Liquidation of a sole proprietorship does not give a chance for the borrower to evade the responsibility for defaulting on the loans, which means, does not let release fr om pledge the loan security. Thus has the Supreme Court of Ukraine (SCU) resolved. Bankers approve of this position, as earlier courts allowed borrowers to evade the responsibility. The resolution of the SCU is to strengthen the protection of creditors.
The Supreme Court came to the conclusion that sole proprietorships must bear responsibility for their debts with all their property even after cessation of their business. Thus reads the legal position of the SCU passed on 4 December as part of the dispute as to recognition of cessation of the mortgage loan obligations. Though the text of the court resolution has not been published yet, the SCU announced that, as envisaged by art. 51, 52, 598-609 of the Civil Code of Ukraine and art. 47-49 of the Law “on Restoring Debtor Solvency or Declaring a Debtor Bankrupt”, wh ere a sole proprietorship is liquidated, its contractual obligations do not cease. They remain with the borrower as an individual person, as it does not cease existing. “The sole proprietorship bears responsibility for its obligations, relating to business activities, with all the property. And as the main obligation under the loan agreement has not ceased, there are no grounds for cessation of the mortgage (its property, “K”),” – the resolution of the SCU says.
The need in the precise interpretation by the SCU originated from differences in interpretations by various courts of the obligations of sole proprietorships when they go bankrupt. “To release their property from pledge, individuals registered as sole proprietorships and then made them bankrupt, all their debts were written off, and the property was released from pledge. The courts interpreted differently the norms, and some ceased obligations of the debtors after their business liquidation,” explains one of the market experts. “Such legal position of the SCU protects the rights of creditors, as now it will be impossible for the borrowers to evade discharge of their obligations.”
Bankers are satisfied with the position of the SCU. “This resolution will result in better protection of creditors from unlawful actions by dishonest borrowers that, through fictitious bankruptcies, try to evade their obligations under the loan agreements. We hope that, after this resolution is passed, courts of all instances will resolve the analogous disputes likewise – in favour of the creditors. This will strengthen the willingness of banks to give loans to small businesses,” marks Oleg Zamorskiy, Head of Legal Department at FUIB.
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