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Borrowers will freeze bankruptcy
28 December 2015
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Officials propose to adopt a law on voluntary restructuring, in order to establish a common framework rules for the work of creditor banks with borrowers. However, the law will be non-binding and will not require banks to make concessions to borrowers. The only thing, in which the new mechanism will help, is the delaying of bankruptcy procedures and abandoning of implementation of obligations for up to four months.

The Finance Ministry and the NBU offer to adopt a law on voluntary financial debt restructuring for legal entities. The draft of a law "On financial restructuring", which they prepared, introduces a common mechanism of voluntary extra-judicial restructuring of loans to legal entities for three years. "But now their work is difficult or impossible because of the debt burden," - said Deputy Finance Minister Artem Shevaliov. He acknowledged that the banks now negotiate with borrowers too, but "it is not of a systematic nature."

The practice of voluntary restructuring is applied in Turkey, South Korea, Thailand and Serbia. The approach to financial restructuring by the Bank of England was taken as the basis for the draft of the Ukrainian law. The document's authors hope that this innovation will partly solve the problem of "bad" loans. As of September 1, the volume of the loan portfolio of legal entities amounted to 761.5 billion UAH, of which 17% was the overdue debt.

Bet on the conscience

To participate in the voluntary restructuring, borrowers will apply to the coordinating committee. For each borrower a creditors' committee will be formed and it will make all the decisions. It will be possible to start the procedure of voluntary debt restructuring after getting the consent of not less than three creditors or of one creditor that owns more than 25% of the debt.

The norms of the law are declarative in their nature and do not contain the parameters of restructuring and requirements for the borrowers, who can count on the favor of the banks. The banks themselves will determine which business is viable and deserves restructuring, and which one does not. Terms of the restructuring (reduction in the interest rate, extension) are also given to be decided by the banks. The creditors' committee will be able to agree on granting the borrower additional funding necessary to restore business. The only condition is that the rules should be the same for all members of the creditors' committee.

But the key innovation is the ability to stop the bankruptcy procedure. "If on the date of the commencement of the voluntary financial restructuring, an Application instituting proceedings in the case of bankruptcy of the debtor was filed to the Economic Court, the parties may submit an application to suspend the procedure of bankruptcy," - the document says. In such a case the court is obliged to terminate the bankruptcy.

In addition, since the commencement of the voluntary financial restructuring, a moratorium is introduced on the execution by the debtor of the demands by creditors, involved in restructuring, for up to 120 days or until the completion of the voluntary restructuring. During the moratorium it is prohibited to use compulsory foreclose on the property of the debtor. During this period neither the fine, nor the penalty is charged.

The law for the few

The National Bank estimated that the law will cover loans worth 200 billion UAH - a quarter of the loan portfolio of enterprises. "We are talking about healthy businesses that faced temporary problems," - said Artem Shevaliov. "With unreliable borrowers, we will work individually and using some other tools," - the deputy head of the National Bank, Vladyslav Rashkovan, explained. But companies are free to decide whether to apply them for the restructuring; and some of them will be subjectively rejected by the banks themselves. "The viability of the enterprises will be determined by independent examination", - Artem Shevaliov added.

Bankers support the initiative, but they warn that the number of successful restructuring can be very limited. "I doubt that this law will be a tool for the restructuring of small business loans. Lenders are unlikely to want to spend time and effort to analyze the situation of small borrowers, - believes the managing partner of a lawyer association "Chudovsky and Partners" Igor Chudovsky. Moreover, borrowers, who want to reduce the debt burden, have agreed on this with the banks long ago. "This mechanism can be effective only if the borrower in fact seeks to voluntarily fulfill their obligations. In all other cases, the tool will be used exclusively to prolong the bankruptcy procedure", - said Pavlo Melnychenko, director of FUIB's loan recovery department.

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