"We expect a significant increase in the number of successful financial restructuring cases" SERGII PAPERNYK , HEAD OF BANKING AND FINANCIAL PRACTICE OF EVRIS LAW FIRM, SAYS
— The Law of Ukraine On Financial Restructuring was adopted in June 2016. How do you assess its impact on the whole business?
— A law of such format is necessary in our country, even if we take into account the incredible size of the bad debt of legal entities in the Ukrainian banking sector.
Both banking institutions and business are interested in this legislative act. We recently observed increasing interest in debt restructuring in the market and we expect growth in the number of successful cases.
But the most important obstacle to the success of this institution is that the Law On Financial Restructuring was adopted and actually implemented only in spring of 2017, when the main peak of the economy crisis had been passed, having given way to a prolonged recession.
Our economy was in bad need of a similar law in 2014, when the war, break of commercial relations and crazy devaluation of the hryvnia led to default among the largest companies in the industry. Unfortunately, having no other more convenient instrument for settling debts to banks, businesses went into bankruptcy on a massive scale.
At the same time, the presence of bankruptcy makes it impossible to initiate financial restructuring. Thus, the largest debtors of the banking sector are already cut off from the opportunities given by the specified procedure, even if they want to participate in it.
— What opportunities did the new law give to financial and banking institutions?
— Since the law was primarily aimed at settling debts owed to banks, a significant part of the advantages provided by it is to motivate a banking institution to enter into negotiations with the debtor and give consent to the financial restructuring procedure.
One of the most considerable advantages for the banking sector provided by the law is the cancellation of sanctions for violation of many regulations, as established by the National Bank of Ukraine (NBU). Thanks to privileges, banks have the opportunity to agree on an installment plan for repayment of loans, accepted for them, fix the interest rate below the cost of credit and even 0%, without fear of violating the credit risk standard. Banks can release any size of debt without looking at the short-term liquidity ratio. In addition, banks can convert all currency debt into hryvnias without violating the limits of currency positions. Moreover, the law allows the investment standard to be ignored, which means banks can agree on the release of the debt partly in exchange for a share in the debtor's authorized capital, thereby actually getting control over the latter.
The law provides for similar privileges for state banks and the Deposit Guarantee Fund, participating in a procedure on behalf of banks in temporary administration.
Various tax benefits (for example, exemption from VAT and income tax in installments), as well as amendments to the provisions of legislation on guarantee, pledge and mortgage allowing banks not to be afraid of terminating any security during the procedure are all extras enjoyed by banking institutions.
The advantages are not so obvious for non-banking finance companies, since such institutions are not bound by strict NBU controls. However, it was a finance company which acted as the creditor in the first procedure of financial restructuring in Ukraine under the new law, having grabbed the opportunity to receive tax benefits in exchange for successfully ensuring payment in installments of debt by a bad debtor.
— What challenges did financial market players face regarding debt restructuring this year?
— The big problem with successful implementation of the law is connected to interaction with fiscal bodies. The law on financial restructuring provides a number of tax benefits, as well as obligatory involvement of bodies of the State Fiscal Service (SFS) in the procedure without the need for their consent if a tax debt is less than one-third of the debtor's total debt.
Nevertheless, bodies of the State Fiscal Service, as always, are reluctant to miss an opportunity to replenish the budget and interpret many provisions of the law exclusively in their favor. Such an attitude very often negates or significantly complicates the advantages, which are prescribed for debtors and their creditors.
— To what extent is an instrument of dispute settlement like the Arbitration Committee demanded?
— Arbitration is one of the most innovative institutions in the legislation of Ukraine in the financial restructuring procedure. Today, all necessary procedural documents on arbitration are approved and placed for information, members of the Arbitration Committee and independent arbitrators are elected and ready to consider any dispute arising in the procedure.
Fortunately, all cases of financial restructuring have been approved in full as of today. If the arbitration remains unclaimed throughout the arbitration procedure’s existence it will, of course, upset me as lawyer, but will highlight the indisputable success of the new law and efficiency of the procedure.
— You are head of the Arbitration Committee on the procedure of financial restructuring and, at the same time, you head the banking and financial law practice at Evris Law Firm. What will your actions be in the event of a conflict of interest between these two roles?
— The Arbitration Committee is a body whose powers are in effect only during arbitration. Until the start of the arbitration procedure, I do not have an earthly chance of having an effect on the decisions of the Secretariat or any participant to the procedure. Moreover, outside of arbitration, the Arbitration Committee has no access to financial restructuring documents either, or to any other information on the actions in a procedure.
Thus, conflict of interest is absolutely excluded during the usual process of financial restructuring.
In the event of start of arbitration in a procedure in which I advised a party, the law on financial restructuring and Arbitration Rules clearly prescribe the consequences: I am deemed to be suspended from fulfillment of duties as head of the Arbitration Committee and, what is more, all decisions will be taken without my participation.
Moreover, control over the possible conflicts of interests is an integral part of our firm’s policy. Even if there is the slightest chance of any conflict of interest in the future we will not be able to render services to such a client.
— What changes are market expectations connected with in the near future?
— In many respects due to the public activity of the Secretariat and all persons involved in the procedure, the market is now more interested in the opportunities provided by the new law. In particular, many of our clients, who are only just got acquainted with financial restructuring, have already applied to banking institutions with our help in order to get consent to the procedure. Such cases have ceased to be individual ones over the last few months and are acquiring a large scale.
We should also take into account the "pent-up demand" for the law — many companies, especially large holdings with a complex corporate structure, are only just beginning to now understand the scale of their debt and the need for it to be settled.
In addition, well-established changes in Ukrainian legislation may well be made in the near future that allow some ambiguities of the law regarding tax regulation to be eliminated.
Thus, we expect a significant increase in the number of successful financial restructuring cases in 2018.