26.03.2022

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Many companies have suffered from hostilities, which is why the number of loans that are not serviced properly is expected to increase.  

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Credit institutions, as a rule, provide for the contractual right to unilaterally demand early repayment of the loan principal amount if the borrower's risk deteriorates significantly – in existence, for example, of the threat of interruption of economic activity, unsatisfied financial condition, loss (alienation) of significant part of entity's assets . However, the limited nature of the russian offensive in 2014-2015 and subsequent years did not lead to mass cases of early termination of lending, except official insolvencies. There were many cases, however, of the loan relations restructuring. 

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What to do with the loan agreements entered into before the war...  

 

Borrower 

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If you are a borrower and your business has suffered from hostilities, i.e. income has decreased or is absent at all, and lenders insist on paying the next instalment, then there are usually two ways to solve this:  

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 1. Invoke provisions on extraordinary circumstances (force majeure, martial law, etc.) 

 

As a general rule, events outside the borrower's control, such as war, may make it impossible for him to fulfill his obligations under the loan agreement. The bad news is that the lack of funds is usually not a force majeure unless the banking system as such is suspended. We wrote about this in more detail in Force majeure and contractual obligations.

 

Despite aforementioned,  the administrative restrictions on cross-border payments qualifies for a circumstance beyond the control of the borrower – due to the ban imposed by the National Bank of Ukraine a loan servicing bank does not execute orders for the transfer of foreign currency towards a non-resident creditor. This ban was effective from 24.02.22, and the exception from September 2022 was the payment of interest payments on loans granted by non-residents, however, with a limit on the amount of the transfer and  compliance with a number of other conditions, for example, that the due date of payment of the such interest payments must fall within the period from February 24, 2022 to August 10, 2022 (inclusive). However, neither the ban nor the restrictions apply to payments with the status ofthe international financial organizations: EBRD, IBRD, IFC, IMF, EIB, etc. 

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 2. Restructure the debt  

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You can ask a bank or other lender to delay, change the repayment schedule, provide loan repayment holidays or otherwise reduce the regular payment - monthly, quarterly, semi-annually. Currently, a bank is prohibited from switching the currency of a loan agreement - from foreign currency to hryvnias, except for restructuring under consumer credit agreements granted in foreign currency. The parties negotiate the specific terms and the restructuring is possible only with the consent of the creditor.  For obvious reasons, we do not see the likelyhood of re-financing the existing debt on more acceptable terms, although hypothetically  this possibility remains even in during the war.   

 

 3. Loan Holidays 

 

Since March 2022, the Deposit Guarantee Fund (hereinafter referred to as the "Fund") introduced loan repayment holidays for all borrowers of the banks under administration of the Fund (list is available online). As of February 24, 2022 until three months after the expiration of martial law the Fund has decided to charge no fees or penalties, and they also lowered an interest rate to 0.0001%. In addition, the Fund will not apply fines for the borrower's breach of obligations and will not charge commissions during the specified period. 

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Also, effective from March 2022, the Civil Code of Ukraine made it impossible to levy from a borrower penalty, compounded interest and/or fines as well as inflation charges for late payments under the loan agreement - for the duration of martial law and thirty days after its completion or termination.  If you have already paid for the late payments in the period as of February 24, 2022, the bank should offset such penalties – however, retroactive application of such measures is not Constitutional and may blow back. 

 

For the creditor  

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If you are a resident lender a borrower can pay you funds without restrictions.  

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Unfortunately, from February 24, 2022, the National Bank introduced strict restrictions on cross-border payments. With some exceptions, the purchase of FX currency on the interbank market and its transfer abroad is prohibited. As mentioned above, the NBU allowed to repay loan interests payments in favor of non-residents. Repayment of loans is allowed in favor of international financial organizations or if the borrower is a banking institution.  

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Payments to persons associated with aggressor countries are also completely prohibited, but this prohibition is not of an institutional nature (for example, from the point of view of financial monitoring) and the NBU has reserved the right to authorize individual transactions. 

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For details on cross-border transfers, please see the Currency restrictions on individuals and the Currency restrictions for business.

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If the financial condition of the borrower is affected, the martial law does not limit the lender's restructuring capabilities – strengthening the requirements for financial parameters, replacing or expanding the collateral, consolidating borrowing payments, etc. In a situation where the collateral (pledged or mortgaged) was destroyed or damaged, the creditor has a right to demand to replace or amend collateral, provide additional security such a guarantee or suretyship in order to restore the balance of the parties’ interests under the secured transaction.  

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Operating in the warfare zone, however, is force majeure event and exempts a borrower from the liability for temporary non-fulfillment of the contractual obligations (Force majeure and contractual obligations). However, establishing of a causal link between the war actions and non-performance may also be difficult due to disorganization of the legal proceedings (Peculiarities of litigation during martial law). 

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Restrictions imposed by the NSSMC for the period of martial law 

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NSSMC had introduced tough prohibitions, which included, inter alia: 

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1. suspension of placement, circulation and redemption of all securities; 

2. limitation of the permitted activity of investment firms; 

3. suspension of operations in depository and clearing systems; and 

4. restrictions on the activities of asset management companies, collective investment trusts (CIT, CIF), asset custodians and assets of private pension funds custodians. However, most of the restrictions were lifted on 8 August 2022 and currently the only restriction that remains - is the ban on transactions with individuals and companies associated with the russia and the belarus, and individuals, who are associated with terrorist activities or are subject to international sanctions.