Shed­ding light on the main­stay tools for pro­tect­ing investors’ busi­ness har­bor

Kyiv Post Legal Quarterly - - Banking -

LCF has been a le­gal ad­vi­sor for the largest Ukrainian banks in high-pro­file dis­putes with un­scrupu­lous bor­row­ers for a long time al­ready.

We ac­tu­ally rep­re­sent the in­ter­ests of PJSC “Alfa-bank” (a cred­i­tor bank) in a dis­pute with a group of com­pa­nies within the Azov­mash hold­ing com­pany with re­gard to the re­turn of credit debts amount­ing to more than USD 70 million.

The cur­rent prac­tice in the bank-bor­rower re­la­tion­ship re­flects the low de­gree of fi­nan­cial cul­ture of the debtors, who are quick to ap­ply var­i­ous un­scrupu­lous schemes to avoid re­pay­ing loans to the banks. This can be seen in the case against the Azov­mash hold­ing com­pany, which has tried, and is still try­ing to use, any pos­si­ble meth­ods, in­clud­ing those of doubt­ful le­git­i­macy, to de­lay the adop­tion and ex­e­cu­tion of court de­ci­sions in fa­vor of our client.

De­spite this, the courts have al­ready handed down rul­ings for the col­lec­tion of more than USD 50 million in debts on loans to Azov­mash. We have man­aged to de­fend the le­git­i­macy of those de­ci­sions in courts of higher ju­ris­dic­tion, and they have al­ready come into le­gal force. The le­git­i­macy of guar­an­tees that have been granted has also been con­firmed.

How­ever, as of to­day, the eco­nomic court of Kyiv has al­ready brought two cases of bank­ruptcy on in­debted com­pa­nies. As a re­sult, this com­pli­cated the en­force­ment of the de­ci­sions be­cause of the in­tro­duc­tion of a mora­to­rium on the sat­is­fac­tion of cred­i­tors' claims.

Due to the fact that cur­rent ini­tia­tors of these bank­ruptcy cases are com­pa­nies that are part of Azov­mash hold­ing, the debtors are not hid­ing their true in­ten­tions.

How­ever, we don’t think bank­ruptcy means that cred­i­tors lose all of their chances to col­lect debts. We have ad­vo­cated for the in­ter­ests of cred­i­tor banks in bank­ruptcy pro­ce­dures on mul­ti­ple oc­ca­sions. In ad­di­tion, we can clearly state that with a pro­fes­sional ap­proach to the is­sue, and us­ing all the pro­ce­dural rights of the cred­i­tor, it is pos­si­ble ei­ther to re­cover the debt re­cov­ery or reach an am­i­ca­ble agree­ment on ben­e­fi­cial terms.

One good ex­am­ple is the case of the bank­ruptcy of an en­ter­prise that owned one of the big­gest in­fra­struc­ture ob­jects in the city of Vin­nyt­sia city. The bank­ruptcy pro­ce­dure took quite a long time and went through lots of stages, in­clud­ing sev­eral rounds of court ap­peals, in­volv­ing the Supreme Court of Ukraine. As a re­sult, the debtor’s as­sets were sold at auc­tion fol­low­ing the bank­ruptcy pro­ce­dure, and the bank re­cov­ered the credit debt.

Talk­ing about our ad­vice to investors and po­ten­tial cred­i­tors to the Ukrainian man­u­fac­tur­ing en­ter­prises, one of the first and most im­por­tant things to do is to take into con­sid­er­a­tion the cur­rent loop­holes in Ukrainian leg­is­la­tion, which can re­sult in fraud ac­tions and that can in­clude the in­volve­ment of law en­force­ment of­fi­cers. This is not a reg­u­lar oc­cur­rence, but this risk should be con­sid­ered by investors.

A sec­ond im­por­tant rec­om­men­da­tion is to es­ti­mate en­ter­prise’s ca­pa­bil­i­ties to ser­vice the loan and re­pay it on time. The main com­ponent of such an as­sess­ment should be an in­te­grated fi­nan­cial and le­gal au­dit of the credit fa­cil­ity. In ad­di­tion, one should take into ac­count the cur­rent po­lit­i­cal sit­u­a­tion. Thus, the ex­port mar­ket of many in­dus­trial en­ter­prises has been fo­cused on Rus­sia, and not all of them can suc­cess­fully re­ori­ent away from it. Hence, the fi­nan­cial re­sults of pre­vi­ous years may not be a good enough in­di­ca­tor for de­ci­sion-mak­ing. More­over, the as­sets of many in­dus­trial en­ter­prises are in oc­cu­pied ter­ri­to­ries, and this should also be taken into ac­count when mak­ing de­ci­sions.

A lot of at­ten­tion should be paid to ex­e­cut­ing credit trans­ac­tions and the reg­is­tra­tion of credit agree­ments. Thus, in many lit­i­ga­tions the small­est nu­ances in con­tracts may ei­ther pro­vide a vic­tory over an op­po­nent, or lead to con­tracts be­ing de­clared null and void, or ter­mi­nated with the loss of funds. In the con­text of multi-million dol­lar loans, bor­row­ers (or rather their lawyers) will not for­give even the tini­est mis­takes. In ad­di­tion, the le­gal de­part­ments of banks should mon­i­tor all cur­rent trends in ju­di­cial prac­tice and take them into ac­count when draft­ing con­tracts, proac­tively elim­i­nat­ing all po­ten­tial risks.

The cor­po­rate struc­ture of the bor­rower has to be con­sid­ered as well. Very of­ten groups of Ukrainian com­pa­nies are man­aged and owned by a hold­ing com­pany reg­is­tered in a for­eign ju­ris­dic­tion. In such a case, it would be very ef­fec­tive to take the cor­po­rate rights of the hold­ing as col­lat­eral, and in the case of a dis­pute, the investors would be able to pro­tect their in­ter­ests in courts of other ju­ris­dic­tions. In such a way, these agree­ments could be made sub­ject to, say, English law, and could also in­clude an ar­bi­tra­tion clause on any lit­i­ga­tion hav­ing to be heard in au­thor­i­ta­tive in­ter­na­tional ar­bi­tra­tion courts.

As for the in­vestor's par­tic­i­pa­tion in the pri­va­ti­za­tion of state as­sets, or in­vest­ing in fa­cil­i­ties that have large debts, there is no sin­gle, de­tailed piece of ad­vice that can be given here. The anal­y­sis of the fea­si­bil­ity of an in­vest­ment has to be car­ried out sep­a­rately in each spe­cific sit­u­a­tion.

There are a lot of in­vest­ment op­tions and tools in a sit­u­a­tion where an en­ter­prise is not bankrupt. If bank­ruptcy pro­ceed­ings have al­ready been in­sti­tuted, in­vest­ment is also pos­si­ble while san­i­ta­tion pro­ce­dures are go­ing on, or by sign­ing a debt set­tle­ment agree­ment.

Sum­ma­riz­ing all the points above, I would ad­vise cred­i­tors who are al­ready fac­ing the un­timely re­pay­ment of debts by a bor­rower or coun­ter­party to use all pos­si­ble le­gal mech­a­nisms for re­cov­er­ing pay­ments, and take a more proac­tive po­si­tion. It is also nec­es­sary to take si­mul­ta­ne­ous mea­sures to re­duce the risks of un­scrupu­lous be­hav­ior by the debtor, and the re­moval of as­sets. And it is al­ways much eas­ier to ne­go­ti­ate with a debtor on the terms of re­pay­ment if you have court or­ders for re­cov­ery and seizure of his as­sets. This is con­firmed by our own ex­pe­ri­ence.

Lviv and Uzh­horod are cities where Groys­man wants to re­form cus­toms first.

Lviv Oblast in western Ukraine has a long border with Poland, which is part of the Euro­pean Union, and is thus a big win­dow for smug­gling.

Vis­it­ing Lviv Cus­toms on May 7, Groys­man said smug­gling had to be halted in three months, and the cus­toms clear­ance of goods made faster.

"If there’s the will for that, I’ll give my sup­port," the prime min­is­ter told Lviv cus­toms em­ploy­ees, writ­ing later on his Twit­ter ac­count. But if not, heads will roll, he warned. Lviv Fis­cal Ser­vice Depart­ment has al­ready in­tro­duced joint border con­trols with Pol­ish au­thor­i­ties at three of six ve­hi­cle check­points, Lviv Cus­toms head Levko Prokipchuk said. Work­ing jointly re­duces the op­por­tu­ni­ties for cor­rup­tion and smug­gling, he said.

“This co­op­er­a­tion is work­ing well, as it speeds up border cross­ings and helps us fo­cus on risks," Prokipchuk said.

Smug­glers from Ukraine fre­quently trans­port cig­a­rettes, cloth­ing and elec­tronic de­vices into Poland.

Bet­ter equip­ment at border posts would help stop them. For in­stance, X-ray scan­ners could de­tect hid­den con­sign­ments of smug­gled goods in an in­stant. But Lviv Cus­toms has no work­ing scan­ners on its borders with Poland.

Along with smug­gling, time-con­sum- ing cus­toms pro­ce­dures are the bane of busi­ness.

Ac­cord­ing to the Do­ing Busi­ness 2016 rank­ing for Ukraine, it takes 122 hours (around 15 days) to pre­pare doc­u­ments and ex­port goods through the border, while im­port­ing takes 220 hours (27 work­ing days).

Staff lev­els are also a prob­lem: Ukraine’s check­points on the Pol­ish border have 550 cus­toms of­fi­cers – 20 per­cent less than on the Pol­ish side

Ev­ery year, pas­sen­ger and trans­port traf­fic in­creases by 10 per­cent – it was 17 million peo­ple in 2015 – but “the num­ber of em­ploy­ees is fall­ing,” Prokipchuk said. “And then they ask why we have lines at the check­points?”

Hen­nadiy Moskal, the gov­er­nor of Zakarpat­tia Oblast, has al­ready found crack­ing down on smug­gling in his re­gion tough go­ing. So tough, in fact, that at the be­gin­ning of May he was ready to quit.

Moskal took over as gov­er­nor in June 2015, af­ter spend­ing 10 months as gov­er­nor of war-torn Luhansk Oblast in east­ern Ukraine. But it was much eas­ier to con­trol Luhansk Oblast, on the border with Rus­sia, than tackle smug­glers on the EU border, he says.

On May 6, Moskal asked to re­sign, com­plain­ing that a lo­cal cus­toms of­fi­cial was block­ing his ef­forts to stop il­le­gal smug­gling. He only agreed to stay on af­ter a May 10 meet­ing with Groys­man and State Fis­cal Ser­vice Head Ro­man Nasirov, dur­ing which Groys­man or­dered Nasirov to fire the of­fi­cial.

Zakarpat­tia Oblast, which borders four EU states – Slo­vakia, Hun­gary, Ro­ma­nia and Poland – is ideal smug­gling coun­try. Ac­cord­ing to Moskal, cig­a­rette smug­glers ear­lier

earned Hr 1 million ($40,000) from each truck they sent to the EU, and Hr 1.5 million ($60,000) from those sent to Bri­tain. Up to 12 trucks would cross the border ev­ery week, bring­ing in up to Hr 72 million ($2.88 million) a month in net profit for the smug­glers.

“Now we have a sta­ble sys­tem – you can try to bribe cus­toms of­fi­cers, but they all know that … if they let through a truck, we might not see this man for 20 years,” Moskal said, re­fer­ring to the pos­si­ble prison term for smug­gling.

“To­bacco smug­gling is a transna­tional or­ga­nized crim­i­nal ac­tiv­ity, and Ukraine is just part of it,” Moskal said. “I can’t even tell you who’s the boss of it all, as it’s an in­ter­na­tional syn­di­cate.”

In a re­cent case, Zakarpat­tia cus­toms of­fi­cers found a car with diplo­matic plates try­ing to bring 60,000 packs of cig­a­rettes into the EU as “diplo­matic cargo,” Zakarpat­tia Fis­cal Ser­vice re­ported on May 21.

Il­le­gal mi­grants also cross the border in Zakarpat­tia into the EU, while brand­name cloth­ing is smug­gled from the EU into Ukraine, Groys­man said.

Mean­while, Samopomich Party law­maker Tetyana Ostrikova wants to take the hu­man fac­tor out of the cus­toms prob­lem.

She has pro­posed in­tro­duc­ing new soft­ware to de­tect sus­pi­cious cus­toms dec­la­ra­tions, and pre­vent cus­toms of­fi­cials from al­ter­ing the val­ues of goods in elec­tronic cus­toms dec­la­ra­tions – a com­mon form of cus­toms cor­rup­tion.

Like Moskal, Ostrikova also thinks that check­points should have new scan­ners and weigh­ing equip­ment. On top of that, there should be clear rules gov­ern­ing the ac­tions of cus­toms of­fi­cials. If these are bro­ken, the of­fi­cial should be dis­missed, and then pros­e­cuted, she said.

But for all that to hap­pen, Ostrikova thinks the heads of all the cus­toms de­part­ments in the State Fis­cal Ser­vice have to be sacked. She also wants to see a rise in the num­ber of cus­toms of­fi­cers work­ing on the

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