BANKING INDUSTRY

Difficult debts & escrow agents

Demand rising in Ukraine for legal service providers to act as mediators in debt negotiations

Difficult debts & escrow agents
About the author: Olena Volyanska is an attorney-at-law and Counsel at LCF Law Group
Olena Volyanska
Friday, 29 June 2018 15:41

Experience shows that debt recovery in Ukraine can be difficult and expensive. When it comes to debt collection from large financial-industrial groups with complex corporate structures, disputes can be particularly challenging and can last for several years. Part of this challenge lies in the fact that the loan obligations of such debtors are often distributed among the various enterprises of the business group. They may also often have a complex system of guarantees and pledges in Ukraine and abroad. To recover debts or to foreclose on mortgaged property, it is often necessary to wage a real litigation war in all jurisdictions and courts. Such actions can easily exhaust the debtors financially, but they also have a habit of becoming a heavy burden for banks.

The experience of numerous specific cases tells us that the most successful outcome for protracted legal battles of this nature can often be agreeing to an amicable settlement of the dispute between the parties. At the same time, it is worth noting that debtors generally only agree to such terms once they have lost a number of key litigation trials and the threat of property loss becomes more of a realistic proposition.  Nevertheless, there are indications that attitudes towards troubled debts are improving within the Ukrainian business community, with non-payment being regarded as increasingly unacceptable and undesirable. Many debtors want to settle troubled debts on reasonable terms in order to improve their credit history and safeguard their reputation in the market. This is now recognized as crucial in order to maintain access to further credit resources and to develop any business beyond the short-term.

This is a welcome trend, but it is also necessary to appreciate that banks enter into any negotiations with problem debtors with caution before making any decision on settling. In some cases, banks require excessive guarantees from yesterday’s debtor and today’s partner. The mutual distrust that exists between the parties is often difficult to overcome. In this situation, the negotiation process needs a kind of mediator who can provide guarantees regarding the fulfilment of mutual agreements and obligations. This role is typically filled in Ukraine by a legal advisor who acts as an escrow agent and enjoys credibility with both parties to the negotiation process.

Borrowers who own real estate, equipment, corporate rights or other assets that are pledged to banks are usually either striving to hold title on real estate property or “to completely close the debt” by transferring part of the property to the bank. In most cases, negotiations focus on the debtor’s own debt-buyback, using factoring transactions or assignment of right of demand with a simultaneous cession of rights in respect of pledged assets. However, in some cases, the debtor is interested in transferring to the bank a portion of non-core assets that are not critically important for the continued functioning of the business, but which still have considerable value.

Often, as a condition for restructuring or refinancing debts, banks request a beneficiary of the debtor’s company to provide personal guarantees. This is a fairly reliable type of collateral which allows the bank to foreclose on valuable assets in default of the secured obligation. At the same time, the process of search and foreclosure on the assets of the beneficiary in different jurisdictions can often be an expensive and lengthy process for any bank. 

In the process of negotiations, banks can invite the beneficiary, as confirmation of his goodwill, to disclose information about his assets. It should be understood that for the beneficiary, this process represents a potentially very significant risk, both during the period of credit relations with the bank and into the future. A legal advisor who acts as an escrow agent in such transactions will be ensuring a balance of interests between the debtor and the bank. The debtor transfers the full amount of information about his assets in all jurisdictions, including key asset identification data, to the escrow agent. All information sent to the escrow agent remains strictly confidential and is not disclosed to the bank.

If the loan agreement between the bank and the borrower is observed and the debt is paid off, the information is returned to the debtor without disclosure. If the debtor fails to perform the obligations undertaken before the bank, the escrow agent gives the bank full access to the information pertaining to the guarantor’s property. When enforcing a court judgment on recovery of a debt from a guarantor, the bank is therefore able to save both time and money tracing assets. Experience shows that agreements reached in Ukraine by debtors and banks with the participation of reputable escrow agents tend to be strictly observed.

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