"The disposal of mortgage property at an understated price is quite common and does not enable liabilities to creditors to be met in full" OLEKSANDR NAVALNEV, DIRECTOR OF VOLHV LAW FIRM, SHARES HIS OBSERVATIONS
— Who is currently working to collect bad debts: lending banks, the Deposit Guarantee Fund (DGF) or companies which have repurchased the debts?
— It can be said that specialists in the debt collection field are working in a unique time. The market sees a huge amount of bad debts of no interest to the big financial players. This is related to the obvious trend of growth in the activities of companies that repurchase debts. Currently, DGF is actively engaged in the divestiture of assets of banks under liquidation. In their turn, financial companies purchasing such assets are focused on a quick return and aggregating funds invested in such assets.
— Is this always connected with court proceedings? What is the percentage of out-of-court ways of recovering debt?
— The actions of such companies, aimed at debt recovery are, as a rule, of the out-of-court nature, as legal proceedings under active counteraction of debtors can last for years. Certainly, it is much easier to dispose of a mortgage and then, post factum, to withstand pressure from the former owner in court. In such cases, delays by courts in proceeding cases may work for the benefit of the financial company.
There are no official statistics on out-of-court execution upon the property of a debtor. However, the judicial practice of appeal against such actions of financial companies speaks for their popularity. In particular, it may be the sale by the mortgagee of the subject of mortgage on his/her behalf to any person. The rights of ultimate buyers of pledged property will be vulnerable in the event of such agreements being concluded with violations as they will not be protected from vindication and the provisions of Article 330 of the Civil Code of Ukraine do not apply to them, as the property was sold not due to the will of the owner. In such cases the law supports the interests of the owner and not a bona fide purchaser (Article 388 of the Civil Code of Ukraine).
It should be noted that the previously popular mechanism of execution upon property by a notarial writ of execution was actually leveled by the ruling of the Kyiv Administrative Court of Appeal, dated 22 February, 2017 in case No. 826/20084/14, by which resolution No. 662 of the Cabinet of Ministers of Ukraine, dated 26 November, 2014 On amendments to the list of documents according to which indebtedness recovery shall be carried out without legal proceedings on the basis of a notarial writ of execution was recognized illegal. It was this decision that determined the list of documents that shall be submitted to a notary for the notarial writ of execution when collecting debts under a loan agreement, including for foreclosure on a mortgaged property.
— Are there any statistics on which part of indebtedness is returned? How do you assess the quality of loan portfolios?
— The number of claims satisfied by means of disposal of pledged property depends on the assets that initially secured the obligation. At the same time, disposal of the mortgage at an understated price is quite common and does not enable liabilities to creditors to be met in full.
I cannot say much for the quality of loan portfolios, since, in general, financial companies, when purchasing such portfolios, pay attention to the attractiveness of the pledged items, selling price, which is several times lower than the volume of alienated requirements. By purchasing such assets without proper legal due diligence, new creditors often discover that the amount of indebtedness was calculated with violations of the terms and conditions of the agreement or current legislation, upon the expiry of the limitation of actions in part or in all claims, etc.
— What are the relevant mechanisms of avoidance and delay in judicial proceedings that you’ve observed recently?
— Quite often cases on indebtedness recovery or on challenging a transaction on alienation of pledged items are accompanied by a delay in judicial proceedings by one of the parties, which files petitions calling for expert evidence or initiates parallel proceedings, which are only technically connected with the main one.
— How can one counteract the procedural diversions of debtors?
— Measures to counteract abuses of procedural rights are contained in draft law No. 6232, which was put to the vote on 3 October, 2017. The Draft Civil Procedure Code (CPC) of Ukraine gives definition of measures to counteract abuses of procedural rights and provides for the powers of a court in such cases. For example, the court has the right to return (leave without consideration) the petition, application or complaint of the person admitting abuse of procedural rights, impose a fine for such actions, introduce counter-security, apply security for court costs, etc. In addition, the deadlines for the submission of evidence, involvement of third parties were reduced, which will speed up case consideration. At the same time, at the moment, this draft has not been signed by the President of Ukraine and, consequently, these means are not yet available. At present a party interested in abusing rights can do this practically with impunity.
— Will the tactics of conducting cases on indebtedness recovery be altered by judicial reform, including through changes in procedural codes and other legislative innovations ?
— If the courts implement measures to counteract abuses of procedural rights, the parties will have to change their tactics in the conducting of cases. For example, in the current CPC of Ukraine it is stipulated that upon repeated failure to appear (regardless of the reason), a court shall leave the claim without consideration in a case if the plaintiff failed to appear, or shall consider the case in absentia if the defendant failed to appear, though this does not happen too often in practice. The new procedural codes, for example, bind the parties to attach available evidence immediately to the first procedural document submitted to the court (the statement of claim, response to the claim), and to provide the other party with copies, which will reduce the number of rescheduled hearings. Introduction of counter-security by a court can also be used as a barrier to abuse the security for a claim, since failure to stand a security hinders from the limitation of the rights of the defendant or other person under the procedure of securing a claim. The complainant may be entrusted with the responsibility of depositing funds on the court's deposit account, the amount of which equals the amount of legal costs claimed by the defendant. This can be an efficient procedural remedy for the rights and interests of the defendant. This will give an additional opportunity for the defendant which is a loan institution to file such a petition and, in case of failure to pay this amount, a petition for leaving the borrower's claim without consideration.
At the same time, there are grounds for suspending the case due to its consideration being impossible until the other case is considered. Since these grounds are often used to delay one process by initiating another one, it will become non-binding (at the court’s discretion) and cannot be applied if there is sufficient evidence in the case to make a decision. This gives an additional opportunity to the defendant that is a loan institution to protect its interests in the event of suspension of proceedings by appealing against the relevant order.