Terrible Credit Histories
Recently, a leading national bank almost lost $1 million in court. Initially, the court of first instance followed by the Court of Appeals ruled the loan agreement invalid on the grounds that it did not stipulate the size of penalties to be paid by the party that failed to meet its commitments. Only the intervention by the Supreme Economic Court made redress possible.
Precisely this issue dominated the April 2 parliamentary hearing, On Finance and Banking: Current Status and Prospects for Development. Its primary goal was to propagate the idea of the priority of protecting of creditors’ rights as the fundamental principle of a market economy. According to Ukrsotsbank Chairman of the Board Borys Tymonkin, the case mentioned — a sizeable loan was issued in an oblast center against property as collateral — is far from unique in the history of court cases brought by Ukrainian banks. Evidence of the judges’ favorable treatment of unscrupulous debtors is the fact that out of eighty cases brought by Ukrsotsbank in the past five years, sentences were passed in only two of them. Notably, in both cases conscientious entrepreneurs (sentenced respectively to 4 and 6 years) made a bad investment in their business. By contrast, in cases when bad debts totaled millions lawsuits have proven useless. “It has become much too easy in Ukraine not to pay back loans. There is even a saying: only a coward returns loans today,” Oleksandr Suhoniako, president of the Association of Ukrainian Banks, declared.
Unscrupulous debtors have a whole range of tricks up their sleeve that make it possible to leave creditors empty-handed. Ukrsotsbank alone registered 130 cases where mortgaged property was sold, and in each case investigators accomplished nothing. According to Mr. Tymonkin, this makes it possible to conclude that the uniformed services and courts are powerless when it comes to the deliberate nonpayment of loans. According to Nadra Bank Chairman of the Board Ihor Hylenko, it has recently become popular to contest the validity of a loan agreement on the grounds of the alleged abuse of the power to sign the agreement by one of the signatories, with loopholes in legislation making such an interpretation possible. According to Mr. Hylenko, another popular way of avoiding the payment of loans is to “break the chain at an early stage,” that is, to contest the validity of the agreement under which the debtor came by the property that was later mortgaged to receive the loan. In this case, the main thing for the unscrupulous debtor is to stop or at least suspend under any pretence the procedure of alienation of encumbered property. When the court decides in the debtor’s favor and the alienation process is suspended for months, the debtor can use the mortgaged property as he sees fit. There have been cases when executives authorized to take possession of forfeited security were not allowed to enter the premises and nobody was held responsible for it.
As was to be expected, the courts that incurred the bankers’ ire do not want to shoulder all the blame, though they admit that today in Ukraine, to quote Supreme Court Justice Mykola Husak, the rule of force gets the better of the rule of law. According to him, this is a “temporary problem” connected with the restructuring of the judicial system. As for the rulings on cases brought by creditors, Mr. Husak believes that court decisions are not always a result of the arbitrariness and partiality of judges, as in most cases this is a result of legal loopholes. For this reason, judicial reform is impossible without improving the legislation.
NBU Governor Serhiy Tihipko believes that at the legislative level this problem should be addressed first by creating a register of rights to immovable property tied to its land plot, setting up a loan record bureau that would collect data on debtors, simplifying the formal procedure of mortgaging and selling property. However, according to Mykola Onyshchuk, first deputy chairman of the parliamentary Committee on Legal Policy, first we need to refute the stereotype of banking problems, which the people’s deputies believe to be corporate issues. Meanwhile, the protection of creditors’ rights is a problem for society at large and the economy in particular. After all, it is connected with the low level of investment in Ukraine, comparatively small loan volume, high interest rates, and high risks of loan forfeiture.
