Post-COVID: Banking & Finance

What factors indicate that a technical default arose under the loan agreement with a foreign lender?
To assess the possibility of debt restructuring before a non-resident, as well as the existence of a technical default, it is necessary to scrutinize the provisions of the loan agreement. Special attention should be paid to the following provisions:

  • force majeure;
  • conditions for a significant change in the circumstances that guided the parties while entering the transaction;
  • grounds for terminating the contract;
  • non-fulfilment of obligations;
  • conditions for the creditor to provide a one-time waiver;
  • representations and warranties by the borrower;
  • providing information;
  • insurance.

Depending on the law governing the loan agreement, the above provisions may be crucial. For instance, the laws of England and Wales do not provide for force majeure as grounds for release from liability, such provisions may be included and will be binding by virtue of the contractual obligations of the parties. Thus, the contract may establish special reservations regarding the right of a party to refer to a force majeure circumstance and the procedure for notifying the other party of the occurrence of such circumstance.
How can a debt before a foreign creditor be restructured?
Debt restructuring before a non-resident is carried out on a contractual basis in accordance with the procedure for restructuring of principal amount, interest and other payments. In this regard, the debtor is encouraged to develop a business plan introducing measures to overcome the shakedown and stages necessary to implement it. The borrower shall be obliged to submit monthly progress reports to the creditor. A surety agreement may be concluded between the creditor and the borrower's parent or related company in order to secure that the debtor will fulfil the terms of the restructuring.
Payment obligations to Ukrainian banks: in which cases the borrower can refer to force majeure?
First of all, a debtor should prove the causal link between the occurrence of a force majeure (quarantine) and the inability to make a specific payment. In this case, the debtor is released only from the negative liability (payment of fines, penalties, etc.) for non-performance, but still has to settle the debt, that is to fulfil the main obligation under the agreement.

The existence of a force majeure circumstance shall be evidenced by a certificate of the Ukrainian Chamber of Commerce and Industry (the "UCCI").

The following circumstances will not constitute the force majeure according to the law and the explanations of the UCCI:

  • financial and economic crisis;
  • default;
  • growth of official and commercial exchange rates of a foreign currency to the national currency;
  • non-compliance / violation of obligations by a counterparty of a debtor;
  • the market deficit of goods required to fulfil the obligation;
  • lack of funds, etc.

In practice, the complete cessation of the banking system or the freezing of the debtor's accounts may be considered as a force majeure which makes it impossible for the debtor to fulfil their monetary obligations.

What is the procedure for certifying force majeure by the UCCI?

A force majeure circumstance shall be certified at the request of corporate entities and individuals under each separate contractual, tax and / or other obligations, execution of which became impossible due to the alleged force majeure.

The burden of proof for the force majeure existence, as well for the accuracy of the data provided, lies with the applicant.

The director of the company shall sign the application and solicit it to the UCCI. The application shall be accompanied by:

  • a certified copy of the contract or regulation confirming the existence of an obligation;
  • scope of fulfilled and unfulfilled obligations;
  • a document confirming that the counterparty has been notified on the occurrence of a force majeure;
  • original documents by the competent public authorities confirming the existence of the force majeure.

Depending on the complexity and volume of documents, the application shall be considered within 10 business days. The applicant can order a fast-track procedure, that is, the application shall be considered within 5 business days.

The certificate issued by the UCCI, or the denial to certify the force majeure, may be challenged before the Regulatory Committee on the Certification of Force Majeure of the UCCI within 3 months from the date when the person became aware of its issuance. The Regulatory Committee is obliged to consider the appeal within 30 calendar days from the date of its receipt.

Typically, contracts provide for a procedure and terms of notifying the counterparty on the occurrence of force majeure. Even in the absence of contractual timelines, we recommend informing about the occurrence of a force majeure within a reasonable time.
Payment obligations towards Ukrainian banks: how to exercise the right for a loan repayment holiday and what documents are needed?
First, make sure that the bank did not recognize the company's loan agreement as a default as of March 1, 2020, otherwise it will be impossible to benefit from ะตั€ัƒ repayment holiday option. In addition, the debt shall be restructured by September 2020.

The next step is to contact the bank by any means possible (e-mail, client-bank system, or mail) and ask for the existing internal procedure, which regulates the debt restructuring depending on the type of a borrower, their loan portfolio and opportunities for financial recovery. The regulation typically prescribes the list of documents to be submitted to the bank.

Banks restructure the debts of medium and large businesses on an individual basis depending on the level of impact caused by quarantine on the company's business and assessment of borrower's financial condition. The company shall primarily justify the impact of quarantine on its financial condition, which can be confirmed by the latest financial statements, bank statement confirming the current financial condition, dormant status of the business as might be evidenced by an idling order.

Providing the bank with a business plan which regulates measures to overcome the crisis and the stages of their implementation will be also important.

Following the negotiations with the bank and approval of the debt restructuring plan, the loan agreement should be amended accordingly.
How to ensure the smooth transition of business to online?
It is necessary to assess what business processes require transition to online, given the specifics of the economic activity of a particular company. You may need to automate communication with customers and contractors (chatbot to process customer requests), or to introduce a comprehensive e-document management system and online interaction with customers, contractors and employees.

Following the assessment, choose the proper e-document management service. Some systems of the kind require special software. Others work through a web browser โ€“ all documents are kept in a cloud storage and can be accessed from any device. [1]

To choose the most effective service, pre-test the system and:

  • determine which documents should be used in the e-document management system;
  • approve the internal procedure for working with the system;
  • train employees how to work with the system;
  • agree the way of using the system with the contractors and amend the contracts accordingly.

[1] https://sme.gov.ua/covid19/tsyfrova-trasformatsiya-dokumentoobigu/; https://sign.it.ua/
Electronic document management system: benefits and challenges
The benefits include:

  • time-effective formatting, as well as signing of copies of documents by the parties;
  • the unified database of documents allowing to quickly manage them;
  • cost-conscious printing, exchange and storage of documents;
  • access to documents from any device and location (the only condition - Internet access);
  • data protection and preventing the loss of important information;
  • ensuring the appropriate level of identification and verification of counterparties.

The legislation of Ukraine does not prohibit the residents to transact by means of remote communication, namely by using an electronic signature, exchanging e-mails, scanned copies of signed agreements, etc. (Article 207 of the Civil Code). The legal force of an electronic document cannot be denied solely because of its electronic form (Article 8 of the Law "On electronic documents and electronic document management").

The original electronic document shall be deemed an electronic copy which contains the obligatory details required by the law for a particular type of transaction, as well as an electronic signature or a qualified electronic signature (Part 1 of Article 7 of the Law "On electronic documents and electronic document management").

At the same time, not every electronic document can be treated as an original. Exceptions include (non-exhaustive list):

  • a certificate of inheritance;
  • a document which may be created only in one original copy in accordance with the legislation;
  • in other cases provided by law.

Transactions that are subject to notarization in accordance with the legislation of Ukraine, de facto cannot be completed by means of remote communication (for example, real estate sale-and-purchase agreements).

In fact, notarized transactions with the use of a qualified electronic signature or a corporate seal or other means of electronic identification are provided for in part 4 of Art. 17 of the Law "On electronic trust services", but the procedure for performing such notarial acts must be determined by the Ministry of Justice of Ukraine. As of today, the procedure has yet to be approved.

Therefore, analyse:

  • whether concluding a specific type of document in electronic form is not prohibited by the legislation of Ukraine, and;
  • whether the legislation of Ukraine requires concluding a specific type of document by means of a qualified electronic signature only.
What should be considered before implementing a system of remote identification and verification?
One of the challenges for business is to identify and verify counterparties remotely, as well as verify the credentials of signatories. The parties of the transaction need to agree in writing the type of electronic signature that should be used for the electronic document (Part 3 of Article 207 of the Civil Code of Ukraine, Articles 11, 12 of the Law "On Electronic Commerce").

The current legislation of Ukraine identifies three types of electronic signatures, each of which provides a different level of identification of the signatory:

1) A simple electronic signature is electronic data that is added by the signatory to other electronic data or logically associated with them and used as a signature.

In other words, an electronic signature is a scanned or otherwise digitized signature of a person. Application of this type of signature cannot ensure a proper identification of the signatory, as well as verification of his credentials.

However, an electronic signature or an electronic seal may not be invalidated and deprived of the possibility to be considered as evidence in court cases solely on the grounds that they have an electronic form or do not meet the requirements for a qualified electronic signature or seal (Part 3 of Article 18 Memorandum "On electronic trust services").

Thus, electronic documents will have legal force provided that the parties have directly agreed on the certification of documents by using an electronic signature and seal.

2) Advanced electronic signature is created as a result of cryptographic conversion of electronic data using the advanced electronic signature and private key and provides an average level of trust in electronic identification.

Advanced electronic signature makes it possible to carry out the electronic identification of the signatory and to reveal violations of the integrity of the electronic data associated with this electronic signature.

3) Qualified electronic signature is an advanced electronic signature created using the means of a qualified electronic signature and based on a qualified public key certificate.

The use of a qualified electronic signature provides a high level of electronic identification of signatories. In addition, only a qualified electronic signature has the same legal force as a handwritten signature, and has the presumption of its conformity to a handwritten signature (Part 4 of Article 18 of the Law "On electronic trust services").
How to properly protect the personal data of contractors, customers, and employees?
Remote communication implies ensuring proper protection of personal data of both contractors and customers, as well as employees. It would be necessary to obtain the consent of the person to process their personal data.

According to the Law of Ukraine "On Personal Data Protection", a person's consent to the processing of personal data should be expressed in writing or in a form that allows to make a conclusion about its provision.

In the field of e-commerce, one may consent to process their personal data, in accordance with the stated purpose, during registration in the electronic system by clicking a respective box.

An important condition for obtaining the e-consent is that the system shall not be technically able to process the personal data of the subject before clicking the box, i.e. until the actual consent is received.

It should be noted that the legislation of Ukraine does not define an explicit list of information that can be attributed to personal data. The term "personal data" is defined as information or a set of information about an individual who is identified or can be specifically identified. Such information can undoubtedly include a last name and a first name, address of residence, passport data, individual tax number. The European Court of Human Rights also refers a person's IP address to the personal data. Thus, personal data can contain any set of information that makes it possible to identify a particular individual.

In addition, a lot of Ukrainian companies might be subject to the European Parliament and Council Regulation (EU) 2016/679 (the "GDPR") because they work with the European partners or clients, employ EU expats or use the existing database of contacts of EU citizens for mailing purposes. Fines for violating the GDPR requirements reach up to EUR 20 million. Considering this, make sure to:

  • conduct a legal audit of the company and determine the need to comply with the GDPR requirements;
  • develop adequate procedure for obtaining the consent, processing and storage of the personal data;
  • ensure an appropriate technical level of the data protection.
What is the difference between concluding contracts by means of remote communication with resident and non-resident counterparties?
While conducting business with non-residents, it is necessary to analyse whether an electronic document can be recognized as valid, binding, and enforceable in accordance with the provisions of the applicable legislation and what the mandatory requirements are. The transaction with non-residents, mainly EU residents, i.e. exchanging soft copies of signed agreements, is common practice. Usually this is a sufficient requirement for the validity of contracts due to the lack of formal requirements to have a hard copy document.

On other hand, the possibility of using a similar approach in order to establish business relations with the Ukrainian residents requires additional analysis, assessment of the counterparty's risk profile, and depends on the type of transaction. For example, the parties have to agree on the type of electronic signature to be used, to exchange the documents confirming the signatory's authority (for example, providing a certified electronic copy of a minutes of the general meeting to authorize the signatory to enter into a transaction).
How to ensure smooth execution of electronic payments?
To ensure the smooth receipt of electronic payments from customers, the company needs to enter into an agreement with a payment infrastructure service provider [1] , namely a clearing or processing institution or other institution authorized to provide certain services in the payment system or perform operational, informational and other technological functions.

Typically, the contractual relationship between the company and the operator arises by joining a public contract, which is published on the website of the institution. Companies need to create a business account on the website of the payment infrastructure service provider and provide the documents required to register in the system. The payment infrastructure operator carries out a preliminary mandatory check (aka know-your-customer procedures) of sellers who plan to accept payments through the relevant payment system. It is recommended to ensure connection with several payment systems so that customers can freely pay for the company's products or services.

[1] https://bank.gov.ua/ua/payments/payment-systems
For inquiries regarding legal advice on the above matters, please contact:

Igor Krasovskiy, Partner
Igor.Krasovskiy@integrites.com
+38 044 391 38 53

Oleh Zahnitko, Partner
Oleh.Zahnitko@integrites.com
+38 044 391 38 53
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