Defensive measures available to borrowers in Ukraine during the COVID-19 outbreak

The Cabinet of Ministers of Ukraine has announced the introduction of quarantine in Ukraine from 12 March until 24 April 2020 to prevent the spread of COVID-19¹. Since the quarantine regime imposes significant restrictions and limitations on business activity within the country, the government of Ukraine has introduced several defensive mechanisms to mitigate the adverse consequences of such restrictions.

As observed from data prepared by the International Monetary Fund (the “IMF”), protection of the rights of borrowers plays a crucial role in state policies of different countries².

Key issues:

  • Prohibition of interest rate increases under loan agreements
  • Removal of liability for consumer loan delinquency
  • Restructuring non-performing consumer and corporate loans

1. Prohibition of interest rate increases under loan agreements

On 17 March 2020, the Verkhovna Rada of Ukraine (the “VRU“) adopted the Law of Ukraine No. 533-IX “On Amending the Tax Code of Ukraine and Other Laws of Ukraine to Support Taxpayers During the Implementation of Measures Aimed at Preventing the Emergence and Spread of Coronavirus Disease (COVID-19)” (the “Law No. 533-IX“).³ The Law entered into legal force on 18 March 2020 and prohibits increasing the interest rate of non-performing loans for reasons other than those provided for in part 4 of Article 1056-1 of the Civil Code of Ukraine (the “CCU“).

For example, the CCU allows a lender to increase the interest rate on a loan in cases where a variable interest rate was determined by the loan agreement. Therefore, the prohibition imposed by the Law of Ukraine No. 533-IX is not absolute and does not prevent lenders from increasing interest rates in particular situations.

On 30 March 2020, the VRU passed the Law of Ukraine No. 540-IX “On Amending Certain Legislative Acts Aimed at Providing Additional Social and Economic Guarantees Due to Spreading of the Coronavirus Disease (COVID-2019)” (the “Law No. 540-IX“)⁴, which strictly forbids increasing the interest rate under loan agreements during quarantine.

Since the Laws No. 533-IX and No. 540-IX overlap, even minor wording inconsistencies may trigger situations where lenders will seek to apply Article 1056-1 of the CCU to increase interest rates and collect fines.

The Law No. 533-IX provides that a consumer must be released from financial liability (e.g. forfeit penalties, fines) for loan delinquency, if the non-performance occurred between 01 March and 30 April 2020.

2. Removal of liability for consumer loan delinquency

The Law No. 533-IX provides that a consumer must be released from financial liability (e.g. forfeit penalties, fines) for loan delinquency, if the non-performance occurred between 01 March and 30 April 2020.

This rule also applies to a wide range of consumer loans defined by the Law of Ukraine No. 1734-VIII “On Consumer Lending” (the “Law No. 1734-VIII“).⁵ According to subparagraph 11 of paragraph 1 of Article 1 of the Law No. 1734-VIII, a consumer loan means funds provided to the customer (borrower) for purchasing goods, works or services unrelated to business activity. However, the Law of Ukraine No. 533-IX maintains liability for loan delinquency in specific circumstances envisaged by paragraph 2 of Article 3 of the Law of Ukraine No. 1734-VIII, in particular:

  • loans granted under contracts that were negotiated as a result of the conclusion of a court-approved settlement agreement;
  • loans granted exclusively within the framework of relevant state or local government programs to certain individuals and envisage specific terms and conditions of lending defined by such programs, including the payment of interest;
  • loans provided by pawnshops in case of transfer of the pledged property to the pawnshop for safekeeping provided that the obligations of the consumer are limited to the value of the pledged property, etc.

It is worth noting that that the removal of a borrower’s liability for loan delinquency as described above applies to all consumer loans regardless of the time that such agreements were concluded, except in the aforementioned exceptional circumstances.

3. Restructuring non-performing consumer and corporate loans

In order to comply with the requirements of the Laws No. 533-IX and No. 540-IX, the National Bank of Ukraine (the “NBU“) has passed two resolutions, which, inter alia, regulate the restructuring of loans. As defined in paragraph 1 of Article 17 of the Law No. 1734-VIII, restructuring of non-performing consumer loans most likely will trigger a change of the essential terms of consumer loans that will adversely affect conditions and/or procedures for the repayment of such loans.

The Resolution of the NBU Board No. 46 “On Peculiarities of Application of the Requirements Set by Certain Legal Acts and Amending Certain Legal Acts of the National Bank of Ukraine relating to the Quarantine and Introduction of Restrictive Measures” dated 03 April 2020⁶ allows banks in certain circumstances to utilize long and short-term restructuring instruments during the quarantine and up to 30 September 2020 without affecting their regulatory capital buffer. However, not all borrowers are eligible for such restructuring.

Distressed loans will be restructured individually taking into account the debtor’s recent financial statements, current financial situation, business vulnerability to the existing economic crisis and recovery prospects.

Specific restructuring requirements are set forth in the Resolution of the NBU Board No. 39 “On the Peculiarities of Application of the Requirements Set by the Regulation on Defining the Amount of Credit Risk in respect of Active Banking Operations Due to the Introduction of Restrictive Measures” dated 26 March 2020 (the “Resolution No. 39“). Moreover, it is also stated that according to the Resolution No. 39 banks should not categorize loans as delinquent if all of the following conditions are met:

  • loan restructuring was in response to financial difficulties caused by the quarantine regime and the introduction of restrictive measures;
  • loan restructuring takes place for payments falling due in the period from 12 March to 30 September 2020;
  • in the case of short-term loan restructuring, repayment is extended no later than 01 August 2020;
  • the bank’s assessment of the borrower’s business concludes the borrower will be able to meet the restructured terms;
  • changes related to loan restructuring do not reduce the net value of expected cash flows by more than 10% as compared to contractually agreed terms.

Moreover, the NBU has clarified possible restructuring mechanisms that could be applied by Ukrainian banks in its official letter dated 27 March 2020 No. 32-0009/15930⁷. For more information, please see recent analysis by Olha Stakheyeva-Bogovyk on “Loan Repayment Holidays” & Restructuring Possibilities from the National Bank of Ukraine: A first step in relaxing the burden for businesses and banks during the COVID-19 crisis.

Distressed loans will be restructured individually taking into account the debtor’s recent financial statements, current financial situation, business vulnerability to the existing economic crisis and recovery prospects. Meanwhile, the NBU recommends using the following restructuring instruments:

  • postponing the scheduled repayment of loan principal for the duration of quarantine;
  • capitalizing interest payments in a way that will allow businesses to remain liquid and to maintain necessary levels of business activity (in complex cases);
  • reducing regular payments for a specified period and extending loan repayment terms.

It is worth noting that banks should not (i) worsen lending terms because of loan restructuring and (ii) require borrowers to pay any fees for restructuring necessitated by the spread of COVID-19.

Conclusion

Legislative and regulatory changes in response to the COVID-19 outbreak provide Ukrainian borrowers with a set of financial instruments that could be used to restructure non-performing loans and, thus, mitigate possible adverse effects to their business. While such defensive restructuring mechanisms are temporary in nature and only delay loan repayment until a borrower’s normal business activity is restored, businesses facing distress should act quickly to avail themselves of newly legislated relief.

Links:

¹ https://zakon.rada.gov.ua/laws/show/211-2020-%D0%BF

² https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#I

³ https://zakon.rada.gov.ua/laws/show/533-IX

https://zakon.rada.gov.ua/laws/show/540-20

https://zakon.rada.gov.ua/laws/show/1734-19

https://bank.gov.ua/legislation/Resolution_03042020_46

https://www.zakon-i-normativ.info/index.php/component/lica/?href=0&view=text&base=1&id=1914764&menu=1