Rada approves legislation to radically improve creditor protection

Ukraine’s parliament voted on Oct. 18 to approve a new
code for treating insolvent debtors that is set to radically improve the
protection of creditors, as well as simplify the procedures of debt
restructuring, debtors’ financial recovery and liquidation. It also introduces
a mechanism of bankruptcy of individual debtors.

The legislation grants more power to creditors in
control of insolvent debtors, sets time limits on procedures related to debt
restructuring, financial recovery or liquidation, as well as stipulates the
transparent sale of assets of bankrupt entities.

On top of that, the new code creates the possibility
for individuals to apply for financial recovery/bankruptcy procedures. It
cancels the current moratorium on foreclosure of property pledged by
individuals under mortgage loans.

The law’s authors said its adoption will result in
Ukraine’s dramatic improvement in the World Bank’s Doing Business rating by at
least nine positions (from its 76th ranking out of 190 economies in 2018). In
the ranking’s Resolving Insolvency category, Ukraine should move to 68th place
from its 149th ranking in 2018.

The law is also part of Ukraine’s commitments to the
IMF “to strengthen the corporate insolvency regime,” as was disclosed
in the last memorandum signed in April 2017.

Alexander Paraschiy: All the
legislation’s details, including its 1,000-plus amendments considered by MPs on
Oct. 17-18, will be available once the president signs it and the final draft
is published. But if most of the clauses offered by the bill’s initiators are
indeed implemented, and if the bill is signed by the president, it should
significantly improve the rights of creditors in Ukraine. In turn, it will
reduce the risks of Ukrainian banks and will stimulate their lending activity,
as well as reduce the costs of lending.

On top of that, full implementation of this
legislation should dramatically improve the recovery rate of non-performing
loans (which the World Bank estimates to be 8.9% in Ukraine now), and therefore
may improve the balance sheets of many Ukrainian banks, as well as grant more
chances to the Deposit Guarantee Fund (which manages the assets of about 90
failed banks) to have a higher recovery rate from the assets under its control.
All in all, the new law may indeed significantly improve the image of the Ukrainian
economy and attractiveness of its financial sector.