The mortgage is not only the main part of the collateral instrument but also is a key element of loan agreements and legal matters related thereto. No doubt that the dynamics of the development of loans directly depends on the transparency, legal certainty and consistency of approach to the mortgage relations on part of legislative and judicial authorities. Every foreign or domestic lender assesses associated risks when preparing a particular deal. Risks associated with the use of a mortgage, including the the risks of security enforcement are quite important. Unfortunately, currently legal practice in such matters is still far from being perfect, however certain positive trends can already be observed.
Thus, in early February 2019, the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Resuming of Lending” entered into force; it significantly strengthened the position of banks compared to the previous regulation. Provisions of this Law introduce changes to the Civil Code of Ukraine, as well as to the specific laws related to banking activities. Moreover, above-mentioned changes apply both to relationships arising after this Law entered into force, as well to the ongoing relationships.
Many legal novelties were developed specifically to introduce the findings of the case-law elaborated by the Supreme Court. For example, provisions of part 5 Article 543 of the Civil Code of Ukraine envisage that the liquidation of a joint debtor being a legal entity or death of a joint debtor being an individual does not terminate obligations of the other joint debtors before the lender and does not change the scope and conditions of their obligations; such provisions were laid down in the Resolution of the Supreme Court of Ukraine dated 06/07/2016 in case No. 918/545/13 as further supported by the Resolution of the Commercial Cassation Court within the Supreme Court dated 06/02/2018 in case No. 910/9943/17.
Another important legislative novelty is a provision that establishes that the liquidation of the debtor – legal entity does not terminate suretyship, provided the lender has filed a lawsuit against the guarantor in respect of violation of a secured obligation by the debtor before the date of the entry of the record on debtor’s winding-up to the United State Register of Legal Entities, Individual Entrepreneurs and Public Organizations.
It is important to note the conclusion made by the Grand Chamber of the Supreme Court and provided in the Resolution dated 18/09/2018 in case No. 921/107/15-g, whereby the Court stated that a court decision on debt recovery under a loan agreement cannot serve as the grounds for termination of monetary obligations, as well as for the termination of a mortgage; it also does not deprive the lender of the right to enforce a collateral (mortgaged property). To substantiate its decision, the Supreme Court noted that the lender had received the right to claim enforcement under loan agreements concluded with the debtors and had exercised this right by applying to the court; decision of the latter on the recovery of debts taken in favor of the lender was not enforced. Subsequently, the plaintiff claimed the court to enforce a collateral (mortgaged property) to ensure the performance of the principal obligation instead of recovery of the same amount of debt, which required a separate court decision.
Therefore, the Supreme Court found that in this case here, the lender used another legal remedy to protect its violated right, which was not restored by the debtor in a proper manner, and thus it could not be considered as repeated recovery of debt.
We note the pros of the amendments made to the Law of Ukraine “On Mortgage” which provided that in case of renovation or unauthorized construction by a mortgagor related to the collateral (including but not limited to the construction of a new building, facility, etc. on a land plot owned by the mortgagor or legally enjoyed by the latter), all renovated or newly constructed real estate objects shall be considered as a collateral under the mortgage agreement. Due to this novelty, unscrupulous debtors and mortgagors finally lost this opportunity to release encumbrance imposed on the mortgaged property. Yet again, this provision has “migrated” from the judicial practice of the Supreme Court of Ukraine, namely, from the Resolution in the case No. 6-1213tss16 dated 06/07/2016.
At the same time, judicial practice does not always protect the interests of lenders only. The position of the Commercial Cassation Court in case No. 918/1071/15 dated 06/09/2018 is quite unconventional. In this case, the Supreme Court ruled that the Law of Ukraine “On Restoring the Debtor’s Solvency or Declaring It Bankrupt” does not link the registration of secured claims with the establishment of the collateral contract value as the only criterion to determine the amount of secured claims. The Court noted that the amount of such claims shall be established based on the amount of indebtedness under the loan, as well as the amount of secured obligations under suretiship in force at the time of filing a claim by the lender under respective loan agreement, regardless of the value of the collateral.
If the lender-pledgee believes that the liquidation value of the collateral will differ from the value determined by the pledge agreement, then the actual value of the collateral shall be determined following the sale of the pledged property; after the sale non-secured claims are shifted to 4 or 6 rank of claims if the debtor received a loan or provided a financial surety in a bankruptcy case that has not been terminated; alternatively, these are liquidated (terminated) if the debtor was just a property guarantor acting for the third person receiving the loan.
Therefore, despite some controversial provisions, positive changes in the regulation of the mortgage in particular, and loan relations, in general, can be observed. Strengthening of the lenders position should have a positive impact on the capacity to return invested funds and, generally, on the country’s investment climate. We note that the legislator has taken into account best practices established as of the time of adoption of the said law, which resulted in introduction of efficient changes that would enhance development of the banking sector.