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Article: "exploding the myths: what is the law on financial restructuring" (auto-translate)

The new law has already started four procedures of debt restructuring

Since the start of the work of the Secretariat established in accordance with the law "On financial restructuring", considering four cases. We see a great interest of banks and business in the procedures of financial restructuring. However, as is the case with any new phenomenon, has arisen a lot of myths and subjective interpretations.

The law "On financial restructuring" gives lenders and borrowers the opportunity to restructure their loan agreement using voluntary extra-judicial procedures. But few people understand the overall ideology of the law and the meaning that was laid into it by the developers.

Why do we need a law "On financial restructuring"? The economy is now at a stage where we need drastic changes to improve conditions and opportunities of doing business. One of the most important unresolved issues of today - limited access to financing. To a greater extent with this problem facing the small and medium business. A derivative of this global problem - a huge portfolio of bad loans. According to official data, they account for 56.6% of the total portfolio of banks, though some skeptics are convinced that their part is much bigger and can reach 70%.

Particularly acute, this problem in front of the state-owned banks, which before introduction in action of the law on financial restructuring, had very limited opportunities to interact with their customers. They had worked certain compromises to exit a potentially dangerous situation. As a result, bad loans amounted 71.43% in the portfolios of state banks. It is unknown whether all bad credit objectively identified banks. Hence, there is an imbalance in the official data and estimates of market participants regarding the actual amount of bad loans.

If the causes of the act is clear, the method of its interaction with the General legal and financial space of Ukraine appear more questionable. This is due to it truly reformist concept. We are talking about using the mediation approach (principle of goodwill), which is the basis of the law. In Western economies in recent years mediation in legal and financial sphere is quite a popular and effective tool. For them, the distribution of such approach is more natural, because due to the history of the development of the legal system.

In Ukraine, as you know, operates a legal system based on the regulations (Romano-Germanic). In fact, the main difference of our system lies in the attempt to describe all possible situations in a separate normative act in the classic format of "hypotheses, dispositions and sanctions." This approach has many advantages, but it is ineffective in regulating economic relations. Particularly when the overall level of confidence in the judicial system, unfortunately, is significantly undermined.

Recent sociological studies show that in Ukraine, a record decreased level of public confidence in financial institutions. 77% of Ukrainians do not trust banks, of which 47,4% do not trust absolutely. Frankly, the credibility of all key administrative institutions is now at a similar level, although it has a positive trend. That is why the law "On financial restructuring" became one of the first laws of Ukraine, where the main focus is on the principle of voluntariness and full transparency of the process.

Whether the voluntary nature of the procedure of financial restructuring to lead to uncontrolled and irresponsible parties? Mediation in all financial and legal procedures does not mean lack of control. On the contrary, this approach is considered more effective due to the fact that at all stages of decision-making need full consent and transparency of the actions of the parties. In this case the law "On financial restructuring" has a very specific control and responsibility for the implementation of these voluntary agreements of the parties in the procedure. In particular, the fines and penalties for failure taken as part of the procedure of the obligations, both for the debtor and creditors involved.

To ensure a balance of interests of all parties introduced the concept of a moratorium on actions against the debtor during the procedure of financial restructuring (prior to the signing of the restructuring plan). That is, introduced a set of legally binding factors which will ensure the implementation of the agreements reached in the framework of voluntary procedures. And this approach, in my opinion, lend credibility to the procedure in General and to ensure compliance with the agreements within its framework.

If the procedure is voluntary, why it exists, the Executive body (Secretariat) and if it can influence the course of the procedure? The Secretariat ensures compliance with the provisional and formal rules of procedure. The Secretariat does not interfere in the procedure itself and the negotiations between the parties. That is, the activities of the Secretariat ensures the issuance of a voluntary desire of the debtor and by the creditors to quickly reach agreement and sign a restructuring plan. No other regulatory functions, the Secretariat or other persons in the procedure do not perform. Moreover, the Secretariat is not personified the essence in this procedure. Better to say that he acts as an independent mediator in each individual case of restructuring. Because the procedure of financial restructuring as transparent as possible, and voluntary at all stages.

Article published on

Andrew Borovik,
The Deputy head of the Secretariat,
created for the implementation of the Law "On financial restructuring"

The project is funded by a grant received from the European Bank for Reconstruction and Development under the Shareholder Special Fund.
The project is implemented by the administrative and financial support of NABU.