Escrow opens new business opportunities

The escrow mechanism is aimed to create the necessary comfort level for counterparts and, in fact, minimize their risks.

There is always a risk in transactions if transferring the property for a product/or service and its payment are not simultaneously. For today, its already invented enough payment mechanisms to reduce the risks. For instance, in Ukraine are spread the deferred payments, advance payment, documentary credit, documentary collection. However, having the number of distinctions and limitations all mentioned settlements are restricted the list of consumers and activities.  They should be replaced by an escrow account which is already used in other jurisdiction to secure such transactions.

To implement this mechanism, the client should make an escrow contract with the bank for opening a special account – an escrow. The Bank undertakes to accept, and transfer funds received from the account holder. In addition, the bank provides the client with services to transfer these funds to the beneficiary, as well as services of returning the funds to the account holder if such clauses are provided by the contract.

It is essential that neither the account holder, nor the beneficiary can dispose the funds on escrow account, although the parties can still provide other conditions. Termination of escrow contract comes after the termination of the escrow term, other circumstances, as well as in case of liquidation of the bank.

Ukrainian corporate legislation is involved with squeeze-out procedure from the middle of 2017. Distributed in the world practice the squeeze-out procedure (the owner of the dominant controlling stake, has the right to require minorities to sell their securities), could not be realized as of the lack of NBU regulation.

With entering into force of NBU Acts N133 and N147, Ukrainian banks can finally provide services to the owners of dominant controlling stakes of joint-stock companies under the squeeze-out procedure. In addition, according to the NBU Act N133 of December 18, 2017, there is an order and a list of documents for opening / closing the escrow account and an exceptional list of transactions on this account.

Becoming effective of NBU regulated procedure, Ukrainian banks are already opening escrow accounts.

Indeed, firstly all NBU regulations were elaborated for squeeze-out and sell-out procedures. But the emerging opportunity to open an escrow account in different currencies for both residents and non-residents allow to use escrow accounts in different areas.

According to the experience the more developed countries, the escrow accounts minimize risks and damages in case of violation or non-fulfillment the obligations by counterpart in such areas as: indemnification; merger and acquisition; contractor retention and construction; private placements and subscription, class action, litigation and structured settlement; software licensing and source code; remediation and environmental protection impoundment; real estate purchase and sale; franchise.

Then, an escrow account can be used for settlements in real estate transactions. The scheme is simple enough. The seller negotiates with the buyer as to transaction terms, the buyer transfers the funds on escrow account, it can be checked at any time by the buyer and the seller, but the funds can be withdrawn only after all the terms fulfilled and documents signed. The bank, as an escrow agent, monitors compliance with the transaction terms.

In future, the escrow agent’s capacities can be exercised not only by banks, but also legal companies, as well as by notaries and lawyers. In some countries, escrow agent services are compulsory for real estate contracts, and the escrow agents list is not limited by banks and financial institutions.

Due to using the escrow accounts by foreign investors to make investments in Ukraine (buying / selling real estate, corporate rights, securities), the escrow accounts should be used in transactions M&A, purchase/construction of real estate, export and import, etc. And the banks, as escrow agents, will keep balance of all interests using an escrow accounts.