Hryvnia Wins Suit against Dollar: Precedent May Trigger Cold War
Ukrainian Business Resource
Viktoriya Boiko for UBR.UA
Last week appeared to be a trouble for banking sector. Mass media informed that one of the Ukrainian banks lost a lawsuit in foreign currency loan for about $19 million. Judiciaries that upheld the claim on invalidation of the loan agreement took as legal ground the fact of issuing the loan in foreign currency
The bank had no right to issue and borrower had no right to receive а foreign currency loan, so far as both had no individual licence of NBU for currency transactions. Thus the only legal means of payment for these parties should have been the Ukrainian currency. So was the act of the court. Consequently, loan agreement, executed two years ago, was invalidated along with mortgage agreement and property rights pledge agreement.
Bankers name the ruling as unprecedented and able to trigger others to take their chance in like disputes. “Such precedents have a negative influence on overall situation and make it possible for borrowers to waive payment of their debts, which, generally speaking, shall not be under discussion if a contract is signed”, says Maryna Bykova, Deputy Chairman of the Management Board of Savings Bank (Sberbank) of Russia. Deputy Head of the Finance and Credit Bank, Sergii Borysov shares her opinion. According to him this act of the court put up for show of absolute inability of judiciary system touch the ground of the matter.
The court decision has been an unexpected one for both banks respondents and the whole system. It courted controversy among associates and attorneys at law. Thus, senior associate of Vasil Kisil & Partners law firm, Yulia Kyrpa insists that court had ignored that bank is a holder of the General Exchange Licence. This Licence, according to the Decree of the Cabinet of Ministers on the System of Currency Regulation and Currency Control, entitles bank to work with currency values. Actually, Head of Financial Law Department of the Ministry of Justice, Liudmyla Kravchenko said this ruling was strange and assumed with certainty that it would be revoked by the higher authorities. “Meanwhile, there were some grounds for the court decision,” emphasized the Official of the Ministry of Justice. “These are 3 Laws on Payment Systems, stipulating that hryvnia is the only legal means of payment within the territory of Ukraine. Furthermore, both Civil and Economic Codes indicate that contract price shall be in hryvnias only and settlements shall be done in Ukrainian currency”.
But lawyers just partially agree with the statement. According to Lesya Kovtun
, attorney at law of Volkov Koziakov and Partners, interpretation of hryvnia as settlement currency and currency of contract price is not obligatory for loan agreements. Both Civil and Economic Codes allow usage of foreign currency for contractual settlements between residents of Ukraine. Basis is stipulated in the Decree of the Cabinet of Ministers. And the issues regulated by the Decree cannot be regulated by other later laws,” mentions attorney at law.
Lesya Kovtun is of the opinion that the court as well as bank’s defence chose the wrong way at the very beginning as they mixed notions of “loan” and “loan price” i.e. interest. Peculiarity of bank industry is raising money and selling them for money. Therefore either a loan or a deposit is a «banking product» or a product that shall be sold to a customer at price denominated as interest on banking product amount. Mentioned is approved by the Part 1 Article 189 of the Economic Code of Ukraine interpreting the price as monetary definition of the value of products (operations, services) realized by economic entities.
Thus, even following court’s reasoning, which defines hryvnia as the only currency of settlements, only currency interest could have been defined as invalid.
Such interpretation is different in its essence. Bank may also be dissatisfies with it, but should defence chose this way then the subject of the dispute between the bank and the borrower would have been validity of the loan agreement only in part of currency interest for loan use, and not the whole agreement. And this difference is even more important in terms of deciding upon the validity of agreements executed for ensuring performance of obligations – simply put – pledge agreements. Whereas according to Article 217 of the Civil Code of Ukraine, if one part of the agreement is invalid, it does not affect validity of the whole agreement. Thereby, no reasons would have arisen for invalidation of security deeds. For these agreements to lose effect, according to Article 548 of the Civil Code, the whole general obligations must have been recognized as ineffective. Subsequently, the bank would have lost not the pledge, but merely the part of interest paid by the borrower until the due date of the ruling.
Now the existing act of court is only in favour of the petitioner. The bank has lost its pledge, is obliged to refund amount of interest paid under agreement; has been underpaid, and the term of loan repayment is undetermined. Yet the borrower is comfortable. He learned that he had been using the loan free of charge for years, and now although he had to repay the principal amount of loan, the proper time for refund he can chose to his liking. Consequently, another special case arises at that. If upon all formal procedures the loan agreement is to be approved as invalid, refund of the currency loan will be made difficult due to borrowers-legal entities having lack of grounds for acquisition of foreign currency at the interbank market. Since the primary agreement, that gave a right to buy currency, has been invalidated by the court.
In addition, taking into account that neither means nor amounts or terms of repayment were mentioned in the act of court (in legal language it means that the procedure of enforcement of legal effects of agreement invalidation was not set out), and even state executive service will not be able to help bank to demand and obtain the debt from borrower.
Associates and attorneys at law insist that market regulators must response, in particular, the Ministry of Justice and NBU. Otherwise, it might well have been that cold war would strike the country and following grave consequences. “Most borrowers will file like claims,” emphasizes senior associate Yulia Kyrpa. “And banks keeping to the beaten track and on the same grounds will be able to dispute the validity of the foreign currency agreement. Hurry up, or you may bargain away.