Invalidation of Loan Agreements
August 11, 2011 By Integrites
On the 06th of July 2011 the High Specialized Court of Ukraine on civil and criminal cases finally put an end to a long and fascinating story named "the legitimacy of concluding loan agreements in foreign currency."
The story was started by the Commercial Court of Donetsk Oblast, which 20.08.2009 decided the case No 9/70 under the action of "Hotel" Central" Limited (Donetsk) against "VTB Bank" Open Joint Stock Company represented by the Donetsk branch of "VTB Bank" Open Joint Stock Company (Donetsk). This court fully satisfied the claim and invalidated the loan agreement in foreign currency between the parties.
The grounds for nullifying the loan agreement were determined by the claimant as the conclusion of that agreement in a currency different from the hryvna and the use of foreign currency under the litigious loan agreement as means of payment what, according to the claimant, contravenes the legislation.
Despite the fact that on the 18th of November 2009 the High Commercial Court of Ukraine reversed the decision of the Commercial Court of Donetsk Oblast dated 20.08.2009 and submitted the case to a new trial, the content of the above mentioned decision attracted a great interest and provoked a wave of similar claims. However, there were no consensus and judicial practice on this issue in the country for the time being: some judges agreed with the borrower's arguments and some of them didn’t.
Before the financial crisis, foreign currency loans accounted for about 60% of the total loan portfolio of Ukrainian banks, while the bulk of these loans were given to borrowers with no income in foreign currency.
After hryvna devaluation at 60% at the end of 2008, many of such borrowers couldn’t reimburse their loans, and it led to the deterioration of Ukrainian banks´ assets.
The share of problem loans in the total portfolio reached 40% at the end of 2010.
Severe battle between banks and borrowers, which began following the financial crisis, continued at the end of last December, when the High Specialized Court of Ukraine on civil and criminal cases dismissed the cassation appeal of "OTP Bank" PJSC for cancelling decisions of previous instances that found foreign currency loans issued by banks based only on a general license to be illegal.
It resulted in stirring up of numerous debates. A large number of previously granted loans faced the threat of no return. Even NBU letters with relevant explanations were not able to influence the situation.
A crucial and really historic moment in the battle between banks and borrowers became the Resolution of the Supreme Court of Ukraine dated 21.03.2011, in the case involving "OTP Bank" PJSC, which satisfied the statement of "OTP Bank" PJSC in part, reversed the decision of the High Specialized Court of Ukraine on civil and criminal cases dated 17 December 2010 and submitted the case back for a new trial to the court of cassation.
Thus, the Supreme Court of Ukraine, in fact, confirmed the position of NBU on the legality of authorized banks lending in foreign currency under a banking license and a written permission (general license for currency transactions).
Its position on this issue the Supreme Court of Ukraine proved as follows.
The main legislative act regulating the legal relations in the sphere of currency regulation and currency control, is the Decree of the Cabinet of Ministers of Ukraine No 15-93 dated February, 19, 1993 «On the System of Currency Regulation and Currency Control" (hereinafter – CMU Decree).
Sub-paragraph "b" paragraph 4 Article 5 of the CMU Decree stipulates an individual license for giving and receiving loans in foreign currency by residents if the terms and amounts of such loans exceed the limits set by the law. At the moment the law doesn’t set any limits for terms and amounts of giving and receiving loans in foreign currency.
Thus, in view of the lack of normative conditions for the application of individual licensing for the indicated transactions, a sufficient legal basis for banks’ lending in foreign currency, under Article 5 of the CMU Decree, is a general license for currency transactions received under determined procedure, i.e.: a written permission from the National Bank for foreign currency transactions.
The last point in the issue of the legality of foreign currency loans was put by the High Specialized Court of Ukraine on civil and criminal cases, which 06.07.2011 adopted long-awaited and quite predictable decision dismissing the plaintiff’s claim totally.
Thus, the Supreme Court of Ukraine and the High Specialized Court of Ukraine on civil and criminal cases fully confirmed the position on the legality of foreign currency lending by authorized banks under a banking license and a written permission (general license for foreign currency transactions).
The situation around previously granted currency loans finally clarified, but their future still remains vague.
On the 01st of August 2011 the President of Ukraine Viktor Yanukovych vetoed the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Concerning Regulation of Legal Relations between Creditors and Consumers of Financial Services" (N3672-VI), which provides for banning consumer loans in foreign currency in Ukraine.
For sure, the story can be continued. In this regard, one may remember the immortal words of Vladimir Mayakovskyi: "If the stars are lit, there is someone who needs it."
ABOUT THE AUTHOR: Anna Tyshchenko, Valentyna Pylypenko
International Law Firm Integrites was set up in 2005 by a team of legal experts. Specializing in law practice, dispute resolution and international arbitration, international trade, banking and financial law, the firm has now decided to develop its services aimed at expanding and combining legal practice and financial audits.
Copyright Integrites
More information about Integrites
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
The grounds for nullifying the loan agreement were determined by the claimant as the conclusion of that agreement in a currency different from the hryvna and the use of foreign currency under the litigious loan agreement as means of payment what, according to the claimant, contravenes the legislation.
Despite the fact that on the 18th of November 2009 the High Commercial Court of Ukraine reversed the decision of the Commercial Court of Donetsk Oblast dated 20.08.2009 and submitted the case to a new trial, the content of the above mentioned decision attracted a great interest and provoked a wave of similar claims. However, there were no consensus and judicial practice on this issue in the country for the time being: some judges agreed with the borrower's arguments and some of them didn’t.
Before the financial crisis, foreign currency loans accounted for about 60% of the total loan portfolio of Ukrainian banks, while the bulk of these loans were given to borrowers with no income in foreign currency.
After hryvna devaluation at 60% at the end of 2008, many of such borrowers couldn’t reimburse their loans, and it led to the deterioration of Ukrainian banks´ assets.
The share of problem loans in the total portfolio reached 40% at the end of 2010.
Severe battle between banks and borrowers, which began following the financial crisis, continued at the end of last December, when the High Specialized Court of Ukraine on civil and criminal cases dismissed the cassation appeal of "OTP Bank" PJSC for cancelling decisions of previous instances that found foreign currency loans issued by banks based only on a general license to be illegal.
It resulted in stirring up of numerous debates. A large number of previously granted loans faced the threat of no return. Even NBU letters with relevant explanations were not able to influence the situation.
A crucial and really historic moment in the battle between banks and borrowers became the Resolution of the Supreme Court of Ukraine dated 21.03.2011, in the case involving "OTP Bank" PJSC, which satisfied the statement of "OTP Bank" PJSC in part, reversed the decision of the High Specialized Court of Ukraine on civil and criminal cases dated 17 December 2010 and submitted the case back for a new trial to the court of cassation.
Thus, the Supreme Court of Ukraine, in fact, confirmed the position of NBU on the legality of authorized banks lending in foreign currency under a banking license and a written permission (general license for currency transactions).
Its position on this issue the Supreme Court of Ukraine proved as follows.
The main legislative act regulating the legal relations in the sphere of currency regulation and currency control, is the Decree of the Cabinet of Ministers of Ukraine No 15-93 dated February, 19, 1993 «On the System of Currency Regulation and Currency Control" (hereinafter – CMU Decree).
Sub-paragraph "b" paragraph 4 Article 5 of the CMU Decree stipulates an individual license for giving and receiving loans in foreign currency by residents if the terms and amounts of such loans exceed the limits set by the law. At the moment the law doesn’t set any limits for terms and amounts of giving and receiving loans in foreign currency.
Thus, in view of the lack of normative conditions for the application of individual licensing for the indicated transactions, a sufficient legal basis for banks’ lending in foreign currency, under Article 5 of the CMU Decree, is a general license for currency transactions received under determined procedure, i.e.: a written permission from the National Bank for foreign currency transactions.
The last point in the issue of the legality of foreign currency loans was put by the High Specialized Court of Ukraine on civil and criminal cases, which 06.07.2011 adopted long-awaited and quite predictable decision dismissing the plaintiff’s claim totally.
Thus, the Supreme Court of Ukraine and the High Specialized Court of Ukraine on civil and criminal cases fully confirmed the position on the legality of foreign currency lending by authorized banks under a banking license and a written permission (general license for foreign currency transactions).
The situation around previously granted currency loans finally clarified, but their future still remains vague.
On the 01st of August 2011 the President of Ukraine Viktor Yanukovych vetoed the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Concerning Regulation of Legal Relations between Creditors and Consumers of Financial Services" (N3672-VI), which provides for banning consumer loans in foreign currency in Ukraine.
For sure, the story can be continued. In this regard, one may remember the immortal words of Vladimir Mayakovskyi: "If the stars are lit, there is someone who needs it."
ABOUT THE AUTHOR: Anna Tyshchenko, Valentyna Pylypenko
International Law Firm Integrites was set up in 2005 by a team of legal experts. Specializing in law practice, dispute resolution and international arbitration, international trade, banking and financial law, the firm has now decided to develop its services aimed at expanding and combining legal practice and financial audits.
Copyright Integrites
More information about Integrites
View all articles published by Integrites
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
