matters. In general, the procedure itself and stages of compulsory execution were left without significant changes. Most of the novelties deal with elimination of legislative gaps, efficient methods of control over the correctness of the enforcement proceeding and establishing private enforcement officers — an alternative to the traditional State Enforcement Service of Ukraine.
Private enforcement officers have the same powers as state officers but with some exceptions. In particular, decisions rendered against the state, state companies and legal entities, decisions of administrative courts and the European Court on Human Rights shall be enforced only by the State Enforcement Service of Ukraine.
According to estimates by the Ministry of Justice of Ukraine, private enforcement officers won’t start until the second half of 2017 due to qualification procedures. This approach is expected to bring competiveness and cut the workload of public officials. Besides, private enforcement officers are expected to be more motivated and result-oriented as their fee is correlated to the amount of debt actually collected.
A part of the truly necessary amendments relates to substitution of paperwork by the Electronic System of the Enforcement Proceedings which is expected to become a platform for performance and storage of all documents in the course of proceedings. That should enable indication of issuing dates of the documents together with information regarding the dates of dispatch and receipt of correspondence. As a result, impartial control over enforcement proceeding shall be ensured.
Online interaction between fiscal, enforcement bodies and officials authorized to register property rights and restrictions was another urgent problem that needed solving. Under the adopted amendments, enforcement officers should be provided with direct access to official state databases and registers to obtain information on debtors’ assets, income and funds (including confidential information) and shall have the right to register the imposition and removal of arrests by themselves.
With the aim of making information about commenced enforcement proceedings publicly accessible, the Unified Register of Debtors was launched. However, it is focused on the future and shall contain information only about the procedures started after 5 January 2017. Records shall prevent performance of transactions regarding a debtor’s property by notaries and/or state registration authorities.
Another part of the amendments was aimed at reducing the discretionary powers of enforcement officials and provide straightforward scenarios for them. Some of the lapses that have been eliminated related to determination of specific terms within which certain actions can be taken and stipulation of the exhaustive list of grounds for suspension of proceedings. The above-mentioned lapses often triggered undue performance of obligations by enforcement officers.
In order to guarantee the commencement of the enforcement proceeding, the creditor is obliged to pay in advance for monetary claims 2% of the debt but not more than 10 minimum salaries (not more than UAH 32,000 from
1 January 2017).
The amended Laws are expected to create a strong legal basis for the efficient execution of court decisions and protection of creditor rights. Execution of court decisions is the final stage of delivery of justice and its success is crucial to convince creditors that the whole litigation process wasn’t a waste of time. We are pinning our hopes on the institute of private enforcement officers as an efficient and prompt instrument on the path of modernization of enforcement proceedings in Ukraine.