On Notable Aspects Of The Procedures For Financial Rehabilitation Of Banks

Law of Ukraine dated 24.07.2009 No. 1617-VI "Amendments to certain legislative acts dealing with notable aspects of the procedures for financial rehabilitation of banks."

The law of Ukraine dated 24.07.2009 No. 1617-VI "Amendments to certain legislative acts dealing with notable aspects of the procedures for financial rehabilitation of banks" (hereafter – the "Law") introduces, inter alia, amendments to:

1-2. the Economic Code of Ukraine and Civil Code of Ukraine, regarding the legal organizational form of banks, procedures for the termination of a legal entity and procedures for the substitution of a Borrower.

3-4. the laws of Ukraine on "Value Added Tax" and "Taxation of corporate income" in the following respects:

  • the following transactions are exempt from VAT:

    (i) selling (or alienation in any other way), in the process of foreclosure by a bank or other financial institution of property pledged (mortgaged) by a physical person or entrepreneur or other entity which is not a VAT payer; and

    (ii) selling (transferring) or purchasing by a bank of obligations under deposits; and
  • income taxation in transactions for the sale (transfer) or purchase of monetary claims for goods supplied, works performed or services provided, indebtedness under financial credits and under other civil agreements.

5. the law of Ukraine on "Banks and banking activity" (hereafter – the "Law on Banks"), according to which, inter alia:

  • the term "moratorium" is interpreted as follows – termination of the fulfillment of obligations to creditors and the obligation to pay taxes and duties (mandatory payments) by the bank and the termination of measures aimed to secure the fulfillment of such obligations;
  • the Law on Banks is supplemented by a definition of the "financial rehabilitation of a bank" meaning the restoration of a bank's solvency and bringing its financial statements in respect of banking activities into line with the requirements of the National Bank of Ukraine; it is stated that, in the course of fulfilling the procedures prescribed by the financial rehabilitation program of a bank, shareholders and creditors (depositors) of the bank cannot require termination or early fulfillment of the bank's obligations or indemnification of losses incurred;
  • it is provided that the Cabinet of Ministers of Ukraine (according to the data provided by the National Bank of Ukraine as agreed with the Committee of the Supreme Council of Ukraine on finance and banking activity) may establish a 'curative' bank which shall acquire the status of 'curative' bank once it is granted by the NBU a special 'curative' bank license and such bank is entitled to conduct only the transactions permitted by the license;
  • banks in Ukraine must be established in the form of a public joint stock company or cooperative bank;
  • in the case of reorganization of a bank by way of changing the bank's legal organizational form, such legal relations shall not be subject to the legal norms concerning the termination of a legal entity; during such reorganization the creditors may not demand termination or early performance of the liabilities of the bank;
  • reorganization of a bank pursuant to the decision of the bank owners may only be performed subject to the issuance of an NBU preliminary permit for reorganization and the approval by the NBU of a bank restructuring plan (the bank restructuring plan must not be prepared in the case of reorganization by way of changing the bank's legal organizational form); the NBU shall determine the list of documents to be submitted for obtaining a permit for reorganization and approval of the bank restructuring plan;
  • the limit of 50% of the capital stock for subordinate debt that may be included in the tier 2 capital of a bank was removed;
  • changes and amendments were made to the provisions of the Law on Banks regarding disclosure of information which constitutes a bank secret;
  • the NBU is vested with the right to implement a special control regime for the activity of a bank and appoint a bank supervisor; the NBU is vested with the right to prohibit the use of direct correspondent accounts for settlements and/or require from a bank that it make settlements exclusively via a consolidated correspondence account during the temporary administration of the bank or a special control regime for the activity of the bank;
  • changes and amendments were made to the provisions of the Law on Banks regarding the appointment of temporary administration; the rights and obligations of the temporary administrator; and control over the activity of the temporary administration; the law was supplemented by provisions on financing sources and other matters of the provision and use of state financial support;
  • a moratorium on the satisfaction of creditors' claims may be imposed for a term of not more than three months. The law grants the NBU a right to extend the moratorium on the satisfaction of claims of creditors of the bank, where the moratorium is imposed at the time of adoption of the law, for a period of up to six months;
  • the provisions of the Law on Banks have been supplemented by the regulations on receipt and alienation of the assets and/or liabilities of a bank during the liquidation procedure of the bank (in particular, the liquidator shall make a decision on the receipt and alienation of assets and/or liabilities of the bank without the notification and consent of the shareholders, debtors and creditors (depositors) of the bank);
  • certain changes and amendments were made to the provisions of Art. 96 of the Law on Banks regarding the sequence and procedure for satisfying creditors' claims as a result of the liquidation procedure; and
  • changes and amendments were made to the provisions of Art. 99 of the Law on Banks regarding the contestation of decisions, actions or omissions of the NBU or its officials, the temporary administrator, liquidator and the persons involved by them. In particular, officials of the NBU, temporary administrator, liquidator and the persons involved by them hold no personal responsibility for any actions or omissions if they acted in good faith and on legal grounds and the claims against them shall be deemed to be claims filed against the NBU.

6. the law of Ukraine on the "Procedure for Repayment of the Liabilities of Taxpayers to Budgets and State Special-Purpose Funds" provides that no financial sanctions in the form of a penalty or fine shall be applied to a bank for the period of the moratorium for satisfaction of creditors' claims set by NBU: for violation of the terms of payment of tax and duties (mandatory payments) through the bank's fault and for nonperformance or undue performance of the bank's own liabilities concerning the payment of tax and duties (mandatory payments) by the bank at the moment of setting of a moratorium and during its period of validity.

7. the law of Ukraine "High priority measures aimed at prevention of the adverse effects of the financial crisis and amendments to certain legislative acts of Ukraine," pursuant to which, inter alia:

  • the Cabinet of Ministers of Ukraine, as agreed with the NBU and the Committee of the Supreme Council on finance and banking activity, shall make decisions about the sale of corporate rights of the State in the charter capital of the banks which are managed by the Ministry of Finance of Ukraine;
  • employees of the Ministry of Finance appointed to resolve matters connected with state participation in bank capitalization shall be protected by law;
  • a temporary administrator is entitled, as agreed with the NBU, to make decisions on the reduction of banks' charter capital. The following provisions of the legislation are not applicable when reducing the charter capital of a bank for capitalization purposes: the necessity to notify all creditors about a reduction of the charter capital of the bank; prohibition on reduction of the charter capital of a bank if there are objections on the part of the bank's creditors; right of the creditors to require early termination or fulfillment by the bank of liabilities and obligations to indemnify; requirement to liquidate a bank if the size of its charter capital becomes less than the minimum amount of the charter capital of the bank, as prescribed by law; requirement to compensate shareholders' losses related to a reduction in the charter capital of a bank; and the restriction regarding minimum nominal value of shares; and
  • the following provisions of the legislation shall not be applicable to the temporary administrator in his performance of the measures prescribed by the bank financial rehabilitation program (including, alienation of the right of claim, transfer of debt or reorganization): the procedure for termination of a legal entity as a result of a change in its legal organizational form; the necessity to notify and receive consent from the debtors, creditors and shareholders; the creditors' right to demand security for the fulfillment of liabilities by way of conclusion of surety agreement(s) or pledge agreement(s); early termination or fulfillment of liabilities and indemnification in connection with a change in the legal organizational form of a legal entity; and the unfeasibility of completing a change in the legal organizational form of a legal entity prior to satisfying claims filed by creditors. A temporary administrator is entitled to make decisions on the reduction of the charter capital of banks, subject to approval by the NBU, while performing the measures prescribed by the bank financial rehabilitation program.

The law became effective as of 05.08.2009.

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