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